First let me be very clear that this is my personal portfolio tailored to my specific financial situation, risk profile, time horizon, and personality traits. I am not recommending anyone mirror this portfolio, which is merely designed to show my unique, rule-based, methodical approach to value-focused, long-term, dividend growth investing.
My situation is unique, as though only 31, I'm already retired (medical retirement from the Army), thus making this portfolio an income-focused retirement portfolio (though in a taxable account). I'm also working full-time (self-employed), and thus have an external source of income to continually add to this portfolio. I do not plan to actually tap the portfolio's income stream for 20-25 years when I plan to move my family (and help support my parents) to the promised land of my people (retired dividend investors): Sarasota, Florida.
What this portfolio can be used for is investing ideas; however, this portfolio includes high-, low-, as well as medium-risk stocks, so it's up to each individual to do their own individual research and decide which, if any, of my holdings are right for you.
For a detailed explanation of my methodology, please read my introductory article to the EDDGE 3.0 portfolio. However, keep in mind that the portfolio is not static, and both it and the underlying investment strategy will evolve and adapt over time. This is because a changing world, new knowledge, and more experience will cause me to fine-tune it over coming years and decades to maximize my income and total returns.
Also, to make it easier to digest, I've decided to try separating my weekly investment lesson/commentary from the actual portfolio update. This week's commentary explains the 3 reasons why rising interest rates are actually good for stocks.
What Happened This Week
Last week I was hit with a one-two punch, suffering first from food poisoning, and then coming down with a nasty case of acute bronchitis. I spent a week in bed, which meant a lot of time reading about numerous topics, as is my habit.
The experience of missing a week of work, as well as having to deal with an unexpected medical illness, inspired me to look into some of the most helpful long-term habits of very successful people. That includes billionaires such as: Mark Cuban, Bill Gates, Warren Buffett, and Charlie Munger, (Buffett's right hand at Berkshire).
Specifically I'd like to highlight three habits of such people that I think can help regular people like us to achieve our own long-term financial goals, including potentially becoming millionaires.
It's easy for many people to look at self made billionaires such as these and think, "I can never do that". And while it's true that most of us may never end up founding multi-billion dollar business empires I think the core philosophy of these people is very useful.
Specifically one of an entrepreneur, or a business owner. Most people assume that only people who actually own their own businesses can achieve this mindset but I'd disagree. The essence of running a business is to achieve maximize long-term free cash flow, meaning the cash that's left over after running the business and investing in its growth. It's basically the profit a business makes and is what the owner can take out of the business when all is said and done.
Well the life of every person is basically the same. You have some source of income that needs to cover your expenses, both basic, and discretionary. The remainder, after paying taxes, is your savings, or free cash flow.
This can either be spent immediately, used to pay down debt, (if you have any), or saved and invested for the future. The key to an entrepreneurial mindset, even for people who have no ability or interest in starting a business, is to maximize savings so that you can transform variable active income, (that you need to work for), into exponentially growing passive income. Or to put another way, to make your hard earned money work even harder for you.
This is why I personally love dividend investing. It's a way to convert highly volatile pay, (you can always lose your job after all), into far more stable income that grows over time. And if you build a well diversified, high-quality portfolio of companies then no matter what economic or industry shocks may occur, your income will continue to grow and allow you to live life on your terms.
A Love Of Lifelong Learning
My sister is currently in nursing school and my other sister in middle school. Both have a typical mindset that I once shared when I was their age. Specifically that I couldn't wait to be done with college, have a job and never have to step foot in a classroom again.
Of course the truth is that learning is something that isn't a burden, but a liberating act that is essential to long-term success. The future of the global economy isn't one were you can simply learn a few skills once and then coast through with cushy job that never changes. The world, (and job market), of tomorrow is one that will be constantly shifting and evolving and so too must your skills and knowledge base.
And don't take my word for it. Warren Buffett estimates that he spends about 80% of his work day reading and thinking. In fact early in his career, Buffett would read up to 1,000 pages per day. Now initially that was mostly about companies, but later on he broadened his repertoire to a much wider variety of topics.
His business partner Charlie Munger? Well Buffett told reporter Michael Eisner that "his children call him a book with legs." In fact Munger's advice to people is to, “Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”
"I used to love to walk through bookstores. If there was something that caught me eye and I thought it could give me one idea — to spend $30 to give one idea that could help propel me and make my businesses better, it was a bargain."
