How Is My Portfolio Performing Using The '10 Minute System'?

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Includes: AYR, BLX, BNS, CMI, CVX, EMCF, GME, GNC, HP, IBM, KMI, LAZ, LYB, M, MDP, MHLD, NGG, NOV, NRZ, ORI, PFG, PLOW, QCOM, SSI, STWD, TCAP-OLD, UFS, VLO, VOO, VZ, WDR, WM
by: Lino Patti

Summary

I use the “10 Minute System” to help me decide what stocks I should purchase.

My portfolio has beat my benchmark last year and so far this year.

I will reveal what stocks I own in my portfolio.

The “10 Minute Stock Rating System” has gotten a lot of coverage over the last couple months on Seeking Alpha. Using Benjamin Graham’s value criteria and other popular dividend metrics, the System is used to help rate a stock’s financials, value, dividend, and risk so that an investor can make an informed decision if they should purchase a specific dividend growth stock or not. The details of what the System is and how it works can be read about in depth here.

I use the System to help me build my dividend growth portfolio. I have only used the System for 2.5 years so I don’t have a lot of historical results to prove that the System is working. Luckily, an investment analysis company performed a 17-year backtest on the System and provided the data that shows an investment strategy using the System would have beat the S&P 500 by 17% a year for 17 years. An article that details the results can be viewed here. I was very happy with the backtest results but selfishly I am more interested in how the System has been helping me over the last few years.

In this article I will explain how and why I benchmark, reveal my portfolio results compared to my benchmark, share with you the makeup of my portfolio, and go over my transactions for the month of June.

Benchmark

I am a conservative long-term investor. I believe in building wealth by investing in assets that return 10% or more a year over a lifetime. My father introduced me to investing when I was about 16 years old and recommended that I invest most of my money in the S&P 500 because it has returned about 10% a year since its inception. This was great advice and I followed it for many years with success. However, in the last six years I started learning and researching about other stock investment strategies. My focus revolved around learning more about dividends. My favorite part about investing in an S&P 500 index fund was receiving my quarterly dividend. It felt like receiving free money and I didn’t fully understand why I was being paid that income. Now after many years of research, I understand how dividends work and found better ways to accumulate dividends than investing in an S&P 500 fund.

The reason I am writing about the early history of my investing life is because it explains why I chose the S&P 500 as a benchmark. If I wasn’t investing in dividend growth companies then I would be investing in a low-cost S&P 500 index fund or ETF to make market average returns. I like to know if my new investing strategy results are better than my simple yet successful original strategy of buying and holding an S&P 500 fund for the long term and reinvesting all dividends. Furthermore, the S&P 500 is often considered a close equivalent to “overall market returns,” so comparing to it basically tells me if I am beating the overall market or not at the same time. Finally, I assume some will ask me why I don’t use a dividend fund as a benchmark, it’s actually a great question. I am actually thinking about adding a common dividend fund for comparison as a benchmark, but I haven’t set that up yet so we will only focus on the benchmark I have established.

The holding I chose for my benchmark is Vanguard S&P 500 ETF (VOO). I used to invest in VOO and it has an extremely low maintenance fee. To achieve the most accurate results as possible, I “paper buy” an equivalent amount of VOO stock whenever I buy shares of a dividend stock in my portfolio. I then compare the results of each investment at the end of every month or quarter. I have coined my portfolio the Early Retirement Fund or ERF.

ERF vs. VOO

The table below shows the results of my ERF portfolio compared against my VOO benchmark as of June 30, 2017:

Year

ERF Return

VOO Return

2015

-12.75%

1.05%

2016

25.89%

13.83%

2017 YTD

1.32%

1.02%

Total Return

14.9%

12.2%

Average Annualized Return

6.0%

4.9%

Source: Author Calculations

As you can see overall I am beating my benchmark by a few percentage points. My first year was rough due to me buying mostly energy, industrials, financials, and basic materials stocks during the most recent oil downturn. I found a lot of deals in 2015 by analyzing financials and dividends using the System. My holdings began to fall as a barrel of oil was trying to find its bottom. I am glad I held on to all the beaten-up stocks I purchased in 2015 because they recovered greatly the next year and almost doubled my benchmark in 2016.

