Fifth Portfolio Review - 'The Accelerated Dividend Portfolio'

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Includes: AAPL, BUSE, DFS, F, HTGC, MFA, MRCC, PFE, T, TWX
by: Clearview60

Summary

Bought additional shares in Hercules Capital at a total cost of $14.65 per share.

As promised last month, I provide some sage advice from the late, great Benjamin Graham from his book titled "The Intelligent Investor".

It's been 28 months since I started building my dividend portfolio. Let's see how it's performing based on the 3/24 closing bell.

Strategy

- Over two years ago I started to think about income streams I'll want for retirement and undertook a plan of building a "starter" dividend portfolio in my Fidelity 401(k) account.

- Used 30% of my 401(k) balance to build my dividend portfolio with the anticipation of gaining greater knowledge and wisdom ahead of going "all in" down the road.

- Attempting to quickly build my portfolio with high-quality, high-yielding dividend companies and then reinvest those dividends, along with a percentage of my biweekly 401(k) contributions, to buy into high-quality companies that currently pay a decent dividend and have prospects for future dividend growth as well.

Ultimate Goal

- The ultimate goal as a retiree is to utilize the dividend income while preserving as much of my 401(k) capital as possible.

Current Portfolio Composition

Company Current % of Holdings YOC Current Total Return
Monroe Capital Corporation 25.60% 9.64% 22.78%
Discover Financial Services 14.96% 1.91% 11.21%
Hercules Capital Inc 13.18% 8.38% 16.10%
Pfizer, Inc. 11.35% 3.99% 10.49%
Apple Inc 10.95% 2.46% 53.29%
MFA Financial, Inc 10.78% 11.54% 29.11%
First Busey Corporation 4.27% 3.59% 51.47%
Ford 3.88% 4.67% -6.53%
AT&T 4.64% 5.06% 12.62%
Cash
0.39%

Trades Since Last Month's Update - One

Earlier this week, I bought additional shares of Hercules Capital at a total cost of $14.65 per share. In my timely article on HTGC in December, I discussed why I felt Hercules was positioned to have a good 2017 and forecasted a total return of 28% over the next two years based on the 12/9 closing price of $13.67. I believe we're on a path to meet that goal and felt this week presented an opportunity to buy additional shares. I plan to revisit the original article in an update shortly.

Existing Portfolio Performance to Date (28 months)

Cumulative Total Return = 20.7%

S&P 500 Total Return Index during like period = 19.11%

To compare apples to apples, it was important for me to look at the S&P 500 Total Return Index (which assumes reinvested dividends) since I'm currently reinvesting the dividends as well.

Since this is a starter portfolio it's important for me to see how I'm performing relative to an alternative investment.

To date, not only is the portfolio outperforming the Total Return Index, but it's yielding about three times greater than the Total Return Index.

Portfolio Yield

Yield on Cost = 6.553%

Current Yield = 5.928%

I find Yield on Cost a useful instrument in the tool bag in assessing the performance of my selections, as well as the return I'm getting on my invested capital.

Dividend News of Note Since Last Month

No dividend increases or decreases this month, however, I expect some news on this front in the coming months.

Portfolio Beta (Weighted)

Per finviz, I've calculated that my weighted portfolio Beta is 0.872, down slightly from last month. This provides a little comfort because, in theory, a low Beta means that my portfolio will be less volatile during market corrections.

Quick Updates on My Holdings

In alphabetical order:

Apple (NASDAQ:AAPL) - Have been tempted to sell this stock to lock up a significant profit in the short, nine month period that I've owned it but have opted to keep this for the long haul.

AT&T (NYSE:T) - Continue to hold for the run. As a shareholder, I continue to be curious to see how things shake out with Time Warner (NYSE:TWX).

Discover Financial (NYSE:DFS) - My second largest holding with strong, transparent leadership. They have an impressive stock repurchase program; common shares outstanding have dropped 13.4% in just the last two years. Dividends have increased 50% since 1Q 2014 and it has a low payout ratio.

