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Rhystic Scrying Portfolio – 2018 Q2 Yield Metric

Summary

  • Introduction.
  • Under-Value Man.
  • PAAY it.
  • Conclusion.

Introduction

I have introduced the Rhystic Scrying Portfolio [RSP] here and have outlined its benchmark, the Rhystic Scrying Benchmark Index [RSBI] here. I completed my first year of tracking the RSP against the RSBI and described it here. I have completed my sixth quarterly update of the RSP and published it here. I reversed a Q1 loss to the RSBI and surged ahead with a Q2 win, mostly by shrewdly selling a large-cap growth index (VTI) and buying a small-cap value index (VTWV) in March, but there were other factors also involved, such as dumping some underperformers, namely General Electric (GE) and a corporate bond fund (VCSH), and buying shares in some undervalued companies: Micro Focus Group (MFGP), Omega Health Investors (OHI), Rockwell International (ROK), Chevron (CVX) and Engility Holdings (EGL).

How do I determine what is undervalued? Well, that’s the topic of this tale.

Under-Value Man

Now that the RSP has topped out at 30-35 unique holdings and 3-4 index ETF’s/mutual funds, I’m mostly investing new cash and reinvesting dividends in existing positions. Yes, I do buy shares in new companies, but that is the exception more than the rule. Although it may seem random how I allocate cash, there is a method to the madness.

In the course of my wanderings through Seeking Alpha, the investing social media site, I chanced upon the portfolio updates of the do-it-yourself investor, The Part-time Investor, who has an interesting solution to this reinvestment conundrum. He holds quite a bit of his portfolio in a retirement brokerage account that does not allow him to automatically reinvest dividends (also known as DRIP) in the shares of the original dividend-generating stocks; he is required to purchase non-fractional shares in one lump sum. So, he is forced to be picky about his purchases, but he doesn’t want the process to be random or to spend a lot of time doing it.

The Part-time Investor [PTI] has developed a DRIP system, known as Pay Above Average Yield (PAAY), which I find very interesting. He also partially proved that it works, at least better than random. The premise is relatively simple: for each stock, calculate the current yield and the 52-week average yield; sort the stocks descending by the difference percentage of the former under/over the latter; invest in the stocks at the top of the list. Why? Well, in PTI’s own words:

“As I read and learned about dividend growth investing [DGI] I learned to focus on the dividend yield, dividend history, and dividend growth when evaluating a company and I realized that a stock which had a yield higher than its usual yield, all else being equal, might be undervalued. I decided to try to use this idea to determine which of my stocks were undervalued, and therefore were good options for reinvestment. So I developed my Percentage Above Average Yield (PAAY) system. The idea is that those stocks whose present yields are above their average yield for the past year are undervalued, and the stocks that have the highest PAAY are the most undervalued, and therefore are the ones that I should be reinvesting in.”

Since I have not found any free sites that do these calculations, I decided to break out the compiler, throw some numbers together and code up my own report.

PAAY It

Without further adieu, here is the PAAY system applied to the Rhystic Scrying Portfolio:

Rhystic Scrying Portfolio

As Of: 08/05/2018

Current

Average

Difference

Ticker

Yield (%)

Yield (%)

Yield (%)

