In the last week of February I swapped a pair of stocks in my Portfolio.  I exited one of my smallest positions, exchanging it for a new one in the same sector that provides additional income.

I’d hoped to post about this last week, but I focused on getting out my Portfolio Thoughts post instead.  However, a delay of one week from the time of the transactions is fairly timely.  I’ve been much worse in the past.

When I made my purchase, I used a small amount of cash in addition to the sale proceeds I obtained, so I ended up making a net investment into my Portfolio.  My forward dividend income got a nice boost though, as my new stock had more than twice the yield of the one I sold.

Here are the details on my stock swap…

 

McCormick & Co. (MKC)

MKC has been a steady performer for me since I added it to my Portfolio in September, 2022.  When MKC drifted lower in price after my initial buy, I made 4 additional purchases of MKC over the next couple of years, nearly doubling my position.

If you take a longer view of the price performance of MKC, it’s basically traded sideways (or slightly negative) for the past 3 years.  Only my purchases during its dips, and a recent run-up in price, allowed me to net a positive return.

With MKC being my 2nd smallest position, I wanted it to become a larger part of my Portfolio.  However, in the absence of better price performance and with it sporting a below average yield (at least for my Portfolio), I decided to part ways with it and look for an alternate investment.

On 2/25/25, I sold all 48.055 shares at $83.05/share.  The sale proceeds were $3,990.86 after the $0.11 SEC fee.

At my sale price, shares of MKC yielded 2.17%.  This was a good bit higher than its 5-year average yield of 1.75%, yet well below my current Portfolio yield of 2.64%.

With this sale, I realized a long-term capital gain of $379.50 and a short-term capital gain of $79.63.  The sale also resulted in a $86.50 decrease in my annual forward dividend income.

Since my initial MKC purchase back in Septermber 2022 until this final sale, I calculate my annualized return for MKC to be 8.76%.  This is pretty good for a defensive Consumer Staples name.  However, a good percentage of this gain was based on some timely purchases, as opposed to the stock driving higher in price over time.

I’m open to owning MKC again in situations where it’s looking undervalued, but I don’t anticipate that time is on the horizon.

As it turns out, I kept the MKC sale proceeds in the Consumer Staples sector.  With my retirement drawing closer, I’m looking to extract more income from my Portfolio, and this next purchase provides that…

 

Flowers Foods (FLO)

FLO was founded in 1919.  Since then, it’s grown into the 2nd largest producer of packaged bakery foods in America.  FLO produces and sells items like breads, buns, snack cakes, and pastries to restaurants and grocery stores across the United States.  FLO’s key brands include Nature’s Own, Dave’s Killer Bread, Wonder Bread, and Tastykake.  The company runs its own bakeries and distributes products via direct-store delivery and warehouses.  Its production facilities are often near key markets, resulting in lower costs and delivery of the freshest products.

One thing not working in the company’s favor… the baked goods market is mature and has a low growth profile.  Knowing this, FLO has tried to transition its business into faster-growing segments of the packaged bakery market.  As an example, FLO recently completed an $800 million acquisition of Simple Mills (currently providing double-digit growth rates), known for its grain-free snacks and baking products.

While not growing quickly, FLO is well-established in its markets, generates consistent cash flow, and provides a healthy yield.  It has a solid credit rating, has debt under control, and nets good returns on its equity and invested capital.  Operating and Free Cash Flow margins could be better though.

With the stock looking quite undervalued currently, and a chance to secure a good initial yield, I established a position.

On 2/25/25, I initiated my FLO position by purchasing 210 shares at $19.70/share, for a total of $4,137.00.  The stock yielded 4.87% at my purchase price, which is roughly 2.25 times larger than the yield I gave up with my MKC sale.  It’s also over 2 percentage points higher than my current Portfolio yield.

The purchase added a substantial $201.60 to my annual forward dividend income.  My first quarterly dividend payment from FLO will arrive this month (March).

FLO entered my Portfolio with just under a 0.50% weighting, making it my 2nd smallest holding (out of 58 holdings).  Over time, I expect to make future additions to this FLO position in order to have it reach a 1% weighting.

The stock currently sits behind NNN REIT (NNN) in my Portfolio rankings, but it’s ahead of my smallest holding, FedEx (FDX).

 

As I normally do with a new holding, let’s take a quick look at its dividend growth history dating back to 2000…

 

 

FLO started paying a dividend in the last quarter of 2002.  The dividend has increased in each of the 22 years since then.

Dividend growth started very strong, but has faded over the years as its payout ratio has risen.  Dividend growth rates have settled into the 4%-5% range over the shorter time periods, but still hovers close to 7% over the 10-year reporting period.

The current earnings payout ratio for FLO is 74%, and is expected to rise further in 2025.  Meanwhile, the free cash flow payout ratio is slightly better at 71%, but should dip to 70% this year.  Both of these percentages are running a bit high for a Consumer Staples company.

FLO has increased its dividend by 4 cents/year each year since 2017.  I expect more of the same moving forward due to FLO’s elevated payout ratio and slow earnings growth.  This means its dividend growth rates will dwindle over time.

FLO has a ‘Safe’ dividend safety score (62 out of 99) from Simply Safe Dividends, which was recently reiterated.  This suggests that a dividend cut is unlikely.  This is a step down in safety relative to MKC which also has a ‘Safe’ dividend safety score, but sits at the top end of the ‘Safe’ range (80 out of 99).

So, I’m not expecting much dividend growth from FLO, but its present yield around 5% is nice, and I suspect results from FLO should be rather predictable – seems like a solid income anchor for my Portfolio.

 

Summary

I managed to execute another pair of Portfolio transactions in the last week of February.  Both stocks are part of the Consumer Staples sector.

I eliminated one of my smallest holdings, McCormick & Co. (MKC), and replaced it with a higher-yielding option in Flowers Foods (FLO).

The transactions resulted in a net investment into my Portfolio of $146.14.  My forward dividend income jumped significantly though, by $115.10, since the yield for FLO (4.87%) was much larger than that of MKC (2.17%).

With the MKC sale, I realized a long-term capital gain of $379.50 and a short-term capital gain of $79.63.  The annualized return for my MKC investment over ~2.5 years was 8.76%

While MKC left my Portfolio, FLO joined, thus the number of holdings in my Portfolio remained at 58.

 

Have you sold any portfolio holdings recently where you gave up earnings or dividend growth and/or dividend safety in order to obtain a higher yield?  I look forward to your comments!