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One of the smartest things I've done in the last several years (apart from marrying my wife, of course) is to have written this series of articles for Seeking Alpha. Little did I know two short months ago when starting out, what an almost unimaginable education I would get from all the highly experienced investors who read my articles and took the time to comment graciously with information, advice, and suggestions that would have most likely taken me years to have accumulated on my own.

The articles to this point are almost like a diary that tracks my wife's and my growth as investors and details our journey, which started with us as complete novices and led to a point where we have become so much better informed than we ever were; but we still have a very long road to follow in order to complete our journey.

The "video" that dramatizes our journey can be seen, I think, in the portfolios I have posted in Parts II through VI of this series. Not only do they show the changes in the names we hold, but they also illustrate our growing awareness of factors that we hadn't considered previous to getting input from SA readers. For example, in Part II there was just a listing of the holdings' names with no accompanying data; it wasn't until Part III that I began showing the percentage of the portfolio comprised by individual names and by sectors.

I also believe that seeing how we classified our positions' sectors and types in the portfolios illustrates how our understanding of these things began to grow. At the same time, one can see the gradual but important diversification we began building:

Evolution of Our Portfolio Sector Classifications and Diversification As Presented in the Article Series

Part II:

Part III:

Part IV:

Stocks

Muni Bonds

BDCs

ETFs

REITs

Equities

Fixed Income

CEFs

ETFs

Funds and Muni Bonds

ETFs

MLPs

MLPs

Muni Bonds

Mutual Funds

Mutual Funds

Other Equities

Equity REITs

Mtg. REITs

Part V:

Part VI:

Consumer Discretionary

Energy (Stocks & MLPs)

Technology

Materials

Health Care

Consumer Discretionary

Telecommunications

Consumer Staples

Utilities

Health Care - Pharmaceuticals

Energy (MLPs and Stocks)

Financial and BDCs

Financial (BDCs and Stocks)

Equity REITs

Equity REITs

Mtg. REITs

Mtg. REITs

Technology

Telecommunications

Utilities - Electric

Our portfolio has changed yet again since my last article. I'll talk more about that below so that folks who have been following the series can see where we are now with our investments.

In addition to learning a lot of what I'll call "technical things" by carefully reading the comments to my articles, I also slowly began to realize that knowledgeable investors came in many different flavors. Although all the accomplished commenters believed and stressed to me in their comments that one must start with a plan in order to invest effectively and profitably and to achieve one's goals, the details of plans they spoke about varied considerably in spite of the fact that the goals were very similar: that is, in most cases to build an ever-increasing income stream in either the accumulation stage before retirement or in the drawdown stage of retirement.

Because my articles were classified under the SA dividend investing rubric, almost all the commenters were dividend investors. Some were "just" dividend investors and others were dividend growth investors. Some were not too worried about price fluctuations, others kept a very close eye on them. Some were convinced one must buy low and sell high while others did not feel the need to wait for a pullback that might never come before buying if the stock was the right one.

Some felt 15 stocks were about all anyone could really monitor carefully and others felt they could easily handle up to 50 or many more.

But the bottom line in these varying views seemed most consistently to revolve around the question of risk, that is, how much risk an investor was comfortable with and the dangers inherent in excessive risk.

More often than not, the question of risk was couched in terms of how great a portion of one's portfolio was devoted to mREITs, BDCs, and MLPs. Our portfolios, which I listed in most of my articles, seemed to appear to the majority of commenters to be too high in risk because of the many mREITs, BDCs, and MLPs.

There is no doubt that at one point we did have too many mREITs in our portfolio. And one of the reasons that was so bad was not just because of dangers confronting this type of security, but also because that heavy concentration prevented us from becoming more diversified in our holdings.

As an example of one of the warnings I received, commenter as10675 wrote:

My thoughts are that with 18% of your portfolio in REITs that you have a very heavy sector concentration. I believe that most advisers would say 10% would be the maximum concentration to control the risk. Normal allocation would be up to 5%.

