This past February was a lot busier for me in terms of selling and buying stocks for my IRA's portfolio than I had thought it would be when I last wrote the January installment of My Mad Method: What Next To Buy, And Why? First of all, I got the larger of my two annual bonuses at the beginning of the month, and while it wasn't as great as last year's, I'm not complaining at all! (I know it's March already, but work, business travel and cold and flu season have delayed me in getting this article written about February's activities to monitor and maintain my IRA.)
Looking back at my past expenses and looking ahead at my household cash flow projections, I decided that I could afford a $1,500 contribution to my IRA out of my bonus, which I thought was one quarter of the $6,000 that I'm allowed since I'm over 50. However, I realized later that the new limit for contributions for those over 50 is now $6,500, which means (if I can afford it) I should be planning on making $1,625 contributions each quarter. So I decided to hold off on the $125 difference and contribute that with (hopefully) next quarter's $1,625 in order to sweeten the pot then and give myself some fun to look forward to.
In addition to those funds, there was the usual (and growing) steady stream of dividends that accumulated during the month. However, looking over my portfolio, and reviewing some comments made on some of my recent articles, I decided that a few changes were in order. So I put together a list of objectives, and went about implementing a plan based on those objectives.
The objectives that I set for myself in February were:
- Purge the (non-mREIT) companies that had cut their dividends.
- Reduce my exposure to potential future income risks.
- Harvest some profits from positions that had grown above the "parity" level of a 3.57% allocation for 28 positions.
- Replace any positions that had been completely purged, in order to maintain a level of 28 positions.
- Work towards achieving parity in the positions that could either reach it, or were the furthest behind.
Thanks, And Good Luck!
To start off with, a careful review of my portfolio brought to light a stock that was no longer producing a dividend, but which had grown 49% since I took a gamble on it and picked some up by selling cash secured puts last year. I had acquired a small position in Nokia Corporation (NOK) back when I was experimenting with options, and also doing a bit of speculating, something that I've steered clear of in favor of a more focused Dividend Growth Investing [DGI] approach to managing my portfolio.
As it has stopped paying a dividend, and I've seen a nice pop in the price, I decided to sell NOK and add that cash to the pool.
Cut, and Get Cut
That was the good news about my positions that cut or eliminated their dividend. The bad news, from the perspective that they'd gone down in per share price since I purchased them, were electric utility Exelon Corporation (EXC) and European telecom giant France Telecom (FTE). EXC and FTE both cut their dividends, and the rule is: if you do that, you get cut from the portfolio.
There are some exceptions to this "rule", such as mREITs and Business Development Corporations [BDCs], the dividends from which can fluctuate somewhat. But for "regular" corporations, freezing, cutting or eliminating their dividends are the big "No-No's" of Dividend Growth Investing.
I was hoping for a bit of a rebound on both of these before cutting them loose, and Exelon crept up somewhat while I was waiting to pull the trigger, but FTE dropped during the same time period, so it ended up being a wash between them. No matter, they are gone, with no regrets.
Time Is Not On Its Side
The last stock I cut from my herd was MV Oil Trust (MVO). While I enjoyed a nice yield from MVO (10.36% at the time I sold it), the problem was, that yield just kept getting bigger and bigger. Why was this a problem, you ask? Because the price of MVO kept dropping further and further.
Being a trust which is due to expire in 2026, and likely to see its share price continue to erode as we get closer to that year, the future did not look bright for MVO as a member of my portfolio. I'd watched its price continue to slide for a while, and decided that now was as good a time as any to cut my losses and divert those funds to better prospects.
However, that meant that four positions had been cut from my portfolio, and I was very eager to maintain the number of positions at 28, so this meant that some replacements needed to be found.
