Saturday, January 18, 2020

2019 Year End Portfolio Summary

As of the end of day on 12/31/2019 the portfolio is sitting at $813,979.31 USD
As I am writing this post on 1/18/2020, after the new year, the portfolio has moved up to $842,509.77 in large part from continued expansion in the US markets. It appears the portfolio is moving ever closer to the $1million goal mark I set out to do 6 years ago in 2013.

I'll start with a market background for the year, and then the portfolio summary.

The year started very poorly, with the SP500 correcting largely from the highs in 2018. A lot of events happened in 2019, a major uncertainty was the trade deal with the US and Chinese and also the tightening Fed policies which put a crunch on liquidity. After the new year, the Fed started enacting more quantitative easing and accommodating monetary policy like stopping the raise of interest rates and increasing the number of assets they were purchasing. Since the year started at basically the bottom, the growth throughout the year was huge. Then late in 2019 and early 2020, the China and US "appear" to have a first phase trade deal agreement. The trade deal uncertainty created a ceiling for US stock markets, with this battle between the US and China easing down, markets increased. However, I am skeptical how real of a progress this first phase trade deal really is. I use the SP500 as a reference as the portfolio holds many large cap stocks and they move rather in tune with the SP500, although a bit more defensive.

 
In 2019 the SP500 returns was 31%, this is huge. I usually do not focus on percentage returns of my portfolio as my goals are to reach $1M by 30 years old, and increase and manage the risk of my dividend income. Comparing my performance to the SP500 index is not of interest to me as I already have my goals defined, which to me is independent of how the SP500 performs. However, since comparing one's performance against the index is very important to some, and also  interesting I guess, I will show the table below for comparison:
 
Type 2014 2015 2016 2017 2018 2019 Growth of $10K Annualized Return
Young Dividend Portfolio 14.19% 6.73% 10.24% 20.42% -0.79% 29.51% $20,787.93 12.97%
Vanguard 500 Index Fund 13.51% 1.25% 11.82% 21.67% -4.52% 31.33% $19,606.88 11.88%
 
In 2019, I lagged the index by a few, but the returns are still respectable at near 30%. This is huge, but I think not sustainable. Since my portfolio does not have a lot of high alpha picks like hot tech or industrials or discretionary stocks, I lagged behind since I hold more conservative defensive companies. When times are good, people want to own the hot stocks and not the conservative dividend paying companies. But even so, dividend companies still performed respectably in 2019.
 
Since inception, my portfolio has done slightly better, but very similar to the largest 500 companies in the US. However, my portfolio generates more dividend income and the growth of that income is much more consistent. The figures above include dividends reinvested. The calculations for the Young Dividend Portfolio had some approximations as positions are constantly being added throughout the year due to my income flowing in, however, the figures above are quite representative of how my portfolio performance relative to the index. 
 
I have noticed my portfolio has similar or higher gains than the SP500 but has lower draw downs. The standard deviation for 2019 for example is 8.6% for my portfolio, while the SP500 is 12.9%. The max percentage draw down in 2019 was double for the SP500 when compared to my portfolio. Similarly, you can also notice in 2018, annual returns, my portfolio drop was less than half of the drop of the broader market. This is because my portfolio holds more defensive and non-cyclical businesses that can still survive when there is a recession. I do not own much in industrials, technology, or raw materials for example, which have high alpha. 
 
When the economy does well, I predict my portfolio will ultimately fall behind, but when times are tough I believe my portfolio will hold up much better than the broad index. I believe my portfolio in the long run will outperform the general market since my declines will be less and the "guaranteedness" of the dividend will help provide dependable returns in good times and bad which acts like a buffer. To illustrate the power of percentages when a correction happens: a 50% drop from 100 to 50 will require a 100% gain to move from 50 back to 100. Hence, I always am in favor of protecting the downside than chasing upside. I believe in another 50% broad market crash, my portfolio will only crash 35% according to backtests of similar characteristic portfolios back in 1998, 2000, and 2008. My goal is to build a portfolio that generates more income, has larger annual dividend increases, has less volatility, while maintaining similar or more total returns, than the broader market. 
 
