Review and Outlook
February 2016 began with the same panic that characterized January as the first 2 weeks of the month saw a bull market only in doom and gloom predictions. However, opportunities to pick up bargains for steel willed investors existed and, by the close of the month, the markets had largely stabilized as the S&P 500 finished a few tenths of a percentage below even. My performance largely mirrored this result with a decline of -0.5% (despite a brutal month for the healthcare REITs that I have been partial to). For 2016, I am still beating the S&P 500 by 200 basis points, but a -3% to -5% 'victory' is hardly worth bragging about. I get the feeling that 2016 will be a year that almost all of my returns will come in the form of my 5%+ dividend yields and very little capital gains will be created once all the dust settles.
Overall, it's been a tough period for value investors over the last few years. Traditional value investment sectors (like energy) have been shown weakness (or been outright decimated) while growth stocks (like the 'FANG' stocks) have ridden high. As is often cited, during 2015 the average return of the FANGs was 83% vs. the S&P 500 return of only 1.4% (with most value indexes posting negative returns). However, that tide may have begun to turn in 2016 as value has begun to reassert its historical dominance over growth.
Tale of the Tape - FANG Edition (source)
Looking at a broader historical context also demonstrates how unusual value stocks' underperformance has been as most of the time value outperforms growth. To better understand this, there is a wonderful (and short) article from late last year that looks at value versus growth for the last 60 years. Here is the main takeaway chart:
"The chart above plots the trailing five-year annualized return of a hypothetical portfolio (the value versus growth portfolio) that goes up when value stocks are outperforming growth stocks and down when growth is outperforming value. […] The chart shows that value outperformed growth across most five-year periods and did so by roughly 5% annualized over time."
This means that value stocks have some significant catching up to do. However, this underperformance really hit home for me when the article continued with this chart:
"As shown in the above chart, during the previous five periods when growth outperformed value, value subsequently delivered very strong results over the next five-plus years. In the current cycle, the value rebound has not yet occurred. Why?"
I don't have the answer to that question, but I do believe that value will catch up in 2016 (even more so if Wall Street's jitters turn into an economic downturn as some predict). And I think my portfolio (heavy value and dividend emphasis) has demonstrated the start of this trend as it has outperformed the S&P 500 in each of the first 2 months. Only time will tell if this is an aberration or a trend, but I feel better knowing that history is on my side.
However, 'losing less' is not a strategy that makes me feel great and I look at cash as the main alternative for my dollars (as opposed to growth stocks). So far in 2016, I have held my nose and accumulated additional shares in dividend value plays on market weakness as I believe that we are not headed for a recession, but merely working through the excessive valuations (especially of growth stocks) that are causing the broader indexes to endure the declines that value investors have been feeling for over a year. I still think we will see a flat-ish 2016 with many drawdowns and rallies (look at the remarkable similarity between the August 2015 drawdown and early 2016's weakness), so my goal is to maximize my returns in this type of environment by selectively buying the dips and selling the rips. For readers looking for specific trade dividend stock ideas to implement in March 2016, see my recent Seeking Alpha article here.
Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires.
- GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns.
- STRATEGY: 'Enhanced' dividend growth or DGI strategy that focuses on a core of diversified holdings (ETFs and individual companies -- my general screening criteria: growing companies (YoY EPS growth >0%) with attractive valuations (PEG <1.5 and P/E <20) and strong and safe dividends (yield >3%, payout <90%, and market cap >$500MM)…no tobacco stocks or micro caps), supplemented with return enhancing tools like hedges (derivatives and shorts), commodity exposure, etc., as well as some crazy picks.
- BALANCE: Blend of ~50% ETFs (domestic and international…often sector focused) and individual companies (where there is a compelling reason to own). Seek to not overweight any one sector unless there is a compelling reason to do so (although the nature of these investments lead me to be overweight in traditional dividend paying sectors like financials and energy).
Note: I violate these guidelines constantly, so please call me out on it!
