At the beginning of this month, I wrote about what I planned on selling and buying next during September in order to improve my portfolio in terms of generating sufficient yield to allow me to build it into a model Dividend Growth Investing [DGI] portfolio. Unlike August's report, which was followed by a revision article and then a finale article, this month is pretty much on track in terms of what I thought I'd be doing. However, with the month half over, there have been some new developments, and I thought I'd share those with you.
What Worked Out
While my Medtronic, Inc. (NYSE:MDT) shares haven't been called away yet on the open covered call options contract I wrote back in July, I still managed to shake loose some capital from my portfolio that wasn't living up to a new standard that I've established for it.
Last week I wrote about the 'Chowder Dividend Rule' [CDR], and then again about how my portfolio measured up to the CDR. What I found was that several of my stocks didn't meet the minimum requirement for the CDR, which is that their combined Yield plus 5 Year Dividend Compound Annual Growth Rate [CAGR] be 12% or better. One of these companies, United Parcel Service, Inc. (NYSE:UPS), only managed to score a 5.90% CDR number, far below the 12% threshold for non-utility companies that the CDR established.
So, I sold it. And, using the proceeds of that sale, I established an initial position in ConocoPhillips (NYSE:COP) as well as adding to my fledgling position in Staples, Inc. (NASDAQ:SPLS). That was according to plan per the first "What Next To Buy, And Why?" article for September, except that I didn't wait for my MDT shares to get called away. I also managed to make a small contribution to my IRA in the time since I wrote that first September article, so with the sale of UPS, dividends collected and the additional cash from the contribution, I was able to buy the COP and SPLS shares I wanted early last week.
What's Next In Available Cash?
That still leaves my MDT position, which in all likelihood is going to get called away after this coming Friday, September 21st. In addition to that, thanks to Mr. Market's enthusiastic response to the Fed's announcement of open-ended QE3, it looks like my shares of Microsoft Corporation (NASDAQ:MSFT), which I also wrote a covered call against back in July, are also going to get called away this Friday.
Now, I like both MDT and MSFT, and while I'm going to just about break even on MDT, MSFT has appreciated over 10% since I purchased it back in January of this year, plus throwing off a 2.56% yield. But therein lies the problem with both of these two stocks; their yields are well below the average for my entire portfolio, which is currently 6.25%, and are also below the 3.00% lower threshold that I'd like all of my positions to yield (MDT is currently yielding 2.42%). While these aren't bad yields, and these are, I think, good companies to be invested in, having their shares get called away this Friday presents me with an opportunity to reinvest that capital into other companies with which I can improve my overall yield.
Therefore, I've decided that when (it doesn't look like it's going to be "if" anymore) my MDT and MSFT shares get called away, I'm going to take the proceeds from them, plus the dividends I will collect this week, and shift that cash into positions with better yields.
So now it's time to turn to the My Mad Method [MyMM] spreadsheet's "superlist" of 40 stocks, made up of a combination of my watchlist and my portfolio list, and see where I can put these anticipated future proceeds to work. As before, I've given the MyMM spreadsheet a 20% weighting of "% Allocation," which causes the MyMM spreadsheet to apply a multiplier of 3.4 to this metric's data, as opposed to a neutral multiplier of 1 for the rest of the metrics, which are each weighted at a 5.88% (100% divided by 17 metrics). This gives stocks that I have no position in, or a smaller position than others, a better ranking, causing them to "float to the top" in these weighted ranking results.
What Next To Buy Now?
First, I'm going to allocate funds so that I can increase my small starting position in COP by 176%. Yeah, I like it that much. It yields 4.54% and it still has a Delta Ratio Reading of "Buy!". It also still has a Rating of "Definitely!", meaning it meets the criteria of being one of the Top 10 stocks in terms of a weighted MyMM Ranking (out of the 40 stocks on the superlist), has a Delta Ratio Reading of at least "Buy!", and yields more than my 3.00% lower limit. That should put COP at a 3.5% allocation of my IRA's total; I like to keep any one position under a 5% allocation, so there's still room to grow COP's position, but this will be enough for now.
Next, a reasonable sum of cash is going to be allocated to increase my growing position in SPLS by an additional 44%. SPLS's price has increased somewhat since I first bought it in late August, but it still has a Reading of "Buy!", and, like COP, also still has a Rating of "Definitely!". This will increase the % allocation in that stock to just about 3.4% of my portfolio, which gives me more room to continue to add to it in the future, too.
After that, I will still have a sizeable chunk of cash left over (at least, for me), so I looked over my superlist, and found a good performer with a great yield that currently only holds a 2.44% allocation in my portfolio. That company is Crescent Point Energy Corporation (CSCTF.PK), a Canadian oil and gas exploration and development firm that sports a current yield of 6.37%. CSCTF.PK has appreciated in my portfolio 12.68% since July of 2010, but has pretty much been treading water more recently. Crescent Point Energy only has a MyMM Rank of 32 out of 40 on my superlist, and a Delta Ratio Reading of "Too High," but it does have a CDR number of 13.86%, which is a big plus in its favor. One of the things I also really like about Crescent Point Energy is that it pays its dividend monthly; that, along with its dandy and, I think, sustainable yield, and room to grow in my portfolio, has led me to decide that the time has come to invest a bit more in the energy sector. So I've allocated enough future cash to increase my position in CSCTF.PK by 77%, which should bring it to a 4.3% overall allocation in the portfolio, a good stopping point.
And finally, with a smaller portion of the MDT and MSFT cash that I expect to have available to me by next weekend, I've decided that Exelon Corporation (NYSE:EXC) will get a 25% pop to its existing position in my portfolio, raising its % allocation to approximately 3.9%. Exelon's price has taken a beating lately, earning it a "Holy Cow!" Reading, and while it only has a MyMM Rank of 35 out of 40 on the superlist, I still think the company is a good long-term bet, while more of its current 5.84% yield will help improve the overall yield of my portfolio. Like Crescent Point Energy, Exelon has never enjoyed a very high MyMM Ranking, but it has been a solid dividend-producer for me so far, and sports a 10.8% CDR number, which is well above the modified 8% limit that the Chowder Dividend Rule allows for utilities.
These steps of letting my MDT and MSFT shares get called away and not repurchasing them, but buying more shares of four other stocks that I currently own, will improve the projected annual dividends that I receive overall. The dividends of the new shares purchased will be 86.5% higher than the projected annual dividends that I would have received from MDT and MSFT combined. That's a nice positive hit to my bottom line, and while it lowers my overall diversity in terms of the kinds of companies that I own, this move will allow me to continue to accelerate the growth of my nest egg, getting me closer to my goal of replacing my paycheck with the income I receive from dividends when I retire.
The only question left at this point is, when to make these planned purchases? You'll notice that I used the term "allocate" when discussing the four stocks that I plan on buying later this month. The funds from the MDT and MSFT shares being called away won't be available to me until after the close of the market this Friday, so the earliest I could place orders for COP, SPLS, CSCTF.PK and EXC would be next Monday, September 24th. However, given the significant run up in the price of all of these stocks due to the QE3 news released last week, I'm going to have to exercise some patience and see if we don't have a pullback of some sort in the market overall in the next few weeks so that I can realize an even better value for my money than what's currently available.
Disclosure: I am long COP, CSCTF.PK, EXC, SPLS. 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: In addition, I am short (MDT) and (MSFT) by virtue of covered calls. 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.