Seeking Alpha

Everything Changes: A Brown Bag Portfolio (Two) Month Review

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Includes: APLE, BXMT, D, DOW, NEWT, OXLC
by: Michael Hesse
Michael Hesse
Value, long-term horizon, dividend investing
Summary

Why free trades forced a change in my portfolio strategy.

Why I sold out of my Dominion Energy position.

How the Brown Bag Portfolio did over the past two months.

Where we are going from here.

Normally, I produce a monthly review of my Brown Bag Portfolio, but this year, I skipped the September review. Mostly this was due to my eldest daughter's wedding and the extended time I was away from my computer, but also due to the fact that in early October all the major online brokerages changed to a commission-free trading model. This event caused me to reevaluate my investing rules and radically changed my overall portfolio.

First, let me note that prior to early October, I had instituted a rule that only "allowed" me to buy shares in blocks of $1,500 or more. I instituted this rule in order to keep my commission charges low and to keep my cost basis under control. It also affected my decision about which stocks to buy. For example: if I was charged $6.95 per trade and I was interested in a $150 stock, I had to wait until I had $1506.95 saved up and when I did purchase the 10 shares my cost basis was therefore $0.695 cents above the initial purchase price. It also made the timing of that particular purchase much more critical as I would be unable to purchase more shares for an extended period of time if the price came down. It made purchases of higher priced stocks unattractive.

It also made small purchases (or nibbles) of low cost/high volatility funds unreasonable. I might and do want small slivers of some of these funds, in order to judge for myself as to whether or not they would make smart investments. I can track things as much as I want in watchlists, but nothing teaches as well as experience. If I could nibble at some of these funds without committing large (to me) amounts of money, I would be able to learn for myself if they were good for my portfolio. As valuable as the comments and advice given on SA and other sites can be, it's not the same as having some skin in the game, so to speak.

And thirdly, it made the accumulation of mid to high ($50 - $100+) priced stocks difficult to do in a timely manner. For example. I bought 40 shares of Dominion Energy (NYSE:D) over a year ago when it was priced in the low $60s. I had always intended to grow my holding to approximately 90 shares, but the price increased faster than I was comfortable with. I didn't want to add just $10 shares when it was in the low $70s and made sense (and as I stated earlier, a $10 share purchase would add almost 70 cents to my cost basis (in addition to the already greater price) and by the time I had another $1,500 ready to commit, the price had gone up enough that it didn't make sense to me to continue to add. Eventually, I came to the conclusion that the price wouldn't come down to a point that was reasonable for me, and therefore, I'd have to be content with a much smaller position than I wanted. With zero commissions, I could have added 2 or three shares a week as the price rose. Even if I hadn't gotten to the 90 shares I wanted, before the price rose above $80 a share, I'd be close enough that I'd be willing to continue to hold and wait for a short-term dip to finalize my position.

The converse is also true. When AT&T (NYSE:T) dropped below $30 I held. With a cost basis of $34 and change, I was still getting nearly a 6% yield, but I was unwilling to commit another $1,500 to the holding. I was relatively sure that the price would eventually recover, but I wasn't willing to make that commitment at that time. However, adding 10 shares here or there at $29 and $30 would have slowly brought my cost basis down and ultimately been a very wise choice. I was in a similar position with Apple Hospitality (NYSE:APLE) a REIT that has, for more than a year, been in the red (for me), but one which I generally believe in, just not enough to buy another 100 shares when it dropped to the low $14s… purchasing 20 shares here and there at that price, however, would have made sense and ultimately put me in a better position.

As we roared into October, I had a lot of things on my mind as far as the Brown Bag Portfolio was concerned. I sold out of my position in Dominion Energy at 52-week highs and used the cash to make initial purchases in several positions that I was interested in. As I mentioned earlier, I sold my position due to my belief that I wouldn't be able to get to a full position without greatly violating my cost-basis. If I had 80-90 shares, I would have held.

