Recent Buy & Portfolio Update for December 2019

Ron Baron, the founder of Baron Capital, an investment firm with approximately $26 billion in assets under management, has some simple advice on how to build wealth. “You have to have a small amount of money and invest it regularly for a long time”. It’s all about compounding, says Baron. If you invest $5,000 a year for 30 years … it’s worth $890,000. That’s how you build wealth. The power of making regular investments and reinvesting the returns is the core of my investment approach. Above all, it’s a timeless approach. It’s has been true 50 years ago, it’s true today and it will be valid in many years into the future.

Personally, I utilize this strategy to build an army of world-class businesses that provide me with an ever-growing income stream. This income stream might be relatively small today. However, considering Baron’s advice, I know it will grow into a powerful cash flow machine in the foreseeable future. To stay the course, I have made a stock purchase towards the end of December 2019. In the following, I will shed some light on this purchase and also present the latest portfolio update.

Recent Buy: Toronto-Dominion Bank (TD)

On December 27, I have purchased 25 shares of Toronto-Dominion Bank (TD) for a total investment of €1,254 ($1,400). Toronto-Dominion Bank is a new position and the 35th company in my DGI portfolio.

There are many great reasons to own Canadian banks and TD in particular. In the first place, we observe some outstanding dividend reliability. While many American peers cut their dividend payments during the years of financial crises, Canadian banks did a better job of weathering the storm.

(TD’s dividend history)

As the above chart illustrates, TD didn’t cut the dividend during the turbulent times of the financial meltdown. Although it’s dividend was frozen in 2010, it kept growing by double-digit percentages in the years after. This is really remarkable, considering the cyclical nature of banks. Moreover, TD’s total return numbers are superb as well. Looking at a 20-year time-frame, the total annualized rate of return is 9.3% (dividends included). The S&P500 has a CAGR of 5.2% in the same observation period.

In addition to it, TD shines bright in the quality department. Simply Safe Dividends gives TD a Dividend Safety Score of 92, meaning that the dividend is safer than 92% of the companies in the SSD universe. Plus, it earns a strong AA- credit rating by Standard & Poors and a wide economic moat by Morningstar. All in all, TD seems likely to remain a source of safe and growing income for many years to come. This recent purchase will contribute €50 ($56) to my forward annual income.

Portfolio Update for December 2019

2019 has been an incredibly successful year for those who were invested in stocks. With a few days of trading left in 2019, the S&P500 is up 29%. In the last 20 years, only 2013 (+32.4%) had a higher total return.

(S&P500: Total Returns)

The market conditions are favorable, interest rates are at all-time lows, corporate earnings are growing. There are many reasons to be optimistic about the future. And as far as I’m concerned, I will keep following Ron Baron’s advice: invest small, invest regularly and invest for a long time.

SF Portfolio Snapshot

As of December 28, 2019, I’m invested in 35 companies.
The SF Portfolio has a total value of €69,502 ($77,842) and is expected to generate €2,137 ($2,393) in pre-tax forward annual income.

(Equity Allocation: December 2019)

I’m more than happy that 2019 has been a successful year for this portfolio as well. Although December isn’t over yet, my holdings have generated a total annual return of 27.5%. As always, there are some stocks that performed better and some stocks that performed worse. Below you can see the five winners and five losers of this portfolio in 2019.

(TOP 5 Winners & Losers)

JPM is leading the winner’s table here. Despite the low interest rates environment, banks had a decent run in 2019. With the exception of WFC, all five big US banks (JPM, BAC, C, and GS) have put a smile on the face of their shareholders by rewarding them with a total return north of 40%. As Warren Buffett is heavily into banks, I can very well imagine him to be a happy shareholder too. As far as this portfolio is concerned, JPM has grown to my second-largest holding by market value.

The loser’s table is led by MMM. By the way, MMM is the only one stock in this portfolio that has a negative total return number for this year. However, I’m not concerned. First, there is no way that I’m going to focus on one loser when I have 34 winners on the same table. It’s a question of attitude. Second, I still have big confidence in MMM’s business. No question, MMM is facing some challenges, however, it has all the ingredients needed to weather this storm.

