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Summary

  • Over the last year we (my wife and I) have made several changes in our portfolio to get closer to realizing our investing plan.
  • During this period we've improved greatly in controlling the negative emotions that had previously informed our investing behavior and led to poor decisions.
  • Although our current portfolio is much safer and better thought out than the one I presented a year ago, we're considering several more modifications.
  • We hope that readers of this article will help us answer some questions that have arisen as a result of these considerations.

As I write this article it is exactly a year and a day since I published Part VII of this series, which chronicles my journey into the world of investing, the myriad of mistakes that I made, and what I've learned. (Part I can be found here.)

There are two reasons this installment has taken so long to appear. First, there was no immediate need for a new installment until I had put into practice the things that I planned to do at the end of the last installment.

Second, for the first half of the year I was been involved with two time-consuming projects that allowed me little opportunity to work extensively on our portfolio. I kept up with it, of course, but made few changes during those six months.

Where We Left Off

On March 18, 2013, at the article's conclusion, I said that I planned to do the following:

  • Reduce our cash to 5% of the portfolio from 14.21% so that we'd increase our dividend income by using that ~10% reduction for more acquisitions.
  • Closely monitor our portfolio.
  • Watch dividend payments closely, looking for reductions and suspensions.
  • Watch earnings and valuations closely in order to make necessary adjustments.

Cash is currently at 6.75% so we've come close to our target. I was able to do the other three things fairly diligently.

Where We Are Now

Nevertheless, we made considerable changes to the portfolio during the second half of 2013 that I want to detail now.

We divested our portfolio of all mREITs and MLPs. They offered us more risk than we felt was prudent (as also felt many of the readers who commented on the portfolio).

This is what our portfolio looks like now. In this installment I've included our municipal bonds and our non-traded REIT to give a fuller picture and to make allocation percentages more realistic. Below I'll explain some of the thinking that got us here and what we're thinking about now.

Portfolio As of 3/16/2014

SymbolDescription and Sector% Yield% of Portf.% by Sector
Cash 6.75%6.75
Healthcare Pharma 7.75
AZN

ASTRAZENECA ADR

4.293.81
GSK

GLAXOSMITHKLINE ADR

4.541.12
MRK

MERCK & CO INC

3.152.82

Industrials - Metals, Mining, Aerospace Defense

19.51
BBL

BHP BILLITON PLC SPONS ADR

3.99

0.95
RTN

RAYTHEON CO

4.3718.56

Consumer Goods - Beverages, Packaged Goods, Tobacco

7.65
BGS

B & G FOODS INC

4.632.60
KO

COCA COLA CO

3.212.37
MO

ALTRIA GROUP INC

5.342.68

Basic Materials - Oil and Gas

4.43
COP

CONOCOPHILLIPS

4.162.96
TOT

TOTAL SA SPON ADR

5.321.47

ETFs - Diversified Income Investments

0.52
ETJ

EATON VANCE RISK MANAGED DIVERSIFIED EQUITY INCOME

9.800.52

Equity REITs: Retail, Office, Industrial, Health, Non-Traded Diversified

14.70
EXL

EXCEL TR INC REIT Equity-Retail (Shopping Center)

5.521.17
IRC

INLAND REAL ESTATE GROUP REIT-Equity-Retail

5.620.63
HTA

HEALTHCARE TR AMER INC REIT Equity-Healthcare

5.001.39
LXP

LEXINGTON REALITY TRUST REIT-Equity-Office, Industrial-Retail

5.840.87
MNR

MONMOUTH REAL ESTATE INVT CORP REIT Equity-Industrial/Office

6.300.86
MPW

MEDICAL PROPERTIES TRUST INC REIT Equity-Health (Hospitals)

6.660.97
O

REALTY INCOME CORP (MARYLAND) REIT- Equity-Retail

5.152.60
ROIC

RETAIL OPPORTUNITY INVTS CORP REIT- Equity-Retail

4.400.62
STAG

STAG INDL INC REIT Equity-Industrial/Office

5.411.42
NON-TRADED REIT

W.P. Carey CPA 17 - Global Inc. REIT Equity Diversified

6.504.06
BDCs and Financial Stocks 3.19
EFCELLINGTON FINL LLC - Asset Mgt.12.181.30
MCC

MEDLEY CAPITAL CORPORATION BDC Financial

10.920.74
PSEC

PROSPECT CAP CORP BDC Financial-Asset Mgt.

12.210.35
TCRD

THL CR INC COM BDC-Investment Brokerage

7.450.79

Energy-Electric Utilities

3.59
PPL

PPL CORP

4.601.06
SO

SOUTHERN CO

4.702.54

Technology: Software, Semiconductor, Telecommunications, Wireless

10.29
CA

CA INC COM - Application Software

INTC

INTEL CORP - Semiconductor

T

AT&T INC COM -Telecommunications services

VOD

VODAFONE GROUP SPON ADR -Wireless communications

VZ

VERIZON COMMUNICATIONS INC -Telecommunications services

Municipal Bonds

5.0021.6121.61

Allocations

So our overall portfolio is about 78% stocks and 22% fixed income (munis). In the stocks portion, the two biggest sectors are equity REITs (14.70%) and industrials (19.51%).

