Tag Archives: Dividend

Where's The Dividend? (Hold The Onions)
April 10, 2018 6:02 pm|Comments (0)

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Apple: Dividend Hike Ahead
April 9, 2018 6:07 pm|Comments (0)

Apple (NASDAQ:AAPL) investors have enjoyed many years of nice returns, albeit with some volatility along the way. The company is working hard on establishing itself as a reliable dividend grower as well as offering returns in terms of capital appreciation.

Rock-solid fundamentals, rising earnings and a huge cash hoard which is now being repatriated are all strong arguments for this stock to be part of any conservative dividend growth portfolio.

Chart AAPL data by YCharts

This chart basically behaves pretty much exactly the way you would want it to behave. Apart from a correction from mid 2015 to mid 2016 this stock has moved steadily from $ 61 five years ago until the current $ 168, a multiple of 2.75x. Adding in a dividend yield during that time of approximately 1.5% translates into an average annual total return of about 24%. Considering the sheer size of this company that is nothing short of impressive.

Apple’s Dividend History

Though Apple used to pay dividends back in the early 1990’s, I don’t really consider that relevant as the company was quite different back then. The relevant history starts in the summer of 2012. In August of that year the company started paying dividends again, at a split-adjusted quarterly rate of $ 0.38. The level was increased in May 2013 to a split-adjusted quarterly rate of $ 0.436. Ever since, a new and higher dividend has been paid each May.

Chart AAPL Dividend data by YCharts

The dividend is growing nicely and reliably each and every year. Between May 2013 and May 2017, when the dividend was last hiked, it increased from $ 0.436 to $ 0.63. That is 44% or an annual average increase of 9.6%. If we look at the last couple of years the annual rate of increase has been very close to this – at 10.6% in 2015, 9.6% in 2016 and 10.5% in 2017.

This trend suggests that the board targets a very consistent percentage-wise increase every year, where it sees through temporary ups and downs in its business. Comments from Tim Cook also suggests that consistency is a priority. Raises will continue to come, though probably not special dividends.

The payout ratio is not so consistent. It has always been comfortably low but has oscillated between 30% in 2014 to a low of 21% in late 2015 before reaching its current level of 26%. As payout ratios go this one is nothing to worry about. At triple the current level I would start to be concerned. Even with no earnings growth, they could continue hiking the dividend at 10% per year for many years to come.

Upcoming Dividend Hike

As mentioned above, May is the month the dividend has been hiked every year since 2013. In conjunction with presenting its first quarter results, the company also announces updates to its capital returns program. This year, it will present its first quarter results on May 1. This will be a very interesting day indeed.

First of all, investors will of course be interested in following the results from operations and how the iPhone X is doing. Further, particularly dividend growth investors will be following closely to see what the dividend hike will be. Lastly, people will want to know the size of the buyback program, the size of which will be decided both by the company’s results but also the amount of cash repatriated due to the new tax code.

Apple has said it will pay approximately $ 38 billion in a one-time tax to repatriate overseas cash. After paying that tax it will still have more than $ 200 billion left for either acquisitions, buybacks or dividends.

Considering that the underlying business is going quite well with EPS coming in at $ 9.21 in 2017, up 11% from $ 8.31 in 2016, the board has plenty of room to increase the dividend. With the payout ratio as low as it is I will consider a 10% hike as a floor.

Then we get to the upside. Though the company has tended to go for smooth dividend increases and funneling surplus cash to buybacks instead, the sheer size of the cash hoard now suggests that some of this will be channeled to dividends as well. The board must be comfortable that the new level will be sustainable and not be so high that it’s difficult to continue with 10% hikes in the years down the road. It is therefore unlikely to be a massive increase – it would make the board’s job harder down the line.

However, a hike which corresponds to the highest hike it has offered since reinstating the dividend, is quite possible in my mind. The highest increase it has had in recent history is the May 2013 increase of 15% to a split-adjusted dividend of $ 0.436. I believe such a hike is quite possible for two reasons. First, there is an expectation in the investor community that some of the massive cash hoard will go towards an extra large increase. Two, such an increase will not be so large as to make the board uncomfortable as to the sustainability of the dividend.

I therefore think the dividend will be hiked by 10-16% this spring for a new quarterly dividend of between $ 0.69-$ 0.73. I think it is more likely to be at the high end of that range rather than the low end.

Risk Factors

A constant risk for Apple is that a competitor will come up with a product that is vastly more appealing than its most important product, the iPhone. It has weathered competition very well so far, but in an innovative space like this, you never know when a new player comes along. After all, Nokia displaced Ericsson and Apple subsequently displaced Nokia in the mobile phone space. Another risk, as it is a global company, is fluctuation of currencies. An appreciating U.S. dollar will decrease foreign earnings when reported in dollars. Privacy has been on the agenda for some time and has really come to the forefront in recent weeks due to the Facebook (NASDAQ:FB) scandal. Some people are concerned about the possibility of having your health records on your iPhone. Apple has taken a clear stand on privacy but the risk of an adverse event and hence bad publicity will not go away.

Current Valuation

The analysis so far shows a rock solid company with a huge cash hoard and growing EPS. However, if the multiple is too high when you buy, even such a company may eventually turn out to be a bad investment.

In order to gauge whether Apple is reasonably priced or not, I will compare it to two global competitors, Samsung (OTC:SSNLF) and Microsoft (NASDAQ:MSFT).

Apple Samsung Microsoft
Price/Sales 3.8x 1.4x 7.5x
Price/Earnings 17.7x 8.9x 75.1x
Yield 1.5% 0.3% 1.8%

Source: Morningstar

First of all, Microsoft’s earnings multiple looks really high. The company posted a loss in the fourth quarter of 2017, which obviously skews the earnings multiple quite a bit. Even so, in addition to losing the Price/Earnings category, it also loses the Price/Sales category while actually coming out on top in the yield category.

Apple comes in second on Price/Sales, beaten by Samsung. Second place is apparently where Apple is supposed to be in this competition as that is the spot it lands in the two other categories as well. Considering the enormous cash level of Apple, I consider the stock to be quite attractive at these levels.

The analyst community expects Apple to turn out an average annual EPS growth rate over the next five years of 13.2%. If we assume that the multiple stays the same – not unreasonable as the multiple is at a decent level – and adding in the yield of 1.5%, we arrive at an expected annual total shareholder return of 14.7%. That has to be considered a nice expected return no matter what kind of investor you are.

At these levels this stock should be added by dividend growth investors, with an emphasis on growth. The current yield is not too impressive but the growth rate is solid and will likely be higher than normal this year. Further, given the solid fundamentals of this company, you can sleep well at night knowing the money will keep flowing in.

Conclusion

Apple is working methodically to establish itself as a reliable dividend grower. It has consistently increased its dividend by 10%, giving investors predictability. The strong underlying fundamentals together with a huge cash pile make it an almost certainty that this predictable dividend growth will continue for many more years to come. This year, due to the repatriation of overseas cash, the hike will likely be larger with a potential hike of almost 16% to $ 0.73. If you’re looking for a fat yield, there are probably better opportunities out there. If, on the other hand, you are a dividend growth investor looking for a high long term growth rate of the dividend, this stock should be in your portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Buy This Oversold Blue-Chip Bank With A 5.4% Dividend
April 8, 2018 6:01 am|Comments (0)

On April 4th, Bloomberg reported that HSBC (HSBC) is considering an exit or sale from smaller consumer operations such as Bermuda, Malta, and Uruguay. In addition, the bank plans to expand its asset management division and is currently looking at a potential merger with a rival.

In our view, the news confirms that the group’s management will remain committed to transforming HSBC into a more focused and more efficient banking institution. More importantly, even though HSBC’s operations in Bermuda, Malta, and Uruguay are small compared to the group’s total assets, we believe a potential sale of these units would have a positive impact on the bank’s capital position, supporting stock buybacks and special dividends.

The recent rise in LIBOR should support HSBC’s NIM

LIBOR has grown by more than 130bps since the beginning of the year. Such a notable increase is currently among the most widely discussed topics. Several analysts suggest that this is an early indicator of a bear market or even a severe financial crisis. In our view, the increase has been driven by idiosyncratic reasons, in particular, higher supply of short-term Treasuries and lower demand from corporates due to the US tax reform.

