2020 Portfolio Review: What a Year

Without a doubt, 2020 will be a year few will ever forget. A global pandemic upended normal life for so many people. Business were forced to close, schools turned to virtual learning and wearing a mask became a part of everyday life.

Early in the year, stocks went through a massive selloff as it appeared that the world was headed for at least a significant recession, if not depression. Timely stimulus from central banks and governments helped to prevent this, though millions remain out of work thanks to Covid-19.

The S&P 500 Index had a total return of 16.3% this past year, but 11.7% of this gain occurred over the last three months.

The portfolio that my wife and I are building, which I have nicknamed The March to Freedom Fund, had a total return for the year that was slightly behind the market index at 12.8%. Much of our gains came in the last quarter as well. As always, our total return includes dividends received but not additional capital added to our accounts.

Over the last six years, when we first began publicly tracking our portfolio on another platform, our portfolio has a total return of 86.3% compared to a 75.9% gain for the S&P 500. This is the first year that the index has beaten our portfolio in that span of time.

As stated in my first quarterly update here on GuruFocus, our portfolio is designed to produce enough dividend income to cover our expenses in retirement. While the gains in share price are most welcomed, we believe that dividend growth is most important as this will be how we plan to pay for retirement in 15 to 20 years.

Second-half purchases

As long-term investors, we try to limit how much selling we do within our portfolio, though we do trim positions from time to time. For example, we trimmed Microsoft Corp. (MSFT) at around $180 in early February as the position had become quite large and we wanted to redeploy to other positions. Of course, shares have gained since then, but we have no regrets as we wanted to limit the size of our holdings at that time.

We did make one significant change to our portfolio this year as we decided to rollover my wife's pension from a previous employer. She has no plans to return to that profession and we conducted many different scenarios and found we would likely come out ahead investing it on our own as opposed to waiting 30 years for her to be able to start collecting a set amount. We normally make 20 to 25 trades per year, but ended up making 70 purchases this year due to this additional capital. We will most likely make a similar number of purchases in 2021 as we invest the second half of her pension.

Listed below are the dates and prices of the stocks we have purchased since the first-half update and their gains or losses through the end of the year.

* Adjusted price following a 2-for-1 stock split

We made some timely buys as well as some that have not worked out so well so far.

Our best purchase of the second half of the year was our Sept. 21 buy of Automatic Data Processing. Shares finished 2020 almost 36% higher than our purchase price. The company has weathered the Covid-19 pandemic very well even as it is the main provider of human resource services to large companies. Automatic Data Processing's dividend is recession tested as it has been raised for more than four decades. This was why I felt the company was an excellent long-term buy earlier this year.

Our second-best buy of the second half of 2020 was JPMorgan as shares are higher by more than 31% since our Sept. 30 purchase. The banking sector has been negatively impacted by low interest rates, which are likely to be a headwind for as long as the Covid-19 pandemic impacts the economy. In the summer, the Federal Reserve also prevented the large financial institutions from returning capital to shareholders by way of dividends and share repurchases until there was more visibility through the ongoing pandemic. That changed when the bank, along with others in the sector, were allowed to repurchase stock. JPMorgan announced a $30 billion buyback on Dec. 18, which equated to more than 8% of the stock's market capitalization at that time.

Our third-best purchase was our July 31 buy of Stryker Corp. The company's orthopedics division had been adversely affected by the delaying or cancellation of elective surgeries as the health care system dealt with the pandemic. This impacted the stock and we were able to add to our position under $191. At that time, we felt that Stryker, which has historically outpaced the medical device sector in terms of organic growth, would eventually rebound from the current challenges. The company's third quarter showed organic growth of 3.3%. This was a deceleration from the third quarter of 2019, when the company had organic growth of 8.6%, but was an improvement from the 24% decline in the second quarter of 2020. We couldn't have predicted a return to growth as quickly as what happened, but we believed Stryker, which became a Dividend Aristocrat this year, has too good of a business model that it would be down for long. The stock has gained 28.6% since we added to our position.

