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

by: J.D. Welch

The passage of time can be a wonderful thing, especially when it comes to dividends. The more time that passes, the more dividends roll in from one's investments (assuming one is invested in dividend-paying stocks, which I am in my IRA, exclusively). Since I last wrote about what I would be adding to my IRA's portfolio, a sufficient amount of dividends have accumulated that I felt it was time to make a decision or two and put that cash to work. This I did last week, but due to unforeseen circumstances, I am just now able to write about it and report back to you, Dear Readers.

Recently, I've been concentrating on adding to my existing position in Prospect Capital Corporation (NASDAQ:PSEC), trying to bring the allocation of it as a percentage of my total portfolio up to what I've termed "parity", the percentage that each of the 28 positions in my IRA would hold if they were all equally balanced, which is 3.57% (1 divided by 28). PSEC's current percentage Allocation is 2.31%, it pays its dividends monthly, and its recent yield is in the 11% range, so I would like to increase my allocation in it.

However, there are other positions that I feel could use an infusion of cash to bring their percentage Allocations up as well. And, I'd like to add to the number of stocks that I hold in my IRA's portfolio so that I eventually have 50 positions, each of which would ideally have a 2% allocation of the portfolio's total. The idea behind this approach is that should any one position cut or freeze its dividend, for whatever reason, or the company behind it (and its share price) falls on hard times, the impact to the overall portfolio will be minimal. I realize that 50 positions is a lot to maintain, and some people consider that to be a burden, but I enjoy monitoring my portfolio, and don't find the task onerous or time-consuming at all.

Unfortunately (or fortunately, depending on your point of view), this time around, I did not find the need to trim or otherwise sell off any of my existing positions, which means that the only cash I had to work with was that which had accumulated from dividends. This made adding a new stock to my stable less desirable than plumping up an existing position, as I'd like to start a new position with a substantial investment, one which would provide it with a decent percentage Allocation to start off with.

Looking over my existing positions through the lens of My Mad Method [MyMM], a few things jumped out at me. One thing that I noticed was that I had an "uneven" number of Coca Cola (NYSE:KO) shares, which annoyed the obsessive/compulsive in me to no end. (By that I mean, I had a number of shares that was not divisible by 5.) The fact that KO was trading below my cost basis made it an attractive option - and, of course, buying just a few shares would allow me to bring my share count up to a number that was divisible by 5, and thus satisfy my OCD.

The other thing that popped out at me as I surveyed my existing positions through the MyMM lens was that the Walgreen Company (WAG), which only had a 2.83% Allocation of my total portfolio, was also trading below my cost basis for it, and was still scoring quite well in terms of its weighted MyMM rank, coming in at #10 out of the 43 stocks on my combined "superlist" of my wishlist and the stocks in my portfolio. In fact, aside from AFLAC, Inc. (NYSE:AFL), which was coming in with a rank of #5, all of the other stocks that were ranking in the top 10 were companies that I had not yet added to my portfolio. This made WAG the obvious choice as to which position to add to, since AFL continues to climb, putting its recent price well above my cost basis and, for the time being, out of consideration to be added to (again).

So with the cash from accumulated dividends available to me, I added a very small amount of KO to my existing position there, increasing its percentage Allocation to 3.29%, and spent the bulk of the funds on adding 22.2% more to WAG, bringing its percentage Allocation up to 3.45%. Both of these fall short of the "parity" target of 3.57% allocation, but they are so close at this point that I will be focusing on other positions to add to with the next round of dividends that become available for re-investment. (Also, I was able to add to both KO and WAG in time to make their next ex-dividend dates, which makes these choices all the sweeter.)

Seven of my positions will be paying dividends on either November 14th or November 15th, including some "heavy hitters" such as Alliance Resource Partners, L.P. (NASDAQ:ARLP) and BreitBurn Energy Partners, L.P. (BBEP). In addition to these, four of the remaining five positions that will distribute dividends to me by the 15th are all monthly payers, including Crescent Point Energy Corporation (CSCTF.PK), Freehold Royalties, Ltd. (OTCPK:FRHLF), Main Street Capital Corporation (NYSE:MAIN) and Vanguard Natural Resources, LLC (NYSE:VNR).

With the very small commissions that I enjoy, having these monthly payers in my portfolio really provides me with the opportunity to add to existing positions with small, incremental amounts of accumulated cash more frequently, allowing me to more effectively "dollar cost average" as I add to my existing positions. I will write again later in this month and let you all know what I decide to do with these mid-November dividends.

Disclosure: I am long AFL, ARLP, BBEP, CSCTF.PK, OTCPK:FRHLF, KO, MAIN, PSEC, VNR, 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.

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.