5%+ Dividend Yield Portfolio: Profiting Handsomely From Volatility (Jan. 2019 Review)

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Includes: ABBV, BAC, BP, BXMT, CAH, CEY, CHIC, DVYA, DWX, E, ECNS, EDIV, EWA, EWM, F, FGD, FLQH, GDX, GIS, GS, GSK, HDLV, HFXE, HYND, HYZD, IBB, IBM, IDHD, IEIH, IQDE, IRM, KMI, KREF, NRZ, OHI, QYLD, RDIV, RIG, SBRA, SCHD, SKT, SPHD, SPYD, T, TEVA, VTR
by: Dividend Disco
Summary

Jan 2019 returns were terrific with my portfolio’s 7.9% gain matching that of the S&P 500.

My portfolio has now beaten or tied the S&P 500 in each of the last four months.

Jan 2019 was also another solid month of dividend growth with a 15% increase over Jan 2018.

Taking further advantage of market volatility, I put my cash to work by buying/adding to four positions.

Outlook

2019 officially started with bang! While, technically, the volatility that the market has been experiencing over the past few months is entirely normal, the timing of the latest rally almost perfectly coincided with the turn of the calendar…so it is certainly nice to have the first monthly print of the year be so positive. In fact, January 2019’s 7.9% gain in the S&P 500 was its best January performance since 1987 (over 30 years!).

Furthermore, the gains were not just limited to the U.S. (as they seemingly have been in recent years) and everyone made money (unless you got scared out of the market by Q4 2018’s troubles).

Source: The Capital Spectator

In my opinion, it is a little too soon to declare total victory as plenty of the 1-year returns are still negative…but I do love to look at my portfolio after a sharp rally. However, I am a bit disappointed that many of the screaming buys have been re-priced into more modest buys (I’m a professed discount shopper). Personally, I expect that volatility will continue to whip stocks around (2019 might be the year that stock pickers finally produce meaningful alpha).

However, nothing fundamental has happened in the past month (or quarter or year) to change the fundamentals of the U.S. and world economy (growing slow but steady). The only thing that has changed are the relative valuations of stocks (from quite pricey in mid-2018 to more reasonably priced today). If you have a long-term focus, this is still a great time to be a buyer (so don’t fret about missing the ‘bottom’).

I think 2019 will see the markets re-achieve their 2018 highs (at some point in the year…especially if there is good news in the trade war), but things will mostly trade sideways (as there isn’t a strong bid in the market). With bond prices/yields frozen at low levels by the newly dovish Fed, there really isn’t a strong alternative to owning equities (so I imagine that steady inflows to equities will continue, which provides a tailwind to prices).

Along the way, things will remain choppy…so having a solid strategy (especially one like a dividends focus that performs well in up as well as down markets) will be key to your personal success in 2019 (just like for basically every year). As for me, I’ll try to add some alpha by trying my best to sell high and buy low, but this strategy is always easier said than done!

Source: ShutterStock

January 2019 Review

January 2019 continued this market’s manic moves (but this time to the upside). My portfolio matched the 7.9% return of the S&P 500; however, my YTD return of 1.2% significantly outpaced the -2.3% of the index. In addition, my 5.4% forward dividend yield on invested capital keeps crushing the 2.0% yield of the broader index…so I’m going to keep declaring myself the winner.

January 2019 rewarded me with realized dividends of $1,083 (versus $937 in 2017…an increase of 15.6%!!). And for the last 12 months, my portfolio delivered $14,232 in cash to me (up modestly from 2018). My realized yield for 2018 was 4.8% for my full portfolio including cash reserves. And I’m increasing my 2019 goal to over 10% growth (or $15,000 for the year). Fear and greed are hard to balance, but I am happy with where I am overall. My yield focused strategy still makes the most sense to me as paper gains may come and go but cash is forever!!

Background

Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires.

  • GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns.
  • STRATEGY: 'Enhanced' dividend growth or DGI strategy that focuses on a core of diversified high yielding holdings (ETFs and individual companies -- my general screening criteria: growing companies (YoY EPS growth >0%) with attractive valuations (PEG <1.5 and P/E <20) and strong and safe dividends (yield >4%, payout <90%, and market cap >$500MM)…no tobacco stocks or micro caps), supplemented with return enhancing tools like hedges (derivatives and shorts), commodity exposure, etc., as well as some crazy picks.
  • BALANCE: Blend of ETFs (domestic and international) and individual companies (where there is a compelling reason to own). Seek to not overweight any one sector unless there is a compelling reason to do so (although the nature of these investments leads me to be overweight in traditional dividend paying sectors like financials, REITS, and energy).

