November is now in the books, which means that I’m another step closer to financial freedom.
November was a big month for me in a couple of respects. November was one of my best months of all-time when it comes to capital gains. Also, I began phase one of the liquidation process that I discussed earlier in the month with regard to selling some equity to raise cash to pay down the high interest rate debt associated with my wife’s recent graduate school loans.
Before I go any further, I want to thank everyone for the advice/suggestions when it came to that situation in the “help me decide what to sell” article that I published last month. The Seeking Alpha community definitely gave me a lot to think about, which was great.
November Performance
My holdings posted capital gains of 3.62%, which was one of my best months of all-time. This growth figure outpaces the broader market’s results. Beating the S&P 500 on an annual basis is one of my stated goals and November is certainly helping me achieve that standard for 2019.
Thus far, my year-to-date capital gains are 26.83%, which is about one half of a percent above the S&P 500’s YTD gains of 26.36%. And, being that my dividend yield is higher than the SPY’s, once those are factored into the results, my total return should be even greater than that of the S&P 500’s.
In late November, the value of my holdings hit an all-time high. Any withdrawals that I make at the start of January will put a damper on this, but at the end of the day, when I stand back and think about all of the gains that I've experienced this year and the fact that the bull market has paid for my wife's graduate degree (and then some), I couldn't be more pleased.
Since I broke down my portfolio's weightings in the "help me decide to what to sell" article earlier in the month, I won't do that again here. But, at the end of the year, I'll do an annual breakdown, providing readers with an up-to-date portfolio snap shot.
Raising Cash
When it came to raising cash, the first moves that I made involved selling out of several positions entirely. As discussed in my “help me decide what to sell” piece, I sold all of my VEREIT (VER) shares.
Although VER has a high yield, I was happy to sell my stock because it is not a dividend grower and therefore, it does not meet my portfolio’s primary goals.
VER has been one of the worst investment decisions that I’ve ever made. I originally accumulated my position back when the company was ARCP. At the time, I thought this fast-growing triple-net REIT has the potential to be the next Realty Income (O) or National Retail Properties (NNN). Well, it turns out that I couldn’t have been more wrong as accounting scandals rocked the company. Management changed, the company’s name changed, and I was left holding a bag that was substantially lighter than the one I originally purchased.
For years, I’ve held onto those shares because of the high yield it provided, waiting to get back into the black so that I could avoid selling at a loss. One of the main principles that I’ve built my portfolio on is capital preservation and to me, it rarely makes sense to sell at a loss because doing so ensures that you lose money. When a beaten-down name is contributing to my passive income stream, I’m generally happy to be patient hold onto shares while I wait for the stormy weather surrounding them to pass.
But, now that I’m in need of cash, VER was an easy sale target, even though I was still in the red. On 11/21/19, I sold VER for $9.73, locking in 19% losses. Over the lifetime of my VER investment, my total returns were positive (due to the high yield that I’ve collected over the years). However, this investment drastically underperformed the broader markets and if I had access to a working time machine, I certainly would have avoided ARCP in the first place.
I also sold my entire position in Berkshire Hathaway (BRK.B) on 11/21/19 at $216.76/share. In doing so, I locked in 98.8% profits. I’m sure that this decision will seem controversial to some, but at the end of the day, BRK.B was a relatively easy name for me to cut when I stood back and looked at my holdings because of the fact that it didn’t pay a dividend.
Berkshire was one of just 3 non-dividend-paying companies that I owned shares of. The other two are Alphabet (GOOGL) and Amazon (AMZN). Unlike the two FANG names, Berkshire isn’t a high-growth stock. I can justify the exposure to names like AMZN and GOOGL because of the massive long-term growth potential that they offer me. However, BRK is a relatively defensive name and I decided that I’d rather fill that niche with consumer staples, telecoms, and utilities that not only offer low beta, but also, high dividends.
When it comes to Berkshire’s defensive nature, I also worry about the name a bit in today’s algorithmically driven market because Berkshire is the largest holding in the Financial Select Sector SPDR (XLF). I worry about the financials when we head into the next recession and whether it’s totally fair or not, BRK.B shares will be lumped into that selling if/when it happens.
It was tough selling BRK.B because of the massive cash hoard that Buffett has built up in recent years. If you know anything about my stock selection style, I love owning cash cows. But, whether or not Buffett’s elephant gun is locked and loaded or not, I decided to move on from the name in an effort to preserve the strength of my passive income stream. And honestly, although I wondered if I would, I haven’t felt a tinge of regret since.
I continue to believe that Berkshire is a wonderful company, but other than VER, I thought that all of the names that I am invested in are wonderful companies and since I had to sell something, picking something that wouldn’t hurt my dividend stream made the most sense.
And lastly, sticking with my conservative approach when it comes to the ownership of financials, I sold my position in Charles Schwab (SCHW). Like BRK.B, I believe that SCHW is a wonderful company. To me, it’s the blue chip name in the brokerage space. This is why I bought shares at $35.44 back on October 7th, when they experienced a precipitous sell-off due to the zero-dollar trade news. However, here we are, less than 2 months later, and I was sitting on roughly 36% gains because the market realized its valuation folly and the stock got a bump because of M&A news related to SCHW’s acquisition of TD Ameritrade (AMTD).
