Dividend Sensei's Portfolio Update 61: 3 Reasons We Live In The Golden Age Of Investing

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Includes: AAPL, ABBV, AOS, BLK, CAH, ENB, EPR, FDX, ITW, KIM, LTC, MMP, MO, OHI, OMP, PBA, SJR, SKT, SNA, THO, TXN
by: Dividend Sensei
Summary

Thanksgiving is a time to reflect on all the blessings we have in our lives.

Investors have three things in particular to be thankful for.

That includes the incredible compounding power of stocks, the golden age of quality investing information, and the most recent correction.

This week I added Apple to my correction target list and bought an initial position. I cancelled limits on two stocks to compensate for the risk of further limits triggering.

This week there are 17 great undervalued dividend stocks to buy off my watchlists. That includes high-yield blue chips, dividend aristocrats and kings, fast growers, and monthly payers.

(Source: imgflip)

Note that due to reader requests, I've decided to break up my weekly portfolio updates into three parts: commentary, economic update, and portfolio summary, stats, and watch lists. This is to avoid excessively long articles and maximize the utility to my readers.

This week's commentary explains why it's the best time in years to buy quality tech stocks, including three deeply undervalued blue-chips in particular.

This week's economic update looks at why the stock market is likely wrong about an impending recession and bear market.

Introduction

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 mirrors this portfolio. My situation is that I'm 32, but consider this portfolio an income-focused retirement one (though in a taxable account, so I can use modest amounts of margin).

I'm also working full-time (self-employed) and am thus able to continually add to this portfolio. I do not plan to actually tap the portfolio's income stream for 14-20 years when I plan to move my family (and help support my parents) to the promised land of my people (retired dividend investors): Coastal 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.

Also, note that this is currently a highly sector concentrated portfolio. That's because I received my professional training working at The Motley Fool's energy desk, specializing in midstream MLPs (and also lots of renewable energy yieldCos). Thus my comfort with these high-yield and very fast-growing industries. Since moving to Seeking Alpha (and becoming an analyst for Simply Safe Dividends), I've branched out into covering all industries. I now look at about 200 companies per year in detail. I spent most of the first year building out full positions in deeply undervalued midstream stocks, and am now diversifying into other sectors (during each market downturn).

The bottom line is that researching dividend stocks is both my greatest passion and my profession. Thus, you should only use these updates as sources of ideas, but not mirror them exactly unless your risk profile/time horizon/goals very closely match my own.

3 Things Investors Should Be Thankful For This Holiday Season

Thanksgiving is a time to gather with friends and family and reflect on all the blessings we have in our lives. Investors too have three big reasons to be thankful this holiday season.

The biggest is the awesome compounding power of the stock market, as well as what stock ownership represents. Think of it like this. Today regular people, who are able to save even a modest amount of their active income (that they have to work for), are able to buy part ownership in a company whose employees and management work hard all the time to grow the business and the value of the company and thus generate passive income and wealth.

If you own a diversified portfolio of stocks, or an index fund, then you can literally have tens of millions of people working to make you rich over time. In the past we had a term for such people, emperors, and many of them considered themselves to be gods. But thanks to the incredible wealth compounding power of stocks, you don't have to be a bloodthirsty tyrant with dreams of world conquest to become financially independent and achieve a standard of living that even Alexander the Great (or Rockefeller, the richest man in history, adjusted for inflation) couldn't have dreamed of.

(Source: Morningstar)

That's because as long as the global economy (and thus corporate profits) are growing, stocks almost always go up. Since 1926 74% of years have seen positive returns in the S&P 500. And over a rolling 15 year period, investors have never lost money in stocks (not even during the Great Depression when the market plunged 90% at its peak).

(Source: Credit Suisse)

And even adjusting for inflation, stocks have delivered 6.5% CAGR total returns since 1900 (the best asset class you can own). In recent times that trend has also held up.

Over the past 20 years the S&P 500's inflation-adjusted returns have been 5.1%, despite two 50+% market crashes, 7 corrections (10% to 19.9% declines from all-time highs), and dozens of pullbacks (5% to 9.9% declines).

