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I inherited a modest sum when I was in my early twenties, bought an apartment, invested what was left over, and then proceeded to work for 20 years as an attorney at law firms in New York City and Washington, DC. I saved aggressively because I thought I could get fired at any time, and invested... More
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  • A Farewell To Sugar High ETFs.

    (click to enlarge)Sundown

    And so, the sun sets on the days of "sugar high" ETFs - those with high but unsustainable yields, high management fees and high asset churn rates. I said my farewells to REM and IDV, and in their place added companies with lengthy histories of raising dividends - MMM, IBM, SWK, VAL, BUD, PEP, LMT, EMR, KMI. I also put in a couple of newer companies that have only limited dividend histories, but high yields and reasonable prospects to maintain those yields in the near term. NAP and TGH made the list, albeit in somewhat smaller percentages than the funds I moved into lower yielding, more predictable business names. I also added more exposure to our REITs, which have come down along with everything else in the marketplace. In short, our portfolio is more about businesses that rent buildings or pipelines, that make cereal, tampons, house paint, hammers, beer or engine parts, and which are nearly religious in making regular, growing distributions to owners.

    I took losses on our IDV and REM sales, although since most of our shares were purchased in 2009 and 2010, the losses were somewhat less dramatic than anticipated. Also, as a result of moving capital into far lower yielding securities, we took a haircut on our portfolio income. As a result, our income level is down for the month, but I'll rest easier.

    I have one last item on the agenda for this month, which will be to reinvest our month-end dividends. My goal is to build exposure to positions that account for relatively little of our portfolio income, but that are exceptional businesses with solid prospects for future dividend growth:















    When next Monday comes and our dividend payments have settled, I will pick whichever one of these businesses has the best yield, or the highest intrinsic value relative to price, and invest our dividends there. At today's prices, AXP, NSC, TMP or JPM could be the best values. AFL may have the lowest PE ratio, but the prospects for growth are somewhat limited by demographic trends in the Japanese market, from which the company earns significant premiums. The price earnings ratio for AFL is low, but that doesn't make the stock a bargain per se. I'll be giving these five names careful scrutiny when I deploy dividends next week. Going forward, I suspect that I'll likely repeat the process each month, at least until I can build our exposure to these under-represented names within our portfolio.

    And now, a fantastic piece of outdoor art we found near the docks at Santa Apolonia. The artist chips at the sides of walls, creating relief images that usually feature faces. Then, he applies spray paint -in this case, images of mechanical parts to go with the relief image. I couldn't help thinking of this image while I worked today reallocating our portfolio into more dividend growth names. I found myself empathizing with the figure in this picture, to be honest.

    (click to enlarge)Graf

    Sep 28 3:54 PM | Link | Comment!
  • Reducing Portfolio Turnover

    (click to enlarge)I own two funds that have, quite frankly, turned out to be disastrous investments. Yes, in both cases, the funds have lost money since I bought them, but that is not why I consider them to be horrible. The main reasons why I have determined to largely exit these investments are (1) both funds have high management fees; (2) both funds have very high asset turnover; and (3) both funds have steadily cut dividends over the past few years.

    The first fund is REM, a mortgage REIT investment fund managed by Ishares. The fund invests in mortgage REITs, curious creatures that borrow $30 for every $1 of capital they own, in order to purchase pools of mortgages trading at a slightly higher yield than the fund's cost of borrowing. It's a great business when it works - a license to print money, frankly, unless interest rates do something the manager never anticipated (which is roughly something that happens all the time). The fund only holds 38 different positions, and yet, somehow manages an asset turnover of 42%. What is the manager doing? Since I cannot answer you, I see little justification for holding the fund much longer.

    The problem is that this fund yields 14%, and the income accounts for over 1% of our portfolio income. Selling it would involve a severe haircut - until now.

    The bright side of things is that as REM has cut dividends and dropped in price, OTHER stocks I follow have dropped in price while raising (or maintaining dividends), and now trade at yields that are comparable to REM. I will replace this fund with shares of TGH and NAP, both of which are in the shipping industry, and both of which are quite risky, but far less so than REM. TGH yields 12% today, and NAP is yielding close to 14%. NAP benefits from very long term charters for it's tankers, so the income and cost structure are locked in and the CEO, Angelika Frangou, is pretty much the best in the business. TGH has somewhat shorter term lease structures for it's shipping containers, but in a sickly industry, it's one of the best run outfits and is likely to survive until the industry turns around again. Both NAP and TGH borrow extensively - 75% debt to assets is high, but actually on the low side in the shipping industry. It certainly is less leverage than what you typically see in the MREIT business, where debt loads are routinely 1000s of times the capital value.

    The next fund on my chopping block is IDV, another Ishares fund focused on dividend growth. This fund claims to be passive but is anything but. Over half of the fund's assets are churned every year, and the dividend growth is negative. Fortunately, this fund only yields 4.7% now, thanks to a significant dividend cut earlier this year. Replacing it? Easy. I will be adding the following positions in roughly equal proportion:KMI, NHI, VTR, NNN, BUD, PEP, LMT, IBM, MMM, AMLP and EMR.