The market has recovered for over a decade now since the housing recession. And has produced tremendous returns. However, one issue I have is that earnings have not been keeping up with price increases of stocks. As a result, 2020 is turning out to be a very expensive year to buy stocks, so I have not bought anything in a long time. My cash pile continues to grow. At the moment it is over $20K. I remember back in 2014, I thought prices were expensive relative to 2009 to 2012. However, looking back, prices in 2014 look really good compared to where they are now...

I find the market to be very expensive at the moment. The graph below shows the PE ratio of the SP500. The good time to purchase was right when 2019 started. The best returns in 2019 was when I added in the beginning of the year. Prices have risen back faster than earnings are growing. If 2020 has an early pull back, that will be a good time to buy, but at the moment I see nothing worth really purchasing. Buying even high quality companies at a high price is still risky. At the moment I am content with sitting on cash. The portfolio is already large on its own, so adding a few more $10K here to grab a thousand dollar gain if the market goes up 10% does not really interest me. The portfolio by itself is already large enough that it can already generate over $80,000 paper gain if the market increases by 10%. There is no need for me to chase and over extend for a few more bucks.


Below are charts, for reference showing the dollar index, the US Treasury 30 year rate, and the Crude oil prices. The dollar index is important as many companies I have invested in are multinational corporations (for example Philip Morris, PM). When retained earnings are carried back to the US from foreign operations, an expensive US Dollar makes it costlier to convert foreign currency to US Dollars. Higher dollars are not good news in this case. The US Dollar has been expensive for many years now and bounces between the mid 90s and 100 level as shown below. The dollar index has been behaving in a range bound range throughout the year so it was not a huge delta of concern. For many companies, it looks like they have stopped complaining about the strong dollar impacting their earnings as they likely have absorbed this impact, in 2014 this was a large excuse as that was the time when the dollar became noticeably more expensive compared to past years.


The treasury rates declined a lot in early to mid 2019. This helped pump up asset values especially those that pay high dividend yields. This was largely from the Fed enacting more easy money policies instead of continuing their rising interest rate plan. Lower interest rates means it's easier to borrow money. More money allows more assets to be bought, so demand is higher, which raises prices. Assets with higher payout yields are also of more interest as the benchmark interest rates are now lower. Due to this, bond prices and stock prices move up. In a low interest rate environment, it is very hard to buy stocks at good value. Lower interest rates will also stifle future returns, as the "bar" has been set lower. The bar to me is the risk free rate, which I will use as the US 10 year treasury. Other types of investments with risk will always need to offer greater return relative to the risk free rate, as why else would I invest in them. When the risk free rate is sub 2%, the returns from stocks will already be mediocre as everything is overpriced already. When interest rates are high, say offering 6% on a 10 year treasury, nobody will invest in stocks that offer just a 6% gain when they can get guaranteed 6% from the US government.



Crude oil prices have never recovered back to the very high levels close to $100 after the fall in 2014. Energy stocks as a result have never really recovered. I do not own any Energy companies in my portfolio due to the cyclical nature of that business. I had owned energy companies like oil, drillers, and pipelines back in 2014 when I began investing in dividend paying stocks. Energy companies had a history of offering high dividends. However, upon more analysis, the cyclical nature and the dependency on oil price to maintain the dividend, plus the commodity like nature of oil, made me not so keen on investing further. As a result, I divested my small positions in energy into other sectors like consumer staples, utilities, and healthcare. In 2019, Oil has risen from the lows in $40s to the $60s. Lower oil prices overall is good for many of the businesses I own. Oil is a basic material input into production and delivery of goods. Lower prices of input means more profit.


The portfolio has done very well from two reasons. First, the portfolio started 2019 with around $560,000 in equity. The individual gain of the markets were enough to contribute over 6 figures of unrealized capital gains. In addition, I have found ways to substantially decrease my own operating expenses and increase my vocational income, this helped contribute another large amount into the portfolio as I reinvest a huge majority of my take home income. At the end of the year, the 2019 performance is the highest I have ever achieved from portfolio returns + personal income I have had so far. In 2019 I gained over $250,000 in my net worth. Note this is with after tax from my personal income, and most of the portfolio returns are tax exempt as most of the growth is from unrealized capital gains (note the dividends will be paid and it will be a few thousand). In 2020, I am predicting that a sizable chunk of my net worth will be determined by the equity performance of my portfolio. The portfolio, now at a decent size, can provide deltas in my net worth that are comparable to the income I take in.