The reason the industrials are so large is because of our holdings in RTN. As I mentioned in a previous article, my wife inherited RTN, which has been in her family since the 1920s. In the three years we've owned it, it has doubled in price and provides a fine dividend of over 4%. It also has 9 consecutive years of dividend increases. There doesn't seem to be any reason to reduce our stake -- especially in these bellicose times and because my wife wouldn't hear of it in any case.

The equity REITs are, I believe, solid and contribute nicely to our income. I feel much safer with these than with the mREITs we were formerly heavily invested in.

I subscribe to Bret Thomas's iREIT newsletter and all of our holdings are based on his recommendations. I know of no one better equipped to offer equity REIT recommendations than Bret.

Nevertheless, I feel a bit uneasy with such a big allocation to that sector, something I'll discuss below.

Otherwise, none of the sector or individual stock allocations seems particularly out of line to me. The third largest, technology (10.29%), is diversified as to sub-sector with solid companies, good dividends, and reasonable dividend growth.

Concerns and Questions

BDCs

Although the portfolio is performing well in terms of appreciation and income in general, there are names I worry about -- worry about regarding performance, suitability, and price.

For example, I have become uncomfortable with our BDCs. Since I've owned them, MCC is down 13.18%, PSEC is down 8.58%, and TCRD is down 9.99%. In real dollars, that only amounts to about $1,500. But we've owned them all for about a year. That's not very good performance. Their DG is nothing to write home about either.

Although they're among our highest yielding names, they're certainly not SWAN stocks. I'm thinking that we'd probably be better off locking in the loss and taking that 1.88% of our portfolio and investing it in a decent-yielding, "blue-chipish," DG stock, even if this means a bit of a reduction in our income.

I'd very much like to hear what you readers think about that in your comments.

Equity REITs

I can't get over the feeling that we have too many equity REIT names in our portfolio. I just feel, looking at the total allocation, that we're too heavy in this sector for no particular reason. Here, too, we could cut back to 5 stocks (ROIC, STAG, O, LXP, and our WP Carey non-traded REIT, which I think are the best of the bunch) and take the 3.85% of the portfolio that would be freed up by selling the other 4 stocks to buy more SWAN holdings.

Such a step would help balance our sector allocation more reasonably and it would not necessarily reduce our income.

In this instance, too, I'd appreciate hearing your opinions regarding this step.

Municipal Bonds

Our munis have appreciated about 3% since we acquired them. I, like most other people, am of course worried about what will happen to their value as QE draws to an end. My wife and I are seriously thinking of selling them and using to proceeds in the stocks portion of the portfolio.

We realize that we give up the tax advantages of munis, but at the same time, we could realize greater appreciation and, more important for our situation, increase the income the new acquisitions will throw off by dividend growth.

Once again, you thoughts on this course of action would be appreciated greatly.

The Overall Plan

Beyond the obvious goal of most retirees, that is, maximizing total return with the least risk possible, our overall plan is heavily informed by my age and the realization that my investing horizon at age 76, is not a long one.

My biggest obligation is to leave my wife (who is 10 years younger than I) in a position in which she is as financially secure as possible. At the same time, I would like to ensure that she does not have to devote a great deal of time and effort to managing her portfolio. Although she is extremely intelligent (she doesn't have that Dr. before her name for nothing), investing is not one of her many strong interests.

Her income needs will not be reduced greatly, if at all, by my death because my social security and defined pension payments will disappear.

It seems to me that the best overall portfolio I could leave her -- which at the same time would be the best for both of us while I'm alive -- would be a strong, conservative dividend growth portfolio with solid, dependable stocks, heavy in blue chips or blue-chip like names.

We really only need between 4% - 5% dividend income from our portfolio to allow us to live the way we are accustomed. This should be easily doable with minimum risk.

Proposed Next Steps

I call these next steps "proposed" because although I believe that they're the right things to do, I'm first going to assume that my readers will again provide their experience-based knowledge and ideas to me in their comments as they have so generously in the past.

I want to consider them before acting. Given that, here are the next steps as I see them for going forward.

  • Sell all our BDC holdings
  • Sell four of our nine equity REITs
  • Sell our municipal bonds
  • Use the proceeds from these sales to buy strong DG stocks while keeping a close eye on sector allocation as we do so.

I'll report back next quarter to let you know how this plan has worked out.

Disclosure: I am long AZN, BBL, BGS, CA, COP, EFC, ETJ, EXL, GSK, HTA, INTC, IRC, KO, LXP, MCC, MNR, MO, MPW, MRK, O, PPL, PSEC, ROIC, RTN, SO, STAG, T, TCRD, TOT, VOD, VZ. 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 VIII - A Year Later