Seeking Alpha

The Brown Bag Portfolio December 2019 Review

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Includes: APLE, ARCC, BP, BXMT, DOW, ECC, EPR, NEWT, OXLC, PFE, PPL
by: Michael Hesse
Michael Hesse
Value, long-term horizon, dividend investing
Summary

A little about me and the history of the Brown Bag Portfolio.

How the Brown Bag Portfolio fared during December.

What I'm planning for 2020.

For those of you who have read my articles in the past, indulge me for a moment while I repeat something that I've said many times before: I am not a financial analyst. I am not an expert in money, monetary policy, investment theories, theorems, or the double-talk that is so prevalent; whether it be on business news or "straight" news shows. My articles should not be taken as advice, financial or otherwise, or as a statement of the right or proper way to do things. They are, taken as a whole, the documentation of the construction of my portfolio. Nothing more. In a decade or so, one should be able to look back and decide if those decisions, those investments were profitable. Whether or not they were "right" is a purely subjective standard. I write about what I do and the reasons for doing such in the hopes that people, especially new investors, will be able to learn from both my mistakes and successes.

What I am is a regular guy, middle-aged, with a life full of past mistakes, most of which, I hope, I have learned enough from to continue forward in a positive direction. I'm a computer technician, a writer (of both articles and novels), father & recently a grandfather. I am certainly not an expert in anything, but I am willing to learn, to ask questions and take some risks. I started my investment journey much later than I should have (one of those past mistakes that I'm learning from), and therefore I have a compressed timeline in order to reach my investment goals. In order to succeed with my goals, which I will outline below, I must accept a bit more risk than I would generally recommend if I were constructing this portfolio in my twenties or thirties. Be that as it may, this is my journey and I hope that it will be instructive for those who choose to follow it.

For those of you who are interested: I'm a contrarian by nature. I was educated by hippies (real hippies straight from Haight-Ashbury, not the fashionable hangers-on who later claimed to represent a generation). I was taught to question authority, to examine both sides of an argument and decide for myself. I was taught to question experts and look for the motivation behind their arguments and advice. I was taught that I might disagree with every word you speak, but I should fight for your right to speak it. I find it ultimately ironic and deeply troubling that those same individuals, upon reaching the zenith of their careers, now demand unquestioning obedience to their authority and supposed expertise. As the oft mis-quoted Mark Twain is erroneously reported to have said, "History doesn't repeat itself, but it often rhymes."

With that in mind, I am not a member of the modern doomsday cult that loudly proclaims that the end of the world is nigh. I do believe that we should learn to live more lightly on the land, but that it should be through the free marketplace of ideas, not by authoritarian proclamations. Regardless of whether or not you believe in Anthropogenic Global Warming, it is a fact that the United States has lowered its emissions to a greater degree after it withdrew from the Paris Climate Accords, than any nation that signed it. Feel free to argue with the editors of Scientific American, if you disagree.

Hopefully, the above statement doesn't cause the comments section to become a battleground of ad hominem attacks on one side or another. It is simply a declarative statement of position, not an attempt to enforce a particular world-view. You are welcome to disagree, as am I.

At the end of December, the Brown Bag Portfolio is three and a half years old. I started it after a major health event (my own) and an unnecessarily vicious divorce left me without any retirement savings. Initially funded with the money I saved by not eating lunches out (as a field technician I daily travel a territory greater than that of Rhode Island) I started packing my lunches in an insulated cooler and moved the saved money into the portfolio (thus the name).

The overall goal for this portfolio is quite simple. When I retire, I want the portfolio to provide enough income through dividends alone to pay for the mortgage, taxes, and insurance on my home each year. I estimate that this will be $16,800 a year. Now, I may very well downsize before or shortly after retirement in which case I may need substantially less each year in dividend income. That would be wonderful, but regardless of whether or not I downsize, I shall keep the same goal.

I opened the Brown Bag Portfolio with $150 on July 5th 2016. Shortly thereafter, I took a cleaver to my expenses and have maintained an average 22% savings rate since (all of which is funneled into the portfolio and invested). Actually, it's greater than that, since 8% of my income (pre-tax) goes into a new 401(k) (the old one had been drained to pay for my ex-wife's medical expenses a decade prior).

