My 4% Dividend Yield Portfolio: Q2'16 Summary And Mid-Term Strategy

|
Includes: AVA, BBL, CBRL, CCP, CMI, CVX, DE, ETN, HCP, HDV, JNJ, MAIN, NHI, O, OHI, PM, SCHD, T, UL, VNQ, VTR, WEC
by: Ron Honig

Summary

My 4% dividend portfolio continues to recover from the lows it faced in Q1.

As uncertainty growth I hope to see some opportunities opening up soon.

Here is the current status of the portfolio and plans for the next couple of months.

A quarter ago I reported here the status of my 4% dividend yield portfolio. The month of March was a turning point in the markets after the pullback that followed the first Interest rate hike alongside the ongoing concerns regarding global growth.

My portfolio, which was generated back in November 2014, is a composition of 21 holdings.

It includes Avista Corp. (NYSE: AVA), BHP Billiton (NYSE: BBL), Cracker Barrel Old Country Store, Inc. (NASDAQ: CBRL), Care Capital Properties, Inc. (NYSE: CCP),Cummins Inc.( CMI),Chevron (NYSE: CVX), Deere & Company (NYSE: DE), Eaton (NYSE: ETN), Johnson & Johnson(JNJ), HCP (NYSE: HCP), Main Street Capital (NYSE: MAIN), National Health Investors (NYSE: NHI), Realty Income (NYSE: O), Omega Healthcare Investors, Inc. (NYSE: OHI), Philip Morris International (NYSE: PM),Schwab U.S. Dividend Equity ETF (SCHD),AT&T (NYSE: T), Unilever (NYSE: UL),Vanguard REIT ETF (NYSEARCA: VNQ),Ventas, Inc. (NYSE: VTR) and Wisconsin Energy (NYSE: WEC).

Current status:

Throughout the second quarter of the year I have seen a constant recovery in my portfolio's value. As the portfolio is highly tending towards REITs and Utilities it faced a significant pullback during the second half of 2015 due to the ongoing concerns regarding the interest rate hike but recovered since the first hike, which took place back in December 2015.

The current notion in the markets is that the chances for a second hike are very slim and therefore both REITs and Utilities are a safe haven, so far, to investors who are looking for yield but concerned about the economic situation. Especially when assessing the soft growth in the U.S. and the local employment situation.

While the value of the portfolio is highly impacted by the markets' sentiment, the dividend income stream it delivers recovers as well. Both JNJ, CBRL and OHI increased their dividends this quarter. These increases offset the dividend from Baxalta (NYSE: BXLT)which I have sold post its merger to Shire plc (NASDAQ: SHPG).

The current quarterly dividend is at $1,072 which means that I am still below the total dividends I have collected in 2015. The dividend drop that I faced due to BBL and ConocoPhillips (COP) dividend cuts has yet to fully recover.

In fact when I am scanning through my list of holdings I still see BBL as the weaker one out of the list but I still hold it in case of a commodities' prices recovery.

The next graph shows the trend in quarterly dividend alongside the Portfolio value during the recent year and a half:

Click to enlarge

The Baxalta merger with Shire plc was a significant event within my portfolio this quarter. After receiving the cash and Shire's shares from the merger I decided to sell the shares and keep it all in cash cushion waiting to invest it back into the markets in the event of a significant pullback.

Here is a summary of the Portfolio based as of June 24rd:

Click to enlarge

My strategy for the next couple of months

There are three elements that I consider when I shape my investment strategy for the coming months:

a. The global sentiment: The recent news from the U.K. vote seemed to catch all the policy makers in an off guard moment. The feeling on the day after was that there wasn't really a plan to deal with a scenario of a decision to exit the EU.

As the follow up declarations talked about new elections in three months and ah holistic separation plan within a couple of months the markets could not react differently.

With uncertainty comes anxiety and the U.S. stock markets reacted in a very aggressive manner on Friday closing close to session's lows.

Nevertheless, when I am trying to assess the impact of this vote on the global economy I find it to be very limited. The impact in the short term would be mainly in the U.K. as its local currency faced a drastic devaluation and there is a high risk to the local housing sector as several companies threatened to move their offices from London to elsewhere in the continent. But with the weaker Pound the Real Estate would become attractive again so the impact would eventually be very minimal.

In the longer term I expect the U.K. to regenerate agreements with the EU and with that it could achieve better trading agreements, similar to other countries like Norway and Switzerland.

That means that in I see the current crisis as a local and limited event that would quickly be forgotten as things saddle down and the levels of anxiety would ease.

b. The next Interest rate hike: If there were some expectations that the FED would take action in July I believe that the recent events in Europe closed the window on this timeframe. Alongside the softness that was seen in the recent employment report and the low inflation that is expected in the next couple of months I expect that the FED would only take an action after the presidential elections in November.

In the meantime sectors that are highly correlated to the interest rate, like REITs and Utilities should continue to be a relatively safe investment.

c. Diversification: My portfolio is already tending towards REIT and Utilities where more than 40% of the total value is invested in these sectors. As I look for new adders to the portfolio I would look for opportunities that have less correlation to these sectors.

HDV as a great adder to my portfolio:

iShares Core High Dividend ETF (HDV) is an ETF that is focused on large-Cap U.S. companies that pay constant dividend.

Among its biggest holdings are Exxon Mobil Corporation (XOM), Verizon Communications (VZ) and Chevron. Out of HDV's 10 top holdings my portfolio includes only three (Chevron, Johnson and Johnson and Philip Morris). Adding HDV would therefore increase the overall diversification within my portfolio.

The expense ratio of the ETF is low at 0.12% and the dividend yield is currently at 3.4%. I would consider buying it closer to 4% dividend yield at a price point below $70.

This might take some time but in the meantime I don't want to add when the correction has yet to fully materialize.

Click to enlarge

Conclusions:

I expect that the fluctuations in the equity markets would continue in the short term, yet I don't believe it is driven by a real economic issue but more from a temporary high level of uncertainty.

I would like to take advantage of the pullback to increase the dividend stream and the portfolio's diversification but only if it would be a significant pullback, similar to the ones the market faced in August 2015 or in February 2016. In the meantime I would patiently wait until the next opportunity to come .

As always I appreciate your inputs and comments.

Happy investing.

Disclosure: I am/we are long AVA, DE, WEC, O, OHI, CVX, CCP, HCP, NHI, T, PM, UL, ETN, CMI, CBRL, JNJ, HCP, VTR, VNQ, SCHD, BBL, MAIN.

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.