I like to look at my Portfolio construction from different aspects.  It’s possible that it might uncover things that I wish to change by viewing my Portfolio in this manner.  Other times this exercise can confirm that I like the construction I already have.

Today I’ll breakdown my portfolio in a few different manners, and see if I uncover anything of interest.

 

Sector Allocation

One example of construction that I always show on my Portfolio page is the sector allocation of my Portfolio compared to the S&P 500.  I try to stay fairly closely aligned with the sector allocation of the S&P 500 while deemphasizing some of the slower growing sectors such as utilities, energy, and telecom.

I currently have 39 companies is my Portfolio.  Here’s my current sector allocation (i.e. how my portfolio value is weighted by sector)…

 

The largest number of holdings are in the Consumer Discretionary (7) & Healthcare (7) sectors.  This is followed by holdings in the Financial (5) & Information Technology (5) sectors.  In the middle of the pack are holdings in Industrials (4), Real Estate (4), Consumer Staples (3) & Materials (2).  The fewest holdings are in those sectors I’m deemphasizing: Utilities (1), Energy (1) & Telecom (0).

Here are my Portfolio companies within each of the 11 sectors:

Consumer Discretionary – Gentex (GNTX), HanesBrands (HBI), Hershey (HSY), Nike (NKE), Starbucks (SBUX), Target (TGT) and VF Corp (VFC)

Healthcare – Abbvie (ABBV), Cardinal Health (CAH), CVS Health (CVS), Quest Diagnostics (DGX), Ensign Group (ENSG), Gilead Sciences (GILD) and Johnson & Johnson (JNJ)

Financials – Aflac (AFL), Blackrock (BLK), Main Street Capital (MAIN), Bank of the Ozarks (OZRK), T. Rowe Price (TROW)

Information Technology – Cognizant Technology Solutions (CTSH), Qualcomm (QCOM), Skyworks Solutions (SWKS), Texas Instruments (TXN) and Visa (V)

Industrials – Air Lease (AL), Fastenal (FAST), Illinois Tool Works (ITW) and Union Pacific (UNP)

Real Estate – Crown Castle International (CCI), Realty Income (O), Omega Healthcare Investors (OHI) and W.P. Carey (WPC)

Consumer Staples – Hormel (HRL), Pepsico (PEP) and Procter & Gamble (PG)

Materials – Air Products & Chemicals (APD) and RPM International (RPM)

Utilities – SCANA (SCG)

Energy – Exxon Mobil (XOM)

Telecom – None

 

I also try to diversify within each sector, by choosing companies within different industries within the sector.  For instance, since I already own Pepsico (PEP), I probably wouldn’t add Coca-Cola (KO) to the portfolio.  However, it’s possible I might replace PEP with KO should I find KO to be a better investment.  Of course, industry diversification isn’t always the case, as I have two biotechs in the Healthcare sector, and multiple semiconductor companies in the Information Technology sector.

Compared to the S&P 500, I’m overweight all sectors I’m not deemphasizing, except Information Technology.  Info Tech is a sector I’d like to add to, whether by adding to my existing holdings or introducing new companies to my Portfolio.  However, good values in that sector are currently not abundant, so patience will be required as I increase my weighting in this sector.

 

Forward Dividend Income by Sector

Even though I’m comfortable with the existing sector allocation of my Portfolio, my dividend payments from each sector don’t come with the same weighting.  Certain sectors tend to pay out more of their earnings as dividends than others.  Usually, the slower growing sectors have the higher yields.

Let’s see how my forward dividend income is weighted by sector.  We’ll look at it side-by-side with the sector weightings we reviewed earlier.

 

The majority of my forward dividend income will come from the Healthcare sector, which makes sense given that its my largest sector weighting by value as well.

However, the dividend income coming from the Real Estate sector is close to rivaling that from the Healthcare sector, despite a much smaller weighting by value.  In fact, it’s so large that it caught me off-guard and has me thinking that I might quit re-investing my REIT dividends and instead direct them into building positions in other sectors.

 

Consecutive Years of Dividend Payments

One the most important aspects for a dividend investor is having companies in the portfolio that will increase their dividend payments every year.