Note: I violate these guidelines constantly, so please call me out on it!

Portfolio Composition as of December 31, 2018

Security Type Div Yield Market Value Last Month Value Gain/Loss(%)
FUNDS 5.0% $133,563 $123,292 8.3%
SPDR S&P 500 High Dividend ETF (SPYD) ETF 4.8% $14,728 $13,628 8.1%
Oppenheimer Ultra Dividend Revenue ETF (RDIV) ETF 4.3% $14,712 $13,392 9.9%
Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD) ETF 5.9% $11,705 $10,930 7.1%
SPDR S&P Emerging Markets Dividend ETF (EDIV) ETF 3.4% $9,983 $9,085 9.9%
PowerShares S&P 500 High Div Low Volatility ETF (SPHD) ETF 4.4% $8,276 $7,640 8.3%
SPDR S&P International Dividend ETF (DWX) ETF 5.1% $7,617 $7,168 6.3%
FlexShares International Quality Dividend Defensive (IQDE) ETF 5.2% $6,626 $6,141 7.9%
iShares Nasdaq Biotechnology ETF (IBB) ETF 0.2% $5,485 $4,822 13.8%
Invesco S&P International Developed High Dividend Low Volatility ETF (IDHD) ETF 4.9% $5,450 $5,144 6.0%
UBS ETRACS 2x US High Div, Low Vol ETN (HDLV) ETN 12.8% $5,216 $4,449 17.2%
iShares Evolved U.S. Innovative Healthcare ETF (IEIH) ETF 2.0% $5,103 $4,711 8.3%
VictoryShares Emerging Market High Div Volatility Wtd ETF (CEY) ETF 5.3% $4,998 $4,394 13.7%
Schwab U.S. Dividend Equity ETF (SCHD) ETF 3.1% $4,981 $4,697 6.0%
Horizons NASDAQ 100 Covered Call ETF (QYLD) ETF 12.5% $4,414 $4,262 3.6%
iShares Asia/Pacific Dividend ETF (DVYA) ETF 6.2% $4,366 $4,031 8.3%
iShares MSCI China Small Cap ETF (ECNS) ETF 6.1% $4,239 $3,901 8.7%
iShares MSCI Australia ETF (EWA) ETF 6.1% $4,118 $3,850 7.0%
IQ 50 Percent Hedged FTSE Europe ETF (HFXE) ETF 4.3% $3,642 $3,550 2.6%
iShares MSCI Malaysia ETF (EWM) ETF 3.8% $3,076 $2,977 3.3%
Global X MSCI China Comm Services ETF (CHIC) ETF 0.2% $2,472 $2,281 8.4%
Franklin LibertyQ International Hedged ETF (FLQH) ETF 5.7% $2,357 $2,239 5.3%
COMPANIES 6.2% $143,184 $133,040 7.6%
Abbvie (ABBV) Company 5.4% $20,073 $23,048 -12.9%
Tanger Factory Outlet REIT (SKT) REIT 6.1% $11,375 $10,110 12.5%
Blackstone Mortgage Trust (BXMT) REIT 7.3% $10,347 $9,558 8.3%
Ventas REIT (VTR) REIT 5.0% $9,674 $8,789 10.1%
Royal Dutch Shell (RDSB) Company 6.2% $9,420 $8,991 4.8%
AT&T (T) Company 7.0% $9,018 $8,653 4.2%
New Residential Investment (NRZ) REIT 11.8% $8,728 $7,304 19.5%
Omega Healthcare Investors (OHI) REIT 6.7% $8,038 $7,030 14.3%
Iron Mountain (IRM) REIT 6.6% $7,440 $6,482 14.8%
Sabra Health Care REIT (SBRA) REIT 8.8% $6,901 $5,537 24.6%
Cardinal Health (CAH) Company 3.9% $4,997 $4,460 12.0%
General Mills (GIS) Company 4.5% $4,444 $3,894 14.1%
KKR Real Estate Finance Trust (KREF) REIT 8.5% $4,124 $3,830 7.7%
BP (BP) Company 6.1% $4,112 $3,792 8.4%
GlaxoSmithKline (GSK) Company 5.5% $3,920 $3,821 2.6%
Ford Motors (F) Company 6.9% $3,520 $3,060 15.0%
Eni (E) Company 5.7% $3,388 $3,150 7.6%
IBM (IBM) Company 4.7% $3,361 $2,842 18.3%
Kinder Morgan (KMI) Company 4.4% $3,330 $2,830 17.7%
Transocean (RIG) Company 0.0% $2,571 $2,082 23.5%
Teva Pharmaceutical Industries (TEVA) Company 0.0% $1,985 $1,542 28.7%
VARIOUS POSITIONS OF <$1,000 VALUE VARIOUS 2.0% $2,419 $2,236 8.1%
FIXED INCOME TOTAL 5.1% $21,834 $20,898 4.5%
Goldman Sachs (GS) - Pref D (GS+D) Pref 5.3% $5,595 $5,250 6.6%
Bank of America Corporation (BAC) - Pref L (BML+L) Pref 4.8% $4,212 $4,184 0.7%
Goldman Sachs (GS) - Pref A (GS+C) Pref 5.1% $3,936 $3,775 4.3%
Goldman Sachs (GS) - Pref A (GS+A) Pref 4.9% $3,762 $3,512 7.1%
WisdomTree BofA Mrl Lynch HYBd ZrDr ETF (HYZD) ETF 5.4% $2,316 $2,242 3.3%
WisdomTree BofA Mrl Lynch HYBd NgtDr ETF (HYND) ETF 5.6% $2,013 $1,935 4.0%
SCHWAB ROBO-ADVISOR TOTAL 2.0% $12,402 $11,513 7.7%
TOTAL 5.4% $310,982 $288,743
TOTAL + CASH $12,126 5.2% $323,109 $294,331 7.9%