Our fourth-best-performing purchase was Alphabet, the parent company of Google. We initiated a position in Alphabet following my wife's pension rollover. We have never owned a non-dividend-paying stock prior to this purchase. Alphabet was an attractive option for us because of the company's dominance in its sector of the economy. One reason we trailed the S&P 500 this year was because we don't own many of the large growth names in the market. Adding Alphabet provides some more growth to our portfolio. Google had nearly $131 billion in cash on its balance sheet at the end of its most recent quarter. The company has also generated more than $31 billion of free cash flow over the last year. There is the possibility that shareholders could receive a dividend some day as the company finds additional uses for its capital. Even if it doesn't, we are happy to add some more growth to our portfolio.

Our fifth-best buy of the last half of 2020 was V.F. Corp. as the stock gained almost 24% from out Sept. 4 purchase. This is not one that I would have expected to be among our best decisions. At that time, we purchased V.F. mostly because it was our smallest position and we were in the midst of trying to bring each name we held up to a certain amount. Retail was slammed during the pandemic as consumer were forced to stay home. The company's second quarter of fiscal 2021 showed weakness overall, but digging deeper V.F. had a 44% increase in direct-to-consumer digital. Compared to the first six months of the previous year, digital sales grew 60%. We bought before the quarter was released, but this says to me that V.F.'s products remain in high demand and consumers, once allowed to visit malls and stores again, would return. Additional context for our reasons for adding more V.F. were discussed in an article published in early September.

Not all of our purchases have worked out yet. Two tied for the worst.

Our worst buy of the last six months was our July 27 purchase of General Mills as the stock fell 8.1% through the end of the year. The company had posted quarterly revenue growth of almost 21% earlier in the month as consumers flocked to General Mills' products as eating out was severely limited due to social distancing directives. The company was also seeing a good number of repeat customers, which we felt boded well for when consumers were allowed to dine inside of restaurants again. Another plus in General Mills' favor is that it has paid an uninterrupted dividend for more than 100 years.

Tying General Mills for the worst buy was our purchase of Kimberly-Clark on Sept. 21. Our Oct. 22 purchase was our fourth-worst buy since our mid-year portfolio update, finishing the year lower by 4.6%. In some ways, the decline in Kimberly-Clark is similar to that of General Mills as the company was a beneficiary of the Covid-19 pandemic as consumers stocked up on paper products. The market likely felt that some of these purchases were pulled from future quarters. Kimberly-Clark was another position we started in my wife's pension rollover. The company has increased its dividend for 48 consecutive years, meaning it is approaching Dividend King status. A recession-proof company if ever there was one, Kimberly-Clark was a name we had eyed for some time. We will definitely be adding to this name if prices go lower.

Another new position for us this year was Lowe's Companies (LOW). Our first purchase of the stock actually ended higher by 2%, but our Oct. 15 addition fell 7.9% through the end of December. Quarterly results for Lowe's have been very good and the company announced a massive buyback addition. As of the end of its most recent quarter, Lowe's had almost $20 billion on its share repurchase authorization, which was about 17% of the stock's market capitalization at that time. It was one of the reasons we remain so bullish on the company. Lowe's also has almost 60 consecutive years of dividend growth and has started to see improving margins.

Rounding out our worst buys of the second half of 2020 was McCormick & Co., which lost 4.4% from our Oct. 12 purchase. We first bought the stock right after the market slammed shares following the purchase of Red Hot and French's Mustard. McCormick has been an excellent investment almost ever since. It was also one of our smaller positions as we had difficulty getting past the valuation. As with V.F., we were trying to build the size of each position. McCormick is another Dividend Aristocrat we feel has a great future ahead of it as consumers turn to its products for cooking at home. The company controls approximately 20% of a highly fragmented spice and seasoning industry. A lower entry point would likely have us looking to our to the position.

