My 4% Dividend Yield Portfolio: Q1'19 Summary And Plans For The Coming Months

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Includes: BBL, CBRL, CMI, CONE, CVX, ENB, ETN, HCP, HRL, ICLN, JNJ, MAIN, NHI, O, OHI, PM, SBRA, SCHD, SKT, SO, T, TLT, UL, VNQ, VTR, WEC
by: Ron Honig
Summary

The recent quarter delivered a massive recovery in my portfolio's value.

Several dividend hikes took place as well.

Here are my expectations for the months ahead.

Another quarter has passed and it is time to summarize the status of my portfolio.

Market overview:

The summary of the fourth quarter took place around Christmas day, hence it was at the peak of the December selloff. This summary is coming after a massive correction in the markets, and it was not only a rally in the Equity markets but also in the long-term Bonds market.

Here is a chart of the iShares 20+ Year Treasury Bond ETF (TLT) which gained a massive momentum since December as the yield curve assumingly got flattened.

It is not clear yet what the bond market signals. Yields of long-term bonds had definitely gone down as massive amounts of money moved to bonds and the 10-years treasury yield is lower than the 3-months yield. But I tend to see the short-term yield as being driven by the Fed’s policy while the long-term yield is being driven by supply and demand.

The concerns about the flattening yield curve got people to recall the time period of late 2006-early 2007 when the 3-months treasury yield was higher than the 10-years' yield.

When looking at the chart that compares the two yield curves it is pretty clear that we are not in a similar situation. Back then, the inverted yield curves phenomena took place during a time period of constant interest rate hikes and the inversion took place in July 2006, when the short-term interest rate got to its peak at 5.25 percent. This situation of inverted yields was held for more than 200 straight days. It is very early in the game to call it a similar situation.

In late December, the Fed declared that it would adopt a flexible approach, which means that it would not be a burden on the markets. The markets rallied while adopting these statements as being dovish.

The next big uncertainty is around the U.S.-China trade deal. There are more unknowns here than resolutions and I suspect that it would not be fully resolved in the next couple of months.

My portfolio:

As for my portfolio, during the recent quarter, I have added the iShares S&P Global Clean Energy Index ETF (ICLN) and explained the rationale behind it in this article.

Most of the portfolio was generated back in 2014 with the goal to generate a dividend cash flow that is constantly growing.

The portfolio includes today a total of 25 holdings.

  • BHP Billiton (NYSE:BBL)
  • Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
  • Cummins Inc. (NYSE:CMI)
  • CyrusOne (NASDAQ:CONE)
  • Chevron (NYSE:CVX)
  • Eaton (NYSE:ETN)
  • Enbridge Inc. (NYSE:ENB)
  • iShares S&P Global Clean Energy Index ETF
  • Johnson & Johnson (NYSE:JNJ)
  • HCP (NYSE:HCP)
  • Hormel Foods Corporation (NYSE:HRL)
  • Main Street Capital (NYSE:MAIN)
  • National Health Investors (NYSE:NHI)
  • Realty Income (NYSE:O)
  • Omega Healthcare Investors (NYSE:OHI)
  • Philip Morris International (NYSE:PM)
  • Sabra Health Care REIT, Inc. (NYSE:SBRA)
  • Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)
  • Tanger Factory Outlet Centers, Inc. (NYSE:SKT)
  • Southern Company (SO)
  • AT&T (NYSE:T)
  • Unilever (NYSE:UL)
  • Vanguard Real Estate ETF (NYSEARCA:VNQ)
  • Ventas, Inc. (NYSE:VTR)
  • WEC Energy Group, Inc. (NYSE:WEC)

The recent quarter was pretty busy in term of dividend hikes.

Five of the holdings delivered a dividend increase during the recent quarter: Chevron, Eaton, MAIN, NHI and Realty Income.

The market’s recovery led the portfolio to gain back 10% in value from the end of Q4’18.

The dividend trajectory continues to point upwards and the quarterly dividend went up from $1,445 to $1,456.

What’s next?

As described earlier, it seems that the Fed prefers not to be seen as a barrier to the markets. In fact, it won’t be a big surprise that if more signs of a cooling economy appear it could take an opposite action and reduce the interest rate.

The signals from the different indicators out there are not completely aligned and it is not clear whether we are on the verge of a recession or only in a modest growth type of economy. Time will tell.

Meanwhile, the situation of the 10-years bonds’ yield being so low, below 2.5%, means that the alternative to equities delivers a negligible return. Where would fresh money get into at these circumstances? My guess is that at these levels it would not rush into bonds.

The markets would also be impacted by the massive buybacks that are expected this year. Though in the short term we are getting into the blackout period, they should pick up again by the end of April and are expected to reach $1.2T throughout the year.

My strategy is to take action when prices are sufficiently low, so as markets rally I prefer to leave my dividends in cash and wait for the next opportunity to add.

Moreover, as the current prices are not cheap, I decided that the next couple of months would be dedicated to a deep dive analysis of the different holdings. The world is dynamic and is constantly changing. After five years, it is a good time for me to reassess what I would like to hold for the long term and what is less appealing compared to five years ago.

Conclusions:

The portfolio that was aimed to deliver a 4% dividend yield and grow over time continues to produce positive growth on the dividend front. In 17 quarters the dividend went up from $1,000 to $1,456.

With equity markets getting closer to their all-time high, I suspect that there would be an attempt to test those highs and I prefer to trim down holdings that I suspect are not a bargain anymore.

What is your take on the months ahead?

Happy Investing!

Disclosure: I am/we are long NHI, CVX, BBL, CBRL, ICLN, OHI, O, VTR, HCP, MAIN, JNJ, SCHD, WEC, SO, PM, SBRA, VNQ, HRL, CONE, CMI. 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 opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision. If you want to get frequent updates on my portfolio, please push on the "Follow" button. Happy investing!