2019 Half Year 10% Yield Update; Truth Behind High-Yield Is Revealed

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Includes: ACRE, AGNC, AINV, ARCC, ARI, ARR, BDCL, BXMT, CGBD, CHMI, CIM, CSWC, DX, FDUS, GBDC, GOF, GSBD, HTGC, IVR, LADR, MAIN, MFA, MITT, MORL, NEWT, NLY, NMFC, NRZ, PCI, PFLT, PMT, SAR, SCM, SLRC, STWD, SUNS, TCPC, TPVG, TSLX, TWO
by: High Yield Investor
Summary

Half Year total portfolio return in 2019; 16.2%.

YTD brokerage account performance chart, distributions and cash.

How to eliminate market stress? Focus on the income.

Current holdings including projected cash dividends.

Price is deceptive when compared to accumulated income and cash flow.

Commentary

It turned out May 2019 was a great month to increase income producing shares. The best way to invest in the market is to plant seed (capital) in a fertile protective valley and avoid steep mountain tops. I have noticed a decrease in my attentiveness when the price of my holdings move up and my keyboard "BUY"button begins to collect dust; (mountain tops). The opposite is true when the market declines; my "BUY"button begins to smoke; (fertile valley).

Needless to say 5 out of 6 months in 2019 were boring (too much price appreciation). A declining market is a great "attention getter"and a good time to put capital to work. If you focus on the income the end results will provide an increasing stream of income year-after-year as shown in Chart-1.

income growth

Source

In the accumulation phase declining prices provide the opportunity to purchase more income shares at reduced cost. High prices provide a headwind toward income creation. Simple concept, but difficult for most to comprehend; the following quote is from someone who knows the difference.

Warren Buffett's 1997 letter to Berkshire Hathaway shareholders;

"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers"they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

The bold highlight in the quote is mine. This quote was published in my November 2nd 2018 article after October's turbulent market action. I thought it was appropriate again during May 2019 market volatility. As a retiree I have explained my strategy design to always be in the accumulation phase and prefer lower prices. If the market keeps climbing, I'll collect the dividends and be prepared to pounce once a decline comes again.

Now class, if we are in the accumulation phase, which direction do we want the market to go?

Introduction

Topic one:

This half year update includes my IRA brokerage performance metric to track actual portfolio balance, distribution and dividend cash accumulation. I have designed Chart-1 to display my yearly results since 2014 and to track the performance 5 years into the future ending in 2023. I believe this portfolio will continue increasing cash flow for my retirement distribution by using surplus dividends for reinvestment; see section, "Performance including distribution and cash".

Topic two:

The 2019 half year trend chart demonstrates how my portfolio of two asset groups is performing. The leader has been BDCs (Business Development Company) and the worst performance was the mREITs (mortgage Real Estate Investment Trust); see section "YTD 2019 Market Trends; BDC, mREIT". Most purchases this year have been on the mREIT side of the ledger giving the best opportunity in my pursuit of cost effective shares.

Topic three:

Investing in high yield comes with the possibility of dividend declines. I have stated this fact many times in the past and YTD I have a few mREITs that demonstrate how economic realities can force the issue. Part of my strategy is to own agency mREITs to prepare for the next recession.

I'm fully aware the possibility of dividend reductions in high yield stocks since they payout 90% of their earnings as dividends. The mREITs that reduced their dividends are holders of agency MBS government backed securities that typically outperform during a bear-market. Time will tell if this trend will continue during the next declining market cycle.

I have been saying for years the reason I hold agency mREITs is because I want to be prepared for the next recession. In a recent article from Rida Morwa; "High Dividends Opportunities"goes into detail about one of the recession proof stocks I currently own. This quote excerpt is from his article on June 22th, 2019.

"This stock is currently paying a yield in excess of 11%, and in the upcoming recession, we could expect the dividend to be doubled. It is a true example of an investment that is truly counter-cyclical. In other words, it performs very well in bear markets but tends to underperform in bull markets."

I'll continue to hold mREITs that recently cut their dividends in my portfolio. I have included a list of current holdings; see section "Current Portfolio Holdings"along with dividend changes YTD. The table is split in half; BDCs in Table-1 and mREITs in Table-2.

Topic four:

There has always been a misconception about high yield RIC (Regulated Investment Company) type of investments. They are designed for income and not necessarily for capital gain. If purchased when the stock is oversold, capital gains will occur, but for the most part they are simple dividend generating machines.

The growth aspect for RICs will depend entirely on the investor to reinvest dividends back into high yield assets. This is one of the differences between typical DGI (Dividend Growth Investing) stocks where the individual company maintains the growth.

