2019 Price, Dividend, Time Charts; Deceptive Price And 10% High Yield Income Revealed

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Includes: AGNC, AINV, ARI, BDCL, CGBD, FDUS, HTGC, MAIN, MITT, MORL, NRZ, TWO
by: High Yield Investor
Summary

The distinction between dividend growth and income growth depends on time horizon.

Price gain/loss deception and high-yield return are revealed.

Individual stock total return is demonstrated, but not necessary for income generation.

Return on original cost in years not decades.

January update; price has recovered slowing down purchases.

Commentary

I’ve tracked my individual stock cost and accumulated dividends from the beginning of my portfolio build. This collective data will help answer the following questions and the reasoning behind my inclusive mindset. Why would anyone build a portfolio using only high yield RIC (Regulated Investment Company) investments? Why invest in stock if capital appreciation is not the goal? How can income growth be accomplished during the distribution phase? These are all valid questions for investors looking for high income.

From the beginning of my journey I wanted to present a new way of thinking about high-yield assets. This article is unique and provides visual evidence the high yield method actually works over time.

Price induces stress, dividends relieve stress, take your pick and focus your energy towards the one you can control and grow. Do not stress over price, but enjoy the calming effects of a steady stream of cash entering your account every month.

Introduction

The purpose of this article is to identify multiple aspects concerning high yield assets in the 8-12% yield range. The information I’m about to present pertains to the effects of high yield dividends that eventually overwhelm cost over time.

The singularity to my investment method does not include stock price appreciation that can be manipulated by other controlling bodies (algorithmic trading, sentiment, etc.). I know it’s very difficult to watch stock price decline, but remember stock price is controlled mainly by market sentiment just experienced in the last few months of 2018. Perhaps there is another way to play the market that does not depend on stock price deception. The charts in this article visualize what might happen to price once a position is established and how dividends come to the rescue.

I’m talking about price for a good reason that gets to my point that investing in high yield stocks with low growth potential may not always provide capital gain. I’ve been reinvesting my dividends over the past 5 years and many stocks are currently selling below my initial cost.“This needs to be understood before people start investing in high yield stocks, because the main attraction is not price appreciation, but the income the investment produces.” High dividends accumulated and reinvested over time are the key elements to success.

One of the key decisions I needed to make was to determine which strategy to take; the DGI (Dividend Growth Investing) method or the HYI (High Yield investing) method. A discussion from a well-known SA author discusses this same concept and elaborates on the differences between them; see section “Compelling distinction between DGI and HYI.

Chart-1 (BDC group of stocks) and Chart-2 (mREIT group of stocks) display market price gain/loss along with ROI (Return On Investment) as two distinctive percentage parameters see sections; “BDC accumulated dividends” and “mREIT accumulated dividends.” Price and dividends are kept separate, because I reinvest the individual cash dividends back into the portfolio based on income allocation. I direct where the funds are needed on a manual basis.

Chart-3 adds price gain/loss to ROI for each stock to provide a total return; see section “Individual Stock Total Return.” Many people rely on total return as a metric, but I do not consider this to be anything other than a manipulated value based on price volatility. I provide this measurement to appease the pundits that think this is an important metric for all strategies. Income accumulation as demonstrated in Chart-1 and Chart-2 are my main focus and consider total return an oddity and not necessary for income creation.

Chart-4 is an interesting way to look at high yield for ROI using time of payback; see section “Years left for complete ROI.” Since every stock in my portfolio continues to accumulate dividends over time I can calculate how long it takes before the investment pays back the original cost. I base this calculation on the current yield holding steady for the duration of return. Of course this will change with dividend increases, special dividends and the dreaded dividend reduction.

The last chart tells the story of price recovery slowing down my new share purchases in January. The continuation of the bear market meltdown from December 2018 has evaporated into thin air; see section “January 2019 update.” Instead of following the downward path in the worst December since 1931, the high yield assets I currently own ripped the cover off the ball in their upward price trajectory. With 11 months to go perhaps a market decline will allow another round of new share purchases. One can only hope the bear market pundits are correct for once.

