Okay, so it’s not that bad out there (though most of us received unpleasant brokerage reports for August 2019). Furthermore, the last 12 months have been an up-and-down affair with the S&P 500 currently sitting about where it started…so what’s different now?
Certainly, headlines have darkened as market prognosticators have soured (even more than usual during this mostly ‘unloved’ decade long bull market).
Now normally I would view negative headlines as a contrarian bullish indicator, yet I feel an unease in the markets as business confidence (at all levels) have ebbed and even the strong consumer sentiment has begun to show cracks. If the adage about the stock market being 6-12 months ahead of the economy is correct, then I fear that the long-awaited recession is in the cards for 2020 (with the market weakening meaningfully sometime later this year or early next).
Despite my gloominess, I am cautiously optimistic that this old bull has a few more tricks to play (especially the political imperative that the President and Senate face to strike a trade deal to keep Republican control over these offices). Also, the Fed seems likely to continue to cut rates in the face of further weakness. Furthermore, longtime readers will note that I have been consistently bullish and a ‘buy the dips’ guy over the past few years…and I’m continuing with that theme as I remain 85% invested. However, a month ago I was 93% invested and I am continuing to shed my riskier positions as I ask myself ‘would I hold this stock through a recession?’
If there is real weakness in asset prices, I will likely buy all the way down as opportunities present themselves (after all, only 1 person gets to trade at the top or the bottom). Afterall, as a younger person, I should applaud any ‘discount shopping’ that I can participate in. However, in the meantime, I will probably continue to shed risk assets and bunker down for choppier seas (since I don’t feel like the upside opportunity eclipses the downside risks at this time). At the same time, I don’t believe we are going to have the massive wipeout of another Great Recession, likely just a run of the mill soft patch. So going to cash (or low yielding bonds) doesn’t feel like the right way to continue to protect/generate long-term wealth. I suppose it’s just time to buckle my chin strap and deal with the unease that I’m increasingly feeling.
August 2019 Review
August 2019 was again dominated by tweetstorms and the trade war which made for poor market performance. For the month, the S&P 500 posted a -1.7% result and I was worse at -2.7%. YTD, I am up 5.1% vs the 18.2% gains for the index (before dividends are considered). However, my 5.8% forward dividend yield on invested capital keeps crushing the less than 1.8% yield of the index.
On a much more pleasant note, August 2019 rewarded me with realized dividends of $1,146 (versus $786 in 2018…a massive 46% increase…and my second monthly 46% YoY increase in a row). For the last 12 months, my portfolio delivered $15,761 in cash to me (up over 12% from my 2018 total). My realized yield for the trailing twelve months was 4.9% 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!!
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 August 31, 2019
|Security||Type||Div Yield||Market Value||Last Month Value||Monthly Gain/Loss (%)|
|SPDR S&P 500 High Dividend ETF (SPYD)||ETF||4.5%||$21,630||$22,830||-5.3%|
|Fst Tst Dow Jns Glbl Sel Dvd Idx ETF (FGD)||ETF||6.4%||$10,885||$11,555||-5.8%|
