In Like A Lamb And Out Like A Lion? The Brown Bag Portfolio May Update

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Includes: D, EPD, EPR, FUN, GSK, KEY, MAIN, OXLC, PEGI, RGR, SIX, T
by: Michael Hesse

Summary

A little history of the Brown Bag Portfolio.

My personal trading rules.

Where the portfolio stands today.

I purchased my first individual stock on July 5, 2016, two shares of Ruger (NYSE:RGR). I didn’t know what I was doing. I’d made the decision that I wanted to invest in the market and I guessed that gun sales would increase going into the election and I wanted to catch that trend. At the time I knew nothing about the market, I hadn’t gotten a feel for its daily ups and downs, macro and micro trends, the effects of interest rates, nor did I recognize how quickly the small (at that time TD Ameritrade charged $9.99 per trade, now $6.95) commission charges could add up. By December 31, 2016 I’d racked up 31 individual buys and 13 sells. I had invested $4200 into my brokerage account during that time and lost approximately $500 due almost entirely to commission charges. The only thing that had kept me from losing even more money was the fact that I purchased 20 shares of Keybank (NYSE:KEY) on September 26, another 20 shares a few weeks later and both purchases were under $12.50. The election had changed a lot of investors thinking about the banking sector and financials were hot.

During that time I learned a lot. I started researching the companies I was interested in and stumbled across a number of web sites with varying degrees of useful financial information. I also discovered Seeking Alpha and was thrilled with the wealth of information available. After a year of investing I started writing articles for SA with the idea that my experiences building a portfolio from the ground up might be useful to other investors new to the arena. I too would benefit from readers' comments and thoughts about what I was doing and why.

Along the way I also developed a number of rules for myself and although these investing rules have changed over time I think it’s valuable to go back and look at them from time to time.

The Brown Bag Portfolio Investing Rules

  1. Invest, don’t trade: By this I don’t mean never sell. There are good reasons to sell a stock and I will address those later in my rules. What I mean by this is limit your urge to make a fast buck. I look at trading as similar to gambling and while I occasionally (rarely) enjoy a few hands of blackjack, if I’m going to gamble I want a couple of free drinks to go along with it. Leave gambling in the casinos. Place your money (invest) in companies whose stories you believe in and are likely to produce good returns over the long run.
  2. Build a core portfolio out of dividend paying stocks. My reasons for this are twofold. My original reason for this was to help alleviate the panic I felt when I saw one of my holdings go into the red. With dividends I’m getting paid to wait out rough patches and when coupled with dividend reinvestment programs actually builds my holding faster which brings me to rule #3.
  3. DRIP. While I’m building my portfolio and not using the income generated by my holdings, place each in a dividend reinvestment program (DRIP). Every month or quarter depending upon the equity, my holdings grow without me spending an additional cent. As long as the dividend isn’t reduced or cut I actually grow my holdings faster when they’re below my purchase price.
  4. Purchase in blocks of $1000.00. Originally this was $500 and next year I’ll probably raise this to $1500. This rule benefits me in two ways. First of all it limits my commission charges and secondly it forces me to wait and evaluate a company for a longer period of time. By waiting I get a better feel for the average price of the stock as well as how it fluctuates which in turn allows me to rest a bit easier when volatility kicks in. I have violated this rule several times this year, but only because I gained a number of free trades and therefore made several smaller strategic purchases.
  5. Set a goal for your portfolio and work towards that goal. My goal is to have the dividends generated by the Brown Bag Portfolio cover my mortgage, taxes, and insurance by the time I retire. At this time that is currently $16,800 a year. Each month in my articles I show where I am with that goal and I concentrate upon the rise in that percentage, rather than how much further I need to go.
  6. Keep it Simple: Don’t short. Don’t use margin. Don’t use options. I’m not saying here that there isn’t value using any or all of these methods, I’m simply stating that I don’t. I don’t use them because I’m not comfortable with these strategies and it’s too easy to get upside down. For example with shorting you have limited upside, but an infinite downside and that’s a situation that I’m not comfortable with.
  7. Forget about timing the market. Purchase shares of companies you believe in when you believe they are reasonably priced. In my experience so far the one thing that guarantees a drop in a stock’s price is my purchase of it. Thankfully this is usually a short-term move, but it’s not always so. What allows me to sleep well at night even with a position in the red is the fact that I felt the price I paid was reasonable. If I still believe that and the price has gone down, then I generally purchase more and so far I’ve been rewarded with the price returning to the level I paid or exceeding it. If not, then as long as I’m still confident in the long term outlook of the company I’m collecting more of it through dividend reinvestment than I would have if the price had remained stable or gone up.
  8. Read the Quarterly Reports. If you don’t have the time or interest in reading the quarterly reports and learning about the company, you shouldn’t invest in it. Understand why the company is performing well or conversely not performing
  9. Time Horizon. Don’t forget your time horizon. If you have a long time, at least 5-10 years before you require the use of your money, then you have time to look beyond the current price per share and concentrate upon the soundness of the business model. If you believe it to be sound then you have more than enough time to ride out any temporary weakness. Use that time horizon to keep you from making impulsive decisions.

