The Brown Bag Portfolio - Year 2 Review

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Includes: APLE, ARCC, BP, EPD, EPR, IRM, KEY
by: Michael Hesse
Summary

History of the Brown Bag Portfolio.

Six rules for the BBP.

How the BBP performed through July.

July marks the third anniversary of the Brown Bag Portfolio and the second anniversary of when I started writing about it. During that time there have been tremendous changes, not only in the portfolio itself, but how I've gone about building it. For that reason, I'm going to spend a little more time than normal discussing how the portfolio was built, where I see it going, and some of the rules surrounding its construction.

July 5, 2016 was the day I chose to take back my future. That statement may come off a little hyperbolic at first, but it's true. Prior to that date I had been trapped in a vicious court battle with my ex-wife, who's only tangible result was to enrich the attorneys. Honestly, we eventually settled with exactly what I had offered five years earlier, but we were both tens of thousands of dollars poorer. I had no 401k, I'd drained it years before to aid my ex-wife when she had some serious medical issues. I had no or very little in the way of personal finances, due to my own medical emergency several years prior that had taken everything that remained.

But at that moment, that day, I was free. I still had thousands to pay my ex-wife, but that only took a couple of years. I had a truck with nearly 300,000 miles on it and I had a new wife, who thankfully, was more than prudent with her own finances. July 5thwas the day that I decided I was going to start making an effort to reclaim my future financial security.

I opened a brokerage account with $150.00 and bought a couple of shares of stock. I didn't know what I was doing, but I did know that the market was one of very few avenues where I could potentially build wealth. I made quite a few mistakes right off the bat, I chased stocks up and sold in a panic when they started to go down. Rookie mistakes, but I learned from them. I learned that I didn't know what I was doing.

I began changing how I dealt with money. Instead of eating my lunches out, I started packing my lunches (the genesis for the portfolio's name), and every extra cent I could save after paying my bills, went into the brokerage account. I started reading everything that I could find on the market, checking web sites, and reading articles. But it wasn't until I found Seeking Alpha and started reading articles on dividend investing that I truly learned my first lesson.

I needed something to keep the panic at bay when a stock I'd chosen fell. Dividend investing and more specifically DRIP (dividend reinvestment programs) provided the security I needed. Since my dividends are automatically used to purchase more stock at the current price, I could see my holdings grow over time. When the price was lower than I initially paid, I received more shares and that provided some comfort. Over time I became used to the fact that current price of my shares would wax and wane, but as long as I felt that the underlying fundamentals of the company were sound, I could relax and wait it out.

After a year of learning, I felt that my experiences in the market were useful to talk about, especially to others who might want to get into the market or were struggling with their holdings as I was. I started writing these monthly articles, documenting what was happening to my holdings and what my thoughts were on them. If I sold something, I told my readers why and more importantly, revisited that sale later in an effort to explain if I thought it had been a wise sale or not. The same with purchases.

The only criteria I had when evaluating stocks was that it must pay at least a 3% dividend. This rule is for my core holdings only, the ten or so stocks that I expect to hold for at least five or more years and will make up 80-90% of my portfolio. This is an ongoing process and I currently have only nine holdings, seven of which I consider core, 1 which is iffy, and 1 that is an experiment - a test of the hypothesis expounded by Steven Bavaria in his Income Factory articles.

I'm not a financial guy, I don't have a degree in finance or business, I'm a computer technician, who has learned everything he knows by doing. I do have certifications; dozens upon dozens of them, but they were all acquired the hard way, by doing first and reading books second. I took the exams, passed the exams, and moved on. I didn't let experts in a lecture hall, place blinders on the process. I'm not saying that my process is the correct one or even the best one, it's the process that I chose and that works for me. I learn by doing, not watching someone else talk about doing.

I've approached my dive into the market the same way. I read a lot, especially on the companies that I invest in. I read articles on people who agree with my thinking and even more importantly with those who disagree. But I make the decision and I place the orders. Why not? I'm the one who's going to take the lumps if I'm wrong - if I give my money to an expert and they're wrong, I'm still going to take the lumps. At least this way, I know why.

Now that isn't to say that I'm against investing in mutual funds or utilizing a 401k if it's available. I restarted my 401k and contribute 8% to it out of each paycheck. I only get a 50% match on the first 3%, the remaining 5% that I contribute I consider a hedge against rash decisions I may make on my own.

