Portfolio Holdings Review – August 2020

In this article I disclose our Top 30 holdings and compare same with our Top 30 holdings of February 2019. This includes holdings in accounts held within the FFJ Portfolio and accounts for which I do not disclose details. Interestingly, the 2 largest holdings have a current dividend yield of 1% or less, constitute ~14% of all holdings, and are both held in accounts for which I do not disclose details.

Introduction

In February 2019 I undertook a review of all holdings which included equity investments for which I do not disclose details; the results were disclosed in this article.

Given that the world has changed significantly subsequent to that article I have now undertaken a similar review. After reviewing each company, I am satisfied with my current holdings and now disclose the companies in which I have the greatest exposure.

Top 10 Holdings

Our top 10 holdings now make up ~43.1% of our overall holdings versus ~42.5% at the time of my 2019 review. The top 2 holdings held in accounts for which I do NOT disclose details now comprise ~14% of our overall holdings.

  1. Visa (V) – shares are held in accounts for which I do not disclose details.
  2. Church & Dwight (CHD) – shares are held in accounts for which I do not disclose details.
  3. Becton, Dickinson (BDX) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  4. Mastercard (MA) – shares are held within the FFJ Portfolio.
  5. Walmart (WMT) – shares are held within the FFJ Portfolio and accounts for which I do not disclose detail.
  6. The Royal Bank of Canada (RY.TO) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  7. Johnson & Johnson (JNJ) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  8. Chevron (CVX) – shares are held within the FFJ Portfolio.
  9. 3M (MMM) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  10. The Bank of Nova Scotia (BNS.TO) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.

I initiated a position in Visa (V) very shortly after its March 18, 2008 IPO. Over the years I have automatically reinvested the quarterly dividends, have periodically acquired additional shares, and have experienced a 4 for 1 stock split. In addition to the quarterly dividend income received, I have periodically generated income from writing covered calls. Based on current valuations, Visa comprises ~8.4% of our overall holdings and the average cost is sub $16/share.

Church & Dwight (CHD) is a company many may not recognize. Mention Arm & Hammer, however, and most will likely recognize the brand. That was pretty much me until mid-2004. Once I delved into the company’s historical results, I initiated a position. As with Visa, I have automatically reinvested the quarterly dividends and have periodically acquired additional shares. As far as share splits go, I have benefited from three 2 for 1 stock splits. If history is any indication, another 2 for 1 stock split within the next 12 – 24 months is not out of the realm of possibility. Based on current valuations, CHD comprises ~5.5% of our overall holdings and the average cost is, coincidentally, sub $16/share.

Becton, Dickinson (BDX) was my 12th largest holding at the time of my February 2019 review. I like the company’s long-term prospects and have been building my position to the extent where it is now my 3rd largest holding.

In addition to automatically reinvesting the quarterly dividends, I have occasionally written covered calls to generate additional income. In fact, I have several August 21st contracts with a $290 strike which will likely expire worthless meaning I will retain the underlying shares and 100% of the option premium I collected.

The Canadian Imperial Bank of Commerce (CM) was my 10th largest holding at the time of my last review. In late May 2020 I wrote covered calls with a July 17th expiry on a portion of my CM exposure. In late June, the holder of these options exercised their right to acquire my underlying shares and they were called away. Now, CM is not even in my top 30 holdings!

Although I no longer benefit from CM’s attractive quarterly dividend income I am not concerned. I think the Canadian economy is going to hit the wall within the next 12 months and bank earnings are likely to experience some weakness. In my opinion, the impact covid-19 has had on the Canadian and US economies (CM’s two largest markets) pales in comparison to what we have yet to experience.

I cannot fathom how the Federal, State and Provincial governments can continue to throw money at the economy the way they have over the past few months. I also fully expect the number of covid-19 cases to surge once the cold weather sets in and contrary to what some believe, a proven reliable vaccine is unlikely to become available within the next few months. Furthermore, I expect new strains of covid-19 meaning any vaccine will not be a permanent solution.

