May was a particularly weird month in a weird period for the markets (though I suppose that could be said about most times). The furious rally from the December 2018 lows (spurred by the narratives of a cool-headed Fed and Administration) fizzled spectacularly against the realities of extended valuations and partisan politics. Just how bad was it? (My advice is to have a drink before you look at your monthly statement this month - otherwise your tears might water down your beer!)
Basically, equities around the globe got hammered in unison. My more conservatively flavored portfolio full of value and dividend payers managed to do better, but virtually no one was exempt from the pain (unless you’re into crypto). Of course, 2019 has still been fairly generous to equity investors year to date (with gains in the double digits), but that too might change. I could, of course, throw a mountain of anecdotes (and quite a few statistics) at you about how this market is primed for a major catastrophe, but there is always a mountain of worry to climb. I could also point to plenty of counterevidence that folks should not overreact to (relatively) minor corrections (which are normal for the markets).
However, I’m now starting to grow a bit worried. I wouldn’t call it a full panic (and I’m keeping my assets mostly fully committed), but I have a growing unease that the S&P 500 basically bounced right off the September 2018 high at the end of April 2019 but couldn’t penetrate it. Furthermore, the market today is basically at the same price as late Dec 2018…so we’ve had almost a year and a half of sideways trading. Where’s the bid coming from for equities?
As far as what to do about this nagging worry, I am trying to be pragmatic. I know that the markets are a wealth generating machine over the longer term, so I’m going to focus on the things I can control - namely allocation and fee issues. I am going to channel this worry into action, but action of the productive kind instead of the ‘run-and-hide’ kind. I’ve gone through every ETF holding to make sure that I’m paying the lowest fees on the best funds. I’ve also gone through every company holding to make sure that the dividend payout ratio is sustainable. Neither of these exercises are likely to have gone perfectly for me, but it sure beats that proven money losers of listening to talking heads and making wholesale changes based on whatever blog post I read last. Fear and greed are primal motivators, so just make sure that you’re putting them to work for you (instead of letting them dictate your actions). Remember that we investors are often our own worst enemies.
May 2019 Review
May 2019 kicked most investors in the teeth. The S&P 500 posted a 5.2% loss for the month and I managed to marginally better at only a 3.8% loss. YTD, I am up 6.0% vs the 12.2% gains for the index (before dividends are considered). However, my 5.3% forward dividend yield on invested capital keeps crushing the less than 1.8% yield of the index - so it’s tough not to give in to FOMO, but I’m about where I would expect to be after a big run up in asset prices (as my value focused picks tend to lag growth stories during big rallies).
May 2019 rewarded me with realized dividends of $1,058 (versus $1,123 in 2018 - a slight decrease of 5.8%). However, for the last 12 months, my portfolio delivered $14,545 in cash to me (up 4.2% from 2018). My realized yield for the trailing twelve months was 4.8% for my full portfolio including cash reserves. I’m also making progress towards my 2019 goal of over $15,000 for the year (a 15% increase over 2018). 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!!
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 May 31, 2019
|Security||Type||Div Yield||Market Value||Last Month Value||Gain/Loss(%)|
|SPDR S&P 500 High Dividend ETF (SPYD)||ETF||4.2%||$21,510||$23,086||-6.8%|
|Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD)||ETF||5.4%||$11,365||$12,080||-5.9%|
