Google is advising anyone who uses the Chrome browser to make sure their browsers have the latest update, which patches a “high” risk security flaw that hackers are already exploiting on unsuspecting victims.
It’s common practice when bugs are disclosed to not immediately share details of how they work until a majority of users have a security patch. The practice allows companies like Google to notify users, and roll out updates, without tipping off any potential bad actors.
While little is known about how the threat, called CVE-2019-5786, works, Justin Schuh, Google’s Chrome engineering and security desktop lead, tweeted on Tuesday that everyone should update their Chrome browser “right this minute” on every device.
Google Chrome updates are usually automatic, however they don’t always roll out to everyone, all at once. If you’d like to trigger a manual update, you can click the three dots in the upper-right corner of the window, select “Help” and “About Chrome.” This will tell users whether their browser is updated or if they need to restart their device to trigger the updated, patched version of the browser.
This article is part of a series that provides an ongoing analysis of the changes made to Berkshire Hathaway’s US stock portfolio on a quarterly basis. It is based on Warren Buffett’s regulatory 13F Form filed on 02/14/2018. Please visit our Tracking 10 Years Of Berkshire Hathaway’s Investment Portfolio article series for an idea on how his holdings have progressed over the years and our previous update for the moves in Q3 2017.
During Q4 2017, Berkshire Hathaway’s (BRK.A, BRK.B) US long stock portfolio value increased ~8%, from $ 178B to $ 191B. The top five positions account for ~62% of the portfolio: Apple Inc. (NASDAQ:AAPL), Wells Fargo (NYSE:WFC), Kraft Heinz Co. (NASDAQ:KHC), Bank of America (NYSE:BAC), and Coca-Cola (NYSE:KO). There are 45 individual stock positions, many of which are minutely small compared to the overall size of the portfolio.
Warren Buffett’s writings (pdfs here) are a treasure trove of information and are a very good source for anyone starting out on individual investing.
Teva Pharmaceuticals (NYSE:TEVA): TEVA is a very small 0.19% of the portfolio stake established this quarter at prices between $ 11.20 and $ 19.33, and the stock currently trades at $ 19.33.
Apple Inc.: AAPL is now the largest 13F portfolio stake at 14.63%. It was established in Q1 2016 at prices between $ 93 and $ 110, and increased by ~55% the following quarter at prices between $ 90 and $ 112. Q4 2016 saw another ~275% increase at prices between $ 106 and $ 118, and that was followed with a stake doubling in January 2017 at prices between $ 116 and $ 122. There was another ~23% increase this quarter at prices between $ 154 and $ 176. The stock currently trades at $ 167.
US Bancorp (NYSE:USB): The 2.44% USB stake has been in the portfolio since 2006. The original position was tripled during the 2007-2009 time frame. It was then kept relatively steady till Q2 2013, when ~17M shares were purchased at prices between $ 32 and $ 36. The last significant activity was a ~5% increase in Q1 2015 at prices between $ 41 and $ 45. Berkshire’s cost basis on USB is ~$ 32, and the stock is now at $ 55.31. There was a marginal increase this quarter.
Bank of New York Mellon Corp. (NYSE:BK): BK is a 1.71% of the 13F portfolio stake. The bulk of the original position was purchased in Q2 2012 at prices between $ 19.50 and $ 25. The stake was increased by 30% in Q2 2013 at prices between $ 26.50 and $ 30.50. The five quarters through Q3 2015 had seen an about-turn, as there was a combined ~20% reduction at prices between $ 36 and $ 45. Q1 2017 saw a ~50% increase at prices between $ 43.50 and $ 49, and that was followed with another similar increase the following quarter at prices between $ 46 and $ 51. There was a ~20% further increase this quarter at prices between $ 51 and $ 55. The stock currently trades at $ 55.98.
Monsanto Company (NYSE:MON): The 0.71% MON position was established in Q4 2016 at prices between $ 98 and $ 106, and the stock currently trades at $ 120. In September 2016, Bayer AG (OTCPK:BAYRY) agreed to acquire Monsanto in a $ 128 per share cash deal. The last two quarters have seen a combined ~46% stake increase at prices between $ 115 and $ 122.