I am of the opinion I have adequate exposure to the Big 5 Canadian banks and am currently sitting on the cash received from the sale of my CM shares. My intent is to deploy funds in companies in other economic sectors if/when valuations retrace to more reasonable levels; the five main economic sectors are Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities.

Top 11 – 20 Holdings

The following is the ranking of my exposure to the next top 10 holdings. These account for ~20.3% of our overall holdings.

  1. Apple (AAPL) – shares are held within the FFJ Portfolio.
  2. Canadian National Railway (CNR.TO) – shares are held within the FFJ Portfolio.
  3. The Brookfield Group of Companies (BAM-a.TO) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  4. FedEx (FDX) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  5. CME (CME) – shares are held within the FFJ Portfolio.
  6. The Toronto-Dominion Bank (TD.TO) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  7. Berkshire Hathaway (BRK-b) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  8. Broadridge (BR) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  9. Automatic Data Processing (ADP) – shares are held in accounts for which I do not disclose details.
  10. BCE (BCE) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.

Apple was my 28th largest holding when I last undertook a similar review. Through the dramatic share price increase, it has jumped to my 10th largest holding.

I have mentioned in several articles that I like the North American rail industry and in particular the Class A railroads as the barriers to entry are extremely high. Canadian National Railway has risen from my 13th largest holding to my 12th largest holding but what is not borne out in the Top 20 rankings is that I have initiated exposure to Canadian Pacific and Union Pacific; while on my ski vacation in March I initiated a position in both companies and disclosed same in this article.

Although I have exposure to the various entities within The Brookfield Group of Companies, I am focused on increasing my exposure to Brookfield Asset Management (BAM-a.TO) (ie. the top of the BAM pyramid)); this group of companies has risen from my 19th largest holding as at February 2019 to my 13th largest holding.

While the composition of my top 20 holdings has changed slightly from my February 2019 report, I see that the top 20 holdings constitute ~62.8% of my overall holdings versus ~63.7% as at the last time of this review.

Top 21 – 30 Holdings

Looking at this group of companies I see they constitute ~13.6% of our entire holdings. This is the group of companies in which there has been considerably more change from the last time I conducted this review.

  1. United Parcel Service (UPS) – shares are held in accounts for which I do not disclose details.
  2. The Bank of Montreal (BMO.TO) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  3. Stanley Black & Decker (SWK) – shares are held within the FFJ Portfolio.
  4. S&P Global Inc (SPGI) – shares are held in within the FFJ Portfolio.
  5. Moody’s (MCO) – shares are held within the FFJ Portfolio.
  6. W.W. Grainger (GWW) – shares are held within the FFJ Portfolio.
  7. PepsiCo (PEP) – shares are held in accounts for which I do not disclose details.
  8. McDonald’s (MCD) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.
  9. Canadian Pacific Railway (CP.TO) – shares are held in within the FFJ Portfolio.
  10. AT&T (T) – shares are held within the FFJ Portfolio and accounts for which I do not disclose details.

Both ratings agencies (SPGI and MCO) were not even within my Top 30 in February 2019; I invested in both companies in mid-October 2018 and disclosed same in articles published October 26 2018. If you look at the share price of both companies you will see the degree to which their respective share price has appreciated subsequent to me initiating a position!

McDonald’s was not in my top 30 at the time of my previous review but the acquisition of additional shares (disclosed here) has resulted in MCD now falling within my ‘Top 30’.

I had no exposure to Canadian Pacific Railway at the time of my last review but in keeping with my desire to increase my exposure to the North American Class A railroads, I acquired shares when this company had been ‘kicked to the curb’ in March 2020 (disclosed here). I acquired share at ~$278.60 but the share price has appreciated to ~$390 as I compose this article and I now find myself ‘sitting on the sidelines’ hoping for the company to fall out of favor again with the investment community.

Holdings Recap

In previous articles I have expressed my opinion about some investors whose investment behavior reminds me of a ‘fly in the bottle’. Rather than investing in a few high quality companies, they invest a little bit in MANY companies; I cannot fathom, for example, what would possess someone to invest a few hundred thousand dollars in over 140+ companies and to have the audacity to charge for their investment ‘advice’. To each their own….

