Trouble On The Horizon? The Brown Bag Portfolio March Update

Summary

• Historical perspective on a difficult February.
• Changes to the Brown Bag Portfolio.
• What lies ahead.

Wow, February was uncomfortable, and as I write this update March looks like it may be turbulent to say the least. Rising rates, threatened tariffs, and investor skittishness have all combined to make owning high-yielding equities difficult. Timing, they say, is everything and if that’s the case then my timing sucks! But - and let’s be honest, you were expecting a "but" - I remain undeterred.

I’m not a member of the "sky is falling" crowd. Although I am a newbie investor (the Brown Bag Portfolio is less than two years old), I am old enough to have some historical perspective. I remember when interest rates were many times higher than they are currently. I remember my parents having a 14% interest rate on their mortgage. I remember inflation rates in the double digits and unemployment above eight percent and I remember that business was still conducted. The economy didn’t collapse. There was a lot of pain on Main Street and well as Wall Street, but we didn’t have breadlines in the streets. Although it wasn’t uncommon to wait more than an hour to fill up your car, martial law wasn’t declared. We got through all of that then, and I expect that we’ll get through it now.

I’m not a professional money manager. I don’t have degrees in finance or international relations. I repair computers and printers, routers and servers for major corporations. I drive throughout a territory larger than Rhode Island putting out "fires" and making sure that those corporations can get back to business. I’m a self-taught tinkerer and the certificates on my wall all come from places like Microsoft (MSFT), HP (HPQ), and a dozen other companies where results are the only criteria of success. I’m proud of the work I do and the effort that was required to master those skills, many of which were obtained while I was being told that I couldn’t succeed.

I mention all of this not to pat myself on the back but to underscore my belief that one doesn’t have to turn over all their hard-earned money to the experts to attain financial freedom. I write these articles for the person who is struggling to learn how to manage their own money, and for that reason I’ll always highlight my mistakes more than I’ll trumpet my successes. I started down this course much later in life than I should have, and I urge anyone in their 20s or 30s to start immediately. The more time you have before you need that money, the more mistakes you can make and still attain your goal. You do not want to be sitting around in your sixties wondering how you can survive off of Social Security (if it even exists by then).

OK, enough moralizing, back-slapping, and chest-thumping, let’s get down to what happened in February and where I’m going from here. Although the Brown Bag Portfolio went from positive returns to negative returns (on paper) in February, the two reasons I’m not tearing out what little hair I have left are time horizon and dividend investing. Dividends, if they are re-invested through a DRIP (dividend reinvestment program) allow you to grow your shares without any further out of pocket expense. Many programs allow you to own fractional shares (which is why you’ll see 181.13 shares for example in the spreadsheet below). The stock price may move up or down (and will), but every month, quarter, or year (depending upon the company), I own a little bit more. Each quarter (for example) the dividend that is paid is on the total number of shares owned during the previous quarter, thus growing your stake faster than just the stated yield. This is compounding and is the "Holy Grail" of investing. Couple this with a long time horizon, and the results can be astonishing.

Additions to the Brown Bag Portfolio

I went on a bit of a buying spree in February, which in retrospect may not have been the best time. However, the longer that I’m invested in the market the more I’m coming to realize that you can’t really time your purchases. You need to decide what is a good price that you’re willing to pay and purchase when the stock hits that price. If it goes down further (and in my experience it almost always goes down), you need to be comfortable with the price that you paid. If you believe in the company (and you shouldn’t invest in it if you don’t), then you should see the price return above your purchase price some time in the future. However, unlike what they appear to be teaching in schools these days, remember that life isn’t fair. You may have shoveled your money down a rabbit hole. It happens. Caveat Emptor. Read the transcripts of the quarterly reports on the companies you’re interested in and judge for yourself if it’s a wise investment. If you don’t have the time or interest in researching the companies you’re investing in, you might want to turn your money over to the “experts,” although they lose money too!

This month I added to my position in Apple Hospitality (APLE). This is a real estate investment trust (REIT) that owns a large portfolio of hotels. This is a tough time for REITs with interest rates rising and a lot of investors dumping their high-yielding equities. However, Apple Hospitality carries one of the smallest debt-loads in their industry and I don’t believe that they’ll be mortally wounded by the incremental rise in interest rates. I wanted to purchase 90 shares but chose instead to only purchase 45. Their last quarterly report wasn’t good, but if the next meets or beats expectations, I’ll probably fill out my position. In the mean time I’m being a little cautious.

I also re-entered the BDC (business development corporation) space with a purchase of 40 shares of Main Street Capital (MAIN). Although I’d previously owned Ares Capital and sold for a loss (however after calculating the dividends I’d earned it was really a wash) I decided that if I was going to be in this space it was going to be with the best of breed. Main Street Capital fit that bill and the monthly dividend helped me in that decision. I can’t tell you how much I enjoy monthly dividends. I really can’t, but fifty percent of my portfolio is in monthly dividend-paying stocks. Main Street Capital also has a habit of paying two special dividends a year, which is wonderful, but I’m not counting on that. The yield listed on the dividend portion of my spreadsheet below doesn’t count the special dividend payments because they are special. If Main chooses not to pay them this year then I’ll be disappointed, but it wasn’t part of my decision making process.

