Dividend Sensei's Portfolio Update 39: 3 Reasons You Should Avoid This Dangerous Type Of High-Yield Stock

by: Dividend Sensei

Many readers have asked me why a dividend focused investors like myself doesn't invest in closed end funds or CEFs.

This security type is famous for its sky high-yields and often pay monthly distributions making them appear at first glance as ideal for income investors.

However, there are three main drawbacks to CEFs that make it virtually impossible to own or recommend any.

These include: high expense ratios, destructive distribution policies, and typically terrible long-term total returns.

This week, there are 189 quality dividend growth stocks at attractive valuations off a master watchlist of 264 companies.

(Source: imgflip)


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 one (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 (Eternal Daily Dividend Growth Experiment) 4.0 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.

The reason behind owning such a widely diversified portfolio is because I've built this strategy using historical statistical analysis. Statistics requires large sample sizes to have any useful predictive power, and so, the more stocks I own, the more likely the long-term total returns are to approximate the projected returns. As a side benefit, it also creates a highly stable "bunker" portfolio that is likely to easily survive whatever future market storm might come. It also creates a stream of near-daily dividends which will allow me to compound my dividend reinvestment faster.

Note that this experiment has to hit certain performance targets within a fixed time frame:

  • Break even within 3 years (Kevin O'Leary Principle: If you don't make money after 3 years, it's a hobby, not a business".)
  • Match the market within 4 years.
  • Beat the market within 5 years (on an unlevered basis).
  • Beat smart beta ETFs that have historically outperformed the S&P 500 (like NOBL) within 6 years.
  • Beat all ETFs or smart beta ETFs (like QQQ) within 7 years.

In case the portfolio fails to hit these targets, then I'll adapt it to add what is outperforming it. That means switching to an alternative plan, which tentatively looks like this:

  • 25% QQQ (Nasdaq ETF, which I consider a superior index to the S&P 500)
  • 25% SCHD (Dividend achiever ETF, which is also superior to the S&P 500)
  • 10% non-dividend stocks (such as Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Alphabet (GOOG, GOOGL), Netflix (NASDAQ:NFLX), and Berkshire Hathaway (BRK.A, BRK.B))
  • 40% individual dividend growth stocks (focused on maximizing long-term total return potential via 20-25 stocks)

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 why investors should celebrate America's strong economic growth and not worry so much about a recession.

Why I Don't Invest In CEFs

Many readers have asked me why I don't invest in closed end funds or CEFs. This is especially true given my fondness for high-yield stocks and MLPs (which make up about 26% of my portfolio). The CEF industry is a tiny asset class represented by 530 different funds.

They are actively managed funds that differ from a mutual fund in that investors can't withdraw capital from the fund. Once an IPO happens the number of shares is fixed and the value of those shares changes from throughout the day based on the supply and demand from investors. In contrast, mutual funds and exchange traded funds or ETFs create or destroy shares based on fund flows (investors putting money in or taking it out).

In theory, CEFs offer income investors everything they could want: high-yield, many pay monthly distributions, and most trade at a discount to NAV (potentially boosting returns). In addition, because the fund manager never has to worry about withdrawals forcing him/her to sell at the worst possible time (like during a crash), it should be theoretically easier for managers to outperform the market.

I'd love to find a CEF that meets my high-yield income growth needs. Unfortunately, thus far, I have yet to find one that doesn't possess one or more of the following deal breaking qualities.

1. Sky High Expense Ratios

CEFs are actively managed and most use some leverage to try to boost income and returns (average of 13% leverage at the end of 2017). However, unlike mutual funds, which have seen their expense ratios falling steadily for years due to the increasing competition from passive index funds, CEFs are a very high margin niche (for their managers) that continues to gouge investors. For example, at the end of 2017, the average active mutual fund had an expense ratio of .59%, but many CEFs charge far more like Kayne Anderson Energy Development (KED).

This MLP focused CEF uses 34% leverage on 35 MLPs to generate 9.2% distributions paid quarterly.

(Source: CEFconnect)

However, in exchange for this high-yield, one has to literally pay through the nose.

(Source: CEFconnect)

Ok that's the most extreme example of a CEF that's overcharging investors. But what about the cheapest MLP CEF? That would be the Neuberger Berman MLP Income (NML). This CEF pays 7% monthly distributions, uses 22% leverage, and owns 30 MLPs.

(Source: CEFconnect)

Now, I'll be the first to admit that many of these MLPs are top notch and I own many of them myself. Others are on my master watchlist, and I plan to add them to my portfolio. But the expense ratio on this, the single cheapest MLP CEF, is still way to high.

(Source: CEFconnect)

And keep in mind that, while I like most of the MLPs, this CEF owns several I consider to be high risk. If I wanted to leverage up high risk MLPs (like ETP) at 25%, I could do so through Interactive Brokers and pay just .75% in annual interest (as a percentage of the position size). That's less than what most CEFs will charge you for leverage that you may not even be comfortable with. And, of course, choosing my own MLPs means I avoid paying exorbitant management fees.

2. Terrible Distribution Policies

The core of my portfolio strategy is: generous, safe, and growing income. I won't own any investment that I'm not confident can maintain its payouts (if they are 10+%) or grow them over time. That's the beauty of MLPs. You gain the benefits of high yields, covered by long-term contracted, commodity insensitive cash flow, AND the distributions rise over time.

Well, not for most CEFs. Here's NML's payout history. Note how it is incredibly stable from the IPO in 2014 through the mid 2016. Remember that it owns many fast growing MLPs who were boosting their distributions at rates of 5% to 20% annually through much of that time.

NML Distribution History

(Source: CEFconnect)

Worst still in 2016, the payout was slashed in half. You know why that is? It's not because most of the MLPs the CEF owned cut their distributions. In fact, only two of the top 10 holdings cut their distributions. The rest continued to grow their payouts at a modest to fast pace. The answer lies in something called return of capital or ROC.

If a CEF doesn't generate enough income or capital gains to pay its distributions, it must dip into its investable assets to cover the shortfall. This is what's known as destructive ROC. It lowers the investable asset base over time, forcing distributions to fall. It also reduces NAV/share which causes the price to follow the payout lower. Destructive ROC is essentially the same as a company generating $1 per year in FCF/share paying a $2 dividend. The $1 overpayment will have to come out of cash reserves, or be funded by debt or additional equity (new shares). However, both options mean rising interest and dividend costs over time which just creates a death spiral of unsustainability that always ends up with a dividend cut.

MLP distributions are technically classified as ROC as well by the IRS due to their pass through structure. This is why the distributions lower your cost basis. As long as an MLPs DCF/unit covers its payout, the ROC is not actually destructive. This is why MLPs like Enterprise Products Partners (EPD) and Magellan Midstream Partners (MMP) have managed to grow their distributions over decades and provide market-crushing total returns.

Chart EPD Dividend data by YChartsChart EPD Total Return Price data by YCharts

In order to avoid the pitfall of destructive ROC you need to check what the distributions are made of.