Clearly 18% of the portfolio was too much. Also, the discussion about our mREIT holdings was not just about mREITs, but also concerned high-yield positions in general. As as10675 added: "I cannot see myself in that much high yield at any age because I think REITs can be too volatile."

But of course there's always another side. WmHilger, who is in his 80s and who, from his comments, seems to be a very successful investor, wrote:

I am also retired and own 104,295 shares in 55 different companies. A full 75% of my stocks are in BDCs, REITs, and MLPs. I do NOT own any mutual funds except a few closed-end funds, and ZERO ETFs! I have no problem monitoring all of them, and also have plenty of time to spend on SA!

Certainly WmHilger has a radically different take on risk from as10675 and several other commenters.

In general, the biggest threat to a portfolio with a high concentration of mREITs is the coming increase in interest rates which everyone seems to expect in a not too-distant time frame. But it seemed to me that if one keeps a close watch on one's portfolio, it should be possible not to be caught in a sudden increase of interest rates. My feeling about this was bolstered by a comment left by chowder who, I believe, does not hold any mREITs at all. He wrote:

I could be wrong, but I doubt that's the way it will work out. Everyone who knows anything about mREIT's knows they will take a hit when interest rates rise. The market looks ahead at least 6 months. The mREIT's will slowly start to pull back well before the interest rate announcements come. By the time most people confirm the rate hikes, the hikes will already be priced into the stock as the price will gradually dissipate over the previous 6 months. And some people will sit there and say, what the ....... ?

Gradually I began to see that even though I had a good basis for an investing plan, thanks to the many SA readers who shared their successful plans with me, the plan I ultimately had to come up with was one that fit well with our own risk tolerance and that would best enable us to reach our goals. That, in turn, made me think that perhaps we needed to re-examine our goals more specifically before getting back to the plan.

Above I said that our goal, and seemingly the goal of many dividend investors, was: "in most cases to build an ever-increasing income stream in either the accumulation stage before retirement or in the drawdown stage of retirement." And in previous articles I had stated that our investment income stream would be used to enable us to maintain the lifestyle we had before we retired.

Clearly, however, I hadn't done a good job of determining how much our investments would have to throw off in order to attain that goal. That was clear when, in an early article, I said that we'd need to earn 8%. That statement naturally brought words of caution from several readers who pointed out that one would need to take on a lot of risk in order to maintain that kind of income from investments, not to mention that the amount would have to grow in order to cover inflation.

So I went back to the drawing board, looked very closely at our expenses and determined that, in fact, we'd only need to earn 5% - 5.5% for our goal to be reached. But I just couldn't help but wonder whether this was really right. Then a comment from Dividend Sleuth, which really had to do with bond investments, made me think of a different way to approach the question of "how much do we really need?" He wrote:

I've never invested in bonds, although I like your "Rocky Top" collection of munis! For diversification purposes, I count my pension and (when I begin to draw from) Social Security as "fixed income," so my investment focus is entirely on equities. For example, if my pension is 1/3 of my income and Social Security is 1/3, then it seems reasonable to go "all in" on equities/equity funds for the 1/3 of income that comes from my IRA. Everyone's situation is different and you may need bonds for balance.

I began to think that my wife and I are fortunate in that the combined income from our Social Security and pensions would allow us to get by comfortably. We wouldn't be able to enjoy the same lifestyle we came to know previously, but we'd certainly be a long, long way from eating pet food. At that point, after reading Dividend Sleuth's comment I began to think about actual dollars rather than percentages. It turns out that our Social Security and pensions provide 75% of what we would prefer to have. Because it was simple to translate what the other 25% was to in cash, it was easier for us to focus on the dollars our investments were earning.

Naturally we already knew exactly how much our investments were bringing in, but the focus had been more on things like "this stock is paying 4.5%." Now, however, I'd look at listings and say, "this stock is a monthly payer and pays $0.09 per month. If I buy 300 shares, that means an additional $27.00 per month." I began not to worry too much whether that $0.09 was 3% or 4% or 6%. By the same token, of course, I wasn't going to buy it because it paid $27.00 per month, which I wanted.