Wells Fargo & Co.: WFC is Buffett’s second-largest stake at 14.54% of the US long portfolio. In recent activity, around 9M shares were sold in Q2 2017 at around $ 53 per share to bring the ownership stake below the 10% threshold. The stock currently trades at $ 59.55. Berkshire’s cost basis is at ~$ 25.50. The last two quarters have seen marginal trimming.
American Airlines (NASDAQ:AAL): AAL stake was first purchased in Q3 2016. The position is now at 1.25% of the portfolio. The original purchase was at prices between $ 28 and $ 39 and doubled in Q4 2016 at prices between $ 36.50 and $ 50. The stock is now at $ 51.07. There was a ~2% trimming this quarter.
Note: Berkshire controls 9.6% of AAL.
General Motors (NYSE:GM): GM is a ~1% of the 13F portfolio position that was first purchased in Q1 2012 at prices between $ 21 and $ 30. The stake was increased by 60% in Q2 2013 at prices between $ 27.50 and $ 35. There was a ~20% increase in Q3 2014 at prices between $ 32 and $ 38, and a similar increase in Q3 2015 at prices between $ 27 and $ 33.50. Q2 2017 saw another 20% increase at prices between $ 32.50 and $ 35.50. There was an about-turn this quarter: a ~17% selling at prices between $ 40.50 and $ 46.50. The stock currently trades at $ 41.81.
International Business Machines (NYSE:IBM): The original IBM position was purchased in Q3 2011 at prices between $ 158 and $ 185. As of Q4 2016, the share count had gone up by almost 40% through periodic purchases. There was an about-turn in Q1 2017: a ~21% selling at prices between $ 166 and $ 182, and that was followed with another ~16% reduction in early May at prices between $ 150 and $ 160. Last quarter saw another one-third reduction at prices between $ 140 and $ 156. The remaining position was almost sold out this quarter at prices between $ 145 and $ 162. The stock currently trades at ~$ 155.
Note: Berkshire’s cost basis on IBM was ~$ 170 per share.
Sanofi (NYSE:SNY): The minutely small 0.09% of the portfolio stake in SNY saw marginal trimming this quarter.
Note: Per the annual report, Berkshire has a $ 1.7B position in Sanofi – so in addition to the ADRs listed in the 13F report, Berkshire also owns Sanofi securities listed in Euronext Paris.
Kraft Heinz Co.: KHC is currently the third-largest 13F stock position at 13.24% of the portfolio. Kraft Heinz started trading in July 2015, with Berkshire owning just over 325M shares (~27% of the business). The stake came about as a result of two transactions with 3G Capital as partner: a ~$ 4B net investment in 2013 for half of Heinz, and a ~$ 5B investment for the acquisition of Kraft Foods Group earlier this year. Berkshire’s cost basis on KHC is below $ 30 per share, compared to the current price of $ 71.92.
Bank of America: Berkshire established this large (top-five) 10.48% of the portfolio position through the exercise of Bank of America warrants. The warrants had a strike price of $ 7.14, compared to the current price of $ 32. The cost to exercise was $ 5B, and it was funded using the $ 5B in 6% preferred stock they held.
Note: Berkshire’s ownership stake in Bank of America is ~6.5%.
American Express (NYSE:AXP) and Coca-Cola: These two very large stakes were kept steady during the last ~4 years. Buffett has said these positions will be held “permanently”. Berkshire’s cost basis on AXP and KO are at around $ 8.49 and $ 3.25 respectively, and the ownership stakes are at ~17.5% and ~9.4% respectively.
Phillips 66 (NYSE:PSX): PSX is a fairly large 4.27% of the portfolio stake. It is a long-term position. As of Q4 2014, the stake was very small at ~0.5% of the portfolio (~6.5M shares). Q1 2015 saw a ~14% increase at prices between $ 59 and $ 80. The following quarter saw an additional ~300% increase at prices between $ 76.50 and $ 82, and that was followed with a stake doubling in Q3 2015 at prices between $ 70.50 and $ 84.50. Q2 2016 saw another ~23% increase in the high $ 70s price range. The stock currently trades at $ 93.33. Berkshire’s cost basis is $ 78.31.