NML Distribution Composition

(Source: CEFconnect)

Of course, the problem is that with any MLP CEF, you will only see 100% ROC. Is that regular ROC or destructive? There's no way to tell until it's too late and the CEF cuts its payout.

But ok so that's an issue with MLPs. But what about non MLP CEFs? Like REITs? There are lots of REIT CEFs around, and since they own leveraged high-yield stocks, surely, they are paying out sustainable distributions right? Well, to answer that, let's take a look at the lowest cost REIT CEF, the Cohen & Steers Total Return Realty Fund (RFI).

This CEF owns 118 REITs, uses no leverage, and is supposed to be an "income only" fund, meaning it doesn't use destructive ROC to pay its monthly 7.7% distribution. But there are a few problems with it. For one, a 36% turnover ratio means it's not tax efficient. Higher turnover also means a higher expense ratio, which is nearly 1%.

RFI Expense Ratio

(Source: CEFconnect)

On the plus side, RFI does own some good dividend growth REITs, which means its distribution should rise over time right?

(Source: CEFconnect)

Actually no. RFI's payout history shows essentially flat monthly distributions for very long stretches, occasionally interspersed with special dividends. During the financial crisis, the CEF did a shadow cut by switching to a quarterly payout that reduced shareholder income. Only recently did the CEF return to monthly distributions.

(Source: CEFconnect)

But guess what? 75% of these distributions are ROC, and while REITs can create minor amounts of ROC, it's not nearly enough to explain this. In other words, once more, we have a CEF that's promising high-yield but instead charging you a lot to just give you back your own money.

REITs and MLPs are both supposed to be about safe and GROWING payout over time. That's what creates your total returns over time. CEFs of either REITs, MLPs, or regular dividend growth corporations don't result in generous, safe, and exponentially rising income. Worse still? Most CEFs, like their open active mutual fund cousins, also drastically underperform the market over time.

3. Pay A Lot For Variable Payouts And Terrible Long-Term Performance

Chart DNI Total Return Price data by YCharts

One of the CEFs a reader mentioned owning and recommending was the Dividend & Income Fund (DNI) which is run by Bexil advisers LLC. As you can see, over past 20 years, this CEF has vastly underperformed the S&P 500.

This quarterly paying levered CEF owns 96 positions, including some quality dividend growth blue chips. It yields 3.8%.

(Source: CEFconnect)

But guess what? The distribution is not rising over time as one would expect from levering up in dividend growth stocks, including dividend aristocrats and kings.

(Source: CEFconnect)

Why is that? Because DNI pays for most of its distributions with capital gains, which are fickle and can't be relied upon for stable income.

(Source: CEFconnect)

So, how much do you have to pay for this CEF which has managed to so badly underperform the market despite owning lots of dividend growth stocks that have beaten the market over time?

(Source: CEFconnect)

Try almost 2% per year. The point is that CEFs are not nearly the easy source of high-yield that investors think. They were invented mainly to benefit active managers. Managers who often use destructive ROC or unsustainable capital gains to pay out temporarily steady but ultimately unsustainable distributions to investors who usually don't bother doing their due diligence.

If you want to own CEFs? If you can find a reasonably priced one with stable, and rising distributions over time that also beats the market then by all means do it. And make sure to let me know what it is because I haven't been able to find a single one that meets those criteria. But whatever you decide to do regarding CEFs, make sure you are VERY careful because if you are looking for generous, safe, and exponentially rising income over time. Because the simple fact is that the vast majority of CEFs are a terrible choice for most dividend-focused investors.

The State Of The Economy (aka Recession Watch)

I use five key meta analyses to track the health of the economy. That includes those which have historically proven to be good predictors of recessions: the yield curve, the BaR economic graph, Jeff Miller's meta analysis of leading economic indicators, the St. Louis Fed's smoothed-out recession risk indicator, and the New York Fed's real-time GDP growth tracker.

(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 12-18 months.

Yield Curve Inversion Date

Recession Start Date

Months To Recession Once Curve Inverts

August 1978

January 1980


September 1980

July 1981


December 1988

July 1990


February 2000

March 2001


December 2005

December 2007




(Source: St. Louis Federal Reserve, Ben Carlson)

Current 2/10 Yield Curve: 0.38% (down from 0.43% last week)

On June 16th, 2018, the curve fell as low as 0.35%, the lowest since 2007. This was caused by the 2 year soaring due to the Fed signaling 4 rate hikes this year instead of 3. Fortunately, history shows that the actual number isn't significant, and recession risk is low as long as the curve is positive. Now that the market is pricing in more hikes, the yield curve should stabilize barring worries over trade wars causing a flight to safety that drives up 10 year bond prices and lowers the 10 year yield.

Overall, I'm still optimistic that strong economic growth and rising inflation expectations 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)

The BaR grid has shown to be a reliable indicator predicting the 1980, 1990, 2001, and 2007 recessions.

With 10 out of 19 economic indicators in the expansion quadrant (indicating accelerating growth), and 9 out of 19 still showing positive (though decelerating) growth, there remains little cause for concern.

(Source: Economic PI)

Note that nine weeks ago, there were 12 economic indicators in the expansion quadrant. However, the mean coordinate point (economic aggregate) remains about 37% above baseline and showing slight positive acceleration.

Next, there's Jeff Miller's excellent economic indicator snapshot, a rich source of numerous useful market/economic data. It also provides an actual percentage probability estimate for how likely a recession is to start in the next few months.

(Source: Jeff Miller)

What I'm looking at here is the quantitative estimates of short-term recession risks. In this case, the four-month recession risk is about 1.06%, while the probability of a recession starting within nine months is about 24%. While that is up slightly from last quarter, I don't consider it statistically significant. However, I will be watching inflation expectations closely (which drive bond yields) to see if the bond market loses confidence in the country's long-term growth prospects.

For another look at recession risk, I like to use the St. Louis Fed's smoothed-out recession risk indicator. This looks at the risk of a recession beginning in the current month (it's actually delayed two months). It uses a four-month running average of leading economic indicators.

(Source: St. Louis Federal Reserve)

The way to read this graph is to understand that in the past (since 1967), as long as the reading (currently 0.16% recession risk) is under 18%, the economy has never been in a recession. This means that this graph can tell us with about a two-month lead time whether or not the economy is likely to be contracting.

Current Economic Growth Projections

Ok, so the economy is nowhere close to a recession right now. But how fast is it growing? Well, we have two models for that, courtesy of the Atlanta Fed and the New York Fed.

(Source: Atlanta Federal Reserve)

(Source: New York Federal Reserve)

Note that these are just models and depending on how they weight different leading indicators, the projections can be wildly different. But they can offer us a reasonable estimate of current economic growth (range of 3.0% to 4.8%). More importantly, the projection trends have remained positive all quarter indicating that US economic growth appears to be not just strong but getting stronger over the last few months. The New York model also is set to estimate future growth and is currently estimating 2.8% growth in Q3 2018.

That bodes well for continued job growth, and thus, a continued tightening of the labor market that should eventually boost wages at a faster rate. Last month, private sector wages grew 2.9% YOY, which is up from 2.6% a year ago. Meanwhile, the Bureau of Labor Statistics estimates that wage growth is now 2.7% YOY and 2.8% for non-supervisory positions (80% of workers).