Bill Gates too is an ardent reader, including about 50 books per year. Now I know a lot of people think, "I'm just too busy for books". I understand and share that sentiment. Where once I would spend every weekend at Barnes & Noble today I don't actually read physical books.
But the good news is that, just as true education is not just found in classroom, knowledge isn't just found in books.
- Audio books
- Internet articles (high-quality ones)
- Online newspapers
These are sources that I spend about three to four hours a day, (on top of the 12 to 13 hours I write), using to learn new facts about a wide variety of topics, many that don't relate to companies I study. This includes things like: history, sociology, psychology, technology, geopolitics, national politics, as well as investment theory.
The point is that the world is a complex place, and the economy that shapes the market and our portfolios is representative of that complexity. This means you must always be learning, both facts, and more importantly how to think critically. That will make it easier to avoid first order investment thinking, such as bumper sticker ideas like "interest rates up, stocks down". Rather you'll be able to see far deeper into the wonderfully complex world we live in and start to recognize patterns and trends that you can act on in a disciplined and profitable manner. It will also allow you to spot your own weaknesses and learn better from the occasional mistake, which even the most successful business people and investors make.
This will allow you to not just become a better investor, but a more well rounded and happier person in general.
Diversified Income Streams
One of the most common links that case studies of millionaires and billionaires have found is that successful people foster numerous sources of income. Just as one diversifies one's portfolio they diversify their income streams.
For example Bill Gates may have become the world's richest person, (at one point), from founding Microsoft (MSFT), but today just 15.5% of Gate's net worth is derived from the company he created. In fact Gates' portfolio, (managed by Michael Larsen at Cascade Investment LLC which Gates created to manage his money), includes numerous stocks. These include: Waste Management, (WM), Ecolab (ECL), UPS (UPS), Canadian National Railway (CNI), and Crown Castle International (CCI).
And while true that Buffett's money is almost all in Berkshire (BRK.B) stock, keep in mind that Berkshire is one of the nation's most diversified companies.
(Source: Berkshire Hathaway)
The bottom line is that you need to diversify your income in order to truly achieve financial security. And do so in a passive way, meaning your active income, via savings, converts to more stable passive income. After all Mark Cuban isn't actively running 130 companies that he has ownership stakes in.
I personally have three sources of active income, (websites I write for), as well as 46 passive sources of income, (ownership stakes in dividend stocks and my VA disability).
My goal is ultimately to get that up to 205 income sources, most of which will be my 200 stock portfolio. Why so many income sources? Because that way no matter what might happen to the economy, I'll be assured that I'll have an vast empire of business interests that will be funneling cash my, on a nearly daily basis, from every corner of the globe.
In fact the biggest comfort I had during my sick week was knowing that even though I was laid up in bed and unable to actively earn a dime, I still have 46 streams of income coming in, earning me an average of about $79 per day in passive income.
Recession Watch (aka The Big Macro)
I use three key metrics which have historically proven to be good predictors of recessions: the yield curve, the BaR economic graph, and Jeff Miller's meta analysis of leading economic indicators.
(Source: Business Insider)
The yield curve has proven the single most accurate predictor of recessions over the past 80 years. Specifically when the curve inverts, or goes below 0 (because short-term rates rise above long-term rates), then a recession becomes highly likely. It usually begins within 12 to 18 months.
Yield Curve Inversion Date
Recession Start Date
Months To Recession Once Curve Inverts
(Source: St. Louis Federal Reserve)
Current 2/10 Yield Curve: 0.5%
Last week the curve fell as low as 0.41%, the lowest number since 2007. It's now out of the danger zone (beneath 0.5%) but just barely. Fortunately history shows that the actual number isn't significant and recession risk is low as long as the curve is positive. Overall I'm optimistic that strong economic growth should help to keep long-term rates rising over time and thus put off any potential inversion for many months if not years. That's especially true if the Federal Reserve avoids hiking short-term rates too aggressively if the curve falls too low.
The second economic indicator I watch is Economic PI's baseline and rate of change or BaR economic analysis grid. This is another meta analysis incorporating 19 leading indicators that track every aspect of the US economy. That includes the yield curve, through a different version of it.