Compelling distinction between DGI and HYI

An article written by Rida Morwa and co-produced by PendragonY made a compelling argument for “Higher Dividend” investing in 2019 over “Dividend Growth” companies in his January 11th 2019 article.

For my own investment strategy I’ve consistently invested in high yield over the past 5 years and have established its success in my most recent 2018 final report article. My portfolio design has always placed its focus on income generation and let price follow its own path. Highlights are mine in the following quote from Rida’s article.

“Appeal of Immediate High Income”

“This argument is more psychological in nature but remains nonetheless very relevant in today’s day and age. Receiving cash NOW is more reliable and guaranteed than forecasted growth that is always more uncertain and may not materialize. We much rather get a 10% yield now than a 3% yield while “hoping” for dividend hikes to occur.

In other words, we see in some cases that yield as the "bird in the hand" and growth as the "bird in the bush." Everyone knows that a bird in the hand is worth two in the bush. This is especially true when you expect future growth to become increasingly uncertain.”

“Limited Downside and Amplified Upside”

“Should dividend growth companies see their earnings impacted by the current economic conditions, they would underperform due to disappointing earnings. Thus investors could be risking overpaying for the forecasted growth.

On the other hand, high-yielding companies with little growth, not only trade based on low valuations, but are priced based on conservative (and even pessimistic) scenario. There is no expectation for growth and as such, there is a lesser risk of earnings disappointment. Moreover, in the event of a positive surprise such as a return to faster growth, the upside potential is amplified due to the pessimistic market expectations.”

The article continues to give an example between DGI stocks with a 5% yield and 5% growth and HYI stocks with a 10% yield and 0% growth. According to his example, it would take about 15 years for the DGI stock to catch up to the HYI income level. I have verified this fact in my own studies and the reason I chose HYI over DGI being only a few years from retirement. For my own purpose I needed tangible income to pay expenses and not the hopes and dreams of capital appreciation 15 years in the future. Having my income upfront is very compelling and reassuring without being pressured with limited cash flow.

Another important factor for growth in HYI in the article is splitting the 10% yield between expenses 5% and the remaining 5% reinvested to grow the income stream. This is an important factor to consider in retirement. Having enough income to pay expenses and reinvest the surplus dividends for future growth.

This was my original thesis in building my retirement portfolio based on a margin of income safety. I can take anywhere between 50 to 60% of my dividends for expenses and reinvest the surplus to grow the income stream. To show this fact, I’ve reported my 2018 actual high yield results including retirement distribution and reinvesting surplus dividends to grow the portfolio balance.

BDC accumulated dividends

In order to see the real value in high yield investments, you need at least three years of accumulated dividends. Stock price as I mentioned is not the focus of this portfolio. Stocks can move up in price for years and all of a sudden decline as we have experienced in 2018.

Note; the headers in both Chart-1 and Chart-2 are the same and display the portfolio performance based on “stock holdings” and original cost. Distributions and cash are not included.

Stock holdings only;

  1. YOC (Yield On Cost) = 9.8%. The reinvested dividends define the fixed cost after each purchase. The projected income is divided by the fixed cost.
  2. YAM (Yield At Market) = 10.1%. The yield is calculated using projected income and market price.
  3. ROI (Return On Investment) = 33.5%. This is the portfolio accumulated dividend return on reinvestment cost. Note: if the cost stays constant (if no more purchases are made) this percentage will naturally continue to increase, because the dividends continue to accumulate over time.
  4. Portfolio balance = -3.3%. This value is based on portfolio balance price and cost. Reinvested dividends naturally grow the balance.

Original starting cash balance

  1. Market price on original cost = 44.1%. When I first started building this portfolio I rolled over my 401k into an IRA. I had a fixed starting amount of cash to invest in dividend stocks. I did this gradually ramping up my current dividend investment method over a number of years. This percentage increase represents compound growth created by reinvesting dividends back into the portfolio. If I sold all 40 stocks at market value I would have over 44% price gain. Of course all my income would disappear.
  2. Yield on original cost = 14.6%. This is the yearly dividends divided by the original starting cash balance.