That, in turn, could spur stronger consumer spending (70% of the US economy) and drive stronger corporate investment and earnings/cash flow/dividend growth. In fact, according to the Bureau of Economic Analysis, consumer spending in the last two months grew at 0.5% and 0.6% month over month, respectively. Meanwhile retail sales for last month came in at 5.9% YOY, which was double what economists were expecting.

Since mid-2015, the overall trend in consumer spending has been positive, which should continue to drive strong growth. That's unless a trade war causes massive economic dislocation (rising prices, supply chain disruption, weaker economic growth).

Master Watchlist

There are about 3,000 dividend-paying stocks in America (including special dividends and variable payers). 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.

This week's new additions to the list include:

Ticker Company Target Yield (Fair Value) Current Yield Potential Long-Term Dividend Growth Total Return Potential Sector Industry
(AMGP) Antero Midstream GP 0.4% 2.4% 26.3% 28.7% MLP (no K1) Oil, Gas & Consumable Fuels
(IDCC) InterDigital 1.5% 1.6% 25.0% 26.6% Technology Telecom Equipment
(AM) Antero Midstream Partners 3.7% 5.1% 19.9% 25.0% MLP Oil, Gas & Consumable Fuels
(DM) Dominion Midstream Partners 3.3% 10.3% 14.0% 24.3% MLP Oil, Gas & Consumable Fuels
(PXD) Pioneer Natural Resources 0.1% 0.3% 23.6% 23.9% Energy Oil, Gas & Consumable Fuels
(NBLX) Noble Midstream Partners 3.6% 3.9% 19.0% 22.9% MLP Oil, Gas & Consumable Fuels
(SIMO) Silicon Motion Technology 2.1% 2.4% 20.0% 22.4% Technology Semiconductors
(EQGP) EQT GP Holdings 2.5% 4.2% 18.0% 22.2% MLP Oil, Gas & Consumable Fuels
(NVDA) NVIDIA 0.17% 0.23% 21.7% 21.9% Technology Semiconductors
(COG) Cabot Oil & Gas 0.3% 1.0% 20.8% 21.8% Energy Oil, Gas & Consumable Fuels
(LRCX) Lam Research 1.2% 2.5% 19.3% 21.8% Technology Semiconductor Equipment
(LOW) Lowe's Companies 1.7% 1.7% 19.8% 21.5% Consumer Cyclical Home Improvement Stores
(HII) Huntington Ingalls Industries 1.2% 1.3% 20.0% 21.3% Industrial Defense
(MKTX) MarketAxess Holdings 0.8% 0.8% 20.0% 20.8% Finance Capital Markets
(NYSE:DPZ) Domino's Pizza 1.1% 0.8% 19.9% 20.7% Consumer Discretionary Restaurants
(CNXM) CNXM Midstream Partners 5.5% 6.5% 14.0% 20.5% MLP Oil, Gas & Consumable Fuels
(AMP) Ameriprise Financial 2.3% 2.4% 18.0% 20.4% Finance Asset Management
(OMP) Oasis Midstream Partners 5.0% 9.2% 11.0% 20.2% MLP Oil, Gas & Consumable Fuels
(ETE) Energy Transfer Equity 5.8% 7.2% 13.0% 20.2% MLP Oil, Gas & Consumable Fuels
(MA) Mastercard 0.3% 0.5% 19.3% 19.8% Financial Credit Services
(EOG) EOG Resources 0.4% 0.7% 19.0% 19.7% Energy Oil, Gas & Consumable Fuels
(EQM) EQT Midstream Partners 3.6% 7.7% 12.0% 19.7% MLP Oil, Gas & Consumable Fuels
(HESM) Hess Midstream Partners 5.0% 6.5% 13.0% 19.5% MLP Oil, Gas & Consumable Fuels
(ABBV) AbbVie 3.5% 3.9% 15.2% 19.1% Healthcare Biotechnology
(NYLD) NRG Yield 6.0% 6.9% 12.0% 18.9% YieldCo Renewable Energy
(NTES) NetEase 1.2% 1.2% 17.7% 18.9% Technology Internet Software & Service
(HCKT) Hackett Group 1.9% 2.1% 16.7% 18.8% Technology IT Consulting
(V) Visa 0.5% 0.6% 18.1% 18.7% Financial Credit Services
(EQIX) Equinix 2.1% 2.3% 16.2% 18.5% REIT Data Center REIT
(RCL) Royal Caribbean Cruises 1.9% 2.1% 16.2% 18.3% Consumer Cyclical Hotel, Resorts, Cruise Lines
(TEGP-OLD) Tallgrass Energy GP 4.2% 9.0% 9.0% 18.0% MLP (No K1) Oil, Gas & Consumable Fuels
(LUV) Southwest Airlines 0.8% 1.2% 16.4% 17.6% Consumer Cyclical Airlines
(AMT) American Tower 1.8% 2.2% 15.4% 17.6% REIT Telecom REIT
(SBUX) Starbucks 1.4% 2.1% 15.4% 17.5% Consumer Cyclical Restaurant
(DOV) Dover 2.2% 2.4% 15.0% 17.4% Industrial Diversified Industrials
(NYSE:NEP) NextEra Energy Partners 4.1% 3.9% 13.5% 17.4% YieldCo Renewable Energy
(CCI) Crown Castle 3.9% 4.2% 13.1% 17.3% REIT Telecom REIT
(CMCSA) Comcast 1.7% 2.2% 15.0% 17.2% Telecom Cable & Satellite
(COR) CoreSite Realty Corp 3.5% 3.6% 13.5% 17.1% REIT Data Center REIT
(PEGI) Pattern Energy Group 6.7% 8.7% 8.3% 17.0% YieldCo Renewable Energy
(QSR) Restaurant Brands International 1.4% 3.0% 14.0% 17.0% Consumer Cyclical Restaurant
(HD) Home Depot 2.1% 2.1% 14.9% 17.0% Consumer Cyclical Home Improvement Stores
(QCOM) Qualcomm 3.2% 4.1% 12.8% 16.9% Technology Semiconductors
(BUD) Anheuser-Busch InBev 2.6% 3.5% 13.4% 16.9% Consumer Defensive Alcohol
(SWKS) Skyworks Solutions 1.1% 1.2% 15.6% 16.8% Technology Semiconductors
(UNP) Union Pacific 2.0% 2.0% 14.8% 16.8% Industrial Railroads
(ALLE) Allegion PLC 0.7% 1.0% 15.7% 16.7% Industrial Building Products
(NYSE:BLK) BlackRock 2.5% 2.2% 14.4% 16.6% Financial Asset Management
(NYSE:THO) Thor Industries 1.6% 1.5% 15.0% 16.5% Consumer Discretionary Recreational Vehicles
(AVGO) Broadcom 1.6% 2.6% 13.9% 16.5% Technology Semiconductors
(HP) Helmerich & Payne 4.1% 4.4% 12.0% 16.4% Energy Oil Service
(CCMP) Cabot Microelectronics 1.2% 1.4% 15.0% 16.4% Technology Semiconductors
(WGP-OLD) Western Gas Equity Partners 3.6% 6.4% 10.0% 16.4% MLP Oil, Gas & Consumable Fuels
