5%+ Dividend Yield Portfolio: July 2016 Review - The Goldilocks Conundrum

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Includes: ABBV, AGEN, ALJ, AMJ, AT, BAC, BNS, BX, BXMT, CCP, CORN, CXSE, DBEF, DEM, DIV, DVYA, DWX, E, EDIV, EFR, EWA, F, FGD, GDX, GECC, GM, GS, GSK, HCP, HDWX, HYND, HYZD, IEP, KMI, MPW, MS, MZZ, NRZ, OHI, PGHD, PRU, PSEC, PUK, QQQ, RIG, ROOF, SAN, SDIV, SH, SNH, SRET, SRTY, STAG, T, TAGS, TMUS, TOT, TWM, USL, VRP, VTR, VZ, WILN, WNR
by: Dividend Disco

Summary

Dividend stocks are like bowls of porridge: You don’t want the yield too low or too high.

Historical stock out-performance skews towards higher yielding stocks over the long term.

My YTD 2016 out-performance continued in July as I have returned 10.5% (vs 7.7% for S&P 500).

In addition to my capital appreciation, I earned a 5% cash yield in 2016.

Despite recent market momentum, my trades continue to be defensive and yield focused.

Review and Outlook

As regular readers know, I am a believer in long-term mean-reversion and have premised much of my trading strategy on capturing (what I hope to be) temporary pricing inefficiencies. Like Warren Buffett, I believe in investing in companies that are built to over perform over the long haul but where I can find an entry price that is lower than the true value of the stock. However, to paraphrase John Maynard Keynes, markets can remain irrational a lot longer than you and I can remain solvent patient. In today's markets of rich valuations, there are few bargains to be had; however, it is fairly clear that we are not about to enter a recession — so how do we continue to earn returns, but not chase so much risk as to open ourselves up for heartbreak?

I wish I had the definitive answer, but the best that I can come up with is to continue to look for strong players (as evidenced by their covered dividend yield) with recent(ish) weakness in their stock price. At the same time, I am selling off winners that have run too far, too fast in my opinion (a number of REITs fit this description) and placing selective market hedges (in the form of inverse ETFs) to profit from future panics. However, it is important to take a measured approach in this and not become the victim of the doom-and-gloom crowd that would have had you miss out on virtually every rally. In times like these, earning a permanent return in the form of cash dividends keeps me sleeping well at night knowing that I am still in the game, but in a measured and more predictable way.

Speaking of long term return predictability, I hope that many of you saw a recent Seeking Alpha article by Ploutos about the dividend sweet spot. Here is the most important graphic in the article:

Click to enlarge

Source: Dartmouth professor Kenneth French (via Ploutos)

Put in a more easily digested way, in a slightly more dated piece, Morgan Stanley summarized 40+ years of returns by dividend yield as follows:


Source: Morgan Stanley (via Ploutos)

As you can see from both exercises, companies that pay elevated dividend yields, but not the highest yields, have generated higher returns over very lengthy periods. That is why my readers have seen me take my very risky portfolio of ultra-high yielders and refined my portfolio to exposure to companies yielding 4% to 6%. My only regret is that I hadn't figured this out sooner or I would be really smoking the market!

On to my performance, July 2016 was another gravity-defying month in which general market tailwinds make us all feel good (but a weak earnings season further elevating valuations should give us pause for concern). I ended June up 2.0% (lower than the S&P 500's 3.7%); however, I continued my overall outperformance in 2016 with YTD returns of 10.5% (versus the S&P 500's 7.7%). This is all before my 5% realized dividend yield is factored in! As has been the case all summer, I continue to be nervous about the very real storm the horizon but don't think there is anything so imminent as to warrant a rush to liquidate attractive dividend payers.

Background

Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires.

  • GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns.
  • STRATEGY: 'Enhanced' dividend growth or DGI strategy that focuses on a core of diversified holdings (ETFs and individual companies -- my general screening criteria: growing companies (YoY EPS growth >0%) with attractive valuations (PEG <1.5 and P/E <20) and strong and safe dividends (yield >4%, payout <90%, and market cap >$500MM)…no tobacco stocks or micro caps), supplemented with return enhancing tools like hedges (derivatives and shorts), commodity exposure, etc., as well as some crazy picks.
  • BALANCE: Blend of ETFs (domestic and international) and individual companies (where there is a compelling reason to own). Seek to not overweight any one sector unless there is a compelling reason to do so (although the nature of these investments lead me to be overweight in traditional dividend paying sectors like financials, REITS, and energy).