Cash payments (dividends and interest) are the cornerstone of my portfolio as I think that market timing is hard for even the pros. Over the last 12 months, my portfolio's realized yield was 5.1% and delivered $11,623.27 in cash to me. While no one likes to see declines on principal, the strong income production of my portfolio could replace all of those paper losses in only a couple years through a very challenging time in the market for value investors (and just think at the tailwind it would provide in better times)! I also think my dividend sustainability is much better as I have worked to eliminate sucker yields and focus on dividend growth and sustainability in my ticker screening.
In February 2016, I earned $836.91 in cash (up an impressive 11.4% from February 2015). For all of 2016, my goal is to earn $12,000 (that's an even $1,000 per month in good months when the market is moving up and bad months when it's trading off). In a sideways market, a yield focused strategy makes more sense than ever to me since paper gains may come and go but cash is forever!!
Portfolio Composition as of February 29, 2016
|Security||Type||Div Yield||Market Value||Last Month Value||Gain/Loss(%)|
|DIVIDEND GROWTH FOCUSED FUNDS||5.7%||$51,597||$51,686||-0.2%|
|SPDR S&P International Dividend ETF (NYSEARCA:DWX)||ETF||6.1%||$9,651||$9,807||-1.6%|
|SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV)||ETF||5.5%||$7,134||$7,040||1.3%|
|WisdomTree Emerging Markets High Div ETF (NYSEARCA:DEM)||ETF||5.5%||$6,569||$6,448||1.9%|
|Deutsch X Trk MSCI EAFE Hdg Eqy ETF (NYSEARCA:DBEF)||ETF||3.4%||$4,946||$5,214||-5.1%|
|iShares MSCI Australia (NYSEARCA:EWA)||ETF||6.0%||$3,507||$3,580||-2.0%|
|UBS ETRACS Wells Fargo MLP Ex-Energy ETN (NYSEARCA:FMLP)||ETN||5.3%||$3,288||$3,130||5.0%|
|JPMorgan Alerian MLP ETN (NYSEARCA:AMJ)||ETN||8.9%||$2,500||$2,566||-2.6%|
|Global X SuperDividend U.S. ETF (NYSEARCA:DIV)||ETF||8.6%||$2,372||$2,333||1.7%|
|IQ US Real Estate Small Cap ETF (NYSEARCA:ROOF)||ETF||6.1%||$2,296||$2,275||0.9%|
|ALPS International Sector Div Dogs ETF (NYSEARCA:IDOG)||ETF||4.4%||$2,292||$2,350||-2.4%|
|Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (NYSEARCA:FGD)||ETF||5.2%||$2,121||$2,110||0.5%|
|iShares Asia/Pacific Dividend (NYSEARCA:DVYA)||ETF||5.8%||$1,863||$1,821||2.3%|
|WisdomTree China ex-State-Owd Entpr ETF (NASDAQ:CXSE)||ETF||2.9%||$1,546||$1,531||1.0%|
|Market Vectors BDC Income ETF (NYSEARCA:BIZD)||ETF||9.7%||$1,511||$1,480||2.1%|
|DIVIDEND GROWTH FOCUSED COMPANIES||7.6%||$91,730||$92,556||-0.9%|
|New Residential Investment (NYSE:NRZ)||REIT||15.8%||$6,880||$6,659||3.3%|
|Omega Healthcare Investors (NYSE:OHI)||REIT||7.1%||$6,412||$6,342||1.1%|
|Alon USA Energy (NYSE:ALJ)||Company||6.0%||$4,930||$5,611||-12.1%|
|Wells Fargo (NYSE:WFC)||Company||3.1%||$4,692||$5,023||-6.6%|
|Kinder Morgan (NYSE:KMI)||Company||2.8%||$3,329||$3,027||10.0%|
|Care Capital Properties (CCP)||REIT||8.6%||$3,314||$3,743||-11.5%|
|Main Street Capital (NYSE:MAIN)||Invest Co||7.5%||$2,942||$2,889||1.8%|