(OTEX) Open Text 1.5% 1.7% 14.7% 16.4% Technology Business Applications
(VLP) Valero Energy Partners 2.8% 5.2% 11.0% 16.2% MLP Oil, Gas & Consumable Fuels
(CDW) CDW Corp 1.0% 1.0% 15.1% 16.1% Technology IT Distributor
(SHLX) Shell Midstream Partners 3.2% 6.0% 10.0% 16.0% MLP Oil, Gas & Consumable Fuels
(NASDAQ:CTAS) Cintas 1.1% 0.9% 15.1% 16.0% Industrial Business Services
(NYSE:SPGI) S&P Global 1.3% 1.0% 14.7% 15.7% Financial Capital Markets
(NASDAQ:NDSN) Nordson 1.0% 0.9% 14.5% 15.4% Industrial Diversified Industrials
(NASDAQ:ADP) Automatic Data Processing 2.4% 1.8% 13.6% 15.4% Industrial Business Services
(AQN) Algonquin Power & Utilities 4.7% 5.4% 10.0% 15.4% Utilities Diversified Utilities
(LECO) Lincoln Electric Holdings 1.7% 1.7% 13.7% 15.4% Industrial Electric Machinery
(CSL) Carlisle Companies 1.2% 1.4% 14.0% 15.4% Industrial Diversified Industrials
(OTCQX:IMBBY) Imperial Brands 5.6% 6.5% 8.8% 15.3% Consumer Defensive Tobacco
(ANDX) Andeavor Logistics LP 5.9% 9.3% 6.0% 15.3% MLP Oil, Gas & Consumable Fuels
(CAKE) Cheesecake Factory 1.5% 2.0% 13.2% 15.2% Consumer Cyclical Restaurants
(NYSE:SHW) Sherwin-Williams 1.1% 0.9% 14.3% 15.2% Basic Materials Specialty Chemicals
(NASDAQ:TROW) T. Rowe Price 2.6% 2.2% 12.9% 15.1% Finance Asset Management
(QTS) QTS Realty Trust 3.1% 4.1% 11.0% 15.1% REIT Data Center REIT
(DG) Dollar General 1.2% 1.2% 13.9% 15.1% Consumer Discretionary Retail
(MO) Altria 4.0% 4.8% 10.1% 14.9% Consumer Defensive Tobacco
(MSFT) Microsoft 0.9% 1.7% 13.2% 14.9% Technology Software
(TSCO) Tractor Supply Company 1.0% 1.7% 13.2% 14.9% Consumer Cyclical Specialty Retail
(IVZ) Invesco 3.2% 4.4% 10.5% 14.9% Finance Asset Management
(BIP) Brookfield Infrastructure Partners 4.5% 4.9% 10.0% 14.9% Utility Diversified Utilities
(NYSE:UNH) UnitedHealth Group 1.6% 1.2% 13.6% 14.8% Healthcare Health Insurance
(WSM) Williams-Sonoma 2.4% 2.8% 12.0% 14.8% Consumer Discretionary Retail
(ENB) Enbridge Inc 3.5% 6.7% 8.0% 14.7% Energy Oil, Gas & Consumable Fuels
(FDX) FedEx 0.6% 0.8% 13.8% 14.6% Industrial Shipping & Logistics
(HAS) Hasbro 2.6% 2.8% 11.7% 14.5% Consumer Cyclical Toys
(MDLZ) Mondelez International 1.7% 2.2% 12.3% 14.5% Consumer Defensive Food & Beverage
(LEG) Leggett & Platt 3.0% 3.4% 11.0% 14.4% Consumer Cyclical Furniture
(TXN) Texas Instruments 1.5% 2.1% 12.2% 14.3% Technology Semiconductors
(ECL) Ecolab 1.1% 1.1% 13.2% 14.3% Basic Materials Specialty Chemicals
(NYSE:BDX) Becton, Dickinson & Company 1.7% 1.3% 13.0% 14.3% Healthcare Medical Equipment
(NYSE:OKE) ONEOK 5.0% 4.7% 9.6% 14.3% Energy Oil, Gas & Consumable Fuels
(MWA) Mueller Water Products 0.9% 1.7% 12.6% 14.3% Industrial Water Infrastructure
(PSXP) Phillips 66 Partners 3.1% 5.3% 9.0% 14.3% MLP Oil, Gas & Consumable Fuels
(NASDAQ:CONE) CyrusOne 3.3% 3.2% 11.0% 14.2% REIT Data Center REIT
(NYSE:SYY) Sysco 3.0% 2.2% 12.0% 14.2% Consumer Defensive Food Distributor
(APTS) Preferred Apartment Communities 6.7% 7.1% 7.0% 14.1% REIT Apartment REIT
(NASDAQ:TXRH) Texas Roadhouse 1.8% 1.5% 12.6% 14.1% Consumer Cyclical Restaurants
(ROST) Ross Stores 1.0% 1.1% 13.0% 14.1% Consumer Cyclical Retail
(NYSE:BA) Boeing 2.4% 1.9% 12.0% 13.9% Industrial Aerospace & Defense
(ADM) Archer-Daniels Midland 2.6% 2.9% 11.0% 13.9% Consumer Defensive Farm Products
(KMI) Kinder Morgan 4.1% 4.8% 9.0% 13.8% Energy Oil, Gas & Consumable Fuels
(CVS) CVS Health 1.6% 2.9% 10.9% 13.8% Healthcare Pharmacy/Health Insurance
(MMC) Marsh & McLennan Companies 2.0% 2.0% 11.7% 13.7% Finance Insurance Brokers
(AY) Atlantica Yield 5.6% 5.7% 8.0% 13.7% YieldCo Renewable Energy YieldCo
(CMI) Cummins 2.6% 3.0% 10.7% 13.7% Industrial Heavy Trucks & Machinery
(FBHS) Fortune Brands Home & Security 1.1% 1.4% 12.3% 13.7% Industrial Building Products
(NYSE:GWW) W.W Grainger 2.0% 1.7% 12.0% 13.7% Industrial Industrial Distribution
(OTC:TRSWF) TransAlta Renewables 4.0% 7.6% 6.0% 13.6% Utility YieldCo
(NYSE:DCI) Donaldson Company 1.6% 1.5% 12.1% 13.6% Industrial Filtration Systems
(MSA) MSA Safety Incorporated 2.3% 1.6% 12.0% 13.6% Industrial Safety Equipment
(OZRK) Bank of the Ozarks 1.5% 1.6% 12.0% 13.6% Financial Banking
(WBA) Walgreens Boots Alliance 1.9% 2.4% 11.1% 13.5% Consumer Defensive Pharmacy
(OTCPK:EMRAF) Emera 4.3% 5.5% 8.0% 13.5% Utility Regulated Utility
(BEP) Brookfield Renewable Partners 5.6% 6.5% 7.0% 13.5% YieldCo Renewable Energy
(NYSE:PSX) Phillips 66 2.8% 2.4% 11.0% 13.4% Energy Refining
(APOG) Apogee Enterprises 1.1% 1.4% 12.0% 13.4% Industrial Building Products
(SEP) Spectra Energy Partners 6.0% 9.4% 4.0% 13.4% MLP Oil, Gas & Consumable Fuels
(NYSE:NKE) Nike 1.2% 1.1% 12.3% 13.4% Consumer Cyclical Apparel
(TTC) Toro Company 1.3% 1.3% 12.0% 13.3% Industrial Agricultural Equipment
(DIS) Disney 1.6% 1.5% 11.7% 13.2% Consumer Cyclical Entertainment
(TJX) TJX Companies 1.2% 2.1% 11.1% 13.2% Consumer Cyclical Retail
(AAPL) Apple 0.9% 1.5% 11.6% 13.1% Technology Consumer Hardware
(BLL) Ball Corp 0.8% 1.1% 12.0% 13.1% Basic Materials Metal & Glass Containers
(INGR) Ingredion 2.0% 2.1% 11.0% 13.1% Consumer Defensive Agricultural Products