Note: I violate these guidelines regularly — please call me out on it!

Cash Generation

Cash payment (dividends and interest) is the keystone of my portfolio as market timing is practically impossible to repeatedly replicate, for even the pros. Over the last 12 months, my portfolio's realized yield was 4.1% (based on its current value) and delivered $11,130 in cash to me. The market's appreciation has lowered my effective yield (a high class problem), but my projected forward yield is 4.9% with increased dividend sustainability as I have worked to eliminate sucker yields and focus on dividend growth and reliability in my ticker screening.

In July 2016, I only earned $707 in cash (-40% from July 2015) mostly due to the tail end of the energy company dividend payments before the oil price recession hit. However, with a YTD haul of $6,406, I am more than half way to my 2016 goal of $12,000 (that's an even $1,000 per month in good months when the market is moving up and bad months when it's trading off). In today's market, a yield focused strategy makes more sense than ever to me since paper gains may come and go but cash is forever!!

Portfolio Composition as of July 31, 2016

Security Type Div Yield Market Value Last Month Value Gain/Loss(%)
CORE DIVIDEND FUNDS 5.1% $59,781 $57,270 4.4%
SPDR S&P International Dividend ETF (NYSEARCA:DWX) ETF 4.8% $11,174 $10,737 4.1%
SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV) ETF 5.6% $8,748 $8,197 6.7%
WisdomTree Emerging Markets High Div ETF (NYSEARCA:DEM) ETF 4.4% $8,004 $7,508 6.6%
Deutsch X Trk MSCI EAFE Hdg Eqy ETF (NYSEARCA:DBEF) ETF 3.2% $5,172 $4,998 3.5%
Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (NYSEARCA:FGD) ETF 5.0% $4,618 $4,454 3.7%
JPMorgan Alerian MLP ETN (NYSEARCA:AMJ) ETN 7.0% $3,191 $3,181 0.3%
Global X Superdividend REIT ETF (NASDAQ:SRET) ETF 8.3% $3,130 $3,109 0.7%
Pacer Global High Dividend ETF (BATS:PGHD) ETF 3.6% $2,792 $2,682 4.1%
Global X SuperDividend U.S. ETF (NYSEARCA:DIV) ETF 7.4% $2,582 $2,553 1.1%
iShares Asia/Pacific Dividend (NYSEARCA:DVYA) ETF 5.2% $2,332 $2,138 9.1%
Global X SuperDividend ETF (NYSEARCA:SDIV) ETF 7.0% $2,165 $2,081 4.0%
iShares MSCI Australia (NYSEARCA:EWA) ETF 4.1% $2,120 $1,974 7.4%
SPDR S&P Int'l Dividend Currency Hedged ETF (NYSEARCA:HDWX) ETF 4.8% $2,047 $1,989 2.9%
WisdomTree China ex-State-Owd Entpr ETF (NASDAQ:CXSE) ETF 1.7% $1,707 $1,670 2.2%
CORE DIVIDEND COMPANIES 6.8% $85,829 $83,092 3.3%
Omega Healthcare Investors (NYSE:OHI) REIT 7.0% $10,350 $10,154 1.9%
New Residential Investment (NYSE:NRZ) REIT 13.5% $8,069 $8,170 -1.2%
HCP (NYSE:HCP) REIT 5.9% $5,936 $5,354 10.9%
Care Capital Properties (NYSE:CCP) REIT 7.7% $5,916 $5,501 7.5%
Ford Motors (NYSE:F) Company 4.7% $5,064 $4,993 1.4%
TOTAL (NYSE:TOT) Company 5.7% $4,810 $4,810 0.0%
GlaxoSmithKline (NYSE:GSK) Company 5.1% $4,507 $4,334 4.0%
AT&T (NYSE:T) Company 4.4% $4,442 $4,434 0.2%