Source: Bloomberg

With that being said, despite the reasons of the rise in LIBOR, HSBC should benefit from higher short-term rates. As shown below, the bank discloses its NII (net interest income) sensitivity to a shift in yield curves. However, this analysis is based on a parallel shift, while yield curves in most global economies continue to flatten.

Source: Company data

What is important here is that HSBC has a variable-rate loan book. More importantly, a significant part of its credit portfolio is priced off short-term rates. This suggests to us that the rise in LIBOR should be a positive for the bank’s asset yields and its NIM.

Source: Company data

One may argue that higher short-term rates will also affect HSBC’s funding costs, especially given that wholesale sources and corporate deposits are generally tied to the short-end of the yield curve. The caveat here is that HSBC has a unique funding position. As shown below, the bank has one of the lowest LtD (loans-to-deposits) ratios among European banks. In other words, HSBC does not need expensive deposits in order to fund its loan growth. HSBC had been struggling from abundant liquidity for many years as a low interest rate environment has virtually crippled its NIM. Given that rates have started rising, the bank’s excessive liquidity is gradually turning into a positive that will protect HSBC’s NIM in a rising interest rate environment.

European banks: Loans-to-deposits ratio

Source: Bloomberg, Renaissance Research

Saudi Aramco’s IPO

Saudi Aramco (Private:ARMCO) has appointed HSBC as an adviser on its much-awaited IPO. JPMorgan (JPM) and Morgan Stanley (MS) will also act as consultants. As such, HSBC is the only non-US bank that will have a crucial role in Aramco’s IPO.

Anecdotal evidence suggests that while many US and UK investors are skeptical on Saudi Aramco’s IPO, as state-owned oil companies have been underperforming their private peers for quite a while now, Chinese investors would be interested in Aramco’s shares. Hong Kong Exchanges and Clearing (OTCPK:HKXCF) (OTCPK:HKXCY) plans to introduce the so-called Primary Connect program, which would allow mainland Chinese investors to participate in initial public offerings on the HKEX.

We believe Aramco’s IPO would strengthen HSBC’s position in the region. In our view, it would also underpin the fact that HSBC is a global banking group with unique access to Chinese investors.

Buybacks and dividends

HSBC pays a $ 0.51 dividend per ordinary share or $ 2.55 per ADR. That corresponds to a 5.4% dividend yield, based on the current ADR price. We believe that a 5.4% dividend from a global blue-chip bank with a strong presence on Asian markets looks very attractive.

Additionally, it is also worth noting that the bank has temporarily suspended its buyback program due to technical reasons related to the issuance of additional Tier 1 capital. We expect HSBC to announce a new buyback in the second half of 2018.

Final thoughts

The shares have fallen by almost 15% since January, and we believe this sell-off represents a great opportunity to buy a global bank with an attractive dividend yield. HSBC has excess capital, thanks to its US unit, and, as a result, we expect the bank to announce a new buyback program in the second half of the year.

If you would like to receive our articles as soon as they are published, consider following us by clicking the “Follow” button beside our name at the top of the page. Thank you for reading.

Disclosure: I am/we are long HSBC, JPM.

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.

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The (Chinese) Empire Strikes Back: This Dividend Stock Soars
April 4, 2018 6:01 pm|Comments (0)

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It's Finally Time To Buy This Dividend King
January 25, 2018 6:02 pm|Comments (0)

Source: imgflip

2017 saw the largest number of US retail store closings in history, which the media has dubbed the “retail apocalypse”. However, in reality, rumors of traditional retail’s demise are greatly exaggerated.

Source: Hoya Capital Real Estate

In fact, traditional retail sales have been growing around 2% a year since 2005, right alongside the overall US economy. Better yet? In 2017, a strengthening economy meant that brick & mortar retail growth actually accelerated. This is why, despite over 10,000 total store closings, the number of US retail stores actually increased by over 4,000.

Source: Hoya Capital Real Estate

In addition, shopping center REITs as a whole have continued to post slow but steady same-store net operating income or NOI growth throughout this so called “apocalypse”.

Source: Hoya Capital Real Estate

The bottom line is that shopping center REITs, like all real estate, are made up of both high, medium, and low quality names. This means that there continue to be Grade A industry leaders with world class management, strong balance sheets, and strong growth prospects.

Let’s take a look at Federal Realty Investment Trust (FRT), which is not just the gold standard in its industry, but arguably one of the best REITs you can own period.

More importantly, thanks to the recent sell-off in REITs, Federal Realty is now trading at some of the most attractive valuations in years. That means that this is likely a great time to add the only REIT dividend king to your diversified high-yield dividend portfolio.

The Undisputed King Of Shopping Center REITs

Source: FRT Investor Presentation

Federal Realty Investment Trust may not be a massive REIT, but since its founding in 1962 (making it one of the oldest REITs in the world), it has proven an exceptional ability to make investors rich. It’s done so thanks to its exemplary management team, led by CEO Donald Wood, who took over the top spot in 2002 after serving for four years as COO and CFO.

Specifically, FRT has focused on quality over quantity, being highly selective about only purchasing or developing shopping centers in the nation’s premier property markets. Today, it owns 104 centers making up 24.1 million feet of leasable square footage leased to over 2,800 tenants.

Source: FRT Investor Presentation

Federal Realty’s centers are located in very high density and very affluent areas, which is why it enjoys the industry’s best average rent per square foot by far.

Source: FRT Investor Presentation

The REIT is also highly diversified by both industry subcategory, as well as tenants, with no customer making up more than 2.9% of annual rent.

Source: FRT Investor Presentation, Earning Supplement

Federal Realty’s focus on top-tier shopping centers located in prime locations also means it has consistently enjoyed the industry’s top lease spreads. This means that FRT is able to obtain higher rents anytime it signs a new lease, whether with a new tenant (if an old one has failed or left) or when renegotiating expiring leases.

Source: FRT Investor Presentation

In the most recent quarter, Federal Realty’s lease spread came in at a very healthy 14%, with 400,000 square feet of space leased at an average rental rate of $ 38.24 per square foot.

This helped it to achieve same-store YOY operating income growth of 2.6%, 4.4% when including redeveloped properties. And speaking of redeveloped properties, this is the key to the REIT’s strong growth prospects going forward.

That’s because in recent years FRT has been investing into non retail properties, such as offices, hotels, and apartments (it owns over 2,052 rental units).

Source: FRT Investor Presentation

In the coming years, management says it wants 20% of rent to come from non retail properties. Not only will this provide greater diversification but because the hotels, offices, and apartments are located on top or near its shopping centers, they help to further drive higher traffic that benefits its tenants. That, in turn, means continued strong leasing spreads.

But wait it gets better. Federal Realty’s plans to invest more heavily into non retail means it has a much larger growth market to target in the future, about $ 4 billion over the next 15 years. The cash yields on these investments are usually about 7% to 8% which is much higher than traditional shopping centers (6.3% cash yield historically).

This brings us to another major competitive advantage, FRT’s industry-leading low cost of capital. This ensures strong AFFO yield spreads (cash yield minus cost of capital) on all its investments.

Approximate AFFO Weighted Average Cost Of Capital 2.9%
Historical AFFO Cash Yield On Invested Capital 6.3%
Approximate AFFO Yield Spread 3.4%


Sources: management guidance, FastGraphs, Morningstar

The low cost of capital is thanks largely to two things. First, the REIT has been very conservative with debt, which is why it has one of the highest investment grade credit ratings in all of REITdom (more on this later).

Second, Federal Realty’s track record of successfully adapting to challenging and constantly shifting industry conditions is literally the best in the business. That’s both in terms of growing its funds from operation or FFO (operating cash flow) per share far faster than lower quality rivals, as well as being the only dividend king REIT in the world.

Source: FRT Investor Presentation

Basically, Federal Realty Investment Trust is the bluest of REIT blue chips and the ultimate sleep well at night (SWAN) stock. The disciplined and very shareholder friendly corporate culture has proven to be incredibly resilient which is why the REIT rightfully trades at a substantial premium to its lower quality rivals (more on this in a moment).

