This dividend income portfolio is doubling the stock market. Should I rebalance the stocks?
Our dividend income portfolio is almost double the market return so far, a 16% return with just one month in. One stock is up 47% and I’m adding another investment that could go even higher.
But should I take some of the profits? When do you know to sell your stocks or rebalance the portfolio?
In this video, I’ll review the portfolio and reveal a critical piece in your investing strategy. I'll show you how to lower your risk and lock in returns to make sure you stay on track with your dividend portfolio.
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My 2019 Dividend Income Portfolio
I started the 2019 Grow Your Dough Challenge just last month and our portfolio of dividend stocks is already exploding higher. I’ll update you on the portfolio including two stocks I took gains on as well as a favorite new name I’m adding.
More importantly though, I’m also going to talk about a crucial piece of your investing strategy.
Selling is always a tricky subject for long-term investors. You have to be careful not to sell your winners and hold on to your losers but the rebalancing rules I’ll show you are going to be critical to producing those returns that will beat your goals.
This is something we talked about last week in a video on the five reasons professional investors use to sell stocks and it’s something that most investors get wrong so make sure you stick around after the portfolio review for those rules.
I’m putting this video into our 2019 Stock Market Challenge playlist so if you haven’t seen the other two updates, check those out. Along with some of the biggest investing channels here on YouTube, I created a $1,000 portfolio in January and will be tracking it all year.
To track my portfolio of dividend stocks, I’m investing $1000 on M1 Finance, a no-fee platform that lets you pick your stocks and automatically invests any new deposits across your group. Unlike some of the other investing apps, M1 doesn’t charge a monthly management fee which is why I’m using it for no-cost investing.
It also has retirement accounts available, something Robinhood doesn’t have so that’s important anytime you’re investing in high yield stocks paying dividends.
Stock Market Challenge Update
I don’t want to spend much time talking about the challenge because I really want to get to those massive returns in our dividend income portfolio. Make sure you check out those first two videos to see how I’m picking our dividend stocks and the first ten names in the portfolio.
Here’s the portfolio as of last Friday with a 15.8% return on some really blowout numbers on some of the picks. We’ll go over each of the 10 dividend income stocks in the portfolio, one with a 46% return already, as well as a new dividend stock I’m adding.
For the year so far, our dividend portfolio is just under twice the return of the broader market shown here with the S&P 500 and is more than twice the return on the Vanguard Dividend Appreciation fund.
But let’s look at those individual stocks in the portfolio because some of these have just boomed higher. Eight of the 10 dividend stocks are beating that 7.9% return on the market with only the Alerian MLP, ticker AMLP, and the iShares European Financials fund, ticker EUFN, lagging the market return.
I still like these two dividend funds though. First because they’re giving me broad diversification in high-yielding energy assets with those master-limited partnerships and with those international financials with the European fund.
Also though, because I still think these are great contrarian themes. Those MLPs own hard assets that pay a hot 8.2% dividend yield. Oil has been battered down to about $50 a barrel but is finding support and I love the theme. For more about why I invest in these high-yield companies, check out this video on my favorite picks in the theme.
The European financials fund is 30% off its and nobody is expecting anything but chaos this year from the theme. I think that’s overblown and the fund pays a 6% dividend yield with banks selling for bargain prices.
Now let’s look at some of our winners and I know half of you have already opened a new internet window to check out Hanesbrands and Bank OZK.
Hanesbrands blew away its fourth quarter earnings last Wednesday for exactly the reasons I pointed out last month, strength in that activewear category and the direct-to-consumer sales. Higher profitability direct sales were a bigger chunk of the total and revenue from activewear beat estimates by seven percent.
Now I did take some money off the table on Hanesbrand. We’ll talk more about how to decide when to sell and rebalance after the review but specific to the company, there were a few reasons.
First is just that after almost a 50% jump, the price was pretty close to my estimate of fair value. Fourth quarter numbers surprised Wall Street but activewear has a contract with Target expiring early next year. I still think there’s some upside and I don’t want to totally abandon the stock so I sold out of the profits and will use it to buy into our new investment.
I also took our profits out of Bank OZK. The bank also reported stellar earnings last month and I still like the valuation but the dividend is now just 2.6% and I wanted to use profits to buy into our new investment.
To reiterate, I’m still in both of these stocks for about the same amount as when we started last month. I just think the bulk of the upside is probably out so I want to keep riding it higher while I limit the downside by booking those profits.
Elsewhere in the portfolio, chemicals maker Olin, ticker OLN, and China Life Insurance, ticker LFC, are both producing 16% returns. Again, if you haven’t watched that first video on why I think this could be a once-in-a-generation opportunity for some of these Chinese stocks, check that out. China Life issued a huge warning on profits late last month and the stock is still up 16% so that tells me the bottom is in on these names.
Our Vanguard real estate fund is doing well at just over 12% and I love the REITs, not only on that four and a quarter dividend yield but on the idea that Fed rate hikes might be on pause this year. REITs and that commercial real estate space have struggled over the last couple of years on higher interest rates but this could be the year they break higher.