(Source: Economic PI)
(Source: Economic PI)
The BaR grid has shown to be a reliable indicator predicting the 1980, 1990, 2001, and 2007 recessions. With 11 out of 19 economic indicators in the expansion quadrant, (indicating accelerating growth), and 8 out of 19 still showing positive, (though decelerating) growth, there remains little cause for concern. Note however that two weeks ago there were 12 economic indicators in the expansion quadrant, so the trend is slightly negative.
Finally there's Jeff Miller's excellent economic indicator snapshot, a rich source of numerous useful market/economic data.
(Source: Jeff Miller)
What I'm looking at here is the quantitative estimates of four and nine month recession risks. In this case they are 0.70% and 18%, respectively. While these are both up slightly in recent weeks, the increase is not statistically significant. In addition rising inflation expectations from the bond market, (why long-term rates are rising), is a bullish sign of economic optimism.
The economy continues to grow well based on the New York Fed's real time GDP tracker, (historically far more accurate than the Atlanta Fed's GDP model).
Current Economic Growth Projections
- Q1 2018 projection: 2.9% (up 0.1% from last week)
- Q2 2018 projection: 3.0% (up 0.1% from last week )
There are about 3,000 dividend paying stocks in America. This list has a goal of eventually listing all low/medium risk dividend growth stocks that have the potential to achieve 10+% total return potential.
Target yield indicates approximately fair value, which is the most I'd ever recommending paying for a company, no matter how good it is.
Total return potential is taken from the Gordon Dividend Growth model which found that over time total return for dividend stocks tracks yield + long-term dividend growth, (a proxy for earnings and cash flow growth).
The projected dividend growth is from either management guidance or the current analyst consensus. Finally I've included a sector column because some investors, for various reasons, don't want to/can't invest in MLPs.
Bolded and bracketed stocks are at fair value or better and worth buying today. The order of the stocks is the order I recommend buying them in assuming that maximizing total return is your primary goal.
|Ticker||Company||Target Yield (Fair Value)||Current Yield||Potential Long-Term Dividend Growth||Total Return Potential||Sector||Industry|
|(AMGP)||Antero Midstream GP||0.4%||2.6%||26.3%||28.9%||MLP (no K1)||Oil, Gas & Consumable Fuels|
|(AM)||Antero Midstream Partners||3.7%||5.9%||19.9%||25.8%||MLP||Oil, Gas & Consumable Fuels|
|(NBLX)||Noble Midstream Partners||3.6%||4.6%||19.0%||23.6%||MLP||Oil, Gas & Consumable Fuels|
|(DM)||Dominion Midstream Partners||3.3%||8.6%||14.0%||22.6%||MLP|| |
Oil, Gas & Consumable Fuels
|(EQGP)||EQT GP Holdings||2.5%||4.0%||18.0%||22.0%||MLP||Oil, Gas & Consumable Fuels|
|(LOW)||Lowe's Companies||1.7%||2.0%||19.8%||21.8%||Consumer Cyclical||Home Improvement Stores|
|(OMP)||Oasis Midstream Partners||5.0%||9.0%||11.0%||20.0%||MLP|| |
Oil, Gas & Consumable Fuels
|(HESM)||Hess Midstream Partners||5.0%||6.3%||13.0%||19.3%||MLP|| |
Oil, Gas & Consumable Fuels
|(EQM)||EQT Midstream Partners||3.6%||6.8%||12.0%||18.8%||MLP||Oil, Gas & Consumable Fuels|