Better yet, it's literally never been easier to achieve your long-term financial goals, including financial idependence or a comfortable retirement.

We Live In A Golden Age Of Information About Good Investing

In the past investing in stocks was incredibly difficult, thanks to a lack of standardized accounting, and sky-high commission costs. In fact, brokers used to charge a percentage of your investment and often required buying stocks in round 100 share blocks. Thus commission costs could soar into the hundreds of dollars, and regular investors often had no way of knowing what companies were either undervalued, high-quality or both.

Today we live in a golden age for long-term value investors. Thanks to the glories of the internet (and smart-phones) we have the collective wisdom of over a century of market data to guide us on the right path. We also have the wisdom of legendary value investors like Warren Buffett, the most quotable (and successful) investor in history to steer us in the right direction.

Discount brokers have cut commission costs to minimal amounts, in some cases even zero. You can literally buy one share at a time on Robinhood (zero commissions), to get started building your long-term wealth, even with a tiny savings rate. My average commission at Interactive Brokers is $0.32 or less than 0.05% of invested capital. Meanwhile the internet is a treasure trove of high-quality information, including about company finances, long-term trends, and of course, sites like Seeking Alpha. As long as you know what resources to use, you can find all the information you need to determine what companies best meet your needs, when they are undervalued, and then act on that information at little to no cost.

Of course, there's also a downside to living in a world awash in financial and investing information. We're constantly inundated by low-quality info as well, such as provided by much of the financial media. These sources try to stoke investor panic during downturns to gin up ad sales. But even that is something to be thankful for.

The Return Of Historical Market Volatility Is A Blessing, Not A Curse

In 2018 we've now had two corrections, which has many investors understandably nervous and fretting. But it's important to remember two things about market volatility.

First, 2017's 20% S&P 500 rally with not even a 3% dip from all-time highs, was NOT a good thing. It was a freakish historical anomoly that represented the lowest volatility in 50 years. It also resulted in an overvalued stock market that led to the January correction.

This year's two corrections, represents a return to normal and healthy market volatility. Remember that stocks haven't generated decades of great returns despite volatility, but precisely because of sharp declines that allow you to find quality companies trading at deep discounts to fair value.

According to Sam Stovall from the American Association of Individual Investors, since WWII there have been 56 pullbacks:

  • on average one every six months
  • average decline 7%
  • average duration (peak to trough) 1 month
  • average recovery (to new all time high) 2 months

This year our normal pullbacks became corrections, where stocks closed at least 10% from their all time highs.

(Source: Yardeni Research)

Since 1928 we've had 53 total corrections and bear markets (20+% decline from all-time high). 10 of those were during the Great Depression, and in the modern era investors have had to endure far fewer big declines.

For example since 1965 we've had just 18 corrections that didn't become bear markets (including this year's two), averaging one every 2.9 years. In 1971, 2015 and 2018 we suffered two corrections in the same year, however, such scary years don't tend to lead to a recession or bear market (at least not for 2+ years). On average corrections see stocks fall 12.3% (accounting for the 2018) and take three months to bottom, and within four months stocks are back to all-time highs.

(Source: Moon Capital Management)

Bear markets tyically come every 6.5 years on average, and see stocks fall 34% over 17 months. It then usually takes 15 months for stocks to get back to record territory. Note that 82% of bear markets since WWII have occured during recessions and right now the economic fundamentals (and the bond market, the best recession predictor ever discovered) are not expecting the next recession to begin until late 2020 to early 2021 at the earliest. In fact, given slowing economic growth expectations, falling inflation, and a Fed that is likely to halt rate hikes sooner than expected (just three more times according to bond futures markets), we may not see an actual recession begin until 2022 or even 2023.

And thanks to two corrections this year, combined with strong earnings growth from tax cuts (as well as continued positive EPS growth expecations in 2019 and 2020), corrections like we're seeing now are not increasing the risks of a bear market. Rather they make a bear market less likely, because deflated valuations combined with slower but steady economic and earnings growth is not what kills a bull market.

