My Mad Method: What Next To Buy, And Why? - October, 2012 Mid-Month Update

by: J.D. Welch

When I last wrote about which stocks I would be buying next as October unfolded, I only expected to be adding to one position due to the somewhat small stash of cash that I expected to have by this time. However, once again circumstances have allowed me to alter the makeup of my portfolio slightly, providing me with a bit more cash than I had anticipated I would have at this point in the current month.

What? Yet More Cash To Work With?

Initially I thought that I would only have enough cash to work with so that I would be able to double up on my position in Prospect Capital Corporation (NASDAQ:PSEC). This was the result of dividends that hit my account on October 15th, as well as some incremental contributions to my IRA that were the result of prudent household budgeting and fortuitous timing.

However, during the course of last week and over the weekend, I re-evaluated my recent purchases of Staples, Inc. (NASDAQ:SPLS), and decided that I [now] didn't like the prospects for this embattled brick-and-mortar retailer of office supplies and other sundries. I had at first felt that SPLS offered an opportunity for growth in addition to its [at the time] 4% yield, as it has a strong online presence in addition to its physical stores. However, the company recently announced that it would be restructuring, and closing a number of retail locations. Looking through my wishlist and portfolio at the prospects for greater yields from "safer" possibilities, I decided to jettison SPLS and accelerate the additions to my PSEC position, and also make a few other timely additions as well.

So I sold SPLS and, after the dividends that I will be receiving from them later this week, incurred only a slight loss on my position. SPLS had held a 3.26% allocation of my IRA's total value, which is very close to the "parity" allocation of 3.57% that is my goal for each of the 28 positions that I currently hold in that account. After selling SPLS this past Monday, I realized a minor loss of just over -$100, after factoring in dividends receivable and commissions paid for the [multiple] purchasing and [single] selling transactions. I can live with that, especially with the very low commissions that I currently pay and the prospects for a higher and, hopefully, safer yield from other sources.

How Could I Spend It?

That left me with a sizeable cash hoard to [re]deploy, which was something I had considered thoughtfully throughout the previous week: Which direction should I take with this money? One thing I was certain of was that I wanted to increase my relatively small 1.08% position in PSEC substantially; but what about the balance of the funds remaining after that? Should I initiate a new position to take the place of Staples and put me back to 28 total positions in my portfolio, and in the process add a new stock that I've been researching (and wanting) for a while? Or should I incrementally add to some of my smaller, existing positions to try to get them closer to the "parity" allocation of 3.57%?

Some of my existing positions that I was considering adding small amounts of more stock to [and their % allocations in my portfolio] were:

  • Aflac, Inc. (NYSE:AFL) [2.48%],

  • The Coca-Cola Company (NYSE:KO) [2.99%],

  • Linn Energy, LLC (LINE) [2.99%],

  • Vodafone Group, plc (NASDAQ:VOD) [2.98%], and

  • Walgreen Company (WAG) [3.01%]

After buying the amount of PSEC I wanted to get, I wouldn't be able to add to all five of these other companies, but I could add to four of them and bring those closer [but not quite] to parity.

On the other hand, the sale of SPLS represented an opportunity to take up a substantial position in something new altogether, something that would enhance the overall yield of my portfolio and which could help me in my efforts to diversify my portfolio a bit further. In one fell swoop I could add a big chunk of something new to my portfolio, rather than having to buy it in small trickles over many months with the small amounts of dividends that I will be receiving until I can make a substantial contribution to my IRA after the new year. But what could and should that be?

It's Electrifyin'!

In the comment threads of some recent Seeking Alpha articles, several of the Dividend Growth Investing [DGI] "regulars" had been discussing utility companies, and the merits and pitfalls thereof. I knew that Chuck Carnevale had recently published a series of articles that discussed how most utilities were currently somewhat overpriced, and my only existing "true" utility position was Exelon Corporation (NYSE:EXC), which I had previously decided not to add to.

One regular commenter who goes by the handle "chowder" mentioned that he viewed utility companies as a substitute for bonds, in that while they usually didn't increase their dividends at the same kinds of rates one usually wants and expects from a typical DGI company, their yields tend to start at higher levels and do [usually] continue to grow at reliable, albeit slower rates.

Chowder also made another significant comment, to the effect that while you can change your mind about, for example, which company will be your cellular provider, you can't change your utility company; you're stuck with whichever company is providing you and your neighborhood with electricity, for better or worse. In other words, as long as houses and businesses in a neighborhood or region of the country were occupied, the local electric utility company had guaranteed customers.

