Seeking Alpha

My 20/20 Vision For The Year 2020

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Includes: BBDC, BDJ, BKCC, BKEPP, BKT, DODIX, GBT, HASI, HRZN, IDRSF, OBSV, PTY, XOM
by: Looking For Diogenes
Looking For Diogenes
Biotech, mid-cap, research analyst, dividend investing
Summary

Based on increasing warning signs impacting our economy, I will outline my approach for investing in the coming year.

I will share my rationale for each stock held in my personal portfolio and my current opinion for new investors to consider.

I will share my method for updating the monthly results for the income generated by each holding and the cumulative results.

The following list reflects actual dividend paying stocks that I hold in my personal portfolio: Barings BDC, Inc. (BBDC), BlackRock Capital Investment (BKCC), Blueknight Energy Partners - PFD Units (BKEPP), BlackRock Income Trust (BKT), BlackRock Enhanced Equity Dividend Trust (BDJ), Dodge & Cox Income Fund (DODIX), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Horizon Technology Finance Corp. (HRZN), PIMCO Corporate and Income Opportunity Fund (PTY), Exxon (XOM).

Based on this list of dividend income generating positions, with this article I wish to outline how they will make up the core position in my personal portfolio for the coming year. You might say this article is - My 20/20 Vision for the Year 2020.

We are in the final month of 2019, a year where we have seen the DJIA average hit historical highs. The DJIA closed at 23,346.24 on January 2nd, 2019. The last day of trading for November 2019, the DJIA closed at 28,051.41 for a YTD gain of 4,705.17, or a 20.15% YTD gain. The S&P 500 also had a spectacular performance for the same period. Starting the year at 2,506.85, it closed on November 29th at 3,140.98. This represents a YTD gain of 634.13, or an impressive increase of 25.29%.

It’s hard to bet against such strong indicators as the Dow and the S&P have shown over recent years. However, history has shown that at some point the joy of being long stocks will come to an end — and often it will be a sudden surprise as for the severity of the correction that will ensue.

In recent weeks, I’ve been making decisions for how I’m preparing my portfolio for the 2020 investment opportunities. Being retired and supplementing my retirement and lifestyle with my investments, I’m reducing my stake in common stocks that aren’t dividend producers. For those who follow my SA articles, you should know that I actively follow the biotech industry as these type stocks can produce massive capital gains — if you get lucky with clinical trial results and eventual FDA approvals. I’m not a market timer, so biotech investing should be based on a long-term holding horizon of at least two years, but preferably more years. This holding period should be predicated on no fundamental changes occurring in the company’s progress. Bad news for a clinical trial or disappointing revenue generation for an FDA approved drug isn’t the time to double down, rather it’s time to seek an exit strategy.

Warning Signs are Growing:

The following comments are from the Dallas Federal Reserve where they are on a one-month lag time with their data. This monthly report is currently showing several sequential months where the Texas economy is demonstrating a downward trend in key economic metrics. Considering the Texas state economy is only exceeded by the California results, investors can get a sense from a well-diversified mid-America state that has been on a roll in recent years, but now is showing troubling signs for slowing down what has been a constant growth pattern.

November 07, 2019

Texas Economy Still Growing, Though Pace Slows

The regional economy is growing at a slower pace in recent months, with Texas labor markets remaining tight. Energy activity has declined, and export growth has slowed this year. Initial unemployment claims increased slightly in early October, indicative of labor market cooling. Apartment rental markets continue to be strong, and inflation has ticked up since dipping in June.

Now we have seen the just released December numbers for the ISM Manufacturing Index coming in at 48.1 vs. the expected 49.4 reading. As for the December Construction Spending data, we saw a decline of 0.8% vs. the expected growth 0.5%. These numbers reflect the national situation, and from my personal observations of the Texas situation, it appears the Texas market is adding to this non-stellar growth in these two key metrics for our economy.

As a nation, we are drowning in debt. Corporate America’s debt is nearing $10 TRILLION – reaching a record 47% of the overall economy. In my opinion, once we get through the current Holiday Season, the coming New Year is going to bring sobering news on the economic front, especially from the big box retailers, the high-end sit-down restaurants, and the auto sales. The issue of student loan debt and with more college graduates entering the job market where they are already mired in debt, even a small retracement in the job market is going to impact retailers, car sales, and even the restaurant business. It is estimated that 70% of college graduates have student debt, with the average borrower owing more than $37,000.00 at time of graduation.

