- Volatility returned in Feb with indexes hitting correction territory and ending down about 5% for the month.
- My paper returns also suffered (-3.6%) but edged the S&P 500 (-3.9%); however my dividends continued.
- I went bargain shopping and added ETFs on the market weakness (and I hope you did too).
- I’m still cautiously optimistic on 2018 (but less so about later in the year will be choppier as midterm election increases volatility).
Volatility returned to the markets in February climaxing early in the month with the first 10% correction in years. In response, a record number of investors panicked and pulled $30.6 billion out of equity funds in one week (the largest ever amount of weekly based on records going back to 2004, according to analysts at Bank of America Merrill Lynch). However, within weeks, those losses had been largely trimmed and the month closed down about 5%.
The only question that matters is: what did you do?
Did you stay the course and hold? …or were you a buyer who took advantage of the volatility? …or did you panic and lock in losses?
I was a modest buyer during the month and (while never happy to suffer paper losses) was glad to be able to add equities at discounted prices. As time continues, volatility is far more likely to be the norm than the unusually calm and steady gains of the post-election period. Your mindset will be as important as your tactics this year…so if you panicked (or didn't sleep well at night), then you need to seriously consider reducing risk (or restrain yourself from checking your portfolio too often).
If looking for a place to deploy new capital or to reduce risk, I continue to believe that dividend paying, value stocks are the best buys in today's market (both from a historical perspective but also when factoring in the particularities of today's market dynamics). The historical argument is clear to recognize:
However, today's market has further factors that predict outperformance as explained in a great longer read from Causeway Capital that is worthy of your time, but the conclusion echoes my thoughts:
Value investing requires discipline to have a realistic estimate of a stock's fair value and to not overpay relative to fundamentals. Even though the market chose not to reward such discipline in 2017, the long-term performance track record has heavily favored value compared to growth, and we believe there is an increasingly strong case to be made for allocating to value-oriented strategies in 2018. Value's performance has tended to be disconnected from economic and market cycles, so yes, value can outperform growth in a late bull market. Moreover, growth stocks are trading at extreme premiums to value stocks, the dispersion in market multiples is well above the long-term average, and momentum has been susceptible to abrupt reversals. Add to that the global monetary backdrop of normalizing central bank liquidity and increasing rates, and we believe there is a confluence of dynamics favoring value over growth.
February 2018 Review
February 2018 was a tough one for me on paper (and likely for you too) as I returned a -3.6% (which edged the -3.9% for the S&P 500). However, I will just keep cashing my dividends because (at its core) my portfolio isn't about paper gains, it is about cash payments. February rewarded me with realized dividends of $ $867 (versus $817 in 2017…a gain of over 6%). For the 12 months ending Feb 2018, my portfolio delivered $13,143 in cash to me (a realized yield of 4.5% for my full portfolio including cash reserves). My 2018 goal is to increase dividends by ~5% to $13,500 for the year, 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!!
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 February 28, 2018
|Security||Type||Div Yield||Market Value||Last Month Value||Gain/Loss(%)|
|Schwab U.S. Dividend Equity ETF (SCHD)||ETF||2.5%||$15,147||$16,050||-5.6%|
|SPDR S&P 500 High Dividend ETF (SPYD)||ETF||3.7%||$14,404||$15,236||-5.5%|
|SPDR S&P Emerging Markets Dividend ETF (EDIV)||ETF||2.8%||$10,778||$10,823||-0.4%|
|SPDR S&P International Dividend ETF (DWX)||ETF||3.7%||$8,269||$8,696||-4.9%|
|Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD)||ETF||3.8%||$7,800||$8,304||-6.1%|
|ProShares S&P 500 Dividend Aristocrat ETF (NOBL)||ETF||1.7%||$6,308||$6,644||-5.1%|