Now then, with all of that in mind let me share with you my experiences with my favorite holding, Enterprise Partners (NYSE:EPD). Enterprise Partners is a master limited partnership in the Energy space. It is primarily a pipeline company moving oil and natural gas from point A to point B. It does not explore or extract the fuels it simply charges a toll for the transportation of those fuels. But wait, there’s more. Enterprise Partners is also heavily involved in the fractionalization of fuels into many other useful compounds and the transportation of those chemicals to other markets. I know that this is a simplistic overview of Enterprise, however due to space constraints, it will do.

I first bought shares (units) of Enterprise in December of 2016 and I quickly purchased more as the price shot up. (Mistake: I should have looked more closely at the historical trends and realized that there would be a better entry point later.) In fact I continued purchasing shares until June of 2017 when that single holding occupied nearly 40% of my entire portfolio. (Mistake: Too large a position). In my defense I was extremely confident in the company’s future and my later purchases were done in an effort to reduce my average share price. Although this was good thinking I ended up extremely over weight in this one position. Since June of 2017 I haven’t made any further purchases, instead I’ve been letting my DRIP’d shares slowly reduce my average price. Currently Enterprise Partners has returned to the black (for me…the company itself has been doing well all along) and its position in my portfolio has gone from 40% to 25%, all without any selling and while my share count has grown from 170 to 184. 25% is still too high a percentage of my portfolio to be devoted to any one company, but I’m still early in the formation of the Brown Bag Portfolio and this situation will resolve itself over time.

I mention Enterprise Partners because it is a good example of a company with strong fundamentals, good business plan, and conservative management that I could have easily gotten scared out of if I hadn’t believed its stock price would recover (at the end of March I was down 9% with Enterprise, now I’m up 7.5%). Personally I don’t believe that this current price will hold and I expect Enterprise to sink to lower levels over the next year. If and when it does (and I’m below 20%) I will purchase more at those lower levels. I’m comfortable with it being approximately 20% of my holdings over the next several years. Once the BBP is full (approximately 15 positions), I’d prefer if it didn’t occupy more than 10%.

May was a quiet month for the Brown Bag Portfolio. I didn’t purchase or sell any shares, opting instead to build cash. June will most likely see more of the same, although I’m tempted to add to Pattern Energy Group (NASDAQ:PEGI) as its price seems to have stabilized. However, and this is a big but (no puns), I may choose to exercise caution and wait for another good quarterly report before adding. I’d like to add to EPR Properties (NYSE:EPR) as well, as they too appear to have stabilized and are closing on my cost per share. I’d like to reduce that cost, but I’m also conscious that my REITs now occupy nearly 30% of my portfolio.

I’m bullish on REIT’s despite potential interest rate damage, but I don’t want to create another situation where I’m extremely overweight in an area and don’t think I can responsibly add. In EPR’s case however, I’m encouraged by Six Flags (NYSE:SIX) recent leasing of several water parks that are part of EPR’s portfolio so I may change my mind and add a few shares later in June.

Although I have doubled my positions since I started writing about the Brown Bag Portfolio, I am still a long way from where I want to be. I’d like to have two new positions by the end of 2018 and am still looking at Dominion Energy (NYSE:D), Six Flags or Cedar Fair (NYSE:FUN), or GlaxoSmithKline (NYSE:GSK).

Ultimately my goal is to have approximately fifteen positions in equities. This is due to the fact that I don’t think I can handle reading and digesting more than fifteen quarterly reports and make sound decisions. That may change as my experience grows or it may not.