December 4th, 2019: Private-Sector Job Data

NEW YORK (Reuters) - U.S. private-sector job growth unexpectedly slowed to its weakest pace in six months in November, and goods producers and construction firms cut jobs, a private survey said on Wednesday.

U.S. companies' payrolls rose by 67,000 last month, the ADP National Employment Report said. The median forecast among economists polled by Reuters called for a gain of 140,000 jobs, with estimates ranging from 120,000 to 188,000.

It was the lowest monthly gain since May when just 46,000 jobs were created, the fewest since 2010, and continues a trend of decelerating job growth that has taken hold this year. By ADP's measure, American firms have added an average of about 159,000 jobs a month in the last 12 months, the lowest since 2011 and down sharply from an average of more than 200,000 a month at the start of 2019.

The Demographics of Our Debt Crisis:

Consumer debt was approaching $14 trillion after the second quarter of 2019, according to the New York Federal Reserve. It was the 20th consecutive quarter for an increase. The record $13.86 trillion of debt for Q2 was up $219 billion from the previous quarter and up $1.2 trillion over the previous record high of $12.68 trillion in the third quarter of 2008. There has been consistent growth in four main areas of debt — home, auto, student loans and credit cards. This is just one example of the growing debt for auto loans.

How I’m planning for 2020:

I’m not advocating that investors completely remove themselves from investing in the stock and bond markets. For those who invest with a long-term outlook for the market, they should always have some exposure to quality stocks with a proven track record. My concern is that the recent elongated upward movement in the markets has reached an over-extended level. I remember vividly — 2008! For any newcomers to investing in the stock market, and you don’t understand the reference to 2008, now would be a good time to seek out a history lesson about the markets that year.

With age and experience, there are some advantages for “older” investors like me. Over the last twenty years, I’ve allocated sizeable amounts of my investment funds into dividend paying stocks, and by a sizeable amount these investments have generated a nice increase in my net worth. Using this foundational basis of my current holdings, going into 2020, my current plans are to limit exposure to non-dividend paying investment vehicles, with the hopes to build my cash positions for what historically has been a stock market that, after retracing from a higher level, will return to an upward trend.

The following chart represents the stocks that are currently in my portfolio.

Readers should note:

  • My ownership levels and amount invested in each position varies.
  • My ownership period goes back for nearly twenty years to as recently as one year for respective stocks.
  • For some of the stocks, I use their reinvestment option to increase my position in the stock. Hannon Armstrong is one such example.
  • Such investments can experience a decline in one's initial investment capital.
  • My goal is that by spreading my investments over a wide variety of dividend paying stocks, my overall capital investment will grow, plus, my cash position will show a nice increase for 2020.

The chart reflects the following salient points for tracking.

  • I will start with a fictive portfolio holding $100,000.00 that is spread equally over the ten positions in my real personal account.
  • The starting price is the close of trading on November 29th, 2019.
  • Then the current annual dividend is shown.
  • The current annual yield percentage.
  • The number of shares that are held for the fictive account.

Going forward, and for each month, I will track the dividend income paid during the month, and then show the current total valuation of the portfolio.

Dividend Portfolio Tracking Chart as of 11/29/2019

Annual

11/29/2019

Dividend

Yield %

Shares

BBDC

$10.41

$0.60

5.76%

961

BKCC

$4.95

$0.56

11.31%

2020

BKEPP

$5.18

$0.72

13.80%

1930

BKT

$6.02

$0.36

5.98%

1661

BDJ

$9.61

$0.60

6.24%

1041

DODIX

$14.17

$0.44

3.13%

710

HASI

$29.35

$1.34

4.57%

341

HRZN

$12.49

$1.20

9.61%

801

PTY

$18.55

$1.56

8.40%

539

XOM

$68.13

$3.48

5.10%

147

Barings BDC – I shared my opinion on Barings with my SA article on January 20th, 2019. At the time of my initiation of coverage, the stock was trading for $9.60 and had a dividend payment of $0.10 per share. This represented 4.16% payment at the time.

At the closing of trading on November 29th, 2019, the common stock was trading at $10.41, a nice 8.43% capital appreciation. But the excellent news is the original $0.10 per share dividend payout has been raised to a $0.15 payout — a nice 50% increase that represents an annual rate of 5.76%. Keep in mind, Barings has outlined they are seeking an 8% dividend rate for their shareholders. Based on the $9.60 share price from January, the current rate would be 6.25%. The current good news is the capital appreciation being seen in their share prices and the potential for further growth in the dividend rate.

