2020 Portfolio Review: What a Year

GuruFocus.com

Sun, Jan 3, 2021, 4:38 PM25 min read

In this article:

- By Nathan Parsh

Without a doubt, 2020 will be a year few will ever forget. A global pandemic upended normal life for so many people. Business were forced to close, schools turned to virtual learning and wearing a mask became a part of everyday life.

Early in the year, stocks went through a massive selloff as it appeared that the world was headed for at least a significant recession, if not depression. Timely stimulus from central banks and governments helped to prevent this, though millions remain out of work thanks to Covid-19.

The S&P 500 Index had a total return of 16.3% this past year, but 11.7% of this gain occurred over the last three months.

The portfolio that my wife and I are building, which I have nicknamed The March to Freedom Fund, had a total return for the year that was slightly behind the market index at 12.8%. Much of our gains came in the last quarter as well. As always, our total return includes dividends received but not additional capital added to our accounts.

Over the last six years, when we first began publicly tracking our portfolio on another platform, our portfolio has a total return of 86.3% compared to a 75.9% gain for the S&P 500. This is the first year that the index has beaten our portfolio in that span of time.

As stated in my first quarterly update here on GuruFocus, our portfolio is designed to produce enough dividend income to cover our expenses in retirement. While the gains in share price are most welcomed, we believe that dividend growth is most important as this will be how we plan to pay for retirement in 15 to 20 years.

Second-half purchases

As long-term investors, we try to limit how much selling we do within our portfolio, though we do trim positions from time to time. For example, we trimmed Microsoft Corp. (MSFT) at around $180 in early February as the position had become quite large and we wanted to redeploy to other positions. Of course, shares have gained since then, but we have no regrets as we wanted to limit the size of our holdings at that time.

We did make one significant change to our portfolio this year as we decided to rollover my wife's pension from a previous employer. She has no plans to return to that profession and we conducted many different scenarios and found we would likely come out ahead investing it on our own as opposed to waiting 30 years for her to be able to start collecting a set amount. We normally make 20 to 25 trades per year, but ended up making 70 purchases this year due to this additional capital. We will most likely make a similar number of purchases in 2021 as we invest the second half of her pension.

Listed below are the dates and prices of the stocks we have purchased since the first-half update and their gains or losses through the end of the year.