I made plenty of mistakes my first year, primarily through trading and not investing. After spending some time on sites like Seeking Alpha, I began to develop an investing philosophy that works for me. Although this philosophy has changed and adapted over the past several years, it essentially remains thus: build a core of 10-15 dividend paying equities, reinvest the dividends and allow them to grow. I don't have a lot of hard and fast rules for my holdings other than they must pay at least a 3% yield. Once the core positions in my portfolio are filled out, I then may begin branching out into some more speculative areas or add a few (very few) select positions that pay under my 3% threshold. However, since the portfolio is so new, I have yet to enter all of my core positions.

Over the last year or two I have added five funds to the portfolio, primarily to juice the returns somewhat, but will keep these funds to no more than 20% of the portfolio as a whole. The funds portion of the BBP currently comprise 12.6% and are something of an experiment having so far returned mixed results, although I've held most of them for too short a period of time to make any overall determination. The most controversial of these are my investments in Oxford Lane Capital (OXLC) and Eagle Point Credit (ECC) which are Closed End Funds of Collateralized Loan Obligations (CLO's). Although they have underperformed rather dramatically over the last six months or so, I will continue to hold and DRIP throughout 2020 before making a decision. Regardless of what that decision may be, I don't want either to comprise more than 5% of the overall portfolio due to the potential risk and may trim my position in OXLC if it grows beyond 5% for an extended period of time.

Readers may notice that the BBP as it stands today is not very diversified. I am quite overweight in Energy and REITs. Combined, these two sectors represent 58% of the overall portfolio. I agree that it is too much, however I am still several years away from the ultimate makeup of the portfolio.

Although it's not a hard and fast rule, I prefer to build a position to the point where I am gaining an additional share of the underlying equity every quarter through dividends (a temporary Full Position so to speak). Once I've reached that point, I will only purchase additional shares if it drops below my cost-basis. Prior to that point, I'll add additional shares above my initial cost-basis, but within reason. I sold out of my position in Dominion Energy (D) several months ago, because it had run up too far and fast from my cost-basis. At that time, I was still paying commissions for additional shares and couldn't afford to nibble at it as it ran. Instead, I chose to take my profits and move them into positions that I felt I would be able to grow without seriously violating my cost basis.

If I were still paying commissions, I would be in nearly the same place with Dow Inc. (DOW). However, due to its volatile movements, I believe I will be able to nibble at this holding without seriously eroding my cost-basis for at least several months. I need an additional 70 shares to get it to my "Full Position" metric, so for as long as I can pick up additional shares within a dollar or two of my cost-basis, I'll be adding. Once I've reached 45-50 shares, I will tighten up the range that I'm willing to pay in order to purchase more. Similarly, Blackstone Mortgage Trust (BXMT) ran up above my cost basis, but since I'm already at half of my arbitrary Full Position, I most likely won't add more unless I can get additional shares for a dollar or less above my cost-basis.

Currently, the Brown Bag Portfolio consists of 9 Core Positions and five funds. As I stated earlier, I expect the Core of the portfolio to be comprised of no more than 15 Core positions when it's fully developed. Now, that doesn't mean that my Core positions will always stay the same. In particular, I'm currently assessing my position in EPR Properties (EPR) and have been assessing Apple Hospitality (APLE) for some time, but for different reasons. Although EPR has performed quite well for me since I purchased my original shares more than a year ago, lately I've become concerned with its interest in riskier investments and its heavy reliance upon Top Golf. Apple Hospitality's share price has steadily eroded over the three years I've owned it, but its lifetime returns have been adequate at 6.72%. Although it's tempting to sell out of one or both of these positions and move the money into different areas, I think I will be holding them for at least another quarter and see what develops.

December Results

The Brown Bag Portfolio performed fairly well throughout December. I collected $212.58 in dividends bringing my 2019 total to $2012.16. In addition, my current positions will bring in more than $2500 a year in dividends if nothing changes. I beat my goal of increasing my dividends by $840 a year and have raised 2020's dividend goal by another $840 to $3360, which you will see reflected on next month's charts. Note, these dividend goals are the amounts going forward, not the amounts collected each year. 2018's goal was $1680... each year I try to grow my dividends by 5% of my BBP dividend goal of $16800.

Brown Bag Portfolio

December 2019

Name

Ticker

Shares

Value

%Return

Div/Shr

Annual Div

DOW Inc.