However, that premium helps to ensure low costs of equity which allows management to, in concert with retained cash flow and modest amounts of low cost debt, ensure it has ample low cost liquidity with which to grow.

In fact, today FRT’s liquidity (remaining borrowing power + cash) stands at $ 781 million, which is enough to fund about three years worth of its planned investments.

Combined with its existing redevelopment pipeline, as well as its ongoing opportunistic acquisitions, Federal Realty is likely to remain one of the fastest growing shopping center REITs in America.

Shopping Center REIT FFO Growth Projections

Source: Brad Thomas

Or to put another way, Federal Realty is perfectly positioned to take advantage of America’s accelerating economy and rising consumer spending which bodes well for its long-term dividend growth prospects.

Dividend Profile: Excellent Income Growth And Risk-Adjusted Return Potential

REIT Yield 2017 FFO Payout Ratio 10 Year Projected Dividend Growth 10 Year Potential Annual Total Return 5 Year Beta Risk Adjusted Potential Total Returns
Federal Realty Investment Trust 3.2% 67% 5% to 7% 8.2% to 10.2% 0.337 24.3% to 30.3%
S&P 500 1.7% 50% 6.2% 7.9% 1.0 7.9%


Sources: management guidance, GuruFocus, FastGraphs, yCharts, CSImarketing, multpl.com

Ultimately, REIT investing is all about the dividend. That means that investors need to pay particular attention to the dividend profile which is composed of three parts: yield, dividend safety, and long-term growth prospects.

As one might expect from a dividend king, Federal Realty offers a very safe payout courtesy of one of the industry’s lowest FFO payout ratios. But of course, there’s more to dividend safety than just a low payout ratio. One also needs to make sure that a REIT isn’t drowning in debt.

REIT Forward Net Debt/EBITDA EBITDA/Interest Fixed Charge Coverage Ratio Debt/Capital S&P Credit Rating
Federal Realty Investment Trust 5.4 5.5 4.1 56% A-
Industry Average 5.8 3.4 NA 62% NA


Sources: FRT Investor presentation, earnings supplement, Morningstar, CSImarketing, FastGraphs

Fortunately, Federal Realty always takes a long-term approach to business, which means a highly conservative balance sheet. That includes below average leverage ratio, a very strong fixed charge coverage ratio, and an interest coverage ratio that’s much greater than its peers. The REIT also has the lowest amount of variable rate debt (1%) in the industry.

That leads to one of the strongest investment grade credit ratings of any REIT in America, which is what helps to ensure: very low cost of capital, a high cash yield spread on new investments, and strong long-term growth.

Better yet? Like most REITs, Federal Realty is a low volatility stock. In fact, over the past five years, it’s been 66.3% less volatile than the S&P 500. This makes it an excellent choice for low risk investors, such as retirees.

All told, Federal Realty’s long-term dividend growth potential of 5% to 7% means that it should be capable of about 9.2% annual total returns. That may not seem very exciting, but you need to keep two things in mind. First, given the overheated valuations of the S&P 500 today, FRT should be able to beat the market over the next decade. And given its status as one of the highest quality REITs in the world, as well as its low volatility, this means it offers far superior risk-adjusted total return potential.

In addition, this Grade A industry leader, which is rarely on sale, is now trading at the most appealing valuation in about four years.

Valuation: Still Not Cheap But Worth Buying At Fair Value

Chart
FRT Total Return Price data by YCharts

REITs have had a rough year, basically returning nothing while the red hot S&P 500 has gone parabolic. Federal Realty meanwhile has done far worse. However, while some might see that as a sign to stay away, I view it as a potentially good buying opportunity.

REIT P/AFFO Historical P/AFFO Yield Historical Yield
Federal Realty Investment Trust 21.1 19.2 3.2% 3.0%
Industry Median 11.0 NA 5.3% NA


Sources: Hoya Capital Real Estate, FastGraphs, GuruFocus

Now it’s important to keep in mind that on a price/FFO basis, FRT is nowhere near “cheap”. After all, it is still trading at a huge premium to its peers, as well as higher than its historical norm.

However, as a dividend focused investor, I generally like to compare a stock’s yield to its historical norm, and here things look a lot better. Specifically, Federal Realty’s yield is now slightly above its 13-year median and compared to its five-year average yield, it looks like a potentially good buying opportunity.

Source: Simply Safe Dividends

Of course, backwards looking valuation metrics can only tell us so much. After all, profits and dividends come from the future. This is why I like to use a long-term discounted dividend model to estimate a stock’s fair value based on the net present value of its future payouts.

Forward Dividend 10 Year Projected Dividend Growth Terminal Growth Rate Fair Value Estimate Dividend Growth Baked Into Current Share Price Discount To Fair Value
$ 4.00 5% (conservative case) 3% $ 106.74 4.5% -17%
6% (likely case) 4% $ 123.11 -1%
7% (bullish case) 5% $ 146.69 15%


Sources: FastGraphs, GuruFocus

I use a 9.1% discount rate because since 1871 this is what a low cost S&P 500 ETF would have generated, net of expenses. Thus I consider this the opportunity cost of money.

However, because any discounted cash flow model requires estimating the smoothed out future growth rates, there is a large amount of inherent uncertainty associated with this approach. This is why I use a variety of what I consider to be realistic growth models, preferably based on long-term management guidance. In this case, FRT expects to grow FFO/share at 5% to 7.25% a year over the long-term.

When we run the figures, we find that indeed Federal Realty doesn’t appear undervalued. Based on my best estimate of its most likely growth scenario. In fact, I estimate that the stock is pretty much at fair value right now.

However, under the Warren Buffett principle of “better to buy a wonderful company at a fair price than a fair company at a wonderful price”, purchasing FRT is still potentially a good idea. That is assuming you understand the risks associated with the stock, especially the realities of its interest rate sensitivity.

Risks To Consider

There are three risks I think are worth considering before buying Federal Realty Investment Trust.

First, while the REIT does have excellent diversification of its rent in terms of tenants, it is worth noting that some of its largest customers are indeed struggling.

For example, The Gap (GPS), and Ascena Retail Group (ASNA) have been struggling in recent years not just with declining sales in weak stores but with an overall decline in their brands. Similarly, LA Fitness, while e-Commerce proof, is facing increased competition from smaller boutique gyms.

Now keep in mind that none of these tenants represent a substantial amount of rent, so FRT’s dividend safety isn’t likely to be put at risk even if they were to fail entirely. However, in the event of continued decline, it could take some time for management to find new tenants to replace them which could result in short-term FFO/share growth weakness that could hurt the short-term dividend growth rate and share price.

Another potential risk to keep in mind is that Federal Realty isn’t a large enough REIT to fully fund its various growth endeavors. For example, its redevelopment pipeline largely represents joint ventures and partnerships with other developers that means that there is a risk that some of its projects might end up being delayed or even canceled if some of its partners fall upon hard financial times.

Finally, we can’t forget that diversifying into non retail properties can be a double-edged sword. That’s because FRT has the most experience in traditional retail, and developing office, hotel, and apartment real estate is not exactly in management’s wheelhouse.

And since real estate development is a highly complex and localized endeavor, there is no guarantee that FRT will be able to finish its projects on time or on budget. That might mean it fails to hit its 7% to 8% cash yield targets on its redevelopment pipeline which could result in FFO/share growth missing its long-term targets.

What about interest rates? That’s certainly one of the biggest things that REIT investors worry about which is understandable given that REITs can, at times, be highly interest rate sensitive.

Source: Hoya Capital Real Estate

Usually, there is an inverse relationship between a REIT’s beta to the S&P 500 (volatility relative to the market) and beta to a REITs’ yield compared to 10-year Treasury yields.

This is because a REIT’s beta (to the stock market) generally is lower the longer the leases are. This makes intuitive sense since the longer the leases the more stable the cash flow that funds the dividends.

However, longer leases also mean slightly higher inflation risk. That’s because, while rental escalators generally have inflation baked into their formulas, the exact formula is fixed until a new lease is signed or an existing one renegotiated.