For this exercise I’m going to breakdown each of my portfolio holdings into groups.  I’ll categorize them into existing groups as defined by this list of David Fish’s Dividend Champions, Contenders and Challengers over at Daily Trade Alert.  In addition, I’ll add a Dividend King group for companies increasing their dividend for 50 or more consecutive years, and a Dividend Newbies group for companies having increased their dividend for less than 5 consecutive years.

Dividend Kings – 50+ consecutive years of dividend increases

Dividend Champions – 25 to 49 consecutive years of dividend increases

Dividend Contenders – 10 to 24 consecutive years of dividend increases

Dividend Challengers – 5 to 9 consecutive years of dividend increases

Dividend Newbies – 0 to 4 consecutive years of dividend increases

 

Here’s how the 39 companies in my Portfolio fall into these groups:

 

That’s some nice balance, or symmetry, for the holdings within the groups.  I can’t say I’d look to make any changes as a result of this.

A few things to note here, though.  CVS has frozen their dividend given the pending acquisition of Aetna and their desire to decrease the balance sheet leverage that will come with the deal.  Thus, CVS’s dividend streak is at risk.  OHI has frozen their dividend for the rest of 2018 due to a poor AFFO outlook.  So, OHI’s streak could be in jeopardy eventually, too.  Finally, HBI has not increased their dividend in over a year, so they’ll need to increase their dividend before the end of 2018 if their streak is to remain intact.

 

3-Year Dividend Growth Rate

When it comes to dividend growth rate, I could look at 1-yr, 3-yr, 5-yr or 10-yr growth rates.  I decided to look at the 3-yr growth rate, as it’s long enough to wipe out any 1-year anomaly, but short enough to allow for a focus on recent trends.

At a minimum, I want to make sure the dividend payments increase at a rate higher than inflation.  This is especially important once I start using the dividends as an income stream to pay my expenses.

Even better would be to have the dividend growth rate exceed the rate of inflation.  This will allow my payments to compound over time.

Since the Dividend Newbies don’t have many years of dividend increases in their history, they’ll be excluded here.

Going back to the list from David Fish, here’s how my portfolio breaks down for 3-yr dividend growth rate once my remaining 35 companies are grouped…

 

I like what I see here, with nearly half of the companies delivering a 3-year dividend growth rate over 10%.  In addition, only 7 companies don’t exceed the 6% bar I’ve set for a preferred minimum.

Of the 7 companies in the bottom groups, I’d like to see improvement from AFL, XOM and PG.  AFL recently had an unexpected 15.6% dividend, so things look good on that front.  Both XOM and PG normally announce dividend increases in April, so next month should provide some additional clarity for these two stocks.

As a result of the dividend freezes noted earlier with CVS and OHI, I can expect the recent growth rates for them to come down.  The growth rate for HBI could be in trouble as well given that the company did not announce an increase as recently expected.

 

Next Time

Although I didn’t cover it here, there are a couple of additional ways I’d like to look at my Portfolio.

The first would include grouping the companies by their Simply Safe Dividend score.  I’m not currently a subscriber at the site, so I don’t have access to the scores, but I would be interested in seeing where the companies in my Portfolio stand in this scoring system.

The second would include grouping the companies by their corporate credit rating.  The corporate credit rating is provided by independent rating agencies such as S&P, Moody’s and Fitch, and is supposed to provide a gauge of the likelihood that the company can meet its financial obligations as they come due.

 

Summary

As a result of this review, I came to the conclusion that I don’t need to make any significant changes to my Portfolio construction.  However, there is one change I will consider, and a few companies I want to keep an eye on.

The change I’ll consider is to stop re-investing my REIT dividends.  This action should slowly decrease the percentage of my Portfolio income coming from the Real Estate sector.  As an alternative, the dividends will be pooled and re-invested to build up other Portfolio positions.

I’ll be watching CVS, OHI and HBI to see if their dividend streaks come to an end.  Should this occur, I will re-evaluate whether I wish to keep these companies in my Portfolio.

I also plan to watch for the expected dividend increases from XOM and PG next month, hoping they can improve upon their less than stellar 3-year dividend growth rates.  If they can’t, and I can’t see a turnaround on the near-term horizon, I may need to consider replacements with better dividend growth prospects.

 

Did anything stand out to you in this review?  How do you choose to examine or breakdown your portfolio?  Do you have a preferred metric?  Please share in the Comments!