(PFG) Principal Financial Group 2.9% 3.7% 9.4% 13.1% Financial Insurance
(TERP) TerraForm Power 6.0% 6.6% 6.5% 13.1% YieldCo Renewable Energy
(APD) Air Products & Chemicals 2.4% 2.7% 10.4% 13.1% Industrial Industrial Gas
(ROP) Roper Technologies 0.6% 0.6% 12.5% 13.1% Industrial Industrial Tech
(CCL) Carnival 2.6% 3.1% 10.0% 13.1% Consumer Discretionary Cruise Line
(SNA) Snap-on 1.6% 2.0% 11.0% 13.0% Industrial Diversified Industrials
(ETN) Eaton Corp 3.1% 3.3% 9.7% 13.0% Industrial Diversified Industrials
(WHR) Whirlpool 2.2% 3.0% 10.0% 13.0% Consumer Discretionary Home Appliances
NOC Northrop Grumman 1.7% 1.5% 11.5% 13.0% Industrial Defense
CAT Caterpillar 3.0% 2.1% 10.9% 13.0% Industrial Farm & Construction Equipment
SEIC SEI Investments 1.1% 0.9% 12.0% 12.9% Financial Asset Management
GD General Dynamics 2.1% 1.9% 11.0% 12.9% Industrial Aerospace & Defense
(TRP) TransCanada 3.9% 5.2% 7.7% 12.9% Energy Oil, Gas & Consumable Fuels
ERIE Erie Indemnity 3.0% 2.8% 10.0% 12.8% Finance Insurance
(WSFS) WSFS Finance 0.7% 0.8% 12.0% 12.8% Finance Thrift & Mortgage Finance
(COST) Costco 1.1% 1.1% 11.7% 12.8% Consumer Cyclical Retail
MCO Moody's 1.4% 1.0% 11.8% 12.8% Finance Financial Exchanges & Data
(CASY) Casey's General Stores 0.9% 1.0% 11.7% 12.7% Consumer Defensive Grocery Stores
(HUBB) Hubbell Incorporated 2.3% 2.7% 10.0% 12.7% Industrial Electronic Components
(TD) Toronto-Dominion Bank 3.4% 3.7% 9.0% 12.7% Financial Banking
(VFC) V.F Corp 2.0% 2.2% 10.5% 12.7% Consumer Cyclical Apparel
(TSN) Tyson Foods 1.1% 1.7% 11.0% 12.7% Consumer Defensive Food & Beverage
(MPLX) MPLX 4.4% 7.1% 5.6% 12.7% MLP Oil, Gas & Consumable Fuels
(AOS) A. O. Smith 1.1% 1.1% 11.5% 12.6% Industrial Building Products
(MRT) MedEquities Trust 7.4% 8.0% 4.6% 12.6% REIT Medical REIT
(CB) Chubb 2.2% 2.2% 10.3% 12.5% Finance Insurance
(EPR) EPR Properties 6.1% 6.7% 5.8% 12.5% REIT Specialized REIT
(FLO) Flowers Food 2.8% 3.5% 9.0% 12.5% Consumer Defensive Food & Beverage
(MMM) 3M 2.5% 2.7% 9.8% 12.5% Industrial Diversified Industrials
(TU) Telus 4.1% 4.5% 7.9% 12.4% Telecom Wireless/Internet
(IRM) Iron Mountain 6.0% 7.1% 5.3% 12.4% REIT Storage REIT
TRNO Terreno Realty 2.9% 2.3% 10.0% 12.3% REIT Industrial REIT
(GIS) General Mills 3.1% 4.3% 8.0% 12.3% Consumer Defensive Food & Beverage
ORI Old Republic International 4.3% 3.7% 8.6% 12.3% Finance Insurance
(EPD) Enterprise Products Partners 5.6% 6.1% 6.2% 12.3% MLP Oil, Gas & Consumable Fuels
(ITW) Illinois Tool Works 2.1% 2.1% 10.2% 12.3% Industrial Diversified Industrials
PH Parker-Hannifin 1.8% 1.8% 10.5% 12.3% Industrial Diversified Industrials
(MKC) McCormick & Company 2.0% 2.0% 10.3% 12.3% Consumer Defensive Food & Beverage
(MDP) Meredith Corp 3.7% 4.2% 8.0% 12.2% Consumer Discretionary Publishing
(IFF) International Flavors & Fragrances 1.9% 2.2% 10.0% 12.2% Basic Materials Specialty Chemicals
(PRU) Prudential Financial 2.7% 3.7% 8.5% 12.2% Financial Insurance
CORR CorEnergy Infrastructure Trust 8.2% 8.1% 4.0% 12.1% REIT Infrastructure REIT
JKHY Jack Henry & Associates 1.4% 1.1% 11.0% 12.1% Technology Data Processing & Outsourcing Solutions
MGRC McGrath RentCorp 2.9% 2.1% 10.0% 12.1% Industrial Business Services
(SPG) Simon Property Group 3.2% 4.7% 7.3% 12.0% REIT Retail REIT
(EIG) Employers Holdings 1.1% 2.0% 10.0% 12.0% Finance Insurance
(SJM) J.M. Smucker 2.3% 3.0% 9.0% 12.0% Consumer Defensive Food & Beverage
(CE) Celanese Corp 1.7% 1.8% 10.1% 11.9% Basic Materials Specialty Chemicals
(C) Citigroup 0.4% 1.9% 10.0% 11.9% Finance Banking
(BNS) Bank of Nova Scotia 3.8% 4.5% 7.4% 11.9% Finance Banking
(UBS) UBS Group 3.5% 3.9% 8.0% 11.9% Finance Banks
(PG) Procter & Gamble 3.1% 3.7% 8.2% 11.9% Consumer Defensive Household & Personal Products
(FDS) FactSet Research Systems 1.2% 1.2% 10.7% 11.9% Finance Capital Markets
(GIL) Gildan Activewear 0.9% 1.5% 10.4% 11.9% Consumer Discretionary Apparel
CFR Cullen/Frost Bankers 2.8% 2.4% 9.5% 11.9% Finance Regional Banks
NSA National Storage Affiliates 4.5% 3.8% 8.0% 11.8% REIT Storage REIT
LANC Lancaster Colony Corp 1.9% 1.8% 10.0% 11.8% Consumer Defensive Food & Beverage
RTN Raytheon 2.3% 1.7% 10.0% 11.7% Industrial Aerospace & Defense
(CNI) Canadian National Railway 1.6% 1.7% 10.0% 11.7% Industrial Railroads
(MPW) Medical Properties Trust 6.6% 7.2% 4.4% 11.6% REIT Hospital REIT
(HON) Honeywell International 2.0% 2.0% 9.6% 11.6% Industrial Diversified Industrials
(CLX) Clorox 2.7% 3.0% 8.6% 11.6% Consumer Defensive Household & Personal Products
(SKT) Tanger Factory Outlet Centers 4.7% 6.2% 5.3% 11.5% REIT Retail REIT
FUN Cedar Fair 5.5% 5.4% 6.0% 11.4% Consumer Discretionary (Uses K1) Amusement Parks
(D) Dominion Energy 3.7% 5.0% 6.4% 11.4% Utilities Diversified Utilities
WDFC WD-40 Company 1.8% 1.4% 10.0% 11.4% Consumer Defensive Household & Personal Products
(NBHC) National Bank Holdings Corp 1.0% 1.4% 10.0% 11.4% Finance Regional Bank
(MMP) Magellan Midstream Partners 4.3% 5.4% 6.0% 11.4% MLP Oil, Gas & Consumable Fuels
(INTC) Intel 1.3% 2.2% 9.2% 11.4% Technology Semiconductors