This year so far I have achieved similar returns than my benchmark. We will see if all the beaten up retail stocks I have been buying at a discount in the last 6 months will recover and produce benchmark beating returns.

I understand 2.5 years isn’t enough history to really legitimize the System but at least it’s a start in the right direction. I am happy with my results.

The ERF Portfolio

My portfolio consists of 25 holdings as of June 30, 2017, and are as follows: Aircastle (AYR), Bank of Nova Scotia (BNS), Cummins (CMI), Chevron (CVX), Emclaire Financial (EMCF), GameStop (GME), GNC Holdings (GNC), Helmerich & Payne (HP), International Business Machines (IBM), Kinder Morgan (KMI), Lazard (LAZ), LyondellBasell Industries (LYB), Macy’s (M), Meredith Corporation (MDP), Maiden Holdings (MHLD), National Oilwell Varco (NOV), New Residential Investment (NRZ), Old Republic International (ORI), Douglas Dynamics (PLOW), Stage Stores (SSI), Domtar (UFS), Valero Energy (VLO), Verizon (VZ), Waddell & Reed Financial (WDR), and Waste Management (WM).

The following table shows my current ERF portfolio:

Stock

Shares Owned

Cost Value

Market Value

Unrealiz-ed Gain

Cash Dividends

Option Premium

Realized Capital Gain

Total Return

AYR

12

263.02

261.00

-2.02

0.00

0.00

0.00

-2.02

BNS

39

2,039.31

2,345.07

305.76

162.91

0.00

0.00

468.67

CMI

110

9,534.10

17,844.20

8,310.10

675.25

51.30

0.00

9,036.65

CVX

15.15

1,657.98

1,581.10

-76.88

146.43

0.00

0.00

69.55

EMCF

100

2,800.00

2,787.50

-12.50

27.00

0.00

0.00

14.50

GME

100

2,850.00

2,161.00

-689.00

150.00

94.29

0.00

-444.71

GNC

100

1,000.00

833.00

-167.00

0.00

113.31

0.00

-53.69

HP

24

1,271.28

1,304.16

32.88

116.70

0.00

0.00

149.58

IBM

33

4,838.63

5,076.39

237.76

234.30

0.00

0.00

472.06

KMI

73.78

2,705.79

1,413.67

-1,292.12

184.26

0.00

0.00

-1,107.86

LAZ

100

3,800.00

4,633.00

833.00

313.00

195.58

0.00

1,341.58

LYB

100

8,176.39

8,439.00

262.61

254.05

0.00

0.00

516.66

M

40

1,329.20

929.60

-399.00

75.50

0.00

0.00

-324.10

MDP

2.64

105.30

156.69

51.39

13.92

131.30

101.74

298.35

MHLD

151

2,137.67

1,676.10

-461.57

88.28

209.04

0.00

-164.25

NOV

100

4,107.42

3,279.50

-827.92

193.60

379.20

-19.98

-275.10

NRZ

100

1,526.00

1,556.00

30.00

48.00

0.00

0.00

78.00

ORI

100

1,896.75

1,953.00

56.25

75.50

12.58

0.00

144.33

PLOW

100

2,250.00

3,290.00

1,040.00

118.50

16.29

0.00

1,174.79

SSI

97

1,047.60

201.76

-845.84

92.15

0.00

0.00

-753.69

UFS

69

3,001.50

2,650.98

-350.52

252.56

0.00

0.00

-97.96

VLO

100

6,617.44

6,746.00

128.56

79.10

0.00

0.00

207.66

VZ

3.87

191.96

172.85

-19.11

299.87

123.59

181.48

585.83

WDR

100

2,500.00

1,888.00

612.00

184.00

98.29

0.00

-329.71

WM

3.79

130.39

277.71

147.32

16.68

0.00

90.29

254.29

cash

120.78

120.78

0.57

0.00

0.00

0.00

0.57

Total:

1,774.23

67,897.94

73,578.06

5,680.12

3,801.56

1,424.77

353.53

11,295.98

Source: Author Calculations

The next table shows the ERF’s previous holdings that I sold out of completely. This table must be shown because each of my previous holdings produced income for my portfolio. This table must be included to be able to calculate the total return of the ERF portfolio since inception.

