Most important decisions or journeys in my life have benefited from me taking a pause and reflecting. All that means I’m taking some time to give some serious thought or consideration to the problem at hand. Most things will allow the pause.
In my day job of developing corporate strategy, I’ve found that my first attempt at creating a strategy looks ~25% of what the final strategy looks like. A little tweak here, a major overhaul here, and then I step back and reflect. It’s this reflection that makes a good strategy great.
Flexibility is the key. I’m only married to one thing in life and it’s not the strategy. In other words, if a change must be made then I’d be a fool to not explore the concept.
And this brings me to the purpose of this article. In May of this year, I wrote an article titled Master Stock List Revisited. I’ve got to say, I was proud of my revisit article. Then, two months later I expanded on the list by writing Next Level Thinking. Constantly trying to improve upon things.
That’s what happens when you create something … you keep reflecting and building upon it. It’s been 6 months since I last revisited my Master Stock List so we should do it again. We’ll see where my taxable stock portfolio sits and determine if I’m comfortable with the list. I’m not making any changes yet, just reflecting and considering (out loud to the reader) where I might go with some potential changes.
One last thing to mention that is critically important before we start. I’m a buy and hold investor so it’s likely (but not impossible) I won’t be selling anything. I may just direct new money in another direction. It’s also possible I may stop reinvesting dividends in certain stocks too.
Reflection of Level 1
In August, I wrote an article titled Are Your Stocks Displaying Real Power that spoke to companies raising their dividends. The focus was on companies in the master stock list that raised their dividends during the COVID-19 pandemic. Those companies were displaying true power and I wanted to potentially own them.
Of the Level 1 stocks, 4 of 5 have raised their dividends. The only hold-out was Exxon Mobil. At least they held their dividend while most energy companies reduced by 50% or more.
Holding Exxon right now is tough, I won’t kid you on that. Not only are they my largest holding (most of it acquired pre-COVID) but they are 30% of my dividend income too. If they cut the dividend it will be painful. I’ve been trying to build up my other stocks (in all levels) so that I reduce my dependance on Exxon but that will take time.
In the meantime, I’ve been chipping away at Johnson & Johnson 10-20 shares at a time. I expect them to be my largest holding within the next 2 years. And I’ve committed to buying 100 shares of Coca-Cola every year until I retire so I’ll wait for the next dip for that opportunity.
Procter & Gamble has been too pricey for me to start building a position. And I missed my opportunity on Nestle (who this year raised their dividend 14.3%) but I’ll get another chance.
The question is whether Exxon stays as a Level 1 stock. It’s down a lot, it’s scary to hold, and the dividend may be cut. That’s not my definition of a Sleep Well at Night stock – I’m thinking way to much about Exxon these days. I’ve started taking their dividend in cash versus reinvesting so that helps. I’ll reevaluate energy companies and how they fit into my portfolio. The only real question is does Exxon stay as a Level 1 stock?
Reflection of Level 2
The list of Level 2 stocks is critical because they’ll likely be core holdings in my portfolio. As a group, they have held up really well during the COVID pandemic.
My best performing stock has been Aflac. I bought it while it was down and I’m up 40-50% this year. I feel very lucky to have that as a core holding and excited to have a 17.9% dividend increase coming soon.
I’ve also been building my Phillip Morris and Pfizer positions too. Pfizer would be larger but I was waiting for them to spin-off their generic business. I can now start buying on dips. I’m not seeing them as a holding of 4% of my portfolio but I can certainly see them at 2-3%.
The consumer defensives like PepsiCo, Church & Dwight, and Colgate will be targets when they get within fair price. 3M and Home Depot are targets too. If prices come down, any of these stocks will likely find their way into my portfolio.
The Level 2 stocks have been impressive dividend growth companies. Like I’ve said, when things are going bad then these are the types of companies to own. And as a near-retiree, they are behaving just like I’d hope they would. At this time, I see very little changing of these stocks but I’ll dig deeper in a few weeks.
Reflection of Level 3
There is a very real possibility that I shrink the number of stocks on the Level 3 list. For example, I need to continue my research on healthcare companies to make sure only the best make the list. They are all good quality but too many on the list creates noise and distraction.
Another thing I’ll do is remove a stock if I buy it’s competitor. For example, if I purchase General Dynamics then I’ll eliminate Lockheed Martin. I’m only buying one so there’s no need to have them both on the list when I buy the other. There are other good industrials on the list I’d like to consider versus owing both General Dynamics and Lockheed Martin.
I’ve got too many financial services companies on the list. I’m not a big fan of them for long-term retirement holdings (too much volatility) so why do I have so many on the list? I’ll shrink the list in the next few weeks.
I’ll probably shrink the utility list too since I’ve got a few favorites (i.e. SWX & PNW). I completely missed buying Alphabet at ~$1,000 (now $1,800) but so goes stock picking. Perhaps another time it will be within my price range.
CVS Healthcare has two components that makes it a level 3 versus a Level 2. First, the debt they took on to acquire Aetna caused them to freeze their dividend. I agree with their freezing of the dividend and they are making progress on the debt. The biggest issue for me is their retail stores and how those end up evolving. I need more evidence those stores will add value to the business versus becoming too much risk.
For the most part, the Level 3 dividends held up pretty well. The master stock list is always evolving. Who knows, I may find some more quality companies and add them to the list if I remove some others. I want to be prepared for when the market or certain industries hit hard times and I’ll be waiting with my cash.
Finally, Royal Dutch Shell will likely come off my list. Remember, this is my list and it doesn’t mean you shouldn’t own it. I’ll continue owning it but I just don’t feel it has earned my trust to recommend it as a quality holding. I’ll give this more thought when I update the list in a few weeks.
Summary
A few things come to mind when I review my holdings and the master stock list. I’ve said many times it’s not only important what you buy (quality) but at what price to you purchase. Aflac is a great example. I had cash when the price was down and got it at some good prices. Now I’m up 45%!
Even though I already knew this, that’s my biggest lesson going into 2021. Now that my portfolio is over $100,000 and I’m earning over $6,000+ in dividend income, I must be patient with future purchases. So, I’ll build up my cash and wait for my price.
Also, I feel pretty comfortable with most of the stocks in the master stock list. Sure, I may move some up or down a level but nearly all of them will stay on the list. Remember, this is an extremely low churn (buy and hold) portfolio so I’ve got to be pretty sure I’d buy anything on this list if the price target is met. That’s a strong commitment to the list.
The list will always evolve and we need to reflect on our portfolio and watch list constantly. We must be patient and have cash at the ready. That’s my main focus now. I love December! Not just for the holidays but because I get to reflect, plan, and prepare for the next year and my last 4 years before retirement.
Thanks for reading!
Mr. TLR