Since January I have been tracking my model dividend stock portfolio, which is based on four Morningstar indices. Here are the latest changes to the portfolio, which has beaten the market since the start of 2024.
My concentrated dividend stock portfolio has so far this year beaten the total return (including dividends) of the Morningstar Global Markets index and the Global Equity Income category, as shown in the chart below.
The 6 New Stocks in My Dividend Portfolio
• Chevron
• Sanofi
• British American Tobacco
• Eastman Chemical
• Ericsson
• Volkswagen
Dividend Methodology - Why the Portfolio Changes
This portfolio is theoretical so I don't own any of the stocks. Returns exclude tax or transaction fees.
Changes to the equally weighted dividend portfolio can occur for four reasons:
1) The stock included in the portfolio has cut its dividend over the quarter.
2) The stock is no longer present in at least two of the four Morningstar indices (see below) used to construct the portfolio.
3) The price/fair value of a security has moved from undervalued to overvalued.
4) Within the sector, there are more attractive stocks.
I analyse the positions of these four indices and select stocks based on their presence in these indices, their weight in each of these indices, their valuation (Morningstar price/fair value) and their forward dividend yield.
Portfolio Changes Sector by Sector
These will be effective at the April 25 market close.
Energy Stocks: Exxon Mobil Out, Chevron In
Chevron (CVX) is the only company in the sector present in three of the four indices (Exxon Mobil is only present in two) and has a higher expected dividend than Exxon (4.03% vs. 3.15). Its price/fair value is currently (as of April 22, 2024) 0.92 versus 0.91 for Exxon Mobil, i.e. a very similar valuation. But Chevron has increased its quarterly dividend in February by 7.9% (from $1.51 to $1.63) while the last time Exxon Mobil increased its quarterly dividend (in November 2023) it did so by 4.4%.
Utilities Stocks: Enel Stays
Italian utility Enel (ENEL) currently trades with a price/fair value of 0.81 and is present in three of the Morningstar indices (Dividend Leaders, Dividend Growth and Dividend Yield). In January 2024 it increased its semi-annual dividend from €0.20 to €0.22 (the company usually pays one dividend in January and another one in July) and has a forward dividend yield of 7.01%.
Communications Stocks: Verizon Stays
There is no reason to change Verizon Communications (VZ) in the dividend portfolio. It is one of the few companies in the sector present in three Morningstar indices and its forward dividend yield is attractive (7.11%). It trades at a price/fair value of 0.75 and pays a quarterly dividend that increased from $0.65 to $0.67 last October.
Healthcare Stocks: Roche in, Sanofi out
There are quite a few candidates for the healthcare sector's spot in the dividend portfolio, with Sanofi and Roche (ROG) standing out. Both have very comparable forward dividend yields (4.26% and 4.25%, respectively), but Roche is significantly more undervalued than Sanofi (P/FV of 0.60 vs. 0.78). Moreover, Roche is one of the European stocks that has consistently increased its dividend over the past 10 years.
Financial Stocks: Citigroup Stays
There is no reason to make a change in the financial sector within our portfolio. Citigroup (C) continues to trade at a 13% discount and has a forward dividend yield of 3.5%. The company posted first-quarter earnings of $1.58 per share, better than expected, versus the FactSet consensus of $1.18, and we have raised (earlier this April) our estimate of Citigroup's fair value slightly, from $66 per share to $68.
Defensive Consumer Stocks: British American Tobacco In, Unilever Out
Unilever is a case of a portfolio shift triggered by a dividend cut. Last February the dividend went to £0.36 from £0.38 in February last year. Not a good sign.
The substitute for Unilever within the defensive consumer sector is British American Tobacco (BATS). It has several advantages over Unilever: the forward dividend yield is very high, close to 10%, its price/fair value is 0.61 (compared to Unilever's 0.89) and this March the dividend was increased to £0.59 from £0.58 in last December and September.
Consumer Cyclical Stocks: German Carmakers
There are three German automakers that meet the conditions for the Consumer Cyclicals sector. Mercedes-Benz, Volkswagen and BMW. All three have a very high forward dividend yield: 7.1%, 7.5% and 5.7% respectively. All three have increased their dividends in recent years and all three have a presence in two of the four Morningstar indices, but there is one company that stands out in terms of valuation, Volkswagen (VOW3), which trades with an undervaluation of 65%. This last point justifies the switch between Mercedes-Benz and Volkswagen.
Basic Materials Stocks: Eastman Chemical In
The basic materials sector appears for the first time in the portfolio. There is little exposure to this sector in the Morningstar dividend indices. However, there is one company, which has a good dividend history, a decent forward dividend yield (3.4%) and a price/fair value in the undervaluation territory (0.77): Eastman Chemical (EMN).
Technology Stocks: Ericsson In
Finally, I am also including the technology sector in the portfolio. I have chosen Swedish telecoms company Ericsson (ERIC B) for three reasons: 1) it is present, albeit with a very low weight, in both the Morningstar Dividend Leaders and the Morningstar Dividend Yield indices; 2) its forward dividend yield is 4.7% and 3) it is one of the cheapest technology companies, with a price/fair value of 0.61 and a Morningstar Rating of 5 stars. It is true that, in 2018, the company cut its dividend sharply after the arrival of the new CEO, but since then it has been able to gradually increase it to the 2.70 Swedish krona that will be distributed this year.
The Key Morningstar Dividend Indices
• Morningstar Developed Markets Dividend Yield >3%: This index tracks the performance of securities in developed markets with trailing 12-month dividend yield greater than 3%
• Morningstar Developed Markets Dividend Growth: This index is designed to provide exposure to securities in the Morningstar Developed Markets Index with a history of uninterrupted dividend growth and the capacity to sustain that growth.
• Morningstar Developed Markets High Dividend Low Volatility: This index offers exposure to developed markets stocks with high dividend yields and strong financial quality, while favoring those with lower volatility
• Morningstar Developed Markets Large Cap Dividend Leaders Screened Select: This index targets securities that pay dividends consistently and have the capacity to sustain those payments. Securities are selected from the Morningstar Developed Markets Large Cap Index. The dividend-leaders index consists of the 100 top-yielding securities that satisfy the screening criteria, including Environmental, Social, or Governance (ESG) screens based on data from Morningstar Sustainalytics.
