DGI For The DIY: 2023 Dividend Portfolio Review

seekingalpha04-08

The stock market shrugged off rising interest rates and global unrest to produce strong gains during 2023.The DGI for the DIY portfolio also managed double-digit gains for the year.Dividend income ...

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Sakorn Sukkasemsakorn2023 Stock Market Review The market in 2023 was a tough one to figure out as the \"Magnificent 7\" of big tech marched higher while the rest of the market spun its wheels waiting for the recession that still hasn't come. The debt ceiling drama turned into a nothing burger and rising interest rates and the ongoing war in Europe have done little to slow tech down. All three major indices finished with double-digit gains for the year, but the 43%+ gains for the Nasdaq (COMP.IND) are a clear indication of which stocks were driving the market. Data by YChartsIn a typical year, the 24.2% gain from the S&P 500 (SP500) and 13.7% gain from the Dow Jones (DJI) would be noteworthy, but they are dwarfed by comparison to the Nasdaq. 2023 Portfolio Performance The DGI for the DIY portfolio had a successful year, putting up a 10.34% gain. This returns the portfolio value to levels seen at the end of 2021, and dividend income also continues its march higher. Portfolio Historical Performance - End 2023 (By Author)A higher weighting in utilities, energy, and real estate caused the portfolio to lag the S&P, DOW, and Nasdaq, but overall I'm happy with the performance. As you'd expect, tech led the way for me in 2023, with big gains coming from Apple (AAPL), Broadcom (AVGO), Microsoft (MSFT), and NXP Semiconductors (NXPI). More surprising is the outperformance from industrial companies Lennox International (LII) and Watsco (WSO), who each returned more than 70%. The other big gainers were Digital Realty Trust (DLR) and the new addition to the portfolio, Texas Roadhouse (TXRH), who each gained 34%. Data by YChartsLaggards were from the healthcare sector, where Bristol-Myers Squibb (BMY) and CVS Health (CVS) showed 29% and 15% declines. Consumer staples also struggled, led by Dollar General (DG), Hormel Foods (HRL), and Medifast (MED). Utility company NextEra Energy (NEE) and energy company Chevron (CVX) were two other notable laggards. Data by YChartsFortunately, I held larger positions in the winners than the losers, so their gains outweighed the losses. Looking at the sectors from the winners and losers, it's easy to see why the Nasdaq outperformed the DOW in 2023. Portfolio Guidelines This is a dividend growth portfolio, so the primary focus of the portfolio is a growing stream of dividend income. This is accomplished by buying companies that grow dividends over time and reinvesting dividends into more shares of companies I own. Here are the general guidelines I use to keep me on track with my investments.  Buy companies that consistently show positive growth in earnings and translate those earnings into increasing dividend payouts. Focus on companies that are investment grade, with S&P credit ratings of BBB or better. Maintain a diversified portfolio that is spread across multiple industries and sectors. Selectively reinvest dividends back into more shares of dividend growth stocks. Consider for sale any company that cuts or freezes its dividend, or fails to consistently meet my income growth goals.  This portfolio aims to produce a passive income stream that will help fund a portion of my future retirement. Being forty-five years old, I have another twenty or so years until I reach that goal. I switched to the DGI strategy in 2013, and in late 2017 I added the goal of 10% annual income growth for the portfolio. I finished that year with $2,005 in dividend income and calculated that with a 10% annual income growth rate, this portfolio could produce over $26,000 in dividend income in 2044, the year I reach 66 years old. Here is my progress so far:   DGI For The DIY - Portfolio Dividend Growth (By Author)The portfolio is on a good track to exceed those goals, as dividend income in 2023 was 7.5% above the $3,543 projection. Between the income generated by this portfolio, social security, and other savings, my wife and I are on a good path toward funding our future retirement. 2023 Dividend Income Summary While the portfolio had exceeded 10% income growth for each year of its existence, 2023 did not reach that mark. Lower crude prices resulted in lower special dividends from EOG Resources (EOG), and sales of some higher-yield slower-growth companies in the portfolio resulted in a step back in payouts.   