My Mad Method: What Next To Buy, And Why - August, 2012, Revised

by: J.D. Welch

It has been said (and I'm paraphrasing here) that even the best battle plans don't survive contact with the enemy. That is, in part, what happened to me last week after I published "My Mad Method: What Next To Buy, And Why - August, 2012" on Monday, and began executing my plan. Some parts of my plan worked out very well, and in truth nothing has really gone wrong. However, there have been some adjustments that I've made to the original plan due to unfolding events. This article will bring you up to date on recent additions, recent sales or pending sales of positions, and the next stocks I will be adding to my growing Dividend Growth Investment [DGI] oriented IRA portfolio.

What Worked Out

Thanks to the roller coaster that was the market last week, I was able to get the limit prices I wanted for both Endeavour Silver (NYSE:EXK) and Apple, Inc. (NASDAQ:AAPL). I completely closed my position in EXK, but only sold a few shares of AAPL and still maintain a position, the percent allocation of my total portfolio being at a comfortable level. I've heard rumors of a slew of new Apple products coming out soon, in addition to the expected iPhone 5 that I had anticipated, so it remains to be seen what comes out of Cupertino in the next few months.

As I reported in the previous article about what I was going to buy this month, I had purchased AFLAC, Inc. (NYSE:AFL) and BHP Billiton plc (NYSE:BBL) with proceeds already available to me. With the funds liberated by the sales of EXK and AAPL, I was able to execute on the next stage of that plan, adding to my position in American Capital Agency (NASDAQ:AGNC) and Johnson & Johnson (NYSE:JNJ). The purchase of AGNC worked out well in that I picked up my second helping of the mREIT at a price lower than my previous cost basis, which is always nice. I managed to buy JNJ the first time around in the huge dip that it incurred back in May, so I wasn't as lucky there, but it still closed Friday ahead of where I'd bought it. So far, so good.

At that point I was out of dry powder, and couldn't go to the next stock in the original order, MV Oil Trust (NYSE:MVO) to add more to my existing position. I had already planned to and discussed selling my position in Abbott Laboratories (NYSE:ABT), and had set what I felt was a reasonable limit order, only to see the stock take an unusual downward turn last week. So it looked like I would have to wait to add more MVO, and possibly miss MVO's August 29th ex-dividend date.

Contact With The Enemy

Several things happened then as the week progressed. First, two new high yielding MLPs came to my attention: BreitBurn Energy Partners, L.P. (BBEP), which yields 9.9%, and Vanguard Natural Resources, LLC (NASDAQ:VNR), which is currently yielding 8.3%. I added both of these to the My Mad Method [MyMM] spreadsheet on both the watchlist and the "superlist" that combines my watchlist with the stocks in my portfolio, and checked the results. BBEP ended up at a respectable 8th out of 26 stocks on the watchlist, while VNR jumped right to #2 on the watchlist. This got my attention.

On the superlist, where there were now 42 stocks including these two newcomers (I'd trimmed some low scorers and the sold stocks out), BBEP ended up improving to 6th overall while VNR, impressively, maintained the #2 position, even though now it was being compared to an even broader field of stocks. To make VNR even more appealing, the partnership announced in July that they would be switching from quarterly distributions to monthly distributions, starting with the September distribution. This got the wheels turning in my little grey cells.

So I looked over my portfolio and really pondered what I was seeing, and something jumped out at me: Both Ford Motor Company (NYSE:F) and Corning, Inc. (NYSE:GLW) were underperforming, and had been for some time, both in terms of share price and yield. Both of these were early purchases of mine, when, last Fall, I was seeking companies with potential for significant capital appreciation (in the long term), and before I had been seduced by the philosophy of DGI.

Checking their yields, F had a yield of 2.15%, thanks in large part to a drop in the share price since I'd purchased it, which resulted in my Yield on Cost [YOC] being 1.72%. Corning's current yield was 2.61%, but my YOC was 2.05%. In terms of the stocks remaining in my portfolio since I started adjusting it for an aggressive DGI approach, these where the worst two yielders.

And so, I decided on Friday to turn a paper loss into an actual loss on both of them, and liberate the capital that was being held captive in these two old and noble companies that I felt, now, just weren't going to go anywhere in the near or even mid-term, and which were clearly below my target levels of producing income. I sold both of them last Friday morning.

With these two sales out of the way, I was able to make my final purchase of MVO, and (bonus!) decided to add a final purchase to BHP Billiton, bringing both of these positions to just over a 5% allocation in my portfolio. In the case of MVO, I was able to pick up this final allotment below either of my previous two purchases of this stock, which further decreased my cost basis. In the case of BBL, on the other hand, it was at a higher price than I'd previously paid for it; however my resulting cost basis is still below Friday's closing price, so I'm happy with the outcome.

