The Biggest Trade I’ve Ever Made: Trimming Apple

Summary:

• I just trimmed my Apple Inc. stake.
• Apple’s dividend growth is disappointing.
• I bought 12 blue chip dividend growers with the proceeds.

I made the biggest trade of my life in early May.

As many of you know, Apple Inc. (NASDAQ:AAPL) is by far my largest position.

It’s been that way for years.

I began accumulating Apple back in 2013 and have bought shares many times since.

I’ve written about Apple extensively, highlighting my bullish outlook for the company again and again.

Simply put, I believe it’s one of the highest quality companies on Earth.

Apple is an absolute cash cow and has been the most generous company in the entire market under Tim Cook’s leadership, having returned $763.5 billion (yes, nearly $1 trillion) to shareholders since the start of its 2012 fiscal year.

I’ve compared iPhones to the omnipresent Coca-Cola cans of the 21st century (you either have one in your hand or you want one in your hand; and once you experience the quality of Apple products, you can’t imagine living without them).

In other words, I don’t really view this stock as a growth technology company anymore, but instead, a consumer staple due to the mission critical nature of Apple’s ecosystem to its global clientele.

To me, Apple’s cash flows, balance sheet, and shareholders returns (dividends + buybacks) make this a top pick for a defensive equity holding in the digital age.

With all of that being said, I’ve been able to sleep well with an extremely overweight Apple position for nearly a decade now…

However, after the company’s most recent earnings report, I decided to trim my stake, selling a significant amount of Apple shares, and reallocating the proceeds towards stocks that better meet my personal goals.

Disappointing Dividend Growth

Anyone who follows my portfolio also knows that my goal, first and foremost, when putting money to work in the market is to generate reliably increasing dividends.

My entire strategy is built around the regular compounding of my passive income stream.

Passive income is what I’m basing all of my retirement plans on.

To me, financial freedom occurs when you generate enough income passively to cover your lifestyle’s expenses with an adequate margin of safety involved; over the years, I’ve taken step and step towards that goal, and a big part of that plan involved my holdings providing annual dividend increases that either meet or exceed my expectations.

Simply put, Apple is no longer meeting my expectations in this regard.

In 2022, Apple raised its dividend by 4.5%.

This wasn’t up to snuff, in my opinion…

To me, an acceptable dividend raise from a company with a dividend yield that is less than 1% is 10%+.

People often ask, so I’ll quickly highlight my baseline dividend yield/growth expectations:

• Yields below 1% should grow at a 10%+ annual rate.

• 1-2% yields should grow at a 8%+ rate.

• 2-4% yields should grow at a mid-single digit clip.

• 4%+ yields should grow at a 2%+ annual rate.

Due to Apple’s immense quality, I was happy to give Cook and Co. the benefit of the doubt and I decided to wait a year before making a rash decision based upon one disappointing increase.

Well, a couple of weeks ago Apple announced its 2023 dividend increase – which came in at just 4.3% – which was another disappointment for me. After that announcement, I knew it was time to make a move.

Don’t get me wrong – Apple’s $90 buyback remains incredibly impressive, and for years I’ve defended this company’s prioritization of the buyback, from a shareholder returns perspective, because I understand that regularly retiring shares does make future dividend growth more sustainable.

Because of Apple’s buyback, I would have been willing to accept a dividend growth result below that double-digit target; however, sub-5% here, on such a low yield, just isn’t getting the job done for me.

You see, after Apple’s most recent quarter, it represented approximately 13.7% of my portfolio’s total value.

That means it was by far my largest holding (roughly 3x the size of my second largest position), and with the stock’s 30%+ year-to-date rally being factored in here as well, I was finally ready to reduce that weighting a bit and use active management to create the passive income growth that I wanted to see.

For years, I’ve been taking steps to reduce my single stock risk here…

Every month I add additional capital to my portfolio, and I haven’t bought Apple shares for years.

Originally, my plan was to just use new investments to slowly, but surely, rebalance my portfolio and reduce my exposure to Apple (assuming that my savings rate would exceed Apple’s growth rate).

This reduced my exposure from ~16% at my all-time Apple weighting highs to the 13.7% range; however, after Apple’s most recent dividend increase, I decided that having so much exposure to a company that was no longer meeting expectations was not a good idea.