As Sir John Templeton, founder of Templeton Funds famously said,

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

(Source: CNN Fear & Greed Index)

The CNN Fear & Greed Index (composed of seven market indicators such as volatility, safe haven demand, ect) currently stands at 8, indicating extreme fear. We're roughly at the same levels right now that caused the market to bottom during the last two corrections.

Basically, value investors should be thankful for this correction, which combined with much lower valuations, and continued strong economic and earnings growth fundamentals, means that the bull market isn't dead, but likely has several more years to run.

The Best Dividend Growth Stocks You Can Buy Today

This group of 20 dividend growth blue chips represents what I consider the best stocks you can buy today. They are presented in four categories, sorted by most undervalued (based on dividend yield theory using a 5-year average yield).

  • High yield (4+% yield)
  • Fast dividend growth
  • Dividend Aristocrats
  • Monthly dividend stocks

Note there may be some overlap between these groups. To help with further research, I've linked to my articles for each recommendation (those not behind a paywall).

The goal is to allow readers to know what are the best low-risk dividend growth stocks to buy at any given time. You can think of these as my "highest-conviction" recommendations for conservative income investors. Note these are not meant to represent a diversified or complete portfolio, but merely highlight the best opportunities for low-risk income investors available in the market today.

The valuations are determined by dividend yield theory, which Investment Quality Trends, or IQT, has proven works well for dividend stocks since 1966, generating market-crushing long-term returns with far less volatility.

(Source: Investment Quality Trends)

That's because, for stable business income stocks, yields tend to mean-revert over time, meaning cycle around a relatively fixed value approximating fair value. If you buy a dividend stock when the yield is far above its historical average, then you'll likely outperform when its valuation returns to its normal level over time.

For the purposes of these valuation-adjusted total return potentials, I use the Gordon Dividend Growth Model or GDGM. Since 1956, this has proven relatively accurate at modeling long-term total returns via the formula: Yield + dividend growth. That's because, assuming no change in valuation, a stable business model (doesn't change much over time) and a constant payout ratio, dividend growth tracks cash flow growth.

The valuation adjustment assumes that a stock's yield will revert to its historical norm within 10 years (over that time period, stock prices are purely a function of fundamentals). Thus, these valuation total return models are based on the formula: Yield + projected 10-year dividend growth (analyst consensus, confirmed by historical growth rate) + 10-year yield reversion return boost.

For example, if a stock with a historical average yield of 2% is trading at 3%, then the yield is 50% above its historical yield. This implies the stock is (3% current yield - 2% historical yield)/3% current yield = 33% undervalued. If the stock mean-reverts over 10 years, then this means the price will rise by 50% over 10 years just to correct the undervaluation.

That represents a 4.1% annual total return just from valuation mean regression. If the stock grows its cash flow (and dividend) at 10% over this time, then the total return one would expect from this stock would be 3% yield + 10% dividend (and FCF/share) growth + 4.1% valuation boost = 17.1%.

Top 5 High-Yield Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Kimco Realty (KIM) REIT 7.3% 4.1% 2.7% to 24.5% 44% 3.8% 17.3%
Enbridge (ENB) Energy 6.5% 3.7% 2.3% to 6.6% 42% 9% 20.9%
Tanger Factory Outlet Centers (SKT) REIT 6.0% 3.5% 2.2% to 6.8% 42% 4.7% 16.0%
Altria (MO) Consumer Staples 6.0% 4.0% 3.1% to 14.4% 32% 8% 17.6%
Magellan Midstream Partners (MMP) Energy (uses K1) 6.4% 4.5% 2.7% to 12.0% 29% 5% 14.4%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model)

Top 5 Fast-Growing Dividend Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

A.O Smith (AOS) Industrials 1.9% 1.1% 0.8% to 3.4% 42% 11.4% 17.6%
FedEx (FDX) Industrial 1.2% 0.7% 0.3% to 1.2% 35% 13.1% 18.4%
Snap-on (SNA) Industrials 2.4% 1.6% 1.2% to 5.6% 32% 11.0% 17.2%
Illinois Tool Works (ITW) Industrial 3.0% 2.1% 1.5% to 4.5% 30% 9.8% 16.1%
Thor Industries (THO) Consumer Discretionary 2.3% 1.6% 0.8% to 2.7% 29% 12.0% 17.7%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

