5%+ Dividend Yield Portfolio: Taking Profits As Market Valuations Flash Warnings (Jan 2017 Review)

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Includes: ABBV, AMJ, BAC, BLW, BNS, BX, BXMT, CAPE, CCP, CORN, CXSE, DBEF, DEM, DIV, DVYA, DWX, E, EDIV, EFR, ETW, F, FGD, GCOW, GDX, GS, GSK, HDWX, HYND, HYZD, IEP, JRO, JSD, KMI, NRZ, OHI, QAUS, QID, REK, RIG, SAN, SDIV, SH, SNH, SPXU, SRET, SRTY, T, TAGS, TMUS, TOT, USL, VIVO, VRP, VZ
by: Dividend Disco

Summary

2017 starts off well with a solid 1.5% gain - along with my 5% yield!

Valuations remain concerning to me, so I am taking profits.

My cash yields are up as I focus on core dividend holdings.

Review and Outlook

It's been a solid start to the year as the S&P 500's return of 1.9% was almost mirrored by my 1.5% return. After the dramatic returns of November and December, it makes sense to me that the markets would take a breather before deciding on the next move.

No Trump talk from me this month - not because it isn't relevant, but because: 1) he is already the subject of thousands of mentions on Seeking Alpha, and 2) no one has any idea what is going to happen next - let alone what the impact on stocks will be.

So now, having dispensed with any readers interested in sensationalism, hopefully the rest of you will stick around for my ponderings and some non-alternative facts. This brings me to valuations (which, contrary to many dividend growth investors, I believe are critically important in figuring out entry and exit points for investments). While I am a believer that overweighting dividend-paying stocks is one the most predictable long-term wealth-building strategies, I think it is the value (versus growth) skew of dividend payers that smooths out volatility-induced drawdowns and mitigates against excessive valuations that are not supported by operating metric fundamentals. So when a dividend payer's yield gets pushed down because its stock price has been pushed up, I will look to take a capital gain and wait to re-buy the stock at future prices more in line with historical metrics (P/E, PEG, dividend yield, etc). While some dividend proponents advocate a "buy-it-and-forget-it" strategy, I think that predictable alpha (over longer-term periods) can be achieved by taking a pruning strategy to move towards cash in times of excessive valuations and push "all in" during times of lower valuations. Of course, this strategy takes some guts and is not for the faint of heart (for more timid types, a buy and hold strategy of dividend-paying ETFs is probably best since the included rebalancing of the indexes will have similar effects to a more active pruning strategy).

The trick (as with many topics involving valuations or the business cycle) is to figure out where the market is at any given point. To help answer this question, please take a look at an excellent article on ValueWalk (please read it). For those tight on time, here is the best takeaway from the article on where we are today:

"The graph below plots the Cyclically Adjusted Price to Earnings ratio (NYSEARCA:CAPE) since 1883, its average and plus/minus one standard deviation levels from the average. The current ratio of 28.14 is approximately 1.75 standard deviations higher than average and stands perched above almost every prior observation in the last 130 years except those of the late 1920's and the late 1990's."

However as you can see, the market has spent much of the past 20 years in the elevated region and 2016 was particular painful for shorts or players on the sidelines. As the article's author notes:

"Throughout 2016 we highlighted that various measures of equity valuations are at historically high levels and present an unfavorable risk/reward profile."

And ends on an ominous note:

"One final note for consideration; since January 1, 2012, the S&P 500 has increased 75%, while earnings have increased 2%. In other words, for all intents and purposes, the entire rally from 2012 is a function of multiple expansion and is in no way supported by fundamentals. For investors who hold mean reversion as an important guiding principle, it is not unrealistic to expect the CAPE multiple to regress back towards its historical average. Indeed, it is entirely expected."

However, 2016 was a great year for U.S. stock returns across wide segments of the market (and January brought us Dow 20,000), so please don't rush out to sell all your stocks. Always remember the wisdom in the Keynes quote that "The market can stay irrational longer than you can stay solvent." All that said, I think that rational observers would argue that now is a time for prudence and not exuberance (though Warren Buffet has been buying like crazy recently). Personally, I am trimming a number of winners that have seen run-ups and gotten ahead of their historic metrics (and I am moving those gains mostly to cash and am glad to be reducing my number of overall positions). I like to think of myself as a hitter who wants to wait for his pitch instead of chase marginal balls. This strategy will certainly cost me if the market continues to barrel upwards, but I think we are overdue for at least a slight correction (like Aug 2015 or Jan/Feb 2016) and maybe something more serious (although I think that improving corporate earnings will prevent any true meltdowns). I recommend that readers look at each position and ask if they had to buy and hold this stock/ETF for the next 3 years at today's prices, would they feel confident the number would be higher. If the answer is no or if the stock has had a big run, do yourself a favor and hit the cash register.

Background

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, including ETFs and individual companies, using the following 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 >4%, 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 ETFs (domestic and international) 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, REITS, and energy).

Note: I violate these guidelines constantly, so please call me out on it!

