2023 Was a Big Year for the Growth & Income Portfolio

Note: On Jan. 23, I launched a premium investing service in partnership with Dave Van Knapp, Greg Patrick, Jason Fieber and Christian Phillips. This new service is called Dividends & Income Select, and it features three real-life dividend portfolios, high-yield opportunities, option income trade alerts and real estate income insights. When you join Dividends & Income Select, one of the real-life portfolios you’ll have access to is my Growth & Income Portfolio. Click here to to learn more.

Otherwise, read on to for my portfolio’s 2023 recap…

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One year ago, you predicted that the S&P 500 would gain 24% in 2023, right?

Liar!

Sorry about that, but I’m just playing the odds. Maybe you were the most bullish bull out there and you actually got it right, but I’m guessing you weren’t nearly that optimistic — that you were more like most of the investing-world pundits who forecast either minor gains or significant pain (complete with a recession) for 2023.

For example, Morgan Stanley’s ever-bearish Michael Wilson, the top-ranked analyst in the 2022 Institutional Investor survey for correctly calling that year’s market slide, predicted a 21% decline in the first quarter of 2023 and only a 2% gain for the year.

Well, SPDR S&P 500 ETF Trust (SPY) actually gained 24% and had a total return of 26% (including dividend reinvestment).

This tells us a couple of things: Analysts aren’t always right (not even close); and it’s not easy to predict what direction wacky Mr. Market is gonna take us.

Indeed, one could say that attempting to invest in stocks based on overall market predictions is a fool’s game. That’s why I don’t try to do it. I invest regularly, sell infrequently, and just watch the market do what it’s always done over time — go higher.

That certainly was the case again in 2023 with my Growth & Income Portfolio, the college fund I’ve been building for my grandkids since June 2020.

At the end of 2022, the GIP was worth $5,656, and total return since its inception had been a measly 4.4%. Well, look at it now!

Had I panicked after a tough 2022 and sold a bunch of stocks or scaled back my investments, I would have missed out on a great year for the market. And the GIP wouldn’t have a 27.3% total return from inception through the end of 2023.

No wonder my son Ben’s kids — 4-year-old twins Jack and Logan, and their 4-month-old brother Noah — are so happy!

Eight of the GIP’s holdings crushed the market’s total return in ’23. Yes, tech led the way (as it led the overall market), but betting app DraftKings (DKNG), warehouse retailer Costco (COST) and animal health-care firm Zoetis (ZTS) also contributed nicely to the portfolio’s advance.

Another stock in the GIP, railroad CSX Corp. (CSX), has a 15.5% total return since I added it in August (and bought more in September); had I gone with SPY instead, the return would have been only 7.8%.

Meanwhile, I also have been building a college fund for my daughter Katie’s kids, 3-year-old Owen and 22-month-old Piper, since October 2021.

So far it hasn’t done as well as the other part of the portfolio — showing a 3.9% loss through the end of 2023 — in part because it has been dragged down by the minus-18% total return of Bank of Nova Scotia (BNS).

However, my latest buy, Canadian National Railway (CNI), has a 15% total return since I added it on Sept. 6. That’s more than double SPY’s 7.3% gain … and like most kiddos, Owen and Piper love a market-thrashing stock!

Owen and Piper also love going to Costco, especially for the oodles of food samples that are handed out there. COST is the Growth & Income Portfolio’s top performer since its inception, with a 77% total return. The company makes billions of dollars every year on membership fees before it ever sells a single product, giving it the best business model in all of retail. The stock continued to defy gravity in 2023, going up another 49%.

Several of the GIP’s high achievers — most notably Lam Research (LRCX), Microsoft (MSFT). Alphabet (GOOGL) and Amazon (AMZN) — have benefited from investors going ga-ga over everything related to artificial intelligence. These companies are about a lot more than AI, however.

As a supplier of components that go into the processing of semiconductors, Lam is a classic “pick-and-shovel” company, and chip stocks were on a tear pretty much all year. Microsoft, Alphabet and Amazon are technology conglomerates that are dominant names in numerous industries. (I know, I know, GOOGL and AMZN actually are classified in sectors other than technology … but please.)

As great a bounce-back year as it was for the likes of Alphabet, Lam and Amazon — each of which had a negative total return through the end of 2022 — the GIP position that really rocked in ’23 was DraftKings.