It's fortunate I have tracked many investment parameters related to my 100% high yield portfolio over the last 5.5 years. I can now show high yield investing is no walk in the park and demonstrate how price is detached from income creation.

Chart-3 and Chart-4 in section "Deceptive Price Using High-Yield"display how massive price paper loss is deceptive when accounting for total return; dividends are the main driver and NOT price.

In reality the cash dividends received and reinvested blow away any price deficiencies over time. This is the main reason I do not focus on price other than entry levels.

Once purchased the focus becomes "Portfolio Total Income Sustainability"not dependent on any individual investment. This is why my system will continue to work over time.

Performance including distribution and cash

From my original 10-Year Performance Tracking article, I have normalized the portfolio balance to $500,377 and a GEE (Gross Employment Earnings) value of $64,000 starting 2018, see Chart-1. The normalized value is scaled to my real portfolio based on my brokerage performance report.

  • My last full year of employment was in 2016 where I locked down my GEE as my "income benchmark".
  • At the beginning of 2018 I started taking retirement distributions.

Note1: the YTD results listed in the following items include cash, distributions, along with stock holdings; all organic, no external funds added;

$463,364 = 2019 beginning balance

$524,169 = 6 month ending balance

$14,324 = distribution taken

$12,376 = cash dividends to reinvest

  • YTD total return 2019; ((524,169 + 14,324) - 463,364) / 463,364 = 16.2%
  • YTD total income 2019; (14,324 + 12,376) = 26,700
  • YAM (Yield At Market) first half 10.04%
  • Most of the YTD return is from price gain

Chart-1; 10 year performance chart

This chart looks intimidating at first, but only has three tracking elements. I placed a lot of notes on the chart to indicate my pre-retirement working phase and my full retirement starting in 2018; vertical white line dividing the chart. During the years 2014 to 2017, I gradually moved my 401k proceeds into an IRA and began purchasing high yield assets according to my current investment strategy.

It should be noted the values of the portfolio balance, dividends and distributions are taken from my brokerage account performance report. They keep track of all the contributions (401k to IRA rollover), dividends and distributions during the year, where I can get a quick snapshot of all pertinent data.

The chart is split in half, the top section is for the portfolio balance (blue line) and the lower half is for reinvested dividends (green bar) along with distributions (red bar). The total dividend (green bar plus red bar) is the actual cash deposited into my account during the year. For detailed description of this chart please see my original 10-Year Performance Tracking article (linked above).

Since the beginning of my 50/50 portfolio back in 2014 a question comes to mind; how has my IRA portfolio performed? Here is a snapshot of my actually brokerage account growth rate after 5 years. The portfolio is generating more than enough income to cover my distributions and leftover dividends to provide future growth. The "Last Month"header is for June 2019.

Source; High Yield Investor, IRA account

The annualized growth rates of the 50/50 portfolio demonstrate how reinvesting dividends back into the portfolio provide the compound growth and not dependent on any individual investment. This is an important concept to realize, both portfolio balance and income will grow well into the future.

YTD 2019 Market Trends; BDC, mREIT

The following chart displays how both my BDCs and mREITs performed along with the S&P 500 during the year. It has been a good year for capital appreciation investors.

Chart-2, BDC and mREIT group trend

Chart-2 displays what is going on this year between the BDC and mREIT group of stocks in the 50/50 portfolio and S&P 500 index. The month of May is the only month with declining prices. It must be noted the S&P 500 index is only used to indicate market direction (correction, bear) and not any benchmark.

My BDC holdings are well above the mREIT group with a price gain of 16% and a total return of 21%; note dividends are added to price, no compound growth. The mREITs have lagged both the BDC group of stocks along with the S&P 500. Most of my purchases this year have been on the mREIT side of the portfolio. The mREIT group still managed an 11% total return YTD.

Looking at the blue line on the chart (right lower axis), what is interesting is the spread between the 3-month and 10-year rates staying negative for about a month now. I track both Treasures to determine yield curve inversion and a possible future recession.

The FED has indicated the possibility of reducing overnight lending rates to support a low growth economy and to catch up with the declining short term Treasury yields. July is the most likely time frame for the FED to act and lower rates. The ongoing trade dispute between the U.S. and China provides another factor that can influence price. I do not trade (BUY only) on speculation, but only after the market responds to sentiment.

Current Portfolio Holdings

Portfolio management principles are focused on yearly income preservation rather than capital appreciation. In retirement, a growing total income cash flow will allow continued distributions along with surplus dividends reinvested to provide income growth.

Table-1: June 2019

Type

Symbol

Yield

%CapAlloc

%IncAlloc

Project-Inc.

