50/50 (BDC, mREIT) Portfolio, Bubble-Up-Yield Purchase Method For The 2016 Year

by: High Yield Investor


Future predictive dividends will be allocated using the BUY (Bubble Up Yield) method.

Predictive 2016 dividends will be deployed each month by dividing total yearly income by 12.

Income growth is obtained by easing into existing securities every month.


We all worked hard last year building up our future cash flow by carefully selecting companies that should provide steady or increasing dividends. Now it's time to plan how to invest those future dividends in the current year. I decided to backfill my existing investments using my income allocation method instead of adding new positions. Income allocation dictates that each investment delivers the same amount of dividend income every year. For the people who use asset allocation, the same principle can be applied, just sort by market value or cost. As some of you know this is my last year on the company treadmill collecting a paycheck from my current employer. I expect to meet my goal from my retirement portfolio to achieve 75% of my GEE (Gross Employment Earnings). For this article I have normalized my GEE to $80,000 to look at real dollar amounts that translate the portfolio dividend income to ($80,000 * 0.75) = $60,000; year-end-goal. The beginning of this year I came up with a different method of increasing cash flow while balancing out my income allocation. Some of you might have noticed the yield increasing on some of your stocks lately because of the turbulent market. This might be an indication that your investments are currently on sale. I'm sure everyone has their list of stocks they want to own, and opportunities will present themselves this year.

I'm not here to promote my current investment method, but want to present a particular application for investment selection that others can adapt to their own investment style. The unique principle of purchase planning for the entire year is what I want to propose. Performing due-diligence before purchase should be the final step.

Attributes of (BDC, mREIT) portfolio design

These are the attributes for my portfolio design. They are unique to my specific portfolio and relate to how I consider this purchase method to be valid.

  1. Both asset classes payout 90% of their earnings to investors. This does not leave much room for dividend manipulation to hold back during good times to even out the bad times.
  2. I expect dividend cuts because of the high-yield/high-payout that will depend on economic conditions or management screw-ups. I don't get spooked by dividend cuts; instead look for opportunities. This is contrary to most investors; I look to the long-term ability for management to bring a company back from despair.
  3. When companies develop poor results and have trouble in the current environment, it will take a few years to resolve their issues and take corrective action.
  4. For the possibility of dividend variability, the portfolio is designed to allow withdrawals to be about 50% of the predictive income with the surplus reinvested back into the portfolio for growth.
  5. The current companies in my portfolio are long-term holdings. I do not trade them; instead I add shares to increase cash flow.
  6. The only time I will eliminate a position is if the company suspends their dividend or I lose confidence in management.
  7. What do business and the typical individual household have in common? They both need to borrow money to run their business or purchase home loans. This is where both BDCs and mREITs are intertwined in both business and individuals; they are linked together through debt. With these two asset types (BDC, mREIT) my diversification bases are covered: business and real estate. Individual companies may come and go, but debt is the fabric of the U.S. economy.
  8. Risk is a concept that eventually rewards people who have patience and stick to a plan despite the turbulent market. I personally have a high risk tolerance and seek out investments that can produce high income. Patience is the main ingredient that transcends market volatility independent of investment method.

BUY (Bubble Up Yield) purchase method…

I have come up with a buy system unique to my investment style I call the BUY method. It is a method of buying stock based on the highest yield (undervalued) and underweight income allocation. The BUY method is applied to all holdings. Using the highest yield as part of the selection process takes into account that market conditions have mispriced my current holdings. All the stocks in my current portfolio I consider holding long term and will add shares to balance out my income allocation. I run the BUY method the day before selecting the securities, which takes into account the yield and the need to bring individual stock income up to my yearly standard. Another continual purchase method I just started was to take my predictive income and divide it by 12 to get a value to invest each month. Every month works out to be about 8% of my predictive dividends being reinvested back into the portfolio, which builds up my total income during the year. Due diligence is performed before purchase as a final step.

As a side note, I'm currently sitting at 72% of my GEE (Gross Employment Earnings). I've been buying since the beginning of 2016 using the BUY method. Let me put this into perspective; this works out to be a 2.8% increase in my passive portfolio income since the beginning of the New Year. This increase has been greater than my employment merit raise over the past few years. What's not to like about increasing my cash flow at an accelerated rate by investing dividends every month. I must be getting cynical in my old age and realizing how much risk most of us take depending on a single source of income and not being in control of company decisions.

This is where designing a retirement portfolio with many individual income streams reduces risk. It can reduce the dependency on any single source of income in retirement that gets into trouble. And I have the ownership in each income generator that puts the power to control my own financial universe.