Adding a New Dividend Income Stock
I want to get to that dividend stock we added and how to know when to rebalance your portfolio so I’m going to update on these other stocks in our March update. Make sure you click that subscribe button so you track the portfolio each month because it looks like it’s going to be a market buster this year.
Now if you watched how I put the portfolio together in our first two videos, you know I love the beaten down plays. It’s a dividend portfolio so I set a 3% yield requirement but I love to go after those best of breed companies that investors have abandoned. As we saw with Hanesbrands and Bank OZK, these deep-value stocks offer huge upside returns along with the dividends.
ConAgra Foods is a U.S. powerhouse in prepared meals where it’s the second-largest in the industry. It has a 40% market share in canned tomatoes and more than a fifth of the meat snacks market with Slim Jim. The company has some solid brands in that relatively safer consumer staples sector so we’re talking dividends as well as protection from the economy.
Management fumbled big time with last year’s Pinnacle acquisition and had to lower the profit outlook by 20% late last year. The problems were centered around Pinnacle’s distribution business so a little harder to read but management has been very transparent since December about its plans going forward.
I think they’re being overly conservative on estimates for a 5% sales decline and margin loss on the Pinnacle assets so the next surprise could be on the upside when things come out better than expected.
Shares of ConAgra pay a 3.9% dividend which management has affirmed with its new 2019 outlook and trade for just 9.9-times trailing earnings, that’s a 41% discount to the price multiple where it was trading in November. Cash flow is still solid and management is expecting $215 million in cost savings through 2022 on the acquisition. The average analyst price target is 50% higher than the current price and even the lowest price target is 8% higher.
When to Rebalance Your Stock Portfolio
Now I want to talk about why I sold off some of our stocks because it’s a very important topic that most investors really don’t understand. Even for long-term, buy and hold investors, you have to follow your stocks. If you’re not ready to spend a little time watching for those five warning signs we talked about in that previous video, then you’re better off just investing broadly in ETFs and don’t worry about stock picking.
But it’s not a matter of holding or selling all of your position and that’s what a lot of investors get wrong. They think it’s all or nothing, you either love a stock and ride it higher or you sell out of the investment.
You see here that I’m still holding Hanesbrands and Bank OZK in the portfolio even though I sold the shares back down to our original investment. This is called rebalancing and there are a few reasons you want to do it.
First is that no individual company should be more than about 5% of your total wealth. The risk is just too high that something unforeseen happens to the company and it could destroy your portfolio. I know it looks like these stocks are between 7% and 12% of the portfolio here but they’re actually a very small part of my overall wealth. Remember, I’ve got investing accounts on five different websites so these are just the percentages of these stocks on the M1 Platform.
Nevertheless, that 5% rule is extremely important and I’ve seen lives destroyed over it. Everyone likes to talk about dollar-cost averaging and buying more of an investment as the price falls. What can happen though is that you chase that stock down, adding more and more just hoping that it rebounds a little and you get even.
Pretty soon, you’ve got 30% or 50% or more of your money in this one company and it never gets back up. I’ve seen it happen with friends investing in coal companies around 2015 and in some tech names.
You also might rebalance your stocks on valuation. Every time you buy an investment, you need to have an estimate for what it’s worth. Now that can be based on some simple measures like price-to-earnings or cash flow analysis, whatever it is, it’s what the fundamental business measures say the company is worth.
For example, while Wall Street analysts were climbing over each other to downgrade Hanesbrands on the way down. My own analysis of the activewear segment and direct sales told me the shares were worth at least $20 each and that was confirmed with last week’s 20% pop to almost $19 a share.
I still think there’s some room for upside, especially as everyone piles into the good news but I wanted to take some of my risk off the table as we got closer to that fair value.
One more reason for rebalancing stocks in your portfolio is just to keep your money from being over-exposed to one particular sector. This wasn’t so much the case with our dividend portfolio but say your stocks of technology companies have been surging and adding up the percentages you have in tech stocks is like 20% or more of your portfolio. Here again, just like having that 5% rule on any individual stock, I think you should limit any particular sector to less than 15% or 20% of your portfolio.
This is also why I don’t recommend investing in the market fund, for example the S&P 500 ETF ticker SPY, which owns all the stocks in the S&P 500. I know a lot of passive index investors love the fund but if you look at what you’re getting, this fund is always 20% or more tech stocks with almost half the fund in just three sectors of the economy.
Like I talk about in our goals-based investing course, you need to diversify across different sectors of the economy that are going to react differently to inflation and growth. It takes a lot of the risk out of your money and makes for a much better portfolio.
I’ve started a playlist with all the Grow Your Dough channel videos that I’ll link to in the video. I’ll also leave a link to M1 Finance, the no-cost investment platform I’m using for the challenge that’s going to save you all those fees whenever you rebalance.
Understand that rebalancing your stocks doesn't mean buying and selling all the time. It's a way to keep your portfolio on track to meet your goals while you take advantage of shorter-term moves in stock prices and a way to reduce your risk. Make sure you follow the 2019 stock market challenge and the dividend income portfolio for more great videos.