Top 5 Dividend Aristocrats To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

A.O Smith (AOS) Industrials 1.9% 1.1% 0.8% to 3.4% 42% 11.4% 17.6%
Cardinal Health (CAH) Healthcare 3.6% 2.1% 0.9% to 3.9% 40% 8.5% 17.5%
AbbVie (ABBV) Healthcare 5.0% 3.3% 0.9% to 5.5% 34% 10.6% 20.4%
Altria (MO) Consumer Staples 6.0% 4.0% 3.1% to 14.4% 32% 8% 17.6%
Illinois Tool Works (ITW) Industrial 3.0% 2.1% 1.5% to 4.5% 30% 9.8% 16.1%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

Top 5 Monthly Dividend Stocks You Can Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Pembina Pipeline (PBA) Energy 5.3% 4.6% 3.3% to 12.6% 14% 5.0% 11.8%
Shaw Communications (SJR) Communications 4.8% 4.3% 1.9% to 5.1% 10% 5.0% 11.0%
LTC Properties (LTC) REIT 5.1% 4.9% 3.8% to 9.5% 3% 4.0% 9.4%
EPR Properties (EPR) REIT 6.1% 6.2% 4.5% to 24.8% -1% 4.7% 10.6%
Main Street Capital (MAIN) BDC 6.1%/7.6% 6.3% 2.3% to 18.5% -2% 2% 7.7% to 9.2%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model) - note MAIN's yield includes both regular and total dividend (including supplemental)

My Bear Market Buy List

These are the top 10 stocks that I plan to buy during the next recession/bear market. That's when even blue-chip valuations will drop to levels that will be capable of generating the kind of strong 13+% total returns that my portfolio is targeting. Note that all total return estimates are for a 10-year annualized basis. That's because total return models are most accurate over longer time frames (5+ years) when prices trade purely on fundamentals and not sentiment. This allows valuations to mean-revert and allows for relatively accurate (80% to 95%) modeling of returns.

The list itself is ranked by long-term CAGR total return potential from target yield. Bolded stocks are currently at my target yield and thus "Strong Buys."

Company Current Yield Fair Value Yield/Share Price Target Yield Historical Yield Range Long-Term Expected EPS Growth (Analyst Consensus, Expected Dividend Growth)

Long-Term Valuation Adjusted Annualized Total Return Potential At Target Yield

LeMaitre Vascular (LMAT) 1.0% 1.1% 1.5% 0.3% to 2.0% 17.5% 22%
BlackRock (BLK) 3.1% 2.5% 3.0% 1.2% to 3.5% 13.7% 19%
Texas Instruments (TXN) 3.2% 2.5% 2.9% 0.9% to 2.9% 12.6% 17%
Enterprise Products Partners (EPD) 6.7% 5.9% 7.2% 3.4% to 11.7% 5.9% 16%
Illinois Tool Works (ITW) 3.0% 2.2% 3.0% 1.6% to 4.5% 10.0% 16%
A.O Smith (AOS) 1.9% 1.1% 1.5% 0.8% to 3.4% 11.5% 16%
Apple (AAPL) 1.7% 1.7% 1.7% 0.4% to 2.8% 13.1% 15%
Berkshire Hathaway (BRK.B) 0% $164 NA NA 12.0% 15%
Microsoft (MSFT) 1.8% 2.6% 2.6% 1.1% to 3.1% 12.7% 15%
Realty Income (O) 4.2% 4.6% 5.5% 3.3% to 11.2% 5.9% 13%
Average 2.7% NA 3.2% NA 11.5% 16%

(Sources: Dividend Yield Theory, Gordon Dividend Growth Model, Simply Safe Dividends, GuruFocus, F.A.S.T. Graphs, Moneychimp)

This week I added Microsoft to the BMBL. Note that Texas Instruments, BlackRock, A.O. Smith, Illinois Tool Works, and Apple are all at or above my target yield. That makes it a great time to either add them to your portfolio or add to an existing position. This is why I'm currently buying these stocks for my portfolio to take advantage of this latest correction.