YTD DivChg

BDC

(CSWC)

9.4%

1.0%

1.0%

$501.76

6.5%

BDC

(GSBD)

9.2%

1.2%

1.1%

$576.00

BDC

(SAR)

8.7%

1.3%

1.2%

$609.12

1.9%

BDC

(GBDC)

7.2%

2.2%

1.6%

$819.20

BDC

(MAIN)

6.0%

2.9%

1.8%

$915.12

5.1%

BDC_ETN

(BDCL)

16.3%

1.2%

1.9%

$1,017.90

BDC

(SLRC)

8.0%

2.5%

2.0%

$1,049.60

BDC

(PFLT)

9.9%

2.1%

2.1%

$1,094.40

BDC

(SUNS)

8.9%

2.5%

2.2%

$1,136.46

BDC

(TSLX)

8.0%

3.1%

2.5%

$1,297.92

BDC

(FDUS)

9.8%

2.5%

2.5%

$1,297.92

BDC

(OTC:AINV)

11.4%

2.2%

2.5%

$1,314.00

BDC

(CGBD)

9.7%

2.6%

2.5%

$1,326.08

BDC

(NMFC)

9.7%

2.7%

2.6%

$1,349.12

BDC

(TCPC)

10.1%

2.6%

2.6%

$1,382.40

BDC

(NEWT)

8.3%

3.4%

2.8%

$1,459.20

5.6%

BDC

(SCM)

9.8%

3.2%

3.1%

$1,618.40

BDC

(HTGC)

10.0%

3.2%

3.1%

$1,638.40

3.2%

BDC

(ARCC)

8.9%

4.2%

3.7%

$1,945.60

2.6%

BDC

(TPVG)

10.1%

4.4%

4.4%

$2,304.00

51.1%

47.2%

$24,652.60

Table-2: June 2019

Type

Symbol

Yield

%CapAlloc

%IncAlloc

Project-Inc.

YTD DivChg

mREIT

(ACRE)

8.9%

0.5%

0.4%

$211.20

6.5%

mREIT

(ARR)

10.9%

0.7%

0.7%

$391.68

-10.5%

mREIT

(LADR)

8.2%

2.3%

1.8%

$965.60

mREIT

(STWD)

8.5%

2.2%

1.9%

$983.04

mREIT

(PMT)

8.6%

3.0%

2.5%

$1,323.52

mREIT_CEF

(PCI)

8.2%

3.1%

2.5%

$1,323.84

mREIT

(BXMT)

7.0%

3.8%

2.6%

$1,364.00

mREIT

(DX)

12.9%

2.1%

2.6%

$1,382.40

mREIT

(MFA)

11.1%

2.4%

2.6%

$1,382.40

mREIT

(TWO)

12.6%

2.1%

2.6%

$1,382.40

-14.9%

mREIT_CEF

(GOF)

10.7%

2.5%

2.7%

$1,401.60

mREIT

(CIM)

10.6%

2.6%

2.7%

$1,408.00

mREIT

(IVR)

11.2%

2.5%

2.8%

$1,440.00

7.1%

mREIT

(ARI)

10.0%

3.1%

3.0%

$1,589.76

mREIT

(NLY)

11.0%

3.0%

3.3%

$1,728.00

-16.7%

mREIT

(CHMI)

12.3%

2.8%

3.4%

$1,756.16

mREIT

(AGNC)

11.4%

3.0%

3.4%

$1,781.76

-11.1%

mREIT

(MITT)

12.6%

2.9%

3.7%

$1,920.00

mREIT

(NRZ)

13.0%

2.8%

3.7%

$1,920.00

mREIT_ETN

(MORL)

21.4%

1.8%

3.7%

$1,958.40

48.9%

52.8%

$27,613.76

Every $100,000 investment at 10% yield = $10,000 income at today's stock price.

This (BDC, mREIT) portfolio has been generating 10% yield since the beginning of 2014.

Each table is sorted by income allocation percentage; the "%IncAlloc"column. The goal for each of the 40 individual stocks is to generate at least 2.5% of the total income. Some are over-allocated and will stay that way for now. I calculate it will take about 4 years to accomplish this task.

I have identified dividend changes for each company (the last column). I do not count special dividends toward the investment yield since they can be stopped at any time.

I also added the actual dollar amount of income projected cash flow; scaled to my actual portfolio. Notice the income allocation of 2.5% is equivalent to about $1,300 in yearly income. The total yearly income of both groups is about the same and will depend on my reinvestment selections the remainder of the year.

As a side note: followers sometimes ask me what my allocation is to stock investing. Let's study an example of "income allocation"I prescribe too in the BDC Table-1.