One of the reasons that I handle the vast majority of my investing myself, is because it provides purpose. I don't make a lot of money. I have to scrimp and save to put aside a couple hundred dollars every paycheck. That's money that I could enjoy, that could go towards making my life a little more comfortable right now, but I choose to defer that enjoyment in order to potentially make my future better. It is much easier for me to justify defer current spending when I'm making the conscious decision to move it to the brokerage account. When it's done automatically through my 401(k), I don't make that decision every two weeks to forgo dinner out, or not to buy a book or music or whatever. It's made for me, because I don't have it available - it's already been siphoned off before it landed in my checking account.

I've also worked hard to develop new income streams (and those go straight to the brokerage account). Currently they don't produce much, but they're growing over time and may bear decent fruit in another couple of years. These include my articles here on Seeking Alpha, as well as the two novels I've published.

A few of the Brown Bag Portfolio Rules:

  1. All core holdings must pay at least a 3% dividend
  2. Use limit orders only
  3. DRIP (dividend reinvestment program) everything
  4. Make purchases in blocks of $1,500 at a time (adjusted upward each year)
  5. Have an overall goal for the BBP
  6. Invest - don't trade

I already mentioned that for my core holdings I want to have each paying at least a 3% dividend. This is for several reasons: the first is that my timeline isn't great. I started out late in my investment cycle and I figure that I have about 15 years before I need the money. It isn't a tragedy, but it doesn't give me as long a runway as I would like. The key behind dividend investing (especially if you use dividend reinvestment programs) is compound interest. A 3% yield will double every 24 years while a 6% yield will double in 12. Now this isn't exact due to the fact that equities change in price and therefore the time period can lengthen or shorten, but it's a good rule of thumb. 24 years is outside of my time frame for my core holdings, but it's close enough, 4% is better and 5% better still since it comes in within my time frame. It should be noted, however, that the higher the yield, the riskier the stock (in theory). Due to my shortened time frame, I need to accept more risk if I am to accomplish my goals.

Limit orders. Basically, there are two types of orders (there are more, but let's keep it simple): Market Orders and Limit Orders. Market Orders purchase or sell the stock at the price the market offers at the time the order is accepted. You might end up paying more for a particular equity than you were planning. When using limit orders, you state that you want to buy or sell x number of shares at y price. If and when the market hits that price and your shares are in the block that's being sold or bought then you get the shares at that price. Limit orders give you more control over what price you're buying or selling. Always use limit orders. Although there is nothing more frustrating than missing an order by a penny or two, it's worth it in the long run.

DRIP. Although there are arguments against utilizing DRIP (dividend reinvestment programs) I find them quite useful. Not only does this allow compounding interest to work for your investment, I don't own enough in any of my holdings at this time to make it more valuable for me to use the dividends elsewhere.

Buying in blocks of $1500. This is new for me for 2019. In 2018, I bought in blocks of $1000, and in 2017, I did it in blocks of $500. This rule is to keep my commission charges low and also to make each purchase significant enough to: 1- make the purchase worthwhile and 2- keep me from impulse buying. Yes, I miss out on some purchases, but this rule has also kept me from making some serious mistakes.

Having an overall goal for your portfolio. Whatever your reason for investing, have a clear goal for your portfolio. It might be retirement income, saving for a home or a bucket-list vacation. For me, the goal is to have the dividends generated by the Brown Bag Portfolio pay the mortgage, taxes, and insurance for my home. The exact goal doesn't matter, but having a goal gives you a metric that allows you to evaluate the portfolio's performance.

My Invest/Don't Trade rule is another rule I designated to keep myself from making rash decisions. The Brown Bag Portfolio has a fifteen-year horizon and therefore its core positions are designed with holding for the long term. This doesn't mean I don't make mistakes or that I won't sell a position. One of my first holdings was in Keybank (KEY). I bought a hundred shares in the mid 12's and sold in the low 20's. I sold for two reasons, first of all the dividend was low and I felt that I could earn more by placing it elsewhere. Secondly, I felt that it had run up too far, too quickly and was ripe for a pullback. I was right in my assessment and have never looked back. Conversely, I sold out of Ares Capital (ARCC) during a six-month period where it was doing poorly. That was a mistake and the stock has gained several dollars per share from where I sold it at a small loss. On the flip-side, Ares was discussing changing to an externally managed structure and that would have been a disaster (in my opinion), for shareholders. At the time, I felt that my decision was correct. In retrospect, it was not. Ares Capital withdrew the proposal or proposed proposal and after several months the price recovered and surpassed my original cost-basis. They are on my watch list and if they come down into the low 17's again, I will look seriously at purchasing again.

How did the BBP perform during July?

