Seeking Alpha

September Update: The Brown Bag Portfolio

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Includes: APLE, ARCC, EPD, KEY
by: Michael Hesse
Michael Hesse
Value, long-term horizon, dividend investing
Summary

August was a tough month for the Brown Bag Portfolio.

Reader comments, feedback, and setting goals.

How a dividend strategy helps limit the losses.

Research for future positions.

August

No matter what the size of your portfolio, it's difficult . . . it's downright heartbreaking to watch it loose money. This is especially true when it is new and fragile and you lack the experience of watching the value of your holdings fluctuate. So without any further ado, let me say that August wasn't good to my investments. In fact, I can say with some certainty, that August and I are no longer friends.

Throughout most of the month, three quarters of my positions were in the red with the only exception being KeyCorp KEY. By the final day in August KEY still sat in the black, but it was uncomfortably close to the break-even line. Apple Hospitality REIT APLE, a stock that had buried itself in the red almost from the moment that I completed my position, finally flung itself back across the break-even line and ended the month at $18.18, just eight cents above my purchase price.

Those of you who read my first article, Introducing the Brown Bag Portfolio, know that I discussed at some length the evolution of my attitude / strategy towards my investments. I went from a traders mindset where the only thing that was important was the current stock price, to a dividend investors' where the strength of the dividend and the ability of the company to continue to pay that dividend is of greater importance than the day to day fluctuations in price. It was this attitude that let me grind my teeth and pass through August without yanking out any more of my rapidly vanishing hair.

Comments & Strategy

One of my readers (shout-out to Rarudolp) asked a very simple question in the comments. It's funny how a complex question can often be answered quickly and easily, but it's the simple questions that make you think. Rarudolp's question was one of the latter. He or she (don't rightly know) asked if I had any particular goal in mind for the the Brown Bag Portfolio. Simple right? Not if I wanted to respond with something more than a quick reply of providing retirement income or something else vague and meaningless. It made me ponder real, but difficult goals. A vague or simple goal isn't worth striving towards and wouldn't make interesting reading or writing. It made me think.

After some time I put together a goal that I figured would be difficult to attain, but would be very satisfying for me if I did make it. It would certainly make all the scrimping and saving (it's called the Brown Bag Portfolio because I initially funded it with my lunch money), worth while. I want to build the portfolio to the point where the dividends pay the mortgage, taxes, and insurance on my home each month. The above comes to approximately $1400 a month or $16,800 a year. Because of this I've added two columns: "Div Goal" and "% of Goal" to my monthly portfolio chart.

The Brown Bag Portfolio

Symbol

Shares

Value

Cost Basis

Return

% Return

Div/shr

Annual Div

YTD Div Paid

KEY

100.85

$1,735.64

$1,597.20

$138.44

8.67%

$0.38

$38.32

$11.44

Ares Capital (NASDAQ:ARCC)

105.25

$1,690.32

$1,791.93

-$101.61

-5.67%

$1.52

$159.98

$88.76

APLE

110.03

$2,005.29

$1,996.50

$8.79

0.44%

$1.20

$132.04

$5.50

Enterprise Products Partners L.P (NYSE:EPD)

175.21

$4,567.67

$4,724.61

-$156.94

-3.32%

$1.68

$294.35

$134.72

Total

$9,998.92

$10,110.24

-$111.32

-1.10%

$624.69

$240.42

Div Goal

% of Goal

$16,800

3.72%

As you can immediately see, the Brown Bag Portfolio has moved into a slight loss. After August I'm looking at a loss of 1.1%, with my greatest loss in Enterprise Partners. Although I was sorely tempted to add more shares in order to drive down my overall price per share, I held off. Firstly because I had just taken a position in Apple Hospitality the month before, but mostly due to the fact that I'm too heavily invested in it as it stands. As I said in my previous article, I won't purchase any more EPD until it occupies less than 20% of my portfolio. As much as I may like the company and as strong as I feel about its future prospects, it already occupies 44.7% of my portfolio, I need to diversify before I can go back and reassess adding to my current position.