Note 1: Earlier this week, it was disclosed that Phillips 66 agreed to repurchase 35M shares from Berkshire at $ 93.725 per share. Berkshire indicated the transaction’s sole purpose was to eliminate additional regulatory requirements that come with ownership stake above 10%.
Note 2: Berkshire avoided disclosing PSX stake in the original Q2 2015 13F by making use of the “Section 13(f) Confidential Treatment Requests”. An amendment filed on 9/4/2015 disclosed the huge stake build-up. Berkshire controlled ~16% of PSX at the time.
Moody’s Inc. (NYSE:MCO): MCO is a 1.90% of the US long portfolio stake. It is a very long-term position, and Buffett’s cost basis is $ 10.05. The stock currently trades at ~$ 164. Berkshire controls 11.5% of the business.
Southwest Airlines (NYSE:LUV): LUV is a 1.63% portfolio stake purchased in Q4 2016 at prices between $ 38.50 and $ 51 and increased by ~10% in the following quarter at prices between $ 49.50 and $ 59. The stock is now at $ 57.73.
Note: Berkshire owns ~7.9% of LUV.
Delta Air Lines (NYSE:DAL): DAL was a very small 0.19% position in Q3 2016. The stake saw a whopping ~850% increase in Q4 2016 at prices between $ 39 and $ 52. The stock currently trades at $ 52.20, and the stake is now at 1.56% of the portfolio. There was a ~12% trimming during H1 2017.
Note: Berkshire controls ~7.3% of DAL.
Charter Communications (NASDAQ:CHTR): CHTR is a 1.49% of the US long portfolio position. It was established in Q2 2014 at prices between $ 118 and $ 158 and more than doubled the following quarter at prices between $ 151 and $ 164. Q4 2014 saw a further ~25% increase at prices between $ 140 and $ 170. In Q2 2015, the position was again increased by ~42% at prices between $ 168 and $ 193, and that was followed with another ~21% increase the following quarter at prices between $ 167 and $ 195. Q2 2016 saw a ~10% trimming at prices between $ 198 and $ 233. The stock currently trades at $ 359, compared to Berkshire’s cost basis of around $ 160. There was a ~10% trimming last quarter.
Note: Berkshire controls ~3.4% of CHTR.
Goldman Sachs (NYSE:GS): GS is a 1.46% of the US long portfolio stake established in Q4 2013. Berkshire Hathaway received $ 5B worth of warrants to buy GS stock during the financial crisis (October 2008) at a strike price of $ 115 (43.5M shares) that was to expire October 1, 2013. Buffett exercised the right before expiry to start this long position. Q3 2015 saw a ~13% reduction at prices between $ 172 and $ 213. It currently trades at ~$ 263.
DaVita Inc. (NYSE:DVA): DVA is a 1.29% of the US long portfolio position that was aggressively built up over several quarters: the original stake was doubled in Q1 2012, increased by over 50% in Q2 2012, 24% in Q4 2012, and an additional 16% in Q1 2013. There has been marginal buying since. The bulk of the stake build-up happened at prices between $ 30 and $ 49. The stock currently trades at $ 74.75, compared to Berkshire’s overall cost basis of $ 45.33.
Note 1: Berkshire’s ownership stake in DVA crossed the 20% ownership threshold last quarter as a result of buybacks at DaVita.
Note 2: In May 2013, Berkshire’s Ted Weschler signed an accord with DVA, limiting open market purchases to 25% of the company.
United Continental Holdings (NYSE:UAL): A minutely small 0.18% UAL position as of Q3 2016 saw a huge ~540% increase in Q4 2016 at prices between $ 52.50 and $ 76. It currently goes for $ 65.68. The stake is at ~1% of the portfolio.
Note: Berkshire controls ~9.3% of UAL.
Liberty SiriusXM Group (LSXMA, LSXMK): The tracking stock was acquired as a result of Liberty Media’s recapitalization in April 2016. Shareholders received 1 share of Liberty SiriusXM Group, 0.25 share of Liberty Media Group, and 0.1 share of Liberty Braves Group for each share held. Berkshire held 30M shares of Liberty Media, for which he received the same amount of Liberty SiriusXM Group shares. There was a ~40% stake increase in Q2 2017 at a cost basis of ~$ 40 per share. The stock is now at $ 41.77.
