10% Yield: Why I 'Sleep Well At Night' With A 100% High-Yield Portfolio
Summary
- Year to date performance as of November 2019.
- SWAN based on income generation and not capital appreciation.
- SWAN analysis of catastrophic dividends going to zero.
Introduction
With less than two months left to the year I can estimate organic income growth for 2019 at 5.2%. The growth is created by reinvesting surplus dividends after removing about 60% of the dividends for household expenses. The income gain is despite seven dividend reductions from the mREIT group of assets identified in my third quarter 2019 report. This 100% high yield 50/50 (BDC/mREIT) portfolio has continued to grow as evidence in my “Brokerage Performance Report”. I expect all readers to experience the same type of results this year from their own portfolio.
Figure-1; Brokerage Performance Report
The performance report in Figure-1 dated November 13th shows multiple aspects of my 100% high yield portfolio generating 10% yield. Notice the results after both 2015 and 2018 declining performance and the following 2016 and now 2019 years resulted in the massive recovery; green arrows. They are typical results when price declines based on fear. When the declining years show up, It’s time to back up the semi-truck which I did during the last quarter of 2018.
We are constantly exposed to the acronym SWAN “Sleep Well At Night” all the time when analysts talk about individual investments. I want to touch on this same concept pertaining to building an income focused portfolio. From the start, building my own retirement SWAN portfolio I took steps upfront to deliver excess income above and beyond what was required to pay expenses. The focus on building a SWAN portfolio does not depend on a few individual investments, but from the totality of all the individual moving parts working together.
SWAN Depends on Income NOT capital appreciation
In Retirement my definition of SWAN is based on portfolio total income and not capital gain based on market sentiment. In addition, my term for SWAN includes my 50/50 hedging strategy to generate income in both a bull or bear market. I have explained this hedging strategy many times in previous articles.
It is not based on individual stocks changing their dividend levels, but the ability to control growth through reinvestment. Don’t let your portfolio become a Turkey (turns out worse than expected) based on price volatility, but the income created by your holdings.
It’s the continued income creation through reinvesting surplus dividends not needed for expenses. Once your focus changes from price to income, the threat of falling price becomes motivation to go shopping. Your attitude changes and with each purchase your income jumps.
Take control of your investments and focus on what you can control (dividend income) and let price tag along taking advantage of price declines. It’s that simple to SWAN when your portfolio generates massive amounts of income well ahead of your distribution.
Remember stress is caused by not knowing what to expect from the market and your investments. Market price everyone focuses on for gain is controlled by others trying to forecast the future. It’s my experience to focus on creating income and let price move at its own pace. Both income and portfolio balance naturally grow over time, it’s that simple.
Pre-Retirement Background
When I first started my journey trying to find out how to replace my paycheck six years before retirement there wasn’t any high yield portfolio articles I could draw upon. When I asked questions in articles, all I could get was stay away from high yield and join the DGI (Dividend Growth Investing) crowd.
The two back-to-back recessions were like a reset to my accumulated retirement account that took years to break-even. Since I had a low portfolio balance after working 40 plus years, I needed to think outside the typical DGI box. Income yields for DGI stocks were in the 3 to 4% range. This low yield would not allow me to retire at my FRA (Full Retirement Age) and I would have to take drastic action to my current expenses.
There were articles about individual high yield stocks, but I could not find high yield portfolios like we see now on Seeking Alpha. To make a long story short, I decided to create a 100% high yield portfolio with a target yield of 10%. Needless to say, when I wrote my first article back in 2014, I was meet with lots of push-back telling me you will crash-and-burn in retirement, it can’t be done. Oops; Still here!
Now retired and taking a distribution, another consideration revealed itself during the 2018 market decline when I retired, see Chart-1. I designed my high yield portfolio not dependent on price, but the tangible income cash flow. If not for my income focused design I would have needed to sell shares to pay expenses. Let’s see how this would have worked out. . .
SWAN case for High-Yield not Low-Yield
Let’s say my portfolio was designed with a DGI portfolio yielding 3.3% when I began taking a distribution at the start of 2018. My actual income would have been 0.033 x 500K producing $16,500 of income. I needed $31,000 (IRA distribution) along with Social security to pay expenses, but my portfolio only produced $16,500.
During the 2018 market decline I would have needed to sell $14,500 in stock reducing my yearly forward income level. When looking at the 2018 performance Chart-1 you see the portfolio declined from about 500K to 463K an 8% reduction. If I needed to sell shares for income the decline would have reduced my balance even further (selling low; not high).
See what just happened? The declining portfolio balance would have produced less future income by selling shares. This action during a declining market is very stressful. The market recovered in 2019, but the income reduction would have already occurred.
Chart-1, ten-month performance chart
Notice the large yellow arrow on the top half of the chart, showing a balance decline. The bottom half shows how the total income generated actually increased in 2018. The red bars are my distributions to pay expenses and the green bars are surplus dividends purchasing more income producing shares. As the market declined in 2018, I was purchasing shares at reduced pricing. Always having cash on-hand with surplus dividends coming in every month keeps me in the accumulation phase even in retirement.
The typical stress level of price declining fear was replaced with greed buying shares on sale and instantly increasing my cash flow along the way. This method turns the market on its head by reversing the common investment pattern from price-fear to income-joy. Not being forced to liquidate stock for expenses reduces the stress level and makes the SWAN effect a reality.