Chart-1; BDC price and accumulated dividends

Half of my portfolio consists of 19 individual BDC (Business Development Company) investments including one ETN. The chart above is designed to separate price gain/loss from accumulated dividends for each stock sorted by price. As shown there are more positive dividend green-bars to the right than negative price gain/loss blue-bars to the left. Not only that, the income green-bars are greater than the blue price bars.

Over time the accumulative income growth trend will continue. This is the main point to high yield investing that is least understood, the longer you hold your stocks the greater the return on your initial investment. This chart visualizes the distinct differences between price gain/loss and dividend growth. Knowing what to expect both in price and dividends makes all the difference to the high yield investor.

mREIT accumulated dividends

Chart-2; mREIT price and accumulated dividends

The other half of my portfolio consists of 17 individual mREIT (mortgage Real Estate Investment Trust) investments, one ETN and two CEFs. The rationale to the previous BDC chart applies to the mREIT chart. The longer you hold your income-producing stocks the better the return on your original investment.

Individual Stock Total Return

Chart-3 displays the total return by adding price gain/loss to accumulated dividends from Chart-1 and Chart-2 displayed above. The bottom line is total return for high yield stocks increases very quickly, only because of the high dividends. When purchasing income stocks the price may not always be the best valuation, but the high income quickly corrects this mistake. High dividends over time will swamp out price and the reason I suggest waiting a few years before evaluating any high yield investment.

Chart-3; Stock total return

Chart-3 above shows the power of high yield investing that is usually misunderstood. By visually comparing price and dividends and then plotting the total return for each investment shows the power of the high-yield strategy.

Realizing the potential of high yield associated with a portfolio; would you rather focus your energies on the manipulated price or the tangible steady dividend income entering your account? Your entry price may not be optimal, but over time the high dividends make all the difference.

Take a look at UBS ETRACS 2X Leveraged Long Wells Fargo Business Development Company ETN (BDCL) in Chart-1 and notice the price blue-bar is down 48.6%, what a terrible investment, I blew that one. Now look at Chart-3 where the price is added to the accumulated dividends and the total return is up 2.6%. Needless to say I have taken the dividends from BDCL and reinvested them in other high yield stocks with sustainable dividends. I keep this ETN for the dividends to further my income growth, year-after-year despite the price dropping like a rock.

Now look at UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (MORL) in Chart-2 and notice the price blue-bar is down 23.7%. Another terrible stock, this time notice how the accumulated dividends green-bar in Chart-2 have almost returned the entire original invested capital at 94.7%. Here the total return in Chart-3 is 71%.

The power of high dividends shines through the depressive price action; this is the whole point for investing in high yield. In a very short period of time I have experience not only increased income growth, but also portfolio balance growth from my original starting capital.

Years left for complete ROI

If I treat my portfolio as a business and each piece of equipment (stock) is needed for the completed product, it would be nice to calculate each equipment‘s productivity according to cost. The chart below lists the productivity (based on stock yield) and how long it takes for return on investment (current dividend).

Chart-4; ROI in years

High yield has its advantage in returning capital invested in a reasonable amount of time. The chart above lists each stock sorted by the time left for a complete ROI from its original cost. As can be seen the first stock for a complete return on cost is MORL in about 3.6 months. The next will be New Residential Investment Corporation (NRZ) in about 3.4 years. And Apollo Commercial Real Estate (ARI), Two Harbors Investment Corporation (TWO), AG Mortgage Investment Trust (MITT), AGNC Investment Corporation (AGNC), and Hercules Capital, Incorporated (HTGC) will have a complete return on cost in 5 years or less. The payback is basically contingent on yield and time the stock is held. The higher the yield the quicker the payback such as MORL, the lower the yield such as Main Street Capital (MAIN) with a 6.5% yield should take 14.5 years.

