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Long only, value, short-term horizon, dividend investing
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At the end of Part II of this series, I listed my portfolio holdings at the time I discovered Seeking Alpha, Todd Johnson, and DividendLab back in January, 2012.

What had I learned by that time?

  1. I had to stop muddling and learn how to invest wisely.
  2. I needed to concentrate on dividends for income.
  3. I needed not to panic and sell when some of my names fell. That is, I needed to learn patience.
  4. Dividends and income mean more than just current yield.
  5. I needed some sort of consistent criteria to select my holdings.
  6. I needed an intelligent watch list.
  7. I needed to have a specific target for my investment income.
  8. I needed to learn about and understand things such as total return, dividend growth, dividend champions, and dividend aristocrats that the people I admired on SA wrote about extensively.
  9. I needed to be able to understand what was applicable to my particular situation when I read the many wise articles on SA.
  10. I needed, perhaps most of all, to understand and manage the concept of risk vs. reward in our portfolio.

Pretty elementary stuff, of course, but only after you've learned it.

One thing that occurred to me at about that time was that the real power of dividend growth and compounding and total return that chowder often explains so well and so convincingly might not be totally applicable to me.

Many, many times I had read about the role one's time frame plays in how one invests. I realized that my time frame was quite short. I'm 75 years old and I figure, because of a variety of factors, that I probably have an investment time frame of only about 5 years. I also realized that if I didn't engage in any kind of draw-down but generated enough income monthly to meet our needs, my wife would be in good shape after I was gone.

One could argue, I suppose, that if the investments comprised a true dividend-growth portfolio, after I was gone my wife would be in an excellent position to have the portfolio continue to grow and provide. The problem at this point is that both she and I are not sure that she would want to devote so much time to managing the portfolio. This is a problem that we still have to find a solution for.

As an aside, I might note that in everything else I do, for example, learning new skills, undertaking new projects, etc., I act as though I'll never die. If I were to come up with a new startup idea again, or one of my former entrepreneurial partners did, I'd jump on it in a minute. But in my investing, I let myself be informed to a significant degree by our current income needs in order to maintain our lifestyle and enjoy the years that are left and to ensure my wife's future needs and well-being.

After starting to work with DividendLab, I began to adjust our portfolio radically. By now, as you'll see below in the current portfolio, I've divested us of all the preferred holdings except one. I took some modest losses on them but they were going nowhere.

I acquired many mREITs (more about mREITs and equity REITs below) and a few MLPs, all under the guidance of Todd's articles and newsletters and articles here on SA.

I got rid of a few of my municipal bonds for the cash to buy other names, but kept the majority of them.

Here's what our portfolio looked like a few days ago.

The Rice's' Portfolio As Of 1/25/2013

Symbol & Beta

Description

Change %

% of Portf.