Like most investors on SA, we don't buy anything without doing our due diligence. We look at FAST Graphs, we find out what past earnings have been, what future earnings look like, what the dividend history is; we look at Morningstar, Seeking Alpha, analysts' views, and we always try to read some of the company's filings in order to get a better sense of its business model and managerial prowess.

But I just couldn't get away from thinking about money and how much we could earn from our investments even beyond the additional 25% we needed on top of our Social Security and pensions to maintain our lifestyle. And that led me to think about the question, "what kind of investors are we." Because, as I mentioned above, without knowing that our chances for developing a plan that would work for us were not very good.

What Kind Of Investors Are We?

Here are the questions and answers I came up with in trying to determine what kind of investors we are:

Q: Are we dividend investors?

A: Yes. The overarching framework of our investment philosophy is to preserve capital and to provide the funds we need through dividend payments and capital appreciation. To this end we will only hold dividend-paying stocks or funds in our portfolio. (Though we also maintain a position in municipal bonds, too, for the interest income.)

Q: Are we dividend growth investors?

A: No. Our investing time line is far too short for us to realize the positive impact of compounding growth. Nevertheless, whenever we do pick a stock, we prefer, if possible, to acquire a name that has a strong history of dividend growth. If that's not possible, we look at other factors such as whether the company has maintained a dividend without cutting or whether it has a history of reductions in dividend payments. We will not consider a stock in the latter case.

Q: Are we greedy investors?

A: Ah ... this is the big one. Greedy is scary. How much loss and grief have people suffered by letting greed dominate their investing strategy! But from all the reading I've done on SA it's apparent that greed has a lot of interpretations. We often come upon the phrase "yield chasing" with the implication that doing this is a sign of uninformed greed. Or it's a trap that some retirees feel themselves forced into because of the horribly low interest rates currently being paid, rates they previously depended on in retirement. Or perhaps it's just the activities engaged in by uninformed, novice investors who believe all the get-rich-quick-with-penny-stocks type of come-ons that flood our mail boxes and computer screens once our names get on lists of people who invest in the market.

But when I spoke above about looking for earnings even beyond the money we needed to earn to maintain our lifestyle, I wouldn't be surprised if some folks thought that sounded greedy. I won't hide the fact that as I get older and older, I feel more and more strongly that I'd very much like to cross many more items off my bucket list. This will require more money.

But, and this is a big "but," I am not going to jeopardize our financial situation by investing greedily. Rather, I will begin to incorporate other investing tools that will allow us to earn beyond that 25% of additional income while, at the same time, maintaining the necessary care required not to put us in a position of financial danger.

So the answer to this question is "no", we are not and will not become greedy investors. However, we will use all the tools we can to maximize our investment income while continually maintaining a strict sense of risk management. And we will continue to educate ourselves as much as possible about investing, because, as you know if you've read my previous articles, we're still real beginners with only about 2 years of investing experience under our belts.

So we are going to be heading in a new investing direction, that is, in terms of enhancing our returns by adopting some strategies that we have not used before. But it might be worthwhile at this point to take a look at our portfolio as it currently stands and note some of the changes since I published it last time on March 18.

Symbol

Description

Sector/Type

Yield on Cost

% by Position

% by Sector/Type

(NYSE:EFC)

ELLINGTON FINL LLC COM

FINANCIAL LLC

14.58%

1.34%

(NYSE:MCC)

MEDLEY CAPITAL CORPORATION COM USD0.001

FINANCIAL BDC ASS MGT & CUST. BANKS

9.11%

1.03%

(NYSE:NYCB)

NEW YORK COMMUNITY BANCORP

FINANCIAL THRIFT & MTG. FINANCE

7.19%

1.26%

(NASDAQ:SLRC)

SOLAR CAP LTD COM

FINANCIAL BDC ASS MGT & CUST. BANKS

9.73%

1.52%

(NASDAQ:TCRD)

THL CR INC COM

FINANCIAL BDC ASS MGT & CUST. BANKS

8.58%

1.02%

6.11%

FCASH

Cash

CASH

6.80%

6.80%

(NYSE:DRI)

DARDEN RESTAURANTS

CNSMR DISCR RESTAURANT

4.38%

1.16%

1.16%

(NYSE:KO)

COCA COLA CO

CNSMR STPL SOFT DRNKS

2.88%

1.09%

(NYSE:MO)

ALTRIA GROUP INC

CNSMR STPL TOBACCO

5.26%

1.18%

2.28%

(NYSE:COP)

CONOCOPHILLIPS

ENERGY EXPLOR. PROD.