I like the SCHW/AMTD tie-up. To me, it will create a behemoth in the brokerage space with size and scale that will make it very difficult for the competition. But, the margin of safety that I received when buying shares in the mid-$30s was no longer there in the upper $40s after the AMTD news was announced (I think that SCHW’s fair value lies somewhere in the $40-$42 range).
Because of this, I decided not to be greedy and simply sell my shares, taking strong profits before another rate scare drove the financials back down. I sold at $48.17 on 11/21/19, closing out what ended up being a fabulous short-term trade.
Replacing Lost Passive Income
With phase one of my liquidation process completed (I decided to wait until the end of the year to potentially make another round of sales. Generally speaking, when I build positions, I like to do so over time to spread out my risk along the time horizon, so doing the same thing when it came to building up my cash position made sense to me as well) I decided to embark on a bit of portfolio rebalancing (or more aptly put, income stream repair).
When I sold VER, I put a little dent in my income stream and I wanted to make a move or two to repair that. Being that I’m currently in the business of raising cash, I couldn’t do so by deploying new capital. Instead, I knew I’d have to sell a lower-yielding name or two and use the proceeds to replace them with higher-yielding equities. So, with that in mind, we arrive at the last trade(s) that I made during November: selling my CSX (CSX) shares at $71.61 on 11/25/19 and using the proceeds to buy Cisco (CSCO) at $45.46.
CSX was a relatively new position for me. I bought the shares that I sold on 7/17/19 at $71.27. I continue to believe in the rails as an efficient transport method capable of creating long-term wealth for shareholders (if bought at the right price), though when browsing my portfolio for potential low-yielding stocks to sell, CSX stuck out because of the highly cyclical nature of its business. I bought those shares when CSX experienced a double-digit dip in response to Q2 earnings. In the ~17x range, I thought that CSX was fairly valued and picking up shares of a high-quality dividend grower like CSX at fair value generally leads to solid long-term results. CSX still trades in that range and analysts are calling for mid single-digit EPS growth in 2020 and low double-digit growth in 2021, so I wouldn’t be surprised to see these shares move higher in the coming years.
But, CSCO is cheap as well (here’s a link to a focus ticker piece that I wrote regarding CSCO’s recent weakness) and since its yield is more than twice the size of CSX’s, swapping out one for the other made sense to me when it came to attempting to fill in the hole that the VER sale created.
This trade alone did not get me back to the break-even point, but it was a step in the right direction. Moving forward, I will continue to make trades with increasing my passive income in the short-term in mind, so hopefully, I’ll be able to repair the damage that selling VER did by early 2020.
Dividend Income
During November, my passive income posted 0.8% y/y growth. This was my lowest y/y growth month on the year, though I’ve come to expect this from the Feb/May/August/November payments because the biggest contributors during this cycle are the telecoms, AT&T (T) and Verizon (VZ), which don’t offer much in the way of organic dividend growth. Apple (AAPL) and Starbucks (SBUX) are the main growth vehicles supplying dividends during this cycle, and each of these names posted below-average dividend growth in 2019 as well. Furthermore, I trimmed both AAPL and SBUX earlier in the year. So, all in all, I’m pretty happy to see that the monthly dividend total was higher y/y.
Year-to-date thus far, my passive income is up 17.36%. This is great. It’s above my 10-12% annual dividend growth target. Also, it's pretty easy to forecast full-year dividends at this point in time and since my December dividend estimate is likely to be ~25% higher y/y, it's looking like my full-year dividend total for 2019 will be ~18.15% higher than 2018’s total. Assuming this is true, 2019 will be a great year for me and my family.
What makes this ~18% y/y growth so exciting (to me, at least) is the fact that I’ve generated it without adding new capital to the portfolio. I’ve discussed this in prior monthly update articles, but for those who haven’t been following along, because of my wife’s situation as a full-time student for much of the last 2.5 years, we haven’t been able to add to our savings. Instead, I’ve actually had to make several withdrawals from the brokerage accounts to pay for things like tuition and large bills that my lone income couldn’t cover.
Knowing that we’d be cash-strapped in the short term, I managed the portfolio carefully, using active trading to organically increase the passive income that our holds produce, by selling high (meaning that yields were lower) and buying low (meaning that yields were higher). This active management was a bit out of character compared to the first 4 years or so of my DGI portfolio’s lifespan, but I learned a lot of valuable lessons regarding using active management to achieve income goals and I’ll certainly continue to put this practice to use moving forward due to the success that I’ve had with it in recent years.
Once my wife and I get our household debt situation cleaned up a bit, we’ll be able to begin to plow excess income back into the market, generating even higher passive income growth.
The time line for this happening will depend on whether or not I decide to pay off all of the debt in the short term or only pay off some and refinance the rest. Right now, I’m still looking over the various options in that regard. But, the one thing that I do know is that if I do decide to liquidate holdings to pay down debt, I’m going to do all that I can to maintain the current strength of my income stream because the more and more that I thought about it, the more and more sure I was that this was the right thing to do.
Until next month, best wishes all!
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