Apple yields less than 0.5%, and I knew it would be easy to sell shares and kill several birds with those proceeds (reducing single stock risk, augmenting my passive income stream, and increasing my short-term and long-term dividend growth prospects).

The downside here was taxes.

Years ago, I trimmed all of my Apple shares in tax-advantaged accounts, meaning that my next sale would result in a large check being written to Uncle Sam.

I abhor incurring unnecessary taxes and fees when managing my portfolio, which is exactly why I generally let my winners run.

So long as a company is providing acceptable dividend growth year in and year out, I’m content to maintain a very disciplined buy and hold mindset.

But, when dividend growth begins to falter, my portfolio management rules dictate a sale/trim.

Trimming Apple

The reason that taxes were such a big headwind here was because I am up substantially on every single Apple share that I own.

Coming into my recent trade, my cost basis on Apple was $24.26.

No matter which lot of sales I sold, significant long-term capital gains were going to be put on the table and I didn’t have tax-loss harvesting opportunities available to even things out a bit.

With that in mind, it was a bit of a balancing act deciding exactly how much Apple to sell (reducing single stock risk) and how much of a tax burden I wanted to create.

Ultimately, I ended up reducing my Apple weighting from 13.7% to 9.4%.

To do so I sold the follow lots of AAPL shares:

• Bought on 10/21/2014 for $25.56 and sold on 5/5/2023 for $173.07 for 577% gains

• Bought on 4/28/2015 for $33.06 and sold on 5/5/2023 for $173.07 for 423% gains

• Bought on 4/18/2016 for $26.79 and sold on 5/5/2023 for $172.72 for 545% gains

• Bought on 7/03/2017 for $36.00 and sold on 5/5/2023 for $173.07 for 381% gains

• Bought on 10/04/2017 for $38.37 and sold on 5/5/2023 for $173.07 for 351% gains

• And another batch of shares that was built up via selective monthly re-investments from June of 2014 to September of 2016 with an overall cost basis of 26.35 that was sold on 5/5/2023 for $173.10 locking in 557% gains.

In an effort to offset as much of those gains as I could, I sold my Stanley Black & Decker, Inc. (SWK) position, at $85.78; this was by far the worst performing holding in my portfolio, down roughly 38.6%.

I hate locking in losses, but in this situation doing so made sense; I’ve had growing concerns surrounding SWK’s dividend safety during its recent downfall, management’s execution throughout the post-pandemic period has been horrific, and frankly, it felt nice cutting ties with this dog and simply moving on to greener pastures.

Following my Apple sale, the cost basis of that remaining 9.4% stake was reduced to $22.79.

I likely won’t be locking in any more gains during 2023 (due to my current tax situation), so for now, my plan is to sit tight with those shares.

Putting the Proceeds to Work

After selling those Apple shares I had quite a bit of cash to work with (I’m generally making trades that represent 0.3% to 0.5% of my portfolio’s value, so trading with approximately 4% of my total portfolio value in a single day was abnormal, to say the least).

With this cash I wanted to not only focus on increasing my yield, but also, accumulating shares of extremely high quality companies.

I never want to cut my flowers and water my weeds, so to speak.

Over the long-term, I believe that quality wins out over value, which is why I hold my winners in the first place.

So, the last thing I wanted to do here was sell what is arguably the highest quality company on Earth and replace it with a bunch of mediocre operations.

And with that in mind, here are the companies that I bought with those Apple gains:

• Accenture plc (ACN) at $268.75 (I recently highlighted my bullish outlook on ACN here)

• Air Products and Chemicals, Inc. (APD) at $292.90 (blue chip player in the industrial gas space)

• ASML Holding N.V. (ASML) at $643.29 (high growth potential in the tech sector)

• BlackRock, Inc. (BLK) at $641.86 (I’m always happy to buy BLK shares yielding ~3%)

• Broadridge Financial Solutions, Inc. (BR) at $153.72 (an extremely reliable compounder)

• Danaher Corporation (DHR) at $242.21 (I recently highlighted my bullish outlook on DHR shares here)

• Linde plc (LIN) at $365.47 (another blue chip stock in the mission critical industrial gas space)

• MSCI Inc. (MSCI) at $469.22 (a high growth/dividend growth stock that I’ve wanted to own for years)

• Thermo Fisher Scientific Inc. (TMO) at $543.99 (best-in-breed pure-play on the life science tools space)