The good news is that FRT’s 8.2-year weighted average remaining lease duration is not that large, which explains why its beta to yield is slightly below the industry average.

Source: Hoya Capital Real Estate

Keep in mind that beta to yield (interest rate sensitivity) is cyclical. This means that short-term price sensitive investors, such as those that retiring soon and plan to use the 4% rule, need to understand that there is a real risk of potentially losing money in any REIT if long-term rates spike and you are forced to sell at the bottom.

But don’t let that scare you away from REITs entirely because historically, commercial real estate has been an excellent long-term income and wealth compounder.

That’s because REIT interest rate sensitivity is both cyclical and mean reverting. That means that over the past 45 years, the actual correlation between REIT total returns and 10-Year yields (proxy for long-term rates) is effectively zero (actually slightly positive).

Sources: NAREIT, St. Louis Fed

Note that the R Squared of 0.02, which indicates that since 1972, 10-Year Treasury yields have explained just 2% of REIT total returns. Basically, this means that, over a long enough period of time, REIT investors should not worry about rates at all. That’s because they are largely irrelevant to long-term total returns.

For example, since 1972, equity REITs have increased in value 85% of the time only suffering 7 down years in the past 45 years.

This includes times where interest rates hit all-time highs (10-year Treasury Yield 16% in September 1981). In fact, here’s how equity REITs did as a sector between 1972 and 1990. This was during the fastest period of interest rates in US history as well as a period of steadily declining Treasury yields.

Year 10-Year Yield (Start Of The Year) Equity REIT Total Return
1972 6.09% 8.0%
1973 6.54% -15.5%
1974 7.0% -21.4%
1975 7.53% 19.3%
1976 7.80% 47.6%
1977 7.4% 22.4%
1978 7.94% 10.3%
1979 8.95% 35.9%
1980 11.13% 24.4%
1981 12.68% 6.0%
1982 14.14% 21.6%
1983 10.8% 30.6%
1984 11.67% 20.9%
1985 11.17% 19.1%
1986 9.08% 19.2%
1987 7.18% -3.6%
1988 8.26% 13.5%
1989 9.01% 8.8%
1990 8.43% -15.4%


Source: NAREIT, St. Louis Federal Reserve

In fact, since 1972, equity REITs have handily beaten the S&P 500, on both an absolute and inflation-adjusted basis.

Asset Type 45 Year Annual Total Return 45 Year Inflation Adjusted Annual Total Return Growth Of $ 10,000 In Inflation Adjusted Dollars
Equity REITs 12.8% 6.4% $ 409,583
S&P 500 10.6% 8.6% $ 163,070


Sources: NAREIT, Moneychimp.com

How is that possible? Because the current narrative that “REITs are bond alternatives” is incorrect. Bonds are fixed coupon assets, whose value is purely derived from: remaining duration, the coupon payment, and current interest rates (usually inflation expectation driven).

Equity REITs, on the other hand, are growing organizations whose management adapts over time to varying industry and economic challenges to keep its property base, cash flow, and dividends growing.

But what about costs of capital? If rates are high, then debt is expensive, and so REITs can’t grow profitably, right? Actually not true, because if rates are very high then cap rates are low and so cash yields on new acquisitions are also higher.

In addition, REITs match their debt duration to their lease duration, thus minimizing cash flow (and profit) sensitivity to interest rates.

Source: FRT Investor Presentation

For example, 99% of Federal Realty’s debt is fixed, and over the past three years, it’s managed to both refinance at lower rates. More importantly, the REIT has refinanced for longer bond duration than its weighted average remaining lease duration of 8.2 years.

Or to put it another way, FRT makes sure that the spread between cash yield on invested capital and its cost of capital is fixed. This ensures that its profitability on new investments is constant, no matter what rates are doing.

What happens after the bonds mature though and interest rates are much higher? Well, that’s where people fail to appreciate the beauty of REITs; specifically that REITs are good inflation hedges.

This is because interest rates are usually high when the economy is strong and thus, inflation is usually higher. REITs are able to thus offset rising inflation via higher rents.

Basically, when FRT’s bonds do mature if interest rates are significantly higher than they were when the bond was sold, the new rental rate it can obtain on the property it purchased with the debt will rise as well. Thus, the cash yield spread on invested capital remains highly stable over time.

This explains both how REITs in general, and Federal Realty in particular, have been able to so consistently compound investor wealth over time; in all manner of economic and interest rate conditions.

Source: NAREIT, Index = 100 in 1972

Bottom Line: Federal Realty Investment Trust Is The Ultimate SWAN REIT And Potentially Worth Buying Today

Please don’t get me wrong, I’m not saying the Federal Realty Investment Trust is necessarily a screaming bargain right now. Nor am I predicting that this is the bottom for this REIT or any other. After all, no one can predict short-term stock prices and it’s certainly possible that FRT and REITs, in general, might have a bad year if interest rates rise sharply.

However, knowing that interest rates are NOT a threat to REITs in the long-term, what I ultimately care about is buying the top quality and time-tested names in a growing industry. That means dividend stocks with: strong balance sheets, growing cash flows and dividends, and a proven ability to adapt over time to grow in any economic, interest rate and political environment.

Federal Realty Investment Trust is unquestionably a Grade A SWAN stock that offers all of these features. And with the price now at fair value (something that’s rare for a stock of its caliber in an overheated market), I have no qualms about recommending it to anyone looking for a highly safe and steadily growing income stream.

In fact, should FRT remain at current prices (or fall) in the coming weeks, I plan to add it to my own high-yield retirement portfolio.

———————————————————————————–

Studies show that most investors have underperformed the stock market by about 80% over the past 20 years due to a large number of mistakes, including market timing, improper portfolio structure, and poor stock selection.

Investor In the Family And Seeking Alpha are proud to bring you the 2018 Do It Yourself Investing Summit from Jan. 22nd to Jan. 26th. This summit brings together 21 of Seeking Alpha’s top investing minds (including yours truly) to highlight numerous priceless: investing principles, as well as ideas and tips about the market, economy and individual stocks for 2018.

I hope you’ll join us for this can’t-miss event and gain access to this treasure trove of knowledge that can ultimately save you a lot of: time, money, and can help you to achieve your financial dreams.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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Dividend Sensei's Portfolio Update 16: Ignore All Market Predictions
December 31, 2017 6:00 am|Comments (0)

Source: AZ quotes

First, let me be very clear that this is my personal portfolio tailored to my specific financial situation, risk profile, time horizon, and personality traits. I am not recommending anyone mirror this portfolio, which is merely designed to show my unique, rule-based, methodical approach to value-focused, long-term, dividend growth investing.

My situation is unique, as, though only 31, I’m already retired (medical retirement from the Army), thus making this portfolio an income-focused retirement portfolio (though in a taxable account). I’m also working full time (self-employed) and thus have an external source of income to continually add to this portfolio. I do not plan to actually tap the portfolio’s income stream for 20-25 years, when I plan to move my family (and help support my parents) to the promised land of my people: Sarasota, Florida.

What this portfolio can be used for is investing ideas; however, this portfolio includes high-, low-, as well as medium-risk stocks, so it’s up to each individual to do their own individual research and decide which, if any, of my holdings are right for you.

For a detailed explanation of my methodology, please read my introductory article to the EDDGE 3.0 portfolio.

What Happened This Week

It’s been one heck of a year for Wall Street. All three major indexes soaring on strong optimism about tax reform and accelerating economic growth.

Chart ^SPXTR data by YCharts

Of course, many are now worried that the market is in a bubble, and that’s understandable. After all, based on the S&P 500’s trailing 12-month earnings, stocks are trading at some of their loftiest valuations in history.

S&P 500 Trailing 12 Month PE

Source: Multpl.com

And looking at the popular (though far less useful than most people think) Shiller CAPE, things look even scarier.

S&P 10 Year Cyclically Adjusted PE Ratio (CAPE)

Source: Multpl.com

Even more amazing? This year’s strong rally has occurred with record low volatility. In fact, the biggest drawdown for the S&P this year was an astonishingly low 3%! You have to go back to 1994 to find a year with better returns with volatility this low.

