Welcome back to Dividend Dollars!
The market was red this with most indexes posting a larger than 1.5% loss for the week driven by worsening Russia-Ukraine developments. Risk sentiment was further emphasized by lack luster growth-stock earnings reactions and Fed concerns regarding a policy mistake.
10 of the 11 S&P 500 sectors ended the week negative with consumer staples being the only sector to have closed higher. Tough week for the market and our portfolio! Every week I write an update on the dividend portfolio as we build it so that we can track its progress. I will give an overview of what the portfolio is invested in, its value, the dividends received, trades made, and any news or business announcements that may be of interest to our positions.
Portfolio Value
To date, I have invested $6,285 into the account, the total value of all positions plus any cash on hand is $6,443.00 . That’s a gain of $158.00 for a total return of 2.51%. The account is down $70.58 for the week which is a 1.08% loss.
We started building this portfolio on 9/24/2021 and when compared to the S&P 500 we are outperforming the market so far! Within that same timeframe, the S&P 500 is down 2.39% whereas our portfolio has an over return of 2.5%! Let’s keep up this good progress with smart adds to the portfolio.
We added $185 to the account this week. A significant chunk of that money added was put towards adding buys in MMM and INTC. Both stocks had steep drops this week that we took advantage of. Continue to the trades section of this article to read about why these stocks dipped.
Portfolio
Above is a dashboard of the portfolio as tracked through simplysafedividends.com. I use that site for tracking forecasted dividend income, yield, annual income, beta, dividend growth, and more.
Below is a table of everything we are invested in so far. There you can see my number of shares, shares bought through dividend reinvestments, average cost, gains, and more. The tickers in green are positions that I bought shares in this week. Usually, a chunk of my buys throughout the week are buys from my monthly stock picks. You can read about February’s stock picks here. I use a stock screener to find potentially undervalued stocks with safe and growing dividends. All stock picks (for this month and previous months) are highlighted in blue.
This week our activity raised our annual dividend income by $9. Our dividend yield increased by 0.07% and our beta decreased by 0.04. My portfolio’s dividend yield may be just slightly higher than what you will see in other portfolios, however that is strategic per my time horizon. I am in my 20s and am just starting off this investment journey, so a higher dividend yield gives me greater cash flow now to reinvest which help me realize the benefits of compounding sooner. Our beta usually hovers right around the mid 0.6s which I like, especially in times of uneasiness. It means my portfolio won’t dip as much as the rest of the market on red days, however, it does go the other way around and I won’t have as much green on the good days. Therefore, it is good to watch your beta in terms of cyclicity. View the chart below to see the performance of my portfolio versus the S&P 500, notice how my portfolio’s green days are not as substantial as the S&P’s but neither are my red days, that is beta at work. My beta so far has led to better returns than the market since beginning this portfolio.
Dividends
This week we received two dividends for a total of $5.15: $4.16 from MMP (a position I liquidated last week) and $0.99 from O (reinvested).
Dividends received for 2022: $38.71
Portfolio’s Lifetime Dividends: $61.63
Trades
Here’s the breakdown of the trades I made this week:
- February 14th
- MMM – added 0.4 shares at $156
- INTC – added 0.5 shares at $48.14
- O – added 0.2 shares at $67.45
- February 15th
- UWMC – added 1 share at $4.43
- O – dividend reinvested for 0.014713 shares at $67.29
- February 16th
- XYLD – added 0.203933 shares at $49.04 (recurring investment)
- SCHD – added 0.128569 shares at $77.78 (recurring investment)
- UWMC – sold $% 2/18 call for $2.00 premium
- February 17th
- MMM – added 0.1 shares at $150
- February 18th
- UWMC call expired at $0
- INTC – added 1 share at $45.11
Noteworthy News
This section of the post will identify some headlines that may be of import to our positions. If they are important enough, we will also call out in the posts if the news calls for actions to readjust our portfolio.
As you see with my buys this week, most of money was put towards adds in MMM and INTC to take advantage of their drops this week.
- MMM releases 2022 financial guidance on Monday
The industrial conglomerate released a presentation that contained a few surprises or shifts in their strategy, but the main takeaway was that management did not offer any updates on 3M’s biggest issues: the legal liabilities concerning the PFAS chemicals and military earplugs that are looming over 3M’s balance sheet.