More Great Dividend Stock Ideas/Investing Articles

These are introductory articles about companies I consider great long-term investments.

American Tower (AMT): One Of The Fastest Growing REITs In America Is On Sale

EPR Properties: A 6.2% Yielding Monthly Dividend Stock With 11% Long-Term Return Potential

Altria: One Of The Best Recession-Proof Aristocrats You Can Buy Today

Noble Midstream Partners (NBLX): Here's Why I Just Increased My Position In This High-Yield Hyper Growth Stock By 400%

Disney (DIS): 3 Reasons Disney Is A Buy And Hold Forever Dividend Dream Stock

Federal Realty Investment Trust (FRT): This Legendary Dividend King REIT Is Worth Buying Today

CoreSite Realty (COR): One Of The Best Hyper Growth REITs You Can Buy Today

Rattler Midstream Partners (RTLR): The Most Exciting High-Yield Dividend Growth IPO Of 2019

3 Things Investors Need To Know About The Future Of Interest Rates

Why Amazon’s $15 Minimum Wage Is Great For Shareholders And The Economy

Antero Midstream Corp.: Why The Upcoming Merger Creates One Of The Best High-Yield, Hyper Growth Stocks In America

Amazon: 3 Reasons Amazon Is A Strong Buy And Why I Tripled My Position

3 Profitable Lessons Investors Should Learn From Sears’ Bankruptcy

The 3 Most Important Things Investors Need To Know About This Earnings Season

3 Things Investors Need To Know About This Correction

3 Essential Lessons From The GE Disaster

One Of The Best High-Yield Investment Ideas You’ve Never Heard Of

Why Mixing Politics And Investing Can Cost You A Fortune

General Electric (GE): 3 Reasons I'm Avoiding This Stock Like The Plague And So Should You

Innovative Industrial Properties (IIPR): Cash In On Cannabis With One Of The Fastest Growing Dividend Stocks In America

Here's Why Stocks Are Plunging And What You Can Do To Protect Your Portfolio

Buys/Sells This Week

  • Sold $3,200 EPR Properties (EPR) - 50% of position at 25% profit
  • Bought $3,200 Oasis Midstream Partners (OMP) - higher YOC, more undervalued, and much faster payout growth rate
  • Bought $5,000 Apple (AAPL) - starter position (limits placed all the way to $125)

This week I put into action my new capital recycling policy, which I'll outline in detail in a future update. This time that meant selling 50% of EPR at a big profit in order to put the money into a much better opportunity, OMP.

I also added Apple to my correction target list, initiated an intial position (30 shares) and cancelled all AOS and BLK limits to compensate for the risk of future limit orders triggering. I don't expect Apple to fall much further (I bought it at 12.6 times forward earnings) but one can never tell how irrationally pessimistic the market might prove in the short-term.

Tentative Plan For The Upcoming Week/Weeks

As I'll explain in update 62, whether or not I buy or sell any stocks will depend on the market. My new capital recycling policy means that one stock in particular (OHI) might become a potential sell candidate to put 50% of the proceeds into a more undervalued, higher-yielding, lower-risk, and faster growing stock. However, the bar to clear for such a move is high, and so far there are no stocks that fit my criteria for such a sale.

As for buying stocks on my correction list, that too is in the hands of the market's fickle whims. Based on how phase two of this correction has gone, it appears that none of the 11 stocks I was initially buying during the correction are likely to trigger additional limits. Even Amazon, a badly beaten down tech stock, appears to have bottomed above my next limit ($1401).

Only Apple, the final stock I'm buying during this correction, might have a chance of falling further. However, given how undervalued it already is, combined with over $200 billion in buying power that BRK and management have to purchase shares, I don't expect it to fall below $160. That would only be enough to trigger one more limit (though I have them in place all the way to $125 just in case).

As always, good risk management is key and so my earlier margin emergency break (which kicks in at excess liquidity under $100k), remains in effect. As of Friday's close I was at $124K in excess liquidity, roughly the same as three weeks ago. That's despite large paper losses of the last few weeks, and buying Apple on Friday.