  1. "BDCL"yield= 16.3%, capital allocation= 1.2%, Income allocation= 1.9%.
  2. "SLRC"yield= 8.0%, capital allocation= 2.5%, income allocation= 2.0%.

Notice something strange? "BDCL"has about twice the yield of "SLRC", but the capital at risk is about half while generating the same yearly income. This demonstrates another aspect to my portfolio design for a margin of safety; capital at risk.

Deceptive Price Using High-Yield

I don't want to sugar-coat the perception that high-yield investing is simple to implement. At the beginning of my journey to the "dividend promise land"I needed to transfer my 401k into an IRA and buy high yield assets, basically lump sum purchases at prevailing prices.

As shown in Chart-3, the current price is well below my cost on an individual basis. This is the chance we take investing in high yield, price will most likely decline, but is a fixed cost. The important metric to my strategy has always been income since retirement was only a few years away.

Now looking back I can see how someone looking at price alone would be misled into thinking high yield investing is a losing strategy. Thank goodness for documenting my journey through the uncharted high-yield wilderness and discovering an alternate universe where income becomes dominant over price.

I want to stress the concept that RIC investing is not intended for capital gain, but income only. Reinvesting the dividends back into the portfolio is where the absolute power of compound growth is achieved. High yield stocks will not only create income, but will also create portfolio wealth over time.

Chart-3; Price Gain/Loss

I have grouped both asset classes separately in Chart-3 and Chart-4. The left 20 stocks are in the BDC group and the right 20 stocks are in the mREIT group. As shown they are also sorted from worst to best price performance.

Anyone looking at price alone such as Chart-3 would be terrified of price paper loss. This chart is only half the story and is deceptive in knowing how high yield actually operates over time. The binary aspect based on price only in this chart is 50%; 20 positive stocks out of 40.

Who in their right mind would invest this way? When I look at my brokerage account they display individual stock price gains/loss without accumulated dividends as shown in Chart-3. This hideous visual-chart is stressful until we examine the rest of the story.

To get an accurate picture more data is needed and this is where accountability comes into play; see the total return Chart-4 below for each individual holding. I have been keeping track of accumulated dividends from the beginning of my portfolio build.

Chart-4; Total Return

Geez, I guess dividends do matter. The total returns in 5.5 years for each individual investment is 100% positive. This chart displays total return as current price plus dividends on each individual stock; June 28, 2019. Look at some of those total return numbers and tell me how 10% high yield investing is not profitable. It takes a few years owning high yield stocks before realizing their true nature; patience is a virtue.

This is what I mean when I say focus on the income and let price follow its own path. If only looking at price Chart-3 (brokerage account), I can see investors being stressed and possibly taking action that is unwarranted and hazardous to their future income growth. A top level approach to investing removes the individual stress of price in creating an income machine to achieve a simple paycheck replacement goal. Based on sector sentiment price will vary at any given moment in time and it is up the manager of the portfolio to take advantage of price declines along the way.

Knowledge of both previous charts demonstrates the real-time aspects of high yield investing. I have found managing a high yield income oriented portfolio based on facts and not emotional misconceptions is essential to becoming a successful investor.

Conclusion

Performance of the 50/50 portfolio using only BDCs and mREITs is providing both portfolio balance and income growth over time. The design from the beginning of my IRA portfolio has always focused on the income and not price. As shown in Chart-1 the total balance of the portfolio will vary quite a bit dependent on market sentiment. The constant is the income generation that keeps growing and I consider most important in retirement.

The first half of 2019 provided a massive recovery of both the BDC and mREIT holdings in the 50/50 portfolio. During this time I have taken advantage of market declines to increase future cash flow. The month of May was another exciting month to try out my POT (Portfolio Online Tracker) technical analysis "BUY"signals. My yearly plan is to maintain the income growth rate at 4% or higher. This will keep the yearly income growing well above inflation.

I demonstrate the truth behind high yield income and the deception of price. When you take accumulated dividends and compare them to cost over time the comparison will demonstrate how cost is fixed, but the accumulated dividends will continually grow over time. Cost is a single moment in time, but the dividends generated will consistently grow well into the future swamping out any cost miscalculations.

What is more important, price in a moment of time or dividend income that continues to accumulate and grow? Taking a percentage of the income and plowing them back into the portfolio will accelerate both income and balance growth. Always be in the accumulation phase and most portfolios will be successful. Good luck to all income seekers, Joe HYI ;-)

Disclosure: I am/we are long ALL STOCKS IN 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.

Additional disclosure: Investment Disclaimer
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 and 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.