Keep in mind the caveats that I stated above! Based on the stellar results that Barings has shown since they created the current company by taken over the former Triangle Capital Corporation in late 2018, I see a firm pricing level forming for the common shares. I also see an excellent chance in realizing the continued growth in the dividend rate by reaching the 8% level. Based on the potential for the stability in the current share price, the 5.76% payout and further increases makes Barings an attractive stock for dividend seeking investors.

BlackRock Capital – I’ve held this position for about 15 years, and even though the stock has lost some valuation, the ample dividend (11.3%) generated that I've re-allocated to non-dividend stocks have contributed to my overall capital appreciation. I will continue to hold the shares and re-allocate the ample dividend.

Blueknight Energy Partners – I’ve held these preferred shares for nearly 10 years, and the dividend income has more than covered the decline in the asset. As of their latest quarterly report, their distribution payouts were covered by 1.4 ratio. I will continue to hold these shares but would not recommend my readers opening a position in the stock.

BlackRock Income Trust – Having held this position for more than 10 years, the cumulative dividend has returned my initial investment. The current near 6% dividend is a livable return, therefore, I will continue to hold the shares and carry the cash for a future investment opportunity.

BlackRock Enhanced Equity Dividend Trust – In the 10+ years I held this stock, the 10-year annualized return has been 10.19%. Even after taking the monthly dividend in cash, the capital appreciation is currently nearly 50% more than my initial investment. With the current 6.24% dividend payout and further capital appreciation potential, this has been a nice investment for me and should be a good place for those seeking investments offering income opportunities on a monthly basis.

Dodge and Cox Income Fund – This is the investment where you can sleep at night and not worry about the normal gyration seen in the market. The current 3.13% dividend is better than holding your cash in a money market account. And it more than covers the inflation rate that we are seeing in our economy. This is a stable funding source and therefore a great place for those seeking protection of their cash as they wait for a better environment in the stock market.

Hannon Armstrong Sustainable Infrastructure Capital - I own and hold this stock for my granddaughters’ future - the livable environment they need and hopefully the monetary resources to enjoy their lives. In October 2014, I shared my opinion for the company with my SA readers — Hannon Armstrong Sustainable Infrastructure Capital: With the Wind of Profit Blowing Them Forward.

Starting with 2013, the annual dividend was $0.42, 2014 - $0.92, 2015 - $1.08, 2016 - $1.23, 2017 - $1.32, 2018 - $1.32, 2019 - $1.34. Since the initiation of my position in the stock in late 2014, reinvesting the dividend in more shares, my capital gain in the stock has been more than 50%+, thus an annualized return of more than 10% where the current annual dividend rate is 4.5%.

For those investors not paying attention to the current undercurrents taking place in how we create our energy sources, let me refer you back to the November 7th report shown at the beginning of this article. Note the reference to the Texas economy slowing down and it being tied to the energy activity declining — and historical oil has been the crown jewel and driver of the economic growth in the state.

This is a news headline from November 21st, 2019 – Exxon Aims to Sell $25 Billion of Assets.

This is a news headline from November 17th, 2019 – Saudi Aramco in Race for IPO Record With $1.7 Trillion Top Value. It should be noted, Saudi Arabia’s leadership is clearly starting to diversify from their dependence on oil as their source of funding the nation. This IPO is simply them selling 1.5% of Aramco (ARMCO) where it is projected to generate $25.6 billion of cash, and value the total company at the $1.7 trillion.

Changes are coming in how we and the rest of the world will create the energy sources that drive our economy, heat and cool our homes and buildings, and get us from one place to another. This doesn’t mean that fossil fuels will be abandoned overnight — but the process of change is going to increase in a more rapid manner. The Exxons will not be going away, but how they generate their revenues will be changing. This coming change isn’t new. What is ironic is the actual change started long ago and came from the fossil fuels titans as this article outlines. As for the implications and what an investor should seek, is what industry/company will benefit from this growing trend to sustainable sources of energy.

It is my opinion; Hannon Armstrong has a 30-year history, and over the recent five years, management has shown a stellar record of participating in the sustainable infrastructure projects that should be the driving force of our future energy sourcing. Based on the dividend growth history and capital appreciation potential, investors seeking a growth segment for the future of our nation and the world — Hannon Armstrong is a vehicle that should provide a safe harbor for one’s investment portfolio.