Brown Bag Portfolio as of Feb 28, 2018

Symbol	Shares	Value	Cost Basis	Return	% Return	Div/shr	Annual Div
KEY	101.93	$2,153.42	$1,617.43	$535.99	33.14%	$0.42	$42.81
PEGI	60	$1,114.20	$1,281.00	-$166.80	-13.02%	$1.69	$101.40
APLE**	158.81	$2,698.18	$2,834.85	-$136.67	-4.82%	$1.20	$190.57
EPD	181.12	$4,604.04	$4,872.23	-$268.19	-5.50%	$1.70	$307.90
T	57.74	$2,095.96	$2,007.30	$88.66	4.42%	$2.00	$115.48
EPR	36.32	$2,093.12	$2,297.13	-$204.01	-8.88%	$4.32	$156.90
MAIN*	40	$1,423.60	$1,475.20	-$51.60	-3.50%	$2.28	$91.20
OXLC	81.05	$814.55	$821.17	-$6.62	-0.81%	$1.62	$131.30
*New Position	** Increased Position
Total		$16,997.07	$17,206.31	-$209.24	-1.22%		$1,137.57
Div Goal	% of Goal	BBP Yield %
$16,800	6.77%	6.61%

Click to enlarge

On March 1, Pattern Energy Group (PEGI) and EPR Properties (EPR) both reported disappointing quarters and declined further. While I may add to my position in Pattern Energy in March or April, I’m going to hold off on EPR for now. Although both form a core of my Millennial Thesis that I outlined in my February update, I’m concerned that EPR may have more downside. Unlike Apple Hospitality, EPR does carry a great deal of debt and its reliance upon movie theaters makes me uncomfortable. I do, however, believe in its long-term prospects and if the price stabilizes I’ll add some more later this year.

Although I’ve mentioned it before I believe everyone should have a goal in mind as they build their portfolio. Mine is to eventually reach the point where the dividends paid by my holdings are enough to pay for the mortgage, taxes, and insurance on my home which I currently calculate at $16,800 a year. Last month I stood at 5.85% of that goal and now I’m at 6.77%, which is a win even if my paper returns are currently negative.

Future Purchases

Beyond having an overall goal for the portfolio, I also have goals for each of my positions and will be increasing those positions when I feel the opportunity is right. For those of you who are interested I’ll list those goals below.

KeyCorp (KEY): Ever since I first purchased this stock I’ve wanted to hold 200 shares. My first purchases were in the $12 range, but the stock quickly shot up to the $18 range. I bought a few more shares at that point and then kicked myself for erasing nearly 50% of my gains. Now with shares sitting over $21 (as of March 2) I’m tempted to take my profits and redeploy in something with a higher yield. I’m tempted, but I don’t think I will. KeyCorp is a well-run regional bank that’s raised its dividend twice in the past year. Unless something changes I think that I’ll just let this one sit for now.

Pattern Energy Group: I’ve already mentioned Pattern Energy Group, but as long as the dividend appears to be stable I’m going to hold. My goal is to have 120 shares for a full position and I’m likely to reach for that in the next 30-60 days.

Apple Hospitality: I’ve also spoken about Apple Hospitality earlier, but for the sake of consistency I’ll note here that my goal has always been 200 shares.

Enterprise Partners (EPD): This oil and gas MLP (master limited partnership) has long been one of my favorites. Its share ((unit)) price goes up and down and I’m usually in the red on paper, but it is extremely well run, and I strongly believe in its prospects. I have already exceeded my goal, which was 160 shares, so it’s a hold. I’m also overbought with nearly 30% of my portfolio in this one company. Unless the price falls dramatically this summer (as it did in 2017), I won’t be adding more until it’s a much smaller slice of my portfolio.

AT&T (T) doesn’t need any explanation. Everyone is or should be aware of what this company is and does. My goal for AT&T is 80 shares, but I’m looking for the right time.

EPR Properties I discussed earlier. As a REIT it's under extraordinary pressure right now. My reason for purchasing and holding is its place in the experiential space, which sits at the heart of my Millennial Thesis. Millennials for all their faults prefer to spend money on experiences, rather than physical things. Now, this may be because they don’t have many things that require diapers, regular feedings, and clothes, but nonetheless as a whole they’d rather spend money on movies, ski vacations, and cruises. We’ll see how this plays out, but for now it’s a hold. My plan was to take a full position at 50-60 shares, but we’ll see what the next quarter brings.

Main Street Capital: I also discussed Main Street Capital earlier, but my thoughts on a full position are around 80 shares sometime this year. I’ll be watching to see how this holding plays out and whether or not rate increases are going to damage this best of breed BDC.

Going forward, I need to reduce my risk profile. I’m not risk-adverse, as you will note when you look at the portfolio as a whole. There are only three positions that I consider safe: KeyCorpt, Enterprise Partners, and AT&T and I only have plans on adding to one of those, AT&T. I’m still looking at Pfizer (PFE), Valley National Bank (VLY), Paychex (PAY), Cedar Fair (FUN) (also part of my Millennial Thesis), and in addition GlaxoSmithKline (GSK). Pfizer and Valley National Bank are probably closer to the type of lower-risk safety stocks that I should add, although GlaxoSmithKline is doing some very interesting work in longevity that has been underreported. It also sports a 7% yield, which is very attractive, so we’ll see.

February was a tough month and March is starting out even tougher, so we’ll see if I finally decide that I need more safety. I’m still very much in the early stages of filling out my portfolio and am looking at initiating two to three new positions during 2018. I also need to raise more cash, so I may do nothing in March and April in order to reach a fifteen percent cash position. As always, I’ll have to see where the opportunities arise.

Author’s Note:

If you found this article useful, please consider following me (check the little box at the top). That way you'll be sure to receive each of my articles when published. In addition if you know a new investor or someone who's interested in dividend investing, please consider sending them a link. I hope to encourage other new/young (younger than me) investors to put aside a little money each month and make investing work for them. Thank you.

Analyst’s Disclosure: I am/we are long KEY, PEGI, APLE, EPD, T, EPR, MAIN, OXLC. 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.