The results of the superlist now looked like this:

Click to enlarge

As you can see, VNR came in just one tenth of an Average point behind Republic Bancorp Inc.'s Class A shares (NASDAQ:RBCAA), and a full point ahead of 3rd place Medtronic (NYSE:MDT), neither of which satisfied the required conditions of being able to produce the necessary level of yield to justify a certain level of cost (hence, their Company names and Tickers did not turn green).

This table is a little different from the last article on this topic, in that I've included the % Allocation of each of my positions, as well as those I'm not yet in (which are, obviously, zero). My goal is for no single position to be more than 5% of the total portfolio, but the few that are above this threshold are not by much, and are highlighted in red. The positions highlighted in yellow are "too close" to 5% for me to warrant adding any more to them, and the ones in green are at or below 3.5% and are "OK" to add a bit more to get them closer to 5%, if their valuations and potential for income warrant it.

Drama In The Graveyard

Later in the afternoon on Friday, I noticed this article by Paul Price that had come out, where a Seeking Alpha Contributor once again was criticizing the accounting practices and management of death care provider StoneMor Partners, L.P. (NYSE:STON). Several weeks ago two other SA authors had made very critical assertions along the same lines that Paul did in his article last Friday. However, in the previous two cases, both authors disclosed that they were short STON, and being a very thinly traded stock, it appeared that they had an effect on the MLP's price in the market, as it went down considerably the days those two articles came out.

However, in the case of Paul's article, he was not short the stock at the time he wrote it, and in contrast to the other two authors, Paul's article contained what I felt were much more substantive facts about the health of STON's financials and future. I've been watching this debate unfold for several weeks, participating in the ensuing comment threads of all three articles, and, after careful consideration, have come to the conclusion that despite its appealing yield, the time has come for STON and me to part ways.

I therefore set a limit sell order over the weekend at a price just above where it closed on Friday, which would guarantee that I would have a net zero return of this investment after dividends and commissions are taken into consideration. I've only held this stock for less than 250 days, and was initially bullish and supportive of it, but have decided that in the interest of capital preservation, it's time to seek safer pastures.

Rising From The Grave

Once STON sells, as I'm confident it will soon, I will have the funds necessary from that sale and the remaining cash from the sale of Ford and Corning to purchase a solid starting position in VNR, and add a final chunk to AGNC to bring it close to my 5% threshold. This is denoted in the table above by the red numbers to the right of the % Allocation, where an "X" indicates a position I had previously discussed which has since been filled according to my original plan. The yield between these two companies should more than make up for the loss of yield from the sale of STON, and I will sleep better at night knowing that I've redeployed this cash into positions that I'm more comfortable being in.

Once ABT sells, which will be by mid-October at the latest, as mentioned in the previous article, I should be able to continue with my previous plan, but with an additional twist.

The next purchase I will endeavor to make will be Hasbro, Inc. (NASDAQ:HAS). In the time between writing the previous article and this one, HAS has slipped from a Delta Ratio Reading of "Buy!" to now being "Too High". Not that that has stopped me from entering into or adding to other stocks that have had a "Too High" Reading before, but I have some time before HAS's October 30th ex-dividend date before I enter into this position.

The new twist that has come about as of the end of last week is that, instead of going ahead with purchasing Cablevision Systems (NYSE:CVC) and/or NTT DoCoMo, Inc. (NYSE:DCM) next, BreitBurn Energy, slipping in at the #6 spot and yielding over twice as much as the other two, will be the next new addition to my portfolio. With a November 8th ex-dividend date, there's no rush to pick up BBEP, but my experience over the last week has shown me that, 1) the prices of MLPs are not necessarily correlating with the movement of the market, and 2) once I've decided to enter a new position, or add to an existing one, do I really need to wait for the "perfect" entry price, given that my intent is to hold these stocks for a number of years? In other words, while I want good value from my purchases, I need to stop trying to time the market.


Am I chasing yield? In a way, I am. Is that counter to a "true" DGI approach to investing? Perhaps in some folks' minds it is, but as I've stated before, I'm not only in my Accumulation Phase of investing, I'm also in Catch Up Mode, having been asleep at the wheel for too many years before realizing I needed to take control of my own destiny and, in addition to saving more, manage my own investments. So while I'm picking up stocks like MVO, VNR and BBEP to juice my returns for some years to allow me to catch up to where I'll be more comfortable with the size of my nest egg, I'm also initiating and adding to positions in Dividend Champions, Contenders and Challengers like JNJ, BBL and HAS.

Will this revised plan survive another encounter with "the enemy"? Only time will tell…

Disclosure: I am long AAPL, AFL, AGNC, BBL, JNJ, MDT, MVO.

Additional disclosure: In addition, I am short ABT and STON, and may initiate a long position in BBEP and/or VNR within the next 72 hours. Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.