In 2020, I am shooting for $950,000 USD in total net worth with 97% being in the equities of public corporations, I think $1M is possible but this will require the market to perform very well. I am trying to hit $1M in net worth by mid 2021, that is when I am still 30 years old. I have always had this goal when I was young of becoming a millionaire by 30, as this was a target Buffett was able to hit when he was 30. I do understand a million US Dollars is worth more back then in Buffett's early days, but I am still highly motivated by this 7 figure threshold (the score card), which will allow me to hit the "double comma" club. It's a silly goal but one I am fixated on achieving. I still believe a million US Dollars is still a decent appreciable size of money even in today's times, especially for a person 30 years old.

One thing I am noticing now, is that the portfolio's size is becoming a noticeable size. Day to day market fluctuations can have thousands of dollars, up to tens of thousands of dollars of movement. The contributions from my personal income helps move the portfolio upward. But large market swings now have noticeable dents on the portfolio. The personal contributions I make help smooth out the market volatility for the time being. However, over longer periods of time (i.e. after decades) the personal income contributions will basically make no impact to the portfolio, and at that point in time it is likely not worth my effort to continue working in my vocation and instead pursue investing full time. Working for others when my portfolio is like adding drops of water in a swimming pool.

Although pricing of stocks is volatile, depending on current events or investor sentiment, the dividend payouts from each of my companies is relatively predictable. Since I prefer investing in established high quality companies with a favor towards non-cyclical businesses, I am able to predict the dividends and the dividend increases year after year. From the below graph, it can be seen that the dividend never drops, it always increases. Unlike price, dividend payments can be more certainly determined by analyzing the company's fundamentals. Since dividends must be paid in cash, as long as one studies the company's balance sheet and cash flow and income statements, one can understand how safe the dividends can be paid. However, it is must more difficult to predict how the price will move as price moves with the whims of the market and is heavily influenced by what people feel and want to do. I have found once the human variable and emotion is introduced into an equation, it is especially hard to forecast what will happen. I prefer to look at a company's fundamentals, the numbers, when determining investing decisions.

In late 2019 to 2020 now, I have not added any more shares of stock (except the dividend reinvestment). The portfolio dividend growth has been flat as a result. However, if you scroll up and look at the portfolio net worth, it had moved up really quickly so far in late 2019 to early 2020. This is because stock prices have jumped so much. When stock prices jump high, I am hesitant to invest more, and this causes the forward dividend curve to lie flat despite prices moving up. This is what I call "yield contraction", which happens when interest rates fall and markets move up relative to earnings.


The portfolio is now outputting $20,296.51 USD in dividends per year at the end of 2019. This is a decent increase from the $16K range it was when 2019 began. This growth comes both from the portfolio's own dividend increases plus my constant contributions throughout 2019. In 2019, I estimate my portfolio was able to increase the dividend payout by 11% all by its own (the combined growth of the dividend yield and dividend growth). All dividends that were paid out were reinvested back into the stocks that paid them back. My goal in 2020, going forward, is to hit $25K in dividend income.

I have a more conservative outlook for 2020. Right now it is very hard to acquire more income because all stocks are expensive. If stocks are expensive, their dividends yields fall. So each share I purchase contributes less dollar in dividend income. I prefer to hold onto cash instead of investing in overpriced shares that pay not a lot of income compared to in the past. In the past, I used to be able to find companies with 3%+ yields that are healthy companies with decent moderate growth. Right now to get these types of businesses I need to lower my standard to around 2.2 to 2.4% yield.

