5%+ Dividend Yield Portfolio: Catching Fallen Angels And Falling Knives (Aug 2017 Review)

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Includes: ABBV, BAC, BLW, BP, BXMT, DBEF, DIV, DWX, DXPS, E, EDIV, ETW, EWA, F, FGD, FXEU, GCOW, GDX, GS, GSK, HGEU, HYND, HYZD, JRO, KMI, NRZ, OHI, ONEY, PREMX, QCOM, QID, RDIV, REET, REK, RIG, SBRA, SCHD, SH, SKT, SNH, SPXU, SPYD, SRET, SRTY, STOR, TEVA, TMUS, VDE, VLO, VRP, VZ, WDIV
by: Dividend Disco

Summary

Disappointment from one falling knife (TEVA) undid a lot of positive momentum in August.

To reduce risk, I’m buying more ETFs and selling individual stocks where my conviction is low.

I’m still positioning myself with a more ‘risk-on’ to match the general mood of the market.

Source: Capital Planning Advisors

Rarely has the truism above demonstrated itself so emphatically in my portfolio. As many long-time readers will have noted by now, I am a valuation focused investor seeking superior risk-adjusted returns by focusing on lower-valued stocks with significant appreciation potential and strong dividend yields. But the difference between a stock trading abnormally low that is about to soar again (a fallen angel) and a stock that is circling the toilet (a falling knife) is often more art than science (as even the best investors track records are littered with poor decisions).

In today’s high valued market, stocks that have a lower than usual P/E generally have a good reason for their divergence from the tailwinds inflating the market in general.

Source: GuruFocus.com

However, I believe that these stocks have the best chances for producing alpha across the years for investors that can stomach the accompanying volatility. Therefore, my portfolio mostly consists of value/dividend focused ETFs spiced up with beaten down individual stocks. While I have gone into great length about my ETF strategy, I have focused less on the individual stock picks that add significant yield, appreciation potential, and risk to my portfolio. Sometimes these stock picks work out very well for me (ALJ, ACAS, and STOR come to mind), other times not so well (TEVA, SKT, and F are current examples of picks in my dog house). The good news is that you often make multiple times your money when they work out well, but only lose your money once when they don’t.

Others have pontificated at length on how to try to see how these types of stocks will play out in advance, but the truth is that you will win some and lose some…so I want to focus on the psychology needed to be successful in these types of stocks. First and foremost, I believe that a key is to make sure you have a long-term hold horizon where you will not need liquidity. This lets you sell when you want to…not because you need to. Warren Buffett is famous for imploring investors to ‘never lose money’, but his portfolio contains numerous examples of turnaround stories and other positions that go temporarily negative on paper (but that he could wait out and let his investment thesis play out). The real art then is knowing the difference between a temporary setback and a permanent diminution in value. Conviction and false confidence are very difficult to differentiate in the heat of the moment, but a useful question can be to ask yourself if you would hold the stock even if it were illiquid for the next few years. For example, to me, a giant generic drug manufacturer like TEVA is definitely a hold (even though its stock price just got crushed).

Each person will have to find their own personal pain threshold if these are the types of stocks that you want to be involved in, but my goal in actively managing my portfolio is seeking alpha…and with my long time horizon and risk tolerance, I will continue to do so with beaten down names that I believe have the potential to rise again (note: the energy sector is full of these right now as is anything that Amazon is rumored to be considering destroying next). Just know that being a contrarian can be painful moment-to-moment and hard on your ego. Remember that losses are tougher to endure psychologically that gains are to enjoy…but your long-term results should be your ultimate guide.

August 2017 Review

August was a tough month for me as basically one stock (NYSE:TEVA) torpedoed my capital gains for the month and my portfolio limped to a -1.5% return vs a flat-ish 0.3% return for the S&P 500. Unlike last year where I was significantly leading the market at this point in the year, in 2017 my 2.4% return for the year is badly lagging the ‘risk-on’ 11.9% return of the S&P 500. From a capital gains perspective, it is hard to keep actively managing my portfolio when a cheap S&P 500 ETF would have returned much more (or even my robo advisor that is up 11.3% YTD); however, value plays will be in vogue again sometime and I will be there to capitalize when their time comes. But my portfolio isn’t about paper gains, it is about cash payments.

August was a solid payments month for me this year as my realized dividends were $908 for Aug 2017 (versus $922 in 2016), but my YoY dividends are up over 8%! For the 12 months ending Aug 2017, my portfolio delivered $12,188 in cash to me (a realized yield of 4.4% for my full portfolio including cash reserves). I remain confident that I will make my $13,000 2017 goal, even with my sizable cash and short positions. Fear and greed are hard to balance, but I am happy with where I am overall. My yield focused strategy still makes the most sense to me as paper gains may come and go but cash is forever!!

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 (ETFs and individual companies -- my 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 leads 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!