    Overall, the most important goals I hope to accomplish with my strategy are as follows:

    (1) I can harvest tax losses;

    (2) I can reduce my exposure (almost to zero) to high turnover, "passive funds" that are actually more like hedge funds in terms of how frequently they trade in and out of positions;

    (3) I can all but exit our exposure to the MREIT business;

    (4) I can reduce my exposure to funds that have a history of dividend cuts;

    (5) I can gain more exposure to companies and funds with stable dividend structures that should, if anything, lead to more dividend increases in the future; and

    (6) I can more equally diversify the percentage of portfolio income I earn from each of the 12 sources I will be boosting, moving closer to my ideal portfolio where I own 100 positions, each accounting for 1% of my portfolio income.

    The move will drop out income level by about $800 a year, which is relatively small compared to the $155,000 worth of IDV and REM that I will be selling. The move will completely wipe out all income growth I have had all month long, so compared to where we were at the start of the month, the only change I will see to our income is a change in the quality and sustainability of the income.

    But it is bitter medicine. I'm content to see our portfolio price drop 10%, 20%, or even harder. But watching our portfolio income drop by .01% is very unpleasing. I suppose I deserve a little pain, though, because without running into a brick wall once in a while, how else will we learn not to charge into brick walls in the first place?

    I'm facing the music. Investing in REM and IDV was a mistake. I invested in IDV because I felt the fund could do a better job than I could do of picking stocks that would increase dividends. It had a higher yield than most funds. It offered cheap and easy access to a well diversified pool of stocks I might not otherwise have any exposure to. Those were fine motivations, but I knew it had high turnover and I invested in it anyway. Wishful thinking, greed, or an unwillingness to admit a mistake and move on.

    With REM, I had owned shares in various individual MREITs, and wanted to harvest losses without changing the footprint of my investment. I would, for example, sell shares of AGNC to trigger short term losses, and then plow the proceeds into REM, keeping my income level constant and gaining diversification in the process. In retrospect, I should have stepped back and asked myself whether this was even a business I wanted to be in to begin with. The MREIT business model has almost fable like aspects of spinning straw into gold, which of course seems to good to be true. I forget that if something seems too good to be true, it is either not good, or not true, or possibly both. My desire to keep a high level of income blinded me from the simple truth that it's better to invest in a 3% yielding stock growing at 10%, than a 10% yielding stock shrinking by 3%. Put differently, I was so focused on income growth, I failed to make income quality the paramount goal, and that cost me.

    Sep 27 11:43 AM | Link | Comment!
  • The Cafe Brasiliero

    (click to enlarge)Coffee

    (click to enlarge)coffee

    (click to enlarge)


    The perfect way to begin the day. Lisbon is virtually closed until 10:00am. If you want a bite to eat or a cup of coffee before then, there is really only one option in my book: The Cafe Brasiliero. They open at some ghastly hour, I suspect. I tend to wake up while it is still dark, and this morning made it down to the Cafe by around 8:00am to find a hub of activity in an otherwise desolate street. The space is bright, smells powerfully of fresh espresso, and as you can see, the art work hanging on the walls is first class. The artists are all local Portuguese artists, and most of the paintings date to the 1950s and 1960s. Combined with the grand chandeliers and gold leaf, it's a magical place to spend 70 cents on delicious espresso.

    By the time I left, the accordian player in the hat showed up and was starting his daily repetoir of waltzes. There were already crowds starting to mill around, and Largo Chiado had officially woken up.

    This was a good dividend increases. Among the funds I own, SPY, SDY, VIG, DVY, VYM, SCHD have all raised distributions from this time last year. This week also delivered a 10% dividend increase by Lockheed Martin (Ticker LMT). As always, I have no idea whether my portfolio is up, down, sideways compared to last week, last month, even last year. Our annual portfolio income, however, climbed by just over $800 a year, compared to where it was at the start of this week - in no small measure thanks to my loyal and capable employees at Lockheed Martin who do an exception job delivering dividend raises on a regular basis. I'm not joking when I tell you that I plan to write Christmas cards to the CEOs of companies I own that do an especially good job raising distributions (certainly the case for LMT) or for just holding the ship together during rough waters (while Navios Maritime Partners stock has dropped by 60% over the past year, the dividend has remained solid and the CEO has indicated that should continue to be the case through 2016 as well as the rest of this year).

    Next Friday, many distributions will be coming through, and I plan to reinvest about $4,000 worth of savings across a few different firms and possibly a few ETFs. In my humble opinion, the areas of the market that appear most heavily loathed by pannic stricken investors are (1) anything having to do with commodities; and (2) anything tangentially related to China. Shipping companies like TGH hit on both of those cylindars, and at a yield of almost 12%, I'm happy to put about $1000 worth of new investment dollars into that.

    Emerson Electric is another (NYSE:EMR). The company has over 20 years of history raising dividends consistently, and yields about 4.3%. It will recieve a $1000 from us next Friday.

    BUD is expensive in my view, trading at a PE ratio of 19. It is always expensive, and I'm sick of waiting around for it to drop. Five years of waiting is long enough. I will buy $1,000 worth, pulling in a yield of 3.2%.

    Finally, IBM. At a PE ratio under 10, it's right in my happy place. It yields 3.6% and has a long, long, long track record of dividend increases. IBM is getting $1,000 from us.

    This allocation will bring in another $223 of dividends, and looking at the past histories of the companies, it is reasonable to guess that each year, that figure could rise over time. With these new investments combined with the dividend increases announced this month, I expect our total income growth this month will bring in another $1,100 per year to start - which I can either use to reinvest, or to offset any dividend cuts by companies experiencing poor industry conditions (particularly the shippers and MLPs we own that I'm worried might have no choice but to slash dividends due to industry conditions).

    Sep 27 4:43 AM | Link | 3 Comments
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