Once again, it didn't take long for my well-intentioned plans for this month to be altered by unfolding events in the market.
In a recent article, well-regarded Seeking Alpha Contributor Regarded Solutions published a warning about the Fed's QE3 having a negative impact on mREITs overall, but Annaly Capital Management (NLY) in particular. Due to its focus on buying government backed mortgage backed securities (MBSes), Regarded Solutions postulated that Annaly is at significant risk of losing value and having to reduce its future dividends again as a result of having to compete with the Fed as the central bank spends $40 billion per month indefinitely buying MBSes.
Regarded Solutions made a good case for scaling back on one's position in NLY to preserve capital and look for safer harbors from which to generate dividends. This was the warning flare that I'd been looking for, and I appreciate the heads up that I got from commenter Northhills24 about the article.
Consequently, I decided to cut my position in NLY in half, and did so last Wednesday, realizing a modest gain in the process. (I didn't buy NLY for its potential for growth in the first place, but I didn't want to lose any more ground than I needed to, either.)
As Annaly had previously held a 4.48% allocation in my portfolio, this left me (once again) with a healthy amount of cash that needed to be reinvested. So, I turned to my copy of the My Mad Method (MyMM) spreadsheet to see where might be a good place to reinvest this cash. The problem was, NLY is yielding north of 12% currently, and with such a relatively large allocation in my portfolio, it represented the largest single source of dividends among the 27 stocks that I held at that time. Finding a suitable replacement that would generate as much cash as NLY was supposed to in a year was going to be a challenge.
Since I also have a large investment in fellow mREIT American Capital Agency (AGNC), I wasn't too keen on the idea of moving this money back into another mREIT. Regarded Solutions' article warned that the Fed's hunger for MBSes might have a prolonged effect on all mREITs, not just NLY. However, finding another stock that yields as much as mREITs have and do, that I also felt safe investing in, proved near impossible.
So I decided to look at this situation from another perspective. One of my current goals is to increase my existing positions in Dividend Champions, Contenders and Challengers [CCCs]. Another current goal is to increase the number of positions in my portfolio so that I can reduce the percent allocation in each one, thereby limiting my exposure to any one company freezing or cutting its dividend. Of course, I also want my portfolio to generate as much yield as I can reasonably manage, so that I can use that income to continue to grow my little IRA into a mighty income-producing machine by the time I retire. And finally, I want to continue to diversify my positions, including adding at least one other Business Development Company (BDC) to the only one I already have, Main Street Capital Corporation (MAIN).
With these objectives in mind, I started plugging in the possible number of shares that I could buy in the MyMM spreadsheet by spreading these funds around. To keep things interesting, I limited myself to spending only what I had netted from the sale of NLY, not any other cash that had already accumulated in my account from recent dividend payments.
Fortunately, I had already planned out my next moves in terms of what to buy when I had accumulated enough funds. The wrench in those plans, however, was the loss of NLY's 12% yield. A couple of commenters on recent articles of mine had independently suggested Prospect Capital Corporation (PSEC) as a potential BDC candidate.
Entering the necessary numbers into the MyMM spreadsheet, I found that PSEC ranked reasonably well against other prospects (no pun intended), and its current yield of 10.5% and mention of the amount of skin its management had in the game swayed me to invest about half of the proceeds from the sale of NLY in it. This I did Thursday morning, having set a limit order Wednesday evening.
The remaining funds presented me with the opportunity to add to some of my existing CCC positions that were somewhat low in their percent allocations. By adding PSEC as a new position, this brought the number of companies that I held in my IRA up to 28, the average percent allocation of which is 3.57%. So I set about looking at which CCC positions were at the lowest percent allocation that I could reasonably bring up closer to this average number with the funds that remained after purchasing PSEC.
The winners in this case worked out to be Hasbro, Inc. (HAS) and the venerable Coca-Cola Company (KO). By adding 23.5% to my existing position in HAS, I would be able to bring its percent allocation up to 3.50%. Then, by adding 21.4% to KO with a little less cash than what I used for HAS, I would be able to bring KO up a bit further on its ladder to a 2.88% allocation. The limit orders were placed Wednesday evening, and with a little attention on my part Thursday morning were filled in time to realize small gains from the rest of Thursday's trading activities.
"But what about Aflac, Inc. (AFL)?" you ask? Haven't I committed myself to growing my position in AFL, too, and for some time now? Correct, and I haven't abandoned that objective. However, both KO and HAS were hovering around the same price that I originally picked them up for, while AFL has marched ahead in price. Also, I could meet my objective of getting HAS very close to the 3.57% average allocation, and move KO closer as well, while AFL was still far enough away that I had to, once again, put it on the back burner. But fear not, AFL will soon get some love from the cash that I will be getting by the latter part of this month. (That's the plan, anyway.)
And what about replacing NLY's terrific dividend? With the purchases of PSEC, HAS and KO I was able to recover a little over 55% of the projected annual dividends that I lost by selling half of my position in NLY. Not fantastic, but considering I picked up Dividend Champion Coca-Cola and soon-to-be Dividend Contender Hasbro, I figure these dividend growth stalwarts will pull their weight in the years ahead, and then some.
The windfall from having to make a defensive move in terms of Annaly has allowed me to accelerate my holdings in both Coke and Hasbro ahead of what I'd otherwise thought I could do, as well as initiate a new position in a promising BDC. So in the end, I think things worked out reasonably well. What do you think?
Additional disclosure: 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.