MFGP

5.72%

1.29%

344.72%

DXC

0.84%

0.56%

50.82%

LB

7.38%

5.89%

25.38%

CCL

3.05%

2.50%

22.01%

PRSP

0.23%

0.19%

18.61%

HPE

2.05%

1.76%

16.51%

BAC

1.52%

1.39%

9.86%

DTE

4.57%

4.26%

7.27%

GIS

4.15%

3.89%

6.73%

NLY

11.37%

10.70%

6.35%

ROK

1.87%

1.76%

6.07%

ALV

4.27%

4.07%

4.83%

HEIO

1.73%

1.68%

2.70%

UNA

3.01%

2.94%

2.48%

SAP

1.40%

1.38%

1.75%

TWCUX

0.00%

0.00%

0.00%

MHTX

0.00%

0.00%

0.00%

EGL

0.00%

0.00%

0.00%

HAS

2.41%

2.42%

-0.38%

VTWV

1.63%

1.64%

-0.54%

TGLS

6.44%

6.51%

-0.98%

OHI

8.74%

8.85%

-1.22%

COL

0.96%

0.98%

-2.11%

CVX

3.55%

3.64%

-2.67%

CSCO

2.90%

2.99%

-3.06%

GE

4.57%

4.73%

-3.38%

WDI

0.11%

0.11%

-3.80%

MCHP

1.53%

1.60%

-4.47%

VZ

4.52%

4.74%

-4.72%

INTC

2.31%

2.44%

-5.39%

HPQ

2.36%

2.50%

-5.40%

EXC

3.16%

3.35%

-5.53%

BA

1.80%

1.92%

-6.33%

SIRI

0.63%

0.69%

-9.09%

AAPL

1.26%

1.40%

-10.20%

SHP

0.57%

0.65%

-11.59%

FP

4.53%

5.17%

-12.40%

NG

5.68%

8.07%

-29.62%

Wow. There are some extreme numbers there. However, after looking at the purchases of stock in existing RSP positions in 2018:

Transaction

Acct

Cash

Date

Ticker

Name

Quantity

Price

Fee

Flow

01/11/2018

GE

AR

129

$19.1600

$6.95

$2,478.59

01/12/2018

MFGP

AB

100

$31.3165

$6.95

$3,138.60

01/17/2018

OHI

AT

360

$26.6650

$6.95

$9,606.35

02/06/2018

ROK

FR

30

$186.5421

$4.95

$5,601.21

02/26/2018

CVX

AT

38

$113.9700

$0.00

$4,330.86

02/26/2018

CVX

AT

62

$113.9690

$6.95

$7,073.03

03/02/2018

CCL

AB

200

$64.6498

$6.95

$12,936.91

03/09/2018

EGL

AB

67

$25.0000

$6.95

$1,681.95

03/23/2018

MFGP

AB

400

$13.4848

$6.95

$5,400.87

05/01/2018

SHP

SB

210

£38.7950

£17.15

£8,164.10

05/21/2018

LB

AT

100

$35.0000

$19.99

$3,519.99

08/02/2018

GIS

FR

100

$44.8050

$4.95

$4,485.45

Five out of the eleven purchases were made using the above average yield metric as an important input. I expect the proportion to significantly increase in the future.

Several caveats need to be made about my calculations as I have not worked out all of the bugs in the system.

First, it appears that my Micro Focus (MFGP) difference yield does not pass the sanity check; the stock halved in value in February and it pays irregular dividends on a biannual basis; there may be some bad interplay between these factors.

Second, DXC Technology (DXC) just spun-off part of itself in June as Perspecta (PRSP), which affected the stock price. This may cause some problems.

Third, Perspecta (PRSP) does not have a year’s worth of dividend payments; my calculations may not take that into consideration.

Fourth, HP Enterprises (HPE) spun-off DXC Technology (DXC) in September 2017, which may skew the results, at least for the next couple of months.

I tested and verified the algorithm with 3 long-term holdings, Cisco (CSCO), Chevron (CVX) and Rockwell International (ROK), so I am reasonably sure of the correctness of the common case (long-term holding with stock quote history greater than 2 years, regular quarterly dividend distributions), but not so confident of the uncommon cases (listed above). As time goes on, I will test and verify different scenarios to increase portfolio coverage.

Conclusion

207 days to go until retirement! The PAAY method introduced by The Part-Time Investor is interesting and now that I have built the basic infrastructure to allow me to analyze the stocks in the [RSP] using this model, it will guide much of my near-future cash allocations.

Disclosure: I am long all securities listed above and have a fondness for USD=X and EURUSD=X.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (even from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

First published August 6th, 2018.