Staying Calm In The Midst Of Bear Market Volatility

by: Dividend Sleuth

Summary

A well-designed portfolio provides a structure for dealing with volatility.

Market upheavals can be opportunities to move a portfolio toward established goals.

Portfolio activity during a wild week in January.

A design can provide structure during turbulent markets

A group of medical students observed a skilled surgeon performing heart surgery. At a critical point the surgeon/teacher said to the students, "You have less than a minute to perform this procedure, so it's very important that you take your time."

I thought of that comment this week as our volatile market cascaded downward. I tried to "take my time," yet respond quickly to a rapidly changing market. I was able to remain calm during Friday's turbulence because during a more tranquil market in the Spring and early Summer of 2015, the Seeking Alpha community helped me formulate a portfolio design. This week's market selloff was not traumatic because a design was already in place. As the trading day unfolded, I remained calm and implemented the plan.

In a June 16 article, I chronicled some of the things I've learned from other SA participants about how to construct a portfolio. In a July 27 article, I offered the portfolio design that makes the most sense for me. The essence of this design was to have several "tiers" of stocks, with heavier weightings for the companies about which I have the most conviction. In December, I wrote about my 2016 plan to emphasize quality.

I have continued to develop, or "tweak," the portfolio design. The portfolio now has six groups, each with five stocks that share a target portfolio allocation. The groups and the respective allocations are presented below.

Tick is the stock's ticker symbol; Price is the closing price on January 15, 2016; Div is the current annual dividend; %Yield is the dividend yield as of January 15; %Port is the actual market value of each holding as a percentage of he portfolio's market value; %Inc is the percentage of the portfolio's income provided by each holding; CCC is the number of consecutive years of dividend increases as reported by SA contributor David Fish; Rating is the company's Standard & Poor's credit rating, where available, as reported by Chuck Carnevale's F.A.S.T. Graphs; Target is my target buy price for adding more shares. Genuine Parts (NYSE:GPC) is not rated by S&P, but it has an A+ rating by Value Line, as indicated below.

Group 1: Target allocation is 5.2% for each company.

The group target is 26.0% of the portfolio. These five holdings currently comprise 26.1% of the portfolio.

My decision to initiate a position in Cummins (NYSE:CMI) was described in a November, 2015 SA article. On January 14, additional shares of Cummins were purchased at $85.54, moving CMI from 4.7% to 5.1% of the portfolio. I also moved CMI from group 2 to group 1. On January 15, additional shares of Johnson & Johnson (NYSE:JNJ) were purchased at $97.78; more shares of Procter & Gamble (NYSE:PG) were bought at $75.02; additional shares of 3M Company (NYSE:MMM) were purchased at $138.54; and shares were added to Merck (NYSE:MRK) at $50.81, moving MRK from 4.6% of the portfolio to 5.1% of the portfolio. I also moved MRK from group 2 to group 1.

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
Johnson & Johnson JNJ 97.00 3.00 3.1 5.5 3.9 53 AAA 93.75
Procter & Gamble PG 74.98 2.65 3.5 5.3 4.3 59 AA- 72.65
3M Company MMM 138.69 4.10 3.0 5.2 3.6 57 AA- 134.43
Merck MRK 51.14 1.84 3.6 5.1 4.3 5 AA 49.07
Cummins CMI 84.35 3.90 4.6 5.1 5.4 10 A+ 78.00

Group 2: Target allocation is 4.4% for each company.

The group target is 22.0% of the portfolio. These five companies now comprise 22.1% of the portfolio.

On January 15, some shares of Wal-Mart (NYSE:WMT) were sold at $61.92, lowering WMT's percentage of the portfolio from 4.9% to 4.2%. Additional shares of GPC were purchased at $77.27. Also on that date, more shares of CenterPoint Energy (NYSE:CNP) were bought at $17.31, raising CNP from 4.1% to 4.4% of the portfolio. I also moved CNP from group 3 to group 2.