If you treat your stock portfolio as a business and each stock is a piece of equipment, the natural accounting practice could be to find out how long the equipment will pay back the initial cost. You would not be constantly trying to find out what each piece of equipment is worth on the open market each day. Instead, your sales department would be selling the finished product to customers who pay cash directly to the business. The business's eventual goal is to increase cash flow to pay expenses and reinvest back into the business and grow.

The same principle applies to a high yield portfolio where the product it generates is cash entering your account. It’s not necessary to watch the price of already purchased investments, because they are still producing their product. In retirement, the distribution I’m taking is considered the expense and any surplus cash is reinvested to grow the portfolio each year. This very simple concept can be applied to any portfolio, you purchase stocks with sustainable dividends and just manage the portfolio like a business to increase growth.

January 2019 update

After all the excitement the last few months of 2018 wouldn’t you know it; the bear market music stopped in January. I would rather the market continued the steady drumbeat of doom and gloom sentiment to purchase more income shares, but now I’m in a holding pattern. It’s strange once you experience great entry prices and the market recovers, the purchase excitement disappears. I watch price moving up on my holdings and in the back of my mind I do not want to pay the high costs. Perhaps February will allow me to get back into my buying mode.

Chart-5; YTD (Year-To-Date) price action

Chart-5 is the YTD price gain for each of my holdings. Worrying about price was senseless last year and a turnaround usually comes when you least expect it. While the S&P500 had an YTD gain of 6.95%, Fidus Investment Corporation (FDUS), Apollo Investment Corporation (OTC:AINV), TCG BDC Incorporated (CGBD) and NRZ are all above 15% gain. Risk is on once again after a tremendous 2018 year-end decline. It’s not uncommon for this type of turnaround and has disappointed most doom-and-gloom pundits. This high yield portfolio just goes with the flow and will continue to increase income in any market cycle. One focus, one positive result, always moving income in an upward direction established from the beginning of my portfolio design.

Performance numbers from my Brokerage account that includes distributions and dividend cash are listed below for the full year of 2018 and January 2019. This sometimes happens, after a terrible year the following year is positive.

  • FYI, 2018 Brokerage account performance = -2.9%
  • YTD, 2019 Brokerage account performance = +10.8%

Trust your system design, don’t panic; just keep on buying.

Conclusion

When investing in high yield it takes only a few years to realize the growth aspect associated with dividends plowed back into a portfolio. This is what my intention was for creating this article to show the mechanics behind high yield investing. Once people realize high yield investing is for high-income and not capital appreciation it becomes easier to work the markets to your advantage. No longer do you fear price, because lower prices become your friend to acquire more income-producing shares. Income-focused strategies replace the unrealistic price-chasing most people are accustomed too.

The most important aspect in using RIC investments is the fact they are required to distribute 90% of the earnings as dividends to avoid corporate taxes. The individual stock price should not be expected to grow, but the growth aspect is transferred to the investor. This is the major difference between DGI stocks and RIC stocks; the investor gets most of the earnings upfront. The investor has the choice to reinvest all the dividends or take a percentage for expenses and reinvest the remainder to grow the income stream.

It seems like everyone is coming up with predictions for the market in 2019. Will the market, including my BDCs and mREITs, be higher in price at the end of 2019? How about I just don’t care; up, down and all around, price is irrelevant as I keep buying in all market cycles. So this is my prediction, I will have higher total income in 2019 than in 2018. My prediction is a lot easier to accomplish than trying to predict price. Income is the place to be now and well into the future. I can’t control price, but you can bet I can control my income. Why make things more complicated than they really need to be. Let’s flip the market on its head; become income greedy when the market declines and cautious when prices climb. Good luck to all income seekers; Joe HYI ;-)

Disclaimer: I am not a financial adviser, but an independent investor. Please note the stocks included in the 50/50 portfolio are not recommendations. They were personally selected by the author and contain a great deal of investment risk. The stocks in the portfolio are BDCs and mREITs. Both investment vehicles are " Regulated Investment Companies" and required to distribute at least 90 percent of their earnings as dividends to investors.

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

Disclosure: I am/we are long ALL STOCKS IN THIS ARTICLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.