This kind of freakishly high risk-adjusted total returns is likely why there is a bubble in people calling market bubbles. And since it’s natural to crave certainty in a deeply uncertain world, analysts and various “experts” are quick to offer predictions about the next year. But there’s a major problem with this: they are basically guesses plucked from thin air.

100% Guaranteed That The Market Will Rise In 2018… Or Fall… Or Stay Flat

Whether it’s economists predicting interest rates, or analysts predicting where the market will go next year, the track record is so bad as to make all predictions essentially useless.

For example, since Bloomberg began tabulating analyst consensus guesses for the next year’s market performance (in 2000), Wall Street’s very well paid best and brightest have predicted the market would rise every single year. This means that they completely missed the four negative years we’ve had in the last 17 years (when factoring in dividends).

This is due to two main factors. First, the stock market generally rises over time. In fact, on an annual basis, the S&P 500 rises about 80% of the time. And that trend has been especially strong recently. For example, in the past 31 years, the market’s total return has only been negative five times: in 1990, 2000, 2001, 2002, and 2008.

In other words, with the market rising 84% of the time in the past three decades, the safest bet for any analyst is to predict the market will go up next year.

This is likely why Mike Wilson, the chief US equity strategist at Morgan Stanley (MS), who offered the most bullish 2017 prediction in late 2016, is now predicting “just” a 2.6% rise (to 2,750) in the S&P 500 in 2018.

That’s despite predictions that: interest rates, increased volatility, and poorer than expected credit and economic data, will all roil the markets next year.

Even John Hussman, the famous permabear who is predicting a 65% market crash, is hedging his bets and saying that the market could continue rising for the foreseeable future.

In other words, every analyst making any kind of short- to medium-term prediction is basically pulling numbers out of thin air while making sure to cover their buts in case they are wrong.

This is why I don’t bother ever predicting what the market, or any given stock, will do over the next year.

“…in the short run, the market is like a voting machine – tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine – assessing the substance of a company.” – Benjamin Graham

As Ben Graham, the father of modern value investing (and Buffett’s professor at Columbia University), explains, short-term prices are totally unpredictable. They are governed by “animal spirits” as millions of investors experience often inexplicable, and volatile, swings in emotions.

Source: Slideplayer

However, the fact is that this precise return of volatility and negative returns that everyone is worried about doesn’t matter. In fact, if you play your cards right, you can turn it to your advantage and use it to achieve the kind of financial independence that most people only dream of.

Markets Always Climb A Wall Of Worry

Source: A Few Dollars More

The US stock market, and the global economy that ultimately drives it, is incredibly complex. There are always some collection of threats and risks that could cause stocks to drop in the short term. This has always been the case, and will continue as long as there is a stock market.

This can lead to large crashes, and long bear markets, in which stocks stagnate or decline for years on end. However, this is where true opportunities lie. In fact, market crashes are where the biggest fortunes are made.

Source: Kapitalust

After all, Warren Buffett has made his fortune by being a value focused contrarian. Which is why I too have adopted this strategy for my own portfolio.

Of course, “being greedy when others are fearful” and being a buy and hold investor is easier said than done. That’s because, while great fortunes are made over decades, we live in a short-term world. One in where the media is constantly bombarding us with speculative, but plausible sounding reasons to churn our portfolios.

This is why the average investor does so terribly when actively managing his/her investments. In fact, between 1996 and 2015, JPMorgan (JPM) found that retail investors underperformed every single asset class, and even inflation.

This also explains the rise of passive investing, aka index funds. Warren Buffett, Mark Cuban, John Bogle (founder of Vanguard), and numerous other successful investors have called a low cost market ETF the best default option for almost everyone.

In other words, what all the historical market data (the examples of the top investors in history) shows, is that time in the market is what matters. That’s opposed to timing the market, in hopes of avoiding the big crashes.

This is why I personally love Steven Bavaria’s “income factory” theory of investing. Basically, Mr. Bavaria thinks of his high-yield retirement portfolio like a cash flow based business.

Each holding is a money minting machine that sits in his income factory. The market prices of those holdings, and the portfolio in general, are the market’s current valuation of his factory.

However, rather than concern himself with the short-term swings of the factory’s value, he only cares about growing the income over time. After all, dividends are what pay the bills, and as long as they rise over time, the factory’s valuation is irrelevant.

In fact, if prices crash, this high-yield investing strategy works even better. That’s because the income it generates can then be invested into even more income producing machines, and lock in a higher yield on each one.

Eventually, a diversified collection of quality income producing assets will naturally appreciate in value, and you will get your capital gains. This is born out by market studies that show that over the long term, the total return of a dividend portfolio follows the formula: yield + long-term dividend growth.

This makes intuitive sense, because current dividends require strong and consistent cash flow from which to pay them. Meanwhile, dividend growth is a good proxy for cash flow growth, since over the long term, payouts must track with earnings and cash flow per share increases. And since a stock’s ultimate value is based on its per share cash flow, rising dividends generally mean rising share prices over time.

All of which means that you don’t need to choose between high income and total returns. Because if you build a quality portfolio that, say yields 5%, and has long-term dividend growth of 5%, then over time, you’ll get about 10% total returns. That’s compared to the market’s historical 9.1% total return since 1871.

Basically, this is why I love dividend investing, because it is literally the easiest and highest probability way for regular people to build an exponentially growing stream of passive income. Not only does this allow you to retire early, and live life on your terms, but it also is the most likely way to beat the market over time. It’s also the best option for potentially become rich enough to do anything you want (such as become a philanthropist which is my ultimate end game).

Basically, by turning your portfolio into a cash flow based business, you can counteract all the dangerous, short-term speculative emotions that cause so many investors to do poorly over time.

Dip Buy List

This list represents quality blue chip dividend stocks that are worth owning, but whose yields are just a tad (15% or less) under my target yield. However, a combination of company specific dip plus a dividend increase could cause them to reach my target yield which would mean that I would snatch them up (get in while the getting’s good).

  1. Bank Of Nova Scotia (BNS) – low risk, 4% target yield, current yield 3.9%
  2. NextEra Energy (NEE)- low risk, target yield 3.0%, current yield 2.5%
  3. NextEra Energy Partners (NEP):- low risk, target yield 4.0%, current yield 3.8%
  4. Altria (MO) – low risk, target yield 4.0%, current yield 3.6%
  5. Pfizer (PFE) – low risk, target yield 4.0%, current yield 3.7%
  6. Crown Castle (CCI): – low risk, target yield 4.0%, current yield 3.8%
  7. Genuine Parts Company (GPC): – low risk (dividend king), 3% target yield, current yield 2.8%

Correction Buy List (in order of priority)

The correction list is the top five quality dividend stocks I want to own, that are between 15% and 20% away from their target yields. This means that it would likely require a broader correction before I can buy them.

  1. Main Street Capital (MAIN) low risk, target 8% yield, current yield 7.1%
  2. STAG Industrial (STAG) medium risk (unproven in recession), target 6% yield, current yield 5.2%
  3. AbbVie (ABBV) – low risk (fast growing dividend aristocrat), target 3.5% yield, current yield 2.9%
  4. Texas Instruments (TXN) – low risk, 3% target yield, current yield 2.4%
  5. Royal Bank of Canada (RY) – low risk, 4% target yield, current yield 3.5%

Because corrections usually only last one to three months, I have decided that I will only maintain a list of five correction buy list stocks. Any more would be pointless since I likely won’t have time to buy them before the downturn ends.

Everything that doesn’t make the correction list is thus shifted to the bear market/crash list.

Bear Market/Crash Buy List

Stocks whose yields are all 20+% away from my target yields.

Bear markets (20% to 39.9% declines from all-time highs) and crashes (40+% decline from all time high) usually only occur during recessions and last from one to three years. Thus, they offer longer and stronger chances to load up on Grade A blue chips and dividend aristocrats/kings that are currently at frothy valuations.

My goal during a bull market is to buy stocks yielding only 4% or higher. This might sound counterintuitive, but it’s actually not. That’s because there is always something of quality on sale in some beaten down industry, such as retail REITs, or pipeline MLPs. Only during a market crash will I allow myself to go as low (but no lower) than 3% yield.