|(NYLD)||NRG Yield||6.0%||6.8%||12.0%||18.8%||YieldCo||Renewable Energy|
|(CCI)||Crown Castle||3.9%||4.1%||14.5%||18.6%||REIT||Telecom REIT|
|(AMT)||American Tower||1.8%||2.2%||15.9%||18.1%||REIT||Telecom REIT|
|(PEGI)||Pattern Energy Group||6.7%||9.4%||8.3%||17.7%||YieldCo||Renewable Energy|
|(NEP)||NextEra Energy Partners||4.1%||4.1%||13.5%||17.6%||YieldCo||Renewable Energy|
|(HD)||Home Depot||2.1%||2.3%||14.9%||17.2%||Consumer Cyclical||Home Improvement Stores|
|(SHLX)||Shell Midstream Partners||3.2%||6.2%||10.0%||16.2%||MLP|| |
Oil, Gas & Consumable Fuels
|(VLP)||Valero Energy Partners||2.8%||5.0%||11.0%||16.0%||MLP||Oil, Gas & Consumable Fuels|
|ADP||Automatic Data Processing||2.4%||2.2%||13.6%||15.8%||Industrial||Business Services|
|SPGI||S&P Global||1.3%||1.0%||14.7%||15.7%||Financial||Capital Markets|
|SHW||Sherwin-Williams||1.1%||0.9%||14.3%||15.2%||Basic Materials||Specialty Chemicals|
|(ENB)||Enbridge Inc||3.5%||6.8%||8.0%||14.8%||Energy||Oil, Gas & Consumable Fuels|
|(FDX)||Fedex||0.6%||0.8%||13.8%||14.6%||Industrial||Shipping & Logistics|
|(PSXP)||Phillips 66 Partners||3.1%||5.4%||9.0%||14.4%||MLP||Oil, Gas & Consumable Fuels|
|(LEG)||Leggett & Platt||3.0%||3.4%||11.0%||14.4%||Consumer Cyclical||Furniture|
|(ROST)||Ross Stores||1.0%||1.2%||13.0%||14.2%||Consumer Cyclical||Retail|
|(KMI)||Kinder Morgan||4.1%||4.9%||9.0%||13.9%||Energy||Oil, Gas & Consumable Fuels|
|(OZRK)||Bank of the Ozarks||1.5%||1.6%||12.0%||13.6%||Financial||Banking|
|(WBA)||Walgreens Boots Alliance||1.9%||2.5%||11.1%||13.6%||Consumer Defensive||Pharmacy|
|(TJX)||TJX Companies||1.2%||2.4%||11.1%||13.5%||Consumer Cyclical||Retail|
|(TERP)||TerraForm Power||6.0%||6.9%||6.5%||13.4%||YieldCo||Renewable Energy|
|(BEP)||Brookfield Renewable Partners||5.6%||6.4%||7.0%||13.4%||YieldCo||Renewable Energy|
|(APD)||Air Products & Chemicals||2.4%||2.6%||10.4%||13.0%||Industrial||Industrial Gas|
|(ETN)||Eaton Corp||3.1%||3.3%||9.7%||13.0%||Industrial||Diversified Industrials|
|CAT||Caterpillar||3.0%||2.0%||10.9%||12.9%||Industrial||Farm & Construction Equipment|
|(VFC)||V.F Corp||2.0%||2.4%||10.5%||12.9%||Consumer Cyclical||Apparel|
Oil, Gas & Consumable Fuels
|(SPG)||Simon Property Group||3.2%||5.3%||7.3%||12.6%||REIT||Retail REIT|
|(SEP)||Spectra Energy Partners||6.0%||8.5%||4.0%||12.5%||MLP||Oil, Gas & Consumable Fuels|
|(KIM)||Kimco Realty Corp||7.0%||8.4%||4.1%||12.5%||REIT||Retail REIT|
|(NSA)||National Storage Affiliates||4.5%||4.4%||8.0%||12.4%||REIT||Storage REIT|
|(MPW)||Medical Properties Trust||6.6%||8.0%||4.4%||12.4%||REIT||Hospital REIT|
|(MKC)||McCormick & Company||2.0%||2.0%||10.3%||12.3%||Consumer Defensive||Food|
|ORI||Old Republic International||4.3%||3.6%||8.6%||12.2%||Finance||Insurance|
|ITW||Illinois Tool Works||2.1%||2.0%||10.2%||12.2%||Industrial||Diversified Industrials|
|(PG)||Procter & Gamble||3.1%||3.9%||8.2%||12.1%||Consumer Defensive||Household & Personal Products|
|(CLX)||Clorox||2.7%||3.3%||8.6%||11.9%||Consumer Defensive||Household & Personal Products|
|(FDS)||FactSet Research Systems||1.2%||1.2%||10.7%||11.9%||Finance||Capital Markets|
|(MMP)||Magellan Midstream Partners||4.3%||5.6%||6.2%||11.8%||MLP||Oil, Gas & Consumable Fuels|
|(CORR)||CorEnergy Infrastructure Trust||8.2%||7.8%||4.0%||11.8%||REIT||Infrastructure REIT|