MUNI CUSIPs

162362FP7

CHATTANOOGA-HAMILTON CNTY TENN HOSP AUTH 05.00000% 10/01/2028 HOSP REV REV BDS ERLANGER HLTH SYS 1998 SER A

15.73%

31.99%

213185DM0

COOK CNTY ILL GO BDS SER. 2009D 05.00000% 11/15/2021

10.47%

251093G61

DETROIT MICH GO BDS SER. 2005-B 05.00000% 04/01/2016

2.14%

406313JJ6

HALLSDALE-POWELL UTIL DIST KNOX CNTY 05.00000% 04/01/2024 TENN WTR & SWR REV REF & IMPT REV BDS SER. 2002 A

0.72%

478271GX1

JOHNSON CITY TENN HEALTH & EDL FACS 05.50000% 07/01/2036 BRD HOSP REV HOSP MGT REV BDS MOUNTAIN ST HLTH ALLIANCE

7.49%

592112CQ7

METROPOLITAN GOVT NASHVILLE & DAVIDSON 05.00000% 05/15/2028 CNTY TENN GO REF BDS SER. 2007A

7.69%

613664X55

MONTGOMERY CNTY TENN REF GO SCH BDS SER. 04.37500% 04/01/2023 2006

8.46%

745277PD9

PUERTO RICO MUN FIN AGY REV BDS SER. 05.00000% 08/01/2027 2002A

5.97%

REITS

17.62%

AMTG (mREIT) 0.93

APOLLO RESIDENTIAL MORTGAGE INC COM USD0.01

9.77%

ARR (mREIT 0.42

ARMOUR RESIDENTIAL REIT INC COM

0.16%

DX (mREIT) 0.88

DYNEX CAPITAL INC

3.38%

EFC (mREIT) 0.48

ELLINGTON FINL LLC COM

13.47%

EXL (eREIT) 1.07

EXCEL TR INC COM

0.27%

HTA (eREIT)

HEALTHCARE TR AMER INC CL A

2.02%

LSE (eREIT) 0.80

CAPLEASE INC

-5.75%

MFA (mREIT 0.65

MFA FINL INC COM

21.28%

MITT (mREIT) 0.50

AG MORTGAGE INVESTMENT TRUST INC COM USD0.01

20.27%

MNR (eREIT) 0.90

MONMOUTH REAL ESTATE INVT CORP CL A

2.53%

MTGE (mREIT) 0.51

AMERICAN CAP MTG INVT CORP COM

27.90%

NCT (mREIT) 1.61

NCT Newcastle Investment Corp

21.21%

OHI (eREIT) 0.88

OMEGA HEALTHCARE INVS INC

7.05%

ROIC (eREIT) 0.32

RETAIL OPPORTUNITY INVTS CORP COM

-0.28%

STAG (eREIT) 0.92

STAG INDL INC COM

0.94%

TWO (mREIT) 0.84

TWO HBRS INVT CORP

18.68%

WMC (mREIT)

WESTERN ASSET MORTGAGE CAPITAL COM USD0.01

2.64%

CEFS AND ETFS

4.38%

ETG

EATON VANCE TAX ADVANTAGED GLO GOBAL DIVID INCOME FD

20.90%

GGN

GAMCO GLOBAL GOLD NAT RES & INCOME COM USD0.001 SBI

-15.64%

GLU

GABELLI GLOBAL UTIL & INCOME TR COM SH BEN INT

1.23%

HIX

WESTERN ASSET HIGH INCOME FD II INC COM

5.49%

PDI

PIMCO DYNAMIC INCOME FD COM USD0.00001

16.25%

PNNT

PENNANTPARK INVT CORP

10.53%

PCEF

POWERSHARES EXCHANGE TRADED FD TR II CEF INCOME COMPOSITE PO

2.35%

MLPS

3.57%

LINE 0.96

LINN ENERGY LLC UNIT REPSTG LTD LIABILITY CO INTS

0.34%

MMP 0.70

MAGELLAN MIDSTREAM PARTNERS LP COM UNIT REPSTG LTD PARTNER I

10.24%

MWE 1.25

MWE Markwest Energy Partners

-9.06%

QRE 1.43

QR ENERGY LP UNIT LTD PARTNERSHIP INT

6.66%

VNR 1.31

VANGUARD NAT RES LLC COM UNIT REPSTG LTD LIABLITY CO INTS

5.08%

MUTUAL FUNDS

11.09%

SWNTX

SCHWAB TAX-FREE BOND FUND

4.08%

VFIIX

VANGUARD GNMA INVESTOR CL

-2.92%

OTHER EQUITIES

20.79%

OTCPK:NZTCY 0.84

TELECOM CORP OF NEW ZEALAND

24.34%

PSEC 0.96

PROSPECT CAP CORP

-2.87%

RTN 0.73

RAYTHEON CO COM NEW

9.93%

SANPRE (Pref.)