Most likely all my target stocks (and the market in general) will bottom this week, and begin its expected Santa Clause/post-mid-term rally. Since 1942 the S&P 500 has never failed to post a positive 12 month return following a mid-term election (17-0 record). The only times (since 1871) when the market has fallen over this time period was 1930 and 1938, during the Great Depression.

In terms of planned purchases the only ones I have coming up are my pre-earnings Amazon purchase which is scheduled for mid-January (two weeks before earnings). Should the correction continue through mid-December I can move that up by one month to take advantage of the better price. I don't expect that to actually happen though, so most likely I won't be buying anything through mid-January.

My limits are "good-until-cancelled" which actually means five months at Interactive Brokers. Since they are yield based, Enbridge's (ENB) upcoming 10% dividend hike (early 2019) will reset those limits higher. Depending on how the stock trades that might potentially trigger one or two more limits, or roughly up to $2K in further purchases. That would make Enbridge my second largest holding, but should the stock rise to $34 by then (avoiding the limits), it will be my third largest position.

Enbridge, as a future dividend aristocrat, can be bought up to 15% of my invested capital, should the price fall low enough. Again, that's highly unlikely given that this bluest of midstream blue-chips is already trading at a single digit cash flow multiple and one of its highest yields in history.

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). Note, low-risk MLP/GP pairs have a max limit of 10% of invested capital. Aristocrats and future aristocrats (22+ consecutive years of dividend growth) have the option to go "overweight" up to 15% of the portfolio if their prices fall to ridiculous enough levels. Amazon is also allowed to rise to 15% of the portfolio before I stop adding more shares each quarter (as long as the price is at fair value or below).
  • Medium risk: Dividend safe and potentially growing for the next 2-3 years, max portfolio size 5%.
  • High risk: Dividend safe and predictable for 1 year, max portfolio size 2.5%

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 a 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 (UNIT) - Stable outlook (WIN revenue diversification plan outlook improving)
  • Omega Healthcare Investors (OHI) - Stable outlook (confidence in management executing on turnaround plan)
  • Innovative Industrial Properties (IIPR) - Stable outlook (strong growth requires current Federal regulatory status quo and strong share price)

Medium-Risk Stocks

  • EPR Properties (EPR): Due to heavy exposure to cinemas (though thriving ones), will be upgraded once it diversifies its property portfolio

Low-Risk Stocks

  • Brookfield Property Partners (NYSE:BPY) - Stable outlook
  • Simon Property Group (SPG) - Stable outlook
  • Enbridge - Stable outlook
  • Brookfield Infrastructure Partners (BIP) - Positive outlook
  • Iron Mountain (NYSE:IRM) - Stable outlook
  • Spectra Energy Partners (NYSE:SEP) - Stable outlook
  • NextEra Energy Partners (NYSEMKT:NEP) - Positive outlook
  • AbbVie (NYSE:ABBV) - Stable outlook
  • EQT Midstream Partners (NYSE:EQM) - Stable outlook
  • EQT GP Holdings (EQGP) - Stable outlook
  • MPLX (NYSE:MPLX) - Stable outlook
  • Antero Midstream Partners (NYSE:AM) - Stable outlook
  • Antero Midstream GP (NYSE:AMGP) - Stable outlook
  • CNX Midstream Partners (NYSE:CNXM) - Stable outlook
  • Oasis Midstream Partners - Stable outlook
  • QTS Realty (NYSE:QTS): Stable outlook
  • Clearway Energy (NYSE:CWEN): Stable outlook
  • Energy Transfer LP (ET): - Positive outlook (ETE/ETP merger makes it a low-risk stock)
  • Texas Instruments (NYSE:TXN): - Stable outlook
  • Kimco Realty (NYSE:KIM): - Stable outlook
  • Brixmor Property Group (BRX): - Stable outlook
  • Kite Realty Group (KRG): - Stable outlook
  • BlackRock: - Stable outlook
  • Illinois Tool Works (NYSE:ITW): - Stable outlook
  • A.O. Smith (NYSE:AOS): - Stable outlook
  • Noble Midstream Partners (NBLX) - stable outlook (Prop 112 defeated in Colorado election)
  • Amazon - stable outlook (not a dividend stock but low risk of permanent loss of capital over 10+ years)
  • Apple (AAPL) - stable outlook

My portfolio began with five stocks, all medium-to-high risk, in two sectors. Right now, I'm invested in 31 stocks (29 post upcoming MLP mergers), mostly low-to-medium risk, in five sectors. Eventually, I'll expand into all sectors, but for now, limited capital must be allocated with care into the best opportunities you know of. This is why I'm focusing on just a handful of my best opportunities each market pullback/correction/bear market.