This is my portfolio standing as of 1/18/2019:
Name Ticker Sector       Value   Weight        Divies      Yield SP Fin VL Fin VL Safety
Visa Inc V Financial $48,949.32 5.81% $286.95 0.5862% A+ A++ 1
Johnson & Johnson JNJ Health $40,124.09 4.76% $1,022.13 2.5474% AAA A++ 1
NextEra Energy Inc NEE Utilities $36,889.19 4.38% $727.88 1.9732% A- A+ 2
Altria Group Inc MO Staples $36,591.56 4.34% $2,410.74 6.5882% BBB B++ 2
Philip Morris International Inc PM Staples $36,314.03 4.31% $1,916.22 5.2768% A B++ 2
Home Depot Inc HD Discret $33,716.49 4.00% $790.90 2.3457% A A++ 1
PepsiCo PEP Staples $31,391.07 3.73% $848.83 2.7040% A A++ 1
Mastercard Inc MA Financial $30,636.98 3.64% $151.45 0.4943% A A++ 1
Clorox Co CLX Staples $28,396.98 3.37% $763.50 2.6886% A- B++ 2
Becton Dickinson and Co BDX Health $28,066.54 3.33% $320.09 1.1405% BBB A++ 1
Ross Stores Inc ROST Discret $25,274.47 3.00% $219.09 0.8668% A- A 2
Realty Income Corp O REIT $24,717.85 2.93% $885.76 3.5835% A- A 2
Automatic Data Proc, Inc ADP Tech $24,470.28 2.90% $503.60 2.0580% AA A++ 1
Air Products & Chemicals, Inc APD Materials $24,353.39 2.89% $476.79 1.9578% A A+ 1
Xcel Energy Inc XEL Utilities $22,514.44 2.67% $558.04 2.4786% A- A+ 1
AT&T Inc T Telecom $22,191.56 2.63% $1,202.98 5.4209% BBB A++ 1
WEC Energy Group, Inc. WEC Utilities $21,898.07 2.60% $574.59 2.6239% A- A+ 1
Kimberly-Clark KMB Staples $21,679.61 2.57% $618.09 2.8510% A A++ 1
McCormick & Company MKC Staples $21,674.96 2.57% $318.67 1.4702% BBB A+ 1
Procter & Gamble Co PG Staples $21,483.82 2.55% $507.30 2.3613% AA- A++ 1
Illinois Tool Works Inc. ITW Industrial $20,270.07 2.41% $480.83 2.3721% A+ A++ 1
3M Co MMM Industrial $19,521.39 2.32% $619.66 3.1743% AA- A++ 1
The Coca-Cola Co KO Staples $18,967.69 2.25% $532.99 2.8100% AA- A++ 1
Stryker Corporation SYK Health $16,957.12 2.01% $183.88 1.0844% A A++ 1
Microsoft Corporation MSFT Tech $16,468.62 1.95% $201.11 1.2212% AAA A++ 1
Starbucks Corporation SBUX Discret $15,040.88 1.79% $231.35 1.5381% A A++ 1
Colgate-Palmolive Co CL Staples $14,365.25 1.71% $347.12 2.4164% AA- A+ 1
Church & Dwight CHD Staples $14,101.72 1.67% $178.57 1.2663% BBB+ A+ 1
Dominion Energy, Inc. D Utilities $13,796.35 1.64% $617.26 4.4741% BBB+ B++ 2
TJX Companies Inc TJX Discret $13,527.78 1.61% $198.65 1.4685% A+ A++ 1
General Mills, Inc. GIS Staples $12,392.43 1.47% $451.05 3.6397% BBB A 1
Abbott Laboratories ABT Health $11,249.54 1.34% $182.01 1.6180% BBB A++ 1
McDonald's Corporation MCD Discret $10,279.48 1.22% $242.46 2.3587% BBB+ A++ 1
General Dynamics Corporation GD Industrial $10,071.59 1.20% $225.92 2.2431% A+ A++ 1
Medtronic plc MDT Health $8,938.50 1.06% $162.20 1.8147% A A++ 1
Honeywell International Inc. HON Industrial $8,858.47 1.05% $174.06 1.9649% A A++ 1
Boeing Co BA Industrial $7,255.38 0.86% $183.99 2.5359% A A++ 1
Misc Type ……….. Partial Totals Weight Yr Dividends  Avg Yield …..832 …..9 …..82
Equity Stocks $813,396.96 96.54% $20,316.73 2.4978%
Investable US Dollars $22,063.31 2.62%
Miscellaneous Assets $7,049.50 0.84%
. .. Equity + Misc Weight …..2 ….. …..222 …22 …..223
Total $842,509.77 100.00%

The top positions in the portfolio are growing larger and larger. 5 figure positions are now the norm. For reference, last year, in January 2019, the largest position was JNJ at $34K and Visa at $31K. Visa posted a blow out year in 2019, and stormed to $49K now. The top 10 list changed dramatically in the last year to now, even though I did not contribute much to these top positions in 2019. I have noticed my strongest companies that I own, the most overpriced, continue to just keep outperforming and as a result their stock prices continue to rise despite being already overvalued. This is why I prefer to own high quality, even if I have to pay up. 