|(SKT)||Tanger Factor Outlet Centers||4.7%||6.5%||5.3%||11.8%||REIT||Retail REIT|
|(STAG)||STAG Industrial||5.9%||6.0%||5.8%||11.8%||REIT||Industrial REIT|
|(BNS)||Bank of Nova Scotia||3.8%||4.3%||7.4%||11.7%||Finance||Banking|
|(D)||Dominion Energy||3.7%||5.1%||6.4%||11.5%||Utilities||Diversified Utilities|
|(BPMP)||BP Midstream Partners||4.5%||5.9%||5.5%||11.4%||MLP|| |
Oil, Gas & Consumable Fuels
|(CTRE)||CareTrust REIT||5.0%||6.3%||5.0%||11.3%||REIT||Senior Housing REIT|
|(KMB)||Kimberly-Clark||3.1%||4.0%||7.3%||11.3%||Consumer Defensive||Household & Personal Products|
|(KO)||Coca Cola||3.2%||3.6%||7.7%||11.3%||Consumer Defensive||Food & Beverage|
|PF||Pinnacle Foods||2.4%||2.1%||9.1%||11.2%||Consumer Defensive||Food & Beverage|
|(UL)||Unilever||3.2%||3.3%||7.8%||11.1%||Consumer Defensive|| |
Household & Personal Products
|(IRM)||Iron Mountain||6.0%||7.1%||4.0%||11.1%||REIT||Storage REIT|
|DLR||Digital Realty Trust||4.7%||3.9%||7.1%||11.0%||REIT||Data Center REIT|
|(XOM)||Exxon Mobil||3.4%||3.9%||7.0%||10.9%||Energy||Oil, Gas & Consumable Fuels|
|(GPC)||Genuine Parts Company||2.7%||3.3%||7.6%||10.9%||Industrial||Auto Parts|
|(BMO)||Bank of Montreal||4.0%||4.0%||6.9%||10.9%||Finance||Banking|
|CVX||Chevron||3.9%||3.7%||7.0%||10.7%||Energy||Oil, Gas & Consumable Fuels|
|NEE||NextEra Energy||3.0%||2.8%||7.9%||10.7%||Utilities||Diversified Utilities|
|(BAM)||Brookfield Asset Management||1.5%||1.6%||9.0%||10.6%||Finance||Asset Management|
|(NHI)||National Health Investors||5.8%||6.1%||4.2%||10.3%||REIT||Medical REIT|
|JNJ||Johnson & Johnson||2.8%||2.7%||7.6%||10.3%||Healthcare||Diversified Medical|
|(O)||Realty Income||5.1%||5.3%||4.9%||10.2%||REIT||Retail REIT|
|(RY)||Royal Bank of Canada||3.8%||3.9%||6.2%||10.1%||Finance||Banking|
|(HRL)||Hormel Foods||2.0%||2.1%||8.0%||10.1%||Consumer Defensive||Food & Beverage|
|WPC||W.P Carey||6.7%||6.6%||3.3%||9.9%||REIT||Diversified REIT|
|EPD||Enterprise Products Partners||6.7%||6.4%||3.3%||9.7%||MLP||Oil, Gas & Consumable Fuels|
|MAIN||Main Street Capital||8.0%||7.7%||2.0%||9.7%||Finance||BDC|
|NNN||National Retail Properties||5.5%||5.1%||4.5%||9.6%||REIT||Retail REIT|
|EXR||Extra Space Storage||4.3%||3.6%||5.7%||9.3%||REIT||Storage REIT|
|PSA||Public Storage||4.9%||4.2%||5.1%||9.3%||REIT||Storage REIT|
|RDS.B||Royal Dutch Shell||7.0%||5.2%||3.0%||8.2%||Energy||Oil, Gas & Consumable Fuels|
(Sources: Gurufocus, FastGraphs, Morningstar, Simply Safe Dividends, Management Guidance)
Note that the average yield, dividend growth and total return potential is based on equal weighting of all 107 companies. If you weight by total return potential, (as I plan to do), then the portfolio looks like this:
- Yield: 3.6%
- Projected Dividend Growth: 11.3%
- Total Return Potential: 14.9%
Buys/Sells This Week
- Bought $1,200 Lowe's (LOW) - partial position, target position $11,000
- Bought $750 Dominion Midstream Partners (DM) - partial position, target allocation $11,500
Note that Simply Safe Dividends recommends sector caps of 25%. I am revising my previous 20% cap to this level since 20% was an arbitrary figure I came up with. This is why I'm now able to once more buy MLPs, though balancing them out with alternating weeks of non MLP investments.