|Prospect Capital Corporation (NASDAQ:PSEC)||Invest Co||14.2%||$2,941||$2,480||18.6%|
|Prudential Financial (NYSE:PRU)||Company||4.2%||$2,644||$2,803||-5.7%|
|The Blackstone Group (NYSE:BX)||Invest Co||13.7%||$2,597||$2,627||-1.1%|
|Verizon Communications (NYSE:VZ)||Company||4.4%||$2,537||$2,499||1.5%|
|Ford Motors (NYSE:F)||Company||4.8%||$2,502||$2,388||4.8%|
|Blackstone Mortgage Trust (NYSE:BXMT)||REIT||10.0%||$2,474||$2,478||-0.2%|
|Atlantic Power (NYSE:AT)||Company||5.2%||$2,408||$2,618||-8.0%|
|Medical Properties Trust (NYSE:MPW)||REIT||7.6%||$2,389||$2,271||5.2%|
|The Bank of Nova Scotia (NYSE:BNS)||Company||5.1%||$2,000||$2,042||-2.1%|
|New Senior Investment Group (NYSE:SNR)||REIT||11.0%||$1,938||$1,838||5.4%|
|Icahn Enterprises (NYSE:IEP)||Invest Co||10.5%||$1,785||$1,580||13.0%|
|Stag Industrial (NYSE:STAG)||REIT||8.1%||$1,756||$1,729||1.6%|
|Senior Housing Properties (NYSE:SNH)||REIT||10.2%||$1,561||$1,448||7.8%|
|Full Circle Capital (FULL)||Invest Co||19.2%||$1,403||$1,452||-3.4%|
|Banco Santander (NYSE:SAN)||Company||8.0%||$1,205||$1,265||-4.8%|
|WI LAN (WILN)||Company||2.1%||$1,086||$673||61.4%|
|Dorchester Minerals (NASDAQ:DMLP)||MLP||9.0%||$1,017||$1,149||-11.5%|
|SPECULATIVE PORTFOLIO HOLDINGS TOTAL||0.4%||$27,954||$28,880||-3.2%|
|United States 12 Month Oil ETF (NYSEARCA:USL)||ETF||0.0%||$7,680||$7,940||-3.3%|
|American Capital (NASDAQ:ACAS)||Invest Co||0.0%||$4,107||$4,206||-2.4%|
|Teucrium Agricultural ETF (NYSEARCA:TAGS)||ETF||0.0%||$2,456||$2,537||-3.2%|
|Teucrium Corn ETF (NYSEARCA:CORN)||ETF||0.0%||$2,063||$2,172||-5.0%|
|Market Vectors Gold Miners ETF (NYSEARCA:GDX)||ETF||0.8%||$1,938||$1,421||36.4%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$4,325||$4,583||-5.6%|
|FIXED INCOME HOLDINGS TOTAL||5.1%||$34,583||$35,254||-1.9%|
|PowerShares Variable Rate Preferred ETF (NYSE:VRP)||ETF||5.1%||$9,352||$9,528||-1.8%|
|Goldman Sachs (NYSE:GS) - Pref A (GS+A)||Pref||5.0%||$8,067||$8,168||-1.2%|
|Bank of America Corporation (NYSE:BAC) - Pref L (BML+L)||Pref||5.0%||$4,060||$4,194||-3.2%|
|Morgan Stanley (NYSE:MS) - Pref A (MS+A)||Pref||5.2%||$3,910||$4,030||-3.0%|
|U.S. Bancorp (NYSE:USB) - Pref H (USB+H)||Pref||4.2%||$2,136||$2,174||-1.7%|
|Goldman Sachs - Pref D (GS+D)||Pref||5.3%||$1,941||$1,970||-1.5%|
|WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (NASDAQ:HYZD)||ETF||4.6%||$2,119||$2,124||-0.2%|
|WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (NASDAQ:HYND)||ETF||4.5%||$1,836||$1,860||-1.3%|
|Eaton Vance Senior Floating-Rate Trust (NYSE:EFR)||CEF||8.0%||$1,163||$1,206||-3.6%|
|SHORT HOLDINGS TOTAL||-1.6%||$3,203||$2,933|
|ProShares Short S&P500 (NYSEARCA:SH)||ETF||0.0%||$10,925||$10,950||-0.2%|
|T-Mobile US (NASDAQ:TMUS)||Company||0.0%||($2,597)||($2,811)||-7.6%|
|PowerShares QQQ Trust (NASDAQ:QQQ)||ETF||1.0%||($5,125)||($5,207)||-1.6%|
|SCHWAB ROBO-ADVISOR HOLDINGS TOTAL||2.0%||$9,209||$9,168||0.5%|
|TOTAL + CASH||$13,784.52||5.1%||$232,061||$233,730||-0.5%|
Portfolio Moves in February 2016
SHARE BUY - Alon Energy : Bought 500 shares from $9.75-$12.50 in Feb.