July was fairly good for the portfolio as you can see in the charts below. Although my REITs were hurt, this was mostly contained to the two that have struggled throughout this year, Apple Hospitality (APLE) and Iron Mountain (IRM). Of the two, Iron Mountain continues to be the greatest concern and that is due to its debt problem. I am, however, willing to give them more time to sort things out. Apple Hospitality's problem seems to be perception, more than anything else. With one of the lowest debt levels in the REIT space and meeting expectations over the last four quarters, you'd assume that Apple would be trading better than it is currently. In fact, it was a year ago last July, when Apple last traded above my cost-basis. Fear of recession/interest rates/trade war/world economic slowdown/ whatever the current negative forecast that is being bandied about by "smart money" appears to depress the stock value. All the while, it churns out $0.10 a share each month without breaking a sweat. Although, I'm not comfortable enough to add to my holdings here, I am content to continue to DRIP my monthly distribution and let the shares accumulate.

Brown Bag Portfolio

July 2019

Company Name

Ticker

Shares

Value

%Return

Div/Shr

Annual Div

Dominion Energy

D

41.91

$3,113.27

12.42%

$3.67

$153.80

Iron Mountain

IRM

88.09

$2,588.47

-12.65%

$2.44

$214.94

Apple Hospitality

APLE

230.37

$3,619.47

-10.68%

$1.20

$276.44

Enterprise Partners

EPD

243.10

$7,322.08

12.30%

$1.75

$425.43

AT&T

T

108.87

$3,706.58

-0.73%

$2.04

$222.09

EPR Properties

EPR

63.80

$4,748.41

13.81%

$4.50

$287.10

Main Street Capital

MAIN

76.46

$3,264.80

11.72%

$2.46

$188.09

Oxford Lane Capital

OXLC

101.42

$1,073.06

4.44%

$1.62

$164.30

British Petroleum

BP

40.60

$1,613.29

-5.70%

$2.46

$99.87

Total

$31,049.43

3.94%

$2,032.06

Div Goal

% Goal

BBP Yield %

$16,800.00

12.10%

6.80%

Div Goal 2019

% Goal

$2,520.00

80.64%

For me, the chart that actually shows me how well I'm doing and whether or not I'm on the right track is the Out of Pocket chart. Regardless of how many shares have been earned in dividends and where the price has moved on any particular day, this chart shows me exactly how much have I taken out of my pocket to buy the equities I hold and how much are they currently worth. With an overall return of 13.59%, I think I'm doing okay, even if I do currently hold one or two strongly underperforming positions.

Out of Pocket:

Out of Pocket

as of July 31, 2019

Symbol

OOP Shares

$ OOP

Shrs frm Div

Div Rcvd

Current Value

Total Rtrn

D

40

$2,626.60

1.907

$142.73

$3,113.27

18.53%

IRM

85

$2,860.85

3.09

$102.14

$2,588.97

-9.50%

APLE

205

$3,618.28

25.366

$433.58

$3,619.05

0.02%

EPD

215

$5,766.99

28.097

$748.84

$7,322.08

26.97%

T

100

$3,453.42

8.857

$279.95

$3,706.58

7.33%

EPR

59

$3,839.26

4.797

$332.59

$4,748.41

23.68%

MAIN

70

$2,672.20

6.459

$248.22

$3,264.80

22.18%

OXLC

80

$810.40

21.423

$217.46

$1,073.06

32.41%

BP

40

$1,686.00

0.596

$24.60

$1,613.29

-4.31%

Total

$27,334.00

$2,530.11

$31,049.50

13.59%

This month I've also included a couple more charts that I keep. The first gives some historical perspective on the Out of Pocket Chart, visually representing each July milestone. While the second provides a simple monthly read on the overall value of the portfolio.

Although I am still in a cash building phase, the turbulence we've already experienced in August is tempting. As I write this British Petroleum (BP) is at a very tempting level to double my position and if Enterprise Partners (EPD) had fallen below $28, I would have wanted to add more shares. As of today, however, I've held off and am waiting for better opportunities.

I expect that oil will stay depressed for much of the next 12-18 months, perhaps a bit longer - at the very least it will remain under pressure until we resolve out trade dispute with China one way or another. For that reason, I think it's likely that I'll find an even better time to add to my British Petroleum holdings.

EPR Properties (EPR) has also been a favorite of mine for some time and I would like to add more, but I'm waiting for a more favorable time. Whether that will be later in August or maybe this October, I'm not sure.

At the moment I'm still building cash. I mentioned in a previous article that I would ideally like to have $3000.00 on hand to be ready for the next time the market has an unnecessary tantrum, but it's difficult to hold off when bargains flash across my screen.

Thanks again for reading and commenting.

Disclosure: I am/we are long D, IRM, APLE, EPD, T, EPR, MAIN, OXLC, BP. 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.