In 2019 my top performers are monsters, the returns I saw are:

APD - Air Products and Chemicals : 49.98%
GIS - General Mills : 43.12% (who would of thought, cereal would do this well)
ITW - Illinois Tool Works : 45.59%
MA - Mastercard : 59.16% !!
MSFT - Microsoft : 57.57% !! (returns like this from a trillion dollar company are impressive)
NEE - NextEra Energy : 42.69% (this is a utility company by the way)
ROST - Ross Stores : 41.34%
T - AT&T : 45.62% (who would of thought AT&T would make it up here)
V - Visa : 43.32%



Happy investing all,
Hopefully 2020 is my million dollar year.
My motto is to keep at it in good times, normal times, and bad times.
Have a plan, recite it repeatedly, and keep to it.
Don't waver or follow the crowd or get distracted.
Don't chase returns, don't get greedy. Have a goal don't compare with others.
A logical plan will carry one forward.

-YD

3 comments:

  1. Thanks Young Dividend for a very well written post. Thanks to you, I will put a huge pause to my investing, I was getting little too excited of pressing buy button on my computer. You are absolutely right that everything is overpriced.

    My total equities portfolio is right around $400k so no small amount. I recently bought about .50% of the entire portfolio Spxu and Sqqq just to decrease the standard deviation. Basically, I look at the recent purchases as an insurance policy for major makret draw downs. You are definitely a wonderful example to me. I wish you best. I am in total net worth over 1M because of 5 rental paid off income properties and have to tell you the after 1M it seems at least to 2M is going to be very fast. What is nice being about being over 1M is that I genuinely no longer feel poor and have a good life. Going to work is somewhat optional but I do go to work because I enjoy it and gives me purpose to do something.

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  2. Could you clarify on your plan for investing this year? I was under the impression, after reading a lot of your posts, that you would buy stock during good times, normal times, and bad times in order to avoid sitting on the side with too much cash. In this post, it seems you have slightly stray from this mind-set and opted to wait until the companies have a healthy correction.
    At what point would you consider returning to invest more? How does this differ from attempting to time the market (at a minor level)?

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  3. I am aware in the past I have always bought when the market was high low or average, not concerned about timing the market, and just dollar cost averaging in to get better value. I've been reading and learning over a long period of time and as I get older I develop more of my views and opinions on investing. I also find I am becoming more conservative as my net worth grows. I am no longer that starving college student I was back in 2009-2013.

    Some books I recently have just finished include "The Most Important Thing Illuminated" and "Warren Buffett's Ground Rules". I am also now reading "Irrational Exuberance". These books all discuss valuation and are impacting my views on investing.

    I think, also, part of the thinking, is my portfolio has now grown to around $840,000 USD. In the beginning when I was $100K or $200K, having $20-30K in cash was a large chunk. I might as well invest every dime in the beginning as my income flow coming in was a huge percentage of my overall net worth. However, at $840K portfolio value, an addition of $20K from cash deployment is not that much and doesn't really make a difference. If the overheated market rises 10% further (to super overheated), that $20K will only add $2K paper gain (while taking substantial risk), while the existing portfolio's $840K will add $84K paper gain on its own. I just don't see such a rush to deploy this capital right away. Even the highest quality companies like JNJ or Visa are very risky investments if they are super expensive (I always like referring to the Nifty Fifty bubble of the blue chips back in 1970s). However, if my $20K cash grows to say $80K position, then I will start to be concerned and will be looking for ideas more urgently to deploy it. It is hard to find good ideas in a heated market, all my good ideas have dried up steadily over the years. I thought 2014 was expensive, but I still had good ideas back then, 2020 is really expensive now and I can't find anything to buy easily without cringing.

    Some of this probably doesn't make 100% sense as it's subjective and not binary yes or no.

    Happy investing -YD

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