Q2 2015 Portfolio Update (and an unintended stock recommendation)

Every quarter I’ll update my portfolio. I’m thinking once a quarter is enough, as the changes aren’t very significant. If the “readership” shows demand for more frequent updates of the the positions I hold, then I’ll provide. This will give you an idea of exactly the stocks and securities I’m using to make my passive income.

(All Data as of: May 5^th, 2015)

Previous Portfolio Updates: Q1 2015

My Portfolio

Here is my total investment portfolio ($292.6k) broken out by sector and sorted by position size, and also fixed income and cash. You’ll also see the tickers for my holdings, the yield, and how that all equates to my monthly passive income ($755.80). This is separate from the checking accounts, savings accounts, and any real assets (house, cars, etc.). In essence, these are assets that make me money (AKA productive assets).

Highlighted in green is my favorite dividend growth stock for each sector. If you’re building a dividend growth portfolio, I believe the highlighted stocks should be the place to start. If you’re already dividend growth investing, then buy those green stocks right away! “Favorite” to me means a company with strong future prospects, attractive dividend yield, and the ability to grow that dividend for a very long time.

I love every company and position in this list, and would highly recommend them to anybody. As you can see, many positions (particularly in technology) pay no dividend at all. These are all companies that I’m holding because I think their growth prospects are phenomenal, and expect them to be worth many times their value a decade from now.

One thing I could do, but am not planning on doing, is to inflate my passive income by reallocating my non-dividend payers into dividend payers. I have a little over $60k in non-dividend paying growth companies. If I deployed this capital into dividend payers at a 3% yield, that would boost my monthly passive income by $154.50. Awesome! But, I won’t do that now. At retirement in 2019 I might do a little bit of that, but between now and then, I’ll just slowly reallocate as positions grow.

Watch List

I’m always on the lookout for new companies that can bolster my passive income or growth potential. This list is how I currently order those companies that I’ll invest in next.

I look at some of these companies and I’m amazed I’m not already invested (JNJ, WM, MO, FB, AMZN). I’ll be using new contributions to my portfolio to buy into some of these great companies over the coming quarter.

I use DRIP (Dividend Reinvestment Program) in my Roth IRA, since those positions only pay out like $81 a month. At those low payouts, it would take a year for enough cash to build up (since I’m not adding new cash to my Roth) to justify buying a new position. I like to buy at least $1k at a time, to lessen the impact of a $10 commission.

In my dividend growth portfolio, I will be adding $11k a year (IRA limit for self and spouse), as well as the current $465/mo in dividends. I allow those dividends to sit as a cash balance, and then I’ll invest in a new position every month or two. Some of these new-fangled no/low-dividend companies (the second list) will take quite a long time to be purchased, as I’ll only buy them with extra funds that aren’t set aside for dividend growth.

Thoughts This Quarter

I’m generally pleased with my portfolio allocation across cash, fixed income, and equity.

I’m at 6% Cash, 9% Fixed Income, and 85% Equities. I feel like I’m still a young gun, and maintaining a heavy weighting in equities seems like the smart thing to do, even though I’ll be retiring in under five years. Why, you ask? Well, because I’m not relying on any market gains to maintain or grow that nest egg or support my retirement, I’m only relying on the dividends they provide–which are much more reliable and consistent than any capital gains. I’ll take the market punches so long as dividends keep pace.

My sector allocation isn’t quite where I’d like it, and it probably won’t be for several years. I’d like to increase my utilities position (I’m suddenly fascinated with the potential of water and waste utilities), as well as increase my healthcare position (it’s criminal I don’t own JNJ yet).

I’m certainly overweight technology, but I’m pretty content with that. I fancy myself a pretty decent stock picker. In the nine years I’ve been investing, my annual returns in my Roth IRA–as I never managed my 401(k) stocks–has been 15.6% CAGR. That trounces the total return (dividends reinvested) of the S&P 500 at 7.6%. At one point that was a small sample period, but nine years of solid outperformance of the S&P is pretty awesome in my mind. I don’t think I’m a savant or anything, I just see pretty obvious opportunities for significant gains over long periods of time. Companies like Tesla, Netflix, Apple, Bank of Internet, Sierra Wireless, Hasbro, and Starbucks have all vastly more than doubled for me (or Netflix, a ten-bagger), and that makes up for a pile of losers.
Technology is simply the space I think I understand the best, and also has most of these opportunities. Look at a company like SolarCity. They basically own (with over 50% market share) the residential, distributed solar market. They’re locking their customers into 20-year energy leases in a space where their costs are on a declining curve and the competitors costs (fossil fuels) are on an inclining curve. The price parity in the solar market has long since tilted toward solar in several sunny states (TX, NV, AZ, CA) as well as several high-cost fossil fuel states (NY, NJ, CT, MA, ME). As technology improves each year, the scale tilts ever further. Tesla, which is basically a strategic partner to SolarCity at this point, is pioneering home energy storage, so the greatest weakness of distributed solar power–the fact that the sun doesn’t always shine–will soon be a thing of the past. There are really only three scenarios that can occur: 1.) SCTY gets bought out early in its growth curve and the potential is never realized as a standalone company; 2.) SCTY gets taken to the woodshed and is marginalized by somebody like Amazon, some emerging (yet-unknown) technology, or a string of competitors, or 3.) SolarCity becomes a monopoly (or part of a duopoly) in residential solar and becomes the nation’s (world’s?) de facto low-cost energy producer.

Most people look at scenario 2 and get scared off. Could SolarCity go to zero? Sure, I’d say there’s about a 33% chance of that happening. There’s another 33% chance, though, that SolarCity absolutely kills it, and becomes the next Dominion Resources, Southern, or Exelon (except with much better margins). I wouldn’t put my whole retirement in SCTY, but I would certainly put some, because some is all I’ll need if it takes off.

In my opinion, this is how you make big money in the stock market. You get in your little time machine and picture yourself ten years from now. What are you buying? What is your house like? What do you do with your time? In 10-20 years:

• Solar panels will be built into most new homes.
• Children will never get a driver’s license. This isn’t because they’re dumb, but because autonomous vehicles are such a transformative, safe, and efficient idea that adoption is going to be rapid.
• Telework, despite Marissa Mayer best attempts, will be status quo.
• Vegetarianism will be commonplace, if not practiced by the majority of society.
• Low-fee, passive, index investing (think Vanguard) will dominate the investing landscape.
• You will buy your house on the internet (Amazon or Zillow).
• Uber will deliver you, your clothes, your dinner, your groceries, your prescriptions, and just about everything else that needs short, predictable transport.
• You will rarely, if ever, physically enter an actual bank.

And that’s just off the top of my head on this fine morning. So, you ask yourself, what companies will benefit if these predictions play out? That’s where I invest my growth dollars.

That’s it for this quarter. I’d love to hear your thoughts on my allocations and ideas. Thank you for reading!

Eric