April 2020 Update

The market staged a little recovery this month seemingly shaking off – or at least minimizing – any effects of the ongoing Covid-19 devastation, due in part to the partial ramp up of the economy in some states.  My state is one where a ‘phased’ approach is underway and there is uncertainty as to whether the peak has been attained (thereby ignoring the federal template).  While the economic malaise is running rampant through the states, it is doubly acute in the oil patch where state budgets (Texas) are dependent on a 4.6% tax on extraction (in a declining price environment) addition to an otherwise robust economy.  It will be an interesting social experiment as to how quick the average consumer will embrace the new reality (capacity limits in restaurants, for one), the ability for these businesses to turn a profit anew and if this throttling can move the needle on the economy (GDP, unemployment) without a corresponding spike in cases and/or mortality.   For one, I’m willing (and able) to wait at least two weeks and reassess at that time.

Due to the broker reshuffling caused by Motif shutting down, I can only provide a close estimate for the month.  Currently about $2,000 (cash, dividends, sells, buys) is in the ether migrating amongst accounts.  A full accounting is probably a week or two out.

Portfolio Value:  An estimated increase of 10.8% versus the 11.26% gain of the S&P.  For the year I’m up 2.06%.  All full share positions have been received by my primary broker with.

Dividends:  As previously acknowledged, my dividend increase run rate was not sustainable.  This came to bear in April with a 7.49% year-on-year actual increase.  I don’t think I lost any dividends with the timing of the transfer, but I may take a slight temporary hit as I await the cash to redeploy it.  Also some of the cycles will change as I exit some issues.

The pace of dividend cuts/suspensions continues to increase while any increases tend to be muted by 2019 standards.  Net increase for the portfolio stands at 5.75%, meaning my 10% dividend growth rate goal is in jeopardy.

Strategy Shift: In probably an overabundance of caution, I’ve decided to exit REITs that have a retail focus.  If the crisis is prolonged, rents, vacancy rates, property values and ability to refinance could come under pressure.  The ones retained are the four industrial and specialties in my portfolio.

I borrowed this illustration from one of my companies (BOKF) and modified it for my portfolio to begin to gauge potential impacts.  Currently PEP and KO’s biggest impact would reside in their fountain drinks (restaurants and venues).  I have yet to calculate a total …
Covid-19 Impact Areas

Entertainment & Recreation
Gambling Industries EPR
All Other CMCSA, DIS, T, AMC, PEP, KO, MSG, BATRA
Retail
Convenience Stores & Gas Stations CASY, VLO, CVX, RDS.B
Restaurants CBRL, YUM, YUMC, SBUX, MCD
Specialty OUT
All Other Retail KIM, SRC, WRE, VER
Hotels MTCPY
Churches & Religious Organizations CMPGY
Colleges & Universities SYY
Airlines LUV, SWRAY
Identified Businesses most impacted by Covid-19 mitigation efforts approximately xx.xx % of portfolio

I’m using this template strictly as a guide.  The retail facing REITs are all sold (with the exception of Kimco), Southwest Airlines has been reduced, the others on this list are cautious holds.  I continue the review of my portfolio with an eye on secondary impacts – like who really considered any impact to banks because church services weren’t being held?  I probably need to expand my thought process to include further knock-off effects.

Later in May I’ll update my posted portfolio – once the confirmations (and money) arrive.  What will be clearer is the shift to larger but fewer holdings.  While the portfolio remains sizable, I will retain  some speculative stocks and a few where I remain undecided.  By and large, banks with no dividend growth or ones where M&A prospects have dimmed will be pruned.  In June I expect to exit ETFs as well.  For the near term (12-24 months) I’m willing to accept a lower dividend yield if I gain quality – and limited Covid-19 exposure – in return.

Here’s hoping your month turned the corner!

Another Freebie Down

Initially, this week’s installment was intended to place a spotlight on the ongoing stream of dividend cuts and suspensions facing DGI aficionados – particularly with earnings season ramping up.  Headlines such as, “For investors banking on dividends, the ‘pain has just begun” are making an appearance with some empirical evidence pointing to 10-16% overall reductions for 2020.  Between Simply Safe Dividends’ running tally and the onslaught of Seeking Alpha notices, it’s become increasingly difficult to deny the brevity of the situation.  In fact, I was handed another this week.

I was beginning to perform some analysis  to identify commonalities other than the two biggies – the Oil War and Covid-19.  With my background, I like to dig in the weeds a little to determine the path forward, whether double-down, stay the course or to sell.  I chose the first on AMC (wrong – now sold), the second on CBRL (jury’s out) and probably the third on CVA.  

What I am finding is the understandable (oil exposure, retail closures), the secondary exposure (companies dependent on retail), the idiots (use of leverage resulting in margin calls) and the coattail riders.  I put Covanta in this category as I think they are using the current environment to their advantage – unless some of their municipal customers are experiencing cash flow issues with Covid-19.

