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Nathan Parsh
Nathan Parsh
Articles (89) 

The March to Freedom Fund 2nd-Quarter Review

We have publicly tracked our portfolio since 2015, which has beaten the S&P 500 in terms of total return over this period of time. Most importantly, dividend income continues to grow

The portfolio that my wife and I are building has been publicly tracked since 2015 on a different platform. As this is the first posting of our portfolio’s performance on GuruFocus, I would like to give some background information about us and our investment goals and strategies.

Investment goals and strategies

We have nicknamed our portfolio “The March to Freedom” because we believe that investing is a long game and that there are no short-term solutions to creating a portfolio that can be used to pay for retirement.

Our portfolio consists of our Roth Individual Retirement Accounts and a workplace 403b and 457b. Our IRAs hold all dividend-paying stocks while the employee retirement accounts contain just mutual funds, primarily those that track the S&P 500.

We aim to max out our IRAs each year and increase our contributions the employee retirement accounts each year.

While we do track how our portfolio performs against the S&P 500 to give us a sense of how our investments are performing, we are primarily interested in growing our dividend income. Retirement is likely 15 to 20 years away and dividends will be how we pay expenses once we are done working.

Our investment strategy for stocks picking is quite simple: identify dividend-paying stocks that have a long history of dividend growth trading at reasonable valuations. The average age of the dividend streak within our portfolio is nearly 24 years, which includes four stocks with a recent dividend cut or pause. The reason for this is that these stocks have proven the ability to continue to pay and raise dividends during multiple recessions.

While each recession is different and cuts or suspensions can come at any time, this track record of dividend growth gives us some peace of mind that the companies we own have experienced turbulent times and still increased payouts to shareholders.

There are two investment guidelines within our strategy. The first is to try to purchase stocks when they trade within our target price-earnings ratio range. The valuation target range varies from stock to stock and usually takes into account historical average multiples. Another factor is the state of the current business. If demand for products or services is growing, then we are willing to pay a higher multiple for the stock.

The second guideline is to build positions to a certain size. Our goal is to buy equal amounts of each position over time. What constitutes a full position changes once all positions have hit their pre-assigned weight. On occasion, this guideline can overrule the first guideline. While overpaying for shares is not desirable, we want to each position to reach a certain size. Since our timetable is multiple decades, overpaying now likely won’t hurt us too much in the long run.

There are two situations in which we may sell part or all of our positions. The first is if the business no longer fits in our portfolio. A good example of this was when we sold our positions in Altria (MO) and Philip Morris (PM) in the fourth quarter of last year. We were no longer comfortable holding these two stocks due to their businesses.

The other reason we may see is if a company has recently cut or paused its dividend. A dividend cut or pause isn’t an automatic reason to sell. Occasionally, companies adjust dividend policies in order to grow. For example, CVS Health Corp. (NYSE:CVS) paused its dividend following its acquisition of Aetna in 2018. The company paused its dividend in order to pay down debt to complete this purchase. To us, this is an understandable use of capital.

We usually have a road map for each year on what positions we hope to add to. It isn’t set in stone, which allows us to add to positions that have become unexpectedly cheap.

We break down every stock we own into two categories: core and supporting positions.

Core positions are those that we will not sell even if they are considered overweight. Core positions are those companies with key competitive advantages and wide moats that have protected the business during a recession and have allowed for long dividend growth histories. These positions are dividend-paying stalwarts like Johnson & Johnson (JNJ), 3M Co. (MMM) and AT&T Inc. (T).

Supporting positions are those companies that we like enough to invest in, but don’t consider to be core holdings. These positioned can be trimmed or sold completely if we feel they no longer match the reason we purchased them in the first place. We may also sell a portion of these positions when they become overweight. For example, we reduced our position in Microsoft (MSFT) in early February as it was nearly three times what we consider a full position to be. Right now, a full position for a core holding is $6,000 and a supporting position is $4,000. We should have every position where we want it within a year or so.

Our results vs. the S&P 500

The Covid-19 pandemic has upended large portions of the economy like nothing else in recent memory. Large sections of the U.S. as well as the rest of the world were on stay-at-home directives during the second quarter. Non-essential businesses were shuttered for lengthy periods of time and many remain close. This has had a negative impact on the economy, but the stock market had very strong second quarter. Our portfolio has not been immune to the pandemic.

The March to Freedom Fund is down nearly 9% for the first half of 2020. The portfolio had a solid second quarter, returning just under 12%. This total return includes dividends received but not contributions.