Normalized data

For this presentation I have normalized the data in real dollars using a GEE of $80,000. The percentage allocation and income is identical to my existing portfolio. My initial goal is to achieve 75% of my GEE with 30 stock investments. The income allocation I expect from each stock works out to be ($80,000 * 0.75) / 30 = $2,000.

In my previous article "50/50 Portfolio (BDCs And MREITs) Year End 2015 Final…", I reference that my portfolio generated 70% of my GEE as of the end of 2015. For this presentation, this works out to be ($80,000 * 0.7) = $56,000 projected total income I should receive in 2016. What I'm going to do is allocate this entire amount to all stock investments that are underweight in achieving my $2000 yearly income allocation and yield.

Chart 1: Income allocation and yield

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The chart displays the 50/50 portfolio sorted by market yield as of January 15, 2016. The bars indicate the actual income each investment should generate for the year {Left axis}. The blue bars represent current dividends being paid and the green bars indicate the added purchase for each stock that is undervalued to bring them up to the $2,000 level. The red line is the sorted market yield of each stock as of January 15, 2016 {Right axis}. My intent is to purchase additional shares of undervalued stocks having the highest yield. More bang for the buck with the assumption that mispriced stocks are being unjustly sold during the first month of the year. I have two ETNs in the mix and I'm not changing allocation: ETRACS 2X LEV LNG WF ETN (NYSEARCA:BDCL) and UBS AG ETRACS MNTHLY ETN (NYSEARCA:MORL). Both are hellish since they are leveraged 2X. They dance around quite a bit with market volatility, but pay incredible dividends.

Since this is February I have been adding to my portfolio income by purchasing BLACKSTONE MORTGAGE (NYSE:BXMT), WESTERN ASSET MORTGAGE (NYSE:WMC), ARLINGTON ASSET (NYSE:AI) and MEDLEY CAPITAL CORP (NYSE:MCC) that increased my predictive cash flow by 2.8% as stated previously. With high yield there is always the possibility of dividend cuts during the year and I have anticipated my income may be reduced by up to 5%. If I stick to my plan, I might actually generate an income that exceeds my 75% of GEE goal even if dividend reductions materialize.

Table 1: Income allocation and yield

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The top row of the table indicates my gross income "GEE" to be $80,000 to normalize all values. This will demonstrate what a 75% portfolio income of GEE would look like with real numbers. The "Div-Inc" is the actual income $56,436 generated from the portfolio at the end of 2015. So in essence I have over $56,000 to reinvest into my portfolio to grow the income stream for next year. The 4th column, GREEN cells indicate the stocks that I need to increase my income allocation to the $2,000 level. The 5th column "new-inc" will be the added income for each stock to get to the $2,000 level. Notice the first row, 5th column is the sum of all the added new income $7,543. The sixth column "new-cost" is limited to the predictive dividend income of $56,000. The last two columns are interesting, because they illustrate the predictive income and expected portfolio balance at the end of 2016. If there are no dividend cuts along the way I can expect an income of $63,979 from the portfolio. This will exceed my 75% of GEE by the end of 2016 and be about 80%. What this means is I can withstand a 5% income reduction caused by dividend cuts along the way and still meet my 75% goal.


In the past I did not have an income balancing plan. Last year I was trying to complete my total stock count of at least 30 companies for income diversification. With this plan to balance out my income allocation, I'll be almost complete except for two companies as shown in Chart 1. They are GOLUB CAP BDC INC (NASDAQ:GBDC) and SOLAR CAPITAL LTD (NASDAQ:SLRC) that I plan to complete next year with surplus dividend income.

Another item I plan on pursuing is to have a fixed amount to reinvest each month based on total projected income divided by 12. This allows me to always have dry powder and be in the buying mindset and not worry about my portfolio balance bouncing around from a manic-depressive market that never knows if it's coming or going. As such market timing is of no concern and monthly dividends will be deployed according to the BUY purchase method. I can't predict the market and I don't want to be wrapped up in all the doom-and-gloom or bull-run excitement that will derail any investment method. Been-There, Done-That. It does not work; steady as she goes will always win the race.

Investment Disclaimer

Please note the stocks included in the 50/50 portfolio are not recommendations. They were personally selected by the author and contain a great deal of investment risk. The stocks in the portfolio are Business Development Companies [BDCs] and mortgage Real Estate Investment Trusts [mREITs]. Both investment vehicles are Regulated Investment Companies [RICs] and are required to distribute at least 90 percent of taxable income as dividends to investors. This is a live active IRA portfolio that I believe will withstand the markets' bull and bear movements based on my own research. The progress will be updated and tracked for feasibility of this investment method over the years. The article titled "50/50 Portfolio (BDCs And mREITs) Baseline 2014" details how the portfolio was constructed.


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.