Well, what a month.
The October bloodbath resumed in December, and then some, after a brief November hiatus. US stock markets fell by over 9%, just in the single month. Even Donald Trump has subsequently conceded that stock markets “hit a glitch”.
Given the reality TV show that is the Trump presidency it is hard to say exactly which news story drove such a drop, but you can take your pick from:
- Trump attacking the Fed – which calls into question American economic governance.
- The ongoing ‘trade war’ between the USA and China.
- The government shutdown in the USA, due to the standoff between Trump and Congress over the $5bn border wall. This has resulted in hundreds of thousands of American workers not being paid/not working; I am never clear whether, if the shutdown stops, they then get backpay, so I’m not quite clear how severe this actually is but it clearly can’t be good.
On top of the Trump nonsense, I think that we saw the first rumours in December of a more significant slowdown in China. As 2019 started Apple shocked markets with (slightly Polyanna-ish) tales of Chinese woe.
While UK news was feverish about the inability of the Tory government to pass its EU Brexit deal through parliament, this had very little discernible impact on UK markets; I tend to agree with the commentators who say that this outcome was ‘priced in’ (i.e. expected) by the market already.
One small portion of my invested portfolio is run as a ‘Dividend Growth Portfolio’ (DGP). I kicked off this portfolio in early 2013, and have run it pretty consistently ever since. It’s time for my first ever ‘deep dive’ into how this portfolio has been performing.
The strategy: buy growing dividends
I didn’t document my exact strategy for this portfolio at the time, but it has been something along the line of this:
To own Dividend Champions, and their ilk, with a strong likelihood of growing their dividend over the short and long term.
I have been a longtime admirer of the Dividend Champions, who are the ~100 publicly listed US companies that have raised their dividend for 25+ years in a row. The UK has hardly any companies that can boast of this track record, and the UK approach to paying dividends (interim + final, rather than 4 equal quarterly instalments) makes the UK fiddlier to monitor for shallow analysts like me. I will certainly consider shorter track records than 25 years, such as the Dividend Achievers, Dividend Contenders etc, but for true quality you need Champions.
You will note that there is nothing in this approach that prioritises high yield payers. In fact US companies tend to have lower yields than UK companies. Much as I like dividend income, for this strategy I am prioritising predictable growth in dividends, not the level of dividend itself.
Leverage: a changing approach
This portfolio was one of my early uses of leverage, though in a very modest way: I used to leverage up the portfolio by one to two year’s worth of dividends (i.e. 2-5%). In late 2015 this approach changed as I leveraged up across the board to buy my Dream Home and by 2016 my leverage for this portfolio had risen to over 40%. As rates have risen, I have reduced my leverage, so right now the Loan to Value is around 30%, and I am in fact paying almost as much interest (~3%) as the after tax dividend yield of the portfolio.
How the stock lineup has expanded over time
My initial set of about a dozen holdings comprised stocks like AXP, CAT, KO, MCD, T, VZ, WFC, with a smattering of IBM, GE in there too. Sizing my positions has been very ad hoc.
Doesn’t October feel like a long time ago? Here in the UK it does, at any rate.
In the USA we saw Trump lose the House (which follows population closely) but gain in the Senate (which follows land/space more closely). He’s here to stay, folks, and he represents a sizeable portion of the USA – like it or not.
Likewise in the UK, while the polls have shifted slightly in favour of Remain, despite everything, a sizeable portion of the UK (over 40%) appears to still prefer to Leave the EU, almost whatever happens. We have a messed up political situation, like it or not.
In the meantime markets have been rumbling around. At one point mid month I breached my maximum drawdown, and was mentally preparing a blog post about it. But in the end the US markets had a last minute jump up, for no particular reasons, with some of the most bruised stocks from Ouch-tober showing the sharpest gains.
As it turns out, my diversified portfolio’s large exposure to the USA has helped me turned in a positive performance this month – though it could easily have gone the other way.
Australia deserves a mention. I haven’t been following it closely this month but its currency gained over 3% on the pound, but its equity index lost almost the same value. I assume this is a pure currency move, with overseas investors holding the value of the equity markets stable in USD/etc terms. I haven’t been following Oz closely this month so any additional insights (from @grasmi, perhaps?) would be helpful.
UK bonds also took something of a tumble. The ‘index’ I track is the corporate bond benchmark, but in fact my fixed income exposure is now more Treasuries than corporates so I should revisit this soon. In any case, both were hit – my Index Linked Gilt holding was a significant drag on my portfolio.