TOP 10 Holdings

(Top 10 Holdings: December 2019)

The Top 10 list is subject to some minor fluctuations. As time goes by, some stocks perform better than others. Also sometimes I decide to add to existing positions. All this has an impact on the top 10 list as some companies (especially at the lower end) enter and leave it frequently. Nevertheless, the vast majority of the names remained more or less the same during the year.

The largest holding is still JNJ. Nothing has changed here. JNJ remains my all-time favorite investment, despite the fact that it has underperformed the S&P500 in 2019. Another stock that gave me great pleasure this year is AT&T (T). It’s one of the companies that many experts expected to fail. Too much debt, too little innovation or not the rights assets. Just to name a few concerns. And yet the big T proved them all wrong by delivering a total return of 45% in 2019. T is a pure income play for me. However, you won’t see me complaining about this outstanding total return figures. That’s for sure.

Sector Weightings

(Sector Weightings: December 2019)

One of my goals toward the end of the year has been to increase the stake in defensive businesses and bring it up to 50%. I have attacked this goal by investing in Coca-Cola (KO), UnitedHealth Group (UNH), Xcel Energy (XEL) and NextEra Energy (NEE). At some point, I have also viewed T and VZ as defensive investments. However, I have decided to take over the classification from Morningstar. And according to M*, communication services are placed in the sensitive sector. That is why this portfolio is showing a defensive share of approximately 42%. In other words, Consumer Defensive, Healthcare, and Utilities have some room to grow in 2020.

Summary

To make a long story short: it has been an outstanding year in financial terms. Not only I have managed to reach my passive income goal. I was also able to keep executing my long-term plan by investing small on a regular basis. And it turned out that being invested in high-quality stocks, was not the worst idea at all. In this respect, 2019 has been very generous to us.

I don’t have a clue about what will happen in 2020. Stocks might experience a decline or keep raising as they did in 2019. Nobody knows. I can’t tell which companies will be the winners and which will be the losers. No idea. However, it’s fortunately not the most relevant thing in order to be successful. What it takes to be successful is consistency. Remember that time is your friend. Invest small, invest regularly and simply keep going. This is how to build a great fortune. All the best in 2020.

4 Comments

  1. JC December 30, 2019 at 9:08 pm

    Nice pickup SF! I’ve been contemplating adding to my BNS and TD positions but just haven’t yet. TD has been a solid investment for me with right around a 10% IRR since I invested in mid 2015. Like you I’d like to add some more defensive names to my portfolio but utilities in particular have been hard to justify purchasing due to their valuations. I’m sure patience will be rewarded though.

    Reply
    1. Snugfortune January 1, 2020 at 6:58 pm

      Good to hear that TD has been a good investment for you, JC.
      TD’s performance has been lagging behind its American peers (such as BAC, JPM, C) in 2019.
      I’m curious to see how it will perform this year. Anyhow I will enjoy the safe dividends.
      All the best for you in 2020!

      Reply
  2. Fabian December 31, 2019 at 12:58 pm

    Hi SF,
    have you considered the withholding tax (Quellensteuer) for dividends from Canadian companies in Germany? I like TD from the figures as well but I’m not willing to pay the extra tax… Could you shed some light on this ?

    Thanks and a happy new year!!

    Reply
    1. Snugfortune January 1, 2020 at 7:15 pm

      Hi Fabian,
      To put it briefly: yes, I’m aware of it. In total it’s 35% taxes on Canadian dividends (25% are immediately deducted by Canadian tax authorities + 10% deducted by German tax authorities as only 15% out of the immediately deducted 25% are counted here in Germany).
      I don’t like it and it sucks. This is also the reason why I don’t own more Canadian stocks (I just have two in my PF).
      I hope it was helpful. Good luck and a happy new year to you as well.
      -SF

      Reply

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