My 4% Dividend Yield Portfolio: Exchanging ConocoPhilips For VNQ

| About: ConocoPhillips (COP)


After the recent earning release I decided to sell my holding in COP.

The Monday panic session allowed me to switch it with a first position in VNQ.

Here are the reasons behind this move.

ConocoPhillips (COP) was on my radar as a risky holding during the last several months. I expressed my concern regarding this holding in a SA article just before the Q4'15 Earning call. The reported results were indeed disappointing. The Revenue came it at $6.8B versus Consensus expectations of $9.1B. Net loss came it at -$3.5B or -$2.78 loss per share versus expectations of only -$0.8B or -$0.64 loss per share.

My biggest disappointment was not the dividend cut which fell by 66%. I have stated before that it would be a sort of magic to maintain it going forward. The more disturbing sign was the signs of additional debt the company is planning to take in order to fund its dividend. This was similar to the same risk I alluded to following the Chevron Corporation (CVX)'s Earning call. The Debt per Equity which already was at the range of 55-60% is now expected to surpass the 70% bar. It would be very hard for the company to maintain its business if the oil price will not recover soon.

The fact that COP has span off its refinery business back in 2012 means that its future is fully dependent on the rise of the oil price though its spending cuts would prevent it to achieve its historical revenue levels.

The arguments of the predicted $60 price per barrel by end-of-year seem to be more as a wishful thinking taking into account the drilling technological progress, especially in the U.S., the excess supply from Iran and the Geopolitical interests, where Saudi Arabia is fighting Iran using the weapon of low Oil price. The country seems to be willing to sacrifice the standard of living of its people to push away the Iranian influence from its borders, in Yemen in the South and in Iraq and Syria in the North.

It took me a couple of days to reach a decision and eventually I pulled the plug on my COP's holding. I sold it during the Monday session at $32.4. The stock went up afterwards but my long term view of the company is pretty grim hence at this point hence it didn't make sense to continue and hold to it while praying for a sound oil price recovery.

As an alternative to COP I considered to add to my existing holdings from the REIT sector that suffered from a significant pullback during the Monday session. I considered to add to either Ventas, Inc. (NYSE:VTR) or Omega Healthcare Investors, Inc. (NYSE:OHI). I eventually decided that neither of these has reached my Buy-point.

My buy-point for VTR is below the $50 bar to achieve a 6% dividend yield and for OHI is below $29 to be closer to an 8% dividend yield. Moreover the massive selloff has led me to feel more comfortable to buy an ETF that covers a larger range of holdings versus to add to a specific company's stock.

I therefore decided to stick to my previously announced strategy and to buy the Vanguard REIT Index ETF (VNQ) at the price of $73 per share.

I know that the markets will continue to flip up and down and I do expect the price of VNQ to fluctuate during the next several months. The volatility would only rise towards the next FOMC meeting in March regarding the expected interest rate hike.

I expect a high level of confusion towards March. While the drivers for an interest rate hike are pretty weak given the inflation rate and the strength of the Dollar, the employment indicators are signaling that it might be the time for another hike.

In any case I expect that the REIT sector would come out stronger. Though an Interest rate hike would be bad for REITs as the cost of leverage will grow but it would also implies that the FED signal that the economy is doing well in spite all the negativity out there and concerns from a recession.

VNQ charges a yearly expense rate of 0.12%. It holds 155 different REITs from the different sub sectors.

At current prices VNQ pays a generous 4.1% dividend per year. When looking at its historical trend the dividend grew by a factor of 10% in average.


The anxiety regarding the interest rate will accompany us in the coming months and years. This would generate great opportunities for the long-term investor who is pursuing an income stream.

The REIT sector is expected to grow even if the interest rate will rise. I find VNQ to be the best ETF that focuses on U.S. REITs.

As there is no way to best optimize the entry or time the market, I will build a position in this ETF through several purchases and my first step was during the recent Monday panic.

I might come back to COP one day when the potential reword would outcome the associate risks.

Happy investing.

Disclosure: I am/we are long VNQ.

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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