Portfolio Dividend History - 2023 (By Author)Dividend income was $3,806.81 in 2023, an increase of 6.57% compared to the $3,572.18 collected in 2022. However, EOG's lower special dividends resulted in its annual income dropping by $95. Had its payouts remained the same, income growth would have been 9.2%. This headwind, along with the selling out of higher-yielding AT&T (T) and 3M Company (MMM) in 2022 and lower income growth from some of my higher dividend payers brought the double-digit growth streak to an end. Dividend Increase Announcements Income growth was down some in 2023, but there were still plenty of dividend increase announcements in the portfolio. There were a total of 54 increase announcements made during the year.   2023 Dividend Increase Announcements (By Author)The average annual increase of 7.31% was led by a 19.6% increase from Texas Roadhouse (TXRH), 15.79% from Mastercard (MA), 15.56% from Visa (V), 13.9% from UnitedHealth Group (UNH), 12.9% from Bank OZK (OZK), and 12.0% from Tractor Supply and Automatic Data Processing (ADP). Three (TXRH, OZK, and TSCO) of those seven companies are recent additions to the portfolio as I continue to swap stagnant positions for higher growth. However, there are still higher-income, lower-growth names on the list with T. Rowe Price (TROW), Realty Income (O), Sempra Energy (SRE), Agree Realty (ADC), Philip Morris (PM), and Hormel Foods (HRL) all producing income growth below 4%. I suspect more of these slower-growth names could meet the chopping block in the months and years ahead if they continue to lag. 2023 Portfolio Sales While this is generally a \"hands-off\" portfolio, I do occasionally make moves to trim overweight positions and remove laggards. Eight trades were made in 2023, with the trimming of positions in Apple and Digital Realty, and the liquidation of positions in Kinder Morgan (KMI), Target (TGT), Dominion Energy (D), McCormick & Company (MKC), Qualcomm (QCOM), and Medifast (MED).   2023 Portfolio Sales (By Author)Target and Qualcomm have both gained nearly 40% since their sales, while Dominion Energy, McCormick, and Medifast have all seen negative returns. Medifast was one of my biggest mistakes in recent years, as I started buying it in mid-2021 and made multiple purchases before the sale. The position ended up losing over half of the invested dollars and the dividend cut meant lost income as well. 2023 Portfolio Buys With dividends now being collected and selectively reinvested, stock purchases are much more frequent than sales in the portfolio. There were 32 buys made in 2023, with the previously mentioned Medifast being the worst performer of the bunch. The best was Texas Roadhouse (TXRH), with three different purchases over the year seeing returns of >48%.   2023 Portfolio Buys (By Author)The most frequent purchases were in Bank OZK (OZK), which saw a big drop early in the year during the regional bank crisis. I made eight separate purchases of it during 2023, with all but the first seeing positive gains, and it has now grown into a full-sized position. Some other fortunate buys include NXP Semiconductors at +30%, American Tower Corp. at +23%, and Extra Space Storage at +36%. End of 2023 Portfolio Holdings Following those trades, this is how the portfolio stood as of year's end.   Portfolio Holdings - Q4 2023 (By Author)  Portfolio Holdings (Part II) - Q4 2023 (By Author)A strong year by Broadcom has made it the largest weighting (5.48%) in the portfolio. My move to trade International Business Machines (IBM) out for it in January 2019 and May 2020 has been a windfall, as Broadcom has grown more than four-fold compared with ~40% gains by IBM over the same period. The rest of the top five includes Watsco (3.87%), Lowe's Companies (3.53%), Microsoft (3.48%), and EOG Resources (2.96%). Here are the overall portfolio weightings for value and income at year's end.   Portfolio Weightings - Q4 2024 (By Author)On The Radar I maintain a watch list of 162 companies as part of my portfolio tracking process, so I've always got ideas ready to go when enough cash builds up in the account for a new purchase. Here are a few names that look interesting to me at current prices. Starbucks (SBUX) is trading near 52-week lows and at a PE of just 21.4X 2024 estimates, which is a 26% discount to its typical PE of 29. The stock now yields 2.6%, and I expect dividend growth to continue at a double-digit rate along with earnings. Starbucks Inc. FAST Graph (By Author)UnitedHealth Group (UNH) is another high-quality company trading near 52-week lows and a significant discount to its historical valuation. The stock now trades at just 16.4X 2024 estimates, which is a nearly 20% discount to its normal PE of 20.5. The company has grown EPS at a 16.5% rate over the last decade and is projected by analysts to maintain a double-digit growth rate going forward. This appears an attractive entry point for those who've been waiting for a chance to buy one of the better long-term performers in the market.   UnitedHealth Group Inc. FAST Graph (By Author)Xcel Energy (XEL) has suffered along with many stocks in the utility and real estate sector, and was also hit with concerns about its potential liability for wildfires in Texas. The price drop has shares trading at a 15 PE, which is a 21% discount to Xcel's normal PE of 19, and has brought the yield over the 4% mark, which is a rarity for the company.   Xcel Energy FAST Graph (By Author)Closing Thoughts Higher interest rates and some shuffling of positions slowed income growth in 2023, but the portfolio remains ahead of target and on a good path for continued growth. A busy family life and work schedule have kept me from being as active as I once was on Seeking Alpha, but I still enjoy following the market and managing this portfolio. I've been providing updates on it for over a decade now, and am hopeful that I can continue doing so in the years ahead. I hope this update finds you well and I wish you all happy investing for the remaining three quarters of 2024.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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