The Simplicity Of A 10% Yield (Bull, Bear) Portfolio Using BDC And MREIT Investments

by: High Yield Investor


Five month 2018 update reveals the improving performance of both BDCs and mREITs.

What happens to my investments when interest rates drop like a rock?

Two charts reveal the accelerated ROI (Return On Investment) despite market price.

I had a number of followers asking for an update.

Personal Background

This year is my first full year in retirement collecting Social Security and receiving a distribution from my IRA. I started my BDC and mREIT investment method during 2014 and along the way reinvesting all dividends to grow the income stream before retirement. My distribution comes from dividends where I withdraw 60% for expenses and reinvest the remainder 40% to grow the income cash flow.

I'm not a financial adviser and never worked in the field. Sure I have been dabbling in the arts (stock trading) over the past few decades, but always came up short with a meaningful trade strategy. Of course it was part time since my main focus was working for a paycheck to achieve the American dream.

My real learning to find a replacement paycheck started when I turned 60 years of age. I could begin to transfer my 401k from my current employer to a single IRA account and began to experiment with creating income from dividend companies. I tried many types of dividend investments, but it wasn't until 2014 I decided to implement the system I'm currently using. After 4 and 1/2 years my initial portfolio design is still running strong based on my original studies. One such study published; Bull Or Bear, Retirement Income Dependability Study


The simplicity part comes from only using two asset classes that deal with loans and mortgages. The first provides loans to companies for them to grow and expand; BDCs (Business Development Companies). The second is mortgage-backed securities both commercial and residential; mREIT (mortgage Real Estate Investment Trust). I believe holding both will provide income in a bull and bear market.

Chart-1 demonstrates both asset classes starting from the market 10% correction in February. Both asset classes are high yield RIC (Regulated Investment Company) investments. They eliminate the double taxation typical in DGI companies and pass 90% of their earnings directly to the investor.

The big take away from these types of investments is not capital appreciation, but the high-income cash flow; very important to the retiree. I've been doing this for many years and know it's a sound method that lets me SWAN just fine. I have more than enough income to take me though the many years in retirement.

Right from the start of my dividend investigation, I looked at the low yielding DGI method and determined this would not supply the income I needed. I'm a buy and hold investor and capital appreciation was not a consideration since I will not sell stock for income.

I mathematically demonstrate choosing HYI (High Yield Income) over DGI (Dividend Growth Investing) was the correct option to generate high income. The interesting thing from the study was the ending balance is the same for both DGI and the HYI method when reinvesting all dividends. The main consideration was the massive income generated upfront for the retiree to pay expenses from day-one.

Having the choice of over earning the income needed for expenses allows the investor to reinvest the surplus dividends to create their own growth. How do I know? I'm living that dream with a distribution only from dividends and reinvesting the remainder. Very few High-Yield investors report their results here on the SA site, but I found one.

As far as I know we are the only two investors that produce quarterly reports based on our 100% high yield investments. We even use completely different stocks based on our own investment style. He has been doing high yield investing for over 10 years. I'm a newbie compared to him, but I'm learning the principles and developing my own portfolio management procedures.

I'm talking about Steven Bavaria and his portfolio (Income Factory). Steven is a lot savvier than I when it comes to stock selection, but we both demonstrate the possibility of an alternative method compared to DGI portfolios. Steven has recently written an article with his reasoning for going with the high yield, zero growth method: 'Dividend Growth Investing' Without The Dividend Growth. If you want a real education investing in high yield assets take a look at Steven's articles.

Five Month 2018 Performance

Chart-1 is based on 20 BDCs and 20 mREIT investments grouped together. The POT (Portfolio Online Tracker) provides this chart where I can track the progress of both high-yield groups.

The chart date starts February 5th where my portfolio hit the lowest price value for the year. Since then the S&P 500 has struggled, but both BDCs and mREIT started to increase in price.

Chart-1: Start date February 5th

This chart demonstrates the unwarranted fear putting money to work in high yield assets. The constant barrage of negativity toward any stock near 10% yield is relentless. Price may be volatile based on that fear, but the income generated is quite steady. The volatility such as February 5th gave me the opportunity to enter positions otherwise out of reach.

I have drawn trend lines for the three displayed assets. Remember the yields listed below are from February 5th correction.

  • The white dashed line from the market low for the S&P 500 has a price gain of 3.23% not including dividends.
  • The green line is the mREITs, notice the three yellow trend lines showing the different directions of price during the 5 month duration. Also notice how the mREITs have jumped upward starting in May 2018. The price gain is 9.11%, but if we include the dividends the total return would be 12.84%.
  • The red line is for the BDCs, I include two yellow trend lines with the last line jumping in price at the beginning of May 2018. BDC price advanced 7.56% with a total return of 10.80%.

Inverse Correlation

The political turmoil in Italy Tuesday May 29th drove the 10 year yield down to 2.77% inducing investor fear selling stock and moving into safer investments (mREITs). Chart-2 shows an example of what will happen when interest rates plunge.

Chart-2: Inverse Correlation to Interest Rates

Friday May 25 the 10 year rate was 2.931%, and the rate dropped to 2.768% on Tuesday May 29 (one day after the holiday) and notice how the mREITs Jumped. While the S&P 500 dropped -1.16% my BDC group of stocks dropped only -0.45% and the mREIT group increased +0.51%.

