Compounders And Dividends: My Top 10, Portfolio Positioning

In my inaugural article introducing my portfolio, I said the following regarding my beliefs on owning the entire market where an oligopoly persists:

• Payment Rails, Northern Railroads, Rating Agencies

• In markets where there are high barriers to entry and few big players, I find it easier just to own the whole market. I could spend hours, days or weeks researching markets and be unable to decide which company is “better.” Therefore, it’s easier to just own the whole market. Other markets in my portfolio that are similar to the above three (but not perfect comparisons due to competition or other factors) include home retailers (Home Depot (HD) and Lowe’s (LOW)), physical general retailers (Target (TGT) and Costco (COST)), and cloud computing (MSFT and GOOGL, (Amazon (AMZN) will appear in this portfolio eventually)).

My most recent article highlighting where I put my September 2022 dividends to work provided the most updated look at my top 16 positions:

Company	Ticker	Allocation
Microsoft Corporation	MSFT	9.049%
Apple, Inc.	AAPL	6.425%
Broadcom, Inc.	AVGO	4.976%
Moody’s Corporation	MCO	4.502%
Alphabet, Inc.	GOOGL	4.424%
Visa, Inc.	V	3.936%
Mastercard Incorporated	MA	3.757%
Canadian National Railway	CNI	3.632%
Essex Property Trust, Inc.	ESS	3.571%
Lowe’s Companies, Inc.	LOW	3.526%
Costco Wholesale Corporation	COST	3.424%
Texas Instruments Incorporated	TXN	3.218%
Meta Platforms, Inc.	META	3.195%
Home Depot, Inc.	HD	3.129%
Netflix, Inc.	NFLX	2.974%
S&P Global, Inc.	SPGI	2.862%

Click to enlarge

Although those are my top 16 positions, I don’t look at my top positions in that way. As noted above, I view several of these companies as “one” where I admit I’m not smart enough to pick between the companies, so I own both to reduce the risk of missing out. As said in my first article:

• As you can see, there are a large number of positions. That is a feature, not a bug. While I’d love to hold a concentrated portfolio of my 10 highest conviction picks, I instead defer to quantity+quality. I’m a firm believer that quantity drives quality.

Here is how I view the top positions in my portfolio (and how I have a page in my excel sheet arranged):

Companies	Tickers	Weighting
Microsoft Corporation	MSFT	9.049%
Visa, Inc. + Mastercard Incorporated	V+MA	7.693%
Moody’s Corporation + S&P Global, Inc.	MCO+SPGI	7.364%
Lowe’s Companies, Inc. + Home Depot, Inc.	LOW+HD	6.655%
Apple, Inc.	AAPL	6.425%
Canadian National Railway + Canadian Pacific Railway	CNI+CP	5.505%
Broadcom, Inc.	AVGO	4.976%
Alphabet, Inc.	GOOGL	4.424%
Essex Property Trust, Inc.	ESS	3.571%
Costco Wholesale Corporation	COST	3.424%

Click to enlarge

Below is a discussion of these segments and how I’d like to position them moving forward:

Big Tech:

MSFT, AAPL and GOOGL are truly in a league of their own. Incredible businesses with competitive advantages, they have been compounding shareholder’s capital for years and likely will in the decades to come. You can pick whatever metrics you want to convince yourself these companies are cheap, but they always trade at a premium to the market for a reason. Yes, the stock price now is cheaper than it was a few months ago, or a year ago, but it’s dangerous to anchor yourself to ATH. Continuing to buy these companies over long periods of time is always your best move. I know that for where I want my portfolio to be when I’m retired, I need to keep buying these companies. I remind myself of this whenever I average up into a position.

Moving forward – I want all three of these companies to remain in my top ten unless something catastrophic happens. Whenever I feel that these companies are underallocated, you can expect to see me allocate some of my dividend reinvestments into these compounders. At first glance, MSFT and AAPL are right to be in my top five. I could see MSFT falling out of the top position if the payment rails (V and MA) or the ratings agencies (MCO and SPGI) catch a bid and overtake the top position. AAPL will likely always be in the 4-7 range. GOOGL is a frustrating one, if I wasn’t a dividend growth investor, I’d instantly double my GOOGL position by selling off something else. My GOOGL position is in a good place though, but you will see me add to it through dividend reinvestments once my yearly dividend is up 10%+ yoy.

Payment Rails – V and MA may be two of my favorite companies. I’ve discussed V in my previous postings and nearly everything can also be said of MA. They are wonderfully run companies that deserve to trade at large premiums to the market. A “toll road” on global GDP, they have faced a number of headwinds over the past decade and have sailed past without issue. That’s not to say those headwinds aren’t real, one only has to look at the V or MA risk factors to know regulation could hamstring these companies’ growth prospects. Until that happens, I’ll keep adding on weakness.

Moving forward – I’d start to feel sick if these two companies fell out of my top five, let alone top 10. I’ll add whenever I get the chance. These companies should be increasing their dividends at a double-digit clip for years to come. As noted above, if I want my portfolio to be multiples of what it is now (which I’m sure every investor wants) I need to keep accumulating shares of these companies.