Last week I purchased Dominion Midstream because it has been the most brutalized MLP I'm aware of, having dropped over 50% in recent weeks. That's due to the FERC ruling uncertainty. Management has said no material impact through 2020, but beyond that they haven't clarified.
Fortunately Morningstar estimates that at worst the rule change will amount to a 2% to 5% reduction in tariffs rates on cost of service contracts on interstate pipelines. And given that Dominion Midstream's coverage ratio was 1.29 in 2017, the MLP can easily slow the rate of distribution growth in order to shift to a self funding business model if the unit price remains permanently depressed (worst case scenario). In the meantime the MLP's leverage ratio of 3.0 (vs industry average 4.4) means a very safe payout and I bought it at just 8.9 times trailing DCF which is a sensational bargain. One that creates immense margin of safety.
Plan For The Next Week
This week I'm buying the next top stock in my master watchlist that isn't an MLP, in order to maintain my MLP exposure at 25%. That would be a $1,900 investment into NRG Yield, (NYLD), a fast growing renewable power yieldCo.
In the coming weeks there are about six MLPs that I'll be opening starter positions in. Once those are purchased the portfolio's concentration in the sector will start to decline once more.
It will still be a long time before I can add any REITs, but Crown Castle (CCI), and American Tower (AMT), are the top two I'm looking to add. They would represent a new REIT industry, (telecom towers), which enjoy a very strong secular trend due to the coming switch to 5G wireless internet.
The Portfolio Today
Dividend Risk Ratings
- Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 5% (core holding, SWAN candidate).
- Medium risk: Dividend safe and potentially growing for next two to three years, max portfolio size 3%.
- High risk: Dividend safe and predictable for one year, max portfolio size 1.0%.
- Negative outlook: Fundamentals of industry and/or company are deteriorating, rising risk of safety downgrade. If it's a turnaround story, the turnaround unlikely to succeed.
- Stable outlook: Fundamentals are stable, or if in turnaround the management plan seems likely to work, the risk of a safety downgrade is low.
- Positive outlook: Fundamentals are strong and rising.
- Uniti Group (UNIT) - Negative outlook (turnaround not likely to succeed)
- New Residential Investment Corp. (NYSE:NRZ) - Positive outlook
- Omega Healthcare Investors (OHI) - Due to ongoing downturn in the SNF industry, stable outlook (confidence in turnaround plan)
- Pattern Energy Group (NASDAQ:PEGI): Will be upgraded when payout ratio declines under 85% - positive outlook
- QTS Realty (QTS): Stable outlook
- Antero Midstream Partners (NYSE:AM) - Stable outlook, waiting for management to notify on FERC ruling
- Antero Midstream GP (AMGP) - Stable outlook, waiting for management to notify on FERC ruling
- CNX Midstream Partners (CNXM) - Stable outlook, waiting for management to notify on FERC ruling
- Medical Properties Trust (MPW): Due to long-term uncertainty surrounding medical REITs - positive outlook.
- EPR Properties (EPR): Due to exposure to cinemas (declining over time) - positive outlook
- Chatham Lodging Trust (CLDT): Due to volatility of hotel cash flow - stable outlook
- Dominion Midstream Partners (DM) - Stable outlook, waiting for management to notify on long-term FERC ruling effect
- Enterprise Products Partners (EPD) - Stable outlook
- AT&T (NYSE:T) - Stable outlook
- Tanger Factory Outlet Centers (NYSE:SKT) - Negative outlook
- Brookfield Property Partners (BPY) - Stable outlook
- TransAlta Renewables (OTC:TRSWF) - Stable outlook
- Simon Property Group (SPG) - Stable outlook
- Enbridge (NYSE:ENB) - Stable outlook
- Realty Income (O) - Stable outlook
- Brookfield Infrastructure Partners (BIP) - Positive outlook
- Dominion Energy (D) - Stable outlook
- STORE Capital (NYSE:STOR) - Stable outlook
- Canadian Imperial Bank of Commerce (CM) - Stable outlook
- Telus (NYSE:TU) - Stable outlook
- Ventas (NYSE:VTR) - Stable outlook
- Iron Mountain (NYSE:IRM) - Stable outlook
- Spectra Energy Partners (SEP) - Stable outlook
- W.P. Carey (WPC) - Stable outlook
- NextEra Energy Partners (NEP) - positive outlook
- Altria (MO) - stable outlook
- Royal Bank Of Canada (RY) - stable outlook
- Bank of Nova Scotia (BNS) - stable outlook
- Exxon Mobil (XOM) - stable outlook
- AbbVie (ABBV) - stable outlook
- EQT Midstream Partners (EQM) - Stable outlook
- EQT GP Holdings (EQGP) - Stable outlook
- MPLX (MPLX) - Stable outlook
- Visa (V) - stable outlook
- Home Depot (HD) - stable outlook
- Lowe's (LOW) -stable outlook
Back to deleveraging mode as I wait for the likely long off recession and bear market. My focus is on more diversification to crash-proof my portfolio against the next recession.