Brown Bag Portfolio as of May 31, 2018

Symbol

Shares

Value

Cost Basis

Return

% Return

Div/shr

Annual Div

KEY^

102.42

$1,991.10

$1,628.12

$362.98

22.29%

$0.48

$49.16

PEGI

61.39

$1,149.63

$1,306.33

-$156.70

-12.00%

$1.69

$103.75

APLE

211.76

$4,029.79

$3,743.74

$286.05

7.64%

$1.20

$254.11

EPD

184.18

$5,322.80

$4,951.75

$371.05

7.49%

$1.71

$314.95

T

101.99

$3,296.32

$3,522.30

-$225.98

-6.42%

$2.00

$203.98

EPR

38.01

$2,272.04

$2,334.84

-$62.80

-2.69%

$4.32

$164.22

MAIN

40.61

$1,560.24

$1,498.18

$62.06

4.14%

$2.28

$92.59

OXLC

84.26

$887.26

$854.46

$32.80

3.84%

$1.62

$136.50

*New Position

** Increased Position

^ Increased Dividend

Total

$20,509.18

$19,839.72

$669.46

3.37%

$1,319.25

Div Goal

% of Goal

BBP Yield %

$16,800

7.85%

6.65%

Things of Note: My percent of goal has grown from 7.70% at the end of April to 7.85% at the end of May and all through dripped dividends. Also, Keybank raised its dividend from 10.5 cents a quarter per share to 12 cents a quarter per share which was quite welcome. Keybank has long been one of my best positions as far as return is concerned however I don’t like the paltry dividend. Every month I consider selling, taking my profit and moving it into something with a better yield. Its stability and potential benefit from long term interest rate increases keeps me in it so far. As frustrating as the low yield is, the story hasn’t changed yet, so I think I’ll stay and enjoy the paper gains for now.

There is another way to look at the Brown Bag Portfolio that I’d like to share. In the chart above Cost Basis is determined by the original cost of shares (out of pocket) plus the reinvested dividends giving the total. However if one looks at the portfolio from the basis of what money was invested out of pocket compared to the total value of the portfolio as it stands today you get a slightly different picture. Now the chart below is as of June 1st, not May 31st and differs in closing price (value) of the shares and also shows a slightly larger number of shares for Oxford Lane Capital (NASDAQ:OXLC) since their dividend was paid on the 31st, but didn’t go into my account until the 1st. So with that in mind I’d like to share the chart for Out of Pocket BBP if only to show the difference that dividends make.

Out of Pocket

as of June 1

Symbol

OOP Shares

$ OOP

Shares Div

Div Rcvd

Current Value

Actual Rtrn

KEY

100

$1,589.60

2.42

$46.52

$2,021.83

27.19%

PEGI

60

$1,281.00

1.39

$25.32

$1,132.03

-11.63%

APLE

205

$3,623.44

6.76

$125.47

$4,012.85

10.75%

EPD

170

$4,569.60

11.2

$362.01

$5,411.21

18.42%

T

100

$3,453.57

1.99

$68.87

$3,309.58

-4.17%

EPR

36

$2,271.96

1.01

$57.90

$2,266.86

-0.22%

MAIN

40

$1,475.20

0.61

$22.92

$1,560.64

5.79%

OXLC

80

$811.20

5.34

$55.43

$899.46

10.88%

Total

$19,075.57

$764.44

$20,614.46

8.07%

You’ll notice that the total return jumps from 3.37% to 8.07% which may or may not be of interest to anyone but me. It does, however, illustrate the difference that reinvested dividends make on the overall portfolio. Please note that this portfolio is less than two years old and most of the holdings have been held for less than a year. In fact the only holdings that I’ve had for more than a full year are Keybank and Enterprise Partners. If it’s of interest to my readers I’ll continue to include this chart in upcoming articles, if not I’ll track it for myself.

In conclusion, May was a good month for the Brown Bag Portfolio. Although I didn’t make any new purchases dividends continued to roll in and I was rewarded with significant price appreciation in a number of my holdings. AT&T (NYSE:T) is still under water, but I’m confident that the situation will improve over the next several months. Pattern Energy Group is still depressed, but their last quarterly report gives me some hope that this too is a short-term situation. Most of my positions are where I want them to be for 2018, although I’d like to add to EPR and Pattern Energy as I’ve previously mentioned as well as Main Street Capital (NYSE:MAIN) if the price declines to the low or mid 37’s. If these situations do not present themselves this year I will continue to evaluate the stocks that I mentioned earlier in this article and purchase when I have the funds available. The goal for the end of 2018 is to open two new positions as well as double my current holdings of Pattern Energy and Main Street Capital. What cash I have available as well as where the market goes will be the ultimate arbiter in the end.

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.

Disclosure: I am/we are long KEY, PEGI, APLE, EPD, T, EPR, OXLC, MAIN.

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.