That will allow me to pick up some truly high-quality and legendary dividend growth stocks – those in other sectors that are now closed to me due to high market valuations and low yields.

My current crash list, in order of priority, and target yield, is:

  1. Boeing (BA) – low risk, 3% target yield, current yield 2.3%
  2. Johnson & Johnson (JNJ) – low risk, 3% target yield, current yield 2.4%
  3. 3M (MMM) – low risk, 3% target yield, current yield 2.0%
  4. Home Depot (HD) -low risk, 3% target yield, current yield 1.9%
  5. Microsoft (MSFT) – low risk, 3% target yield, current yield 2.0%
  6. Amgen (AMGN) -low risk, 4% target yield, current yield 3.0%
  7. Apple (AAPL) – low risk, 3% target yield, current yield 1.5%
  8. Toronto Dominion Bank (TD) – low risk, target yield 4.0%, current yield 3.2%
  9. Digital Realty Trust (DLR): -low risk, 4% target yield, current yield 3.3%
  10. Target (TGT) – low risk, target 5% yield, current yield 3.8%

This week I was doing extensive research on some top pharma stocks, and it reminded me that Amgen is one of the few stocks in this complex but defensive industry that I want to own.

Meanwhile, the decision to forgo ETFs entirely due to the variable nature of their payouts means that the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) has been removed from my crash list.

However, I also realized that I need to ultimately diversify the high-yield REIT portion of my portfolio. This is why I’ll be gradually adding faster growing REITs to my crash list. For this week, I’ve added Digital Realty Trust to the crash list and Crown Castle to the dip buy list.

I’ve also added Genuine Parts Company to the dip list, as it’s one of my favorite fast growing dividend kings (with 10+% total return potential).

Finally, a reader pointed out that I had the current yield on Royal Bank of Canada incorrectly listed as 2.4%, when in fact it’s 3.5%. That means that it’s only about 15% away from my target yield and thus deserves a spot on my correction list. This was made possible by this week’s purchase of, and thus removal from my correction list, of STORE Capital.

Buys And Sells Of The Week

Sold $ 6,200 of iShares Global REIT ETF (REET)

Bought $ 1,000 Algonquin Power & Utilities (AQN)

Bought $ 6,000 of STORE Capital (STOR)

This past week, iShares Global REIT ETF announced its next dividends, and they were way down from Q4 of 2016. While this is normal for an ETF, due to the very large and diversified nature of the portfolio (275 stocks), I’ve decided that ETFs just don’t work for me.

After all, my most sacred rule is that I’m looking for safe, and steadily growing dividends, which means that the variable nature of ETFs, and CEFs, makes them unsuitable for my needs.

The biggest reason I had owned REET was the 1/3 exposure to global blue chips. However, since Interactive Brokers allows me to trade on dozens of foreign exchanges, I can pick and choose the best names. This allows me to avoid paying an expense ratio, while better targeting foreign dividend stocks that best meet my needs.

The capital from the REET sale also presented me an opportunity to buy one of my all time favorite, fast growing SWAN REITs; STORE Capital. Arguably STORE Capital is the highest-quality, (and one of the fastest growing) triple net lease REITs.

And as Brad Thomas just pointed out, it’s currently trading at a fair price and likely to generate strong market beating total returns. So under the Buffett Principle of “better to buy a wonderful company at a fair price, than a fair company at a wonderful price”, I decided to swap my REET (fair investment) for a wonderful company at a reasonable price (STOR).

Meanwhile, the Algonquin purchase I had planned was larger than expected. That was thanks to a very nice surprise Christmas gift (of cash) that allowed me to buy double what I had initially anticipated.

The Tentative Plan Going Forward

In the past week, I came across another awesome Canadian utility with impressive yield, matched by industry leading dividend growth. This would be Emera (OTCPK:EMRAF), which currently yields 4.8% and plans to raise its dividend by 8% annually through 2020.

I love Emera’s huge regulated (and thus highly defensive and predictable) business and diversified asset base (US, Canada, and the Caribbean). The only iffy thing about them is the rather high debt levels they took on to acquire TECO (Tampa Electric Company). However, Moody’s has looked at their current leverage and judged them still worthy of a Baa3 rating (equivalent to S&P BBB-) which is investment grade.

Management plans to deleverage over time, while still aggressively investing in growth. So due to the highly diversified, and low risk business model, I consider it a worthy addition to the utility portion of my portfolio.

This means that in the coming weeks, I will finish trimming 75% of Uniti Group (UNIT) and New Residential Investment Corp. (NRZ) and put the capital to work:

  • Paying down $ 2,000 more of margin debt (with another $ 2,000 to be paid off through net dividends through February).
  • Finish off my position in Crius Energy Trust (OTC:CRIUF) – about $ 5,100.
  • Buy a full position in Brookfield Real Estate Services (OTCPK:BREUF) – about $ 9,200.
  • Buy a full position in NorthWest Healthcare Properties REIT (OTC:NWHUF) – about $ 8,000.
  • Finish off my AQN position ($ 4,000).
  • Buy an 80% position in Canadian Imperial Bank of Commerce (CM) with the remaining $ 4,100.

This tentative two-week plan serves several purposes. First, it completes the right sizing of all my positions by dividend risk. It also continues to “crash proof” my portfolio through deleveraging. Finally, it adds some much needed diversification via:

  • my first hospital REIT;
  • my first bank;
  • more utilities to act as the third pillar of my portfolio (along with REITs and pipeline MLPs); and
  • more Canadian companies, the best I can do in terms of international diversification given my need for non-variable dividends

Beyond these next 2 weeks, the plan is to finish off my CM position (which will take 2 weeks). Then get started on Telus (TU), the AT&T of Canada, but with much faster dividend growth.

As for Emera? Well, that is going to be tricky. This is because Interactive Brokers requires that I buy foreign stocks in round lots of 100. With Emera current trading at $ 37.49, that means I need to buy it $ 3,750 at a time.

That means that I would either have to buy it on margin and then pay it back, or wait until the first week of February or March (I receive the majority of my pay at the end of the month).

Since my goal is to crash proof my portfolio (thus paying down $ 36,000 in margin debt in a few months), I’ll have to wait to add Emera. I’ll also likely have to buy it over 2 months. This means that acquiring CM, TU, and EMRAF will basically eat up the first third of 2018.

However, remember that this is a “tentative plan” because my dip list takes priority in case any of those blue chips hits my target yields. Whether or not I’m able to build out a full position is uncertain, so in the future I may end up with several stocks with partial positions. These I’ll add to opportunistically until each position is full.

The Portfolio Today

Source: Morningstar

Dividend Risk Ratings

  • Ultra low risk: (Limited to ETFs with proven histories of steadily growing dividends over time); max portfolio size 15% (core holding).
  • Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 10% (core holding).
  • Medium risk: Dividend safe and potentially growing for next two to three years, max portfolio size 5%.
  • High risk: Dividend safe and predictable for one year, max portfolio size 2.5%.

High-Risk Stocks

  • Uniti Group
  • New Residential Investment Corp.

Medium-Risk Stocks

  • Pattern Energy Group (PEGI): Will be upgraded when payout ratio declines under 85%.
  • Iron Mountain (IRM): Will be upgraded when dividend is maintained/grown during next recession.
  • Macquarie Infrastructure Corp. (MIC)
  • Crius Energy Trust: Due to cyclical nature of part of its cash flow.
  • CONE Midstream Partners (CNNX): Due to its small size.
  • Omega Healthcare Investors: Due to ongoing downturn in SNF industry.

Low-Risk Stocks

  • Enterprise Products Partners (EPD)
  • MPLX (MPLX)
  • AT&T (T)
  • Tanger Factory Outlet Centers (SKT)
  • EQT Midstream Partners (EQM)
  • Brookfield Property Partners (BPY)
  • TransAlta Renewables (OTC:TRSWF)
  • Simon Property Group (SPG)
  • Enbridge (ENB)
  • Realty Income (O)
  • EQT GP Holdings (EQGP)
  • Brookfield Infrastructure Partners (BIP)
  • Dominion Energy (D)
  • STORE Capital

The diversification continues to proceed steadily. I wasn’t able to trim UNIT or NRZ this week, as my sell plan involves capturing the full January dividends to help pay down $ 2,000 in margin debt.

