'Play Money' High Yield Portfolio Revisited

by: Matthew Zeets

I made some predictions a little over a year ago about a high yield portfolio that would do well even as interest rates continued raising.

The portfolio performed better than I expected.

Now that it seems likely the Federal Reserve will pull interest rates back some, it's as good a time as any to revisit.

In March of 2018, I set out to create a fake, high yield portfolio that I believed would do well even in the face of rising interest rates. I only mention that it's fake because it does not represent my personal holdings exactly, nor their weightings. I have invested in all the companies listed at some point and am still holding most of them, but this portfolio was more a snapshot of what I thought were good buys at the time I wrote my original article and from the perspective of someone looking for a safe, high yield portfolio. I noticed at the time that many higher yield vehicles were struggling as the Fed continued to raise interest rates. Not all high yield stocks will struggle during rising interest rates though. I set out to find Real Estate Investment Trusts (REITs) that had great balance sheets but had been beaten down with riskier REITs, Business Development Companies (BDCs) with mostly fixed rate debt, and a few other companies I saw with great payouts and reasonable valuations. Here is a screenshot of what my original portfolio looked like:

High Yield Portfolio Only about a month after making the portfolio, I decided to add Landmark Infrastructure Partners LP (LMRK) and Ladder Capital Corp (LADR). Landmark is structured as a Limited Partnership, but outside of tax rules, they have more in common with a REIT. They invest in towers that they lease to telecoms and other infrastructure that should continue to be used more as 5G is rolled out.

LADR is another commercial mortgage REIT, similar to RSO. LADR is much more established and they don't trade at a discount to NAV, like RSO, but they do have an internal management structure which gives them a real cost advantage to some other commercial mREIT peers. I would not touch residential mREITs currently. They typically have much higher levels of floating rate debt and are much more dependent on the 2-10 year treasury spreads than commercial mREITs.

Adding these 2 companies was the only active changes I made. Other than that, I allowed dividends to be reinvested. There was also a merger that forced me to adjust my holdings to match. Energy Transfer Partners (ETP) was bought by their general partner, Energy Transfer Equity (ETE), and eventually became Energy Transfer (ET), which I now hold. Because Morningstar did not automatically adjust the number of shares, I was forced to add a separate number of shares to match the conversion rate of 1.28 ETE shares for each ETP share I owned.

Here is a look at my portfolio after having dividends reinvested for the 15 months and with the other adjustments mentioned above:

High Yield Portfolio So with a starting amount of fake money of ~$100,000 and it up over $117,000 in the 15 months, my annualized returns have been ~14%. Looking back over the year, it appears the best performers were the REITs. I think I benefited some by the timing of my first article as most REITs have done very well in the past year. That being said, I knew my weighting towards REITs was high originally, but I decided they were too undervalued at the time to not gone overweight on. At this point, I think it would be prudent to prune parts of my positions. While there is not any company I'm cutting outright, as I still see them all as great businesses, there are a few that I think have ran fairly high over the last year and total returns going forward will probably be less.

Namely I am cutting part of my holdings in Medical Properties Trust (MPW), STORE Capital (STOR), and WP Carey (WPC). They all have ran up about 40% and are all REITs, making my total portfolio weighting in REITs even higher. While I still see each of these businesses continuing to pay increasing payouts, I could easily see the stock price dropping in any of them in the next year.

With those proceeds, I am going to keep my fake cash position a little higher, as the market just hit all time highs again this week. The only company I'm going to add at this time is Pennsylvania Real Estate Investment Trust (PEI). They are a mall REIT and a peer of Simon Properties Group (SPG), which as you can see is in the portfolio. SPG represents the cream of the crop in the mall REIT space and PEI is just middle to lower of the pack in terms of mall quality and how safe their balance sheet is. However PEI is making gigantic strides in improving their properties and with it their sales per square foot metrics. I see them as the best turn-around story in the space.

Because I do not want my weighting in the mall REIT sector too high, being a sector still under fire, I am reducing my SPG exposure in order to pick up some PEI in this fake portfolio. The safer bet for capital preservation is definitely SPG, but PEI has a much higher yield and I see them as surviving the tough environment. While riskier, PEI comes with asymmetrically high reward. Obviously everyone has different risk tolerances, so perhaps for some holding onto the better capital preservation stock in SPG makes more sense. For this fake portfolio, I am deciding to move toward PEI.

I was writing this article over the weekend, so all of the trades were done with the prices at the end of day Friday, 6/21. Here is the portfolio after all the adjustments:

High Yield Portfolio The new weighted yield, including the large cash position, of the portfolio is higher than it was previously and is now 6.1%. I do not plan on being very active with this fake portfolio at all, probably only visiting it every year or two. I am curious to see how it performs during a recession. There are an endless number of combinations of companies you could include and weightings to build a portfolio. Please feel free to add the companies you personally like in a high yield portfolio in the comments.

Disclosure: I am/we are long ET, GILD, IBM, KNOP, LADR, MAIN, MO, RDS.B, STOR, TCPC, XAN. 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: For Tip Ranks: I rate MPW, STOR, and WPC as Sells. I rate GILD, HTGC, IBM, LADR, LMRK, MAIN, MO, RDS.B, SPG, and TCPC as Holds. I rate ET, KNOP, PEI, and XAN as Buys.