The phrase is sometimes used as an idiom, a way of reflecting about one's action during any critical period. I've been asking myself, "What did I do during this bull rally?"
Self-evaluation is an important part of DYI investing. I've been trying to take a step back and objectively evaluate how I've responded to the strong bull rally that began earlier this year and pushed the market to new highs.
This bull rally surprised me.
I readily admit that I was caught completely off guard by this rally. I started becoming more cautious and defensive almost two years ago. The title of a November 3, 2014 article was Bracing for Both Bull and Bear. The three points of the article were:
- The mid-October downturn was an opportunity to rebalance the portfolio.
- Moving toward the goal of a higher percentage of Dividend Champions.
- Safety has become increasingly important.
A year later, on December 20, 2015, I wrote that "Quality is Job 1 When Building a Fortress Portfolio." I listed three goals for 2016:
- Focus on Quality;
- Be Prepared for Volatility;
- Grow Income Prudently.
As 2015 ended, I was prepared for volatility and I thought the biggest risk was to the downside. So, when the market sold off in January, and again in February, I was prepared to buy undervalued stocks.
So far, the most important periods in 2016 were the January and February selloffs.
In January, I bought shares of Texas Instruments (NYSE:TXN) at $51.17, $50.11 and $47.93; Archer Daniels Midland (NYSE:ADM) at $33.65; Dover (NYSE:DOV) at $55.62; Hannon Armstrong (NYSE:HASI) at $17.32; Pattern Energy (NASDAQ:PEGI) at $17.22; and Nucor at $35.10.
My best description of the opportunity in early 2016 was recorded in my January 21, 2016 Instablog, which noted these portfolio holdings were off at least 40% from their 52-week highs:
- Cummins (NYSE:CMI) @ $84.26
- Union Pacific (NYSE:UNP) @ $73.61
- Enterprise Products Partners (NYSE:EPD) @ $20.02
- Archer Daniels Midland @ $31.29
- STAG Industrial (NYSE:STAG) @ $16.28
- Pattern Energy @ $17.02.
These holdings were off at least 30% from their 52-week highs:
- Wal-Mart (NYSE:WMT) @ $60.84
- International Business Machines (NYSE:IBM) @ $121.26
- Emerson (NYSE:EMR) @ $42.64
- HCP Inc (NYSE:HCP) @ $34.97
- Parker-Hannifin (NYSE:PH) @ $86.53
- Dover @ $52.65
- Enviva Partners (NYSE:EVA) @ $14.09.
These stocks were off at least 20% from their 52-week highs:
- 3M (NYSE:MMM) @ $136.98
- Merck (NYSE:MRK) @ $50.55
- Genuine Parts (NYSE:GPC) @ $79.04
- CenterPoint Energy (NYSE:CNP) @ $16.90
- WP Carey (NYSE:WPC) @ $54.99
- Main Street Capital (NYSE:MAIN) @ $26.35
- Hannon Armstrong @ 16.77.
One result of this bull rally has been an increase in the number of individual equities.
On November 3, 2014, the portfolio consisted of 27 holdings. On December 20, 2015, there were 25 holdings.
From the lows described in my January 21, 2016 Instablog, the portfolio grew to 35 holdings by March 13.
By March 13, the portfolio was up over 9% for the year, which marked a very rapid appreciation from the lows of January and February. The growth of the number of holdings occurred because I believed the purchases described above represented unusual opportunities.
Another result of the rally has been the creation of three new asset "buckets."
As the portfolio appreciated with the rising market, I began to look for ways to "lock in" some higher yields with somewhat lower beta. I decided to add some preferred stocks. I realize there are no "locks" in the market, but I believed that if the portfolio is up 10%, and I moved 10% of the portfolio to preferred stocks, I would add some relatively safe yields with potentially less volatility.
