It has been just over two years since I made these picks and I’ve been providing a quarterly update ever since. This list is reflective of my investment objective which is to create a growing stream of passive income.
This isn’t an academic exercise for me. I own 11 out of 12 of these picks. The only exception is Soul Patts which is on my watchlist.
A passive income strategy requires patience and consistency. I’ve owned several of the names on this list for decades. My original purchase date for ADP is 1981, Diageo 2008, Phillip Morris 2009, Kinder Morgan 2010 and Brookfield Infrastructure in 2014. Find shares that consistently increase their dividends and reinvest those dividends for decades and your passive income can skyrocket.
Before getting into the update a quick reminder of what I’m trying to accomplish with these 12 picks.
My original premise
I had two long-term goals for the shares and ETFs I included on my list on June 20th 2024. For the more growth orientated bucket I wanted to achieve average income growth of 10% per year. For the higher yielding shares I was targeting average income growth of 8% annually.
In both cases this income growth comes from a combination of dividend reinvestment and dividend growth. In providing this update I used the following assumptions to calculate the results:
- Equal weighted portfolio: I assumed that each of the 12 picks received an equal allocation of $10,000. For the US holdings I used the exchange rate on the 20th of June 2024 which makes a $10,000 local investment $6,654 US. I am going to assume no rebalancing so the equal weighted portfolio is only a day one exercise and the weights will fluctuate over time.
- Dividend reinvestment: I am assuming that dividends are reinvested at the closing price on the day of the dividend payment. This may vary slightly from how a broker processes any automatic reinvestments or how an investor might manually reinvest dividends. In all but the most extreme situations the price will not vary significantly under these scenarios from my approach.
- Income on 20th of June 2026: This represents the dividends and distributions in the preceding 12 months on the 20th of June multiplied by the number of shares held on the 20th of June.
- Income on the 1st of January 2026: This represents the dividends in the proceeding 12 months on the 1st of January multiplied by the number of shares held on the 1st of January.
In the following chart you can see the results of this exercise.
Over these eighteen months the picks have achieved 16.38% income growth in constant currency terms and 13.77% in Aussie dollar terms. It was a poor quarter with overall dividend income dropping since 31/3/3006 – more on this later.
Currency matters and there will always be fluctuations. However, since this is a long-term portfolio I’m more interested in what is happening in constant currency terms. I included companies that I thought would grow their dividends. The constant currency view answers this question.
Things were a bit mixed this quarter. Nice dividend increases from Aurizon, Brookfield Infrastructure and American Tower. However, Diageo and CSL both cut their dividends meaningfully.
Diageo announced a new dividend payout ratio target of 30%-50% of earnings, below the historical five-year average of 65%. CSL earnings are down as is the dividend as the turnaround takes longer than expected.
These cuts are obvious headwinds on the performance of the overall list. This shows the power of diversification.
How did the portfolio perform?
I’m an income investor. But that doesn’t mean I don’t want my portfolio to increase in value. I don’t think those goals are mutually exclusive.
Performance continues to be mixed with some large drops in CSL and Diageo weighing on the portfolio.
In both cases a turnaround in the share price will likely take a while given the entrenched issues with CSL and the structural headwinds with drinking rates dropping for Diageo.
Why did the quarter go so poorly from an income perspective?
There were several drops in income from individual holdings over the quarter. Before getting into how some of the specific holdings performed it is worthwhile looking at the overall dividend picture in Australia where much of the underperformance occurred.
For holders of ETFs this drop was evident with the June distributions. From an overall market perspective, a good example is the Vanguard Australian Shares ETF (ASX: VAS) which tracks the ASX 300. The June distribution dropped 25% from the previous year.
There were also meaningful drops in many of the income specific ETFs that are popular with investors – Vanguard Australian High Yield ETF (ASX: VHY) June distribution dropped 80% and the SPDR MSCI Australia Select High Dividend Yield ETF (ASX: SYI) was down 50%.
This is representative of the overall dividend environment in Australia where dividend yields have fallen due to lower payouts from Australian companies notably in the mining sector. The current dividend yield on the ASX 300 has fallen to the low 3% range after averaging more than 4% over the long-term.
This overall dividend environment is reflective of the fall in the Van Eck Australian Equal Weighted ETF (ASX: MVW) where the June distribution dropped by close to 30% from the previous years level.
This drop was compounded with some of the individual Australian holdings including CSL and Contact Energy where the March dividend for both dropped around 12% from the previous year’s dividend.
Overall, this led to the 12 picks income levels lower than they were at the March month end update. Dividends will fluctuate and going through these periods is just part of being an investor. I believe that long-term income prospects from the list are still strong.
Have any questions or comments? Write me at [email protected]
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