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Long-term horizon, research analyst, dividend growth investing
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If you've been reading my articles, you may recall that after I transferred most of my positions in my IRA out of my old broker's account into my new IRA account at Interactive Brokers (IB) earlier this year, there were still a few positions left in the old account that couldn't be transferred over. These were Duet Group (OTCPK:DUETF), an Australian utility company; Telstra Corporation (OTCPK:TTRAF), the major telecom Down Under; and Keppel Corporation (OTCPK:KPELF), an oil and gas development firm out of Singapore. I left those positions in the old account because they all had pending semi-annual dividend payments that were coming up in a few months after I made the switch over to IB, and those dividends weren't trivial amounts, at least not to me.

But now I've collected those dividends, and as all three of these stocks had appreciated nicely (plus the dividends I'd received), but were moving somewhat sideways of late; and to give myself an opportunity to finally consolidate my two IRA accounts into one; and to give myself the opportunity to invest in some Dividend Champions, Contenders and/or Challengers ((CCCs)); and to get out of the problem of having to pay foreign taxes, weather currency fluctuations and not be able to find adequate financial data about these foreign stocks, I decided to finally pull the plug and sell them, which I did two weeks ago.

This left me with a rather large passel of cash to work with, which is on its way into my IB account. Knowing this money was on its way into my new IRA and that I didn't want it to sit around doing nothing, I turned to my version of the My Mad Method [MyMM] spreadsheet and spent a considerable amount of time modeling where I should redistribute these liberated funds.

As you can see from the table above, out of the 28 positions I held at the time I sold them, these three did not have fantastic MyMM Ranks in my portfolio. However, they were solid dividend yielders, which presented me with the challenge du jour: What to replace them with that, combined, would replace the projected annual dividends that I would be losing by selling these three stocks?

With the goal firmly established, and my MyMM spreadsheet set up so that I could simply input the desired number of shares for any position to see the cost of purchasing those shares plus the dividends they should throw off in a year, I started playing around with various options.

One thing that I have been trying to do with my portfolio is add some CCC stocks, but I also needed to meet or exceed the dividend dollars that I had lost by selling Duet, Telstra and Keppel. Because this was going to be such a large infusion of cash into my new IRA account, I took this as an opportunity to add healthy amounts of shares of four new positions, as close to a 3% allocation of my portfolio's total for each as I could get, plus a smaller amount to an existing position that I had been wanting to increase, plus a wee bit more to another solid, high-yielding company to make sure I reached my goal.

So I set up my "superlist" of my combined watchlist and portfolio list, and applied a 20% weighting to the % Allocation metric (meaning stocks that I didn't own, or owned very little of, received a more favorable weighted MyMM Rank than stocks I already own, or own more of), and here's what I came up with:

Walgreen Company (NYSE:WAG)

First up is Walgreens. With a weighted MyMM Rank of 4 out of the 38 stocks on my superlist, where lower is better, and being a Dividend Champion with over 37 years of continuously increasing its dividend, WAG is a stock I've been wanting to own for some time now. WAG jumped up in price in mid-July on news that it had settled its issues with online prescription house Express Scripts Holding Company (NASDAQ:ESRX), but has been holding relatively steady since them. It currently has a Delta Ratio Reading of "Too High," but most of the stocks on my superlist are Reading either "Too High" or "Screaming!" -- so not a big issue there. With a recent yield of "just" 3.07%, indulging myself in picking up WAG wasn't going to throw off enough dividends to make a serious dent in those I needed to replace, but it's a solid performer with great prospects, in my humble opinion, and will be a fine addition to my portfolio.

Hasbro, Inc. (NASDAQ:HAS)

Next on the "Gee, I wish I could own that" list is Hasbro, a company I've written about in the past, but have never been able to pull the trigger on for various reasons. With a respectable weighted MyMM Rank of 14 and pulling back into "Too High" territory recently, I decided that the time has come to jump into Toyland and pick me up some HAS. With a recent yield of 3.86%, HAS will pull its weight in the challenge to meet or beat the dividend dollars I have to replace, but it will need some help.

Vodafone Group plc (NASDAQ:VOD)

I'm a big fan of telecoms, already owning AT&T (NYSE:T) and France Telecom (FTE), and I wanted a bit more international exposure to offset the loss of the foreign stocks I had just sold as a kind of cushion against inflationary pressures being put on the U.S. dollar by recent actions by the Federal Reserve. VOD has a very attractive weighted MyMM Rank of 11, and is also "just" Reading "Too High," which is okay by me in the present environment. The big appeal for VOD, besides being a U.K.-based company, is its recent yield of 6.89%, which will provide some serious dividend dollars towards my goal. The only drawback to VOD is that it only pays dividends twice a year, but since it's a U.K. company, I won't have to pay foreign tax on those dividends like I have to with FTE. So into the corrale VOD will go.