On March 13, 2016, I discussed a "retire in peace" portfolio, which reported the purchase of my first preferred stock, Public Storage B (PSA.B). This has become an important investment "bucket" for the portfolio. By August 5, 2016, eight preferred issues represented 13.2% of the portfolio and two "baby bonds" (which trade like preferred stocks) represented 2.8% of the portfolio.
On April 18, I described the addition of an ETF for the portfolio. The purpose of this was to prepare the way for possibly moving the portfolio to mostly (or entirely) ETFs at some point in the future. Given the continued appreciation of the portfolio, this also seemed to be a good way to diversify by spreading the risk of a potential market decline. By August 5, 2016, four ETFs and one CEF represented 4.9% of the portfolio.
I tend to be fully invested, with typically small cash positions. Still, I was cautious and increasingly defensive. I began to look at non-leveraged, option-writing closed-end funds selling at discounts to net asset value. The discounts seemed to be one way to provide some downside protection as well as a way of enhancing yield from the income of writing (selling) options. On May 22, I described the addition of four sector CEFs to the portfolio.
Summary of the three new "buckets"
As of August 5, eight preferred stocks and two bonds were held:
|Entergy New Orleans bond||ENO||200||26.53||5.2%||1.4%||1.8%||BBB/A-|
|Fed Agricultural Mortgage Corp||AGM.C||200||28.50||5.3%||1.5%||1.9%||NR|
|KKR Group Fin||KKR.A||200||27.10||6.2%||1.4%||2.2%||A/BBB+|
|NextEra Energy Cap Jr Sub Deb||NEE.K||200||25.51||5.1%||1.4%||1.7%||A-/BBB|
|State Street Corp||STT.G||200||27.57||4.9%||1.5%||1.7%||A/BBB|
As of August 5, the portfolio held four ETFs and one "regular" CEFs:
|Boulder Growth & Income Fund||BIF||400||8.49||4.7%||0.9%||1.0%||3 M*|
|Vanguard EM ETF||VWO||100||37.49||2.9%||1.0%||0.7%||3 M*|
|WisdomTree EM Equity Inc Fund||DEM||100||38.26||4.3%||1.0%||1.1%||2 M*|
|Vanguard REIT ETF||VNQ||40||90.33||3.5%||1.0%||0.8%||4 M*|
|Vanguard Long Term Corp Bond||VCLT||40||94.71||4.2%||1.0%||1.0%||5 M*|
On August 5, three closed-end funds were added to the portfolio:
- Nuveen Dow 30 Dynamic Overwrite Fund (NYSE:DIAX). This CEF seeks an attractive total return by participating in the Dow Jones 30 Industrial Average. A measure of downside protection in declining markets is sought through "dynamically" selling call options covering between 35% and 75% of the value of the fund's equity portfolio, with a long-run target of 55%. 250 shares were purchased at $14.85. The NAV on August 4, 2016 was $15.85. Morningstar gives DIAX four stars and reports expenses of 0.93%.
- Nuveen Nasdaq 100 Dynamic Overwrite Fund (NASDAQ:QQQX). This CEF seeks an attractive total return with less volatility than the Nasdaq 100 Index. The fund also "dynamically" sells call options covering between 35% and 75% of the value of the fund's equity portfolio, with a long-run target of 55%, in seeking to enhance the portfolio's risk-adjusted returns by providing some downside protection in declining markets. 200 shares were purchased at $18.64. The NAV on August 4, 2016 was $19.63. Morningstar does not rate QQQX and reports expenses of 0.93%.
- Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ). This CEF invests in a diversified portfolio of common stocks and purchases out-of-the-money, short-dated S&P 500 index put options and sells out-of-the-money S&P 500 Index call options of the same term as the put options with roll dates that are staggered across the options portfolio. The Fund evaluates returns on an after tax basis and seeks to minimize and defer federal income taxes. The Fund pays monthly distributions to shareholders through a managed distribution plan. 350 shares were purchased on August 5 at $9.83. The NAV on August 5, 2016 was $10.41. Morningstar gives ETJ one star and reports expenses of 1.10%.
