Musings
Another month, another head snapping reversal. After the crowing of the "sell in May and go away crowd" (May 2019 S&P 500 returns of -5.2%), June was a barnburner with a 6.9% gain (and I'll bet none of the market timers who urged you to get out are apologizing for their terrible advice).
However, this market continues to be very difficult to predict and is driven by tweets and Fed whisper-ers…not a great setup for a home gamer like myself. Furthermore, longtime readers (and basically anyone in a dividend focused strategy) will be keenly aware that value-biased portfolios are enduring a particularly long and a brutal run of underperformance against growth stocks.
Twelve years on the wrong side of a trade can shake the confidence of even the more ardent supporters (see article). But I do not feel that all hope is lost (ironically, I feel like my own capitulation would likely mark the turning point, like it did for me in 2009). In fact, having surpassed the S&P 500 two of the last three years, I feel like a smart alpha approach to dividend focused investing is exactly where I should be at this point in the cycle. Trying to catch the last few home runs is particularly challenging (since most of the "obvious winners" have already taken their great runs), but sitting on the sidelines will prevent me from enjoying a few more months/years in the sun until the next downturn comes (and, sooner or later, eventually it will). In fact, my modest portfolio (by Seeking Alpha standards) will produce over $15,000 annually in dividend payments (even if the market moves sideways).
July (and the rest of 2019) could be great or a disaster since there is plenty of evidence supporting either outcome. But overly greedy or panicked investors will likely see the worst returns of any cohort. So I'll stick to the things I can control (fees, diversification, etc.) and try not to live and die on each month's brokerage statement. I have also built up a bit of a cash cushion to take advantage (at the margins) of any opportunities that come up. However, remember that we investors are often our own worst enemies when it comes to over-optimizing and strategy chasing.
June 2019 Review
June 2019 was rocking for the markets (with the S&P 500 posting its best June since 1955 and the Dow posting its best June since 1938). The S&P 500 posted a 6.9% gain for the month (certainly better than May's 5.2% loss). As expected, I lagged with only a 3.9% increase (as my portfolio has a conservative bend). YTD, I am up 9.2% vs. the 18.5% gains for the index (before dividends are considered). However, my 5.5% 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).
June 2019 rewarded me with realized dividends of $1,992 (versus $1,830 in 2018…a meaty 9% gain). For the last 12 months, my portfolio delivered $15,367 in cash to me (up over 9% from 2018). My realized yield for the trailing 12 months was 5.0% for my full portfolio including cash reserves. I'm also quite confident about achieving 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!!
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 June 30, 2019
| Security | Type | Div Yield | Market Value | Last Month Value | Monthly Gain/Loss (%) |
| FUNDS | 5.0% | $137,345 | $131,190 | 4.7% | |
| SPDR S&P 500 High Dividend ETF (SPYD) | ETF | 4.5% | $22,830 | $21,510 | 6.1% |
| Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD) | ETF | 5.7% | $11,555 | $11,365 | 1.7% |
| Invesco S&P Emerging Markets Low Volatility ETF (EELV) | ETF | 5.4% | $9,796 | $9,412 | 4.1% |
| PowerShares S&P 500 High Div Low Volatility ETF (SPHD) | ETF | 4.2% | $8,420 | $7,978 | 5.5% |
| SPDR S&P International Dividend ETF (DWX) | ETF | 4.6% | $8,089 | $7,796 | 3.8% |
| FlexShares Intl Quality Dividend Defensive (IQDE) | ETF | 5.1% | $6,633 | $6,420 | 3.3% |
| Invesco S&P Intl Devd High Div Low Vol ETF (IDHD) | ETF | 4.6% | $5,700 | $5,479 | 4.0% |
| UBS ETRACS 2x US High Div, Low Vol ETN (HDLV) | ETN | 11.4% | $5,516 | $5,171 | 6.7% |
| iShares Nasdaq Biotechnology ETF (IBB) | ETF | 0.2% | $5,489 | $4,999 | 9.8% |
| iShares Evolved U.S. Innovative Healthcare ETF (IEIH) | ETF | 1.5% | $5,134 | $4,786 | 7.3% |
| Xtrackers MSCI World ex US Div Yld Hdgd ETF (HDAW) | ETF | 4.3% | $4,976 | $4,743 | 4.9% |
| VictoryShares EM High Div Vol Wtd ETF (CEY) | ETF | 4.8% | $4,966 | $4,683 | 6.0% |
| Invesco S&P SmallCap High Div Low Vol ETF (XSHD) | ETF | 5.1% | $4,752 | $4,535 | 4.8% |
| Horizons NASDAQ 100 Covered Call ETF (QYLD) | ETF | 11.3% | $4,605 | $4,338 | 6.1% |
| iShares MSCI Australia ETF (EWA) | ETF | 5.4% | $4,497 | $4,360 | 3.1% |