- Reasoning: ALJ has all the statistics of a great DGI pick (see my article) and continued weakness in this small cap refiner finally made the valuations low enough that I couldn't resist.
SHARE BUY - Stag Industrial : I purposefully set a high strike (to collect a higher premium) and my put option I wrote ($17.50 strike by 2/19/2016) was assigned.
- Reasoning: STAG is a terrific REIT that has really been unfairly beaten up (it is Brad Thomas's pick of 2016), so I believe this is a good entry point.
WROTE PUT - Bunge Limited (NYSE:BG): Wrote a put option ($50.00 strike by 4/15/2016) for $190.29 net of fees on 1 contract on Feb 23.
- Reasoning: I would like to own this stock (P/E of 10.9, PEG of 0.83, yield of 3%, etc), but I will keep playing this one as an option until I am reasonably sure this is a falling knife so I should proceed with caution.
SHARE SALE - ALPS Emerging Sector Dividend Dogs ETF (NYSEARCA:EDOG): Sold my 100 shares of EDOG at $19.79 on Feb 18 (I bought them on Dec 5, 2014 @ $25.95).
- Reasoning: While I loved the idea of an easy to use ETF wrapped for a 'Dogs of the …' play, the carnage in the emerging markets space was simply too much for me to bear (especially since I think the pain will continue), so I wanted to sell to free up capital (and took a 24% loss).
SHARE SALE - ProShares UltraShort Russell 2000 ETF (NYSEARCA:TWM): Sold my 100 shares of TWM at $46.85 on Feb 1 (I 'bought' it on Mar 23, 2015 @ $35.02).
- Reasoning: I used the weakness in the market to close out this short ETF and free up trading capacity while booking a terrific 34% gain!
PUT EXPIRED - Glaxo Smith Klein : Wrote a put option ($37.00 strike by 2/22/2016) for $40.28 net of fees on 1 contract on Jan 19. On Feb 22, the put option I wrote on expired worthless.
- Reasoning: I already owned GSK and would have liked to add more on weakness.
PUT EXPIRED - United States 12 Month Oil ETF : On Feb 22, the put option I wrote on USL at $13.00 expired worthless. I earned $99.50 net of fees on this trade.
- Reasoning: At an implied crude price of ~$22, I felt good about this put and it worked out great for me.
2015 really tested my convictions in a dividend and value focused strategy, but I think the painful scrubbing away of empty growth promises and sucker yields will continue to bear fruit in 2016. Additionally, my confidence that we may have set a bottom in crude prices for the year continues to strengthen (especially as we move towards the summer driving season) and I think there is real near term upside in my portfolio if the energy sector can continue to (slowly) rebound.
Overall, while I am confident that the general economy will continue to stay strong, all bets are off in an election year so I continue to struggle with wanting to deploy capital to make value focused investments while worrying that there could be a black swan event that will offer even better deals in the future. Only time will tell, but I'll keep banking my dividends in the meantime. Good luck to everyone.
Disclosure: I am/we are long ALL POSITIONS MENTIONED.
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: The author is an amateur who has a history of getting calls both right and wrong with zero predictive power. Trade at your own risk and never rely solely on this author's opinion. Also, as I have no knowledge of your circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.