(CSFL) CenterState Bank 0.6% 1.3% 10.0% 11.3% Finance Regional Bank
(SRE) Sempra Energy 2.8% 3.2% 8.1% 11.3% Utilities Diversified Utilities
(HSY) Hershey 2.3% 2.8% 8.5% 11.3% Consumer Defensive Food & Beverage
(KO) Coca Cola 3.2% 3.5% 7.7% 11.2% Consumer Defensive Food & Beverage
BF.B Brown-Foreman 1.4% 1.2% 10.0% 11.2% Consumer Defensive Alcohol
(GLW) Corning 2.3% 2.5% 8.7% 11.2% Industrial Electronic Components
(KMB) Kimberly-Clark 3.1% 3.9% 7.3% 11.2% Consumer Defensive Household & Personal Products
STAG STAG Industrial 5.9% 5.3% 5.8% 11.1% REIT Industrial REIT
(PFE) Pfizer 3.5% 3.7% 7.4% 11.1% Healthcare Pharmaceuticals
(T) AT&T 4.9% 6.0% 5.1% 11.1% Telecom Wireless/Internet
(UPS) UPS 2.9% 3.1% 8.0% 11.1% Industrial Air Freight & Logistics
PF Pinnacle Foods 2.4% 2.0% 9.1% 11.1% Consumer Defensive Food & Beverage
(UL) Unilever 3.2% 3.3% 7.8% 11.1% Consumer Defensive Household & Personal Products
(XOM) Exxon Mobil 3.4% 4.1% 7.0% 11.1% Energy Oil, Gas & Consumable Fuels
RLI RLI Corp 1.4% 1.3% 9.8% 11.1% Financial Insurance
MCD McDonald's 3.1% 2.4% 8.6% 11.0% Consumer Cyclical Restaurants
DLR Digital Realty Trust 4.7% 3.8% 7.1% 10.9% REIT Data Center REIT
KIM Kimco Realty Corp 7.0% 6.8% 4.1% 10.9% REIT Retail REIT
(HEP) Holly Energy Partners 8.0% 8.8% 2.0% 10.8% MLP Oil, Gas & Consumable Fuels
BMO Bank of Montreal 4.0% 3.8% 6.9% 10.7% Finance Banking
(PPG) PPG Industries 1.5% 1.7% 9.0% 10.7% Basic Materials Specialty Chemicals
NEE NextEra Energy 3.0% 2.8% 7.9% 10.7% Utilities Diversified Utilities
(BAC) Bank of America 1.3% 1.6% 9.0% 10.6% Finance Banking
(GPC) Genuine Parts Company 2.7% 3.0% 7.6% 10.6% Industrial Auto Parts
CVX Chevron 3.9% 3.6% 7.0% 10.6% Energy Oil, Gas & Consumable Fuels
PNR Pentair 2.0% 1.6% 9% 10.6% Industrial Water Infrastructure
(CSCO) Cisco Systems 2.4% 3.0% 7.6% 10.6% Technology Communications Equipment
(PM) Philip Morris International 5.0% 5.6% 5.0% 10.6% Consumer Defensive Tobacco
(JNJ) Johnson & Johnson 2.8% 2.9% 7.6% 10.5% Healthcare Diversified Medical
(GRC) Gorman-Rupp 1.5% 1.5% 9.0% 10.5% Industrial Pumps
(TAP) Molson Coors Brewing Company 2.0% 2.4% 8.1% 10.5% Consumer Defensive Alcohol
(RPM) RPM International 2.3% 2.5% 8.0% 10.5% Basic Materials Specialty Chemicals
(BPMP) BP Midstream Partners 4.5% 5.0% 5.5% 10.5% MLP Oil, Gas & Consumable Fuels
(PEP) Pepsi 3.0% 3.4% 7.0% 10.4% Consumer Defensive Food & Beverage
BAM Brookfield Asset Management 1.5% 1.4% 9.0% 10.4% Finance Asset Management
SYK Stryker Corp 1.4% 1.1% 9.3% 10.4% Healthcare Healthcare Equipment
(LYB) LyondellBasell 3.4% 3.5% 6.9% 10.4% Industrial Petrochemicals
(CP) Canadian Pacific Railway 0.9% 0.9% 9.4% 10.3% Industrial Railroads
AFL Aflac 2.4% 2.3% 8.0% 10.3% Finance Insurance
(PCAR) PACCAR 1.5% 1.8% 8.5% 10.3% Industrial Construction Machinery & Heavy Trucks
(FTS) Fortis 4.0% 4.2% 6.0% 10.2% Utility Electric Utility
(CL) Colgate-Palmolive 2.4% 2.6% 7.6% 10.2% Consumer Defensive Household & Personal Products
(MAN) ManpowerGroup 1.6% 2.2% 8.0% 10.2% Industrial Human Resources & Employment Services
(RY) Royal Bank of Canada 3.8% 3.9% 6.2% 10.1% Finance Banking
BMI Badger Meter 1.3% 1.1% 9.0% 10.1% Technology Electronic Components
UGI UGI Corp 2.3% 2.1% 8.0% 10.1% Utility Gas Utility
(HRL) Hormel Foods 2.0% 2.1% 8.0% 10.1% Consumer Defensive Food & Beverage
(VTR) Ventas 5.8% 5.8% 4.2% 10.0% REIT Healthcare REIT
(FELE) Franklin Electric 1.0% 1.0% 9.0% 10.0% Industrial Pumps
(TGT) Target 3.3% 3.3% 6.7% 10.0% Consumer Cyclical Retail
MDT Medtronic 2.2% 2.1% 7.8% 9.9% Healthcare Medical Products
O Realty Income 5.1% 5.0% 4.9% 9.9% REIT Retail REIT
CTRE CareTrust REIT 5.0% 4.9% 5.0% 9.9% REIT Senior Housing REIT
SXT Sentient Technologies Corp 2.0% 1.9% 8.0% 9.9% Basic Materials Specialty Chemicals
USB US Bancorp 2.5% 2.3% 7.5% 9.8% Finance Regional Bank
MAA Mid-America Apartment Communities 4.1% 3.8% 5.9% 9.7% REIT Apartment REIT
EMR Emerson Electric 3.0% 2.7% 7.0% 9.7% Industrial Electrical Components
AVB AvalonBay Communities 3.9% 3.5% 6.1% 9.6% REIT Apartment REIT
NHI National Health Investors 5.8% 5.4% 4.2% 9.6% REIT Medical REIT
CPT Camden Property Trust 3.9% 3.4% 6.1% 9.5% REIT Apartment REIT
MAIN Main Street Capital 8.0% 7.4% 2.0% 9.4% Finance BDC
LTC LTC Properties 6.0% 5.4% 4.0% 9.4% REIT Healthcare REIT
WPC W.P Carey 6.7% 6.1% 3.3% 9.4% REIT Diversified REIT
FRT Federal Realty Trust 4.0% 3.3% 6.0% 9.3% REIT Retail REIT
ARE Alexandria Real Estate Equities 3.5% 2.8% 6.5% 9.3% REIT Medical Office REIT
DEO Diageo 3.0% 2.3% 7.0% 9.3% Consumer Defensive Alcohol
NNN National Retail Properties 5.5% 4.5% 4.5% 9.0% REIT Retail REIT
EXR Extra Space Storage 4.3% 3.2% 5.7% 8.9% REIT Storage REIT
VZ Verizon 6.0% 4.9% 4.0% 8.9% Telecom Wireless/Internet
AMGN Amgen 4.0% 2.9% 6.0% 8.9% Medical Pharmaceuticals
PSA Public Storage 4.9% 3.7% 5.1% 8.8% REIT Storage REIT
PLD Prologis 4.2% 3.0% 5.8% 8.8% REIT Industrial REIT
ESS Essex Property Trust 4.2% 3.2% 5.2% 8.4% REIT Apartment REIT
RDS.B Royal Dutch Shell 7.0% 5.3% 3.0% 8.3% Energy Oil, Gas & Consumable Fuels
Average 2.8% 3.2% 10.5% 13.7%