Western Refining (NYSE:WNR) Company 7.3% $4,170 $4,249 -1.9%
Kinder Morgan (NYSE:KMI) Company 2.5% $3,741 $3,444 8.6%
Prospect Capital Corporation (NASDAQ:PSEC) Invest Co 11.9% $3,421 $3,194 7.1%
Eni (NYSE:E) Company 5.8% $3,065 $3,235 -5.3%
Blackstone Mortgage Trust (NYSE:BXMT) REIT 8.6% $2,901 $2,767 4.8%
Verizon Communications (NYSE:VZ) Company 4.1% $2,771 $2,792 -0.8%
Royal Dutch Shell (RDSB) Company 6.9% $2,711 $2,476 9.5%
Abbvie (NYSE:ABBV) Company 3.4% $2,649 $2,476 7.0%
The Blackstone Group (NYSE:BX) Invest Co 6.4% $2,684 $2,454 9.4%
The Bank of Nova Scotia (NYSE:BNS) Company 4.4% $2,539 $2,451 3.6%
Prudential Financial (NYSE:PRU) Company 3.7% $2,259 $2,100 7.5%
Senior Housing Properties (NYSE:SNH) REIT 7.0% $2,221 $2,083 6.6%
Icahn Enterprises (NYSE:IEP) Invest Co 11.2% $1,605 $1,620 -0.9%
SPECULATIVE HOLDINGS TOTAL 2.7% $30,232 $30,485 -0.8%
Alon USA Energy (NYSE:ALJ) Company 8.5% $6,363 $5,832 9.1%
United States 12 Month Oil ETF (NYSEARCA:USL) ETF 0.0% $5,073 $5,805 -12.6%
Banco Santander (NYSE:SAN) Company 5.4% $3,400 $3,143 8.2%
Transocean (NYSE:RIG) Company 0.0% $3,297 $3,567 -7.6%
Market Vectors Gold Miners ETF (NYSEARCA:GDX) ETF 0.4% $3,059 $2,771 10.4%
Teucrium Agricultural ETF (NYSEARCA:TAGS) ETF 0.0% $2,631 $2,855 -7.8%
Teucrium Corn ETF (NYSEARCA:CORN) ETF 0.0% $1,894 $2,050 -7.6%
VARIOUS POSITIONS OF <$1,000 VALUE VARIOUS 2.0% $4,514 $4,462 1.2%
FIXED INCOME TOTAL 4.7% $36,336 $34,847 4.3%
PowerShares Variable Rate Preferred ETF (NYSEARCA:VRP) ETF 5.0% $10,188 $9,932 2.6%
Goldman Sachs (NYSE:GS) - Pref A (GS+A) Pref 4.4% $9,328 $8,716 7.0%
Bank of America Corporation (NYSE:BAC) - Pref L (BML+L) Pref 4.4% $4,720 $4,546 3.8%
Morgan Stanley (NYSE:MS) - Pref A (MS+A) Pref 4.6% $4,372 $4,140 5.6%
WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (NASDAQ:HYZD) ETF 4.7% $2,293 $2,261 1.4%
Goldman Sachs - Pref D (GS+D) Pref 4.7% $2,211 $2,072 6.7%
WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (NASDAQ:HYND) ETF 4.7% $1,882 $1,873 0.5%
Eaton Vance Senior Floating-Rate Trust (NYSE:EFR) CEF 7.0% $1,342 $1,308 2.6%
SHORTS TOTAL $11,917 $15,024
ProShares UltraPro Short Russell2000 (NYSEARCA:SRTY) ETF 0.0% $9,880 $11,041 -10.5%
ProShares Short S&P500 (NYSEARCA:SH) ETF 0.0% $9,550 $9,914 -3.7%
ProShares UltraShort Russell2000 (NYSEARCA:TWM) ETF 0.0% $3,087 $3,484 -11.4%
ProShares UltraShort MidCap4000 (NYSEARCA:MZZ) ETF 0.0% $3,014 $3,293 -8.5%
T-Mobile US (NASDAQ:TMUS) Company 0.0% ($3,244) ($3,029) -6.6%
PowerShares QQQ Trust (NASDAQ:QQQ) ETF 1.0% ($10,371) ($9,679) -6.7%
SCHWAB ROBO-ADVISOR TOTAL 2.0% $10,475 $10,103 3.7%
TOTAL 4.9% $234,569 $230,821
TOTAL + CASH $40,274 4.2% $274,843 $268,499 2.0%
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Portfolio Moves in July 2016

New Positions

SHARE BUY - Banco Santander : Added to my existing position with 500 shares at $3.90 this Spanish financial services company on July 1.