|Invesco S&P Emerging Markets Low Volatility ETF (EELV)||ETF||5.7%||$9,108||$9,796||-7.0%|
|PowerShares S&P 500 High Div Low Volatility ETF (SPHD)||ETF||4.1%||$8,102||$8,420||-3.8%|
|FlexShares Intl Quality Dividend Defensive (IQDE)||ETF||5.1%||$6,300||$6,633||-5.0%|
|Invesco S&P Intl Devd High Div Low Vol ETF (IDHD)||ETF||4.2%||$5,490||$5,700||-3.7%|
|iShares Nasdaq Biotechnology ETF (IBB)||ETF||0.1%||$5,147||$5,489||-6.2%|
|UBS ETRACS 2x US High Div, Low Vol ETN (HDLV)||ETN||11.2%||$5,113||$5,516||-7.3%|
|iShares Evolved U.S. Innovative Healthcare ETF (IEIH)||ETF||1.4%||$4,912||$5,134||-4.3%|
|Xtrackers MSCI World ex US Div Yld Hdgd ETF (HDAW)||ETF||4.8%||$4,738||$4,976||-4.8%|
|Horizons NASDAQ 100 Covered Call ETF (QYLD)||ETF||10.6%||$4,532||$4,605||-1.6%|
|Invesco S&P SmallCap High Div Low Vol ETF (XSHD)||ETF||4.9%||$4,471||$4,752||-5.9%|
|iShares MSCI Australia ETF (EWA)||ETF||5.3%||$4,336||$4,497||-3.6%|
|iShares Asia/Pacific Dividend ETF (DVYA)||ETF||6.2%||$4,196||$4,421||-5.1%|
|iShares MSCI China Small Cap ETF (ECNS)||ETF||5.8%||$3,859||$4,298||-10.2%|
|Global X MSCI Portugal ETF (PGAL)||ETF||7.6%||$2,963||$3,201||-7.4%|
|iShares International Select Dividend ETF (IDV)||ETF||6.2%||$2,948||$3,084||-4.4%|
|iShares MSCI Malaysia ETF (EWM)||ETF||3.5%||$2,792||$3,003||-7.0%|
|Global X MSCI China Comm Services ETF (CHIC)||ETF||0.5%||$2,184||$2,440||-10.5%|
|Iron Mountain (IRM)||REIT||7.7%||$12,740||$12,530||1.7%|
|Blackstone Mortgage Trust (BXMT)||REIT||7.1%||$10,440||$10,644||-1.9%|
|Royal Dutch Shell (RDSB)||Company||6.7%||$8,364||$9,984||-16.2%|
|Sabra Health Care REIT (SBRA)||REIT||8.3%||$7,264||$6,549||10.9%|
|New Residential Investment (NRZ)||REIT||14.2%||$7,232||$7,941||-8.9%|
|Tanger Factory Outlet REIT (SKT)||REIT||10.1%||$7,070||$7,985||-11.5%|
|Occidental Petroleum (OXY)||Company||7.3%||$4,348||$5,023||-13.4%|
|Cardinal Health (CAH)||Company||4.6%||$4,313||$4,760||-9.4%|
|KKR Real Estate Finance Trust (KREF)||REIT||9.0%||$3,782||$4,001||-5.5%|
|Kinder Morgan (KMI)||Company||4.9%||$3,730||$3,870||-3.6%|
|PacWest Bancorp (PACW)||Company||7.1%||$3,408||$3,882||-12.2%|
|Gilead Sciences (GILD)||Company||4.0%||$3,177||$3,415||-7.0%|
|People's United Financial (PBCT)||Company||4.9%||$2,874||$3,349||-14.2%|
|VARIOUS POSITIONS OF <$1,000 VALUE||VARIOUS||2.0%||$3,151||$3,472||-9.3%|
|FIXED INCOME TOTAL||4.1%||$6,765||$6,800||-0.5%|
|iShares Long-Term Corporate Bond ETF (IGLB)||ETF||4.1%||$6,765||$6,800||-0.5%|
|SCHWAB ROBO-ADVISOR TOTAL||2.0%||$12,729||$13,043||-2.4%|
|TOTAL + CASH||$47,281||4.9%||$317,267||$326,621||-2.7%|
Portfolio Moves in August 2019
SHARE BUY– Pfizer (PFE): Bought 100 shares of this pharma giant at $34.75 on August 20.
- Reasoning: It has been a brutal moth for Pfizer as its stock price has been cut by 25%, but I have been hoping for an attractive entry point for a while, so I pulled the trigger on this 4.2% yielder.
SHARE BUY– Iron Mountain (IRM): Bought another 200 shares of this data REIT at $31.85 on August 30.
- Reasoning: While the stock chart shows a falling knife, I believe that IRM is one worth holding through the next recession (and collecting the 7.7% yield).
SHARE SALE– Morgan Stanley (MS) - Pref A (MS+A): Sold my whole position (200 shares) of this floating bank preferred stock at $22.05 on August 22.
- Reasoning: Given that interest rates seem to have peaked for this cycle, the floating feature of this preferred was no longer attractive enough to overcome its poor performance in down markets, so I sold at a tidy 8% gain (plus years of ~5% dividends).