(Source: Management guidance, F.A.S.T. Graphs, GuruFocus, Simply Safe Dividends, Google Finance)

Note that the average yield, dividend growth, and total return potential are based on equal weighting of all 264 companies. If you weight by total return potential (as I plan to do), then the portfolio looks like this:

  • Yield: 3.2%
  • Projected Dividend Growth: 11.4%
  • Total Return Potential: 14.6%

Note that those figures include even stocks that are too overvalued to buy today. In reality, the yield and total return potential should be higher if you avoid overpaying.

Buys/Sells This Week

  • Bought $500 NVIDIA (NVDA)
  • Bought $1,500 Spectra Energy Partners (SEP)

NVIDIA was the new stock of the week. Spectra Energy Partners was my double down stock but a proxy for Enbridge which is buying it out in an all-stock deal.

Plan For The Next Week

The new stock of the week is Pioneer Natural Resources (PXD). This is a one of the fastest growing oil companies in America and a pure play on the Permian Basin. The Permian is America's super shale formation with up to 90 billion barrels of recoverable oil left. Pioneer owns 750,000 gross acres of key Permian land which gives it 20,000 potential drilling locations. Management plans to grow production by 20% per year through 2026 bringing oil production up from 260,000 bpd today to about 1.3 million. Management's plans are highly achievable, and the company plans to fund this growth purely from operating cash flow (not debt). Along the way, the token dividend is set to soar (PXD increased it 300% for this year). The bottom line is that Pioneer Natural Resources is poised to become one of the fastest growing companies in America and represents a great way for income investors to cash in on the miracle that is the Permian oil bonanza.

The double down stock of the week (to lower cost basis) will be EQT Midstream Partners (EQM) on which I'm down about 13% on my average cost basis. EQM is the MLP created by EQT Corp (EQT), America's largest natural gas producer. EQT is the king of the Marcellus/Utica shale which is expected to see strong gas production through 2050. EQM just bought Rice Midstream, covers its 7.7% yield with a distribution coverage of 1.42 (anything over 1.1 is safe). Management's long-term plan is: for 15% to 20% distribution growth through 2020, a debt/EBITDA ratio of 3.5 (industry average 4.4), an investment grade credit rating, long-term distribution coverage of 1.15, and no equity issuances through at least the end of 2020.

The Portfolio Today

(Source: Morningstar)

Dividend Risk Ratings

  • Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 10% (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%.

Safety Outlooks

  • Negative outlook: Fundamentals of industry and/or company are deteriorating, rising risk of safety downgrade. If it's a turnaround story, the turnaround is 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.

High-Risk Stocks

  • Uniti Group (NASDAQ:UNIT) - Negative outlook (turnaround outlook iffy)
  • New Residential Investment Corp. (NYSE:NRZ) - Positive outlook
  • Omega Healthcare Investors (NYSE:OHI) - Due to ongoing downturn in the SNF industry, stable outlook (confidence in turnaround plan)

Medium-Risk Stocks

  • Pattern Energy Group: Will be upgraded when the payout ratio declines under 85% - positive outlook
  • QTS Realty: Stable outlook
  • Medical Properties Trust: Due to long-term uncertainty surrounding medical REITs - positive outlook
  • EPR Properties: Due to exposure to cinemas (declining over time) - positive outlook
  • Chatham Lodging Trust (NYSE:CLDT): Due to volatility of hotel cash flow - stable outlook
  • NRG Yield: Stable outlook
  • NetEase: Negative Outlook (medium risk due to variable dividend policy, gaming division is struggling)

