Managing Low Conviction Positions - Feedback And Strategy

by: Bob Wells


It has been challenging the past few years building a distribution phase portfolio from scratch.

This process has resulted in many new self-directed investors holding what could best be described as "low conviction" positions.

Each investor needs to determine their personal strategy for managing these positions.

If you are a new Self Directed Investor starting out since 2013, you have no doubt found it a challenge to build a portfolio without over paying for a position. This challenge has been even greater for those who have just retired and favor portfolios yielding 4% or more at today's cost. As a result, you may have a number of positions that can only be called "low conviction". The question long term for those like me that find themselves with a number of low conviction positions is what role, if any, should they continue to play.

In my last article, I identified those positions I hold that I consider "low conviction", along with my current thinking on their role within my portfolio. I asked for reader feedback.

For those seeking a better understanding of Dividend Growth investing, there is perhaps no greater better source than the thoughtful comments made by readers in response to the read. Such comments often result in spirited conversation. That was certainly the case with the over 200 comments that so dramatically complimented my last article. Its subject really struck a cord with many readers, particularly those who have sought to assemble distribution stage portfolios from scratch in the past few years. I encourage you to read the original article and fully explore these thoughtful comments, if you haven't already.

I discovered readers who like me had purchased positions that can only be described as "low conviction" most often to boost total portfolio yield of their new portfolios to between 4-5%. Clearly, the goal for most was income supplied solely from dividends without the need to sell assets. There appears to be a conscience among respondents that it was prudent to aim for dividend growth of 6% or more.

I discovered others who have enjoyed better than expected dividend growth over the past few years. With higher than projected income being produced, we are looking to trade out of select low conviction positions and redeploy the funds to those for whom we have greater commitment even if it results in a small drop in initial income. Some are joining me in seeking even stronger portfolio dividend growth as a result of such moves.

Of my list of what I considered to be my low impact positions, I learned that some were held by many readers as high conviction or core. This was particularly true of Microsoft (NASDAQ:MSFT). I have decided to hold my position in Microsoft and perhaps add a bit during pullbacks.


I have often shared my concerns with holding banks as part of my portfolio. At the time of my last article I owned two, both Canadian: Bank of Montreal (NYSE:BMO) and Bank of Nova Scotia (NYSE:BNS). Both possessed "A" quality ratings and withstood 2008/9 without cutting the dividend.

I expected my last article and the feedback that followed would result in a reduction of the number of stocks held in our portfolios. Now, it looks like that number may actually rise. Feedback included a spirited discussion of which Canadian Banks were best. It looks now like I am likely to own three that will then collectively make up 2% of our portfolio. Fortunately, all three are considered to be slight undervalued. I expect to purchase a small position in Toronto-Dominion (NYSE:TD) on the next pull back.


I experienced solid capital gains the past two years as had others I heard from. Among my biggest gainers were many of the Master Limited Partnerships that I owned. This has resulted in MLPs making up a larger percentage of my portfolio than I'm comfortable with. I considered low conviction positions in the sector like Energy Transfer Partners (NYSE:ETP) with slow dividend growth and those with what I considered excessive losses in 2008 like Genesis Energy (NYSE:GEL), BreitBurn Energy (BBEP) and Vanguard Natural Resources (NYSE:VNR).

After consideration of the many comments I received, I just sold 35% of my position in Genesis Energy which is now considered overvalued. I expect to trim further from this sector moving forward. More on this later.


My disclosure that I considered Prospect Capital (NASDAQ:PSEC) to be one of my "low convection" holdings brought considerable discussion regarding business development companies - BDCs. I found support for three BDCs - Triangle Capital (NYSE:TCAP), PSEC and Main Street Capital (NYSE:MAIN). All three showed strength in 2008 compared to the market. TCAP and MAIN had the strongest 5 yr. performance. PSEC has an investment grade quality ranking, is currently the most undervalued, and enjoys the highest yield at over 13.1%. MAIN has the strongest current dividend growth rate and the lowest yield at 7.3%. TCAP is the sole member of the CCCs and yield 8.77%. A case could be made for owning each. I now do having made my first purchase of MAIN during last week's losses. My total investment in the three now equals 3% of my portfolio.


I currently have a 1% position in Dynex Capital (NYSE:DX) that I purchased over a year ago when it was the sole MREIT among the CCCs. When it cut its dividend it was placed on probation. Since then performance has improved slightly. As long as that continues and it continues to yield over 10%, I will likely hold. Shares may be sold and funds redeployed when opportunities for high conviction stocks present themselves.


I currently own one utility that I consider "low conviction" PPL Corporation (NYSE:PPL). Its high yield and consistent performance results in a hold despite its low dividend growth and BBB- credit rating.


As dividend growth investors in the distribution stage of investing, we prefer to be 100% invested. We now hold just less than 5% in cash. It will be spent as pullbacks and other opportunities present themselves.

As I stated in Part One, I consider some of my higher yielding, low conviction stocks as a form of cash. Cash with a bonus in the form of a dividend. This is particularly true for BBEP and VNR which pay monthly dividends.

I fully expect moving forward that all of my low conviction positions in Master limited Partnerships will be reduced as more high conviction stocks become undervalued.

My low conviction positions, if thought of this way, represent an additional 8% cash. Each is less than 1% of our total holdings to guard against major reduction of income due to dividend cuts. I recognize that with this strategy there is risk to capital. I am planning to formalize this as part of my portfolio business plan available here, that at no time will low conviction positions total more than 10% of our overall portfolio.

That's the plan for now. Now, as always it's time to hear from you regarding your reaction to my decisions and your approach to managing low conviction positions. Keep reading as I will be gathering information for future articles as part of the comment section.

Disclosure: I am long GEL, BBEP, VNR, ETP, DX, PSEC, TCAP, MAIN, PPL, MSFT, BMO, BNS, TD. 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.