|Invesco S&P Emerging Markets Low Volatility ETF (EELV)||ETF||5.3%||$9,412||$9,678||-2.7%|
|PowerShares S&P 500 High Div Low Volatility ETF (SPHD)||ETF||3.9%||$7,978||$8,530||-6.5%|
|SPDR S&P International Dividend ETF (DWX)||ETF||4.5%||$7,796||$7,956||-2.0%|
|FlexShares Intl Quality Dividend Defensive (IQDE)||ETF||4.9%||$6,420||$6,691||-4.1%|
|Invesco S&P Intl Devd High Div Low Vol ETF (IDHD)||ETF||4.5%||$5,479||$5,580||-1.8%|
|UBS ETRACS 2x US High Div, Low Vol ETN (HDLV)||ETN||10.7%||$5,171||$5,487||-5.8%|
|iShares Nasdaq Biotechnology ETF (IBB)||ETF||0.2%||$4,999||$5,321||-6.1%|
|iShares Evolved U.S. Innovative Healthcare ETF (IEIH)||ETF||1.4%||$4,786||$5,002||-4.3%|
|Xtrackers MSCI World ex US Div Yld Hdgd ETF (HDAW)||ETF||4.1%||$4,743||$4,990||-5.0%|
|VictoryShares EM High Div Vol Wtd ETF (CEY)||ETF||4.7%||$4,683||$4,880||-4.0%|
|Invesco S&P SmallCap High Div Low Vol ETF (XSHD)||ETF||4.8%||$4,535||$4,535||0.0%|
|iShares MSCI Australia ETF (EWA)||ETF||5.4%||$4,360||$4,354||0.1%|
|Horizons NASDAQ 100 Covered Call ETF (QYLD)||ETF||10.7%||$4,338||$4,580||-5.3%|
|iShares Asia/Pacific Dividend ETF (DVYA)||ETF||5.9%||$4,324||$4,385||-1.4%|
|iShares MSCI China Small Cap ETF (ECNS)||ETF||5.3%||$4,168||$4,558||-8.6%|
|IQ 50 Percent Hedged FTSE Europe ETF (HFXE)||ETF||4.0%||$3,756||$3,957||-5.1%|
|Global X MSCI Portugal ETF (PGAL)||ETF||4.2%||$3,150||$3,324||-5.2%|
|iShares International Select Dividend ETF (IDV)||ETF||5.5%||$3,006||$3,169||-5.1%|
|iShares MSCI Malaysia ETF (EWM)||ETF||3.9%||$2,962||$2,971||-0.3%|
|Global X MSCI China Comm Services ETF (CHIC)||ETF||0.2%||$2,250||$2,762||-18.5%|
|Blackstone Mortgage Trust (BXMT)||REIT||7.0%||$10,578||$10,677||-0.9%|
|Royal Dutch Shell (RDSB)||Company||6.0%||$9,429||$9,734||-3.1%|
|Tanger Factory Outlet REIT (SKT)||REIT||8.4%||$8,480||$9,030||-6.1%|
|New Residential Investment (NRZ)||REIT||12.8%||$7,839||$8,640||-9.3%|
|Sabra Health Care REIT (SBRA)||REIT||9.3%||$6,481||$6,572||-1.4%|
|Iron Mountain (IRM)||REIT||7.9%||$6,130||$6,496||-5.6%|
|Occidental Petroleum (OXY)||Company||6.0%||$4,977||$5,521||-9.9%|
|Cardinal Health (CAH)||Company||4.5%||$4,207||$4,871||-13.6%|
|KKR Real Estate Finance Trust (KREF)||REIT||8.6%||$3,956||$4,034||-1.9%|
|Ford Motors (F)||Company||5.8%||$3,808||$4,180||-8.9%|
|Kinder Morgan (KMI)||Company||5.0%||$3,671||$3,656||0.4%|
|PacWest Bancorp (PACW)||Company||6.5%||$3,634||$3,955||-8.1%|
|Gilead Sciences (GILD)||Company||4.0%||$3,113||$3,252||-4.3%|
|People's United Financial (PBCT)||Company||4.6%||$3,074||$3,458||-11.1%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$3,244||$4,053||-20.0%|
|FIXED INCOME TOTAL||5.0%||$21,671||$21,872||-0.9%|
|Goldman Sachs (GS) - Pref D (GS+D)||Pref||5.2%||$5,868||$5,931||-1.1%|
|Morgan Stanley (MS) - Pref A (MS+A)||Pref||4.9%||$4,104||$4,048||1.4%|
|Goldman Sachs (GS) - Pref A (GS+C)||Pref||5.1%||$3,968||$4,008||-1.0%|
|Bank of America (BAC) - Pref L (BML+L)||Pref||4.6%||$3,949||$3,997||-1.2%|
|Goldman Sachs (GS) - Pref A (GS+A)||Pref||5.0%||$3,782||$3,888||-2.7%|
|SCHWAB ROBO-ADVISOR TOTAL||2.0%||$12,338||$13,015||-5.2%|
|TOTAL + CASH||$16,579||5.2%||$315,462||$329,842||-3.8%|
Portfolio Moves in May 2019
SHARE BUY– Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD): Bought 200 shares of this EM dividend ETF at $23.95 on May 1.
- Reasoning: I dumped a large cap U.S. ETF in favor of this small cap ETF with a better yield and lower expense ratio (4.8% yield and 0.3% net expense ratio).
SHARE BUY– Xtrackers MSCI All World ex US High Dividend Yield Hedged Equity ETF (HDAW): Bought 200 shares of this international dividend ETF at $24.95 on May 1.
- Reasoning: With U.S. valuations fairly expensive versus the rest of the world, I think HDAW is a better mousetrap than most (4%+ yield and 0.2% net expense ratio)…and I can trade it for free on my Schwab account. (I would say that HDAW and EELV are my 2 favorite int’l ETFs right now)
SHARE BUY– Invesco S&P Emerging Markets Low Volatility ETF (EELV): Bought another 200 shares of this EM dividend ETF at $24.15 on May 1.
