50/50 Portfolio Update, And Introducing A Brand-New Stock-Tracking Tool

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Includes: AGNC, BDCL, DX, HTS, MORL, NEWT, NLY, NRZ, NYMT, SCM, SLRC, TSLX, TWO, WMC
by: High Yield Investor

Summary

Recreational POT for the casual user was created to visually track a portfolio during the day.

POT displays each stock in a simple bar chart format for quick analysis between investments.

I'm a high yield investor, and my current market yield in April is greater than 12%.

Two trade transactions were placed in the 50/50 portfolio, a quick sell and buy that increased my yearly income.

Portfolio Activity

A company in my portfolio, Hatteras Financial Corp. (NYSE:HTS), has been acquired by Annaly Capital Management (NYSE:NLY), which changed my original investment intent. Once a company has been acquired, it sets in motion the need to find a replacement. As it turns out, I had my sights set on a company that adds another dimension to my portfolio. The trade was completed by purchasing New Residential Investment Corp. (NYSE:NRZ) with the proceeds from the sale of HTS. The bottom line was that I traded a 12% yield investment for a 15% investment, while still owning HTS indirectly from the NLY purchase.

NRZ contains a high percentage of MSR (mortgage servicing rights), and this uniqueness will add a new dimension to the mREIT section of my portfolio. The current yield is about 15% and contains a great deal of risk associated with interest rate-sensitive investments, and is not suited for most investors. The NRZ website explains some of the company's unique investing ability.

Probabilities for High Yield

  1. What is the probability of a price decline for high yield investing? Answer: Good.
  2. What is the probability of a dividend reduction? Answer: Good.
  3. What is the probability of generating high income exceeding your expenses? Answer: Very good.

We deal with probabilities all the time. What is the probability of me hitting something while backing out of my driveway? Answer: Very low if watching out for a tree, but it does happen because of our calculated judgment. Why should investing be any different? Doing the best due diligence research and following analysts reduces the chance of error, but there's always the probability of price reduction and dividend cuts. Beating yourself up because of the probability of something not working out as expected is not productive.

Investing is all about probabilities. It does not matter what you invest in, or the experience someone has - the matter of fact is perfection is an illusion. All investors will have success and failure. It's how you react to both that makes for a successful investor. People say I'm crazy for investing in high yield greater than 10% and investing in high-risk BDCs and mREITs. For me, the risk is not generating enough income to cover expenses, and what I have experienced over the past two years has convinced me it's achievable. Most dividend investors place their risk tolerance on price and dividend growth, but I place my risk in providing substantial cash flow. This is where probabilities come into play for my high yield 50/50 portfolio.

  1. The only purpose for the existence of BDCs and mREITs is to generate income; price is considered secondary.
  2. Dividend variability is tolerated based on management's proficiency and economic conditions.
  3. Income magnitude is maintained through income allocation of over thirty income-producing companies.
  4. The portfolio is designed not for perfection, but for the probability of success. Price decline and dividend cuts may happen to companies owned, but this is expected because income is their main product.
  5. It is the understanding of your expectations for these types of assets that are designed to pay out at least 90% of their income to investors. They are not in a classification of your common DGI stock with a dual mandate. One, to produce a product for sale, and the second, for dividends and dividend growth. The investments in my portfolio produce income only, and this is my main focus in retirement.
  6. On average, bull markets last 4 years and recessions last 2 years. I prefer to collect high dividends during a bull market and invest more in a recession. The probability is in my favor to increase income at accelerated levels for most of the bull market cycle. Both DGI and HYI stocks will drop during a recession, but collecting high income will cushion the downturn and make available surplus cash to invest.
  7. Perhaps I hang on to investments too long. There's a part of me that wants to experiment and find out for myself if these vehicles that produce dividends as a final product will succeed over time. They have the ability to increase and/or decrease their dividends based on the necessity of survivability. I'm convinced that since they are income vehicles and begin to get in trouble, managements have an incentive to turn the companies around and take corrective actions. For this reason, I do not sell an investment based on minor dividend cuts. If a company eliminates its dividend, it will be jettison and replaced - no loyalty on my part.

Recreational POT (Portfolio Online Tracker) for the casual user

I built the POT application to give me a quick method to evaluate my investments during the day. It's an application that takes advantage of Excel 2010 features that can access Yahoo stock data. With this ability, the tool can get online stock quotes that are delayed 15 minutes throughout the day. Excel is excellent in performing calculations to provide portfolio balances and dividends in a graphical presentation. This application takes a table of numbers and quickly runs through a series of charts that are accessed by just a click of a button. Each stock in a portfolio is visually displayed on the chart, and the title gives a total portfolio evaluation.

50/50 portfolio using POT

I have normalized my portfolio and stock shares to generate an approximately $500K balance as of April 21. My actual 50/50 portfolio percentages are exactly as in the charts displayed. The chart evaluation is a daily total performance gain or loss. The output bar chart looks at each stock, and the total portfolio balance is displayed in the title.

Chart 1: Daily Price action

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This is the default chart when you request a price update during the day. What's not shown are the buttons on the right side of the chart that select the different displays. These actual April 22, 2016 end-of-day results (time stamped upper left) indicate that Solar Capital (NASDAQ:SLRC) was my best performer. I have grouped my investments by type. On the left are all my BDCs and on the right side are my mREITs. Notice, the right-most symbol is actually the S&P 500 as indicated by ^GSPC; I use this symbol as a reference. Also notice TPG Specialty Lending (NYSE:TSLX) and Newtek Business Services (NASDAQ:NEWT) on the right side of the chart. These are my watch stocks, and I have no shares in them as of yet. As investments of interest are revealed, I just add them to the list and can monitor them with my actual income investments.