Note: LSXMA/LSXMK is trading at a significant NAV discount to the parent Sirius Holdings’ (NASDAQ:SIRI) valuation. For investors attempting to follow Buffett, LSXMA/LSXMK is a good option to consider for further research.
USG Corporation (NYSE:USG): USG is a very long-term holding, and there was a significant 21.39M share stake increase in Q4 2013 due to conversion of notes at $ 11.40 per share – Berkshire acquired the convertible notes during the financial crisis (2/2009), and USG opted to redeem them on 12/16/2013. Q2 2014 saw a ~12% stake increase at prices between $ 30 and $ 33. The stock currently trades at $ 33.88. Buffett controls around 27% of the business, and his cost basis is ~$ 19.
Verisign Inc. (NASDAQ:VRSN): VRSN was first purchased in Q4 2012 at prices between $ 34 and $ 49.50. The position was more than doubled in Q1 2013 at prices between $ 38 and $ 48. The following quarter saw a one-third increase at prices between $ 44 and $ 49. Q1 and Q2 2014 also saw a combined ~17% increase at prices between $ 47 and $ 63. The stock currently trades at $ 114, and the position is at 0.78% of the portfolio (~10% of the business).
Liberty Global PLC (LBTYA, LBTYK): The position was established in Q4 2013 at prices between $ 37.50 and $ 44.50 (adjusted for the 03/2014 stock split) and increased significantly in the following two quarters at prices between $ 38.50 and $ 46. The three quarters through Q1 2016 had also seen a combined ~30% increase at prices between $ 30 and $ 50. Q2 2016 saw a ~17% further increase at prices between $ 27 and $ 39. The stock is now at $ 34.92, and the stake is at 0.51% of the 13F portfolio.
Note: Berkshire controls 7.9% of Liberty Global.
Sirius XM Holdings: The 0.39% SIRI stake was purchased in Q4 2016 at prices between $ 4.08 and $ 4.61. Q2 2017 saw selling: a ~20% reduction at prices between $ 4.70 and $ 5.50. The stock is currently at $ 6.09.
Synchrony Financial (NYSE:SYF): SYF is a 0.42% of the portfolio position purchased in Q2 2017 at prices between $ 26.50 and $ 34.50 and increased by ~20% last quarter at prices between $ 28.50 and $ 31.25. The stock is now at $ 36.70.
Note: Synchrony is the private-label credit card business spin-off from GE that started trading in August 2014 at ~$ 23 per share. It has seen recent super-investor interest – Baupost Group has a ~10% portfolio stake.
Axalta Coating Systems (NYSE:AXTA): AXTA is a small 0.39% of the portfolio stake established in Q2 2015 at prices between $ 28 and $ 36 and increased by ~16% the following quarter at prices between $ 24.50 and $ 33.50. The stock currently trades at $ 30.84. Berkshire owns ~9.8% of the business.
Restaurant Brands International (NYSE:QSR): QSR is a 0.27% of the 13F portfolio position established in Q4 2014 at prices between $ 35 and $ 42. The stock currently trades well above that range at $ 57.71. It started trading in December 2014 following a merger/rename transaction between Tim Hortons and Burger King Worldwide.
Note: Berkshire’s stake in the business is ~4.2%.
Store Capital (NYSE:STOR): The 0.25% STOR stake was established in Q2 2017 in a private placement transaction at $ 20.25 per share. The stock is now at $ 23.41.
Costco Wholesale (NASDAQ:COST), Graham Holdings (NYSE:GHC), Johnson & Johnson (NYSE:JNJ), Liberty LiLAC Group (LILA, LILAK), Mondelez International (NASDAQ:MDLZ), M&T Bank (NYSE:MTB), MasterCard Inc. (NYSE:MA), Procter & Gamble (NYSE:PG), Torchmark Corporation (NYSE:TMK), United Parcel Service (NYSE:UPS), Verisk Analytics (NASDAQ:VRSK), Verizon Communications (NYSE:VZ), Visa Inc. (NYSE:V), and Wal-Mart Stores (NYSE:WMT): These are very small positions (less than ~0.5% of the portfolio each) kept steady this quarter.