The stocks I used to own include Banco Latinoamericano De Comercio Exterior (BLX), National Grid (NGG), Principal Financial Group (PFG), Qualcomm (QCOM), Starwood Property (STWD), and Triangle Capital (TCAP-OLD).

Stock

Cash Dividends

Option Premium

Capital Gain

Total Return

Reason For Exiting Position

BLX

410.44

70.58

0.90

481.92

Froze dividend

NGG

35.69

0.00

113.36

149.05

Did not have dividend raise streak

PFG

0.00

294.87

0.00

294.87

Secured puts expired worthless

QCOM

0.00

71.29

0.00

71.29

Secured puts expired worthless

STWD

240.00

51.58

33.19

324.77

Froze dividend

TCAP

527.64

58.87

16.75

603.26

Cut dividend

Total:

1,213.77

547.19

164.20

1,925.16

Source: Author Calculations

The summations of the two tables added together are as follows:

Stock

Shares Owned

Cost Value

Market Value

Unrealiz-ed Gain

Cash Dividends

Option Premium

Realized Capital Gain

Total Return

Total:

1,774.23

67,897.94

73,578.06

5,680.12

5,015.33

1,971.96

517.73

13,185.14

Source: Author Calculations

I must note that I opened up a brokerage account in 2011 when I was 23. I deposited $2,500, had no real strategy, bought five high yielding dividend stocks that sounded good to me, and still own at least some of those shares in those five positions today. I didn’t start using the System until the beginning of 2015 and did not get serious about contributing to my brokerage account until that time as well. My portfolio balance never exceeded $5000 until I started depositing savings more aggressively every month into my account in November 2014. I have thus far made a positive return on 4 out of the 5 stocks originally purchased, but KMI was the stock I regret as its value has decreased significantly since I bought it. If I used the System back in 2011 to 2014, I would have never purchased KMI because the System would have revealed to me that the company had poor financials at the time. You live and you learn.

I am still very happy with my results as I have gained $13,185.14 of wealth since I opened up a brokerage account, which is good for a 19.42% total return on investment. Since my primary goal is to build a passive dividend income stream, I am more excited about the $5,015.33 of dividends that I have collected. Those dividends make up a large percentage of my total return.

The reason I want to share my portfolio results on a monthly or quarterly basis is for accountability reasons. I don’t want to recommend an investing strategy if it does not work for me. I also hope to influence investors into considering similar long-term dividend growth investing strategies by showing positive results over time. I am not concerned with short-term stock fluctuations, instead I am looking at the long-term horizon as I want to build a large dividend income stream that will supplement my traditional retirement income. The June update on my portfolio income can be viewed here.

June Portfolio Transactions:

The following table shows my ERF June 2017 transactions:

Stock

Transaction Type

Shares

Price/Option Strike Price

Amount

VLO

Buy

4

$62.46

$249.82

GNC

Call Option

100

$10.00 Strike

AYR

Buy

12

$21.92

$263.01

NOV

Call Option

100

$37.50 Strike

Source: Author Calculations

Please view my past articles on Seeking Alpha of the reasoning behind my VLO, GNC, and AYR transactions. But to summarize, I purchased VLO and AYR because the System rated these stocks 93% and 80%, respectively, indicating that each company had strong financials, an optimal balance sheet, a safe dividend, and a built-in margin of safety. I wrote call options on GNC and NOV to pick up extra income as I wait for each stock’s price recovery. I want to eventually exit both positions due to each stock cutting its dividend.

Usually, I don’t make transactions lower than $1,000 to keep commission fees low, but I received some free trades from my online broker for adding my beautiful wife to my account. Spousal benefits were great this June!

Conclusion

The ERF portfolio has performed well since I started my dividend growth value investing strategy two and a half years ago. I have outperformed my benchmark overall and have proved that my “10 Minute Stock Rating System” is helping me find undervalued dividend growth stocks that are producing market beating returns. I made four transactions in June 2017 which produced option premium income and will produce more dividend income in the future.

Disclosure: I am/we are long AYR, BNS, CMI, CVX, EMCF, GME, GNC, HP, IBM, KMI, LAZ, LYB, M, MDP, MHLD, NOV, NRZ, ORI, PLOW, SSI, UFS, VLO, VZ, WDR, WM.

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.

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.