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
Microsoft MSFT 50.99 1.44 2.8 4.4 2.9 14 AAA 48.00
Wal-Mart WMT 61.93 1.96 3.2 4.2 3.1 42 AA 57.01
Genuine Parts GPC 78.47 2.48 3.2 4.6 3.4 59 A+VL 74.03
International Business M IBM 130.03 5.20 4.0 4.5 4.1 20 AA- 126.83
CenterPoint Energy CNP 17.30 .99 5.7 4.4 5.9 10 A- 15.23

Group 3: Target allocation is 3.6% for each company.

The group target is 18.0% of the portfolio. These five securities currently comprise 18.8% of the portfolio.

I did not buy or sell shares of any of the stocks in group 3 on January 14 or 15, but I moved PepsiCo (NYSE:PEP) from group 4 to group 3, effectively raising the target percentage from 2.8% to 3.6%. In the flurry of activity on January 15, I deferred a purchase of more shares of PEP until next week (if the price remains low).

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
PepsiCo PEP 93.93 2.81 3.0 3.2 2.2 43 A 93.67
WEC Energy WEC 52.75 1.98 3.8 3.6 3.2 10 A- 49.50
Southern Company SO 47.17 2.17 4.6 3.7 4.0 15 A- 41.33
Emerson EMR 43.09 1.90 4.4 3.8 3.9 58 A 41.17
HCP Inc HCP 36.24 2.26 6.2 4.0 5.9 30 BBB+ 33.48

Group 4: Target allocation is 2.8% for each company.

The group target is 14.0% of the portfolio. These five enterprises currently comprise 14.0% of the portfolio.

As previously disclosed in an Instablog, I opened a position in Texas Instruments (NYSE:TXN) on January 8 at $51.17 and added more shares on January 13 at $50.11. On January 15, I added to the position at $47.93. That day I also bought additional shares of Union Pacific (NYSE:UNP) at $73.35.

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
Texas Instruments TXN 48.03 1.52 3.2 2.0 1.5 12 A+ 46.77
Union Pacific UNP 74.11 2.20 3.0 2.8 1.9 9 A 70.97
AT&T T 33.99 1.92 5.6 3.3 4.3 31 BBB+ 32.54
Enterprise Products Prt* EPD 22.50 1.54 6.8 3.1 4.9 18 BBB+ 20.53
Realty Income O 52.19 2.38 4.6 2.9 2.9 22 BBB+ 45.84

Group 5: Target allocation is 2.0% for each company.

The group target is 10.0% of the portfolio. These five companies currently make up 9.9% of the portfolio.

As mentioned in an Instablog, I re-established a position in Dover (NYSE:DOV) on January 13 at $55.62. I added to this position on January 15 at $53.56. On January 15, I established a position in Parker Hannifin (NYSE:PH) at $88.09. These two industrial companies are long-standing Dividend Champions and their shares have been hit hard in the bear market among industrial companies. I wrote about Dover in a December, 2014 SA article. Also mentioned in the Instablog was the establishment of a position in agricultural company Archer Daniels Midland (NYSE:ADM) at $33.65. I added to this position on January 15 at $31.59.

On January 14, I trimmed my shares of WP Carey (NYSE:WPC) at $56.72, to bring it into the 2.0% target range for group 5. There has been considerable conversation among SA participants about WPC. I've held shares of WPC since July, 2009, and it has at times been my largest holding. I wrote about WPC in a June, 2015 SA article. I have reduced the percentage of these shares because of its relatively low credit rating (BBB). WPC has announced that it is considering spinning off its investment management business. I'm holding shares of WPC to see what the remaining REIT entity will look like and also to see what its credit rating will be after the separation.

* As a master limited partnership, EPD pays distributions to units rather than dividends to shares.

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
Dover DOV 52.90 1.68 3.2 2.0 1.5 60 A 51.69
Parker- Hannifin PH 87.99 2.52 2.9 2.0 1.3 59 A 84.00
Archer Daniels Mid ADM 31.51 1.12 3.6 1.9 1.6 40 A 29.87
National Retail Pr NNN 39.77 1.74 4.4 2.0 2.1 26 BBB+ 34.80
WP Carey WPC 56.54 3.86 6.8 1.9 3.1 18 BBB 55.12

Group 6: Target allocation is 1.2% for each company.