Portfolio Moves in December 2018

New Positions

SHARE BUY– iShares MSCI China Small Cap ETF (ECNS): Bought another 50 shares of this China small cap ETF at $38.72 on Jan 3.

  • Reasoning: I can’t seem to get enough of these international ETFs…and the trade war will eventually end and be a huge tailwind for Chinese stocks.

SHARE BUY– Goldman Sachs (GS+C): Bought 200 shares of this financial firm’s floating rate preferred shares at $18.85 on Jan 10.

  • Reasoning: I love the strong yield and rebound potential of these floating rate bank preferreds.

SHARE BUY– IQ 50 Percent Hedged FTSE Europe ETF (HFXE): Bought 200 shares of this European ETF at $17.75 on Jan 28.

  • Reasoning: Europe is having a rough time, so I’m bargain (and yield) hunting.

SHARE BUY– AT&T (T): Bought another 100 shares of this mega telecom company at $29.40 on Jan 30.

  • Reasoning: After getting clobbered by earnings, AT&T went on sale…so I scooped some more up.

Exited Positions

SHARE SALE– Market Vectors Gold Miners ETF (GDX): Sold all 100 of my shares in this gold miner ETF at $22.05 on Jan 30.

  • Reasoning: I was always told that I needed some gold in my portfolio…but I hated that there was no yield…so I tried gold miners…which still have a pitiful yield…I’m done with gold.

Final Thoughts

A great start to the year (provided you kept your head/wallet in the game after the Q4 2018 plunge). January might have been a bear market rally so keep sharp as we travel further into 2019. While I think this is a stock pickers’ market. If your gains persistently trail the market, it might be a sign that you need more beta and less alpha in your holdings (so get some low-cost ETFs). There is no shame in modifying your behavior to swim with the market (harvest beta) instead of against it (seeking alpha). Over decades long time periods, the most proven winning strategy is a simple diversified buy and hold.

I believe that a dividend focused strategy that pays you to be patient will continue to be the best bet for 2019. I think that my financial results thus far are proof of that a 'slow but steady' approach can produce alpha (while still letting you sleep well at night). The good news for a strategy of buying solid companies at attractive valuations is that the market seems to be becoming more selective in the way it rewards/punishes companies based on actual results (instead of the bubble-like metrics of 2017). I think this trend will become even more distinct in 2019, so I'll be thinking defense (after all, the Patriots once again proved that defense wins championships).

Comments encouraged.

Disclosure: I am/we are long ALL POSTIONS AS MENTIONED. 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.

Additional disclosure: The author is an amateur who has a history of getting calls both right and wrong with zero predictive power. Trade at your own risk and never rely solely on this author's opinion. Also, as I have no knowledge of your circumstances, goals, and/or portfolio concentration, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.