Company/Stock	Purchase Date	Purchase Price ($)	Dec. 31 Close ($)	Gain/Loss
General Dynamics Corp. (NYSE:GD)	7/8/2020	143.54	148.82	3.7%
General Mills (NYSE:GIS)	7/27/2020	63.99	58.80	-8.1%
Stryker Corp.(SYK)	7/31/2020	190.54	245.04	28.6%
Realty Income Corp. (O)	8/21/2020	60.64	62.17	2.5%
V.F. Corp (VFC)	9/4/2020	68.96	85.41	23.9%
Alphabet Inc. (GOOGL)	9/21/2020	1,410.00	1,752.64	24.3%
Automatic Data Processing (ADP)	9/21/2020	129.84	176.20	35.7%
Caterpillar Inc. (CAT)	9/21/2020	147.76	182.02	23.2%
Duke Energy Corp. (DUK)	9/21/2020	81.76	91.56	12.0%
The Home Depot Inc (HD)	9/21/2020	271.53	265.62	-2.2%
Kimberly-Clark Corp. (KMB)	9/21/2020	146.65	134.83	-8.1%
Lowe's Companies Inc. (LOW)	9/21/2020	157.46	160.51	1.9%
Stanley Black & Decker (SWK)	9/21/2020	154.56	178.56	15.5%
The Toronto-Dominion Bank (TD)	9/21/2020	45.70	56.42	23.5%
The Unilever Group (UL)	9/21/2020	59.78	60.36	1.0%
United Parcel Service Inc. (UPS)	9/21/2020	158.42	168.40	6.3%
W.P. Carey Inc. (WPC)	9/28/2020	67.40	70.58	4.7%
Cisco Systems Inc. (CSCO)	9/29/2020	39.09	42.11	7.7%
Dollar General (NYSE:DG)	9/30/2020	210.98	210.30	-0.3%
JPMorgan & Chase Co. (NYSE:JPM)	9/30/2020	96.93	127.07	31.1%
AT&T Inc. (T)	10/6/2020	29.03	28.76	-0.9%
The Toronto-Dominion Bank	10/6/2020	48.08	56.42	17.3%
Verizon Communications Inc. (VZ)	10/6/2020	59.75	58.75	-1.7%
Amgen Inc. (AMGN)	10/12/2020	238.75	229.92	-3.7%
McCormick & Co. (MKC)*	10/12/2020	100.02	95.60	-4.4%
Johnson & Johnson (JNJ)	10/13/2020	148.66	157.38	5.9%
Lowe's Companies Inc.	10/15/2020	174.29	160.51	-7.9%
The Procter & Gamble Co. (PG)	10/20/2020	142.47	139.14	-2.3%
Caterpillar Inc.	10/21/2020	170.12	182.02	7.0%
Kimberly-Clark	10/22/2020	141.40	134.83	-4.6%
Lockheed Martin Corp. (NYSE:LMT)	10/22/2020	368.60	354.98	-3.7%
The Unilever Group (UL)	10/23/2020	61.24	60.36	-1.4%
The Coca-Cola Co. (NYSE:KO)	10/26/2020	49.49	54.84	10.8%
3M Co. (MMM)	10/27/2020	162.97	174.79	7.3%
Stanley Black & Decker	10/27/2020	166.53	178.56	7.2%
Automatic Data Processing	10/28/2020	155.02	176.20	13.7%
United Parcel Service Inc	10/28/2020	161.53	168.40	4.3%
Alphabet Inc.	11/5/2020	1,757.23	1,752.64	-0.3%
Duke Energy Corp.	11/5/2020	95.37	91.56	-4.0%
The Southern Co. (SO)	11/12/2020	63.40	61.43	-3.1%
The Home Depot Inc.	11/18/2020	273.68	265.62	-2.9%
The Home Depot Inc.	12/1/2020	276.08	265.62	-3.8%
McDonaold's Corp. (MCD)	12/10/2020	208.16	215.58	3.6%
W.P. Carey Inc.	12/10/2020	69.24	70.58	1.9%
Amgen Inc.	12/18/2020	227.49	229.92	1.1%
General Dynamics Corp.	12/18/2020	151.98	148.82	-2.1%
Nike Inc. (NKE)	12/22/2020	142.94	141.47	-1.0%
Cisco Systems	12/30/2020	44.68	44.75	0.2%
Realty Income Corp.	12/30/2020	61.41	62.17	1.2%

* Adjusted price following a 2-for-1 stock split

We made some timely buys as well as some that have not worked out so well so far.

Our best purchase of the second half of the year was our Sept. 21 buy of Automatic Data Processing. Shares finished 2020 almost 36% higher than our purchase price. The company has weathered the Covid-19 pandemic very well even as it is the main provider of human resource services to large companies. Automatic Data Processing's dividend is recession tested as it has been raised for more than four decades. This was why I felt the company was an excellent long-term buy earlier this year.

Our second-best buy of the second half of 2020 was JPMorgan as shares are higher by more than 31% since our Sept. 30 purchase. The banking sector has been negatively impacted by low interest rates, which are likely to be a headwind for as long as the Covid-19 pandemic impacts the economy. In the summer, the Federal Reserve also prevented the large financial institutions from returning capital to shareholders by way of dividends and share repurchases until there was more visibility through the ongoing pandemic. That changed when the bank, along with others in the sector, were allowed to repurchase stock. JPMorgan announced a $30 billion buyback on Dec. 18, which equated to more than 8% of the stock's market capitalization at that time.