Through the ages, many in the DGI camp have laid bare their rules in dealing with dividend cuts or even lack of growth.  My preference has always been to address these on a case-by-case basis as generally, any loss is already reflected in the price providing time to perform additional confirmation.  Nowadays, my view is any decision must reflect a corporation’s ongoing viability – which is all the more difficult when there is no consensus on what the ‘new normal’ really is.

While an atomistic view, one can also take an holistic approach as Mr Free at 33 is doing.  While I’m sure he has attained a level of freedom and solace, I prefer an attempt at damage mitigation.  Perhaps if a section of my portfolio wasn’t allocated to a higher degree of speculation I could have greater agreement with his sentiment.  And this just may just come to pass as well – as the following hit my inbox:

Fri, Apr 17

Dear Investor,

Since 2012, we’ve worked to give everyday investors access to cutting edge investment products.  First, I want to thank you for all your support in taking Motif to where it is today. We’ve come a long way since we started this journey together and there is a lot for us to be proud of. 

At this time, we’ve made the decision to cease operations and transfer your account to Folio Investing.  We’ve selected Folio to give you access to leading investment tools in a similar experience to what you’ve enjoyed at Motif.

Your account transfer will start after market close on Wednesday, May 20, 2020, and your new Folio Investing account will be ready for you to use on Thursday, May 21, 2020.  Unless you choose to opt-out, there is no action required on your part …

Needless to say, I’ll be in the opt-out category.   Motif holds (held?) most of my speculative ideas. Some panned out, others did not, but it was my playground area.  My Canadian stocks were incubated in Motif until I got them structured as I wanted and migrated them to my primary broker earlier this year.  I had started unloading some of the ideas destined for probable failure (thanks to the pandemic) already. It appears I will need to be a little more aggressive as my timeline is now compressed.  Not a major surprise as the advent of free took its toll. The ones I keep will be moved primarily to Schwab with a handful possibly to M1 (depending on their answer to two questions on Monday). 

My primary point being – all strategies will be tested at some point in time.  My banking strategy – after a six year run – has been torpedoed by low interest rates.  My Experiential strategy has been blown away by Social Distancing. Oil transport by the Oil War, Discretionary spending by the job (and protection) uncertainty, M&A by the uncertain future.  I for one, remain willing to sell when circumstances have changed and the path forward is fog bound. Surprisingly, all of my spec plays are in positive territory ranging from a low of 0.1% gain to a high of 2,103.15%.  Until clarity reappears, I will remain a selective buyer – particularly of my three portfolio anchors (WEC, KMB and CLX) which are all up for the year.

In a year such as this, hunkering down with the tried and true is the primary game plan for yours truly.

When There’s Lemons …

This week’s missive will get back to some of the basic block and tackling we face at times as investors.  Not to downplay the market madness, it seems everyone and their brother now has a view on the pandemic. Certainly not immune to the downdraft, in hindsight my decision to sell my taxable Canadian stocks on February 28th makes me look like a genius.  The reality is essentially sheer dumb luck. It did, however, provide the cash to nibble on subsequent down days.

The Canadian IRA Taxability Answer

I did receive my first dividend from TMX Group a couple of weeks ago and to my chagrin saw Canadian tax withheld even though it’s in my IRA.  Obviously one of the outliers I previously referenced. While my appeal failed, my broker did confirm two of my companies reside in this category, the other being Hydro One.   I did gain some insight which I figured I’d share.  

  1. To be processed as compliant with the tax treaty, companies have to use the DTC – which comes with a cost.  Most Canadian companies trading in the US absorb this fee as a cost of doing business.
  2. Canada has their own version of the DTC – CDS which is owned by none other than the TMX group, which uses (at least for US based stockholders) Citi for disbursement without treaty compliance review.
  3. Brokers have no recourse but to withhold Canadian taxes in IRAs for CDS processed dividends.  Meaning there is no tax benefit for US citizens holding non-DTC processed securities.

These two will be sold from the IRA when the markets recover a little.  Meanwhile both are also held in my taxable account where I can claim a tax deduction when taxes are filed.

De-risking Process

With the heightened level of uncertainty, more than a few bloggers have shared their approach towards increased safety.  Dividend Diplomats ran a piece on Debt to Equity Ratios and Chuck Carnavale reviewed a Debt to Capital analysis. While both metrics are fundamentally sound – and I’ll likely add to existing holdings that are on these lists – both share a flaw that is highlighted by the current black swan event.  Companies in unprecedented numbers are drawing down their credit lines or issuing new paper, both of which have an impact on the ratios. I mean, is Disney any less of an investment with $6B additional debt offset by $6B cash? Other than a slight increase in carrying expense, I would argue no but they do have other issues with the magnitude currently unknown.  My take is this is where the ratings agencies theoretically should be earning their keep.

My process is to essentially begin the process of reducing the speculative portion of the portfolio.  Eliminating my one BDC (MAIN – smaller business exposure), Entertainment Properties (high social distance exposure), Newell (a recipient of an SEC subpoena).  This is one time a dividend cut or suspension doesn’t necessarily mean a sell if the purpose is cash preservation. I did reduce – but not fully sell – Cracker Barrel on their delay and suspension.