The S&P 500, on the other hand, just had its best quarter since the fourth quarter of 1998. The total return for the index was down 20% at the end of the first quarter, but finished the second quarter down just 4.2% for the year.

The S&P 500 has outperformed our portfolio so far this year, but we’ve done better over a longer period of time. Our total return is 64.5% through the end of the second quarter since I started tracking our portfolio in 2015. The total return for the S&P 500 over this same period of time is 51.5%.

First-half purchases

Most dividends are received in cash for now as we are attempting to build positions at a much quicker pace. Low-yielding stocks, or those that are far away from full position status, are still automatically reinvested.

Due to dividends received, contributions to our IRAs, trimming our Microsoft position and closing our Boeing (BA) position in early February, we have made 21 purchases so far in 2020.

Here are the purchases we have made this year and the June 30 closing price for each stock.

Company/Stock

Purchase Date

Purchase Price

June 30 Close

Gain/Loss

Raytheon Technologies (RTN)*

1/24/2020

$96.41

$61.79

-35.91%

W.P. Carey (WPC)

1/24/2020

$84.53

$67.99

-19.57%

Nike Inc. (NKE)

1/24/2020

$101.88

$98.43

-3.39%

Raytheon Technologies*

2/4/2020

$96.29

$61.79

-35.83%

Abbott Laboratories (NYSE:ABT)

2/4/2020

$88.91

$91.43

2.83%

AbbVie Inc. (NYSE:ABBV)

2/7/2020

$92.10

$98.18

6.60%

PepsiCo Inc. (PEP)

2/13/2020

$144.81

$132.26

-8.67%

Amgen Inc. (NASDAQ:AMGN)

2/14/2020

$223.12

$235.86

5.71%

The Coca-Cola Co. (KO)

2/14/2020

$59.89

$44.88

-25.06%

W.P. Carey

3/3/2020

$81.49

$67.99

-16.57%

The Southern Co. (SO)

3/5/2020

$67.10

$51.85

-22.73%

AT&T

3/25/2020

$28.33

$30.23

6.71%

Realty Income (O)

3/25/2020

$53.94

$59.50

10.31%

Verizon Communications Inc. (VZ)

4/1/2020

$53.02

$55.13

3.98%

Cisco Systems Inc (NASDAQ:CSCO)

4/1/2020

$38.62

$45.63

18.15%

Dominion Energy Inc (NYSE:D)

4/9/2020

$81.72

$81.18

-0.66%

General Dynamics Corp. (GD)

4/9/2020

$140.15

$149.46

6.64%

Pfizer Inc. (PFE)

4/30/2020

$38.15

$32.70

-14.29%

Raytheon Technologies

4/30/2020

$64.89

$61.79

-4.78%

Aflac Inc. (NYSE:AFL)

5/13/2020

$32.21

$36.03

11.86%

PepsiCo Inc

6/11/2020

$131.45

$132.26

0.62%

* Adjusted price following the merger of Raytheon Company and United Technologies

The trades above show our investment guidelines in action. For example, Cisco Systems had reached the low end of our valuation target in early April. We couldn’t pass up the name even though Cisco Systems wasn’t scheduled to be next up for purchase. Same with Aflac in May. In both cases, the stocks had simply become too cheap for us to ignore.

On the other hand, PepsiCo was expensive both times that we added to the holding. We were willing to pay more for this stock as we believe that PepsiCo is a core holding that needed to reach a certain size. Our February 13 purchase hasn’t worked out yet and our June 11 buy is essentially flat. After these two purchases we now consider the stock a full position. We likely won’t add to the name again until it is time to adjust the value of core and supporting positions or it becomes considerably cheaper. More important to us than the short-term performance is PepsiCo is now contributing more to our dividend income than it was previously. And the goal is to grow the income stream.

Current portfolio

Following second-quarter trading activity, the March to Freedom Fund consists of the following 42 positions:

Core positions (17) : 3M, Abbott Laboratories, AT&T, Coca-Cola, Dominion Energy, General Mills (GIS), Johnson & Johnson, Mastercard (MA), McCormick & Co. (MKC), McDonald’s Corp. (MCD), NextEra Energy, PepsiCo, Procter & Gamble (PG), Realty Income, Southern Co., Verizon and Visa (V).