As of August 5, there were eight option-writing CEFs.
|Cohen & Steers Total Return Rlty||RFI||300||14.14||6.8%||1.1%||1.9%||4 M*|
|BlackRock Utility & Infrastructure||BUI||200||20.03||7.2%||1.1%||1.9%||3 M*|
|Tekla World Healthcare Fund||THW||400||15.24||9.2%||1.6%||3.6%||NR|
|BlackRock Int Growth & Income||BGY||600||5.90||10.0%||0.9%||2.3%||NR|
|Eaton Vance Div Equity Income||ETY||200||10.74||9.4%||0.6%||1.3%||3 M*|
|Nuveen Dow 30||DIAX||250||14.85||7.2%||1.0%||1.1%||4 M*|
|Nuveen Nasdaq 100||QQQX||200||18.64||7.5%||1.0%||1.4%||NR|
|Eaton Vance Risk Managed Div Eq||ETJ||350||9.83||11.4%||0.9%||0.8%||1 M*|
On August 5, 2016, I trimmed CMI by selling 25 shares at $125.02, 50 shares of QCOM at $62.00, and 100 shares of AT&T (NYSE:T) at $43.07. My cost basis for the remaining shares of CMI is $95.67 and for QCOM is $43.16. My cost basis for the closed T position was $32.29. The gains were directed toward the purchase of DIAX, QQQX and ETJ (described above). This reduced the number of individual equities to 36.
In future articles, I will present the portfolio in the fashion below, with a "line item" for the individual equities, and the other three portfolio "buckets" reported on one summary line item each.
|Jnsn & Jnsn||JNJ||100||124.24||2.6%||3.3%||2.1%||AAA|
|Roy Bk Can||RY||200||60.31||4.1%||3.2%||3.2%||AA-|
|Int Bus Mach||IBM||50||163.50||3.4%||2.2%||1.8%||AA-|
|Ent Prod Part||EPD||185||27.20||5.9%||1.3%||1.9%||BBB+|
|Total Indiv Eq||69.3%||60.9%|
The market value of the portfolio as of August 5 was $375,618. The gain year-to-date is 21.8%. The average monthly income is $1330, and the current portfolio yield is 4.25%.
What if I had stayed with the 20-stock portfolio from mid-2015?
On January 4, 2016, the value of the portfolio was $303,881. The average monthly income was $1043 and the yield was 4.1%. There were 25 holdings in the portfolio. I'm reproducing the 1/4/16 portfolio below. I try to do this exercise occasionally, just to see whether I would have been better off putting the portfolio in a drawer and checking back in six or eight months.
|Jnsn & Jnsn||JNJ||155||100.48||15574||124.24||19257||23.6%|
|Int Bus Mach||IBM||100||135.95||13595||163.50||16350||20.3%|
|Ent Prod Prt||EPD||400||26.44||10576||27.20||10880||2.9%|
|Nat Retail Pr||NNN||200||39.56||7912||51.26||5126||29.6%|
|Main St Cap||MAIN||245||29.18||7149||33.97||8323||16.4%|
I have not calculated dividends received, so the gain for the portfolio if left "as it was" would be 18.2% plus dividends. The yield on 1/4/16 was 4.1%, so seven months would be about 2.4%. That would bring the total return to 20.6%.
So the present portfolio gain of 21.8% means that the portfolio moves in 2016 have thus far made a positive difference of 1.2%. That isn't the whole story, of course. The question is whether the present portfolio will be able to outperform the 1/4/16 portfolio.
I believe a substantial degree of safety has been added through some of the individual equities (i.e., GE, CSCO, PFE, TXN, HASI, PEGI, ADM, DUK, DOV, VOD, the Brookfield partnerships, and the Canadian banks) and the three aforementioned buckets--the preferred stocks, baby bonds, and the various funds.