Horizon Technology Finance – Horizon is a leading specialty finance operation that provides capital in the form of secured loans to venture capital backed companies in the technology, life science, healthcare information and services, and sustainability industries. Through my ownership of Horizon shares I’m invested in the biotech industry, plus more related healthcare entities. By holding these shares I’m getting a near 10% dividend that is payable on a monthly basis. Including the monthly distributions declared in the fourth quarter of 2019, Horizon has declared $12.62 per share in cumulative distributions since its 2010 initial public offering.

As mentioned earlier, biotechs have been a segment of the economy that have offered the largest potential for capital appreciation based on positive binary events impacting specific biotechs. My standard warning for biotechs has been the fact the graveyard is filled with failed biotech companies. Prime example is the recent blow-up for ObsEva (OBSV), on which I published an article where I included an extensive list of potential problems with invitro fertilization drug. I shared this article on July 31st, and the bad news arrived on November 7th, and immediately took 50% of the market capitalization out of the stock. However, by adhering to my strict rule of having a balanced position in several biotechs to spread the risk, I was saved from the ObsEva fiasco with my position in Global Blood Therapeutics (GBT). This is a link to the SA article outlining my position on the stock — at the time the stock was trading for $33.20. The good news for the stock was delivered on November 25th, when the FDA gave approval for their sickle cell therapy. The stock closed (12/3/2019) at $72.49, a superb double for the share price since my original article.

With my new investment theme for 2020, the biotech investment has potential, but with the potential for the political unrest and turmoil roiling the overall market, I have sold all my biotech stocks, with the exception being my position in Idorsia (OTCPK:IDRSF). My opinion for Idorsia hasn’t changed, and I firmly believe that 2020 will be a major catalyst year for those holding a position in their common shares. This is a link to my SA article outlining my thoughts on the company. I plan to have an update soon. The stock is YTD, and since I initiated my position, up more than 60% - the best is ahead for this company - IMO!

As a cushion for my positions in the biotech arena, I’ve held a position in Horizon for more than five years, and the yield has been a constant $1.20 a share beginning in 2017. There has been some volatility in the share price; however, with the dividend yield (currently 9.61%), my overall capital investment has remained intact. Based on my planned continued hold of the stock, I think for those investors with a comparable long-term approach and an interest in the biotech field, Horizon could be a good place for an investment.

PIMCO Corporate and Income Opportunity Fund – My holdings in this stock shows the merit of a buy and hold investment where you can ignore the typical daily action and look at the long-term potential - and be able to sleep at night! This fund is my largest holding. Since the inception of the fund in 2002, the stock generated an annualized return of 14.48%. My initial purchase occurred in 2004, and in the market swoon in 2008, I bet the farm on the stock and got shares for $8.00 and change. With the current 8.4% dividend yield and potential of a yearly special dividend being paid (announcement for this year should come by next week), investors should seriously consider having a position in this proven investment vehicle for capital appreciation and monthly dividends.

Exxon – With this one I’m going against the earlier things said about the energy companies. But I have a solid reason for my affinity for their stock. My wife’s uncle, the husband of her father’s sister, worked for what is now Exxon, where he worked for about six months before reporting for active duty in the U.S. Army. Each paycheck they deducted an amount and invested it in shares of their stock. When he left to serve in World War II, he owned 5 shares of their stock. Twenty years ago, I personally was willed his shares - I won’t mention the exact number those five shares had increased due to stock splits; I will only say the number was well into four digits and I inherited them based on the stepped-up cost valuation. In the interim, the 5% dividend has been more than a satisfactory arrangement. My granddaughters will now have to worry about what the stepped-up valuation might be when they inherit these shares - I just hope it isn’t anytime soon!

Conclusion:

The warning signs I cite and the conclusions I’ve made are strictly my opinion. At the end of 2020, we will know if my concerns had merit. If I’m wrong, the good news is that if my current returns, generated by my real portfolio, remain intact and generate the same historical returns - I will still be happy that I didn't have sleepless nights worrying about my investments.

I'm sure that others will question the merits of some or all of the stocks in my portfolio; however, keep in mind that some of these positions were taken as long as 20 years ago, but all were taken with the intention of holding them for the long term. Owning the five-digit position in PTY where I purchase the bulk of them in 2008 at the $8.00 price level, I'm a happy investor!

Good luck with your future investing decisions. And look for my first update shortly after the close of trading for the current month — December 2019.

Disclosure: I am/we are long IDRSF BBDC BKCC BKEPP BKT BDJ DODIX HASI HRZN PTY XOM. 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.