SWAN based on Catastrophic Dividend Risk
The following table was created using one of the POT (Portfolio Online Tracker) applications that takes your required distribution (mine is currently 60% of total yearly income) and determines how many of the highest payers would need to go to zero before interrupting my withdraw. The table below shows 12 stocks about 32% going to zero as a worst-case event. This table demonstrates the SWAN distribution survivability based on catastrophic risk analysis. Knowing this element of a portfolio design drastically reduces stress.
Distribution = $31,442, 12 Stocks Removed, Income Loss = $21,146 | ||||||
Rank | Symbol | Yield | Shares | Div/Shr | Cur-Income | AtRisk-Inc |
1) | (MORL) | 22.90% | 640 | 3.06 | $1,958.40 | $0.00 |
2) | (ARCC) | 8.57% | 1,216 | 1.6 | $1,945.60 | $0.00 |
3) | (NRZ) | 12.46% | 960 | 2 | $1,920.00 | $0.00 |
4) | (AGNC) | 11.03% | 992 | 1.92 | $1,904.64 | $0.00 |
5) | (NLY) | 11.03% | 1,792 | 1 | $1,792.00 | $0.00 |
6) | (CHMI) | 11.02% | 1,088 | 1.6 | $1,740.80 | $0.00 |
7) | (MITT) | 11.64% | 960 | 1.8 | $1,728.00 | $0.00 |
8) | (TPVG) | 9.46% | 1,152 | 1.44 | $1,658.88 | $0.00 |
9) | (NEWT) | 9.43% | 768 | 2.15 | $1,651.20 | $0.00 |
10) | (HTGC) | 9.12% | 1,280 | 1.28 | $1,638.40 | $0.00 |
11) | (SCM) | 9.54% | 1,190 | 1.36 | $1,618.40 | $0.00 |
12) | (ARI) | 10.28% | 864 | 1.84 | $1,589.76 | $0.00 |
13) | (DX) | 11.00% | 832 | 1.8 | $1,497.60 | $1,497.60 |
14) | (SAR) | 8.77% | 666 | 2.24 | $1,491.84 | $1,491.84 |
15) | (IVR) | 11.18% | 800 | 1.8 | $1,440.00 | $1,440.00 |
16) | (ARR) | 11.92% | 704 | 2.04 | $1,436.16 | $1,436.16 |
17) | (CGBD) | 10.94% | 960 | 1.48 | $1,420.80 | $1,420.80 |
18) | (CIM) | 9.90% | 704 | 2 | $1,408.00 | $1,408.00 |
19) | (PCI) | 8.38% | 672 | 2.09 | $1,403.14 | $1,403.14 |
20) | (TWO) | 11.21% | 864 | 1.6 | $1,382.40 | $1,382.40 |
21) | (MFA) | 10.40% | 1,728 | 0.8 | $1,382.40 | $1,382.40 |
22) | (TCPC) | 10.10% | 960 | 1.44 | $1,382.40 | $1,382.40 |
23) | (GSBD) | 8.86% | 768 | 1.8 | $1,382.40 | $1,382.40 |
24) | (BXMT) | 6.94% | 550 | 2.48 | $1,364.00 | $1,364.00 |
25) | (NMFC) | 10.17% | 992 | 1.36 | $1,349.12 | $1,349.12 |
26) | (OXLC) | 17.38% | 832 | 1.62 | $1,347.84 | $1,347.84 |
27) | (CSWC) | 7.62% | 832 | 1.6 | $1,331.20 | $1,331.20 |
28) | (PMT) | 8.28% | 704 | 1.88 | $1,323.52 | $1,323.52 |
29) | (OTC:AINV) | 11.02% | 730 | 1.8 | $1,314.00 | $1,314.00 |
30) | (PFLT) | 9.79% | 1,152 | 1.14 | $1,313.28 | $1,313.28 |
31) | (TSLX) | 7.16% | 832 | 1.56 | $1,297.92 | $1,297.92 |
32) | (SLRC) | 7.98% | 640 | 1.64 | $1,049.60 | $1,049.60 |
33) | (STWD) | 8.00% | 512 | 1.92 | $983.04 | $983.04 |
34) | (LADR) | 8.03% | 710 | 1.36 | $965.60 | $965.60 |
35) | (MAIN) | 5.72% | 372 | 2.46 | $915.12 | $915.12 |
36) | (GBDC) | 7.21% | 640 | 1.28 | $819.20 | $819.20 |
37) | (ORCC) | 6.88% | 186 | 1.24 | $230.64 | $230.64 |
38) | (ACRE) | 8.66% | 160 | 1.32 | $211.20 | $211.20 |
Conclusion
My definition of risk is based on income generation just like working for a paycheck. Why should this change in retirement. The SWAN affect is subjective to a total portfolio design and not just for individual investments. We can try our best to find the best SWAN investments, but eventually they may disappoint the investor. If we look at a portfolio in its totality as a system generating income, minor setbacks in stocks or dividend reductions are just minor blips to be corrected. These are only a few considerations to protect retirement income cash flow not based on capital appreciation.
Good luck to all income seekers, Joe HYI ;-)
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.
This article was written by
Disclosure: I am/we are long ALL STOCKS IN THIS 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.