Cash Generation

Cash payment (dividends and interest) drives my returns strategy. For the 12 months ending in January 2017, my portfolio's realized yield was 5.04% (based on its TTM value), and it delivered $11,758.47 in cash to me. I hope to earn over $13,000 in cash payments in 2017 (a 12% improvement from 2016).

In January 2017, I earned $997 in cash (which was a 20% improvement over Jan 2016's $827). Fear and greed are hard to balance (my greedy desire to own high yielders is tempered by my fear of a fall that leads me to hold significant cash and short positions), but overall I am happy with where I am. My yield-focused strategy still makes the most sense to me, as paper gains may come and go but cash is forever!!

Portfolio Composition as of January 31, 2017

Security Type Div Yield Market Value Last Month Value Gain/Loss(%)
CORE DIVIDEND FUNDS 5.2% $66,893 $64,605 3.5%
SPDR S&P International Dividend ETF (NYSEARCA:DWX) ETF 5.2% $11,341 $11,000 3.1%
SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV) ETF 4.9% $8,681 $8,054 7.8%
WisdomTree Emerging Markets High Div ETF (NYSEARCA:DEM) ETF 3.6% $8,303 $7,915 4.9%
Global X Superdividend REIT ETF (NASDAQ:SRET) ETF 8.1% $5,840 $5,736 1.8%
Deutsch X Trk MSCI EAFE Hdg Eqy ETF (NYSEARCA:DBEF) ETF 2.6% $5,652 $5,612 0.7%
Global X SuperDividend U.S. ETF (NYSEARCA:DIV) ETF 6.8% $5,040 $4,946 1.9%
Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (NYSEARCA:FGD) ETF 4.4% $4,813 $4,660 3.3%
JPMorgan Alerian MLP ETN (NYSEARCA:AMJ) ETN 6.6% $3,311 $3,161 4.7%
Pacer Global Cash Cows Dividend ETF (BATS:GCOW) ETF 3.3% $2,742 $2,685 2.1%
SPDR MSCI Australia StrategicFactors ETF (NYSEARCA:QAUS) ETF 4.1% $2,450 $2,375 3.2%
iShares Asia/Pacific Dividend (NYSEARCA:DVYA) ETF 4.8% $2,352 $2,248 4.6%
Global X SuperDividend ETF (NYSEARCA:SDIV) ETF 6.9% $2,130 $2,081 2.4%
Eaton Vance Buy-Write Opportunities Fund (NYSE:ETW) CEF 11.1% $2,120 $2,014 5.3%
SPDR S&P Int'l Dividend Currency Hedged ETF (NYSEARCA:HDWX) ETF 5.3% $2,119 $2,119 0.0%
CORE DIVIDEND COMPANIES 7.3% $68,348 $68,375 0.0%
Omega Healthcare Investors (NYSE:OHI) REIT 7.8% $12,828 $12,504 2.6%
New Residential Investment (NYSE:NRZ) REIT 12.3% $9,021 $9,361 -3.6%
Blackstone Mortgage Trust (NYSE:BXMT) REIT 8.1% $6,098 $6,014 1.4%
Royal Dutch Shell (RDSB) Company 6.6% $5,747 $5,797 -0.9%
Total (NYSE:TOT) Company 5.4% $5,056 $5,097 -0.8%
Ford Motors (NYSE:F) Company 4.9% $4,944 $4,852 1.9%
Care Capital Properties (NYSE:CCP) REIT 9.3% $4,942 $5,000 -1.2%
Kinder Morgan (NYSE:KMI) Company 2.3% $4,111 $3,811 7.9%
GlaxoSmithKline (NYSE:GSK) Company 5.4% $3,931 $3,851 2.1%
Eni (NYSE:E) Company 5.8% $3,091 $3,224 -4.1%
Verizon Communications (NYSE:VZ) Company 4.7% $2,451 $2,669 -8.2%
Abbvie (NYSE:ABBV) Company 4.2% $2,444 $2,505 -2.4%
Senior Housing Properties (NYSE:SNH) REIT 8.2% $1,905 $1,893 0.6%
Icahn Enterprises (NYSE:IEP) Invest Co 10.0% $1,780 $1,798 -1.0%
SPECULATIVE HOLDINGS TOTAL 0.4% $21,214 $20,934 1.3%
United States 12 Month Oil ETF (NYSEARCA:USL) ETF 0.0% $5,895 $6,120 -3.7%
Transocean (NYSE:RIG) Company 0.0% $4,191 $4,422 -5.2%
Teucrium Agricultural ETF (NYSEARCA:TAGS) ETF 0.0% $2,665 $2,568 3.8%
Market Vectors Gold Miners ETF (NYSEARCA:GDX) ETF 0.3% $2,393 $2,092 14.4%
Teucrium Corn ETF (NYSEARCA:CORN) ETF 0.0% $1,914 $1,871 2.3%
VARIOUS POSITIONS OF <$1,000 VALUE VARIOUS 2.0% $4,157 $3,861 7.7%
FIXED INCOME TOTAL 5.1% $39,845 $39,236 1.6%
PowerShares Variable Rate Preferred ETF (NYSEARCA:VRP) ETF 5.1% $10,000 $9,844 1.6%
Goldman Sachs (NYSE:GS) - Pref A (GS+A) Pref 4.2% $9,677 $9,446 2.4%
Bank of America Corporation (NYSE:BAC) - Pref L (BML+L) Pref 4.5% $4,524 $4,530 -0.1%
Blackrock Limited Duration Fund (NYSE:BLW) ETF 6.6% $3,168 $3,034 4.4%
Nuveen Floating Rate ETF (NYSE:JRO) ETF 7.0% $2,432 $2,438 -0.2%
WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (NASDAQ:HYZD) ETF 5.1% $2,393 $2,390 0.1%
Goldman Sachs - Pref D (GS+D) Pref 4.6% $2,200 $2,182 0.8%
WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (NASDAQ:HYND) ETF 4.8% $2,131 $2,150 -0.9%
Nuveen Short Duration Credit ETF (NYSE:JSD) ETF 7.0% $1,815 $1,749 3.8%
Eaton Vance Senior Floating-Rate Trust (NYSE:EFR) CEF 6.1% $1,504 $1,473 2.1%
SHORTS TOTAL $23,382 $24,610
ProShares UltraPro Short Russell2000 (NYSEARCA:SRTY) ETF 0.0% $9,023 $9,184 -1.8%
ProShares Short S&P500 (NYSEARCA:SH) ETF 0.0% $8,973 $9,135 -1.8%
ProShares UltraShort NASDAQ (NYSEARCA:QID) ETF 0.0% $4,324 $4,786 -9.7%
ProShares Short Real Estate (NYSEARCA:REK) ETF 0.0% $3,484 $3,490 -0.2%
ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU) ETF 0.0% $1,937 $2,041 -5.1%
T-Mobile US (NASDAQ:TMUS) Company 0.0% ($4,359) ($4,026) -7.6%
SCHWAB ROBO-ADVISOR TOTAL 2.0% $10,925 $10,664 2.4%
TOTAL 4.7% $230,608 $228,424
TOTAL + CASH $53,269 3.8% $283,877 $259,385 1.50%