Note: Since November 2015, Warren Buffett is known to own ~8% of Seritage Growth Properties (NYSE:SRG) at a cost basis of $ 36.50 in his personal portfolio. It currently trades at $ 38.96. SRG is a REIT spin-off from Sears Holdings (NASDAQ:SHLD) that started trading in July 2015.
The spreadsheet below highlights changes to Berkshire Hathaway’s US stock holdings in Q4 2017:
Disclosure:I am/we are long BAC, GM.
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.
“Corrections only are considered “natural, normal, and healthy” until they actually happen.” ….Tony Dwyer, Canaccord Genuity.
From the view at 30,000 feet, the recent volatility and pullback is all part of the regular ebb and flow that occurs in the stock market. Yes, we just witnessed a pullback greater than 5%, and it was the first such decline from a closing high for the S&P 500 since before the election last November. Fear showed up and the pullback morphed into a dip into correction territory for the major indices. Problem for bullish investors, it all happened in a week.
The period from when President Trump was elected through Friday, February 2nd, is one that any investor alive today is unlikely to experience again in their lifetimes. 448 days without a 3% decline.
Much to the dismay of the naysayers, when a streak like this ends it doesn’t usually signal a market top.
Since no one can accurately predict stock prices, my belief is an investor has to look at the probabilities of events occurring. Regular readers know that to formulate the probability of something occurring, I like to view market history to form an opinion. Let’s take a look at some history that could be telling us to prepare for some volatility and weakness in stock prices in 2018.
Ryan Detrick, Senior Market Strategist notes;
“Midterm years tend to be a banana peel for markets, as they see the largest pullbacks out of the four year presidential cycle. However, those who hang on for the ride tend to see a significant bounce over the next year.”
Taking a closer look, since 1950, the S&P 500 Index has been down 16.9% on average at its intra year low during midterm years, though it tends to bounce back, posting an impressive 32.0% average gain over the subsequent twelve months.
So investors seem to have a choice now. Lean to the short term scenario that is always accompanied by “noise”, or look down the road as to what is really driving equity prices over the longer term.
OK, IF that occurs here in 2018, it says we could see a decent draw down this year, then the indexes could resume their upside momentum. Then again, consider the possibility that we have just seen the dip with a decline of 12% from the high to the intraday low on Friday. For a long term investor, this is just a shrug of the shoulders, a so what, a yawn and a how is the weather moment. For the nervous short termers and the investors with one foot out the door (and they are plentiful) this is a horror show, wrought with all sorts of fear and emotion. The latter will get whipsawed and more than likely be unsuccessful in over thinking and over managing their money. Not to mention the cost of their tranquilizers.
Two streaks for the S&P were broken in this sell off. The long skein of consecutive days where the S&P 500 traded above its 50 day moving average, the S&P 500’s 578 calendar day streak without a 5% decline from a closing high, both went down.
This market’s run of over a year and a half will go down as the S&P 500’s second longest streak without a 5% decline on record. The only streak that was longer was the 593 day streak stretching from 12/18/57 through 8/3/1959.
There have been ten S&P 500 streaks without a 5% pullback (blue line) along with how the S&P 500 traded in the year that followed the end of each streak. While the end of these streaks was not typically followed by a deep decline, the amount of time it took for the S&P 500 to get back above its prior peak ranged anywhere from a month (1943 and 1955), to up to nearly two years (1961).
Since I have often brought up the last secular bull market and a period from the mid 90’s as comparisons, the following chart shows how the S&P reacted after the streak ended then.
A period of consolidation with volatility. The streak comes to an end (blue line), then sideways action before a new uptrend (red line) takes over. Let there be no doubt, we do have a total reset in the minds of investors now. This change has occurred seemingly overnight. That is the reason for my view on consolidation and volatility being the condition for investors to face in the short term that could indeed mimic the time frame in the graphic shown above.
That headline may have added to the worry that economy was heating up too fast and causing the Fed to panic and raise rates. Well, as suggested this outfit changes their ideas, thoughts, and reports, like we change our socks. So now it appears things have cooled off;
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 4.0 percent on February 6, down from 5.4 percent on February 1.”
