My Income Portfolio Update: Exchanging A High-Yield ETF For A Solid-Yield REIT

Includes: HYG, LTC
by: Invest Yourself


High-yield bonds have been a part of my portfolio for quite a few years now. Over time, their diminishing yield has made me scrutinize at just what level they become less appealing to me.

Once my high-yield bond ETF quit paying 6%-plus in dividends, I decided it was time for a change.

So I replaced the iShares iBoxx High Yield Corporate Bond ETF with LTC Properties Inc., a REIT. The article outlines my selection process and my reasons for choosing this stock.


High-yield bonds have been a part of my portfolio for quite a few years now. Over time, their diminishing yield has made me scrutinize at just what level they become less appealing to me. We are in a historically long low interest rate period, a period that if you are to take anything from the latest monthly inflation report may be brought to an end by inflation sooner than we think. Bonds have had a very nice run over the last 5 years. My bond holdings were up 4.5% this year alone, when I was convinced that they could not go much higher than they already had over the last 4 years. Once my high-yield bond ETF quit paying 6%-plus in dividends, however, I decided it was time for a change.

Selling HYG:

I was never one to hold specific high-yield bonds, I chose instead to spread my risk over the broader sector which is why I owned the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG). Since 2012, I have purchased in varying quantities $1809.94 worth of HYG shares. I have had the monthly dividend payments set to be re-invested over this time as well. As of June 10, 2014, I had accumulated 23.2521 shares worth $2,198.05. I decided it was time to cash out this investment, as the current yield related to the risk level of this investment was no longer worth it, in my view.

Setting My Search Criteria:

HYG had one thing that I really loved, it paid monthly dividends. One of my primary factors in replacing HYG was to focus on looking for another monthly-paying dividend stock. This single factor was a huge filter by which to analyze investments and therefore, was my first limiting factor. I also liked the higher dividend yield associated with this investment, so I decided to look for an investment that had an annual yield above 5%.

Filter Criteria:

  1. Monthly-paying dividends
  2. Yield above 5%

So using these two criteria, I set out on a search for a replacement stock to hold in my portfolio.

Searching for a Replacement:

My search led me down a couple of paths, but due to my want for monthly dividends, I kept coming back to two choices: REITs and Other ETFs. I could not find a solid bond fund that met my requirements due to my interest rate stipulation. Most bond fund yields have been getting squeezed over the last 3 years, so most funds are in the same situation, which leaves me with REITs.

REITs can be adversely affected by rising interest rate environments, which is something we may be facing in the near future, so I decided to add a stipulation to my REIT search. I did not want a REIT that had a debt load larger than 50% of its market cap.

Additional Criteria:

  1. Company debt to not exceed 50% of Market Cap Value

Finding My Replacement Stock:

I decided while riding home one evening that I currently have no exposure to what will be the baby boomer retiree rush over the coming years. I decided to look for a retirement property-based REIT holding company. I have been watching these self-contained communities pop up all around the area where I live. Once I decided my target sector, the rest was easy. Using the search criteria above, I narrowed my search down to one company: LTC Properties Inc. (NYSE:LTC). A profile of LTC reads as follows:

LTC invests in senior housing and long term healthcare properties, including skilled nursing properties, assisted living properties, independent living properties, and combinations through mortgage loans, property lease transactions, and other investments. Its portfolio consists of 89 skilled nursing properties, 102 assisted living properties, 14 other senior housing properties, 2 schools, and a parcel of land under development.

LTC currently pays a dividend of $0.17 per share monthly for an annual yield around 5.2%, and has a current level of debt-to-market cap of 21.7%. So on June 17, 2014, I purchased 51.7426 shares of LTC for a cost basis of $38.65 per share for a total purchase amount of $2000.

Reservations about LTC:

I understand the risk that REITs present in a rising interest rate environment, but I feel that LTC's low level of debt (21.7% of Market Cap) will not hamper its future earning potential as much as some other REITs. I also feel that the increasing demand for properties like LTC's will give it greater pricing potential for current properties, as well as greater incentive to expand its portfolio of properties in the years to come.


As you can see from the table below, this investment swap does hurt one of my longer-term goals of annualized dividend income. Even though the impact is minimal in the broader sense of my entire portfolio, I still must acknowledge the current negative impact.


Held Shares

Current Dividend

Annualized Dividend

LTC Properties




iShares HY Corp Bond ETF




I believe, however, that the long-term growth potential of LTC earnings will far outweigh the loss in current yield from the sale of HYG. I am far more content with owning LTC rather than holding onto HYG because I do feel that high yield will begin to falter in the coming months/years.

For more information regarding my portfolio holdings, you can see my entire portfolio at the end of Q1 here. Another quarterly update will follow soon after the end of June, so please be sure to follow my profile and check out that update.

Word of Warning (Watch Inflation Reports):

If anyone out there is currently holding high-yield bonds, I would urge you to keep an eye on inflation rates. The last month's spike was more than double projections for inflation rates. If this trend continues, it may cause the Federal Reserve to act sooner than previously targeted, which could spell a negative impact to interest rates and thereby hurt bond values, and with as far as they have climbed over the last 5 years, you can be certain they could fall just as far.

Disclosure: The author is long LTC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The Author Has Recently Closed a Position in HYG