Portfolio Composition as of August 31, 2017

Security Type Div Yield Market Value Last Month Value Gain/Loss(%)
CORE DIVIDEND FUNDS 4.6% $98,054 $98,287 -0.2%
SPDR S&P 500 High Dividend ETF (SPYD) ETF 4.4% $14,088 $14,276 -1.3%
Schwab U.S. Dividend Equity ETF (SCHD) ETF 2.8% $13,752 $13,670 0.6%
SPDR S&P Emerging Markets Dividend ETF (EDIV) ETF 3.9% $9,627 $9,454 1.8%
SPDR S&P International Dividend ETF (DWX) ETF 5.0% $8,355 $8,271 1.0%
Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD) ETF 4.0% $7,629 $7,690 -0.8%
Global X Superdividend REIT ETF (SRET) ETF 7.3% $6,232 $6,196 0.6%
Global X SuperDividend U.S. ETF (DIV) ETF 6.2% $5,070 $5,116 -0.9%
iShares MSCI Australia ETF (EWA) ETF 4.5% $4,530 $4,540 -0.2%
Vanguard Energy Index Fund ETF Shares (VDE) ETF 2.6% $4,286 $4,432 -3.3%
ProShares Hedged FTSE Europe ETF (HGEU) ETF 3.5% $4,093 $4,088 0.1%
SPDR Russell 1000 Yield ETF (ONEY) ETF 3.0% $3,442 $3,516 -2.1%
SPDR S&P Global Dividend ETF (WDIV) ETF 3.5% $3,392 $3,389 0.1%
Oppenheimer Ultra Dividend Revenue ETF (RDIV) ETF 3.7% $3,325 $3,415 -2.6%
Pacer Global Cash Cows Dividend ETF (GCOW) ETF 2.5% $3,007 $2,994 0.4%
iShares Global REIT ETF (REET) ETF 5.0% $2,589 $2,596 -0.3%
Eaton Vance Buy-Write Opportunities Fund (ETW) CEF 9.3% $2,346 $2,360 -0.6%
PowerShares Europe Currency Hedged Low Vol (FXEU) ETF 16.6% $2,291 $2,284 0.3%
CORE DIVIDEND COMPANIES 6.8% $95,890 $101,247 -5.3%
Omega Healthcare Investors (OHI) REIT 8.1% $15,935 $15,795 0.9%
Blackstone Mortgage Trust (BXMT) REIT 8.0% $9,405 $9,174 2.5%
Royal Dutch Shell (RDSB) Company 6.7% $8,495 $8,679 -2.1%
New Residential Investment (NRZ) REIT 12.2% $8,471 $8,738 -3.1%
Sabra Health Care REIT (SBRA) REIT 7.9% $7,342 $7,342 0.0%
BP (BP) Company 7.0% $6,946 $7,028 -1.2%
Qualcomm (QCOM) Company 4.4% $5,227 $5,319 -1.7%
Teva Pharmaceutical Industries (TEVA) Company 2.1% $4,758 $9,651 -50.7%
Tanger Factory Outlet REIT (SKT) REIT 5.8% $4,680 $5,286 -11.5%
Ford Motors (F) Company 5.5% $4,412 $4,488 -1.7%
GlaxoSmithKline (GSK) Company 6.3% $4,023 $4,052 -0.7%
Iron Mountain (VLO) REIT 5.6% $3,942 $3,643 8.2%
Kinder Morgan (KMI) Company 2.6% $3,557 $3,759 -5.4%
Eni (E) Company 5.8% $3,148 $3,158 -0.3%
Abbvie (ABBV) Company 3.5% $3,012 $2,796 7.7%
Store Capital (STOR) REIT 4.6% $2,538 $2,339 8.5%
SPECULATIVE HOLDINGS TOTAL 0.8% $7,794 $7,825 -0.4%
Market Vectors Gold Miners ETF (GDX) ETF 0.2% $2,472 $2,286 8.1%
Transocean (RIG) Company 0.0% $2,448 $2,595 -5.7%
VARIOUS POSITIONS OF <$1,000 VALUE VARIOUS 2.0% $2,874 $2,944 -2.4%
FIXED INCOME TOTAL 5.1% $30,033 $30,365 -1.1%
PowerShares Variable Rate Preferred ETF (VRP) ETF 4.8% $5,208 $5,250 -0.8%
Bank of America Corporation (BAC) - Pref L (BML+L) Pref 4.3% $4,770 $4,854 -1.7%
Goldman Sachs (GS) - Pref A (GS+A) Pref 4.1% $4,690 $4,820 -2.7%
Blackrock Limited Duration Fund (BLW) ETF 6.0% $3,198 $3,178 0.6%
T. Rowe Price Emerging Markets Bond Fund (PREMX) Fund 6.4% $3,053 $3,007 1.5%
WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (HYZD) ETF 5.2% $2,390 $2,412 -0.9%
Nuveen Floating Rate ETF (JRO) CEF 7.3% $2,344 $2,374 -1.3%
Goldman Sachs (GS) - Pref D (GS+D) Pref 4.4% $2,338 $2,389 -2.1%
WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (HYND) ETF 5.0% $2,042 $2,081 -1.9%
SHORTS TOTAL $8,349 $8,615
ProShares Short S&P500 (SH) ETF 0.0% $8,198 $8,215 -0.2%
ProShares Short Real Estate (REK) ETF 0.0% $3,218 $3,242 -0.7%
ProShares UltraPro Short S&P 500 (SPXU) ETF 0.0% $1,463 $1,475 -0.8%
T-Mobile US (TMUS) Company 0.0% ($4,530) ($4,316) -4.7%
SCHWAB ROBO-ADVISOR TOTAL 2.0% $11,874 $11,819 0.5%
TOTAL 5.1% $251,993 $258,159
TOTAL + CASH $36,558 4.4% $288,551 $266,459 -1.5%