4.52%

1.27%

(NYSE:TOT)

TOTAL SPON ADR EA REP 1 ORD SHS

ENERGY INTG. OIL & GAS

7.23%

1.22%

2.49%

(NYSE:LSE)

CAPLEASE INC

EREIT DIVERSIFIED

5.59%

0.68%

(NYSE:MNR)

MONMOUTH REAL ESTATE INVT CORP CL A

EREIT INDUSTRIAL

5.78%

1.11%

(NYSE:STAG)

STAG INDL INC COM

EREIT INDUSTRIAL

6.03%

0.88%

(NYSE:EXL)

EXCEL TR INC COM

EREIT RETAIL

5.33%

0.62%

(NASDAQ:ROIC)

RETAIL OPPORTUNITY INVTS CORP COM

EREIT RETAIL

4.56%

0.65%

(NYSE:HTA)

HEALTHCARE TR AMER INC CL A

EREIT SPECIALIZED (HEALTHCARE)

5.23%

0.54%

(OHI0

OMEGA HEALTHCARE INVS INC

EREIT SPECIALIZED (HEALTHCARE)

7.39%

2.54%

7.03%

(NYSE:ETG)

EATON VANCE TAX ADVANTAGED GLO GOBAL DIVID INCOME FD

FUND

3.11%

0.58%

(NYSE:ETJ)

EATON VANCE RISK MANAGED DIVERSIFIED EQUITY INCOME FUND

FUND

0.60%

(NASDAQ:IFGL)

ISHARES FTSE EPRA/NAREIT GLOBAL REAL ESTATE

FUND

1.23%

SWNTX

SCHWAB TAX-FREE BOND FUND

FUND

0.00%

3.49%

4.72%

(NYSE:AZN)

ASTRAZENICA ADR EACH REP 1 ORD USD0.25(NYSEMKT:MGT)

HEALTH CARE PHARMA

16.66%

1.40%

(NYSE:MRK)

MERCK & CO INC NEW COM

HEALTH CARE PHARMA

4.13%

1.13%

(NYSE:GSK)

GLAXCOSMITHKLINE

HEALTH CARE PHARMA

1.25%

3.78%

(NYSE:RTN)

RAYTHEON CO COM NEW

INDUSTRIALS AEROSPACE DEFENSE

4.33%

11.12%

11.12%

(NASDAQ:INTC)

INTEL CORP

INFO TECH SEMI-COND.

4.35%

1.15%

(NASDAQ:CA)

CA INC COM

INFO TECH SYS. SFTWRE.

0.00%

1.20%

2.35%

(NYSE:BBL)

BHP BILLITON PLC SPONS ADR EACH REP 2 ORD USD0.50

MATERIALS METALS & MINING

7.23%

1.20%

(NYSE:SCCO)

SOUTHERN COPPER CORP DEL COM

MATERIALS METALS & MINING

2.55%

1.33%

2.53%

162362FP7

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

FIXED INCOME MBOND

5.00%

0.78%

251093G61

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

FIXED INCOME MBOND

5.00%

1.89%

478271GX1

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

FIXED INCOME MBOND

5.00%

9.04%

592112MQ6

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

FIXED INCOME MBOND

5.00%

4.79%

613664X55

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

FIXED INCOME MBOND

4.37%

10.08%

745277PD9

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

FIXED INCOME MBOND

5.00%

1.70%

28.28%

(NASDAQ:CLMT)

CALUMET SPECIALTY PRODS PARTNERS L P COMMON UNITS REPSTG LTD PARTNER INT

MLP OIL & GAS REFING. & MKTING.