Before I get to discussing the replacements for NOK, EXC and FTE, there was a bit more activity on the selling side that I undertook in February. There has been much discussion across various Seeking Alpha articles about whether or not it is a good idea to trim some shares from a position that has increased in share price to the point where you've realized a substantial gain. Some people believe in "letting a runner run", while others like to maintain a certain degree of parity between all of the positions in their portfolio so that no one position represents too high of a percentage of the allocation of the portfolio's total funds, and could therefore pose a disproportionate risk to the portfolio should something untoward happen to that stock. I'm in the latter camp, and can add to that thought that it's never a bad idea to take and book profits, within reasonable guidelines.
In my case, those guidelines were whether a stock had enjoyed a significant gain in value, such as 40% or more, and was above my "parity" number for 28 positions of a 3.57% allocation of my portfolio's bottom line. It wouldn't make sense for my overall objective of achieving parity for all of my positions to sell off shares of a stock that was doing well but was still below parity, so just having a 40% or better gain wasn't the only criteria for harvesting profits from one of my existing positions.
However, there were a number of companies that fit this criteria, which got a slight haircut and contributed to the growing cash pool from which I wanted to replace the stocks I'd cut, as well as grow as many positions as possible to as close to parity as possible. These were:
- BHP Billiton plc (BBL)
- Freehold Royalties, Ltd. (OTC:FRHLF)
- Johnson & Johnson (JNJ)
- Main Street Capital Corporation (MAIN)
- SeaDrill, Ltd. (SDRL)
Each of these positions got a slight trim to the number of shares that I held, enough to harvest some profits but not enough to bring any of them below parity, which would be counter-productive. And at only $1.00 per trade for each of them, I wasn't concerned about the cost of liberating a bit more cash with which to try to achieve my objectives.
Since I had completely cut out four positions from my portfolio, and wanted to maintain 28 positions at this time so that I could maintain a target parity level of an allocation of 3.57% for each position, I needed to find replacements for NOK, EXC, FTE and MVO. To accomplish this I turned to my trusty My Mad Method [MyMM] spreadsheet and focused on those stocks on my watchlist that were showing the most promise.
In the recent past, I've been very focused on acquiring new stocks that had the highest yield that I could find at a level of risk that I could tolerate (which at this point in the accumulation phase of my investing lifecycle is still pretty high). However, for this large sum of cash that I had now stockpiled up from all of this selling activity, I wanted to "return to my roots" of why I put together My Mad Method in the first place. I wanted to see if MyMM really was working, so I concentrated on those stocks that had very good (meaning low) MyMM Rankings.
To start off with, I wanted to favor those stocks that had a better Chowder Dividend Rule [CDR] number than the others. To do this, I weighted the Yield Rank and 5 Year Dividend Growth CAGR Rank metrics at 20%, leaving all the other 15 metrics at the "nominal" weighting of 5.88% (1/17=5.88%). (This gave those two metrics a weighting multiplier of 3.4 vs. the nominal weighting multiplier of 1.)
This resulted in the following stocks being ranked the best out of the 17 stocks I had on my watchlist at the time, and their Delta Ratio Readings:
- Microsoft Corporation (MSFT) - Holy Cow!
- NTT DoCoMo, Inc. (DCM) - Buy!
- General Dynamics Corporation (GD) - Falling
- Lockheed Martin Corporation (LMT) - Falling
- Harris Corporation (HRS) - Too High
Those were pretty good Delta Ratio Readings for the Top 5 MyMM Rankings to have. Usually the stocks that rank very well in terms of MyMM are either all "Too High" or "Screaming!", which tells me they're pretty far from the average of their 52 week highs and lows. Only Harris Corporation fell into that category, and upon further inspection I found that it was just over the line from "Stable" to "Too High", so I didn't throw it out right off the bat.
That MSFT was ranked #1 didn't surprise me much, as I had owned it previously in 2012, and it had the same rank then. It's price was much lower than what I had sold it at, and as a result its yield had improved to 3.37% over the 2.6% it was at when I sold it back in September (via covered calls), so I jumped on it and picked up enough shares to put it just over the parity line. MSFT is a Dividend Contender with a very respectable 16.6% CDR number, and has a great ability to generate cash to continue to grow its dividend.
