May 2017 Portfolio Update: O, How Sweet It Is

Includes: O, SKT
by: New Div on the Block

Early May saw a broad REIT sell-off, giving me a chance to pounce and add my first exposure to the sector.

There were many options, but I decided to go with the tried and true stalwart.

A look at sales, purchases, and dividends collected since the last update, and what's ahead for June.

Blink and you'll miss it, but we're already nearing the halfway point of 2017. Hard to believe I know, but the markets, much like time, just keep chugging on and inching higher, though the momentum is definitely noticeably slower these days than the early months of the year. It was another tough month for retail, especially retail-focused REITs, when prices on big names like Realty Income (NYSE:O) plummeted on weak numbers from small competitor Spirit (NYSE:SRC). There were a few days of small bounces across the sector, but overall O finished down well over 6% for the month, while mall operators like Simon (NYSE:SPG) and outlet landlords like Tanger (NYSE:SKT) lost 8.5% and 18.5%, respectively.

Ouch. But good news for investors like me who are relatively new to the game and have been waiting for quality REITs like O to come back down to earth from the nosebleed price levels we were seeing into the middle of last year. I was able to make my second purchase for my new Roth IRA and add this DGI stalwart at a more reasonable price, which I'll discuss a bit more in a moment. So let's take a look at how things stood at the end of May.

Portfolio Snapshot

Company Sector Shares % Portfolio % Income Sector Weight Global BMI
Staples 11.7% 9.0%
CVS Health (NYSE:CVS) 21.2349 7.14% 5.50%
Archer Daniels Midland (NYSE:ADM) 25.1789 4.58% 4.18%
Materials 3.5% 5.6%
Eastman Chem (NYSE:EMN) 10 3.51% 2.64%
Telecoms 7.3% 2.9%
AT&T (NYSE:T) 43.5383 7.34% 11.06%
Tech 2.5% 16.5%
Qualcomm (NASDAQ:QCOM) 10.0927 2.53% 2.98%
Industrials 9.5% 12.1%
Southwest Airlines (NYSE:LUV) 36.0673 9.48% 2.34%
Cyclical 15.2% 12.5%
General Motors (NYSE:GM) 51.5654 7.66% 10.16%
Magna Int'l (NYSE:MGA) 38.2051 7.49% 5.45%
Health 20.6% 10.8%
AbbVie (NYSE:ABBV) 25.2402 7.29% 8.37%
Pfizer (NYSE:PFE) 45.4169 6.49% 7.53%
Johnson & Johnson (NYSE:JNJ)* 12 6.73% 4.98%
Energy 6.8% 5.7%
Valero (NYSE:VLO) 25.2654 6.80% 9.17%
Financials 20.1% 17.5%
Toronto-Dominion (NYSE:TD) 35.2824 7.36% 8.13%
Bank of Nova Scotia (NYSE:BNS) 25.2162 6.23% 7.36%
T. Rowe Price (NASDAQ:TROW) 21.0586 6.49% 6.22%
Utilities & REITs 2.9% 7.4%
Realty Income* 12 2.88% 3.94%

As I am still very much in the building stages of my portfolio construction, I'm not too worried about the levels of variance from my targets as represented by the Global BMI breakdown. As I continue to add holdings, these numbers will even out and better reflect a diversified portfolio, and one that includes holdings across all 11 GICS sectors.

At the end of the month my current yield was 3.38% with a yield on cost of 3.49%.

Purchases & Sales

5/4 - BUY 12 shares of Realty Income @ $55.30

With the early month sell-off, O finally slipped into territory where I was comfortable opening a new position. As you can see, I did not by any means back up the truck here. There's always a healthy discussion in the Seeking Alpha DG community about O and its valuation, and many people were commenting that they were waiting for $54 or $52 or lower. It did go below $54 eventually, but not for long. I think it will be interesting to follow Realty's price again this month heading into the next Fed meeting, where interest rates are expected to be raised again, but I'm happy to start with a nibble and work my way up from there over time. If O does see the low $50s again, I'd probably look at picking up another small tranche.

Dividends Received

In May I received dividends from 4 companies - CVS Health, AT&T, Toronto-Dominion Bank, and AbbVie. The total for the month was $60.68, an increase of 34% over the middle month of Q1. This was driven by a shift in payment from TD from Month 1 to Month 2, and by my increased investment in CVS Health yielding additional dividends.

Also worth pointing out that Southwest Airlines did finally release their updated capital allocation plans on May 17th, including a 25% dividend increase from $0.10 to $0.125. That's a great number but keep in mind Southwest's current yield is less than 1%.

June Preview

Once again I am rather limited in potential funds for new buys this month, but if I do decide to nibble again, I'd probably start on existing holdings like Eastman Chemical or Qualcomm. And as a side note, if you're looking for more information about why those are good potential buys right now, please check out my New Div on the Block Quarterly Earnings Round-Up series! For a potential new holding, here's where I might look:

Tanger Factory Outlet Centers

As I mentioned in the introduction, it's no secret that May was a rough month for retail REITs. I'm sure shareholders of Tanger were none to pleased to see their investments take a nearly 20% haircut in a single month. That being said, while the situation is challenging, I don't think it's existential. I'll leave it to REIT experts like Brad Thomas to explain more in depth about why that is, but the basics are this: The company is still able to generate healthy cash flow that keeps its dividend payout ratio remarkably low among its peer group. And with the sell-off, the yield on Tanger is now historically high well over 5%. As with O, I probably wouldn't back up the truck here yet as we simply don't know how this is going to play out, regardless of the company's health fundamentals, but it's hard to see a compelling argument not to at least dip one's toes into this high-quality name, if one is not too overall bearish on the retail environment.

Which companies are you watching this month? Do you agree with my purchase choice? Add to my watchlist, leave a comment below, and thanks for stopping by!

Disclosure: I am/we are long MGA, TROW, ADM, GM, CVS, BNS, T, LUV, TD, QCOM, VLO, ABBV, PFE, EMN, JNJ, O. 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.