Please note the stocks included in the 50/50 portfolio are not a recommendation. They were personally selected by the author and contain a great deal of investment risk. Seeking Alpha contributors and commentators are a good source of investment choices and were instrumental in some of the stocks selected for this portfolio. This is a live active portfolio I believe will withstand the markets up/down movements based on my own research. The progress will be updated and tracked for feasibility of this investment method over the years.
Before I begin my 50/50 portfolio initial update, I want to recap the process leading up to this article:
- In my first article, Retirement Planning Depends On When You Begin Your Dividend Income Strategy And/Or Your Beginning Portfolio Balance, I outlined the process to determine what your retirement plan should be before you just randomly start selecting dividend stocks. The bottom line was to come up with the income you need from your retirement portfolio.
- In my second article, High Yield 50/50 Portfolio Strategy Build with BDCs and mREITs, I outlined the 50/50 portfolio based on the concept that BDCs outperform when markets go up (positive correlation), and mREITs, outperform when markets go down (negative correlation). This strategy is the method used in building the 50/50 Portfolio.
- My third article was a calculator used to create some of the charts in the above two articles. The DGC (Dividend-Growth-Calculator), free to investors who want to play around with a very unique way to look at portfolio ending balances. The user can play with different combinations of yield and yield growth and a matrix table will be created for a visual evaluation of all possibilities. The article with the free DGC link is Dividend Growth Calculator For Retirement Balance Projections. This is how I calculated my portfolio balance at the end of my accumulation phase (3 years now).
Risk management in four areas might be useful in any portfolio as outlined below:
- Strength in numbers: I have selected 30 stocks to begin with in this portfolio. Spread the risk of any one or two eliminating their dividend income will not blow up my income path to freedom. Out from the intolerable pressure to get up every morning to work for a living to bring home the bacon. The thought of doing something I want to do instead of being told what to do is something that should delight the soul of any working individual. Sorry for the sidetrack. The quantity of stocks also plays into the payout ratio mentioned in the below bullet. If my payout ratio is 60% I only need 18 stocks to support my income withdraw, that means that I could have 12 company dividends go to zero and still maintain my living expenditures. Of course this is the worst case scenario; you should be on top of any collapse in your dividends before it actually happens.
- Dividend Allocation: One of my first decisions was to require each stock to contribute a minimum amount of yearly income to the portfolio. Example if I want a minimum of $1000 for each of the 30 investments, I would have as a minimum of $30K total dividends. If I select $2000 for the minimum amount I expect each stock to pay me a total income of $60K. The value of minimum income from each stock is determined by your expense evaluation as noted in article 1 above.
- High Yield allocation: This risk protection is a byproduct of Dividend Allocation mentioned in the above bullet. This is how it works. Let's say I have two stocks, Stock-A paying 7% yield and Stock-B paying 14% yield. Both are selling at $20 per share. Stock-A pays a dividend of $1.40 a share and Stock-B pays a dividend of $2.80 a share. The dividend allocation method would buy enough stock from each investment to product $1000 in yearly income. Stock-A paying a 7% yield would purchase 715 shares for a total capital expenditure of $14,300. Stock-B paying a 14% yield would purchase 358 shares for a total capital expenditure of $7,160. The capital risk exposure is reduction in the high yield Stock-B. The premise behind this method is to have less capital at risk for high yield investments and more capital invested in the low yield stocks hopefully safer investments. A caveat to the Dividend Allocation method in my 50/50 Portfolio is to allow dividends to be greater than the minimum. Some of my high yield investments are good investments and I put more capital at risk for high income. This is up to the portfolio builder. I treat rules as only guidelines that afford flexibility on an individual basis.
- Payout Ratio: The amount of income you get from your investment portfolio and leaving some left over for investments. This is the process where you do not spend all your income, but save some for investments. It's like having a job that pays you a take home pay of $50K. You're not going to spend the whole 50K living from paycheck to paycheck, but you're going to save for emergencies or make investments for future growth. Withdrawing from an investment portfolio in retirement is the same principle. You make sure you do not drain all the dividend income from your portfolio, but only 60 to 70% to allow the remaining 40 to 30% be reinvested back into your portfolio for growth. Most blue-chip companies paying dividends also use this principle. They have a payout ratio low enough so they have disposable income for acquisitions or investment. Your building your investment generator the same way with income left over to add to stocks you already own or for new acquisitions. You have now become a business owner and manage your new business with valid principles for success.
The 50/50 Portfolio, BDC (Business Development Companies) and mREIT (Real Estate Investment Trusts)
The 50/50 Portfolio I created is a High Yield (goal >10% YOC) Investment Dividend generator that contains a 50% weighting between agency mortgage REITs and BDCs. My current investment method started January 2014 to concentrate on high yield equities that put more importance on income and less on capital appreciation. Investment purchase is based on each individual stock generating a minimum dividend per year. As long as stocks are generating income to meet or exceed my minimum dividend they will not be removed. Currently all dividends are reinvested back into stocks that require their dividends to be increased to meet my minimum yearly dividend. Three years are left in my accumulation phase (2015, 2016 and 2017). Stock selection, will have a total of 30 companies with each paying a minimum yearly income amount. To date 28 companies have been selected and some of the stocks need additional capital invested to bring them up to my minimum Dividend Allocation.