January ISM services index bounced 3.9 points to 59.9, a new record high, after falling 1.3 points to 56.0 in December (revised from 55.9). The employment component surged 5.3 points to 61.6, also a new all-time peak, from 56.3. New orders climbed to 62.7 from 54.5.
December JOLTS Job Openings report was a non event at 5.81M vs. consensus of 5.90M. Jobless claims remain at levels not seen since the ‘70’s.
J.P.Morgan Global Services PMI remained at ihg levels matching the 26 month high lat October. David Hensley, Director of Global Economic Coordination at J.P.Morgan;
“The global service sector made a positive start to 2018, with output growth improving and the upturn broad-based by both sub-sector and nation. Stronger inflows of new orders combined with rising business confidence and job creation all suggest that the sector is on course to maintain this robust upswing during the coming months.”
“The world economy sustained its strong upturns in output and new business at the start of 2018, as manufacturers and service providers benefitted from a synchronised upswing in global market conditions and growth. Forward looking indicators such as new orders, backlogs of work and business confidence also suggest that this solid phase of expansion will be maintained in coming months.”
“At 58.8, the final Eurozone PMI for January came in even higher than the earlier flash estimate, registering the strongest monthly expansion since June 2006. If this level is maintained over February and March, the PMI is indicating that first quarter GDP would rise by approximately 1.0% quarter-on-quarter.”
Germany contributed to the strong Eurozone reading as their PMI came is at a seven year high. France results on their PMI readings remain elevated as well, staying near cycle highs. Spain show the fastest pace of growth in six month.
“The Caixin China General Services Business Activity Index rose 0.8 points to 54.7 in January, the joint-best reading since October 2010. “The new business sub-index continued to inch up, although by a smaller margin than in the previous two months, reflecting solid demand for services. The input prices subindex hit the highest since April 2012, due to the impact of rising labor costs and increasing crude oil prices.
“However, the sub-index of prices charged went down again last month, suggesting that providers of services have failed to fully pass higher costs on to consumers. The Caixin China Composite Output Index increased 0.7 points to 53.7 in January, pointing to continued improvement in the operating conditions of both the manufacturing and services sectors.”
India Services PMI rose at its fastest pace in three months. Aashna Dodhia, Economist at IHS Markit;
“The recovery across India’s service sector continued during January, with growth in output picking up to the joint-strongest since June 2017 as underlying demand conditions improved. That said, the overall performance of the service sector remained weaker than the long-run growth trend.”
“January PMI data shows continued growth in Japanese service sector output. Indeed, activity rose at a faster pace amid a stronger expansion in new business inflows. This supported forecasts of further economic growth by panelists, with business optimism strengthening to a 56-month high.”
“Input cost inflation accelerated to the sharpest rate since August 2008, with higher food and fuel expenses cited as a principal factor behind the uptick. However, demand growth spurred on firms to raise output prices at the fastest pace since May 2014. The Bank of Japan does not expect the 2% target to be attained until at least April 2019, with December 2017 core CPI rising at an annual rate of 0.9%.”
None of that global economic information is indicative that growth is slowing down.
Earnings continue to come in extremely strong, so results from corporate America were not to blame for the volatility and sell off.
Earnings Scorecard: For Q4 2017, with 68% of the companies in the S&P 500 reporting actual results for the quarter, 74% of S&P 500 companies have reported positive EPS surprises and 79% have reported positive sales surprises. If 79% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008.
Earnings Growth: For Q4 2017, the blended earnings growth rate for the S&P 500 is 14.%. All eleven sectors are reporting earnings growth for the quarter, led by the Energy sector.
Valuation: The forward 12-month P/E ratio for the S&P 500 is 16.3. This P/E ratio is above the 5-year average (16.0) and above the 10-year average (14.3).
My what a correction will do to the overvaluation argument.
The Political Scene
The vote was there, the vote wasn’t there, the government shut down for a while then reopened before I had my morning coffee on Friday. Happy days are here again.
Notably for investors, the bill also extended the debt ceiling until March 2019 and funds federal agencies until March 23, 2018, giving Congress additional time to develop a spending bill that will last through September 30, 2018, the end of the federal government’s fiscal year.