  • Reasoning: With a single digit P/E ratio, the 5.5% dividend of this falling knife Spanish bank was too much to resist. WARNING: THIS IS A SPECULATIVE PICK!

SHARE BUY - Care Capital Properties : Bought another 75 shares at $29.55 in this healthcare REIT on July 25.

  • Reasoning: I am rotating out of REITs that have already run up (and now sport low yields) and into REITs that haven't crossed their 2015 highs. CCP is my 2nd best idea in this space and with an 8% yield I am optimistic that it will flourish for me.

SHARE BUY - Ford Motor : Bought another 200 shares at $12.35 in this U.S. automaker on July 5.

  • Reasoning: Many pundits are nervous about "peak car" in the cycle having already been reached, but I think Ford is well positioned for the future and is sporting a 5% dividend as well as a 5.5 P/E ratio and PEG of 0.6.

SHARE BUY - Global X SuperDividend REIT ETF : Bought 200 shares of this global REIT ETF at $15.50 on July 25.

  • Reasoning: As I traded out of lower yielding REITs, I was looking for diversified REIT alternatives and the 8% yield of SRET fit the bill.

SHARE BUY - Omega Healthcare Investors : Bought another 100 shares at $33.55 in this healthcare REIT on July 7.

  • Reasoning: I am rotating out of REITs that have already run up (and now sport low yields) and into REITs that haven't crossed their 2015 highs. OHI is my best idea in this space and with a 7% yield I am optimistic that it will continue to flourish for me.

SHARE BUY - ProShares UltraPro Short Russell2000 : Bought another 300 shares of this ultrapro-short ETF at $ 22.069 and $20.40 on July 8 and 21.

  • Reasoning: I couldn't pick a yield stock to sell, so I just sold the S&P Russell2000 index as a hedge instead.

SHARE BUY - Prudential Financial : Bought an entry position of just 30 shares at $69.71 in this insurance/financial services company on July 5.

  • Reasoning: With a single digit P/E ratio and PEG near 1, the almost 4% dividend of this recently punished financial services stalwart was too much to resist. My 1 month return of 7.5% has me pretty pleased too!

SHARE BUY - Royal Dutch Shell (RDSB): Bought 50 shares at $56.10 in this oil conglomerate.

  • Reasoning: Similar to my investment in ALJ/WNR, the refiner space has been killed in over the past 24 months, but these businesses have withstood the test of time and offer strong capital appreciation in addition to high dividend rates.

SHARE BUY - Western Refining : Bought an additional 100 shares at $20.25 in this independent refiner and retailer.

  • Reasoning: Similar to my investment in ALJ/RDSB, the refiner space has been killed in over the past 24 months, but these businesses have withstood the test of time and offer strong capital appreciation in addition to suddenly high dividend rates. WARNING: THIS IS A SPECULATIVE PICK!

Closed Positions

SHARE SALE - Agenus (NASDAQ:AGEN): On July 6, I dumped all my shares in this biotech company at $4.45.

  • Reasoning: AGEN was a strong recommendation from a friend years ago and was supposed to have a miracle cancer cure. However, the cure hasn't materialized and while I have made profits trading around the edges on this stock, it was time to let it go and focus on my core strategy.

SHARE SALE - Atlantic Power (NYSE:AT): On July 21, I dumped all my shares in this utility company at $2.55.

  • Reasoning: AT was supposed to be a 10%+ yield turnaround as well as diversification away from energy and financials, but it only brought me heartbreak instead (they suspended their dividend and I lost ~15%). This was another lesson in 'quality matters'.

SHARE SALE - Full Circle Capital (FULL): On July 18, I dumped all my shares in this BDC at $2.67.

  • Reasoning: FULL was a strong recommendation from a friend and was supposed to be a 10%+ yield value pick, but the promised turnaround never came and a dividend cut (then suspension) followed by a fire-sale to a larger player was all that was left (I lost ~40%) and I had the lessons of 'don't stretch for yield' and 'pick smarter friends' reinforced.

SHARE BUY/SELL - General Motors (NYSE:GM): Bought 100 shares at $28.05 in this U.S. automaker on July 5; sold all 100 shares at $30.55 on July 13.

