Midsummer High Growth And Income Portfolio Update

by: Michael Bryant

I have read a lot of articles by authors assessing their stock picks and how they reached their goals. While I commend Dividend Growth Machine's article A Real Dividend Growth Machine, the first thing I thought was that most people cannot save 49% a year (or about $16,000). But yes, savings are key to investing, like he mentioned in the above article. So I will start my story.

This year, I have saved about $5,000, which believe it or not is over 60% of my paycheck. I think most people have a higher income than I do, so $5,000 in savings should not be that hard. I just got employed about 2 years ago, so obviously my account is very small. And while I am impressed by the early results of Dividend Growth Machine's model (along with what Chowder has told me), I think: why not combine a steady income steam, a growing dividend model, and a pure growth/aggressive model? For my steady income stream, I focus on MLPs, namely Rentech Nitrogen Partners (NYSE:RNF), Terra Nitrogen Company (NYSE:TNH), and CVR Refining (NYSE:CVRR). I guess mREIT Newcastle Investment (NYSE:NCT) and its spinoff New Residential Investment (NYSE:NRZ) can also be classified as steady income stream. These I keep in my non-IRA stock account, since I want to eventually live off the distributions and dividends, which are currently:

Rentech Nitrogen Partners = 6.3%

Terra Nitrogen = 8.5%

CVR Refining = 23.0%

Newcastle Investment = 11.6%

New Residential Investment = 4.1%

CVR Refining has recently said that it plans to maintain a 15% distribution for the year. That's good enough for me.

Rentech Nitrogen Partners and Terra Nitrogen are both fertilizer plays. As the population of the world grows and soil area declines due to erosion, more fertilizer will be needed. Plus, Terra Nitrogen is majority-owned by CF Industries (NYSE:CF), the world's largest nitrogen producer.

CVR Refining was spun-off from CVR Energy (NYSE:CVI). I like it mainly because billionaire Carl Ichan is a large stake holder. A well-known investment strategy is to invest where the rich are putting their money.

I have been watching Newcastle Investment for three years, but have not pulled the trigger till recently, mainly because I did not have the money. I was also a little skeptical of the mortgage REIT business, but I liked Newcastle Investment's low PE ratio, high dividend, and steadily growing stock price over the last year. And since I had shares before the spin-off, I received shares of New Residential Investment .

I have not worked on a dividend growth model yet, but I plan to start one, mainly for my Roth IRA. This seems most appropriate for a Roth IRA, since I have some 30 years till I can withdraw the money. And the dividend growth model seems to work best over long periods of time. Stocks I am considering are Pepsico (NYSE:PEP), United Technologies (NYSE:UTX), Realty Income (NYSE:O), and Coca-Cola FEMSA (NYSE:KOF), although it is too early to classify Coca-Cola FEMSA as a dividend growth stock. It has only been public for less than two years.

Pepsico is the largest producer of hummus, and hummus is one of the fastest growing snacks in America. The company also has a dominant soda and snack business. Plus, I see good growth in its bottled water business. I thank Alex Morris for introducing me to it.

Coca-Cola (NYSE:KO) is similar to Pepsico minus the snack business. It is also a dominant position in billionaire Warren Buffett's portfolio and former Seeking Alpha contributor Brian Polino. Though I do not argue with Coca-Cola's dominance in the global soft drink market, I think Coca-Cola FEMSA will grow faster, mainly because it is smaller.

United Technologies is a major supplier of weapons to the Middle East, and could benefit from the conflict there. But it does far more than that; its business also involves installing elevators and air conditioners. And speaking of air conditioners, this division might do well as the heat wave soaks the United States and global warming is forever growing.

I have to say I stole the idea of buying Realty Income from Chowder. I still do not know a lot about the company, but its land holdings and long-term chart look impressive. I will trust Chowder and Brad Thomas (who wrote a wonderful article on the company) on this one. The stock is also down a good amount recently, which I see as a buying opportunity.

Finally, my pure growth/aggressive picks have been Hovnanian Enterprises (NYSE:HOV), Portfolio Recovery Associates (NASDAQ:PRAA), Nokia (NYSE:NOK), BlackBerry (NASDAQ:BBRY), SunPower (NASDAQ:SPWR), and YRC Worldwide (NASDAQ:YRCW). All do not have dividends and have high potential growth. Of course, high growth comes with high risk. These stocks are split between my non-IRA and my Roth IRA.

I have recently sold Nokia and BlackBerry, since I have become impatient with the stocks. Yes, patience is one of the top rules of investing, but I think there are better fish in the sea: those with faster growth. I wish I had bought both when I recommended them on June 9, 2012, as both have gone up a lot since then. But I still do think both stocks will recover and grow, but it may take a while.

Hovnanian Enterprises is my play on East Coast rebuilding after Hurricane Sandy. I also liked West Coast homebuilder Standard Pacific (SPF), as I believe housing would come back. Both have been hit hard by the housing crash.

Portfolio Recovery Associates is my unethical pick. Sorry, but I do not see debt collectors as ethical. But with a purely investment point of view, the company has a long-term, linear chart, something I look for, and an extremely high current ratio. This tells me that it had far more current assets than current liabilities, a sign of a financially strong company.

I picked SunPower solely because Warren Buffet bought solar projects from the company. My logic was that Buffett would not buy the projects unless they held value. That means other company projects could also have value too. Plus, the fact that he bought it for $2.5 billion means that the rest of the company could be worth significantly more than that.

YRC Worldwide is my comeback play. I held the stock when it was $7, but being foolish and impatient, I sold. It has since skyrocketed. I have rebought the shares, hoping that it recovers. My instinct is that it still has far more revenue than shareholders give it. And if the merger with Arkansas Best (ABFS) goes through, all the better. Lastly, transportation, both rail and trucking, will lead us out of recession, as the transport of goods is key for economic growth.

Some future pure growth/aggressive picks are Krispy Kreme Doughnuts (KKD), American Railcar Industries (NASDAQ:ARII), and Overstock.com (NASDAQ:OSTK). Krispy Kreme Doughnuts seems to be on the right track with its introduction of coffee with its donuts, a high margin business. American Railcar Industries looks well-positioned to take advantage of the railroad boom. And Overstock.com could very likely be the next Amazon.com (NASDAQ:AMZN) of overstocked goods.

I hope this combination will help me secure a decent retirement and fulfill my big ambition of living off my distributions and dividends as well as amassing $1 million in ten years. Wish me luck.

Disclosure: I am long RNF, TNH, CVRR, NCT, NRZ, SPWR, YRCW, HOV, PRAA. 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.