• UnitedHealth Group Incorporated (UNH) at $498.31 (a blue chip dividend grower that I recently highlighted here)

• Visa Inc. (V) at $229.87 (Visa continues to be one of the fastest growing dividend growth stocks out there)

• Zoetis Inc. (ZTS) at $179.34 (a high growth stock and the best-in-breed player in the animal health industry)

	Dividend Yield	Most Recent Dividend Raise	5-year DGR	2023 EPS growth Est.	Forward P/E	2024 EPS Growth Est.	5-year forward DGR Est.
Accenture	1.56%	15.50%	11.30%	8%	24.8	8%	8-11%
Air Products	2.54%	8.00%	10.90%	10%	24.2	10%	7-10%
ASML	0.74%	n/a	29.10%	34%	33.7	20%	12-15%
Blackrock	2.99%	2.40%	13.60%	-1%	19.1	14%	5-8%
Broadridge	1.88%	13.30%	14.60%	7%	22.3	9%	8-11%
Danaher	0.48%	8.00%	12.00%	-15%	24.3	12%	9-12%
Linde	1.39%	9.00%	8.50%	11%	26.9	9%	8-11%
MSCI Inc.	1.17%	10.40%	28.20%	12%	36.8	14%	12-15%
Thermo Fisher	0.27%	16.70%	15.10%	2%	22.1	13%	12-15%
UnitedHealth	1.38%	13.80%	17.10%	12%	19.2	13%	10-13%
Visa	0.77%	20.00%	17.20%	15%	27	14%	14-17%
Zoetis	0.83%	15.40%	24.80%	11%	33.3	11%	10-13%
Average	1.33%	12.10%	16.70%	8.80%	26.1	12.20%	11.1% (mid-point)
Apple	0.55%	4.30%	7.30%	-2%	29.2	10%	4-7%

Click to enlarge

Data compiled on 5/19/2023.

As you can see, compared to Apple’s metrics, my new basket of 12 stocks outperforms its historical results and future expectations in all relevant dividend related metrics.

This basket was pretty much evenly weighted, allowing me to bolster my exposure to each of these blue chip dividend growth stocks.

Two of them are new positions for me (MSCI and ZTS).

Admittedly, I paid a premium to initiate both of these positions; however, I sold AAPL at a high premium, so that helped me to justify the valuations on a relative basis.

By making this trade, I have used active management to increase my passive income stream by 55.16%.

In other words, since I wasn’t happy with Apple’s 4.3% dividend increase, I went ahead and gave myself a 55% dividend increase…while increasing dividend growth prospects moving forward.

That’s a win-win, in my book (and a win-win-win when you factor in the reduced single stock risk).

Conclusion

And Apple Inc. remains my largest holding…by far.

Now, Apple is roughly twice the size of my second largest holding though, not 3x.

The cool thing about this trade is: I just sold ~30% of my AAPL shares…and yet, they’re now worth the same amount of money that they were at the start of the year.

Without a doubt, AAPL’s year-to-date rally has been amazing.

And if Apple continues to outperform (which wouldn’t surprise me)…well, I’ll still be a very happy camper.

Obviously I wouldn’t allocate 9.4% of my wealth towards this company if I couldn’t sleep very well at night holding so many shares.

But, by making this trade I’ve used active management to increase my passive income stream (and dividend growth prospects), meaning that my holdings are now more aligned with my primary goals.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, ABBV, ACN, ADBE,ADC, ADP, AMGN, AMZN, APD, ARCC, ARE, ASML, AVB, AVGO, BAH, BAM, BEPC, BIPC, BIL, BLK, BMY, BN, BR, BTI, BX, CARR, CCI, CMCSA, CME, CMG, CMI, CPT, CRM, CSCO, CSL, DE, DEO, DHR, DIS, DLR, DPZ, ECL, ENB, ESS, FRT, FZFXX, GOOGL, HD, HON, HRL, HSY, ICE, ITW, JNJ, KO, LHX, LMT, LOW, MA, MAA, MCD, MDT, MKC, MO, MRK, MSCI, MSFT, NKE, NNN, NOC, NVDA, O, ORCC, OTIS, PEP, PH, PLD, PLTR, PYPL, QCOM, REXR, RSG, RTX, RY, SBUX, SHW, SPGI, STZ, TMO, TD, TXN, USFR, UNH, V, VZ, WM, WPC, ZTS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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