Our third-best purchase was our July 31 buy of Stryker Corp. The company's orthopedics division had been adversely affected by the delaying or cancellation of elective surgeries as the health care system dealt with the pandemic. This impacted the stock and we were able to add to our position under $191. At that time, we felt that Stryker, which has historically outpaced the medical device sector in terms of organic growth, would eventually rebound from the current challenges. The company's third quarter showed organic growth of 3.3%. This was a deceleration from the third quarter of 2019, when the company had organic growth of 8.6%, but was an improvement from the 24% decline in the second quarter of 2020. We couldn't have predicted a return to growth as quickly as what happened, but we believed Stryker, which became a Dividend Aristocrat this year, has too good of a business model that it would be down for long. The stock has gained 28.6% since we added to our position.

Our fourth-best-performing purchase was Alphabet, the parent company of Google. We initiated a position in Alphabet following my wife's pension rollover. We have never owned a non-dividend-paying stock prior to this purchase. Alphabet was an attractive option for us because of the company's dominance in its sector of the economy. One reason we trailed the S&P 500 this year was because we don't own many of the large growth names in the market. Adding Alphabet provides some more growth to our portfolio. Google had nearly $131 billion in cash on its balance sheet at the end of its most recent quarter. The company has also generated more than $31 billion of free cash flow over the last year. There is the possibility that shareholders could receive a dividend some day as the company finds additional uses for its capital. Even if it doesn't, we are happy to add some more growth to our portfolio.

Our fifth-best buy of the last half of 2020 was V.F. Corp. as the stock gained almost 24% from out Sept. 4 purchase. This is not one that I would have expected to be among our best decisions. At that time, we purchased V.F. mostly because it was our smallest position and we were in the midst of trying to bring each name we held up to a certain amount. Retail was slammed during the pandemic as consumer were forced to stay home. The company's second quarter of fiscal 2021 showed weakness overall, but digging deeper V.F. had a 44% increase in direct-to-consumer digital. Compared to the first six months of the previous year, digital sales grew 60%. We bought before the quarter was released, but this says to me that V.F.'s products remain in high demand and consumers, once allowed to visit malls and stores again, would return. Additional context for our reasons for adding more V.F. were discussed in an article published in early September.

Not all of our purchases have worked out yet. Two tied for the worst.

Our worst buy of the last six months was our July 27 purchase of General Mills as the stock fell 8.1% through the end of the year. The company had posted quarterly revenue growth of almost 21% earlier in the month as consumers flocked to General Mills' products as eating out was severely limited due to social distancing directives. The company was also seeing a good number of repeat customers, which we felt boded well for when consumers were allowed to dine inside of restaurants again. Another plus in General Mills' favor is that it has paid an uninterrupted dividend for more than 100 years.

Tying General Mills for the worst buy was our purchase of Kimberly-Clark on Sept. 21. Our Oct. 22 purchase was our fourth-worst buy since our mid-year portfolio update, finishing the year lower by 4.6%. In some ways, the decline in Kimberly-Clark is similar to that of General Mills as the company was a beneficiary of the Covid-19 pandemic as consumers stocked up on paper products. The market likely felt that some of these purchases were pulled from future quarters. Kimberly-Clark was another position we started in my wife's pension rollover. The company has increased its dividend for 48 consecutive years, meaning it is approaching Dividend King status. A recession-proof company if ever there was one, Kimberly-Clark was a name we had eyed for some time. We will definitely be adding to this name if prices go lower.

Another new position for us this year was Lowe's Companies (LOW). Our first purchase of the stock actually ended higher by 2%, but our Oct. 15 addition fell 7.9% through the end of December. Quarterly results for Lowe's have been very good and the company announced a massive buyback addition. As of the end of its most recent quarter, Lowe's had almost $20 billion on its share repurchase authorization, which was about 17% of the stock's market capitalization at that time. It was one of the reasons we remain so bullish on the company. Lowe's also has almost 60 consecutive years of dividend growth and has started to see improving margins.