Top 10 Income Sources

(Source: Simply Safe Dividends)

The long-term goal is to diversify to the point where no single position accounts for more than 5% of my income. However, it will take several years to diversify the portfolio to that point. Fortunately, all my biggest income producers have safe dividends/distributions.

(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. That being said, I'm fundamentally a value-focused investor, and so, will always be overweight in that investing style. Meanwhile, my heavy US exposure is due to the heavy concentration of hard assets, most notably MLPs.

(Source: Morningstar)

My portfolio is very concentrated in energy because that's where the best overall opportunities are in terms of safe yield, fast payout growth, and valuation. But now that my midstream MLP buildout is complete (full positions in all my highest-conviction buys), I'll be working on diversifying into more ultra-value REITs, utilities (yieldCos), and any other great opportunities I find. I've come down from about 70% hard assets to just 55% thanks to all the diversification I was able to do during this correction.

Sector Concentration

I've managed to diversify down from 59% energy to just 42% thanks to buying other sectors so aggressively during this correction.

(Source: Simply Safe Dividends) note consumer discretionary is Amazon so 10% of my portfolio is actually in technology stocks, which is now my 4th largest sector.

(Source: Morningstar)

The benefit of my currently concentrated portfolio is that I enjoy far better fundamental stats than the S&P 500. That includes lower valuation, much higher yield, and superior long-term growth potential. I'm also running a mostly midcap portfolio, with above-average profitability, and that should generate market-beating long-term returns.

In the future, I plan to add more utilities to help build up the defensive side of my portfolio. The new utilities I'll be buying include:

  • Brookfield Renewable Partners (BEP)
  • TerraForm Power (TERP)
  • Atlantica Yield (AY)

In the meantime, my limit orders are focused on the most undervalued, fast-growing blue chips I know of, mostly industrial, pharma, and financial stocks.

(Source: Simply Safe Dividends)

Note that the 10-year dividend growth figures are artificially low because my tracking software doesn't average in anything that hasn't existed for those time periods. Some of my holdings have IPO-ed in the last five years, and so, the 1-year and 5-year growth rates are the most accurate. These figures are purely organic growth rates and assume no dividend reinvestment. The dividend declines during the Financial Crisis were due to three of the REITs I own cutting their dividends (78 REITs did during the Great Recession). Fortunately, since then the sector has deleveraged and enjoys the strongest sector balance sheet in history.

(Source: Hoya Capital Real Estate)

That means that during the next recession most REITs will NOT cut their payouts, especially the ones I own. The long-term goal is to maintain a 10+% organic income growth rate.

Projected Portfolio Dividends Over Time

(Source: Simply Safe Dividends) (Note: Assumes no dividend reinvestment, just organic growth that slows gradually over time (constant holdings))

Even assuming no dividend reinvestment (I do that manually) and that I never sell anything I own (if growth slows and I find better opportunities), this portfolio would become an income powerhouse. And even if I were to not add to the portfolio at all with fresh savings within 20 years, I would have achieved my goal of financial independence.

Over the long term, my goal is about 5% portfolio yield, with about 10% long-term dividend growth over time. In order to maintain that, I may have to recycle some holdings when they no longer meet my needs.

For perspective, the S&P 500 yields 1.9% and its 20-year median annual dividend growth rate has been 6.4%. So, the goal is about to triple the market's yield, with about 4% faster dividend growth. Since 1871, the S&P 500 has generated annual total returns of 9.2%. The market's historical inflation-adjusted total return has been 7.0%.

Even assuming no valuation multiple expansion (my deeply undervalued portfolio always remains so), this portfolio should easily be capable of about 15% un-levered total returns over time. Factoring in multiple expansion (which is already starting to happen for some of my stocks) and 25% leverage, the returns could be even greater, potentially north of 20% annualized net levered returns.