Japanese telecom DCM has consistently ranked well on my watchlist and superlist (the combination of my watchlist and the stocks already in my portfolio), but I just didn't feel comfortable replacing FTE with another foreign telecom operator. I already held AT&T (T) and Vodafone Group, plc (VOD) in my IRA, so felt I had pretty good coverage in that area. Instead, I opted to diversify within the telecom space and go with a parity position in HRS, which is a supplier of telecom equipment and likely to benefit from the increasing demands for wireless communications capabilities worldwide, regardless of which carrier might come out on top in the future. Also, HRS is a Dividend Contender, and although it only had a yield of 3.10% at the time I bought it, it had a CDR number of 25.0%, indicating a strong record of increasing its dividends over the last five years.
At this point, two of my four vacant positions had been filled, and next on the Top 5 list was GD, followed closely by LMT. I'd been watching both of these firms for over a year, waiting for the fallout from the "fiscal cliff" and "sequestration" to settle. During that time their prices have fluctuated up and down, but overall were at the same general level as when I first put them on my watchlist. What had changed, however, was their MyMM Rankings, which had improved considerably from then to now.
Taking a page out of (frequent Seeking Alpha commenter and blogger) chowder's book, I reasoned that these two represented the best of the best in the defense industry sector, and as I really didn't have any defense stocks (aside from eclectic National Presto Industries (NPK), which I didn't feel really counted as a "pure" defense contractor), I decided to load up full parity positions of both of them. chowder likes to have the #1 and #2 companies in a given sector or industry in his portfolios, which is the approach I took by adding both GD and LMT to my portfolio at the same time.
Trying to Max Out
That took care of filling the four positions vacated by NOK, EXC, FTE and MVO, but it took the lion's share of the funds I had available to get full parity positions in MSFT, GD, LMT and HRS. With what was left I had to attempt to bring as many other positions up to parity as possible.
First up was toy giant Hasbro, Inc. (HAS), which was hovering just below parity since I first acquired it, and that was really bugging me. HAS had taken a bit of a dip recently, so by adding just 4.8% more to my position in HAS, I was able to bring it up to a healthy parity number of just over 3.57%.
Next up was international utility company National Grid plc (NGG), which had also dropped off recently after a steady-yet-erratic climb from when I'd first purchased it. Out of all of the positions that were still under parity, NGG was the farthest away from that target, so I chose it to be the beneficiary of my remaining funds. Unfortunately I didn't have enough money left over to bring it up to full parity, but by buying an additional 30% more shares I was able to bring it up to a healthy and respectable 3.00% allocation in my portfolio, and in the process replace some of the utilities exposure I'd lost by selling EXC by buying more shares of NGG.
There's been a lot of changes to my portfolio in the last two months or so, so to give you an idea of what all I currently have, here are the current holdings in my IRA:
American Capital Agency
BHP Billiton plc
Crescent Point Energy Corp
Freehold Royalties, Ltd.
General Dynamics Corp
Johnson & Johnson
Kimberly Clark Corp
The Coca-Cola Company
Lockheed Martin Corporation
Main Street Capital Corp
National Grid, plc
Annaly Capital Mgmt
National Presto Industries
New York Community Bancorp, Inc.
Prospect Capital Corporation
Resource Capital Corp
Two Harbors Investment Corp.
Vodafone Group, plc
Wisconsin Energy Corp.
That's A Wrap
And with that, my adventures in February came to a close. It really was far more trading that I'd expected to be doing at this time, but things just worked out that way, as there were dividend cutters to be cut and bonus money to be contributed to the ol' IRA. March is now upon us, and soon more funds will have accumulated from the dividends thrown off by my growing portfolio, at which time I'll be sure to let you know what I'm going to do with them.
Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.