Portfolio Moves in August 2017

New Positions

SHARE BUY – SPDR Russell 1000 Yield ETF (ONEY): Bought 50 shares of this U.S. mid cap dividend ETF at $70.32 on Aug 2.

  • Reasoning: I was looking for a dividend with a mid-cap spin and this 3% yield with 0.2% fee ETF fit the bill.

SHARE BUY – Oppenheimer Ultra Dividend Revenue ETF (RDIV): Bought 100 shares of this U.S. dividend ETF at $34.15 on Aug 2.

  • Reasoning: This dividend ETF boasts a 5.85% yield, 0.39% fee rate, and 5 stars from Morningstar and is my experiment with a more active dividend ETF.

SHARE BUY – Schwab U.S. Dividend Equity ETF (SCHD): Bought an additional 200 shares of this U.S. dividend ETF at $45.85 on Aug 1.

  • Reasoning: Despite only boasting a 2.85% dividend yield at the moment, if I could only own 1 ETF it would be this one due to its coverage universe and 0.07% fee.

SHARE BUY – Vanguard Energy Index Fund ETF Shares (VDE): Bought 50 shares of this energy sector ETF at $88.55 on Aug 7.

  • Reasoning: As one of the view areas of value left (mostly as the result of a brutal commodity downturn), the 2.65% yield and 0.1% fee load attracted me to buy into an eventual turnaround in the sector.

Exited Positions

SHARE SALE – Blackstone Mortgage Trust (BXMT): Sold a partial position of 100 shares of this mortgage REIT at $30.70 on Aug 2.

  • Reasoning: While I still really like this REIT, I needed to sell some positions for the down payment on a house.

SHARE SALE – Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF): Sold all 200 shares of this European ETF at $30.55 on Aug 4.

  • Reasoning: Not enough current yield (<2%) led me to cash in my chips on this ETF for a 25% return.

SHARE SALE – WisdomTree United Kingdom Hedged Equity Fund (DXPS): Sold all 100 shares of this U.K. ETF at $24.35 on Aug 23.

  • Reasoning: While I still like this ETF, I needed to sell some positions for the down payment on a house.

SHARE SALE – ProShares UltraShort QQQ (QID): Sold all 200 shares of this inverse NASDAQ ETF at $16.03 on Aug 1.

  • Reasoning: While my hedges have helped me sleep a little better at night, this was expensive insurance in a market that seems to do nothing but go up…I would rather deploy my assets into yield vehicles than into insurance for the drawdown that might not come for a long time.

SHARE SALE – Senior Housing Properties Trust (SNH): Sold all 100 shares of this healthcare REIT at $19.42 on Aug 21.

  • Reasoning: While I still like this REIT, I needed to sell some positions for the down payment on a house.

SHARE SALE – ProShares UltraPro Short Russell2000 (SRTY): Sold all 175 shares of this inverse Russell 2000 ETF at $41.90 on Aug 1.

  • Reasoning: While my hedges have helped me sleep a little better at night, this was expensive insurance in a market that seems to do nothing but go up…I would rather deploy my assets into yield vehicles than into insurance for the drawdown that might not come for a long time.

SHARE SALE – Verizon Communications (VZ): Sold my last 50 shares of this U.S. telecom at $48.45 on Aug 23.

  • Reasoning: I managed to trade AT&T just right and sell near the high last summer, but I rode VZ all the way down and am glad to be out with a 5% profit and years of a 5% yield.

Final Thoughts

TEVA got cut in half as my bottom fishing in this hyper-valued market hurt my paper returns this month. However, by focusing on the long-term I still believe that the best returns can be had by blending market tilt ETFs with unloved value stocks. For me, continuing to collect dividends at almost 3x the S&P 500 market rate while I endure elevated volatility still feels like a winner of a strategy to me. For you, make a long-term plan that you are comfortable with before diving into contrarian stocks or you will be forced to sell when the price is low (instead of waiting for better days when some of your calls go bad). Luck is always a factor, so I hope you catch many more fallen angels than falling knives.

Source: Bass/Schuler Entertainment

Do you have any ideas for great contrarian plays with strong dividends (and covered payouts)?

Comments encouraged.

Disclosure: I am/we are long ALL AS 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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