Portfolio Moves in January 2017

New Positions

NONE

Exited Positions

SHARE SALE - Bank of Nova Scotia (NYSE:BNS): Sold all 50 shares of this Canadian bank at $58.55 on Jan 11.

  • Reasoning: I took profits (47.1%) on this Canadian bank because I think that the public markets are generally overbought, so I wanted to prune some non-core winners.

SHARE SALE - Banco Santander (NYSE:SAN): Sold all 800 shares of this Spanish bank at $5.45 on Jan 20.

  • Reasoning: I took profits (39.7%) on this Spanish bank because it had a great run up and I wanted to prune some non-core winners.

SHARE BUY/SALE- Meridian Bioscience (NASDAQ:VIVO): Bought (at $11.80) then sold (at $12.95) 200 shares of this pharma stock at on Dec 13.

  • Reasoning: I had a deep out of the money buy order get triggered when the company missed earnings then slashed its dividend. However, I got a nice 10% profit for holding the stock for 2 hours.

SHARE SALE - Morgan Stanley Preferred A (MS+A): Sold all 200 shares of this floating rate preferred at $23.55 on Jan 5.

  • Reasoning: While I am still a big fan of floating rate bank preferreds, I think that this market has traded up too fast, so I took a 13.8% gain and moved into cash (but I would buy MS+A again in the future).

SHARE SALE - AT&T (NYSE:T): Sold all 103 shares of this diversified telecom giant at $41.55 on Jan 20.

  • Reasoning: I took profits (32.4%) on this dividend stalwart because I think that its 20x P/E ratio has gotten too high (but I hope to buy AT&T again on future weakness).

SHARE SALE - Blackstone Group (NYSE:BX): Sold all 100 shares of this private equity giant at $30.30 on Jan 13.

  • Reasoning: I took profits (4.8%) on this volatile dividend stock because I think that private equity valuations are overheated (but I hope to buy BX again on future weakness).

SHARE SALE - WisdomTree China ETF (NASDAQ:CXSE): Sold all 37 shares of this China focused dividend ETF at $51.55 on Jan 24.

  • Reasoning: While I am still bullish on China, this ETF's yield is too low for me to continue owning it.

Final Thoughts

Uncertainty is part of investing, but implementing a well-tested strategy to produce long-term gains will help take the guess work out of position selections. Despite the market's current exuberance, I think the fundamentals are still fundamental (as the Benjamin Graham quote about voting machines versus weighing machines has proven time after time). So please tread cautiously when opening new positions (and consider taking some profits in more speculative holdings). Ebbs and flows are part of the natural order of the markets and no election can change that. However, please don't mistake my words of caution for pessimism as I am deeply optimistic about the long-term future of humanity as it is manifested through GDP growth and share gains. Despite taking some profits this month, I am still heavily long the market and encourage others to stay true to their long-run strategy. On future weakness, I am most interested in adding healthcare/IT dividend stocks and dollar hedged European dividend ETFs. What would you like to buy on weakness?

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.

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