We also closed out three positions this year. First, we sold Boeing Co. (BA) in early February. We were concerned about the company's ability to generate enough cash flow to continue to pay its dividend. We sold our shares on Jan. 24 at a price of $308.66. Boeing did eventually cut its dividend and shares are well below where we sold.

On Mar. 12, we sold our stake in Exxon Mobil Corp. (XOM). The energy sector remains challenged as the price of oil continues to fluctuate. Exxon Mobil continues to burn through cash and has borrowed heavily to pay its dividend. Long-term debt has almost doubled over the last four quarters. The company expects to write off as much as $20 billion in assets in the fourth quarter. Despite 37 years of dividend growth, we believe it is only a matter of time until the dividend is reduced.

Finally, we closed our position in Ventas Inc. (VTR). Initially, we had held onto the stock following its dividend cut in July, but felt that there were better opportunities for our money. We also wanted to trim the total number of portfolio holdings that we had. We sold our shares on Sept. 30 for $42.47.

However, one company that we did not sell following the suspension of its dividend was The Walt Disney Co. (DIS). Disney was impacted by Covid-19 in nearly all businesses. However, we still like what the company does for a living. It's movie content, streaming services and theme parks are likely to recover from the damage done from the pandemic. The sheer number of streaming members (74 million currently with an expected 230 million to 260 million by 2024) is a sign that the company's products remain extremely popular with consumers. We originally owned Disney not for its income, but for its content, which we believe will be a long-term winner.

Current portfolio

Following our trading activity in 2020, our portfolio consists of the following 52 positions:

3M Co., Abbott Laboratories (ABT), AbbVie Inc. (ABBV, Financial), Aflac Inc. (AFL, Financial), Alphabet, Amgen Inc., Apple Inc. (AAPL), AT&T, Automatic Data Processing, Caterpillar, Chevron Corp. (CVX, Financial), Cisco Systems, The Coca-Cola Co., Costco Wholesale Corp. (COST, Financial), Cummins Inc. (CMI, Financial), CVS Health Corp. (CVS), Dollar General, Dominion Energy Inc. (D, Financial), Duke Energy, General Dynamics, General Mills, Home Depot, Honeywell International (HON, Financial), Johnson & Johnson, JPMorgan Chase, Kimberly-Clark, Lockheed Martin, Lowe's Companies, MasterCard Inc. (MA), McCormick & Co., McDonald's, Microsoft, NextEra Energy Inc. (NEE), Nike, PepsiCo Inc. (PEP), Pfizer Inc.(PFE), Procter & Gamble, Raytheon Technologies Corp.(RTX), Realty Income, Southern Company, Stanley Black & Decker, Starbucks Corp. (SBUX), Stryker, Target Corp. (TGT), Toronto-Dominion, Unilever, United Parcel Service, Verizon, V. F. Corp., Visa Inc. (V), The Walt Disney Co. and W.P. Carey.

Dividend income analysis

Prior to 2019, all of our dividends received were automatically reinvested in each position. We started collecting dividends in cash from our largest positions last year in order to accelerate our ability to purchase additional shares. As a reminder, 2014 was the first year we tracked our dividend income.

Source: Author's calculations

July is traditionally one of our slower months for dividends as only a handful of positions pay out during this time and many tend to be of the lower yielding variety, such as McCormick and Stryker. We also used to own two stocks, Altria Group (MO) and Philip Morris International (PM), that distributed dividends during this month. We sold those positions early in 2019, which accounts for the month-over-month declines.

The addition of higher-yielding stocks, like Toronto-Dominion and W.P. Carey, will likely begin to offset this in 2021.

Despite the loss of Altria and Philip Morris, year-to-date dividends received still grew compared to 2018 and 2019.

Companies that paid dividends in the month of July included Cisco Systems, Dollar General, JPMorgan, McCormick, Nike, Realty Income, Stryker, Ventas and W.P. Carey.