My portfolio began with five stocks, all medium to high risk, in two sectors. Right now I’m up to 23 stocks, mostly low to medium risk, in four sectors. By January 8th, I estimate I’ll be up to 26 stocks in five sectors. The goal for the end of 2018 is 30-35 stocks in six sectors. The Morningstar holding graphic is capable of showing my top 34 holdings.

Dividend Sources

  1. Uniti Group: 18.7%
  2. New Residential Investment Corp: 14.2%
  3. Omega Healthcare Investors: 6.9%
  4. Macquarie Infrastructure Corp: 5.8%
  5. Pattern Energy Group: 5.3%
  6. CONE Midstream Partners: 4.7%
  7. TransAlta Renewables: 4.4%
  8. Enterprise Products Partners: 4.3%
  9. MPLX: 4.3%
  10. Iron Mountain: 3.4%
  11. Everything Else: 34.9%

This week I’ve gone to a new format for dividend income mix. The previous pie chart was from the version of Simply Safe Dividends wasn’t capable of tracking Canadian stocks, of which I own many. Thus, I’ve gone to a manual income mix breakdown, generated from the newest version of the software that includes my foreign holdings.

The portfolio remains dominated by my top two positions, which will be corrected within the next two weeks. After that, about three stocks will still represent over 5% of my annual income (OHI, MIC, and PEGI). The goal is to get that under 5% (and much lower over time). This ensures strong portfolio income diversification and security. I estimate that it will take me until Q2 2018 before my additional savings and acquisitions dilute these three medium risk stocks to their target levels.

Source: Morningstar

The portfolio has become far more diversified by stock style, especially compared to the early days when it was pretty much 100% small cap value. In fact, today almost none of it is small cap value but far more spread out over market cap and style.

Over time, I plan to use Trapping Value, the Canadian high-yield guru, as a source for lots of Canadian high-yield investments. Combined with some quality Canadian banks, I will have plenty of exposure to non-US holdings, whose representation in my portfolio is down from 15% to 14% this week. This is due to the sale of REET, which had one third exposure to international blue chip REITs.

In the coming months, the additions of CRIUF, BREUF, NWHUF, AQN, CM, TU, and likely BNS will raise that my Canadian exposure substantially. As for non-Canadian international stocks? I’m always on the lookout for international dividend stocks, but I likely won’t be finding too many that meet my steady dividend growth needs. That’s because foreign companies (like British Telecom (BT) or Vodafone (NASDAQ:VOD)) generally pay less frequent and variable dividends.

And since I’m no longer owning any ETFs, it’s unlikely that my portfolio will journey out beyond North America. That being said, my portfolio does have exposure to foreign cash flow. That’s because many of the blue chips I’ll be adding are themselves multi-nationals. For example, my 3% Asia exposure is due to BPY’s global portfolio of properties.

Source: Morningstar

While the market is dominated by cyclical companies, my need for steady and growing dividends requires more consistent cash flow. Thus, the large presence of hard assets (REITs and pipelines), high-yield (telecoms), and slow growth (utilities).

Source: Morningstar

Remember that Morningstar classifies some MLPs as energy and some as industrial. In reality, my portfolio is currently about:

  • 44% REITs
  • 33% Pipeline MLPs
  • 18% Utilities
  • 5% telecom

In the coming weeks, my utility positions will grow substantially. In addition, REITs, being one of the best sources of low risk, high-yield dividend growth, will likely always remain the largest sector in my portfolio. Pipeline MLPs are the other cornerstone of my portfolio. Utilities, while great, are generally too slow growing for me to add more than the few names I have currently planned. I may be able to find more later, but utilities will likely peak soon.

Source: Morningstar

With no more ETFs, my expense ratio is now zero. More importantly, thanks to my equity now surpassing $ 100K, I will no longer be at risk of Interactive Broker’s monthly maintenance fees.

This is $ 10/month minus any commissions. Once I’m done de-risking the portfolio, my average monthly commissions will likely fall to $ 2 or so, which means that my larger portfolio will avoid about $ 8/month in fees.

Rising interest rates are a major concern of course, with the Fed planning on at least three more hikes in 2018. Goldman Sachs (GS) expects the actual number to be four, with the first coming in March. My margin rate is the Fed Funds rate + 1.5%, so each hike raises my annual interest cost by $ 166.41 at present.

Currently, I anticipate that by the end of 2018, my margin debt will decline to about $ 50,000 which would have a single rate hike sensitivity of $ 125 per year. By the end of 2019 (assuming no correction by then), margin should be down to $ 35,000 or less. This would create rate sensitivity of $ 87.5 per rate hike.

During the next recession, the Fed is likely to take rates back to zero which would lower my margin rate to 1.625%. However, my actual future margin rates will depend on how much I borrow. Margin amounts over $ 100,000 have an interest rate of Fed Fund rate + 1.0%, so as the portfolio grows in the coming years, I’ll get substantial price breaks. However, the plan is to only add margin during corrections/bear markets. During bull markets, I’ll be deleveraging, both with capital gains as well as allowing net dividends to pay down margin debt.

Source: Morningstar

I no longer believe my lower risk approach (avoiding most BDCs, mREITs, refiner and tanker MLPs) will allow me to hit a 7% total portfolio yield. However, I’m confident that 6% is doable, so that’s my new long-term goal.

The current profitability metrics for the portfolio are lower than the market average owing to the highly capital intensive nature of REITs, MLPs, and utilities. As I diversify in the future into higher margin and return on capital industries (pharma and tech especially), these figures will improve. As will the overall growth rate of the portfolio.

Of course, given the high-yield focus I have, there are limits to how high the earnings, cash flow and dividend growth can realistically climb.

Source: Simply Safe Dividends

Note that the longer-term growth figures are incorrect. They don’t take into account that some of my holdings (such as NRZ, UNIT, and MPLX) didn’t exist five or 10 years ago, and thus they make the dividend growth appear much faster than it really is. However, the organic dividend growth of the past year is factual and represents the most recent annual payout hikes provided by my holdings.

The 1-year organic growth rate is down to 9.4% from 10.6% last week. However, this is still a fantastic annual payout growth rate and up substantially from the 4.2% that this portfolio started with.

Of course, going forward, that will likely fall off as I continue to diversify my portfolio. That’s partially because the version of Simply Safe Dividend Portfolio tracking software I’m using isn’t able to track Canadian stocks. A different version is, but it only offers five-year average growth figures. The problem with that is that it doesn’t account for new stocks that went public during that time. However, in the future, I may include those figures as well, because once the portfolio is diversified with more mature blue chips, those figures will become more accurate and thus representative of actual historical (and future) results.

Source: Simply Safe Dividends

Keep in mind that this projection table only indicates how much the current holdings would be paying if I didn’t add any cash to the portfolio or didn’t reinvest the dividends. In other words, it’s a highly static, non-compounding figure – one, however, that still shows the awesome cash-minting power of the business empire I’m building here.

Also note that the above estimate assumes I maintain the current portfolio, with no changes. In reality, I’m still in the process of de-risking the portfolio with planned trimmings of my UNIT and NRZ holdings in early January. Owing to the relatively slow dividend growth rates of those companies (relative to the blue chips I’ll be adding in the future), the dividend growth rate should hold up rather well, or even increase slightly in the future.

Thanks to my high savings rate, I estimate that within 10 years, my portfolio should be generating about $ 130,000 in net inflation adjusted dividends.

That’s because, despite a very broadly diversified portfolio, I estimate the long-term portfolio dividend growth rate will be around 7%. So assuming I can maintain an annual savings rate of about $ 72K (once all my divorce debt is paid off), my 6% yielding portfolio should, within a decade, have an inflation adjusted value of about $ 2.2 million.

