Compounders And Dividends: 2023 Portfolio Goals

With 2022 wrapping up, I wanted to spend some time reflecting on 2022 and codify my plans for 2023.

2022:

This year has been great for my family. We welcomed our first child and I made a career change that gave me more control over my portfolio. While I had owned some individual securities before, I’ve always had to color between the lines of ethics and was forced to sell some companies against my will. The career change allowed me to open up the portfolio quite a bit, allowing 2022 to be the year I divested some ETF holdings and went long some companies I’ve long admired.

The first 9-10 months of the year saw me focus on rounding out the portfolio by selling ETF positions and building/growing dividend growth companies. I added a number of positions throughout the year to help diversify my dividend income. Something I’ve long discussed is working with an end in mind. I know I want my wife and I to live off our dividend income in retirement without being forced to sell shares. In order to do that, I have to build a large vault of blue chip companies paying reliably increasing dividends. You can’t do that overnight, it takes years. I imagine at retirement we will own in excess of 100 companies, but I currently own under 50. I imagine the large majority of those companies will hold a weighting below 0.5% of my portfolio, and that’s OK. Buy blue chips at attractive valuations and allow them to compound.

Near the end of 2022, with my 10% dividend growth hurdle being met (and my 2023 20% hurdle already surpassed) I began to allocate to dividend companies (or a basket of companies) with yields in excess of 2%.

During this period, I established new positions in wonderful companies, including Union Pacific (UNP), BlackRock (BLK), and Verizon (VZ), which were all trading at attractive dividend yields.

In December (spoiler!) I added FOUR new positions, which was likely my most active month in years. I purchased a higher yielder in Enterprise Products Partners (EPD), two core dividend growth companies in Mid-America Apartment Communities (MAA) and Medtronic plc (MDT), and added a non-dividend payer in Charter Communications (CHTR) since I was still well over the 2% threshold.

I focused on this because my long-term portfolio goal is to raise my dividend yield to something “meaningfully higher” than the yield of the S&P 500. I won’t achieve that goal next year, or the year after, or possibly this decade. In order to achieve that goal, I’ll have to guide my portfolio in that direction over the next several years. While my shorter term goals may conflict with that (you’ll see further below) my long-term goal remains.

2023:

My goals for 2023 are to focus on two specific segments: growing and sculpting my top 10 companies and adding compounders. My Top 10 Article described how I view my top 10 positions and some companies I want to drop out/rise up. Here is how I currently view my top 10:

1. Visa (V)/Mastercard (MA): 8.468%

2. Microsoft (MSFT): 7.489%

3. Moody’s (MCO)/S&P Global (SPGI): 6.762%

4. Canadian National (CNI)/Canadian Pacific (CP)/Union Pacific: 6.296%

5. Home Depot (HD)/Lowe’s (LOW): 5.904%

6. Broadcom (AVGO): 4.964%

7. Apple (AAPL): 4.942%

8. BlackRock: 4.193%

9. Texas Instruments (TXN): 3.717%

10. Alphabet (GOOG) (GOOGL): 3.322%

Since the above article, there has been a shakeup in my top ten. First, MSFT (previously in first) and V/MA (previously in second) have swapped positions. I’m perfectly happy with that. Moving forward, I’d want either MSFT, VA/MA, or my railroads to be in my top position. Those three should rotate over the coming years.

MCO/SPGI remained in third, and I plan for them to stay in my top five for decades. Wonderful businesses with capital light models that reward shareholders, sign me up!

The railroads have jumped from sixth to fourth, and I anticipate they will keep climbing. The big change was adding UNP which helped bolster the position. I think this is an area I’ll be adding to aggressively in the near year.

The move up from the rails pushed HW/LOW and AAPL down to fifth and seventh. Perfectly fine by me. I’d love to see HD/LOW fall out of my top 10 completely, but that will take a while. I don’t plan to add to either name through monthly savings or dividend reinvestments anytime soon. If the value on either drops, I may reconsider since I can’t help myself when a high quality company declines in price.

AVGO’s strong price appreciation coupled with AAPL’s price deterioration has allowed AVGO to creep into my top six. I don’t imagine this will last long. At current prices, I may buy some more AAPL shares in the new year.

Rounding out my top 10 last time were GOOGL, ESS and COST. That has changed to BLK, TXN and GOOGL. I was happy to see ESS fall out of my top 10 due to the money I added to BLK and TXN. GOOGL has been decimated in the market, so I’m not shocked to see it fall a few notches. Moving forward, I’d like to see COST return to my top 10 (it’s a candidate for dividend reinvestment on January 1) and BLK and AVGO drop out.

To cogently lay out what I just said, I want to continue to add to V/MA, SPGI/MCO, MSFT, GOOGL, AAPL, UNP/CNI/CP, TXN, and COST in 2023. I want to see AVGO, BLK, and HD/LOW have a reduction in portfolio weight throughout the year.

For those counting, that’s only eight companies. I’m not too sure what else I want to see in my top 10. I’ve long admired Danaher (DHR), ADP (ADP), and American Tower (AMT), and would be happy to see those companies increase in weight. I also think some companies not in my portfolio may end up joining, like Berkshire Hathaway (BRK.B), Amazon (AMZN), AutoZone (AZO), Constellation Software (OTCPK:CNSWF) or Otis (OTIS).

As noted above, the companies I plan to add money to in 2023 won’t help my long term goal of increasing my dividend yield. Several of the companies pay less than a 1% yield, but what they lack in starting yield they make up for in growth and possible price appreciation. I will likely focus on higher yielders in later years, but I want to see strong organic dividend growth over the next few years built on a portfolio anchored by truly wonderful companies.