Source: Author's calculations

August showed another month of excellent growth compared to the previous years. This was one of the first months to show at least a 100% gain compared to the same month in 2017. Helping matters is that we have some of our largest contributors to our dividends, including AbbVie, AT&T and Verizon, making payments in the month of August. We have also been aggressive in adding to these names over the past few years.

Companies that paid dividends in the month of August included AT&T, Abbott Laboratories, AbbVie, Apple, Costco, CVS Health, General Dynamics, General Mills, MasterCard, Procter& Gamble, Realty Income, Starbucks and Verizon.

Source: Author's calculations

The March/June/September/December months continue to be best months for dividends. Twenty of our positions distributed dividends this month. Many of these positions have been owned for quite some time so the dividend reinvestment that occurred up until last year has been a major contributor. Recent additions, such as Amgen and Pfizer, have also assisted in this growth.

Companies that paid dividends during the month of September included 3M, Aflac, Amgen, Chevron, Cummins, Dominion Energy, Honeywell International, Johnson & Johnson, Lockheed Martin, McDonald's, Microsoft, NextEra Energy, Nike, PepsiCo, Pfizer, Realty Income, Southern Company, Target, V.F. Corp and Visa.

Source: Author's calculations

As with July's dividend totals, October's were impacted by the closing of positions in Altria and Philip Morris. Both companies were in our top five largest contributors to income. This explains the declines for the month compared to 2018 and 2019. Even without these two stocks, our income for the month has more than doubled since 2014. Our year-to-date increase compared to what it was in July is actually higher, which means that the rest of our portfolio more than made up for the loss of two key positions. The ability to overcome the subtraction of a sizeable amount of income speaks to the strength of what we own.

This was the last month we received a dividend from Ventas. We also had our first dividend from my wife's pension rollover as Toronto-Dominion added to our income total.

Companies that paid dividends in the month of October included Cisco Systems, Coca-Cola, Dollar General, JPMorgan, McCormick, Nike, Realty Income, Stryker, Toronto-Dominion, Ventas and W.P. Carey.

Source: Author's calculations

November's income was the first month to show a 100% gain to the same period of 2018. We are closing in on a 100% gain compared to 2019 as well and are nearing a 400% increase for the year to date totals compared to 2014.. This is due to additional purchases in many of the high-yield names that payout during this month. Lowe's Companies also made its first contribution to our monthly total.

Companies that paid dividends in the month of November include: AT&T, Abbott Laboratories, AbbVie, Apple, Costco, CVS Health, General Dynamics, General Mills, Lowe's, MasterCard, Procter& Gamble, Realty Income, Starbucks and Verizon.

Source: Author's calculations

December was the best month we have ever had for total dividends received. Twenty-six positions paid us this month, including our first payments from Stanley Black & Decker, Unilever and UPS. Costco's special $10 dividend certainly helped out, but absent this our monthly total was still the best it has ever been. This was the second consecutive month to give us an over 100% gain compared to the same period in 2018.

Companies that paid dividends during the month of December included 3M, Aflac, Amgen, Chevron, Coca-Cola, Costco (special dividend), Cummins, Dominion Energy, Duke Energy, Home Depot, Honeywell International, Johnson & Johnson, Lockheed Martin, McDonald's, Microsoft, NextEra Energy, Nike, Pfizer, Realty Income, Southern Company, Stanley Black & Decker, Target, Unilever, UPS, V.F. Corp and Visa.

Total dividends for 2020 grew more than 400% compared to what we received in 2014. This was accomplished by making regular contributions to our IRAs, reinvesting the vast majority of dividends and investing in companies with long histories of dividend growth.

Also aiding growth has been dividend increases. Prior to this year, we have averaged a 9.1% dividend increase by position and 8.1% by position weighting since 2014. Those figures fell to an increase of 5% by position and 4.7% by position weight for this past year. Several companies gave smaller than normal raises, likely due to the unknown impact of COVID-19 on the business. Dividend cuts and pauses in a few names also negatively impacted results.