Portfolio Statistics

  • Holdings: 31
  • Portfolio Size: $313,219
  • Equity: $179,008
  • Remaining Margin Buying Power: $782,909
  • Margin Used: $134,791
  • Leverage Ratio (portfolio/equity): 75%
  • Dividends/Margin Interest Ratio: 4.0
  • Distance To Margin Call (how much the portfolio would need to fall): 46.4%
  • Current Margin Rate: 3.57%
  • Yield: 6.2%
  • Yield On Cost: 5.9%
  • Net Yield On Invested Capital: 7.8%
  • Time Weighted Total Return Since Inception (September 8, 2017): -3.8%
  • Cumulative Dividends Received: $15,214
  • Cumulative Margin Interest Costs: $1,463
  • Cumulative Net Dividends: $13,751
  • Total Portfolio Gains: $-6,610
  • Annual Dividends: $19,266
  • Annual Margin Interest Cost: $4,812
  • Annual Net Dividends: $14,454
  • Monthly Average Net Dividends: $1,204
  • Daily Average Net Dividends (my business empire never sleeps): $39.60

(Source: Simply Safe Dividends)

Note that the diversification effort has now smoothed out my monthly dividend stream immensely. Over time, this will continue. The recent additions are also gradually lowering my portfolio volatility.

  • Portfolio Beta (volatility relative to S&P 500): 1.13 (down from high of 1.29)
  • Projected Long-Term Dividend Growth: 10%
  • Projected Annual Unlevered Total Return: 15%
  • Projected Net Levered Annual Total Return: 18% (assuming long-term average leverage of 25%, 3% average margin rate)

10 Worst-Performing Positions

Stock Loss Cost Basis
EQGP -24.9% $21.31
AMGP -22.2% $18.11
AM -15.5% $31.27
AMZN -14.1% $1,752.12
EQM -12.5% $55.47
ET -12.1% $16.27
NBLX -11.6% $40.03
BPY -10.7% $20.56
MPLX -5.8% $34.53
BIP -3.9% $41.39

(Source: Interactive Brokers)

10 Best-Performing Positions

Stock Gain Cost Basis
OHI 29.6% $28.04
EPR 25.6% $56.31
SPG 17.7% $155.79
UNIT 17.0% $16.19
IIPR 15.7% $47.65
ITW 6.3% $126.23
NEP 5.4% $44.32
CNXM 5.0% $16.42
BLK 3.6% $392.66
AOS 3.4% $44.15

(Source: Interactive Brokers)

Bottom Line: Be Thankful That We Live In A Golden Age For Long-Term Value Investors

It might seem counter intuitive to celebrate stocks during the second correction of the year. However, in reality such volatility isn't just healthy and normal, but is precisely why stocks are the best asset class you can own.

Better yet, while the market as a whole may only drop a modest amount, plenty of quality dividend growth stocks can, and do, fall into full on bear markets. That means that corrections like these are the perfect time for long-term value investors to go bargain hunting, and lock in higher-yields as well as excellent long-term total returns. And thanks to the internet, as well as time tested wisdom from value investing legends like Warren Buffett, it's literally never been easier for regular people to get rich over time. That's thanks to knowing exactly how to invest to best meet their long-term financial goals.

Anyone with the ability to save even a modest amount of money is able to literally become a part owner of a great business. That means that even regular people can harness the incredible long-term wealth compounding power of capitalism to become financially independent. In the past anyone who had millions or even tens of millions of people working to enrich them was called an emperor. Today the awesome power of the stock market means that tens of millions of regular people can become emperors (but without the megalomania and slaughter), which is the biggest reason of all to be thankful this holiday season.

Disclosure: I am/we are long EQM, OMP, BPY, ABBV, ET, BIP, AM, NEP, SEP, EPR, EQGP, CNXM, OHI, MPLX, IRM, QTS, AMGP, UNIT, ENB, SPG, NBLX, CWEN, KIM, BRX, KRG, BLK, AOS, AAPL. 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.