How Do You Manage Your 'Low Conviction' Positions?

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 |  Includes: BAX, BBEPQ, BMO, BNS, CBRL, COP, CVX, DX, ESV, ETP, GEL, LNT, MAT, MHLD, MSFT, PPL, PSEC, TGT, VNR, WGL
by: Bob Wells

Summary

It take time and patience to build a "distribution phase" portfolio.

The process of portfolio may require the purchase of "low conviction" positions.

In this article I review the role of my low conviction positions as part of my portfolio.

How do you manage your "low conviction" positions? It's a question we should all ask from time to time.

Let's face it folks, we all have them. They may be simply holdings that we may no longer value as much as when we purchased them. Low conviction positions may also be held intentional by an investor to provide greater overall portfolio yield or greater diversity. Some investors refer to them as satellites to their core aka/high conviction positions.

No matter what we call them we think of them differently than we do our high conviction or core positions.

A little over three years ago, I formally began converting old 401Ks invested in index and mutual funds and began to embrace a Dividend Growth investment strategy. Folks, I'm three years into portfolio reconstruction and it still needs adjustments. If you follow others like Mike Nadel, Part-Time Investor, Dividend Sleuth, Martin Rice and others, you find out quickly I'm not alone.

Refining a Dividend Growth portfolio for the Distribution stage of investing take both patience and time. The challenge is that most of us needed income from the get-go. I'll be the first to admit that I knew when purchasing many stocks over the past three years it probably wasn't going to be a long term relationship. I was reminded of the Steve Stills lyric "And if you can't be with the one you love...Just love the one your with". Things got even more complicated when my need to provide increased financial support for my mother forced me to decide between sell off shares or increasing current yield. I chose the latter.

I tried to keep most of the basics in check: Don't overpay, Select Dividend Champions, Challengers and Contenders, stress low beta. In exchange for yield sometimes I overlooked quality, performance during bear markets and strong dividend growth. I owned more MLPs and REITS than I preferred.

As yield has built due to Dividend Growth, I find I'm in a position to reduce the number of low conviction positions I hold. This time out I thought I would identify my low conviction positions, discuss their place in my portfolio and review a plan of action moving forward...

Let me start with a definition; by low conviction I simply mean those stock positions more likely to be trimmed or sold.

My definition of low conviction is based on my personal risk tolerance. It is neither right or wrong, it's simply one man's opinion. My low conviction positions were purchased for three reasons. They either:

  1. Boosted current portfolio dividend yield
  2. Helped provide better sector diversification
  3. Were considered strong candidates for capital growth

Let's look closer at the 10 positions I currently consider low conviction.

MLPS

Genesis Energy - (NYSE:GEL) - Yield 3.8% - Dropped 57.83% in 2008. Purchased as a capital gains play. It was yielding over 5% at purchase. It represents 1.5% of my portfolio.

Breitburn Energy - (BBEP) - Yield 9.9% - Dropped 68.71% in 2008. Purchased to help boost current portfolio yield. 1.5% holding

Vanguard Natural Resources - (NYSE:VNR) - Yield 8.4% - Dropped 58.52 in 2008. Purchased to boost current yield. 1.5% holding

Energy Transfer Partners - (NYSE:ETP) - Yield 6.6% - Low Dividend Growth - Frozen Angel CCC status. 1.5% holding. Purchased for yield.

MREIT

Dynex Capital - (NYSE:DX) - 11.6% small recent dividend cuts no growth. Original purchased as the only MREIT member of the CCCs. When it made a small cut, it was placed on the bench. 1.5% holding

BDC

Prospect Capital - (NASDAQ:PSEC) - Yield 12.2% - non CCC status. 1% holding. Purchased for yield.

BANKS

Bank of Montreal - (NYSE:BMO) - Yield 4.0%. Purchased for bank exposure. 1% holding.

Bank of Nova Scotia - (NYSE:BNS) - Yield 3.8%. Purchased for bank exposure. Less than 1% holding.

TECHNOLOGY

Microsoft - (NASDAQ:MSFT) - Yield 2.8%. Bought for tech exposure. Dropped 44.16 in 2008.

UTILITY

PPL Corp - (NYSE:PPL) - Yield 4.4% - Low Dividend Growth.

The way I see it I have a number of options with regards to my low conviction positions.

I can:

  • Sell and hold cash
  • Sell and redeploy into existing positions
  • Sell and redeploy into new positions
  • Trim and redeploy into existing positions
  • Trim and redeploy into new position
  • Continue to hold

In my existing portfolio there are a number of stocks that each represent less than 2% of our total portfolio and are considered fairly valued. Each represents an existing position where new cash could be redeployed. Each position enjoys a quality rating of A or better:

Mattel - (NASDAQ:MAT) - 4% Yield

Target - (NYSE:TGT) - 2.8% Yield

Baxter - (NYSE:BAX) - 2.7% Yield

Conoco Phillips - (NYSE:COP) - 3.7% Yield

Microsoft - MSFT - 2.8% Yield

Chevron - (NYSE:CVX) - 3.2% Yield

Alliant Energy - (NYSE:LNT) - 3.5% Yield

Many investors in the distribution phase hold little cash since holding cash reduces income. This can provide another reason to hold low conviction positions. You might wish to consider low conviction holdings as a form of cash with a twist...That being the benefit of providing income until higher conviction positions come available at a good price.

I work hard at not over paying for my stock positions. To assist with that objective, I try at all times to have one or two low conviction stocks identified that could be sold or trimmed should higher conviction holdings suddenly come available for purchase below value. Right now GEL would be most likely to be trimmed or sold.

New positions I'm currently considering for purchase include:

WGL Holdings - (NYSE:WGL) - Yield 4.4%

Cracker Barrel - (NASDAQ:CBRL)- Yield 4.1%

Ensco - (NYSE:ESV) - Yield 6.0%

Maiden Holdings - (NASDAQ:MHLD) - Yield 3.5%

Now it time to hear from you. I looking forward to hearing your ideas with respect to how to best manage my low conviction positions.

Disclosure: I am long MAT, TGT, BAX, COP, MSFT, CVX, LNT, GEL, BBEP, VNR, ETP, DX, PSEC, BMO, BNS, PPL. 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.