- Reasoning: I love the valuations and long-term growth prospects in the emerging markets, but I think EELV is a better mousetrap than most (5.3% yield and 0.29% net expense ratio) - and I can trade it for free on my Schwab account. (I would say that HDAW and EELV are my 2 favorite int’l ETFs right now)
SHARE BUY– SPDR S&P 500 High Dividend ETF (SPYD): Bought 200 shares of this U.S. dividend ETF at $38.25 on May 2.
- Reasoning: I dumped a large cap U.S. ETF in favor of this best in class ETF with a better yield and lower expense ratio (4.2% yield and 0.07% net expense ratio). (I think this is the best U.S. dividend ETF right now - and I get to trade it for free at Schwab)
SHARE BUY– ING Group (ING): Bought 300 shares of this insurance company at $11.75 on May 9.
- Reasoning: A range limited stock, I liked the yield (7.2%) and the low payout, but I’ll probably sell when the stock gets back near $18.
SHARE BUY– LyondellBasell Industries (LYB): Bought 50 shares of this international chemical giant at $82.00 on May 9.
- Reasoning: A range limited stock, I loved the yield (5.7%) and the low payout, but I’ll probably sell when the stock gets back near $110.
SHARE BUY– Occidental Petroleum (OXY): Bought another 50 shares of this oil and gas E&P company at $51.45 on May 29.
- Reasoning: After a brutal decline that brought the stock near multi-year lows (despite solid fundamentals and a rising price for oil), I picked up OXY for its 6.3% yield and recovery potential (albeit with a pricey acquisition in process), so it’s too early to tell if I made a horrible call.
SHARE SALE– WisdomTree Negative Duration High Yield Bond Fund (HYND): Sold my 100 shares of this negative duration bond ETF at $20.08 on May 2.
- Reasoning: With the Fed signaling the end of the interest rate tightening cycle (at least until something dramatic happens), it doesn’t really make sense to accept a lower interest rate for the negative duration protection against rising rates…not that it ever did me much good in this trade (and I won’t be buying HYND again).
SHARE SALE– WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD): Sold my 100 shares of this interest rate hedged bond ETF at $23.56 on May 2.
- Reasoning: With the Fed signaling the end of the interest rate tightening cycle (at least until something dramatic happens), it doesn’t really make sense to accept a lower interest rate for the interest rate protection against rising rates…not that it ever did me much good in this trade (and I won’t be buying HYZD again).
SHARE SALE– Invesco S&P Ultra Dividend Revenue ETF (RDIV): Sold all 400 shares of this dividend ETF at $38.55 on May 3.
- Reasoning: The yield had fallen below 3.5% (and this ETF has 0.39% net expense ratio), so I locked in a 10% gain and switched my U.S. dividend holdings to SPYD (which has a 4.2% yield and 0.07% net expense ratio)…note: both trades were commission free on my Schwab account.
SHARE SALE– General Mills (GIS): Sold all 100 shares of this food giant at $51.05 on May 8.
- Reasoning: The yield was nice at ~4%, but this company just doesn’t seem to be going anywhere…so I cashed out with a 20% profit and will look for better opportunities elsewhere.
Lots of activity in my portfolio this month as I kept my hands busy pruning (instead of knee-jerk landscaping). I think this market is going to continue to be very choppy through the next presidential election (ugh, do we really have to start focusing on that again). My advice it to channel your angst into the things your can knowingly control (are your investments the most advantaged they can be within your strategy) rather than trying to call market tops and bottoms. Diversification can be a great tonic in late stage bull markets, so now is certainly not the time to bet the farm. ‘Get rich slowly’ is an excellent mantra for wealth preservation.
With a hat tip to Jeff Miller at NewArc Investments whose ‘Weighing the Week Ahead' is the single most valuable thing I read every week, I will separate my thoughts into two buckets: ‘Could Be Signal’ for front of mind topics and ‘Probably Just Noise’ for things in the press that don’t bother me much at this point with regards to how it might impact equity markets.
Could Be Signal:
- Elevated U.S. valuations versus low corporate growth expectations (P/E ratio stagnation/compression will likely persist until the market gets a real ‘bid’)
- Political entrenchment now virtually guarantees that the trade wars will continue for many more months…and resolution is likely to be a whimper instead of a bang
Probably Just Noise:
- Yield curve inversion (despite the return of selected inversion, now is not the time to panic due to this indicator with a long fuse)
- Fed rate changes (my best bet is that we end the year at the same place where rates are today…but if markets price in a rate cut and are disappointed, there could be real signal here)
- Anything 2020 political positions (it’s just too early and governance has a way of moderating firebrands)
Disclosure: I am/we are long ALL POSITIONS 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.