SANTANDER FINANCE PREFERRED SA UNIP PFD

3.72%

T 0.63

AT&T INC COM

11.37%

TOT 1.20

TOTAL SPON ADR EA REP 1 ORD SHS

19.37%

VOD 0.62

VODAFONE GROUP SPON ADR REP 10 ORD USD0.11428571

1.05%

46 Names

Gain 6.95%

CASH

10.56%

Until very recently (a couple of weeks ago), all of my REITs were either pure mREITs, agency REITs, or hybrid REITs and I was thinking of acquiring even more. Then I read Brad Thomas's SA article, Build An Intelligent REIT Portfolio Without Mortgage REIT Risk. Again, an example of how little I still knew. I don't remember ever having heard of equity REITs before reading this article. As mentioned, all of my REITs were based on paper. In the article Brad pointed out the many risks of mREITs. He has since followed up on that theme with a second article on the theme of mREIT risk, "There Is No New Paradigm In Mortgage REIT-Dom. Just Risk."

Because I was still trying to understand how to work out the risk/reward aspects of my portfolio management, this article made a big impression on me. That was then reinforced significantly when in one of Todd's newsletters he recommended reducing the size of one of the mREIT holdings "for prudent asset allocation," and he mentioned the size of the holding in terms of percentage in relation to the entire portfolio.

Here, too, was something new to me: thinking of individual names in terms of how big a percentage they were of the total portfolio. (I've discussed this with a couple of commentators just today in my Part II of this series.)

These insights made me decide that I needed to realign my REIT holdings. All of this was about two weeks before the state of the portfolio as shown above. What I did was to acquire all of the equity REITs that now appear there using cash that I got from selling some of the mREITs and reducing our position in others.

And this reduction rather than sale of some of the REIT holdings brings me to the next matter that I've been giving a lot of thought to in regard to the risk/reward equation.

When I read the eminently sensible information here on SA about, for example, dividend champions and challengers, or some individuals' criteria for dividend returns, I keep seeing numbers ranging from, say, 3.5% to 5.5%. Note that I'm not talking about total return here. These are associated with stocks that are really solid in terms of dividend growth and many of the other metrics that knowledgeable people use in selecting their names.

But these percentages are just not large enough for us. There have been lots of discussions in the comments in various articles about this question and many viewpoints presented.

But I know that I need a yield of 8.0% to 8.5% in order to meet my income needs. That would be a real piece of cake, if I weren't worried about risk. But of course I am. So I decided that I would have to find a reasonable compromise.

And that's where I am now. In the broadest terms, I've decided to reduce but not eliminate positions in some of the highest-yielding names I own and use the proceeds of these sales to buy lower risk but decently yielding holdings. I will also use this process to build up more cash so that I can take advantage of good buys when they appear.

Here's an example of one thing I plan to do. We currently hold 2,000 shares of Newcastle Investment Corp. that has done very well for us. I'll sell 1,000 shares and realize $10,110.00. My cost was $8,340.00 which gives me a profit of $1,770.00. I'll use the $8,340.00 to buy a new name and put the $1,770.00 in with my cash.

NCT's current yield is 8.59%. If I replace it with something yielding, say, 5.0%, I've effectively reduced my current income, but, assuming that 5% stock is safe and has other good characteristics such as strong dividend growth, good P/E, etc., I'm in good shape. I've reduced my risk but still have a high-yielding name and have acquired an excellent holding.

After I decided to do this, I happened to come across a comment by Chuck Carnevale who wrote:

As a general statement, there are exceptions, lower yields are often associated with faster growth. Therefore these can be used to turbo charge your increase so to speak. Which leads me to the idea of a blended 4% current yield. It can be achieved by blending a 2.5% yield with a 5.5 - 6% yield (REITs or MLPs) for an average of 4% etc.

So I guess I'm currently engaged in blending.

Another step I'm about to take is to sell some of the municipal bonds that have yields of about 5% at this point. There will be profit there to add to cash and I believe that looking at total return, I'll be able to do better than the 5%.

I'll also be looking more closely at MLPs and most likely build up that area of our portfolio.

Finally, I'll be working on looking at and understanding the role of individual name allocations.

From time to time now I'll make additional postings on SA to update my progress in attaining my family's goals.

Source: How One Retiree Is Muddling Through Dividend Investing: Part III - Our Portfolio Today