My Mad Method: What Next To Buy, And Why? - January 2013

by: J.D. Welch

Golly, I haven't written one of these articles since mid-November of last year. OK, it wasn't that long ago, but I'd maxed out my contributions to my IRA and hadn't really accumulated enough in the way of dividends through the end of December to do anything worthwhile, so it's taken until now to get enough cash stashed up to make a few purchases. Let's take a look at what I've gotten myself into this time:

Same Old Song And Dance

To start off with, Yes, I continued to add to my position in Prospect Capital Corporation (NASDAQ:PSEC) last Thursday. I'm still trying to get it to the "parity" level of a 3.57% allocation of my IRA's total value, and am almost there, but not quite. With an addition of 12.3% more to my existing position, I've brought my holdings in PSEC up to a 3.18% allocation of my portfolio. One more months' worth of dividends, and I should be able to tip it over the top and get it above a 3.57% allocation. Then I can concentrate on bringing up other positions' allocation percentages in my quest to have parity across most, if not all of my positions.

One of the reasons I've been concentrating on PSEC so much in the last few months is that it's still got a great yield of 11.75%. It also pays monthly, which I like a lot; and I've been continuing to add to it below my overall cost basis, which is always a plus. More, please!

Get Back In LINE

Next up in this month's round of purchases was a whopping 25% increase in my existing position in Linn Energy, LLC (LINE), bringing its allocation to 3.30% and that much closer to parity. Like PSEC, one more month should do it and I will have nudged LINE over the line (sorry) and achieved parity with it. The more all of my positions line up with each other in terms of their percentage allocation of my bottom line, the happier I become, as that decreases my exposure to any one of them taking a big hit and having a disproportionate negative impact on my bottom line.

LINE's recent yield of 7.73% isn't too shabby, either, and is above the overall average yield of my portfolio, so more of LINE means moving the needle on my total yield up more as well. And like PSEC, these additional shares of LINE were below my existing cost basis, improving that metric as well.

One thing I'll be on the lookout for is what kind of an impact having several Master Limited Partnerships [MLPs] in my IRA will have on my taxes. I haven't yet had to deal with the dreaded K-1 forms, and have heard that they can be a nightmare, but have also heard that working with them (and their potential impact on what taxes I might have to pay) isn't as difficult as some folks make it out to be. I've been preparing my own taxes for over twenty years (using TurboTax from Intuit (NASDAQ:INTU)) and have so far never had a problem, so it will be interesting to see how things go this year. (I'll probably write an article about my own experiences with the K-1s this year, but don't expect to see that until sometime in April.)

Now for the surprise of this month: I decided to part ways with an old friend…

So Long, Apple, It's Been Fun

Yes, I've decided that I've seen enough of the slide in share price of Apple, Inc. (NASDAQ:AAPL) from its lofty heights of just over $700 not all that long ago. I have a long record of comments here on Seeking Alpha opining that Apple without Steve Jobs is not the same company that Apple with Steve Jobs was, and this time they can't get him back. I'm afraid the folks in Cupertino aren't innovating the way they used to be when Steve was driving them forward, and suspect that AAPL will just continue to slip and slide closer to my cost basis.

So after a few quick calculations on my handy-dandy My Mad Method (MyMM) spreadsheet, I found a much better alternative in terms of yield, and reasoned that with the very small number of shares that I still held of AAPL, it wasn't worth hanging around to see if it would creep up any more than where it was last Thursday morning. So I pulled the trigger and dumped the last of my AAPL, with no regrets. I realized a 45.55% overall return with my short time with Apple, and have booked the last of my profits from that venture and moved on to better yielding pastures.

New Kid On The Block

Which brings me to the answer to, "What did you do with the proceeds of your sale of AAPL?" I can't quite recall where I first heard about commercial real estate financier Resource Capital Corporation (NYSE:RSO), but I think it was from a comment that chowder made in an article I was reading a while ago. I plugged RSO's numbers into the MyMM spreadsheet's watchlist, and it didn't score too badly, so I kept an eye on it.

With the thought of dumping AAPL to reallocate those funds into something with a better yield rolling around in my little grey cells, the more I thought about it the more I liked the idea of switching out AAPL's 2.098% yield for RSO's 13.378% yield. Looking at RSO's chart, it seemed to have been moving sideways for quite a while, and while it's not likely to take off like AAPL could if something really gotta-have-it techno-fantastic comes out of Cupertino in the near future, I decided to diversify a bit more and add my first REIT to my portfolio, and trade in my Apple dollars for some RSO yield. (I have two mREITs, American Capital Agency (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY), but no non-mortgage REITs until now).

Now, I could have taken the funds from the sale of AAPL and spread them around the various existing positions that are flirting with reaching parity, but that would have reduced my total number of positions to 27, and therefore increased my parity target to 3.70%, which would have defeated the purpose. Instead, I opted to replace Apple with a new position, keeping my number of companies in my portfolio at 28. My long-term goal is still to increase my total number of positions to 50, so not losing ground on that objective is another plus for this month's moves.

That's A Wrap

And that about does it for this month's installment of this series. I have a number of large dividend payments in the pipeline for the rest of January, and an even better lineup pending through the middle of February, after which I'll have to wait a while for the tank to fill back up again. Also, I'll be receiving the larger portion of my semi-annual bonus in early February, and I'm expecting that I'll be able to make a nice contribution to my (and my wife's) IRAs when the February dividends materialize, the first contributions of 2013. See we shall, and see ya then!

(As always, please keep in mind that I am not an investment professional or advisor; I'm just a regular guy trying to manage my own IRA's portfolio so that I can eventually replace my regular paycheck with the income from dividends from my investments when I retire. The purpose of this article is not to promote any one stock, but to document my process and journey of selecting stocks for my portfolio and, hopefully, watching it grow.)

Disclosure: I am long LINE, PSEC, RSO. 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.