First Busey (NASDAQ:BUSE) - Obviously very pleased with this purchase and almost added additional shares this past week during the financial selloff. Note - I have been doing some research on recent mergers and acquisitions in the banking sector to see what companies are willing to pay for assets, loans, and deposits. It's been a very interesting endeavor and it allows me to put a rough "value" on banks based on the recent M&A activity. I see some tempting opportunities out there.

Ford (NYSE:F) - Rough month for Ford. Though it's currently my smallest holding, I will not hesitate to average down as long as I think the dividend is safe.

Hercules Capital (NASDAQ:HTGC) - Talked about my recent purchase earlier in the article. As mentioned last month, I own Hercules Capital in three portfolios: my HSA account via Fidelity, a personal account with TD Ameritrade, and this one via Fidelity.

MFA Financial (NYSE:MFA) - This high-yielding and under-publicized stock also has great leadership; a common and necessary requirement for holdings that make up a significant amount of my portfolio. Additionally, their track record has been impressive over a long period of time.

Monroe Capital (NASDAQ:MRCC) - As promised last month, I recently wrote an article on Monroe Capital. The article identifies many of the reasons why I'm a strong believer in the company. My total return is currently 22.78% with another dividend coming next week.

Pfizer (NYSE:PFE) - I believe Pfizer is going to be a stable and dependable contributor to my dividend portfolio for many years to come. As part of my diversification plan, I'm currently performing DD on other stocks in this sector (along with the stocks in the utility sector).

Portfolio Risks

- As mentioned in previous updates, I acknowledge that I'm too overweight in Monroe Capital Corporation. It currently makes up 25.6% of my portfolio, though it has dropped slightly from 27.71% in the last four months. One must keep in mind that this portfolio was funded from 1/3 of my total 401(k) balance. Looking at my total 401(k) balance today, Monroe comprises a significantly smaller percentage of my overall portfolio.

- Sector diversification. As you can see, I'm very heavy in the financial sector. I believe this has served me well recently and will continue to do so in the coming months.

I'll be looking to minimize my portfolio risks going forward by investing my dividends and biweekly 401(k) contributions into quality, non-financial stocks. I will note that I didn't follow my own plan this month when purchasing additional shares of Hercules Capital.

The Intelligent Investor

In last month's update, I mentioned sharing a few of my favorite nuggets of investing advice from the book titled The Intelligent Investor by the late, great Benjamin Graham. This, together with the book titled Buffett, The Making of an American Capitalist are my two investing bibles that I reference/read all the time.

Almost four years ago, I ripped out a page from a 6/23/13 article in Forbes Magazine titled "Wealth Wizards - Advice From The Masters". The particular page I ripped out was on Warren Buffett. When asked what the best money advice he ever got was, he answered; "The Intelligent Investor by Benjamin Graham". He went on to say that chapter 8 (The Investor and Market Fluctuations) and chapter 20 (Margin of Safety as the Central Concept of Investment) have been the bedrock of his investing activities for over 60 years of investing.

Needless to say, I immediately bought the book (revised edition with commentary from Jason Zweig) and have been hooked ever since. I could probably write a whole article of useful advice from Mr. Graham, but in honor of Mr. Buffett's comment above, I'm providing two nuggets of advice, one each from chapter 8 and chapter 20.

Chapter 8:

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

Chapter 20:

The risk of paying too high a price for good quality stocks - while a real one - is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Both are great pieces of advice and I believe they go hand in hand with each other.

Next Month

In next month's update, I would like to discuss the timeline as to when I might want to consider grabbing the next chunk of money from my 401(k) and placing it into this portfolio.

Summary

After 28 months, this portfolio is not only outperforming the S&P 500 Total Return but is yielding almost three times more than the Index. Thank you for taking the time to read the article and accompanying me on my journey. As always, I look forward to your advice and suggestions.

Disclosure: I am/we are long ALL NINE STOCKS SHOWN IN THE PORTFOLIO.

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.