I just wrote this article in which I outlined why I was selling one of the higher paying dividend stocks within the Team Alpha portfolio. The issue many investors face is how to replace the lost income with another high dividend paying stock.
Sometimes all we need to do is look at the portfolio itself as it might contain the answers. At the same time I will be selling one stock, I will be increasing the allocation in two financial stocks that have been performing rather well, and that pay very handsome dividends.
Our Team Alpha portfolio now consists of Apple (AAPL), McDonald's (MCD), Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), CSX Corp. (CSX), Realty Income (O), Coca-Cola (KO), Annaly Capital (NLY), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), General Dynamics (GD), and iShares S&P U.S. Preferred Stock Index Fund (PFF).
Doubling Down On Two Financial Stocks
KKR Financial and BlackRock Kelso Capital have been performing very well since I first suggested them in this article, back in early November of last year. I wrote a follow-up article not long after that, and I urge everyone to take a look back at both of these articles.
Both stocks were purchased well under $10.00/share, and in the short term the capital appreciation of each has been quite impressive. Roughly 15% increases in each share price within a 3 month period is not too shabby for a dividend opportunity stock.
Each of these stocks offer very attractive dividend yields as well as having some very good basic fundamentals.
- KFN has a current yield of 7.40%.
- KFN has a current payout ratio of just 46%.
- KFN also has a very low price to book value with just a 10% premium.
- KFN also has roughly 60% institutional ownership of all outstanding shares.
- BKCC has a current yield of 9.90%.
- BKCC has a current payout ratio of 122% which is quite reasonable for a BDC (business development company) since they are IRS mandated to pay out at least 90% of all income as regular dividends to shareholders. Much like a REIT does.
- BKCC has a low price to book value with just an 11% premium.
- BKCC has 50% of outstanding shares held by institutions.
Both of these companies have turned in impressive earnings as well. The latest BKCC report can be viewed right here and their newest report will be announced March 7th, and the latest KFN report can be viewed right here.
While BKCC has said publicly that business going forward will be challenging, I believe that the dividend and the reasonable share price is still compelling enough for investors to take the dividends and wait for business to get better.
KFN, on the other hand, has had very positive results as noted in their year end, and quarterly filing.
- Net income for the fourth quarter and year ended December 31, 2012 totaled $77.0 million, or $0.40 per diluted common share, and $348.2 million, or $1.87 per diluted common share, respectively.
- Declared a quarterly cash distribution of $0.21 per common share for the fourth quarter of 2012 and a special distribution of $0.05 per common share for the year ended December 31, 2012.
- Book value per common share was $10.31 as of December 31, 2012 as compared to book value per common share of $10.09 as of September 30, 2012 and $9.41 per common share as of December 31, 2011.
I believe that adding shares to this holding will be a net positive as well. Therefore, I will be "doubling down" the Team Alpha allocation in both BKCC and KFN from 2% to 4% effective on the next trading day.
What Do The Allocation And Cash Reserves Look Like Now?
|Stocks Held||Allocation %|
By increasing our allocation in both BKCC and KFN to 4%, we are at the top end of our own allocation for dividend opportunity stocks, that come with more risk than the huge blue chip dividend winning stocks we already own.
Our average cost price on both BKCC and KFN will now be roughly $10/share, up from roughly $9/share. By purchasing these stocks we will now be at an overall dividend yield of just about 4.70% once again. At the same time, the cash reserves in Team Alpha will be at a reasonable 7% allocation level, or roughly $8,800. I am comfortable with the cash now and since we will be taking this action, our income derived from the portfolio will be roughly $5,875 (on about $125k invested right now) over a 12 month period, not including dividend increases or decreases of course.
The Bottom Line
The Team Alpha portfolio now has 18 holdings and my own personal maximum is 20. I find it too much of a task to closely monitor much more than that, but everyone has a different "pain" threshold.
The most important action I can think of, for those of us with retirement income needs, is to replace income that might have been lost, while at the same time keeping some dry powder to seek out other opportunities.
While this portfolio is far from perfect, I think it has done quite well since we began 15 months ago.