  • Reasoning: Many pundits are nervous about "peak car" in the cycle having already been reached, so I nervously toed my foot into GM which is sporting a 5% dividend payer sporting a 4 P/E ratio and PEG of 0.4. I might have hit the cash register too quickly, but taking a 9% gain in 1 week seemed pretty good at the time. I will likely buy more GM on future weakness.

SHARE SALE - IQ U.S. Real Estate Small Cap ETF (NYSEARCA:ROOF): On July 18, I sold all of my holdings in this U.S. small cap REIT ETF at $27.59.

  • Reasoning: I really like the concept behind ROOF, but it spent most of my time holding it underwater so I took advantage of its run up in recent months to take profits (I made 5% on the trade); however, I would own ROOF again in the future at a lower valuation.

SHARE SALE - iShares MSCI Australia ETF : On July 26, I sold half of my holdings in this Australian ETF at $20.60.

  • Reasoning: I really like the concept behind EWA, but it spent most of my time holding it underwater so I took advantage of its run up in recent months to exit the position (I lost 10% on the trade).

SHARE SALE - Medical Properties Trust (NYSE:MPW): On July 22, I sold all of my holdings in this U.S. medical REIT at $15.75.

  • Reasoning: I like MPW, but it spent most of my time holding it trading sideways so I took advantage of its run up in recent months to take profits (I made 20% on the trade); however, I would own MPW again in the future at a lower valuation.

SHARE BUY/SELL - Prudential (NYSE:PUK): Bought 100 shares at $31.62 in this U.K. insurance/financial services company on July 5; sold all 100 shares at $33.99 on July 12.

  • Reasoning: Given the Brexit's impacts on the U.K. financial services sector, I thought it was time to go bottom feeding with a 5% dividend payer sporting a 13 P/E ratio and PEG below 1.5. I might have hit the cash register too quickly, but taking a 7.5% gain in 1 week seemed pretty good at the time.

SHARE SALE - STAG Industrial (NYSE:STAG): On July 18, I sold all of my holdings in this U.S. REIT at $24.55.

  • Reasoning: I like STAG, but it has made a big run in recent months (up >50%) so I took profits (I made 40% on the trade in 5 months); however, I would own STAG again in the future at a lower valuation.

SHARE SALE - Ventas (NYSE:VTR): On July 22, I sold all of my holdings in this U.S. medical REIT at $73.55.

  • Reasoning: I really like VTR, but it spent most of my time holding it trading sideways so I took advantage of its run up in recent months to take profits (I made 45% on the trade); however, I would own VTR again in the future at a lower valuation.

SHARE SALE - Wi Lan (NASDAQ:WILN): On July 12, I dumped my shares in this patent holding company at $2.65.

  • Reasoning: WILN was supposed to be a 10%+ yield diversification away from energy and financials, but it only brought me heartbreak instead (I lost ~25%); however, I exited on a brief bought of strength (the stock has since rolled back down another 30% and I had the lessons of 'don't stretch for yield' reinforced.

Final Thoughts

I hope that I don't come off as a doom-and-gloom guy to my readers as I am extremely bullish on the long term prospects for the U.S. (and global) economies; however, I do fret about short term weakness that could see a double digit sell off before 2016 is done. So I have tried to take many commenters' advice to sell off weak positions (especially in my speculative portfolio) and focus on my core. While it was painful to admit to so many defeats, my portfolio is much better for it and I was able to deploy the capital into my strongest ideas. Overall, my best advice these days (that I am trying to take myself) is to be defensive in your trades and err on the side of caution (but not outright fear) in your trades. Dividend yields can be a great comfort (especially in turbulent, but sideways markets), but a focus on earnings power and dividend sustainability is even more critical than usual. As with more things in life, the trick is to find a balanced approach that you are personally comfortable with that is not too hot or too cold. Hopefully I have some good ideas here for you to make your own ideal bowl of porridge, but I would love any suggestions you guys have to add to my own mix (Seeking Alpha is my best single source for investment ideas).

Disclosure: I am/we are long ALL POSITIONS AS MENTIONED.

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.

Additional disclosure: The author is an amateur who has a history of getting calls both right and wrong with zero predictive power. Trade at your own risk and never rely solely on this author's opinion. Also, as I have no knowledge of your circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.