6.98%

1.08%

(NASDAQ:LINE)

LINN ENERGY LLC UNIT REPSTG LTD LIABILITY CO INTS

MLP OIL & GAS EXP. & PROD.

7.58%

0.70%

(NYSE:QRE)

QR ENERGY LP UNIT LTD PARTNERSHIP INT

MLP OIL & GAS EXP. & PROD.

11.54%

1.85%

(NASDAQ:VNR)

VANGUARD NAT RES LLC COM UNIT REPSTG LTD LIABILITY CO INTS

MLP OIL & GAS EXP. & PROD.

2.89%

2.51%

(NYSE:MMP)

MAGELLAN MIDSTREAM PARTNERS LP COM UNIT REPSTG LTD PARTNER I

MLP OIL & GAS STOR. & TRANSPORT

4.44%

0.98%

(NYSE:MWE)

MARKWEST ENERGY PARTNERS LP

MLP REAL EST. DEVELOP

5.56%

0.69%

7.73%

(NASDAQ:AGNC)

AMERICAN CAPITAL AGENCY CORP.

MREIT

11.51%

0.88%

(NYSE:DX)

DYNEX CAPITAL INC

MREIT

12.18%

1.03%

(NYSE:MFA)

MFA FINL INC COM

MREIT

9.34%

0.85%

(NASDAQ:MTGE)

AMERICAN CAP MTG INVT CORP COM

MREIT

18.26%

0.71%

(NYSE:NCT)

NEWCASTLE INVT CORP

MREIT

9.37%

1.70%

5.14%

(NYSE:T)

AT&T INC COM

TELECOMM INTG. SVCS

5.89%

3.32%

(NASDAQ:VOD)

VODAFONE GROUP SPON ADR REP 10 ORD USD0.11428571

TELECOMM WIRELESS SVCS

7.76%

1.46%

4.79%

(NYSE:PPL)

PPL CORP

UTILITIES ELECTRIC

4.86%

1.16%

(NYSE:SO)

SOUTHERN CO

UTILITIES ELECTRIC

4.41%

1.21%

2.35%

I think the most important things to notice is that other than the municipal bonds and the position in RTN, and our funds, which, for the reasons explained in a previous article, comprise our "fixed income" portfolio, none of our sectors or types of investments exceed 7.73%.

Next, again other than the "fixed income" items, no single holding comprises more than 3.49% with the vast majority below that: there are 17 names under 1%, and 25 positions between 2% and 3%. In the non-fixed income holdings, there is no individual stock that would, were it to disappear tomorrow, harm us unduly. Also, I'd like to point out that our holdings in mREITs now only comprise 5.14% of our holdings. A big change from the more than 17% they formerly made.

I am convinced that at this point our portfolio is better balanced, more diversified, and safer than it has been at any time since I began publishing on SA at the end of January. Additionally, and this is the exciting thing for us, the portfolio will throw off this year in the form of dividends and interest enough to satisfy our need for the additional 25% we set as our chief target.

I feel that I must say here that this would never, ever have been the case had it not been for the time so many SA readers took to address comments and messages to me that pointed out many of our mistakes and that provided intelligent and useful suggestions in order to help us shape our portfolio in a way that would make it more suitable for our needs.

Obviously, however, we can't just sit back and twiddle our thumbs at this point. Not only will we have to monitor the portfolio carefully, but even if all things stay equal, that is, if there are no changes in our dividend and interest income and none of our holdings become endangered or crash, we will not meet the 25% next year because in the process of making our portfolio safer in terms of risk, we sold many high-yielding positions or parts of those positions. Thus the income we've realized in the first quarter of this year, will not be there next year without our replacing it with our investing activity from now forward. I'm assuming that we'll be able to do this.

Fine thus far. But where will that extra income beyond the 25% that we would love to have so that we can whittle down our bucket list come from?

