Dividend Portfolio total 2017 return 6.48%; 2 buys and 2 sells in 2018 rebalancing

2017 was a tough year for benchmarking my Dividend Portfolio.

For the year the total price appreciation on the stocks in the portfolio after all buys and sells was 3.4% The 21.64% return on the Standard & Poor’s 500 crushed that.

The dividend yield on the portfolio for the year came to 3.11%. Which beat the 2.8% total return from holding 10-year Treasury bonds for 2017. (The total return for 3-month Treasury bills for the year came to 1.28%)

The total return on my Dividend Portfolio for 2017 was 6.48%.

If you’re goal was beating the return on Treasury bonds for the year, then the 6.48% looks pretty swell. If you goal was to generate more income than the 10-year Treasury, then mission accomplished too. On the other hand, if you just wanted to earn the highest total return for the year, then you would have done much better just sticking with an S&P 500 index fund. (I think the points of this portfolio is to beat the yield and total return benchmarks of bonds or a bond index. On that basis 2017 was a decent year for the portfolio. If you’re own goal is generating the highest possible total return, I’d suggest that this isn’t the portfolio for your money.)

That all said, I’m still disappointed in the total return for this portfolio. I don’t mind leaving some money on the table in my search for income, but the gap between the 6.48% total return on this portfolio in 2017 and that 21.64% total return on the S&P 500 is just too great for my liking.

I can think of three reasons for that.

First, 2017 rewarded growth and momentum more than any other investing style. And the biggest growth stars of the 2017 market–the Amazons, the Facebooks, the Alibaba’s–just don’t pay much, if anything in dividends. Many of the big winners of 2017 just weren’t eligible for this portfolio.

Second, the portfolio was too concentrated in the energy sector. These were’t terrible picks but the timing wasn’t hurt. Energy income stocks saw their biggest recovery in 2016. In 2017 portfolio picks such as Helmerich & Payne (HP) and OneOK (OKE) were basically flat or slightly down. And some picks in the sector were down significantly: Targa Resources (TRGP) was down 23.6% in 2017 and Western Gas Partners (WES) was lower by 18.2%

Third,let me not neglect the effects of some bone-head picks (or at least absence of sell calls) last year. The biggie, of course, was General Electric (GE), which dropped 44.8% in the year. I think these shares will come back in 2018–after more chaos–but it would have been smarter in a portfolio such as this to sell earlier rather than cycle through the bottom and then (I believe) back up.

In rebalancing this portfolio for 2018, I’m going to address Problem #2 and take advantage of what are strong possibilities for dividend (and buyback) increases from companies that are seeing big benefits from a reduction in their corporate tax rates.

On the sell side, I’m removing Targa Resources (TRGP) and Western Gas Partners (WES) from the portfolio. Although they both pay above average dividends, I’m looking for another tough year for natural gas prices as producers in U.S. shale geologies increase the pace of drilling in order to take advantage of high oil prices–and in the process produce more natural gas. Targa essentially duplicates OneOK’s (OKE) exposure to natural gas production growth in the Permian Basin. But while most of OneOK’s contracts are now fee based, the bulk of Targa’s contracts remain percentage of proceeds, which means revenue is very exposed to natural gas prices that are likely to remain low thanks to competition in the Permian Basin among producers. In the case of Western Gas Partners, I see oil and natural gas production in 2018 focused on low cost/high return geologies such as the Permian Basin where Western Gas Partners has relatively lower exposure.

On the buy side, I’m adding Bank of America (BAC) and McDonald’s (MCD). Both companies look likely to raise dividend payouts in 2018 as a result of lower effective tax rates. That should, if this call is correct, push yields (and total returns) on these stocks higher. I’ll have complete write ups on these two buys later today.

These moves keep the portfolio at 15 positions with an equal amount of cash invested in each as we start 2018.