It has been roughly 10 months since I last modified my monthly investment plan. I have been content with the plan and generally resisted change. The impetus for change came, however, after I did my tax return for the past year. My income puts me at the 25% ordinary income and 15% dividends tax bracket. The bite that taxes take out of my investment returns increasingly weighs on me.
Take two stocks both with 10% total return for example. If a high yield stock pays 4% dividend with a 6% price appreciation, the 4% dividend becomes 3.4% after tax, giving a total return of 9.4%. If a low yield stock pays 1% dividend with a 9% price appreciation, the 1% dividend becomes 0.85% after tax, giving a total return of 9.85%. So investing in the high yield stock means I am effectively paying a 0.45% "expense ratio"! Just as it would be foolish pay 0.45% extra expense ratio for a mutual fund that performs no better than a cheaper version, it is nonsensical to lose 0.45% to taxes. Hence, I eliminated two higher yielding stocks and increased stakes in two lower yielding stocks while adding a low yield stock. My revised plan is as below:
| Ticker | Rating | DGI | Discount? | Shiller P/E | Yield | Monthly Invest | Sector | Sector Total | Sector Percent |
| NVS | A1 | B | N | 15.35 | 3.76% | $200.00 | Healthcare |
$400.00
|
11.43%
|
| SNY | A2 | B | N | 23.59 | 3.46% | $100.00 | Healthcare | ||
| BDX | B+2 | A | N | 33.65 | 1.60% | $100.00 | Healthcare | ||
| KO | A+1 | A | N | 24.04 | 3.46% | $200.00 | Staples |
$700.00
|
20.00%
|
| WMT | A1 | A | N | 16.38 | 2.79% | $200.00 | Staples | ||
| PEP | A+1 | A | N | 28.09 | 2.67% | $100.00 | Staples | ||
| BUD | A+2 | C | N | 21.95 | 3.13% | $100.00 | Staples | ||
| UL | A1 | D | N | 25.94 | 2.74% | $100.00 | Staples | ||
| XOM | B+1 | A | N | 11.21 | 3.67% | $200.00 | Energy | $200.00 | 5.71% |
| BRK.B | A+2 | D | N | 26.36 | 0.00% | $200.00 | Financial |
$500.00
|
14.29%
|
| AFL | B3 | A | N | 14.58 | 2.36% | $200.00 | Financial | ||
| AXP | A3 | C | N | 19.01 | 1.69% | $100.00 | Financial | ||
| INTC | A2 | D | N | 19.42 | 3.09% | $100.00 | Tech |
$200.00
|
5.71%
|
| MSFT | A2 | B | N | 30.00 | 2.40% | $100.00 | Tech | ||
| EMR | A2 | A | N | 18.73 | 3.32% | $200.00 | Industrial |
$600.00
|
17.14%
|
| NSC | A2 | B | N | 22.30 | 2.19% | $200.00 | Industrial | ||
| VMI | D | B | N | 23.61 | 1.03% | $200.00 | Industrial | ||
| YORW | D | B | Y | 44.99 | 1.86% | $100.00 | Utility | $100.00 | 2.86% |
| NKE | A+2 | B | N | 43.22 | 1.30% | $200.00 | Discretionary |
$700.00
|
20.00%
|
| DIS | A2 | C | N | 35.03 | 1.38% | $200.00 | Discretionary | ||
| VFC | A+2 | A | N | 27.29 | 3.07% | $150.00 | Discretionary | ||
| MCD | A2 | A | N | 28.19 | 2.88% | $150.00 | Discretionary | ||
| SON | C2 | A | N | 23.97 | 2.91% | $100.00 | Material | $100.00 | 2.86% |
| Total | 24.44 | 2.43% | $3,500.00 | $3,500.00 | 100.00% | ||||
| Rating | $ | % | DGI | $ | % | ||||
| A | $2,600 | 74% | A | $1,600 | 46% | ||||
| B | $500 | 14% | B | $1,100 | 31% | ||||
| C | $100 | 3% | C | $400 | 11% | ||||
| D | $300 | 9% | D | $400 | 11% | ||||
| Total | $3,500 | 100% | $3,500 | 100% | |||||
| Rating is based on Morningstar as follows: | |||||||||
| A=Wide Moat; B=Narrow Moat; C=No Moat; D=Not rated by Morningstar | |||||||||
| +=Exemplary; [blank]=Standard; -=Poor stewardship | |||||||||
| 1=Low; 2=Medium; 3=High; 4=Very High uncertainty | |||||||||
| DGI (Dividend Growth investing) as follows: | |||||||||
| A=25+ years of higher dividends; | |||||||||
| B=10-24 years of higher dividends; | |||||||||
| C=5-9 years of higher dividends; | |||||||||
| D= less than 5 years of higher dividends. |
Changes implemented:
1) EXC and NNN are dropped. EXC had a 3.6% yield while NNN had a 4.1% yield. NNN is the worse of the two in that it is an REIT, so its dividends are taxed as ordinary income, which generates an even higher tax bill. My total investment in EXC has also grown uncomfortably large to over $20K, so I wanted to stop adding to it. My utility sector allocation is now down to just 2.86% in only 1 stock: YORW.
2) AXP is added. This is an A-rated stock, unlike EXC (B-rated) and NNN (D-rated), which increases my overall percentage of A-rated stocks to 74%. AXP has a relatively low 1.7% yield and reasonable Shiller PE of 19. This addition also increased my financial sector allocation to 14.29%.
3) NKE and DIS investments are increased from $150 to $200 per month, each. Both are high quality low yield stocks.
Changes I considered but did not make:
1) I seriously considered replacing either INTC or MSFT with GOOGL. INTC and MSFT are slow growing/ stagnating and INTC's 3%+ dividend yield is a bit high. GOOGL is a fast grower with zero dividend. I resisted the change, however, due to GOOGL share dilutions and lofty valuations. If GOOGL's price drops some, I might take the plunge.
2) I thought about getting rid of SNY and/or NVS given their high 3%+ yields, but then I would be left with little representation in the healthcare sector. My stock selection in the monthly investment plan is limited to no fee direct stock purchase plans (DSPPs) or loyal3 (no fee to buy specified dollar amount of stocks each month). In the meantime, I will keep looking for lower yield replacements in this sector.
Overall investment level remains at $3,500/month. Number of stocks dropped from 24 to 23. Portfolio yield decreased (4.7%) from 2.54% to 2.42%. Shiller PE, however, increased slightly (1.6%) from 24.09 to 24.48. That is a good tradeoff overall.
Like your analogy to the expense ratio. Good thoughts,
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