Supporting positions (25): AbbVie, Aflac, Amgen, Apple (NASDAQ:AAPL), Chevron (NYSE:CVX), Cisco Systems (NASDAQ:CSCO), Costco (NASDAQ:COST), Cummins (NYSE:CMI), CVS Health Corp., Dollar General (NYSE:DG), General Dynamics, Honeywell International (HON), JPMorgan Chase (JPM), Lockheed Martin (LMT), Microsoft, Nike, Pfizer, Raytheon Technologies, Starbucks (SBUX), Stryker (SYK), Target (TGT), Ventas (VTR), V. F. Corp. (VFC), The Walt Disney Co. (DIS) and W.P. Carey .

Dividend income analysis

As stated above, we currently have dividend reinvestment turned off in most positions so that we can more quickly add to stocks that we find undervalued. All dividends had been reinvested prior to 2019. It should be noted that 2014 was the first year that we really tracked our dividend income.

Month / Year

Month-over-month increase

Year

Year to date increase

April 2014

158.7%

2014

319.2%

April 2015

92.3%

2015

208.9%

April 2016

75.9%

2016

140.5%

April 2017

48.7%

2017

79.2%

April 2018

14.3%

2018

35%

April 2019

-7.5%

2019

2.9%

Source: Author’s calculations.

Despite April usually being of a slower month for dividends, income growth has been pretty steady. This past April saw a decline of 7.5% in dividend income compared to April 2020 because of our decision to part ways with Altria and Philip Morris in the fourth quarter of 2019. This has a material impact on this past April’s income results as both positions provided substantial dividends.

Year to date, income growth is overall positive compared to last year. We have seen a nearly 320% increase in income against the same time period of 2014. Growth has slowed compared to last year largely due to no more dividends from Altria and Philip Morris.

Companies that paid dividends in the month of April include: Cisco Systems, Dollar General, JPMorgan, McCormick & Co., Nike, Realty Income, Stryker, Ventas, Disney and W.P. Carey.

Month / Year

Month-over-month increase

Year

Year to date increase

May 2014

375.3%

2014

329.3%

May 2015

192.6%

2015

205.6%

May 2016

166.9%

2016

145.3%

May 2017

64.3%

2017

76%

May 2018

37.2%

2018

35.4%

May 2019

11.5%

2019

4.5%

Source: Author’s calculations.

May showed solid gains compared to the previous year. Helping matters is that we’ve made purchases of several stocks that have higher yields. We also reinvest some dividends among the stocks that we own due to their small position size or low yield. The month-over-month comparison are becoming more impressive as time goes on.

The year to date gains are also strong and we returned to growth compared to 2019 following a dip in April. The portfolio managed to make up for the decline in income for April in a single month. Even losing two high-yielding stocks was just a speedbump in the grand scheme of things.

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

Month / Year

Month-Over-Month Increase

Year

Year-to-Date Increase

June 2014

754.7%

2014

390%

June 2015

333.6%

2015

230.1%

June 2016

1198.2%

2016

156.6%

June 2017

103.6%

2017

82.2%

June 2018

61.8%

2018

41.1%

June 2019

12%

2019

6.3%

Source: Author’s calculations.

The months of March, June, September and December always produce the highest levels of income. These months also represent our best month-over-month gains. Some of this is due to the fact we receive dividends from 19 companies. Some of this growth is also due to higher-than-normal dividend increases from several companies.

A quick note, Boeing was the largest position in our portfolio when we sold it earlier this year. We subtracted a significant amount of income when we made that decision and our income compared to June of last year shows a double-digit improvement in dividends received. The rest of our portfolio more than made up for what was a major contributor to our income.

We have seen a nearly 400% increase in dividends compared to the first six months of 2014. The work that our portfolio has done to grow income over the last six and a half years has yielded these results. We have achieved this growth through simply buying and, for the most part, reinvest dividends. We estimate that our dividends for 2020 will be almost five times the total we received in 2014. We look forward to what dividend growth will look like in 15 to 20 years.

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

Final thoughts

The March to Freedom Fund, which is being built with the goal of providing income in retirement, had a decent second quarter following an extremely challenging first quarter. We came up short compared to the S&P 500, but have outperformed the index since 2015.

We made several purchases in the second quarter as we continue to build up positions to their respective assigned size.

Dividend income, our primary goal, continues to grow higher even after we divested some large positions. We will achieve financial freedom by sticking to our plan and making regular investments.

How was the second quarter for your portfolio? What are you looking to buy the rest of the year? Feel free to leave a comment below.

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About the author:

Nathan Parsh
I was originally born in Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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