Tuesday, January 15, 2013

Spring Cleaning My Dividend Portfolio

Most articles on dividend investing focus on buying the best dividend stocks, reinvesting dividends and living happily ever after. They dazzle you with elaborate analysis and entry criteria, yet spend little in analyzing factors that cause one to sell.

In a long term dividend portfolio, I expect that there will be lots of change occurring over time in both company’s business prospects and portfolio composition triggered by the business environment changes. As a result even if you picked the best stock in the world at the best price, you might still need to consider selling for one reason or another.

I have tried addressing this issue in previous articles, where I identified three reasons where I will make me sell. The three reasons include dividend cuts, company being bought out for cash or position being too high relative to other portfolio components. The only automatic rule is selling after a dividend cut or if I get bought out for cash when a stock is acquired. In the process of my portfolio reviews, I have uncovered another guideline that would recommend selling a certain type of companies on a stock per stock basis.

In the past year, I have sold three companies, which have kept growing their distributions. I then replaced these with companies which had better earnings and growth prospects.

In the middle of 2012, I replaced most of my Con Edison (ED) shares with units of ONEOK Partners (OKS). Con Edison was growing earnings and distributions very slowly, and looked overvalued based on the low future expected growth in earnings. ONEOK Partners on the other hand had much better growth prospects and a higher yield. The more time I spent researching the industry, the more I view utilities as poor long-term dividend growth stocks with their tendency to pay high current yields but to cut distributions every once in a while.

At the very end of 2012, I sold my position in Exxon-Mobil (XOM) and purchased shares in ConocoPhillips (COP). Exxon-Mobil has one of the stingiest dividend payouts in the oil and gas industry, and it tends to prefer stock buybacks to cash distributions. ConocoPhillips on the other hand has a better payout, and looked like a better value. I wanted to maintain my energy exposure, which is why I bought shares of ConocoPhillips.

The third trade I recently made was selling my position in Cincinnati Financial (CINF) and purchasing shares in five Canadian banks. These banks included Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CM) and Royal Bank of Canada (RY). Cincinnati Financial had raised distributions at a very slow rate over the past five years, had a high dividend payout ratio and earnings were not expected to grow by much in the foreseeable future. The yield was high due to indiscriminate yield chasing by yield hungry investors, and the P/E ratio is close to 18. With the funds received, I purchased the five Canadian banks mentioned above in order to maintain exposure to financials in my portfolio. In addition, they had slightly higher yields on average, and better earnings and growth prospects than Cincinnati Financial.

Another trade I have made includes replacing Universal (UVV) with Phillip Morris International (PM) stock. Both companies have similar yields, although Universal has a lower P/E ratio relative to PMI. However, I view PMI’s growth prospects to be much brighter than those for Universal. In my last analysis of Universal, I  realized that the company might experience declines in earnings going forward.

In general, I reviewed each company’s prospects on a company per company basis before making a decision to sell. I viewed low growth in earnings, dividends and poor near-term growth prospects as negatives. I then tried to look for a replacement in the same sector, or a close substitute.

Full Disclosure: Long PM, BMO, CM, BNS, RY, TD, COP, OKS, ED

Relevant Articles:

When to sell my dividend stocks?
Dividend Cuts - the worst nightmare for dividend investors
Why I am replacing ConEdison (ED) with ONEOK Partners
Dividend Investors – Do not forget about total returns
Exxon Mobil’s Stingy Dividend Payout


  1. Definately always a good idea to periodically review your portfolio and make sure the companies you own are living up to your expectations. I like to make sure earnings and dividend growth are both at a rate I expect them to be and the reasons I bought the company in the first place still hold true.

  2. DGI - Wondering if you considered the BMO S&P/TSX Equal Weight Banks Index ETF (ticker symbol "ZEB" on the TSX). It holds the 5 Canadian banks you purchased plus one other (National Bank).

  3. Smart man, buying CDN banks. :)

    I actually sold COP and bought more VTI. That puts me down to 9 U.S. dividend aristocrats in my portfolio.

    Most of them are DRIPping and only a few left that are not - that should change in 2013 - all stocks will be on autopilot for the next 20 years.

    Everything else U.S. is in VTI and likely always will be. Some yield and capital appreciation.

  4. Don't Canada hold out 15% tax on the Canadian bank dividends? They're not 100% recoverable

  5. I hold most of my dividend stocks in a retirement account. Would you buy OkE instead of OKS as Roth accounts cannot hold MLPs?


  6. I've been a reader of your site for about the last year and I know that in a couple instances you mentioned that often times, the idea of selling one stock and replacing it with another ends up being a bad move. I tracked these 4 changes you made and how they've fared over the following 3 years. Three did not work out in your favor(ED much better than OKS, XOM less down than COP, CINF MUCH better than the Canadian banks) and one was neutral (UVV and PM about the same as they were in early 2013). For me, this shows that often, one's "best ideas" are not correct. Makes me hesitant in actively managing my own portfolio to be honest but we'll see how it goes!

    1. Ian, I have found out that selling one company to buy another has been a dumb move on my part.

      I have had much better success just picking an investment, and sticking to it as long as the dividend not cut. Thinking too much about and doing too much could be hazardous to wealth building.


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