Monday, November 2, 2015
Whenever I make a new purchase, or the rare sale, for my portfolio I feel it's only fair to get a post written giving all of the juicy details. Normally I try to get the posts out as quickly as possible but there was way too much going on in my personal life over the past two months that I just didn't have the time. So I want to update you all on some of the changes made to my portfolio. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.
Over the last couple weeks I've been compiling information for our taxes so I can find out where we currently stand. We're most likely going to end up dropping down to the 15% income tax bracket this year which means taxes on dividends and long term capital gains drops to 0%. Since this is likely to be a rare situation that we find ourselves in I've been reexamining our portfolio to look for what positions might need to be culled through outright sale or which ones I might want to try and step up my cost basis on by selling and repurchasing the shares. The yield on cost would get messed up but the current yield would stay the same so there'd be no loss in dividend income.
One company that I'd targeted as a candidate to remove from my portfolio was Baxter International (BAX). Earlier this year Baxter spun off Baxalta, it's bioscience arm, which changed the makeup of the company. Not only that but the combined dividend from the two companies was reduced by over 60%. I already sold my Baxalta stake earlier this year and with our taxes due on gains being zero I decided to close my Baxter holding this past Friday for $37.47 per share.
I had two lots of Baxter shares for a total ownership of 39 shares. One lot of 23 shares had a total cost basis of $858.92 and the other was 16 shares with a cost basis of $563.59 with a total cost basis for the position of $1,422.51. Total proceeds from the sale, after commissions, came to $1,453.35. That's just a 2.17% return for the two years that I held the position, excluding dividends.
However, we have to remember that when I purchased the shares the company was one but they had since split in two different companies so to get an accurate reflection of the return we need to include both companies in the calculation. The combined cost basis was $2,575.59 and the total proceeds from both sales came to $2,811.15. The return looks a bit more palatable at 9.15%. Although there's a big factor missing: dividends. I received 9 dividend payments over that time totaling $146.84 so the total return works out to 14.85%. Still nothing spectacular but a profit is a profit.
To really see how well, or poor, I did you have to take into account the timing of the purchases. After all 14.85% return would be great for a one or two year period but pretty poor for ten years. That's where Excel's XIRR function comes in handy. I'm not going to rehash how to use the XIRR function but if you're unsure you can check out this post. The following chart shows the cash flows for the combined position.
While my total return worked out to 14.85% my internal rate of return, which accounts for the all important time factor, came to 7.31%. A solid return and nothing to complain about.
The reason I sold my stake in Baxter is largely due to the combined dividend being reduced. Although in all honesty I would have been fine with that but the future returns don't look all that spectacular. I go into more detail here about the future returns but there's potential for the returns to only work out to 2-3% per year over the next 3 1/4 years. Given the dividend reduction, 0% capital gain tax for this year, and uncertain medium term I decided to part ways with my Baxter holding. Although I wouldn't be opposed to re-initiating a position after a couple years when there's more information on how the company is performing.
The sale of Baxter reduced my forward 12-month dividends by $17.94 to $6,011.85. Including the $59.55 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $6,071.40
Have you made any sales to clean up your portfolio? What companies should be on my radar to invest this capital in?
Image courtesy of Stuart Miles on FreeDigitalPhotos.net.