Increasing Dividend Income

Asset Management, Companies and Industries, Investment Themes, The Economy January 24, 2020

Increasing Dividend Income

As the longest bull market in history continues, Nelson Roberts has found opportunities to reduce portfolio risk and increase dividend income through the addition of value-oriented stocks.

In the technology sector, we brought our exposure up to our target weight with the addition of International Business Machines Corporation (tkr: IBM). Typically, technology names are thought of as growth stocks. However, IBM trades at a forward price-to-earnings (PE) ratio of 11x which is very low relative to the PE ratios of its technology peers. Its core hardware and software business is profitable and it has started to invest in new initiatives such as analytics and cloud computing. Recently, IBM purchased Red Hat which will position the company as the leading hybrid cloud provider. Furthermore, it pays an attractive 4.8% dividend which increases our overall portfolio dividend yield.

We increased our exposure to the Real Estate Investment Trust (REIT) sector with the purchase of Ventas (tkr: VTR). Ventas provides a portfolio of senior housing, medical office buildings, life science buildings and hospitals. Recently, management diversified the business away from caring for patients and focused more on housing. Therefore, the addition of Ventas increases our exposure to the large aging baby boomer demographic. The company pays a 5.5% dividend and REITs tend to outperform late in the economic cycle and during recessions.

We trimmed one of our oldest holdings, Costco Wholesale Corporation (tkr: COST). We believe Costco has good management, will continue to grow, and is relatively recession-resistant. However, its growth had made it one of our largest portfolio holdings and largest overweight relative to the S&P 500. We decided to take some money off the table while it was trading near an all-time high.

Similarly, we cut our position in TJX Companies (tkr: TJX), the parent company of off-price department stores: TJ Maxx, HomeGoods, and Marshalls. TJX has done extremely well over the last couple years as one of the few retailers that has withstood the intense competition from Amazon. With high inventory turnover, TJX creates a “treasure hunt” mentality, as shoppers never know what they are going to get. This draws customers in and helps maintain high same-store sales. We have long maintained TJX as a core holding in our consumer discretionary sector. However, we decided to trim our large overweight position slightly as it was trading near its all-time high. Over the course of 2019, we executed 13 buys (5 of which were adding to existing positions) and 15 sells (7 of which were trimming existing positions), representing portfolio turnover of 19.5%. We increased our portfolio’s dividend yield from 1.48% in the beginning of the year to 1.79% at year-end.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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