All of the purchases I made during October were nibbles that I expect to add to over the next several months if/when prices fall below my current cost basis. In some cases, like Blackstone Mortgage Trust (BXMT), I purchased about half of what I ultimately want to hold and will add to it when it comes down a dollar or so a share. I doubt that I'll add to this holding this year. I picked up 20 shares of Dow Inc (DOW) at $50.35 and will slowly add 10 shares at a time whenever I can lower my cost basis until I get to the 80 shares that I'd like to hold. I expect DOW to continue to be rather volatile as news waxes and wanes about the trade war and I expect that its price will continue to be depressed for some time. If I can reach my goal of 80 shares with a cost basis in the 40s over the next six months or so, I'll be very pleased with this holding and let it run. Newtek Business Services (NEWT) is an interesting BDC who's variable dividend is misunderstood. I may add another 20 shares this year, but will most likely wait for a price drop when the Q1 dividend is announced, which I expect to be significantly lower than the current 71 cents a share. At that time, I'll add and probably settle in at 80-100 shares.

I also added three funds to the mix: First Trust Specialty Finance (FGB), Ivy High Income Opportunity (IVH), and Clough Global Opportunity (GLO). These are all high yielding funds that I expect to add to over the coming year, but just in nibbles as the price comes down. Along with Oxford Lane (OXLC) and Eagle Point Credit (ECC), this portion of my portfolio is more experimental and not initially designed for long-term holds. I want to keep the funds portion of my portfolio to a maximum of 20% (it currently stands at just above 11%). I will not be adding to Oxford Lane other than through DRIP over the next six months, although I may add to Eagle Point Credit at some point. Both of these funds are CLOs (collateralized loan obligation funds), and I'm still judging their performance.

Where the BBP stands today

As always, I include two charts. The first chart shows my current holdings and their return at the end of October 31. The second shows how much money actually came out of pocket and where those positions now stand. In most cases, even if the first chart shows a paper loss, the second shows a real gain. Apple Hospitality is probably the best example of this. According to chart 1, I've got a -6.15% return on this holding, but if you look at the second chart, I'm at a +6.9% gain if I were to sell out. This is all due to the compounding effect of reinvesting the dividends (which are slowly driving down my cost-basis (in some cases) and increasing the overall size of the position). This is why I DRIP all of my holdings, in order to take advantage of the compounding interest.

Brown Bag Portfolio

Oct 2019

Company Name

Ticker

Shares

Value

%Return

Div/Shr

Annual Div

DOW Inc.