| iShares Asia/Pacific Dividend ETF (DVYA) | ETF | 6.0% | $4,421 | $4,324 | 2.3% |
| iShares MSCI China Small Cap ETF (ECNS) | ETF | 5.8% | $4,298 | $4,168 | 3.1% |
| IQ 50 Percent Hedged FTSE Europe ETF (HFXE) | ETF | 4.2% | $3,940 | $3,756 | 4.9% |
| Global X MSCI Portugal ETF (PGAL) | ETF | 4.4% | $3,201 | $3,150 | 1.6% |
| iShares International Select Dividend ETF (IDV) | ETF | 5.8% | $3,084 | $3,006 | 2.6% |
| iShares MSCI Malaysia ETF (EWM) | ETF | 3.9% | $3,003 | $2,962 | 1.4% |
| Global X MSCI China Comm Services ETF (CHIC) | ETF | 0.2% | $2,440 | $2,250 | 8.5% |
| COMPANIES | 6.5% | $133,892 | $129,877 | 3.1% | |
| AbbVie (ABBV) | Company | 5.9% | $18,210 | $19,178 | -5.0% |
| Blackstone Mortgage Trust (BXMT) | REIT | 7.0% | $10,644 | $10,578 | 0.6% |
| AT&T (T) | Company | 6.1% | $10,070 | $9,174 | 9.8% |
| Royal Dutch Shell (RDS.B) | Company | 5.7% | $9,984 | $9,429 | 5.9% |
| Tanger Factory Outlet REIT (SKT) | REIT | 8.8% | $7,985 | $8,480 | -5.8% |
| New Residential Investment (NRZ) | REIT | 13.0% | $7,941 | $7,839 | 1.3% |
| Sabra Health Care REIT (SBRA) | REIT | 9.1% | $6,549 | $6,481 | 1.0% |
| Iron Mountain (IRM) | REIT | 7.8% | $6,155 | $6,130 | 0.4% |
| Occidental Petroleum (OXY) | Company | 6.2% | $5,023 | $4,977 | 0.9% |
| Cardinal Health (CAH) | Company | 4.1% | $4,760 | $4,207 | 13.1% |
| LyondellBasell (LYB) | Company | 4.9% | $4,365 | $3,713 | 17.6% |
| BP (BP) | Company | 5.9% | $4,238 | $4,072 | 4.1% |
| GlaxoSmithKline (GSK) | Company | 5.2% | $4,030 | $3,864 | 4.3% |
| KKR Real Estate Finance Trust (KREF) | REIT | 8.6% | $4,001 | $3,956 | 1.1% |
| PacWest Bancorp (PACW) | Company | 6.2% | $3,882 | $3,634 | 6.8% |
| Kinder Morgan (KMI) | Company | 4.8% | $3,870 | $3,671 | 5.4% |
| IBM (IBM) | Company | 4.7% | $3,506 | $3,175 | 10.4% |
| ING (ING) | Company | 6.7% | $3,486 | $3,228 | 8.0% |
| Gilead Sciences (GILD) | Company | 3.7% | $3,415 | $3,113 | 9.7% |
| People's United Financial (PBCT) | Company | 4.2% | $3,349 | $3,074 | 8.9% |
| Canon (CAJ) | Company | 4.9% | $2,952 | $2,802 | 5.4% |
| Transocean (RIG) | Company | 0.0% | $2,007 | $1,860 | 7.9% |
| VARIOUS POSITIONS OF <$1,000 VALUE | VARIOUS | 2.0% | $3,472 | $3,244 | 7.0% |
| FIXED INCOME TOTAL | 4.9% | $21,958 | $21,671 | 1.3% | |
| Goldman Sachs (GS) - Pref D (GS+D) | Pref | 5.0% | $6,033 | $5,868 | 2.8% |
| Morgan Stanley (MS) - Pref A (MS+A) | Pref | 4.9% | $4,087 | $4,104 | -0.4% |
| Goldman Sachs - Pref A (GS+C) | Pref | 5.0% | $4,064 | $3,968 | 2.4% |
| Bank of America (BAC) - Pref L (BML+L) | Pref | 4.6% | $3,913 | $3,949 | -0.9% |
| Goldman Sachs - Pref A (GS+A) | Pref | 4.9% | $3,860 | $3,782 | 2.1% |
| SCHWAB ROBO-ADVISOR TOTAL | 2.0% | $13,043 | $12,338 | 5.7% | |
| TOTAL | 5.5% | $306,237 | $295,076 | ||
| TOTAL + CASH | $24,258 | 5.1% | $330,495 | $315,462 | 3.9% |
Portfolio Moves in June 2019
New Positions
None
Exited Positions
SHARE SALE- Ford Motor Company (F): Sold all 400 shares of this automaker at $9.95 on June 4.
- Reasoning: The yield was nice at ~6%, but this is a tough part in the cycle to hold large ticket consumer goods companies…if this is what the "good times" look like for Ford, then I certainly don't want to get caught holding through the bad times (In the end, I ended up with a wash on my capital gains loss versus three years of dividend payments).
Final Thoughts
After a flurry of May activity, June was relatively quiet for me from a trading perspective as I spent more time watching instead of doing (which is probably better for my overall returns potential). I continue to see a lot of chop out there (especially if the Fed holds interest rates steady), but the fundamentals continue to chug along, so I will chug along with them in high yield, predictable businesses. I'm still onboard with the "get rich slowly" mantra.
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").
- Corporate buybacks contributed about half of S&P 500 companies' earnings growth in the first quarter (these buybacks accounted for the highest share of EPS growth since 2007).
- 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 (not a great metric to use for trade timing anyway, I think this cycle is seeing an unusual amount of Fed-related activity that makes this more of a policy debating point than a leading economic indicator).
- Fed rate changes (my best bet is that we end the year at the same place where rates are today…but there will be some bumps along the way as markets price in rate cuts that may or may not occur).
- Anything 2020 politics (it's just too early and governance has a way of moderating firebrands).
Comments encouraged.