Chowder also stated that, even if one were to lose one's job, the electric bill still needed to get paid to keep the lights on and the refrigerator going, regardless of what other bills might get put off until better times. In other words, electricity is a "necessity", something that virtually no one can do without, and therefore the electric bill usually always gets paid, while more and more things start to get categorized as "luxuries" as funds become tighter.

These comments got me seriously considering some of the "better" utility companies that were being bandied about in these comment threads, such as American Electric Power Company, Inc. (NYSE:AEP), National Grid, plc (NYSE:NGG), NV Energy, Inc. (NYSE:NVE), Southern Company (NYSE:SO) and Westar Energy, Inc. (NYSE:WR).

I already had NGG in my copy of the My Mad Method [MyMM] spreadsheet, and had been watching it for many months with interest. I added the other utilities mentioned above to the MyMM spreadsheet to take a look at how they stacked up against each other, and against everything else that was in my "superlist" of stocks on both my watchlist and in my portfolio.

After plugging in all the necessary numbers for the 17 metrics that I track on my MyMM spreadsheet, NVE ended up ranking dead last out of all 26 companies that are on my watchlist, so I didn't bother adding it to my superlist. However, the others fared well enough that I took the trouble to add them to the superlist, which resulted in a total of 44 companies on the superlist, including the 28 stocks in my IRA portfolio. After weighting the "% Allocation" metric by 20%, AEP and NGG ended up ranking reasonably well, in 12th and 13th place, respectively, and were virtually tied in terms of their MyMM Average numbers. WR ranked reasonably well at number 21, while SO, a well-respected utility, limped in at number 32.

I then took a closer look at each of these companies' Chowder Dividend Rule [CDR] number, which combines a company's yield with its 5 Year Dividend Compound Annual Growth Rate [CAGR]. For non-utilities, a company's CDR number should come in at or over 12% to be considered "healthy", but chowder cuts utilities [including telecoms and MLPs] a bit of slack and sets their CDR threshold at 8%, below which one needs to seriously consider whether one wants to stay in, or [in my case] initiate a position in that company.

When I checked these numbers, Souther just made the CDR cut at exactly 8.0%, whereas Westar fared a bit better, coming in at 8.9%. AEP, on the other hand, ended up just below the line at 7.7%. The winner in this contest was National Grid, with a very healthy CDR number of 17.4%. Not surprisingly, while AEP, SO and WR all had respectable yields well above 4%, NGG's yield clocked in at 7.2%, which certainly got my attention.

How I Ended Up Spending It

Using about a third of the funds from the sale of SPLS combined with the cash I had accumulated, I proceeded to increase my position in PSEC by 135%, bringing that Business Development Corporation's [BDC] stock (and its 10.46% yield) to a 2.44% allocation of my IRA's portfolio. Fortunately I was able to make this purchase early this past Monday, and was able to enjoy watching PSEC continue to climb throughout the rest of that day and, thankfully, the next day as well. So, progress made in beefing up my position in Prospect Capital, but there's still room to grow it.

But what about the other two-thirds, the remaining funds? Instead of picking up small amounts of several stocks or putting it all in one new stock, I decided on a hybrid approach, whereby I made a substantial purchase of National Grid, resulting in a respectable 2.50% allocation of my portfolio, while also adding to one of my existing positions. I had intended to buy another 16.7% of Walgreens, which would have brought it up to a 3.51% allocation, but the limit order I placed Monday night was just a bit too low; WAG came within $0.03 of my limit early Tuesday, but then took off and headed up into a price range that made me think twice about picking it up at this point in time.

However, I noticed that KO was not having a great day on Tuesday morning, so I switched my sights to it and added another 15.3% to my existing position on this mini-dip, bringing Coke to a healthy 3.45% allocation in my portfolio, and lowering my cost basis for it in the process. This left me with just a few dollars remaining in my cash position, which suits me just fine.


As a result of swapping out Staples for a larger share of Prospect Capital, a good starting position in National Grid and pumping up Coca-Cola, the average yield of my portfolio increased from 6.75% to 6.87%. That's always a good thing!

More dividends are on the way, and I already have plans for them, which I will tell you about when the time comes.

Disclosure: I am long AFL, EXC, KO, LINE, NGG, PSEC, VOD, WAG. 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.

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.