DOW

20.00

$1,009.80

0.28%

$2.80

$56.00

Eagle Point Credit

ECC

50.67

$766.61

-5.50%

$2.40

$121.61

Apple Hospitality

APLE

234.70

$3,867.87

-6.15%

$1.20

$281.64

Enterprise Partners

EPD

246.90

$6,426.68

-3.02%

$1.77

$437.00

AT&T

T

110.48

$4,252.49

12.25%

$2.04

$225.39

EPR Properties

EPR

64.74

$5,036.12

18.65%

$4.50

$291.33

Main Street Capital

MAIN

77.56

$3,338.96

12.46%

$2.46

$190.80

Oxford Lane Capital

OXLC

187.15

$1,747.99

-5.08%

$1.62

$303.18

British Petroleum

BP

61.28

$2,323.12

-5.34%

$2.46

$150.75

First Trust Spc Fin

FGB

50.00

$313.50

3.64%

$0.70

$35.00

Ivy High Income Op

IVH

25.00

$337.00

0.60%

$1.20

$30.00

Clough Global Op

GLO

80.00

$735.20

1.77%

$1.07

$85.60

Newtek Bus Srv

NEWT

40.00

$881.20

-0.90%

$2.84

$113.60

Blackstone Mort Trst

BXMT

35.00

$1,270.50

0.83%

$2.48

$86.80

Total

$32,307.04

2.89%

$2,408.70

Div Goal

% Goal

BBP Yield %

$16,800.00

14.34%

7.68%

Div Goal 2019

% Goal

$2,520.00

95.58%

Out of Pocket

as of Oct 31, 2019

Symbol

OOP Shares

$ OOP

Shrs frm Div

Div Rcvd

Current Value

Total Rtrn

DOW

20

$1,007.00

0

$0.00

$1,009.80

0.28%

ECC

50

$801.00

0.668

$10.00

$766.61

-4.29%

APLE

205

$3,618.28

29.701

$503.13

$3,867.87

6.90%

EPD

215

$5,766.99

31.895

$855.80

$6,426.68

11.44%

T

100

$3,453.42

10.483

$335.47

$4,252.49

23.14%

EPR

59

$3,839.26

5.74

$404.71

$5,036.12

31.17%

MAIN

70

$2,672.20

7.56

$285.56

$3,338.96

24.95%

OXLC

160

$1,572.00

27.151

$269.92

$1,747.99

11.20%

BP

60

$2,405.00

1.28

$49.57

$2,323.12

-3.40%

FGB

50

$302.50

0

$0.00

$313.50

3.64%

IVH

25

$335.00

0

$0.00

$337.00

0.60%

GLO

80

$722.00

0

$0.00

$735.20

1.83%

NEWT

40

$885.00

0

$0.00

$881.20

-0.43%

BXMT

35

$1,260.00

0

$0.00

$1,270.50

0.83%

Total

$28,639.65

$2,714.16

$32,307.04

12.81%

Total Profit

$3,667.39

Now, in order to be completely honest, I have been advised multiple times to take the income generated by the CLO funds as income and not reinvest it. That is something I will do at some point, but the monthly income generated is honestly too small at this point for that to be worthwhile. However, when it buys a half a share (for ECC) each month or 2+ shares (for OXLC), my holdings may grow to the point in a couple of years where it will be worthwhile to turn off the drip for these. We'll just see. Maybe my detractors will be right in the end and maybe they'll be wrong, but either way, my readers will be able to see for themselves.

In order to reach my dividend goals for the Brown Bag Portfolio within my time frame (15 years), I need to accept a higher degree of risk, than if I were building a portfolio with a 40+ year time frame. For me, that higher degree of risk is 20% of my portfolio, while I continue to build the other 80% around lower yielding, but generally less-volatile positions.

Ultimately, the goal of this series of articles is NOT to offer investment advice, but rather to document the journey I'm going through. I have and will make mistakes, and I'll write about them here. If these higher risk investments turn out to be huge mistakes, then maybe my documenting them will save someone else from making that mistake. But if I'm right about managing the risk, and it turns out well for me, then perhaps some of my readers may benefit from that as well.

In the future, I expect to make a few changes with how I present this information. I will be changing my charts a bit... breaking the funds out into their own section (for ease of viewing) and adjusting what information is displayed. I expect to implement those changes in the next article and will welcome comments on whether or not it works for my readers.

As far as the next few months are concerned, I'm looking at adding an additional 20 shares to my position in British Petroleum if I can get them in the $36ish range. If so, that position will be filled out for the time being. I want to add 40 shares to NEWT, but expect to add those shares in early 2020 (when and if the price falls due to the variable dividend). I would like to double my current position in BXMT if I can get the shares at $35 or below. I will also add to my three new funds opportunistically when the price falls below my current cost basis.

After that, I feel that I need to seriously look at initiating positions in the Health Care and Industrial sectors, as well as adding a new position in the Utilities sector. I currently hold 9 positions in my core portfolio and 5 funds. I want to keep my core portfolio to no more than 15 positions, so I need to research where it would be best to add to the remaining 6 slots.

Thank you all for reading and best of luck in your investment journeys.

Disclosure: I am/we are long DOW, ECC, APLE, EPD, T, EPR, MAIN, OXLC, BP, FGB, GLO, IVH, NEWT, BXMT. 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.