In my case, ~77% of my investments are in my Top 30 holdings and these are companies I am reasonably confident can weather challenging business conditions. Although it is my intent to increase my exposure to the Top 30, I have exposure to other high quality companies where I fully intend to increase my exposure under acceptable circumstances/valuations. These, in no particular order, include but are not limited to:

  • Microsoft (MSFT)
  • Ecolab (ECL)
  • Stryker (SYK)
  • Alimentation Couche-Tard (ATD-b.TO)
  • Intact Financial (IFC)
  • Enbridge (ENB)
  • Nike (NKE)

Dividend Income

I began tracking our dividend income in 2007 with the view of being able to create a portfolio which would spin-off dividend income to replace our income if/when we decided working was no longer part of our ‘master plan’. It was not my intent to invest in companies with highly attractive dividend yields which I thought were unsustainable. In fact, in late 2016 I met a pensioner in his mid-70s who had invested exclusively in Real Estate Investment Trusts (REITs). I was alarmed by this but it was certainly not my place to suggest he think twice about his investment decisions. I merely explained my rationale for having very, very limited exposure to such an investment (SmartCentres Real Estate Investment Trust (SRU-UN.TO) is the only REIT in which I have invested and my exposure is negligible). In my opinion, an attractive dividend yield should not be the primary reason for investing in a company!!

Having said this, it is important that our investments generate sufficient dividend income to cover all expenses while leaving ample funds for reinvestment purposes. At this point, it is not our intent to draw on any government pension plan for several more years and it is also not our intent to encroach on our capital.

When I started tracking our dividend income in 2007 our investments were generating a low 5 figures annually. After diligently investing for a number of years, our investments now generate over $12,000/month on average. If you look at the dividend yield of the companies within our top 30 holdings you will find several with a sub 2% dividend yield. In fact, our 17th largest holding, Berkshire Hathaway, distributes no dividend.

I mention this because I can personally attest to the fact that if you are disciplined, it IS possible to build an investment portfolio over time which can allow you to ‘step away’ without any consternation or fear that you might run out of money before you run out of time. You must, however, start early and allocate a reasonable percentage of your income toward savings/investing BEFORE you allocate funds toward expenses. If you simply save/invest what is ‘left over’….there may be no ‘left over’.

What is a reasonable amount to consistently set aside? I don’t know. That depends on your personal circumstances. I think 10% of your gross annual pre-tax income is the BARE minimum. I didn’t think this was enough based on our goals and objectives so we ramped this up to 20% – 25% in some years.

Time to Cull

In my previous report I listed the following companies in which I intended to completely eliminate from my holdings:

  • CDK Global (CDK)
  • Manulife (MFC)
  • SNC-Lavalin (SNC)
  • Wells Fargo (WFC)

I exited all positions with the exception of CDK but this position is relatively insignificant; I acquired shares when it was spun off from ADP and have never increased my exposure.

I do not intend to exit any existing positions although Total (TOT) and Exxon Mobil (XOM) are on my ‘watch list’. Having said this, my exposure to these companies is very limited. While I like to acquire additional shares in companies which are experiencing what I deem to be short-term challenges, I think both companies face long-term headwinds. I do, however, expect their respective share price to appreciate from current levels and will bide my time and might very well exit these positions at a more opportune time.

Final Thoughts

I can appreciate how someone reading my articles may find it strange that I repeatedly indicate that I want a very significant and swift broad market correction. My position is that if you are investing in high quality companies for the very long-term, you want stock prices to drop! ‘Running for the hills’ when stock prices tank but scrambling to acquire shares when stock prices are surging does not strike me as prudent.

Furthermore, continually buying/selling stocks should not be construed as investing. When you invest in a company, think like a business owner. A good business owner thinks strategically and thinks long-term.  If your investments are made with a focus on the short-term it is quite possible you may experience unpleasant outcomes.

In my opinion, all is not well in this world and I fully expect a swift and sharp market pullback in the not too distant future. I am, therefore, keeping ‘powder dry’.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.