The Ratings Agencies

If I had to own “one” company for the rest of my life, it would probably be MCO+SPGI (if I had to pick one, probably SPGI, no MCO, no, both). The ratings agencies may have the single best business model. Low capital requirements plus a government mandated oligopoly gives both companies 90%+ market shares. Yes, both companies have 90%+ market shares because any issuance is typically rated by both companies. By that standard, they aren’t really even competitors. All of that excess cash comes to us through buybacks and dividends. A quick glance at the recent MCO 10-Q has MCO buying back $871MM of shares and distributing $259MM of dividends. Those figures from the SPGI 10-Q are $8.5B for buybacks and $472MM in dividends. To be clear, SPGI financed those buybacks through debt and the cash on its balance sheet. SPGI acquired INFO earlier this year so it’s been cannibalizing its share count. But that’s what you love to see with the companies when times are tough, they’re buying back shares.

Moving forward – These two should remain in my top three or five companies for years. Expect me to add every now and then through monthly savings and see the guys become repeat offenders in the dividend reinvestment article.

Home Retailers

LOW and HD are known for being stewards of shareholder capital. Both have been compounding their dividends at double digit rates and annihilating their share counts. As much as I love these companies, I’d like to see them tumble down my top ten; that’s going to be difficult though. Both appear attractively valued, so I’ll keep adding through dividend reinvestments. As of now, I’m happy to have these companies in my top five. I’ll keep adding opportunistically and accumulate shares into weakness. Several macro headwinds lay ahead for these companies, so I’m not throwing all of my resources at them. Over the long term, both companies should continue to bear fruit for investors.

Moving forward – I’ll keep allocating some dividend reinvestments to these companies every few months. With both yields at attractive levels, it’s hard not to dump more. Over the long-term, I’d like to see the companies in the bottom half of my top ten (or out of it) to make room for some other companies I own/will own.

Northern Railways

The last segment I’ll discuss is my northern railways, CNI and CP. Depending on how some things play out, this may become “railways,” but that may be a different article. CNI and CP are two of the best Class I railroads. These are the opposite of the ratings agencies and payment rails since they have significant CapEx requirements, but those requirements have built nearly impenetrable moats. They have become maniacally focused on reducing costs and improving their operating ratios. This capital discipline has allowed them to pay increasing dividends while cannibalizing their share counts. CP is a very exciting opportunity with the pending acquisition of Kansas City Southern and I fully expect the Surface Transportation Board to bless the deal. Once the deal is done, CP will resume dividend increases. Buybacks should likely resume in early 2024 once CP gets its debt load back to a manageable level (~2.5x)

Moving forward – Pending future purchases, I could easily see this segment catapulting into my top three (and be in the top position at some point). If I had to bet on one business/industry existing 100 years from now, I’m picking the rails because they have the bonds to prove it.

Other Positions:

Rounding out the top ten I have AVGO, ESS and COST. I hope to see AVGO and ESS drop out over the next few years. COST is one of my favorite companies given their shareholder focus (it’s right there in their stores) and history of a growing dividend with the occasional special dividend. One other company I’d like to see in my top ten is TXN (which I wrote about a number of times as a future top ten company). I’ve long admired TXN’s CEO and strict capital allocation strategy. There is a good chance TXN will be up there with AZO as one of the best repurchasers of shares over 20+ years.

I believe that’s “nine” companies when grouped. The tenth company is likely a moving target. I could see American Tower (AMT), ADP (ADP), Danaher (DHR), Meta Platforms, or Netflix or a company I don’t own like Amazon, Union Pacific (UNP), UnitedHealth Group (UNH) or Berkshire Hathaway (BRK.B) settling into that spot. It will be a bit of what the market gives me and how all of these companies perform.

Conclusion

My portfolio is dynamic and changing as I grow older and as the market moves. Companies that I don’t expect to be in my top ten (AVGO and ESS) continue to grow. Rather than sell those winners and reallocate to other names, I choose to let winners win and grow positions through selective dividend reinvestments and monthly savings allocations. I will even add to those shares opportunistically (as I have done with both AVGO and ESS this year). Just because I want to reduce the weighting of a position doesn’t mean I still won’t accumulate into weakness. My portfolio is positioned for the long term, a daily snapshot of my top ten or fifteen names won’t have me panicking to rebalance. Targeting a long-term top ten is in an investor’s best interest because it allows winners to keep winning and gives you an opportunity to slowly DCA into a position if it’s always expensive. Selling shares at times is important, especially if the reasons you bought the company have changed. I’ll always sell shares and rebalance when the thesis changes or doesn’t play out. Until that happens, I’m holding my positions steady and allowing the magic of compounding to unfold.

In addition, I view my top ten as buckets of several companies covering markets dominated by oligopolies with high barriers to entries. This allows me to focus more on the industries/markets I want to invest in rather than the specific details around the companies. I know I want to invest in the rating agencies, but I don’t want to go on a fool’s errand to try to determine which company is better (even some of the best investors in the world own both companies rather than own one). I’ll leave that to the professionals and allow both companies to compound in my portfolio for decades.

I hope this provided you some insight into how I actually look at my top ten positions and my portfolio positioning moving forward. I look forward to continuing to provide my dividend reinvestment updates on a monthly cadence and will sprinkle in some other portfolio related content as needed.