My portfolio began with five stocks, all medium- to high-risk, in two sectors. Right now, I'm up to 45 stocks, mostly low- to medium-risk, in nine sectors. By next week, I'll be up to 46 holdings in nine sectors. The goal by year-end is around 75 stocks, in 10 sectors.
The Morningstar holdings graphic is capable of showing my top 57 positions. However, my long-term goal is 200 stocks, which I estimate will take about 10 years to accomplish (barring a bear market). It will likely take about 15 years before I can fully weight my portfolio by total return potential.
Top 10 Dividend Sources
- Pattern Energy Group: 5.8%
- Uniti Group: 5.6%
- EPR Properties: 4.5%
- Omega Healthcare Investors: 4.4%
- New Residential Investment Corp: 4.2%
- Enterprise Product Partners: 4.2%
- Medical Properties Trust: 4.2%
- Brookfield Real Estate Services: 3.6%
- CNX Midstream Partners: 3.6%
- Spectra Energy Partners: 3.4%
- Everything Else: 56.8%
The ultimate goal is to diversify enough to ensure no stock represents more than 5% of my income. That's to ensure that in a worst-case scenario in which one of my holdings' investment thesis breaks, my overall dividend income will be minimally affected.
However, because I used to weight by yield, this may take a few months before I can grow and diversify the portfolio enough to accomplish this.
The portfolio has become far more diversified by stock style, especially compared to the early days when it was pretty much 100% small cap value. It's still heavily focused on value stocks, but in the coming weeks and months growth will become a much bigger factor given my total return focus. That should shift my portfolio more towards core and growth.
Over time, I plan to add some exposure to non-US holdings, mostly Canadian stocks as well as some European ones like LyondellBasell (LYB), and Unilever (UL). Of course, the overall international exposure will be rather limited, because I only own stocks with a history of stable or rising dividends. The variable pay nature of most foreign dividend stocks means they don't fit my needs.
Fortunately, over time, owning many blue chip multinationals will still mean I'm benefiting from an international dividend empire. For example, CM, RY, and BNS have large overseas and emerging market exposure. Meanwhile, future Dividend Aristocrat additions like Procter & Gamble (PG), Coke (KO), and Pepsi (PEP) also do a lot of business overseas.
Once we experience a market crash, I'll be able to further diversify by style and market cap when I add numerous growth stocks and blue chips to the portfolio.
My portfolio is made up of three core sectors, all currently highly rate-sensitive (I'm okay with that, since rate sensitivity is a short-term phenomenon):
- 39% - REITs - above 25% cap, moratorium on buying more for now
- 25% - Pipeline MLPs - at 25% cap (my Exxon stake makes it seem slightly higher than it is), can add more MLPs but balanced with non-MLPs to keep weighting at 25%.
- 17% - Utilities, approaching 25% cap but unlikely to exceed it.
Utilities will eventually increase a bit, as I plan to add several more, including:
- NextEra Energy (NEE)
- Emera (OTCPK:EMRAF)
- Brookfield Renewable Partners (BEP)
- TerraForm Power (TERP)
- NRG Yield (NYLD)
- American Electric Power (AEP)
- Fortis (FTS)
- DTE Energy (DTE)
- Southern Company (SO)
However, since I'm adding in order of highest to lowest total return potential I won't be adding most of these utilities for many months. That should prevent me from ever hitting 25% exposure.