Additionally, I keep abreast of the news to identify potential opportunities.  You’ve heard the mantra, Don’t Fight The Fed?  How about profiting from the economic stimulus they’re embarking on?  Blackrock is a (partial) proxy for this angle. I say partial as I doubt the fees will generate a meaningful profit to them.

In Parting

As no one knows when and how this will end and I doubt I have the time on my side to play the long game, the better part of valor is to strengthen the hand I have.  Someone younger can carry more risk but caution is warranted in my opinion. Either way, try to make some lemonade from these lemons.

January 2020 Update

What a way to start the new year.  Beginning with the reshuffling of my portfolio and continuing right into earnings season and the inevitable debate over the Coronavirus impact on the economy … all I can say is yep it’s a lot to digest – and it’s only January.  With the gyrations in the market, all but two of my low-ball limit orders executed, probably the most controversial being MTR Corporation – the Hong Kong high speed rail line recently at the forefront of the protests. Anyway, I added two Canadian companies (Fortis and TMX Group – (Toronto stock exchange)) and starting the long rumored whittling of some of the non-core holdings (XRX and MSGN).  Most of the other action was moving Canadian companies from my taxable accounts to the IRA – some of which were done as a rebalance to minimize fees (hence the slight additions to the other holdings). Also selling part of the PB stock (which went overweight due to a merger) to fund these movements. As I indicated last week, this is the first of a multi-month transition. Obviously my timing was decent (this time, anyway) as the S&P lost 0.16% for the month while my portfolio gained 1.81%.

PORTFOLIO UPDATES

DIVIDENDS

My primary focus resides on dividends with the goal being a rising flow on an annual basis.

  • January delivered an increase of 22.73% Y/Y primarily the result of last years’ dividend cuts rolling off.
  • Dividend increases averaged 11.48% with 8.5% of the portfolio delivering an increase.
  • 2020 Dividends received were 1.86% of 2019 total dividends putting me on target to exceed last year’s total in November. The YTD run rate is under my 110.0% goal but I anticipate this will normalize as my portfolio movement becomes clearer and the current year begins to distinguish itself from the last. 

Note: I updated my Goals page to provide a visual of these numbers.  Based on Mr All Things Money’s instruction set with a conversion to percentages.  My code only updates when the monthly Y/Y number is exceeded.  Otherwise, the prior year actual is used.

AT A GLANCE

Inspired by Simple Dividend Growths reporting

The relationship between market action and purchase activity was roughly 95/5.  As I’m generally playing with ‘house money’ (proceeds from sales, M&A activity and dividends), I doubt there will be a significant variance until I fund my 2019 IRA contribution.  The Net Purchase Expense being less than 1 or 2% illustrates the ‘house money’ concept. Timing did play a part as I sold early in the month (before the drop) and most of the purchases were in the latter part of the month. 

SPINOFFs

On Oct 4, 2018 MSG filed a confidential Form 10 to spin the sports business which remains in progress.

MERGERS

Spirit MTA REIT (SMTA) voted on Sept. 4th to approve the sale of most assets to HPT for cash. A second vote was held to liquidate the REIT. The first payment was received and awaiting final settlement payout. Fully expecting a profitable outcome for one of my most speculative positions.

SCHW to acquire AMTD for 1.0837 sh SCHW to 1 AMTD.  My only surprise with AMTD being taken out was the suitor – I had expected TD.  Regardless, I have three concerns over this deal, 1) profit margin compression with the onset of $0 fee trades, 2) possible liquidation of a partial TD stake to reduce their ownership share from 13.4% to 9.9% (the same issue Buffet regularly faces) and 3) 10 year phase-out of AMTD/TD cash sweep account relationship.  The third one means TD has a low cost (albeit, decreasing) source of deposits for the foreseeable future. After the first of the year, I’ll probably cash in AMTD and increase TD a little further.  

SUMMARY

Overall, the only complaint is the sluggish start to the year. Minus the drag from last years’ dividend cuts I figure this will be short lived.  On my goals, progress was made as follows:

  • Scenario 1 – TD is now confirmed
  • Scenario 2 – Half complete, awaiting timing issues for the sell part
  • Scenario 3 – Determination of maximum contribution amount complete
  • Scenario 4 – 2020 RMD amounts identified

Here’s hoping your month was successful!

Jul 2016 Update

Last month the sky was falling primarily on Brexit concerns.  Just a few short weeks later, the S&P and DOW are setting all time records.  Similarly you can choose a Cleveland view of the US economy (“it’s on the cusp of a recession”) or the Philadelphia view (“Tremendous progress has been achieved”).  Sadly reality probably sits squarely in between.  Meanwhile, I’m keeping an eye on Italian banks.  For good measure, the S&P outperformed my portfolio for the first time this year – 3.56% vs 3.0%.  For the year though, I’m ahead by 11.65%.  Headlines related to my portfolio this month include:

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