Linn Energy, LLC (NASDAQ:LINE)

The last of the new positions I will be adding to my portfolio is Linn Energy, a Master Limited Partnership (MLP) that I've heard a lot of good things about. It has a great weighted MyMM Rank of 7 out of 38, and its recent yield of 7.08% will help it overcome its "Screaming!" Delta Ratio Reading. At this point, I really need to get serious about adding another high yielder to meet my goal and offset the dividend dollars lost from closing out my old IRA, and MLPs in general have been experiencing a lot of gains in their share prices for a while now, so I reasoned that now is as good a time as any to add LINE to my stable.

Main Street Capital Corporation (NYSE:MAIN)

At this point, I've still got enough cash left over to add to my existing position in MAIN, a Business Development Corporation (BDC) that has been on a tear for some time now. MAIN pays its 6.12% dividend monthly, which is a huge plus in my book. I already have a 2.61% allocation of MAIN in my portfolio from my initial purchase back on June 20 of this year, and by adding an additional 70% to that, MAIN should top out at a 4.44% allocation, which is below the 5% allocation threshold that I try to maintain for any one position.

BreitBurn Energy Partners, LP (NASDAQ:BBEP)

And finally, with some of what remains of my available cash, I'm going to add just a little bit more BBEP to my existing position. Not much -- about as much as I added earlier this week -- but enough so that its 9.46% recent yield will help put me over the top to meet my goal and generate enough dividends from these purchases to overcome the deficit I created for myself by selling Duet, Telstra and Keppel. I'll be adding an additional 7.4% to my existing position in BBEP, which will bring it to a percentage allocation of exactly 5.00% in my portfolio.

But What About…

At this point I will have run out of funds from making these purchases and won't have enough left over to make another meaningful purchase. I have wanted to add to my existing position in Kimberly Clark Corporation (NYSE:KMB). If I had shaved a few shares off of everything else I'm planning on purchasing this round, I would have had enough to add 25% to my position in this Dividend Champion, which would have brought it to a 3.79% allocation in my portfolio. However, I still haven't made the small addition to AFLAC, Inc. (NYSE:AFL) that I wrote about earlier, so despite both KMB and AFL slipping out of "Screaming!" territory down into a "Too High" Reading range, they will need to wait until enough dividends roll in from everything else so I can add to those positions, too.

Conclusion

With everything I plan to purchase, I will accomplish my goal of generating enough dividends to offset the loss of dividends from Duet Group, Telstra and Keppel. In fact, by distributing only the funds that I got from selling those three across WAG, HAS, VOD, LINE, MAIN and BBEP, these companies should generate enough dividends to beat what I had been getting from the other three by 2.00%. Mission accomplished!

Using my methodology for setting prices at which to make new purchases, the limit orders have been placed for the companies I detailed above, and now I just need to practice my patience (maybe) and see where I actually end up getting these orders filled.

Well, that does it for the "big cash" amounts that I had to redistribute into my (now) Dividend Growth Investing (DGI)-oriented portfolio. Yeah, yeah, I know, you've heard that from me before, but this is really it. The only ways I'll have a large stash of cash to use to buy more stocks in the future are:

  1. If any of my existing positions either freeze or cut their dividends; or
  2. They start failing the Chowder Dividend Rule (CDR) and their combined yield and 5 year dividend compound annual growth rate (CAGR) falls below 8%; or
  3. An existing position increases in value so much that it ends up having a huge % allocation of my portfolio's total, and there's a compelling reason to "rebalance" by selling off enough shares to bring it down to a 5% allocation (or less); or
  4. Apple, Inc. (NASDAQ:AAPL) goes above $724 per share, in which case I'm selling a bit more; or
  5. If I can rustle up the cash to make my full contribution to my IRA for this tax year (I've got $1,000 to go).

Other than that, my current positions are throwing off enough dividends to make monthly purchases worthwhile, so I will be continuing this "What Next To Buy, And Why?" sub-series of the My Mad Method approach, just not with such significant amounts of cash to reinvest as I've had in recent months.

Next up: An end of quarter report for Q3 2012, which should be published in a couple of days or so, in which I will list my entire current portfolio. Until then, best of luck with your investments!

(Please bear in mind that I am not a professional investment advisor, and these choices are my selections from my superlist that are geared towards meeting my personal long-term and immediate investing goals. This is in no way an endorsement for anyone else to purchase these stocks, merely me continuing to chronicle my efforts to build a portfolio that will hopefully generate enough income by the time I retire that I will be able to replace my paycheck with it.)

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.


Source: My Mad Method: What Next To Buy, And Why? - October 2012