So far, perhaps the most important benefit of this bull rally has been the 27.5% increase in the average monthly dividend income, from $1043 to $1330, while maintaining a priority on dividend safety. That may be the most important thing I've done so far in this rally. Oh, and I bought some Pfizer.
There are now eight option-writing closed-end funds in that "bucket" of the portfolio. I'm considering adding one or two more--up to about 10% of the portfolio. As always, I welcome your suggestions.
In another "bucket" there are now ten preferred stocks (or bonds) in the portfolio, comprising about 16% of the portfolio. I do not anticipate increasing this percentage. I added these holdings to the portfolio for relative safety, thinking these historically low beta assets would be flat to slow growing, but they have appreciated alongside common stocks. So, I will be alert to the possibility of adding some newer issues around par value. If I can improve the credit quality, maintain or improve the yield, I'm willing to sell a preferred that has appreciated significantly. I do not have any new issues on my radar.
You can check for new issues through Quantum Online. Go to the "Income Tables" drop-down and choose one of the options, such as "All Preferred Stocks," or "All Exchange-Traded Income Securities." You can click "IPO Date," and it will re-arrange the securities to show you the most recent issues. You can use that function for the other columns, such as "Call Date" and "Moodys/S&P."
Another source for preferred stock ideas is Doug K. Le Du's monthly update of preferred stock IPOs.
I continue to study exchange traded funds as I implement my plan to have ten or so ETFs in the portfolio as I've indicated in earlier articles. In addition to the current five, I'm watching these:
- PowerShares S&P 500 High Div Low Vol ETF (NYSEARCA:SPHD), 5 M*, 12-month SEC yield 3.22%, expenses 0.30%.
- Schwab US Dividend Equity ETF (NYSEARCA:SCHD), 5 M*, 12-month SEC yield 2.78%, expenses 0.07%.
- Vanguard High Dividend Yield ETF (NYSEARCA:VYM), 5 M*, 12-month SEC yield 3.07%, expenses 0.09%.
- iShares Core High Dividend ETF (NYSEARCA:HDV), 5 M*, 12-month SEC yield 3.54%, expenses 0.12%.
- iShares Residential Real Estate Capped ETF (NYSEARCA:REZ), 4 M*, 12-month SEC yield 3.89%, expenses 0.48%.
- Vanguard Utilities ETF (NYSEARCA:VPU), 4 M*, 12-month SEC yield 3.09%, expenses 0.10%.
- Utilities Select Sector SPDR ETF (NYSEARCA:XLU), 4 M*, 12-month SEC yield 3.27%, expenses 0.14%.
Individual equities on my watch list include:
|Northwest Nat Gas||NWN||63.83||1.87||2.9%||A+||60||46.75|
|Am States Water||AWR||43.29||0.90||2.1%||A+||61||31.03|
* XOM is on the list only on Tuesdays and Thursdays. :-)
So, what have you been doing during this bull rally?
To enhance our conversation, I would like to hear your responses to one of more of these questions:
- Have you done anything differently with your portfolio in light of the strong market advances we have seen since February? If so, what?
- Do you think the next big market surprise will be to the upside or downside? What preparatory steps have you taken?
I'm not advocating the purchase or sale of any security. I offer this update as the journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.
Disclosure: I am/we are long DIAX, QQQX, ETJ, MRK, GE, JNJ, CSCO, RY, MSFT, PFE, SO, GPC, CMI, QCOM, MMM, PG, IBM, CM, WMT, TXN, WPC, CNP, UNP, PEP, EMR, EPD, BPY, PEGI, EVA, HASI, AGR, ADM, TD, DUK, BEP, DOV, BIP, WEC, VOD, RFI, BUI, THW, BGY, ETY, SCHW.D, CHSCM, ENO, AGM.C, KKR.A, NEE.K, PSA.B, STT.G, TY.P, WFC.Q, BIF, VWO, DEM, VNQ, VCLT.
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.