Chart 1: Individual stock, ROI (Return On Investment)The return I get on my investment is what counts toward the recapture of my initial investment cost, see Chart 1. I can keep track of dividends paid on each investment and when it reaches 100% the investment now becomes perpetual income. I'm not a trader, just a buy, hold and collector of dividends, (dividends * shares = ;-) happy face). I can't count on capital appreciation since all investments will increase and decrease in any market cycle. Dividends I can count on as payment for investment risk that accumulates over time. This is similar to any business capitalization request. In any corporation management always wants to know what the payback from their investment will be. If management has two capital requests to choose from, the first will pay back in 5 years and the second will pay back in 15 years for the same cost, guess which one they will select? I believe this is the same principle for stock investment, how soon will the company return my initial investment. Stock selection is based on the quality of the company and after performing DD (due diligence) analysis the stock is selected for purchase.
Chart 1 is a simple display of the income received that visually shows me the progress of my investment repayment. The bottom green bar is the dividends already received on the investment and the red bar is the remaining capital I need to achieve 100% repayment. Every time a dividend is paid the green bar moves up satisfying the original investment. If you treat your portfolio like a business you will not be watching price action every day, or listening to the talking heads on TV for meaningless information. Instead you will be analyzing reports and making sure management is shareholder friendly and the dividends are secure. Displayed in the chart are the actually companies I currently own and the dividends collected during 2013 to 2014. The stocks owned in 2013 were (NASDAQ:AGNC), (NYSE:TWO) and (FSC) before the 50/50 portfolio method was finalized.
Chart 2: Dividend Allocation
Chart 2 shows a detailed look at the income allocation method. Notice the 100% level is the minimum income I have chosen for all investments. Whatever that level is $1000 every year (giving a total income of 30K/Yr.) or $2000 every year (giving a total income of 60K/Yr.) sets a floor level of income that should be maintained to have a functioning portfolio that will withstand a market downturn. As part of the risk portfolio method if your payout ratio is 60% you could withstand a 40% drop in dividends and still maintain your expense withdraw level. If you think about it 40% of 30 stocks means you could withstand the loss of 12 dividend paying stocks and still maintain adequate income. Notice AGNC is a very high dividend payment. I bought many shares in 2013 before I finalized the 50/50 portfolio. Dividend payments are allowed to be above the minimum income level. Notice the small positions in AINV, CMO and SCM. I like to take small positions first to keep track of management and if they look good after three months I try to fill the dividend gap.
Chart 3: 50/50 Portfolio, each stock YOC (Yield On Cost) Nov 2014
This chart displays the stocks allocated by investment type, BDCs and mREITs. Notice the yields on the BDCs are lower than the mREITs.
- The stocks in the BDC group range 7% to 11%. In addition to the BDC group I have added (NYSEARCA:BDCL) an ETN that is a good proxy for the group in general and also pays a high dividend.
- The stocks in the mREIT group range 8% to 18%. In addition I have included (NYSEARCA:MORL) an ETN that is a good proxy for this group.
- The yield is on-cost and will not change unless additional shares are added to the investment or dividend is increased or cut. This makes maintaining the overall portfolio YOC very easy to maintain throughout the years since dividend movement from investments is very slow compared to the market value of the stock.
Chart 4: Portfolio Return On Investment and Portfolio Yield On Cost each year
This chart displays the bottom line to the 50/50 Portfolio made up of 50% BDCs and 50% of mREITs. The blue-bar, 15.6% return is the accumulative dividend income received on the total portfolio balance. The green-bar, 10.6% is the yield on cost of the portfolio. This level of YOC >10% is my goal based on the amount of income I need to sustain life on this planet. Only time will tell if this can be accomplish. Notice the other years 2015 to 2017 will be different color bars that will be updated each year. Remember I'm in the accumulation phase before retirement and all dividends are reinvested back into the portfolio.
- This is the initial evaluation for the creation of the 50/50 Portfolio (50% BDCs, 50% mREITs). Yearly evaluation will demonstrate the feasibility of such a portfolio in both a down and up market.
- Risk management based on the number of stocks, dividend/HY (High Yield) allocation, and payout ratio has been demonstrated that can be used for any portfolio.
- The 50/50 Portfolio is a live experiment that the author has personally researched and thinks has a good chance for success.
- It's in my nature to succeed where others have failed and consider obstacles as challengers to overcome with enthusiasm. All comments will be evaluated to improve on the process I have set forth. Thanks Seeking Alpha for providing a forum to share knowledge between investors.
Disclosure: The author is long SLRC, GBDC, ARCC, TCPC, SCM, FSC, NMFC, TCRD, AINV, HTGC, HRZN, MCC, BDCL, STWD, TWO, HTS, NLY, AGNC, ARI, MFA, CMO, DX, MITT, CYS, RSO, NYMT, WMC, MORL.
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.