SHARE SALE– SPDR S&P International Dividend ETF (DWX): Sold my whole position (200 shares) of this international dividend ETF at $38.10 on August 27.
- Reasoning: I wanted to raise cash and this ETF was a lower yielder (4%) with a higher fee level (0.45%) than most of my international ETF holdings. I sold this ETF for approximately what I paid for it a few years ago, so the 4% annual yield was my only gain.
SHARE SALE– Bank of America (BAC) - Pref L (BML+L): Sold my whole position (200 shares) of this floating bank preferred stock at $22.20 on August 27.
- Reasoning: Given that interest rates seem to have peaked for this cycle, the floating feature of this preferred was no longer attractive enough to overcome its poor performance in down markets, so I sold at a decent 5% gain (plus years of ~5% dividends).
SHARE SALE– Goldman Sachs (GS) - Pref C (GS+C): Sold my whole position (200 shares) of this floating bank preferred stock at $22.05 on August 27.
- Reasoning: Given that interest rates seem to have peaked for this cycle, the floating feature of this preferred was no longer attractive enough to overcome its poor performance in down markets, so I sold at a solid 12% gain (plus years of ~5% dividends).
SHARE SALE– Goldman Sachs (GS) - Pref A (GS+A): Sold my whole position (200 shares) of this floating bank preferred stock at $21.10 on August 28.
- Reasoning: Given that interest rates seem to have peaked for this cycle, the floating feature of this preferred was no longer attractive enough to overcome its poor performance in down markets, so I sold at a decent 3% gain (plus years of ~5% dividends).
SHARE SALE– Goldman Sachs (GS) - Pref D (GS+D): Sold my whole position (300 shares) of this floating bank preferred stock at $21.95 on August 28.
- Reasoning: Given that interest rates seem to have peaked for this cycle, the floating feature of this preferred was no longer attractive enough to overcome its poor performance in down markets, so I sold at a decent 6% gain (plus years of ~5% dividends).
SHARE SALE– SPDR S&P International Dividend ETF (DWX): Sold my whole position (200 shares) of this international dividend ETF at $18.95 on August 29.
- Reasoning: I wanted to raise cash and this ETF was my lowest yielder (3.1%) of my international ETF holdings. I sold this ETF for a 5% premium to what I paid for it a few years ago, so it wasn’t bad but nothing to write home about.
It was a big trading month for me as I divested myself of all my floating bank preferred stocks (as well as some of my international ETFs with poorer economics). All told, I turned over almost 20% of my portfolio. My strategy is the same (as is my 5% portfolio yield); however, I feel like I am much more prepared to weather and capitalize on spikes in volatility.
With a hat tip to Jeff Miller at NewArc Investments ( https://www.dashofinsight.com) whose ‘Weighing the Week Ahead’ is the single most valuable thing I read every week, I will separate my thoughts into two buckets: ‘Likely Signal’ for front of mind topics and ‘Probably Noise’ for things in the press that don’t bother me much at this point with regards to how it might impact equity markets. (note: the past months have seen Jeff’s indicators indicate rising caution)
- Elevated U.S. valuations versus low corporate growth expectations (the 2019 ‘earnings recession’ means that all gains this year are from multiple expansion)
- Repeated and persistent yield curve inversions (I wasn’t worried the first few times, but now the signal is becoming undeniable)
- Slowing corporate buybacks slowing (aka the last solid source of ‘bid’ in the markets)
- Rising worldwide protectionist entrenchment (aka trade wars) makes conflicts permanent (at least for a while)…I think China is going to wait for the 2020 U.S. election before making any ‘real’ concessions, the Brexit nightmare is begetting an Italian mess, as well as Japan-Korea and other regional trade disputes
- World economies continue to sag (Germany is sliding into (or already in) a recession and Argentina’s crisis has all the hallmarks of the start of a regional contagion)
- Fed rate changes (given all the instability, the Fed will probably cut rates again in 2019 but I am losing confidence in the Fed’s ability to stabilize equity markets)
- Anything 2020 politics (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.