My Investing Summary of 2022
Another solar rotation passed, and the world experienced a plethora of unexpected events. In the aftermath of the Corona epidemic that altered the course of the last couple of years, we had the unfortunate invasion of Ukraine by Russian forces, the tightening of Corona measures in China (and toward the end of the year, their withdrawal and gradual reopening of the economy), an ongoing economic recession, the rate hike by the FED and the general uncertainty of the most immediate future.
The stock market is no stranger to this situation, falling almost 20% annually.
The year has been strange, in fact. Rises in interest rates tend to favor bonds. Most bonds pay a fixed premium (i.e. interest payment) and if the rates are going up the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond. But this year has been also historically bad for bonds, with a nominal return of -17%.
The exchange USD/EUR fluctuated wildly favoring the USD, and at some point even parity was achieved. There is an eclectic mix of geopolitical events and a certain degree of randomness where we do not want to dive into in this article, but as an investor here there are a couple of interesting points:
- If your base currency is the USD, buying EUR stock was cheaper.
- If your base currency is the EUR, buying USD stock was more expensive.
- If your base currency is the USD, you did receive fewer EUR dividends.
- If your base currency is the EUR, you did receive more USD dividends.
As an investor and an individual, you can influence certain things in your life, but the global currency exchange and the global macroeconomic development are not two of them. No matter how you invest, you probably just need to play with the circumstances as they come.
2022 has been a year of financial records for me. I am adding now some charts about my portfolio, its evolution, and some thoughts and conclusions.
My portfolio at the end of 2022
Things can always be better, but I am extremely satisfied with the results in 2022. My portfolio at the end of 2022 consists of 71 companies, geographically and sectorally diversified, and of generally high quality. This is the current portfolio distribution:
Most of my portfolio contains companies belonging to the super defensive sector, despite having added mostly cyclical companies during this 2023 (my top acquisitions by amount were T. Rowe Price, Starbucks, Blackstone and Intel). This helped the portfolio to withstand the economic downturn.
Companies sold and new companies
8 companies left my portfolio during 2022: Organon, Kyndryl, Oriol REIT, Siemens Energy, Viatris, Warner, URW and TAG Immobilien. The first 6 companies are the result of a previous spin-off, and hence not a sell motivated by poor performance or a loss of trust.
URW was sold after having cut the dividend in 2020, with poor performance and no clear plans for turning the tables. This is something I have painfully learned: I am fine with a company circumstantially cutting the dividend and providing explanations, but slashing it without any roadmap is not acceptable.
This happened actually to Tag Immobilien. I bought this company this very same year, but they recently announced that they will cancel the dividend for the foreseeable future. I sold the company at -65%, and moved forward, without any second thoughts, sadness, or remorse.
10 new companies entered my portfolio: Intel, Starbucks, Rio Tinto Blackstone, Lowe, Medtronic, BXMT, Home Depot, Stanley Black & Decker, and V.F. Corp.
Benchmarking and performance
The most valid benchmark for myself is how my income this year compares with the previous one. Due to a combination of extra invested cash and the USD/EUR exchange, my dividend income in 2022 was 64.9% higher than in 2021. This certainly beats inflation.
To add an additional data point, this year I wanted to compare the performance of my portfolio with my benchmark of reference, the S&P500. Not that it matters for a DGI strategy, but it provides some information on how the portfolio contrasts with the market. Again, the results were outstanding:
During 2022, there were 7 months when my portfolio performed better than the S&P500. One month where the performance was the same. 4 months where the performance was worst. In general, when the S&P was falling strongly my portfolio was holding it better (and also, as a trend, when the S&P500 was recovering quickly my portfolio did not have as much energy).
My portfolio was 1.22% up, whereas the S&P500 was -19.95% at the end of the year. I can think of two main factors that caused this:
- Tech and FAANG’s (some of the worst performers of this year) weight in my portfolio is almost negligible. On the other hand, most of it consists of companies in the defensive sector, which performed better.
- EUR/USD currency exchange. At the beginning of 2022, the EUR/USD exchange was 0.88, whereas at the end was 0.93 (and it achieved parity and beyond in September. This certainly factored in the better performance.
- A non-trivial amount of randomness. My portfolio could have been higher or lower without me taking any special action (but very likely, my dividend income would have been always higher, regardless of the market conditions).
Dividend performance
During 2022, this was the behavior of the companies in my portfolio from a dividend point of view:
- 4 companies cut their dividend (TAG Immobilien completely slashed it, and it was sold).
- 9 companies kept the dividend.
- 58 companies increased their dividend.
Overall, the dividend income growth due to exclusively dividend increases (and/or dividend cuts) was 5.08%. All dividends were reinvested in the portfolio.
Portfolio evolution
This has been the evolution of my portfolio since July 2020:
As you can see, the dividends slowly account for a significant percentage of their total value. The current dividend return on investment (i.e., how much of my investment has been returned as a dividend) is 7.23%. This number does not grow quickly since I am continuously adding to my portfolio (but it does grow steadily).
This chart represents the number of dividends earned over time:
You can see that the slope of the graph becomes more pronounced every year. The large gap in April/May is due to the dividends paid by German companies, which mostly focus their payments on those months.
Conclusions and thoughts
This year I internalized the fact that the sooner I get rid of companies I do not trust more, the better. This means companies that slash their dividend and provide no clear prospect of future growth. Having a diversified portfolio means that I can cover those losses via dividends and that the impact will be rather small.
Speaking of impact and diversification: I started following a different approach this year. Instead of taking into account how much a company weighs in my portfolio, I find myself checking more often how much their dividends weigh in my total income. I find myself more comfortable with this approach. This limits my exposure to companies with high yields (as well as allows a bit more of the presence of those with a lower yield, which often tend to have better dividend growth).
Currently, 13 companies have more than a 2% of dividend weight on my portfolio, but I am working towards reducing them (as well as increasing those companies with a lower weight).
The approach I have been following for the last years of regular acquisitions of whatever company is at a good price without hassling on the price or overrepresenting has worked out well all those years. I keep investing a proportion of my income every month, as well as reinvesting dividends continuously.
I want to expand on the consumer defensive sector. My next acquisitions already scheduled for 2023 are Hormel Foods, Nestlé, and Tyson Foods.
Besides that, I consider that everything is on track with my investments, and its management is slowly pivoting to “watching paint dry or watching grass grow”. It still requires me to oversee it, but the amount of time invested is minimal.
Despite a growing family, dividends are covering most of our monthly costs. I do plan to keep growing the passive income for some time, however.
I write my thoughts about Software Engineering and life in general on my Twitter account. If you have liked this article or it did help you, feel free to share, 👏 it and/or leave a comment. This is the currency that fuels amateur writers.