The group target is 6.0% of the portfolio. These five currently make up 7.6% of the portfolio.

This group is designed to hold high-yielding securities and/or special situations. Currently, it contains two BBB rated companies: the REIT STAG Industrial (NYSE:STAG) and the business development company Main Street Capital (NYSE:MAIN). It also contains three alternative energy-related companies: REIT Hannon Armstrong (NYSE:HASI); master limited partnership wood pellet manufacturer Enviva (NYSE:EVA); and a wind energy producer Pattern Energy (NASDAQ:PEGI).

I re-established positions in HASI on January 14, at $17.32, and in PEGI on January 15, at $17.22.

On January 14, I sold part of my position in ExxonMobil (NYSE:XOM) at $78.61 and I sold the rest of the position on January 15, at $77.02. My first purchase of XOM was in August, 2015, and my cost basis was $70.81.

I described my interest in alternative energy opportunities in two SA articles in June, 2015. In part one, I explained why I sold Chevron (NYSE:CVX) and bought PEGI. In part two, I described my purchase of EVA. I later purchased shares of XOM when its price was depressed into the low $70s and high $60s.

Why sell Exxon? It is one of only three U.S. companies rated AAA by Standard & Poor's. I believe it has the strongest balance sheet and the safest dividend among the oil companies. I sold XOM because I believe oil will be "lower for longer." In a January 6 interview, Boone Pickens said he believes oil is close to a bottom and will return to the $70 range within a year. On a January 8 interview, RBN Energy president Rusty Braziel presented the reasons he believes oil will stay closer to the present range than $70. I found Braziel's arguments more compelling. I don't believe XOM's dividend is in danger of being cut. However, given the current situation of the oil market and the global economy, I believe Exxon's yield should be at least 5.0% to compensate for the macro risks. If XOM moves into that yield range, perhaps I will re-establish a position.

Meanwhile, I have re-constituted my alternative energy trio of HASI, EVA and PEGI. I first wrote about HASI in an August, 2014 SA article, after being introduced to HASI by SA contributor Tom Konrad. I continue to hold units of master limited partnership Enterprise Products Partners (NYSE:EPD).

Company Tick Price Div %Yield %Port %Inc CCC Rating Target
Main Street Capital MAIN 27.28 2.16 7.9 2.3 4.2 5 BBB
STAG Industrial STAG 16.95 1.39 8.2 1.8 3.5 6 BBB
Hannon Armstrong HASI 17.15 1.20 7.0 1.2 1.9 NA NR
Enviva Partners* EVA 15.45 1.76 11.4 1.1 2.8 NA NR
Pattern Energy PEGI 17.53 1.49 8.5 1.2 2.4 NA NR

* As a master limited partnership, EVA pays distributions to units rather than dividends to shares.

The current portfolio cash position is 2.0%. The target is 6.0%.

The current portfolio yield is 4.3%.

Portfolio Sector Representation

Sector %Market %Income
Energy (EPD,EVA,PEGI) 5 10
Industrial (MMM,CMI,EMR,UNP,DOV,PH) 21 18
Consumer (PG,WMT,GPC,PEP,ADM) 19 15
Healthcare (JNJ,MRK) 11 8
REITs (HCP,O,NNN,WPC,STAG,HASI) 14 19
Financials 2 4
Info Tech (MSFT,IBM,TXN) 11 8
Telecom (NYSE:T) 3 4
Utilities (CNP,WEC,SO) 12 13

In the comment section, I hope to hear from many of you about any actions you took in the first half of January to strengthen your portfolio.

This article is part of the journal of my effort to design a retirement income portfolio. It is not intended as a recommendation to buy or sell any security. I offer this as part of Seeking Alpha's ongoing community conversation about stocks to study and how to design a portfolio. Please do your own due diligence.

Disclosure: I am/we are long JNJ,PG,MMM,MRK,CMI,MSFT,WMT,GPC,IBM,CNP,PEP,WEC,SO,EMR,HCP,TXN,UNP,T,EPD,O,DOV,PH,ADM,NNN,WPC,MAIN,STAG,HASI,EVA,PEGI.

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.

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