The bellwether trials for the PFAS litigations are expected to begin in early 2023. These trials will give us a clearer idea of the settlement payouts we can expect for the groundwater contamination. Meanwhile, the EPA seeks to classify certain PFAS chemicals as “hazardous substances” by mid-2023. If successful, manufacturing facilities would be required to report releases of PFAS chemicals and the EPA would have more leeway to pursue responsible parties, like 3M, as they analyze sites and determine remediation costs for cleanup. Some analysts expect 3M’s settlements and remediation expenses for the PFAS litigations to cost around $10 billion but a worst-case scenario could be as bad as $30 billion according to a Bloomberg analyst.
3M’s earplug liabilities could be even worse. In 2008, 3M bought a business that sold government approved combat earplugs from 2003 through 2015 when the product was discontinued. The first lawsuit for the earplugs surfaced in December of 2018 when a veteran claimed they had hearing damage because of 3M’s faulty earplugs. At current, 3M has been served lawsuits representing over 13,000 individual claims with similar allegations. Another 290,000 unfiled and unverified claims have been maintained in the court. Sounds bad, however, unverified claims are essentially a list of veterans with few details such as where they served or if they ever really used the product. I expect some of these claims to get dismissed, but the potential liabilities are still a major headwind for the company. Different types of hearing loss result in different settlement amounts. These amounts range from $14,000 for inner ear dysfunction to over $1.5 million for total hearing loss. If we assume 3M settles 300,00 claims and pay an average of $100,000 per claim, then that would be a total liability of $30 billion. But if half of these claims are dismissed and the average payout halved as well, then that total liability could fall to $7.5 billion. Bellwether trials started in 2021 and through January 2022, 3M has won 5 of the 11 trials. Another 5 trials are scheduled between March and May. 3M plans to appeal the adverse verdicts which is a process expected to take up to 18 months. Once the fog settles will be when 3M really determines how to push forward with a potential settlement.
Overall, the PFAS and earplug liabilities could cost anywhere between $10 – $50 billion with payouts likely to happen over a course of years. 3M retains about $2.5 billion of free cash flow annually after paying dividends. To cover future settlement costs and avoid cutting the dividend, 3M would need to squeeze its healthy balance sheet to plug the gap. Assuming settlement payouts are spread over years and 3M uses all of its retained free cash flow to pay down debt, I expect 3M would be able to handle this $10 – $50 billion settlement amount while keeping the dividend intact. However, this is just an assumption until we know more about the magnitude and timing of the looming liabilities.
I, however, remain bullish. Given MMM’s lackluster dividend increase last week, I see the company is already preparing to lean on their strong balance sheet to see these liabilities through. After which we will begin to see greener pastures. As a dividend investor, I see this as a good long-term opportunity to build a substantial position in an established company and dividend payer that will continue to be successful in the long run.
- INTC 2022 Investor Meeting
On Thursday, Intel held their 2022 Investor Meeting and outlined some elements of their strategy and path to long-term growth during these unprecedented times for semiconductors.
Analysts were disappointed with their short and medium-term goals. This investor day focused primarily on extremely long-term bullish forecasts for which shares are pricing in little to no chance of success with a 5% dip in price on Friday.
Intel laid out its planned recovery under CEO Pat Gelsinger who is cutting profit to build out manufacturing capacity. Executives admitted that it will be years before this investment pays off. They expect gross margins of 51% to 53% till 2024, then 54% to 58% from 2025 onwards and negative cashflow of $1 to $2 billion in 2022 and expected free cash flow of 20% of revenue by 2026 and initial single digit revenue growth expanding into double digits by 2026.
The announcement of another delay in chip rollout also didn’t help with the dismal reaction to the meeting. Intel’s 7 nanometer data center chip meant to be the successor to their 10 nanometer Sapphire Rapids chip was pushed back from 2023 to 2024.
Intel paints a increasingly bullish picture for where they see themselves going in the long term. I think Gelsinger is beginning the long process of turning the ship around and he’s taken many steps within his first year as captain to get that done. It has been anticipated that FCF and margins will suffer while this happens, but in the long term it may pay off. I think the 5% dip on Friday is an overreaction. This meeting presented things most analysts already assumed; the only real news was the chip delay. Given my time horizon, if INTC is a poor performing stock for the next few years, I won’t be made about it. I will continue to add and patiently await the long-term success Intel is setting themselves up for.
Summary
That is it for the update this week. Let’s kill it next week. Stay patient and be ready to buy income producing assets at a discount!
Let me know what you think of the progress so far, share with me your progress and questions, interact with me on twitter and Instagram using the links below!
Thank you for reading! See you next week!