Chart 2: Portfolio Market Value

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This is the valuation for each stock in the 50/50 portfolio. Notice, stocks TSLX and NEWT are on my watch list and I do not own any shares, which is the reason for no green bars. This chart will automatically scale depending on the amount of stocks in your portfolio. For the 50/50 portfolio, I currently have 31 stocks. As shown, American Capital Agency Corp. (NASDAQ:AGNC) is my largest holding and was acquired back in 2013, before I had a retirement portfolio plan. I just kept the shares since they're generating a good chunk of dividends.

Chart 3: Projected Yearly Income

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With a quick glance, I can see who is generating the most to my income and the least. As shown in the previous chart, AGNC is contributing the most income, and the UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) is contributing its fair share with less capital at risk (see previous valuation chart). The bottom line: I'm generating about $63,000 (scaled for this article) in yearly income from a portfolio of about $500,000 that gives a yield of about 12.6%. The BDC stocks are generating a yield of about 11.5%, and my mREITs are generating about 13.8%. Portfolio statistics for dollar amounts and percentages are located under the chart. It's like a secret panel you can hide the chart, and a table is revealed with good stuff about your portfolio. Go ahead and press the hide chart and unhide chart button once you have downloaded the application.

Chart 4: Projected dividend income yearly loss

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Here's the dreaded dividend cut chart. This is generated by taking the dividend per share at the end of the previous year (manual entry) as my baseline to predict future total income and calculating the difference from the current Yahoo online dividend data. I noticed it takes about a week or two for Yahoo to update their online services from when the actual dividend is reported. I take the difference between the dividends pre and post change and just multiply by shares to come up with the actual dollar change. As indicated, Western Asset Mortgage Capital Corp. (NYSE:WMC) had two cuts this year for a total of 25%, Two Harbors (NYSE:TWO) had an 11.5% cut and Dynex Capital (NYSE:DX) had a 12.5% cut. You would think this would sink the ship, but notice, it only affected my total income by 1.77%. Thank goodness for income allocation, as I've explained many times in my previous articles, for the unplanned attacks. I don't depend on withdrawing all my dividend income, but planning a 50% withdraw method to allow for dividend enhancements and reinvesting the surplus to grow my income cash flow.

As a side note, the most common complaint about investing in high yield assets is dividend cuts. Since I know investing in high yield places a high probability of dividend cuts, I can plan for such an event. I have looked at the past few years at my current investments and calculated the average of about 4%. The biggest dividend cuts were from the Taper Tantrum for mREITs back in 2013, and BDCs had a hard time in 2014 because they were kicked out of the Russell. Since this is part of the equation when investing in high yield, I plan to allow for a 5% dividend cut each year and reduce my projected income into the following year. My high yield method of income management allows for such a planning mechanism to be put in place and not even come close to upsetting my withdraw plan. This is where the larger income stream overcompensates for minor obstacles along the way. Knowing limitations to your investment method allows planning to reduce risk.

Chart 5: Monthly Income

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From Yahoo online data, I receive the pay date for dividends. If you guys noticed, some of the dates Yahoo gives might be incorrect. This is where the investor enters the pay cycle, Q for quarter and M for monthly, and the program will recalculate the corrected date. As shown, April is a big hitter - lots of dividends this month sitting on the sidelines because of the substantial rise in both BDCs and mREITs from the first week of February. The crazy thing - I'm making more money in dividends in April than I can contribute to my work 401(k) at 10% of my employment income. Huge income begets huge investment potential when the market drops from its current levels.

Chart 6: Yield

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This is just the simple market yield for each stock investment. It looks like MORL is close to 30% and UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN (NYSEARCA:BDCL) at 20%. Both are ETNs that are 2X leverage to produce the massive dividends. Notice, WMC, even with its massive 25% dividend cut, is at an 18% yield since the price dropped quite a bit. The BDCs are to the left of the chart, from BDCL to Stellus Capital (NYSE:SCM), and the mREITs start with MORL and end at New York Mortgage Trust (NASDAQ:NYMT). Both TSLX and NEWT are on my watch-list to monitor their performance over time.

Conclusion

Recreational POT (Portfolio Online Tracker) might be beneficial to the casual user. For me, I needed a new method for tracking my investments instead of constantly logging into my brokerage account to see how I'm doing during the day. This application takes a table of numbers that are difficult to interpret and presents the table as a visual comparative analysis of each investment. The POT application will be updated over time as I dream up new dividend methods to help me evaluate performance. This is just the first of many future updates followers will enjoy to help navigate the investment markets. Since this is Yahoo Finance, not all stocks will have their data filled in and give an N/A in the field. Included in the ZIP file are instructions and a few stocks in the application to get started. Enjoy! Joe HYI

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.

Disclosure: I am/we are long AGNC,AI,AINV,ARCC,ARI,BDCL,BXMT,CMO,CYS,DX,FSIC,GBDC,HRZN,HTGC,NRZ,MCC,MFA,MITT,MORL,NLY,NMFC,NYMT,SCM,SLRC,STWD,TCAP,TCPC,TCRD,TPVG,TWO,WMC.

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.