|Global X Superdividend REIT ETF (SRET)||ETF||8.5%||$5,584||$6,008||-7.1%|
|iShares Nasdaq Biotechnology ETF (IBB)||ETF||0.3%||$5,404||$5,704||-5.3%|
|UBS ETRACS 2x US High Div, Low Vol ETN (HDLV)||ETN||10.5%||$5,382||$4,905||9.7%|
|Global X SuperDividend U.S. ETF (DIV)||ETF||6.1%||$4,850||$5,009||-3.2%|
|iShares MSCI Australia ETF (EWA)||ETF||4.3%||$4,564||$4,754||-4.0%|
|Vanguard Energy Index Fund ETF Shares (VDE)||ETF||2.8%||$4,556||$5,104||-10.7%|
|PowerShares S&P 500 High Div Low Volatility ETF (SPHD)||ETF||3.2%||$3,938||$4,240||-7.1%|
|Oppenheimer Ultra Dividend Revenue ETF (RDIV)||ETF||4.2%||$3,552||$3,732||-4.8%|
|Global X NASDAQ China Technology ETF (QQQC)||ETF||2.1%||$3,124||$3,280||-4.8%|
|Pacer Global Cash Cows Dividend ETF (GCOW)||ETF||2.7%||$3,115||$3,275||-4.9%|
|Fidelity Dividend ETF for Rising Rates (FDRR)||ETF||2.8%||$3,100||$3,136||-1.1%|
|iShares MSCI China Small Cap ETF (ECNS)||ETF||2.9%||$2,579||$2,726||-5.4%|
|Horizons NASDAQ 100 Covered Call ETF (QYLD)||ETF||7.6%||$2,491||$2,303||8.2%|
|iShares Global REIT ETF (REET)||ETF||3.8%||$2,400||$2,569||-6.6%|
|Market Vectors Gold Miners ETF (GDX)||ETF||0.7%||$2,135||$2,375||-10.1%|
|Omega Healthcare Investors (OHI)||REIT||10.3%||$17,836||$18,928||-5.8%|
|Royal Dutch Shell (RDSB)||Company||5.8%||$9,627||$10,790||-10.8%|
|Blackstone Mortgage Trust (BXMT)||REIT||7.9%||$9,315||$9,300||0.2%|
|New Residential Investment (NRZ)||REIT||12.2%||$8,291||$8,887||-6.7%|
|Ventas REIT (VTR)||REIT||6.5%||$7,248||$8,396||-13.7%|
|Tanger Factory Outlet REIT (SKT)||REIT||6.2%||$6,696||$7,554||-11.4%|
|Sabra Health Care REIT (SBRA)||REIT||10.5%||$5,672||$6,078||-6.7%|
|Ford Motors (F)||Company||5.7%||$4,244||$4,388||-3.3%|
|Iron Mountain (IRM)||REIT||7.6%||$3,146||$3,503||-10.2%|
|Kinder Morgan (KMI)||Company||3.0%||$2,981||$3,308||-9.9%|
|KKR Real Estate Finance Trust (KREF)||REIT||7.5%||$1,960||$1,945||0.8%|
|Teva Pharmaceutical Industries (TEVA)||Company||0.0%||$1,872||$2,041||-8.3%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$2,537||$2,665||-4.8%|
|FIXED INCOME TOTAL||4.5%||$15,982||$15,773||1.3%|
|Bank of America Corporation (BAC) - Pref L (BML+L)||Pref||4.4%||$4,670||$4,628||0.9%|
|Goldman Sachs (GS) - Pref A (GS+A)||Pref||4.4%||$4,492||$4,390||2.3%|
|WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (HYZD)||ETF||4.8%||$2,409||$2,423||-0.6%|
|Goldman Sachs (GS) - Pref D (GS+D)||Pref||4.7%||$2,245||$2,229||0.7%|
|WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (HYND)||ETF||4.8%||$2,166||$2,104||3.0%|
|ProShares Short S&P500 (SH)||ETF||0.0%||$7,400||$7,153||3.5%|
|ProShares Short Real Estate (REK)||ETF||0.0%||$3,486||$3,266||6.7%|
|SCHWAB ROBO-ADVISOR TOTAL||2.0%||$12,660||$13,213||-4.2%|
|TOTAL + CASH||$17,835||4.6%||$294,900||$308,609||-3.6%|
Portfolio Moves in February 2018
SHARE BUY- Fidelity Dividend ETF for Rising Rates (FDRR): Bought 100 shares of this dividend ETF at $31.31 on Feb 16.
- Reasoning: A tech heavy spin on a DGI strategy wrapped in ETF packaging.
SHARE BUY- UBS ETRACS 2x US High Div, Low Vol ETN (HDLV): Bought 200 shares of this dividend ETN at $26.55 on Feb 22.
- Reasoning: A 2x leveraged approach to a high dividend, low volatility strategy with a very persuasive dividend yield (though much more risk than an unleveraged fund).
SHARE BUY- Horizons NASDAQ 100 Covered Call ETF (QYLD): Bought 100 shares of this covered call ETF at $22.98 on Feb 9.
- Reasoning: I was seeking to access more tech exposure while receiving a high dividend, and this ETF seemed to be a good fit.
For those who forgot that volatility was a part of stock market investing, February was a rude re-introduction. However, unless you happened to be buying a house or something life changing in that particular month, then the paper losses will mean nothing to you a few months from now…assuming that you didn't panic and sell or otherwise act irrationally. No one likes paper losses, but capitulation is a guaranteed loser of a strategy in the long run (trust me, I tried it for a while in 2009). In today's market, I believe that equities remain the best risk-adjusted source of long-term wealth creation for the average investor…so buckle up, buttercup, the ride might be choppy, but the destination is worth it!
This article was written by
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