We ended the year with a dividend yield of 2.1%, which compares favorably to the S&P 500's year-ending yield of 1.6%. This is one of our lower ending yields, but we spent much of the last two years adding to our lower yielding positions. Our three largest positions, Microsoft, Apple and Target, all have a sub-2% yield and account for nearly 12% of our portfolio. MasterCard and Visa, our sixth and seventh largest positions respectively, each pay a dividend of less than 1%. Given the growth of these names and others, we are willing to sacrifice some income.

Based on estimated dividends for 2021, we believe our year-over-year dividend growth will be 20% compared to last year. We expect comparable dividends will be higher as additional contributions are made and dividends are reinvested. Our projected yield as of now is 2.5%, more in line with our average yield since 2014.

Strategy for 2021

We have spent the last two years building up our smaller positions. This work is mostly done due to the combination of added capital and growth in the value of the majority of our positions.

A full position was $6,000 previously. Now that we are properly positioned in nearly every holding, a positioned is considered full once it reaches $9,000 in value. Currently, only Apple, Microsoft and Target have reached full position status. This means that the remainder of the stocks we own can now be bought again as we work towards building up almost the entire breadth of our portfolio.

For 2021, our investing choices will be made using the following criteria:

• 3%-plus yields: a focus will be made on purchasing stocks that produce higher amounts of income as our overall yield has dropped to one of the lowest levels we've seen.
• Valuation: stocks trading below their long-term average price-earnings ratios are becoming more difficult to find. Those that are trading with a reasonable valuation will be ones we target for purchasing.
• Double-digit dividend increases: many of the names we hold gave lower than usual dividends in 2020. Those that raise dividends by at least 10% this year will give us some confidence that the worst of the COVID-19 impact upon the business are behind the company.
• Beat-and-Raise: Companies that top revenue and earnings per share estimates and raise guidance will show the strength of their business.

These factors will guide our stock selection in 2021.

We estimate that it will take us five years of additional capital investments (and increases in share prices) for each of our holdings to reach full position status. Dividend growth investing isn't about becoming wealthy overnight. It takes patience, a disciplined plan, capital to invest and, of course, a bit of luck. We are at least 15 years away from being able to retire, so we are playing the long game.

Final thoughts

Though we trailed the total return of the S&P 500, The March to Freedom Fund generated another double-digit return in 2020. We have a positive return every year since 2015 and have double-digit total returns in four out of the last five years.

More importantly to us, dividend income continues to grow at a high rate even as we have turned off automatic dividend reinvestment in roughly half of our positions.

With a portfolio that is largely properly sized, it is time for us to increase the size of full positions. 2021 will be a year where can focus on adding to almost any stock in our portolio.

Retirement is a long way away for us and portfolio building remains ongoing, but we have made excellent progress over the past few years simply by following our plan.

How was 2020 for your portfolio? What are your goals for 2021? Feel free to leave a comment below.

Disclosure: The author has a long position in 3M Company, Abbott Laboratories, AbbVie, Inc., Aflac Incorporated, Alphabet, Amgen Inc., Apple, Inc., AT&T, Automatic Data Processing, Caterpillar, Chevron Corporation, Cisco Systems, The Coca-Cola Company, Costco Wholesale Corporation, Cummins Inc., CVS Health Corporation, Dollar General, Dominion Energy, Inc., Duke Energy, General Dynamics, General Mills, Home Depot, Honeywell International, Johnson & Johnson, JPMorgan Chase, Kimberly-Clark, Lockheed Martin, Lowe's Companies, MasterCard Incorporated, McCormick & Company, McDonald's Corporation, Microsoft, NextEra Energy, Inc., Nike, PepsiCo, Inc., Pfizer Inc., Procter & Gamble, Raytheon Technologies Corporation, Realty Income, Southern Company, Stanley Black & Decker, Starbucks Corporation, Stryker, Target Corporation, Toronto-Dominion, Unilever, United Parcel Service, Verizon, V. F. Corp, Visa Inc., The Walt-Disney Company and W.P. Carey.

Read more here:

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