The above chart shows how DKNG came out of the gate hot after I first bought it in June 2020, how it dive-bombed from late-2021 to mid-2022, how it stagnated the rest of 2022, and how it has rallied since the start of ’23. It was up an astounding 209% in the year just ended.

Yeah, I’d have been better off just buying the index instead of DKNG back in 2020, but DraftKings was always a speculation play, and we’ll see what happens in the coming years. The company has yet to turn a profit but expects to in 2024, and sports gambling has become more popular than ever.

On the down side, a few of the portfolio’s positions had only single-digit percentage total returns (or even negative returns) in 2023, including long-time favorites such as Pepsi (PEP), Lockheed Martin (LMT) and Johnson & Johnson (JNJ).

Nike (NKE) shares fell 12% on Dec. 22 after the company released an earnings report that included a revenue miss and warnings about future sales. Things could be rocky for the sportswear giant near-term, but I still like owning this dominant, omnipresent brand over the long haul.

UnitedHealth Group (UNH), which led the GIP with a 48% total return through the end of 2022, barely managed to break even in ’23. The industry has been facing increasing regulatory hurdles and political pressure, but analysts still expect UNH’s earnings to grow by 12% in 2024 and 13% in 2025.

Valuation Station

Several GIP stocks look quite overvalued, led by Costco (41.4 forward P/E ratio); Zoetis (34.1); Microsoft (33.5); Mastercard (31.2); and Apple (29.1).

If you are building your portfolio the same way I am building this one — with small, monthly buys over the course of 15-20 years — valuation is less important. That’s doubly true of “growthier” stocks that almost always seem expensive. (In my personal portfolio, where I make larger buys, I’m not adding to my COST position at its current price.)

According to Simply Safe Dividends, the two Canadian banks in the Owen/Piper portion of the portfolio offer the most compelling values. Johnson & Johnson looks slightly undervalued, and SSD says a few others also might be worth considering for those with valuation on their minds.

Notably, there are plenty of analysts who still love some of the seemingly overvalued stocks.

For example, 54 of the 55 analysts monitored by Refinitiv consider Amazon to be either a strong buy or buy, and their mean 12-month target price of $177 suggests 15% upside.

CFRA analyst Angelo Zino is very bullish on Microsoft, saying: “Our Strong Buy rating is mainly based on AI opportunities as well as MSFT’s ongoing cloud transition, with strong traction for cloud versions of Office, Dynamics, Teams, and Azure infrastructure cloud services. … We see a slew of diverse ways that MSFT will be able to monetize the explosion of generative AI (e.g., cloud, CoPilot integration, OpenAI, Search expansion), driving considerable upside potential to our/Street consensus views looking ahead.”

Mastercard is one of those always-expensive stocks, but many analysts are still in buy mode due to its strong fundamentals, wide moat and pristine balance sheet.

Income Report

“Growth” is this portfolio’s first name, and that is its primary objective. Nevertheless, over the years, I do expect the GIP to produce material income on its way to helping pay for our grandkids’ college costs.

Most GIP companies fall into the low-yield, high-growth category of dividend payers. Zoetis is a good example, with its 0.9% yield and its average 25% dividend growth over the past 5 years.

All of the portfolio’s dividend-paying holdings — including those in the Owen/Piper portion — declared increases during the course of the year, from LRCX’s 15.9% raise to the 2.9% hike of BNS (and everything in between).

Two nice bonuses were announced, as well. Costco will pay a $15 per share special dividend; and Disney, which eliminated its dividend early in the pandemic, is bringing back a 30 cents/share payout.

Wrapping Things Up

So, after closing at 4,770 in 2023, where will the S&P 500 be at the end of 2024? Here are predictions from numerous investment banks and analytical firms:

Even the most bullish expect only about a 9% gain, while the biggest bear is forecasting a 12% decline.

What do I think of all that? Not much. I don’t know what the market will do in 2024 … and judging from analysts’ forecasts a year ago, neither do most of them.

So I’ll just keep investing a little at a time into the Growth & Income Portfolio, month after month and year after year. To me, especially in a portfolio with such a long-term objective, it’s the only way that makes sense.

Remember, it is not my intent to get any investor to replicate the GIP. The idea is to present stocks for further research and to discuss investing concepts.

— Mike Nadel