The Following Images May Be Disturbing for Some of Our Viewers

If you're talking to ordinary investors rather than cowboy traders, what kind of reaction do you get when the word "margin" comes up in conversation? Here's one reaction from the dividendlab.com forum where someone asked about buying on margin: "Margin was a tool created by the devil!" Another poster got even more excited

I would not recommend buying any stocks on margin. Be they dividend stocks or tech growth stocks. Because at the end of the day you will get wiped out and lose your entire portfolio. Just like on 9/11, all it will take is for Iran to send a few suitcase atomic bombs to New York City, Washington DC, and Hollywood, CA., to shut down the stock markets for a week or two. When they open up the markets again if they can even find Wall St., the margin desk will liquidate your entire position and ask for more cash to pay whatever else you still owe. Best idea is to stay away from having a margin account.

What, then, would even make me think about margin given my focus on risk management? Well, after I posted my last article, I got a message from a reader who suggested using a little bit of leverage to extend my money in order to get greater returns. He went into a great deal of detail and spoke to the question of risk in a very sensible way. This approach to the use of margin as leverage has nothing to do with getting rich.

Here's an example I came up with that's the type of thing he was talking about. I posted this on the dividendlab.com board as part of the discussion that had elicited the above responses:

I understand the dangers of buying on margin. But if you do it carefully as leverage with SOLID, STABLE dividend-paying stocks at small percentages, I think it's a money-making opportunity.

For example, the margin rate at Interactive Brokers is about 1.64% for 25K, the lowest around. Now suppose you buy AT&T yielding 4.9%. Yes, AT&T goes up and down like all stocks, but it's a keeper and it's raised its dividend every year since 1999 (longer, really, but that's as far back as I looked).

Let's say, to keep it simple, you buy 100 shares @ 36.74. You buy 75 of them with your own cash at $2,755.50 and 25 on margin at $918.50. Currently the annualized dividend is $1.80. So for your 25 shares you'll take in $45.00. The interest on the $918.50 comes to $15.06. Thus you've received $29.94 for no outlay.

That strikes me as a pretty good deal with very little risk if we're talking about stocks such at T.

Margin, like so many things in investing, is all about not being greedy. There are many more ins and outs even in this simple example when it comes to margin, but in the end, one needs to be smart, rational, unemotional, and, above all, not greedy. In this way one can add a nice supplement to one's dividend income.

This post got a response that agreed with me:

Martin, I agree 100% with your analysis. A little bit of margin at the low interest rates of today is a gift, if it is used wisely. If you keep margin to 25-30% of your steady-eddy dividend stocks, then you can earn some $$ with no basis--a really good deal. The question is always are we on the cusp of a major correction. The judicious use of puts and a little margin can maximize earnings vs risk. Of course it can back fire as others have said, but the real issue is greed and not too much leverage. Leveraging low volatility stocks such as T is much safer than our current favorites CVRR, NTI etc.

The next response came from Todd Johnson, one of my heroes, who wrote the following:

I agree with Martin & Zyde. I would only do it if you are in control of the account & buy protective puts (tight) on every holding. Sell covered calls to offset the protective puts.

If you are buying protective puts, use interactivebrokers.com. Know the risks and what protection the puts give you. Easily done but some don't want to use protective puts or sell covered calls.

At this point I intend to investigate this strategy carefully and in depth. There's a possibility it could become a part of our plan for increasing our income from investments.

Another strategy I've been thinking about for quite a while now was broached by Chris Zocca in a comment to Part IV of this series:

Going forward, you may want to consider utilizing some basic options strategies such as covered calls and cash secured puts to increase the total yield of the portfolio.

There have been several other commenters who have mentioned the same idea. This, too, will get careful, in-depth investigation from us before we embark on either of these roads.

So all-in-all, at this point I believe we can maintain the type of portfolio we now have, keep close tabs on it in order not to get caught sleeping at the wheel, and continue to achieve our primary investing goal without taking on too much risk.

In order to get beyond the primary goal, however, there is much we need to study and learn. I can assure you, however, that we'll do nothing rash as we continue investigating.

Disclosure: I am long EFC, MCC, NYCB, SLRC, TCRD, DRI, KO, MO, COP, TOT, LSE, MNR, STAG, EXL, ROIC, HTA. 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.

Source: How One Retiree Is Muddling Through Dividend Investing Part VII: What Kind Of Investors Are We?