One of the more rewarding aspect of dividend investing is the fact that the dividends themselves help mitigate some of the losses. I'm currently sitting on losses in two of my stocks, both Ares Capital and Enterprise Partners . Interestingly, these are also my biggest dividend payers . . . before I go on and for the sake of accuracy, let me first state that EPD is a Master Limited Partnership (MLP) and it's dividends are not dividends, they are called distributions (you also don't own stock, you own units). However in order to keep the chart simple I list those distributions under the column (dividends).

As of the end of August I have had a negative 5.67% return on ARCC which translates to a loss of $101.61. However during the time I've owned the stock I've also received $88.76 in dividends which were reinvested through my brokerage's DRIP program. So on the one hand I'm down $101.61, as far as money I've had to take out of my pocket in order to invest, I'm only down $12.85. Enterprise is a little different. By the end of August I was down $151.68, but after dividends (distributions) that figure is actually only $16.96.

Now I know that someone out there is going to argue that because all dividends and distributions were reinvested through DRIP programs I own more of the stock or units than I did initially and therefore I really am down those larger amounts. That's true, but the 5.21 extra shares (units) of Enterprise didn't come out of my wallet and the same goes for the extra 5.25 shares of Ares. The end result is that I'm not freaking out about the current drops in share price for either of these stocks. Enterprise frequently trades with the price of oil (although it shouldn't) and it will pop up and down, but it is such a solid performer that I'm not very concerned about it's ability to continue to pay it's ever-increasing distribution.

As I mentioned last month, Ares has had two bad quarters and is currently trading approximately forty cents below NAV. It could be a bargain, it might be time to get out. However, as long as the dividend remains stable I think I'll stay. I'll wait for the next quarterly report before I make any decisions.

Research

Although another one of my current rules is to commit no more than two thousand dollars to any one company, I still reached out to Apple Hospitality investor relations department. Apple Hospitality has four hotels in Houston and as an investor I was curious if they had been damaged or if they were up and functioning and able to help house some of the people affected by the hurricane. I was surprised when I received an email back (within a couple of hours of my inquiry) from Kelly Clarke, who informed me that all four hotels hadn't sustained any material damage and all were open and operational. Regardless of Kelly's answer this taught me an important lesson...ask. We frequently wait for breaking information or details and analysis from some writer/expert/pundit about a stock we're interested in, when we can find that information out for ourselves, just by asking.

August and September are capital growth months for me. In other words, I'm saving my pennies and trying to decide where I should open a position. Another one of the rules I developed during the past year was to attempt to purchase in blocks of $1000.00. This rule was designed to limit the amount of money I spend on commissions. Like eating out, it's amazing how much money you can spend on commissions when you aren't paying attention.

I've identified a number of companies that I'm interested in. Each pays a solid dividend, but I'm still in the process of evaluating each of these companies and hope to have decided upon one that I'll be ready to invest in as of October. Over the next twelve to eighteen months I need to concentrate upon diversification and will most likely be looking at companies in the tech and healthcare sectors first. Im particularly interested in: Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), Analog Devices (NASDAQ:ADI), as well as Pfizer (PFE]], AbbVie (NYSE:ABBV), Astrazeneca (NYSE:AZN), or Abbott Labs (NYSE:ABT) are the first that I'm giving serious consideration. There are several REIT's I'm interested in as well, such as EPR Properties (NYSE:EPR), Stag Industrial (NYSE:STAG), Omega Healthcare Investors (NYSE:OHI), and Cyrus One (NASDAQ:CONE), and I'm likely to add one of these within twelve months. However, I'll most likely add a company from both the tech and healthcare sectors first. I already have a REIT and I want to keep from becoming too concentrated.

Summary

In conclusion, August was a learning month. I learned that holding to my dividend strategy even while my portfolio was sinking was an effective way to mitigate my losses. I also learned that it is fairly easy to reach out to some of these companies to learn information that may not be readily available elsewhere. Even in a rough month, holding to the rules can produce good results.

Disclosure: I am/we are long ARCC, APLE, EPD, KEY. 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.