This leads me to the next big area I want to focus on in 2023: Compounders. Defining a compounder is tough, there isn’t a universal definition. Todd Combs has said the following:

“The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital.”

We can start with the basic definition of a company that can grow without the need of new or significant capital. MA, V, MCO, and SPGI all come to mind as companies I own that a true compounders. A company I recently purchased is CHTR, which I believe falls into the compounder category given its pricing power and competitive advantages in the regions it operates. There is plenty of concern over future competition, but at my entry point I only have to be directionally right, and my position size will protect me if my thesis is wrong. Other compounders I’m looking at buying in 2023 include BRK.B, CNSWF, Intuit (INTU), AZO/O’Reilly (ORLY) (depending on your thinking), and possibly Adobe (ADBE) or Autodesk (ADSK).

The last item I wanted to discuss was any possible sales I anticipate in 2023. While the simple answer is that I’m a buy and hold investor and don’t ever want to sell, things are never black and white and the best investors are always pruning their portfolio. Am I one of the best investors? Absolutely not, but there are lessons to be learned. There are a few companies that are on my sell radar depending on how the year plays out:

• EOG & COP — These companies have been absolute winners for me, and the idea that I could sell them hurts me. The variable dividends they have given me this year have been a boon to my dividend growth and have been reinvested into some really great companies. The truth is, I’m interested in trading one or both in for more stability with one of the super-major oil producers with more consistent dividend growth or a refiner to add a bit more diversification. Honestly, I’m not sure I’ll do anything here, but it’s been on my mind for some time. A super-major would give me even easier portfolio management. If I were to rank the chances of selling one of these it’s probably on the verge of 25% or so. It’s much more likely I’ll outright buy a super-major and make sure its weighting is well in excess of these two and/or buy a refiner as another position.
• NFLX & META — I’ve owned these companies for quite some time and I’ve generally been quite disappointed the last 1.5 years. The truth is, my rigidity in not selling burned me on both of these companies. I should have sold when NFLX missed its subscriber numbers and tumbled into the mid $300s and META as soon as it changed its name (which I’m using as a proxy all of the events META was facing at the time). I bought these companies under the assumption of growth and pricing power, and NFLX has shown difficulties growing and META is attempting to position itself for an AR/VR future while superfluously spending our money. META is probably the company you don’t want to buy when it’s cheap because it’s cheap for a good reason. I’m planning to hold onto both companies since they are weighted appropriately in my portfolio, but don’t be surprised if I sell at some point this year. It’s 5%+ of my portfolio that could quickly be weaponized to increase exposure to some wonderful companies. I think the takeaway for me here is I thought I was buying wonderful companies but, when the tide went out, I realized I merely purchased good companies.

I’m 31 and I have a lifetime of mistakes to make and learn from. I’m thankful for the community here that will help me identify and learn from my mistakes.

Portfolio

Here is a snap shot of my portfolio right around the holidays.

Company	Ticker	Allocation
Core Dividend Growth		36.887%
Microsoft Corporation	MSFT	7.489%
Apple, Inc.	AAPL	4.942%
Canadian National Railway	CNI	3.228%
Air Products and Chemicals, Inc.	APD	2.788%
AbbVie, Inc.	ABBV	2.672%
Essex Property Trust, Inc.	ESS	2.550%
Canadian Pacific Railway	CP	2.361%
Comcast Corporation	CMCSA	1.795%
Qualcomm Incorporated	QCOM	1.563%
Vulcan Materials Company	VMC	1.150%
ConocoPhillips	COP	1.046%
EOG Resources, Inc.	EOG	0.976%
CVS Health Corporation	CVS	0.978%
Starbucks Corporation	SBUX	0.878%
Union Pacific Railway	UNP	0.707%
The Coca-Cola Company	KO	0.685%
NextEra Energy, Inc.	NEE	0.501%
Medtronic plc	MDT	0.346%
Mid-America Apartment Communities	MAA	0.233%
High Dividend Growth		46.417%
Broadcom, Inc.	AVGO	4.694%
Visa, Inc.	V	4.294%
Moody’s Corporation	MCO	4.206%
BlackRock, Inc.	BLK	4.193%
Mastercard Incorporated	MA	4.174%
Texas Instruments Incorporated	TXN	3.717%
Lowe’s Companies, Inc.	LOW	3.007%
The Home Depot, Inc.	HD	2.897%
Costco Wholesale Corporation	COST	2.756%
S&P Global, Inc.	SPGI	2.556%
American Tower Corp	AMT	2.237%
Automatic Data Processing, Inc.	ADP	2.153%
Danaher Corporation	DHR	1.935%
Old Dominion Freight Line, Inc.	ODFL	1.704%
Target Corporation	TGT	1.129%
Estee Lauder Companies, Inc.	EL	0.493%
High Yield		5.422%
Altria Group, Inc.	MO	2.204%
Realty Income	O	2.039%
Verizon Communications Inc.	VZ	1.144%
Enterprise Products Partners LP	EPD	0.036%
Non-Dividend		9.449%
Alphabet, Inc.	GOOGL	3.322%
Netflix, Inc.	NFLX	3.075%
Meta Platforms, Inc.	META	2.261%
Charter Communications, Inc.	CHTR	0.739%
Olaplex Holdings	OLPX	0.052%
Other Bets		1.408%
Financial Institution A	—	0.579%
Hilton Worldwide Holdings, Inc.	HLT	0.566%
The Walt Disney Company	DIS	0.262%
Cash		0.416%

Click to enlarge

Conclusion

I look forward to updating everyone on my purchases and dividend reinvestments this month in early January 2023! I hope everyone is enjoying the holidays. It has truly been special to spend this time with our first born and parents. I wish everyone a happy new year and strong dividend growth in 2023.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.