DOW

20.26

$1,108.72

8.59%

$2.80

$56.72

Apple Hospitality

APLE

237.63

$3,861.47

-7.35%

$1.20

$285.15

Enterprise Products Partners

EPD

251.05

$7,069.43

4.92%

$1.77

$444.35

AT&T

T

111.92

$4,373.91

13.74%

$2.04

$228.32

EPR Properties

EPR

77.49

$5,473.68

5.43%

$4.50

$348.69

Main Street Capital

MAIN

78.73

$3,394.01

12.38%

$2.46

$193.67

British Petroleum

BP

72.27

$2,727.47

-5.25%

$2.46

$177.78

Newtek Bus Srv

NEWT

51.25

1160.74

1.66%

$2.84

$145.55

Blackstone Mort Trst

BXMT

35.00

$1,302.70

3.39%

$2.48

$86.80

Eagle Point Credit

ECC

52.13

$761.56

-8.40%

$2.40

$125.10

Oxford Lane Capital

OXLC

193.25

$1,576.90

-16.65%

$1.62

$313.06

NB RE Sec

NRO

50.00

$279.00

0.00%

$0.48

$24.00

Clough Global Op

GLO

81.11

$765.65

4.54%

$1.06

$85.97

Ivy High Income Op

IVH

50.37

$700.18

4.28%

$1.20

$60.45

Total

$34555.43

2.69%

$2575.68

Div Goal

% Goal

BBP Yield %

$16,800.00

15.31%

8.45%

Div Goal 2019

% Goal

$2,520.00

102.07%

Lifetime Returns

Symbol

OOP* $

OOP Shares

Shares frm Div

Div Received

Current Value

Total Rtrn

DOW

$1,007.00

20

0.258

$14.00

$1,108.72

10.10%

APLE

$3,618.28

205

32.629

$550.22

$3,861.47

6.72%

EPD

$5,766.99

215

36.045

$965.05

$7,069.43

22.58%

T

$3,453.42

100

11.922

$391.82

$4,373.91

26.65%

EPR

$4,733.85

71

6.487

$457.89

$5,473.68

15.63%

MAIN

$2,672.20

70

8.729

$336.14

$3,394.01

27.01%

BP

$2,791.50

70

2.270

$87.26

$2,727.47

-2.29%

NEWT

$1,109.50

50

1.25

$28.40

$1,160.74

4.62%

BXMT

$1,260.00

35

0.000

$0.00

$1,302.70

3.39%

ECC

$801.00

50

2.126

$30.40

$761.56

-4.92%

OXLC

$1,572.00

160

33.248

$320.84

$1,576.90

0.31%

NRO

$279.00

50

0.000

$0.00

$279.00

0.00%

GLO

$722.00

80

1.107

$10.34

$765.65

6.05%

IVH

$666.50

50

0.373

$5.02

$700.18

5.05%

Total:

$30,453.24

$3,197.38

$34,555.43

13.47%

*OOP = Out of Pocket

What the Future Holds

Although we can't tell what the future holds, regardless of what the prognosticators on television say, I generally believe that 2020 will see a continuation of the Bull Market. If possible, my plan is to fill out my positions in DOW and BXMT as well as adding 1-2 new positions. I'm looking at the Healthcare and Utilities Sectors at the moment. Pfizer (PFE) looks intriguing, as well as AbbVie (ABBV), although its nearly 45% run up over the past six months may keep me away.

I may also add a few more shares, perhaps as many as 30 to British Petroleum if I can get them around $37. I expect to double my position in Newtek Business Services if and when the price declines below $21 and I'll be looking to initiate a new position in Ares Capital (ARCC), but no more than 50-100 shares this year. I made a mistake two years ago of selling out of my position in ARCC and would like to rectify that if I can pick them up during a pull-back.

As far as Utilities are concerned, Duke Energy (DUK) and Pennsylvania Power and Light (PPL), both are interesting, but I need to do a bit more research on both of them before I commit to one.

I'd also like to opportunistically add to three of my funds: NRO, GLO, and IVH, but would prefer not to add additional shares above my current cost-basis. I may trim OXLC a little, even at a loss, but will probably wait a few months to see how it shakes out.

I probably cannot do all of this, even with a 22% savings rate, but I'll take my best stab at it.

Thanks for reading. See you next year!

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