Low-Risk Stocks

  • Enterprise Products Partners: Stable outlook
  • AT&T - Stable outlook
  • Tanger Factory Outlet Centers - Negative outlook
  • Brookfield Property Partners (NYSE:BPY) - Stable outlook
  • TransAlta Renewables (OTC:TRSWF) - Stable outlook
  • Simon Property Group - Stable outlook
  • Enbridge - Stable outlook
  • Realty Income (NYSE:O) - Stable outlook
  • Brookfield Infrastructure Partners - Positive outlook
  • Dominion Energy - Stable outlook
  • STORE Capital (NYSE:STOR) - Stable outlook
  • Canadian Imperial Bank of Commerce (NYSE:CM) - Stable outlook
  • Telus - Stable outlook
  • Ventas - Stable outlook
  • Iron Mountain - Stable outlook
  • Spectra Energy Partners - Stable outlook
  • W.P. Carey - Stable outlook
  • NextEra Energy Partners (NYSEMKT:NEP) - Positive outlook
  • Altria - Stable outlook
  • Royal Bank Of Canada - Stable outlook
  • Bank of Nova Scotia - Stable outlook
  • Exxon Mobil - Stable outlook
  • AbbVie - Stable outlook
  • EQT Midstream Partners - Stable outlook
  • EQT GP Holdings - Stable outlook
  • MPLX - Stable outlook
  • Visa - Stable outlook
  • Home Depot - Stable outlook
  • Lowe's - Stable outlook
  • Noble Midstream Partners - Stable outlook
  • Starbucks - Stable outlook
  • Antero Midstream Partners - Stable outlook
  • Antero Midstream GP - Stable outlook
  • CNX Midstream Partners - Stable outlook
  • Dominion Midstream Partners - Negative outlook (liquidity trap for now)
  • Huntington Ingalls Industries - Stable outlook
  • Apple - Stable outlook
  • Silicon Motion Technology Corp. (SIMO) - Stable outlook
  • InterDigital - Stable outlook
  • NVIDIA (NVDA) - Positive outlook

My focus is on now 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 54 stocks, mostly low- to medium-risk, in 10 sectors. By next week, I'll be up to 55 holdings in 10 sectors. The goal by year-end is around 80 stocks in 10 to 11 sectors.

My current long-term goal (subject to change) is to own 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. Note that I may end up owning a different number of stocks, depending on how the portfolio returns bear out over time.

Top 10 Income Sources

(Source: Simply Safe Dividends)

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.

(Source: Morningstar)

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 and Unilever. 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. Only in rare exception, such as very fast-growing names like NetEase, will I own a variable-pay dividend stock.

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 PG, KO, and 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.

(Source: Morningstar)

My portfolio is currently made up of three core sectors, all currently highly rate-sensitive (I'm okay with that, since rate sensitivity is a short-term phenomenon):

  • 37% - REITs - above 25% max target allocation but will come down over time.
  • 27% - Energy - above 25% max target allocation but that's where the bargains and best opportunities are, my highest conviction sector
  • 15% - Utilities, approaching 25% max target allocation but unlikely to exceed it.

Utilities will eventually increase a bit, as I plan to add several more, including:

  • NextEra Energy Partners
  • Brookfield Renewable Partners
  • TerraForm Power
  • Atlantica Yield
  • American Electric Power (NYSE:AEP)
  • Fortis
  • DTE Energy (NYSE:DTE)
  • Southern Company (NYSE:SO)
  • AES Corp (AES)

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. I do plan to double down on Dominion Energy in the coming months for as long as it remains incredibly undervalued. I don't know how much I'll end up buying but it probably won't be enough to push my utility exposure to above 25%.

(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 versus yield, the average 5-year dividend growth rate is up from 8.9% to 9.8%.

Projected Portfolio Dividends Over Time

Time Frame

Inflation Adjusted Total Annual Portfolio Dividends

5 years


10 years


15 years


20 years


25 years


30 years


40 years


50 years


100 years


(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 11.4% long-term dividend growth estimate and a 2.0% inflation estimate. The 11.4% is the projected long-term dividend growth from the master watchlist, 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 3-4%. But the dividend growth rate should rise to about 9-10%. Ultimately, the goal is to build a highly diversified, low-risk, high-yielding portfolio with strong enough dividend growth to achieve 10-11% 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 3-4% faster dividend growth. Since 1871, the S&P 500 has generated annual total returns of 9.1%. The market's historical inflation adjusted total return 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.

Portfolio Statistics

  • Holdings: 54
  • Portfolio Size: $159,801 (all time record high)
  • Equity: $138,242
  • Remaining Margin Buying Power: $698,908
  • Margin Used: $21,952
  • Debt/Equity: 0.16
  • Dividends/Margin Interest Ratio: 12.7
  • Distance To Margin Call: 80.2%
  • Current Margin Rate: 3.43%
  • Yield: 6.0%
  • Yield On Cost: 6.1%
  • Yield On Equity Cost (net yield on cash I have invested): 6.5%
  • Cumulative Total Return Since Inception (since September 8, 2017): -1.5%
  • Cumulative Unlevered Total Return Since Inception: 1.2%
  • Year-to-Date Unlevered Total Return: -0.7%
  • Annualized Unlevered Total Return (YTD 2018): -1.5%
  • Unrealized Capital Gains (current holdings): $1,969 (+1.3%)
  • Cumulative Dividends Received (including accrued dividends): $8,827
  • Annual Dividends: $9,577
  • Annual Interest: $753
  • Annual Net Dividends: $8,824
  • Monthly Average Net Dividends: $735
  • Daily Average Net Dividends (my business empire never sleeps): $24.18

(Source: Simply Safe Dividends)

  • Portfolio Beta (volatility relative to S&P 500): 0.86
  • Projected Long-Term Dividend Growth: 11.4%
  • Projected Annual Unlevered Total Return: 14.6%
  • Projected Net Levered Annual Total Return: 17.5% (assuming long-term average leverage of 25%, 3% average margin rate)
  • Long-Term Net Levered Annual Total Return Goal: 16.0%

10 Worst-Performing Positions

Stock Loss Cost Basis
DM -14.3% $15.11
SEP -14.0% $36.04
AQN -13.4% $11.10
EQM -13.1% $64.07
ENB -12.1% $36.54
CM -11.1% $98.23
HASI -11.1% $20.80
IRM -10.3% $37.09
D -10.2% $66.31
MO -9.50% $62.98

(Source: Interactive Brokers)

10 Best-Performing Positions

Stock Gain Cost Basis
UNIT 38.4% $16.19
CNXM 20.0% $16.42
QTS 16.1% $34.38
EPD 15.7% $24.49
EPR 14.3% $56.31
HD 13.6% $176.34
V 13.4% $119.09
MPW 12.8% $12.31
LOW 12.6% $88.10
NEP 11.6% $38.91

(Source: Interactive Brokers)

Bottom Line: Make Sure You Understand The Downsides To Any Potential Investment Before Risking Your Hard Earned Money

I'm not saying that every CEF is a necessarily a terrible investment. However, thus far, I have yet to find one that meets my specific goals of generating: generous, stable, and growing income. Rather I've only found high cost funds that usually represent an expensive way to gain leveraged exposure to quality dividend stocks that investors would be better off buying on their own.

If diversification is your goal, then sector ETFs usually offer a far superior choice. That's thanks to their: much smaller expenses, lower turnover, and superior long-term total returns.

If you do decide that the higher-yields of CEFs are worth it, then I recommend doing your due diligence to make sure that those mouthwatering payouts are actually sustainable, and not set to decline drastically over time.

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, NYLD, SBUX, NBLX, NTES, HII, AAPL, SIMO, NVDA. 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.