Rounding out our worst buys of the second half of 2020 was McCormick & Co., which lost 4.4% from our Oct. 12 purchase. We first bought the stock right after the market slammed shares following the purchase of Red Hot and French's Mustard. McCormick has been an excellent investment almost ever since. It was also one of our smaller positions as we had difficulty getting past the valuation. As with V.F., we were trying to build the size of each position. McCormick is another Dividend Aristocrat we feel has a great future ahead of it as consumers turn to its products for cooking at home. The company controls approximately 20% of a highly fragmented spice and seasoning industry. A lower entry point would likely have us looking to our to the position.

We also closed out three positions this year. First, we sold Boeing Co. (BA) in early February. We were concerned about the company's ability to generate enough cash flow to continue to pay its dividend. We sold our shares on Jan. 24 at a price of $308.66. Boeing did eventually cut its dividend and shares are well below where we sold.

On Mar. 12, we sold our stake in Exxon Mobil Corp. (XOM). The energy sector remains challenged as the price of oil continues to fluctuate. Exxon Mobil continues to burn through cash and has borrowed heavily to pay its dividend. Long-term debt has almost doubled over the last four quarters. The company expects to write off as much as $20 billion in assets in the fourth quarter. Despite 37 years of dividend growth, we believe it is only a matter of time until the dividend is reduced.

Finally, we closed our position in Ventas Inc. (VTR). Initially, we had held onto the stock following its dividend cut in July, but felt that there were better opportunities for our money. We also wanted to trim the total number of portfolio holdings that we had. We sold our shares on Sept. 30 for $42.47.

However, one company that we did not sell following the suspension of its dividend was The Walt Disney Co. (DIS). Disney was impacted by Covid-19 in nearly all businesses. However, we still like what the company does for a living. It's movie content, streaming services and theme parks are likely to recover from the damage done from the pandemic. The sheer number of streaming members (74 million currently with an expected 230 million to 260 million by 2024) is a sign that the company's products remain extremely popular with consumers. We originally owned Disney not for its income, but for its content, which we believe will be a long-term winner.

Current portfolio

Following our trading activity in 2020, our portfolio consists of the following 52 positions:

3M Co., Abbott Laboratories (ABT), AbbVie Inc. (NYSE:ABBV), Aflac Inc. (NYSE:AFL), Alphabet, Amgen Inc., Apple Inc. (AAPL), AT&T, Automatic Data Processing, Caterpillar, Chevron Corp. (NYSE:CVX), Cisco Systems, The Coca-Cola Co., Costco Wholesale Corp. (NASDAQ:COST), Cummins Inc. (NYSE:CMI), CVS Health Corp. (CVS), Dollar General, Dominion Energy Inc. (NYSE:D), Duke Energy, General Dynamics, General Mills, Home Depot, Honeywell International (NYSE:HON), Johnson & Johnson, JPMorgan Chase, Kimberly-Clark, Lockheed Martin, Lowe's Companies, MasterCard Inc. (MA), McCormick & Co., McDonald's, Microsoft, NextEra Energy Inc. (NEE), Nike, PepsiCo Inc. (PEP), Pfizer Inc.(PFE), Procter & Gamble, Raytheon Technologies Corp.(RTX), Realty Income, Southern Company, Stanley Black & Decker, Starbucks Corp. (SBUX), Stryker, Target Corp. (TGT), Toronto-Dominion, Unilever, United Parcel Service, Verizon, V. F. Corp., Visa Inc. (V), The Walt Disney Co. and W.P. Carey.

Dividend income analysis

Prior to 2019, all of our dividends received were automatically reinvested in each position. We started collecting dividends in cash from our largest positions last year in order to accelerate our ability to purchase additional shares. As a reminder, 2014 was the first year we tracked our dividend income.

Month / Year	Month-Over-Month Increase	Year	Year-to-Date Increase
July 2014	130%	2014	357.8%
July 2015	65.9%	2015	212.3%
July 2016	56.2%	2016	150.4%
July 2017	19.5%	2017	79.7%
July 2018	-10.2%	2018	38.6%
July 2019	-25.6%	2019	5.7%