(Source: Simply Safe Dividends)
As I continue adding fast growing dividend stocks my average dividend growth rate has been steadily climbing. Since I switched to a focus on total return weighting vs yield, the average 5 year dividend growth rate is up from 8.9% to 9.3%.
Projected Portfolio Dividends Over Time
Inflation Adjusted Total Annual Portfolio Net Dividends
(Sources: Simply Safe Dividends, Dave Ramsey Investment Calculator, Morningstar)
Keep in mind that this table only takes into account organic (stock-level) dividend growth. It doesn't consider fresh savings I'm adding over time, nor that I reinvest my dividends. In fact, at my current savings rate, I estimate that within 10 years, I'll hit $100,000 per year in net dividends.
Still, it's an impressive thing to see just how powerful compounding can be, especially since these figures are in today's purchasing power (inflation-adjusted). I use an 11.3% long-term dividend growth estimate and a 2.0% inflation estimate. The 11.3% is the projected long-term dividend growth from the master watch list, weighted by total return potential, since that is ultimately what my portfolio will end up becoming.
Over time, as I diversify my portfolio, the yield will fall to about 3% to 4%. But the dividend growth rate should rise to about 9% to 10%. Ultimately, the goal is to build a highly diversified, low-risk high-yielding portfolio with strong enough dividend growth to achieve 10% to 11% inflation adjusted total returns.
For perspective the S&P 500's 20-year median annual dividend growth rate has been 6.2%. So, the goal is to about double the market's yield, with about 3% to 4% faster dividend growth. Since 1871, the S&P 500 has generated annual total returns of 9.1%. The market's historical inflation adjusted total returns has been 7.0%.
Thus the idea is to prove that a high-yield dividend growth portfolio can easily beat the market over time. That is, if the individual holdings are all above average or excellent quality.
- Holdings: 45
- Portfolio Size: $132,590
- Equity: $108,817
- Remaining Margin Buying Power: $274,516
- Margin Used: $24,131
- Debt/Equity: 0.22
- Dividends/Interest Ratio: 11.3
- Distance To Margin Call: 68.3%
- Current Margin Rate: 3.18%
- Yield: 6.5%
- Yield On Cost: 6.2%
- Yield On Equity Cost (net yield on cash I have invested): 6.9%
- Cumulative Total Return Since Inception (since September 8, 2017): -9.5%
- Cumulative Unlevered Total Return Since Inception: -6.0%
- Year-to-Date Unlevered Total Return: -9.0%
- Annualized Unlevered Total Return (YTD 2018): -26.9%
- Unrealized Capital Gains (current holdings): $-6,916 (-5.2%)
- Cumulative Dividends Received (including accrued dividends): $7,381
- Annual Dividends: $8,675
- Annual Interest: $767
- Annual Net Dividends: $7,908
- Monthly Average Net Dividends: $659
- Daily Average Net Dividends (my business empire never sleeps): $21.66
(Source: Simply Safe Dividends)
- Portfolio Beta (volatility relative to S&P 500): 0.77
- Projected Long-Term Dividend Growth: 11.3%
- Projected Annual Unlevered Total Return: 14.9%
- Projected Net Levered Annual Total Return: 17.8% (assuming long-term average leverage of 25%)
- Long-Term Net Levered Annual Total Return Goal: 16.0%
10 Worst-Performing Positions
(Source: Interactive Brokers)
10 Best-Performing Positions
(Source: Interactive Brokers)
Bottom Line: If You Want To Become Rich You Need To Learn To Live Richly
Life, and investing, is simple in concept, but far trickier in execution. That's why it's essential to adopt the right long-term habits. More importantly, we need to apply them as consistently as we can. Even if we fail, we must always be striving to improve ourselves, our skills, our knowledge, and of course our investment strategies.
Life is a never ending cycle of self reflection, education, and self improvement. My promise to you is that I'll continue working hard to learn all I can and then share it with you in an effort to help as many people as possible achieve their long-term financial goals and aspirations.
Disclosure: I am/we are long EPD, PEGI, CNXM, MPW, MPLX, BREUF, EQM, AM, OHI, T, O, TRSWF, IRM, SKT, BPY, VTR, STOR, BIP, SPG, UNIT, ENB, NRZ, EQGP, TU, CM, AQN, D, AMGP, SEP, QTS, EPR, WPC, NEP, MO, BNS, RY, ABBV, V, HD, LOW, DM. 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.