This inverse correlation between both asset classes is what I'm expecting during a market melt-down. During a recession that might last around 18 months the FED will be lowing overnight bank rates to stabilize the economy affecting Treasury yields. During that time I expect the price of BDCs to decline with some loans going into default, but the bond substitute mREITs price will climb along with their dividends. The reason for mREITs as a safe haven for cash is the fact agency mREITs are guaranteed by the United States government. This is what happened to NLY during the 2000 and 2008 recessions.

ROI (Return-On-Investment)

I track each cumulative dividend along with price for each investment. Once a month I create two charts displayed below to monitor my capital investment payback over time. The fact they pay high yield accelerates this process very quickly. I separate out the dividends received, market price along with cost for the calculations in each chart.

The header in each chart is the total portfolio performance. As of May 31, 2018 I have a 9.8% yield on cost, 9.9% yield at today's market and 28.9% total return-on-investment (including all dividends reinvested).

Looking at both charts the GREEN bars to the right of 0% quickly demonstrate how effective high-yield is to the bottom line. The more GREEN the better!

Chart-3: BDC Return-On-Investment

The 20 BDC assets are generating a 9.33% total yield as of this writing. The group of BDC stocks are sorted by market price gain, highest to lowest.

  • The top two performers are; Newtek Business Services Corp. (NEWT) with a price gain of 40.5% and Gladstone Investment Corporation (GAIN) with a price gain of 34.3% as of May 31, 2018. Dividends received for NEWT is 17.8% while GAIN is 15.4%. The gains are from original cost basis for both price and income. All gains are not compound growth since I collect the dividends and reinvest elsewhere. To get total return; we just add the price gain to dividend gains. For NEWT the total return is 58.3% and for GAIN the total return is 49.7%.
  • The bottom two worst performers are 2x Leveraged Long Exchange Trade (BDCL) with a price loss of -41.2% and Apollo Investment Corporation (AINV) with a price loss of -17.8%. The dividends received for BDCL is 44.5% and for AINV is 28.7%. The total return for BDCL is 3.3% and for AINV is 10.9%. High yield reveals the acceleration of ROI at a very quick pace.

Chart-4: mREIT Return-On-Investment

The 20 mREIT assets are generating a 10.56% yield as of this writing. The group of mREIT stocks are sorted by market price gain, highest to lowest.

  • Here again for the mREIT group the two highest price gains are New Residential Investment Corp. (NRZ) with a price gain of 53.5% and Blackstone Mortgage Trust Inc. (BXMT) with a price gain of 19.6%. The dividends received for NRZ is 29.2% of cost and for BXMT the gain is 22.4%. The total return for NRZ is 82.7% and for BXMT the total return is 42.0%.
  • The bottom two worst performances are Dynex Capital Inc. (DX) with a price loss of -25.9% and for AGNC Investment Corp. (AGNC) a price reduction of -23.2%. The Dividends received from DX is a 41.1% and for AGNC is 51.0% ROI. The total returns for DX is 15.2% and for AGNC is 27.8%. I get many commentators tell me how terrible AGNC price performance is and I always come back with my calculation of total return as being positive when including dividends.
  • Take a look at ETRACS Monthly Pay 2XLeveraged (MORL) where my price loss is -19.8%, but the dividends received back is 82.8% of my original cost. I have one year left before my original investment is completely paid back. This is not compound growth in the same stock, but just receiving the income to purchase new investments or reinvest in stocks that need their income allocation built up.


In keeping things simple I have decided to invest in two high yield investment types, one for business and the second a bond substitute. Both react differently in deep market cycles as my original design. I do not plan to trade in and out of positions, but to hold onto both asset classes and take advantage to price dislocation. During 2018 I've made some changes to investments that will be presented in the first half 2018 update.

This year has been challenging for the market, but as shown in Chart-1 I have been experiencing price appreciation since February lows. I made purchases during the first quarter to take advantage of price dislocations. This year I'm concentrating on dividend sustainability that caused some stocks to be sold and replaced.

I wanted to provide this update to show how interest rates affect each asset class of my portfolio; Chart-2. The basic concept is that BDCs move up during a bull market and mREITs will move down or remain flat. When we are experiencing a bear market mREITs will move up and BDCs will move down or remain flat. In extreme market cycles the asset classes will be inversely correlated. The main purpose of this design is the massive dividends paid to the investor in any market cycle.

Investment Disclaimer

Please note the stocks included in the 50/50 portfolio are not recommendations. They were personally selected by the author and contain a great deal of investment risk. The stocks in the portfolio are Business Development Companies [BDCs] and mortgage Real Estate Investment Trusts [mREITs]. Both investment vehicles are Regulated Investment Companies [RICs] and are required to distribute at least 90 percent of their earnings as dividends to investors.

This is a live active IRA portfolio that I believe will withstand the markets' bull and bear cycles based on my own research. The progress will be updated and tracked for feasibility of this investment method over the years. The article titled 50/50 Portfolio (BDCs And mREITs) Baseline 2014 details how the portfolio was constructed. It must be noted that investment selections are dynamic and based on management's ability to navigate economic conditions. I have made changes during the years as any portfolio manager is expected to perform.

Disclosure: I am/we are long ALL STOCKS IN THIS ARTICLE.

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.