In perspective, the S&P 500’s 20-year median annual dividend growth rate has been 6.1%. So the goal is triple the market’s yield, with 1% faster dividend growth. That should result in approximately 13% unlevered total returns compared to an S&P 500 ETF’s historical (since 1871) total net return of 9.0%.

Portfolio Stats

  • Holdings: 23
  • Portfolio Size: $ 178,101
  • Equity: $ 100,160
  • Leverage Ratio (portfolio/equity): 1.78 (compared to max of 2.25 in week 5)
  • Debt/Equity: 0.66 (compared to a max of 1.25 in week 5)
  • Distance to Margin Call (portfolio wide drop): 36.9% (compared to a minimum of 20% in week 5)
  • Margin Cost: 2.91%
  • Margin Debt: $ 66,572 (compared to max of $ 98,000 in week 5)
  • Remaining Buying Power: $ 206,592
  • Dividends/Interest: 6.63
  • Yield: 7.2%
  • Yield On Cost: 7.5%
  • Net Yield On Equity: 10.9%
  • Total Return Since Inception (through Dec. 28th, 2017): 2.87%
  • Total Annualized Unlevered Return Since Inception: 1.82%
  • Unrealized Capital Gains (Current Holdings): $ 7,124(+4.6%)
  • Cumulative Dividends Received (including accrued dividends):$ 5,235
  • Annual Dividends: $ 12,837
  • Annual Interest: $ 1,937
  • Annual Net Dividends: $ 10,900
  • Monthly Average Net Dividends: $ 908
  • Daily Average Net Dividends (my business empire never sleeps): $ 29.86

Source: Simply Safe Dividends

  • Portfolio Beta (volatility relative to S&P 500): 0.70
  • Projected Long-Term Dividend Growth: 7% to 8%
  • Projected Unlevered Total Return: 14.5% to 15.5%
  • Projected Net Levered Total Return: 23.5% to 25.3%

Worst-Performing Positions

  • Macquarie Infrastructure Corp: -8.0% (cost basis $ 69.85)
  • Omega Healthcare Investors: -1.5% (cost basis $ 28.04)
  • Crius Energy Trust: -0.6% (cost basis $ 7.19)
  • STORE Capital: -0.2% (cost basis $ 26.04)
  • Iron Mountain: 0.2% (cost basis $ 37.64)
  • Dominion Energy: 0.2% (cost basis $ 80.85)
  • Pattern Energy Group: 0.5% (cost basis $ 21.39)
  • Algonquin Power & Utilities: 1.0% (cost basis $ 11.08)
  • Brookfield Property Partners: 1.4% (cost basis $ 21.73)
  • MPLX: 2.2% (cost basis $ 34.60)

The strong rally in high-yield value stocks has helped to turn my previous losers into winners, with only four of my 23 positions being in the red.

Best-Performing Positions

  • Tanger Factory Outlet Centers: 16.9% (cost basis $ 22.76)
  • AT&T: 15.8% (cost basis $ 33.71)
  • Simon Property Group: 10.4% (cost basis $ 155.79)
  • New Residential Investment Corp: 8.8% (cost basis $ 16.44)
  • Brookfield Infrastructure Partners: 8.0% (cost basis $ 41.75)
  • Enterprise Products Partners: 7.7% (cost basis $ 24.49)
  • EQT GP Holdings: 6.1% (cost basis $ 25.46)
  • EQT Midstream Partners: 5.9% (cost basis) $ 68.77
  • Enbridge Inc: 4.5% (cost basis $ 37.53)
  • Uniti Group: 3.7% (cost basis $ 17.21)

It was a great week for high-yield value stocks. Last week’s post tax reform freakout ended and REITs, MLPs, and high-yield blue chips all rose sharply. Tanger was the biggest winner, popping 6% in the past week.

Undervalued Dividend Stocks On My Radar (And Buy List)

While I may be tapped out of additional buying power, that doesn’t mean I’m not always on the hunt for quality, undervalued dividend growth stocks.

So, here are the ones I recommend you check out. They are all near 52-week lows, and I would buy them (if I had the capital) at this time because I am confident they can generate long-term 10+% (unlevered) total returns.

Note: Buy indicates I believe a stock is a good investment right now, while Strong Buy means I consider the company to be a Grade A industry leader (and a safer company) trading at particularly excellent levels.

I also include the dividend risk ratings for each stock:

  • Ultra-low risk: (Limited to ETFs with proven histories of steadily growing dividends over time), max portfolio size 15% (core holding)
  • Low risk: High dividend safety and predictable growth for 5+ years, max portfolio size 10% (core holding)
  • Medium risk: Dividend safe and potentially growing for next two to three years, max portfolio size 5%
  • High risk: Dividend safe and predictable for one year, max portfolio size 2.5%

The stocks are in order of highest to lowest yield:

  • Crius Energy Trust: 8.8% yielding, monthly paying Canadian utility with very low payout ratio (53% after its latest acquisition), and a rock solid balance sheet. Medium risk, (due to somewhat volatile cash flow), buy.
  • Starwood Property Trust (STWD) – 8.8% yield, Grade A commercial mREIT. High risk, buy.
  • Brookfield Real Estate Services (OTCPK:BREUF): 8.2% yield, paid monthly, Canada’s top real estate service provider, managed by one of the top asset managers on earth, Brookfield Asset Management (BAM). Highly undervalued due to imminent demise of premium fees, but even with that payout ratio will be about 75%, meaning a safe, and likely growing dividend. Medium risk(housing market will cool eventually), buy.
  • Pattern Energy Group: 7.7% yield, one of America’s top yieldCos (renewable utilities). Solid plan in place to double wind capacity by 2020 which should boost dividend growth from 2% a year to 10% to 11% (post 2020). Medium risk (payout ratio guidance 96% for 2017), buy.
  • TransAlta Renewables: 7.0% yield, paid monthly. An excellent Canadian yieldCo with strong balance sheet, low payout ratio, and excellent growth prospects (5% to 6% long-term distribution growth). Low risk, Strong Buy.
  • EPR Properties (EPR): 6.1% yield: Badly misunderstood REIT specializing in entertainment properties. Dividend protected by 81% AFFO payout ratio, strong balance sheet, and 6-7% long-term growth. 5-6% long-term dividend growth likely for 11-12% total return. Medium risk, buy.
  • Brookfield Property Partners: 5.5% yield, this real estate LP is run by Brookfield Asset Management, the world’s top name in hard assets. Concerns over potentially overpaying for GGP have caused it to fall to 52-week lows. However, with 5% to 8% long-term dividend growth (guidance), today is a great time to take a contrarian approach and pick up this low risk, Grade A Strong Buy.
  • American Campus Communities (ACC): 4.1% yield, safe dividend, strong long-term growth prospects of 6-7%. Buy, medium risk

Bottom Line: Don’t Lose Sight Of What Really Matters

2017 was a wild year, in a good way. What will 2018 bring? I have no idea, but I’m reasonably confident that the economy will continue accelerating, as will corporate profits. This means that dividends will keep rising, and income portfolios will likely keep generating exponentially more income for patient, long-term investors.

Which means that there is absolutely no reason to concern yourself with what arbitrary figures the market hits or doesn’t hit in 2018. Just focus on the fundamentals, specifically of building a diversified, high-quality portfolio of dividend stocks that meet your long-term goals.

Best of all? Since there is always some good dividend stock on sale, you can continue to build your portfolio, no matter how crazy overvalued the broader market gets. And when the inevitable correction and or bear market hits? Well, that’s when things really get exciting for value dividend investors. While the media may freak out and Wall Street might be running red with the blood of speculators’ shattered dreams, smart long-term income investors will be sitting pretty in our crash proof bunker portfolios.

Not only will we be counting our generous, safe, and exponentially growing dividends, but we’ll also be able to snap up the best quality dividend growth stocks at fire sale prices.

A very happy New Year to all my readers and followers. May peace, joy and health bless you and yours in 2018, no matter what the market does.

Disclosure: I am/we are long UNIT, NRZ, PEGI, EPD, CNNX, MIC, TRSWF, SKT, MPLX, T, OHI, EQM, BPY, SPG, IRM, ENB, O, STOR, BIP, EQGP, D, CRIUF, AQN.

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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