This will now allow investors to be totally obsessed with every 0.01% move on the 10 year treasury note. (sarcasm intended)
In my view, way too much concern on how the new Fed chair Jerome Powell will approach the interest rate situation. Some of that concern will be addressed when he steps in front of Congress and gives testimony on February 28th.
I cannot see any change from the data dependent stance that has been in place since the Bernanke era. I do see rates approaching 3%, but they are rising for the RIGHT reason, an improving economy. I might add we saw a 3% 10 year back in 2013 and early 2014, GDP in the 4th quarter of 2013 was 2.6% and stocks rose all through this period in time.
Rates rocketing overnight? Could that really happen? Maybe, BUT, what happens when there is fear? Investors flock to treasures. What happens when they buy into the safety of treasuries? The yield on the notes is pressured down. Basically creating an equalizing effect. Rates should rise gradually over time in a backdrop of an improving economy.
My instincts told me the spike in bullish sentiment that had some concerned would be temporary. The last few weeks that bullish sentiment has been in retreat. Based on the weekly survey from AAII, bullish sentiment declined from 44.8% down to 37% for the fourth weekly decline in the last five. At the start of the year, bullish sentiment spiked up to just under 60%.
Cross a euphoric environment off of your worry list. Anyone that just jumped on board the stock market got a quick lesson in stock market psychology.
The weekly inventory report was benign. Inventories were reported with a slight build this week, adding 1.9 million barrels, that was smaller than expected. Gasoline inventories also increased by 3.4 million barrels. The price of crude sold off with stocks and like the S&P gave back all of its 2018 gains. WTI closed out the week at $ 59.20, down $ 6.22 or about 10% from the prior week close.
The Technical Picture
In terms of breadth, it has dropped off a cliff along with the major indices. Following last Monday’s decline, the percentage of S&P 500 Industry Groups trading above their 50 day MA dropped to 4.2% from a level of 91.7% just two weeks earlier.
These types of sharp declines in breadth have been uncommon over the last 28 years. Bespoke Investment Group reports that following the nine prior periods where we saw similar sharp declines in group breadth over a two-week period, the S&P 500 saw much better than average returns going forward. Some say it presents a washout scenario.
The S&P 500’s performance following each of these “washouts” is positive. One week, and one month later, the S&P 500 averaged a gain of right around 3%, although the median one month return was even stronger at 5.1%. The real impressive returns, however, came in the following three and six months. That plays into my theory that we will now see a period of consolidation before any real gains are achieved. Three months later, the S&P 500 was positive nine out of nine times for an average gain of 8.3% (median: +6.4%), and six months later, it was also positive every time averaging a gain of 13.6% (median: 13.7%).
In the year following each of these periods, the S&P 500 averaged a gain of 19.8% (median: 21.5%). The only time the S&P 500 was down a year later was in the period following the March 5th, 2007 event. In that year, the S&P 500 peaked in October, and the Financial Crisis began to unfold. Notwithstanding that one outlier, similar washouts in industry group breadth over a two-week period have historically been followed by strong gains.
All short term support levels were taken out this week. Plenty of technical damage to the short term charts. The daily chart of the S&P shows the quick decline, then a rally that failed to recapture the 50 day moving average (blue Line). Note prior support now becomes resistance. That was followed by a selling binge that saw the intraday low of 2593 taken out on Thursday, and selling pressure continued on Friday. That dropped the S&P below its 200 day moving average. Perhaps a reversal occurred on Friday, the S&P fell to new lows, then rallied above the prior day close.
I do not believe we will see any type of “V” recovery in prices. The mindset of investors has decidedly changed, they are obsessed with interest rates now. Bullish Investors now need to reset their expectations for the short term. A period of consolidation while the market tries to carve out a bottom. How long this lasts is anyone’s guess. My thoughts are that the S&P trades within this wide range, from 2500+ to the old high, as it builds a base.
The new line in the sand is the intraday low on Friday, S&P 2535. If that gets taken out, my downside target moves to S&P 2490. Resistance is the old support at the 100 day MA, S&P 2639.
Individual Stocks and Sectors
Last week the market began to show its first signs of mean reversion, and this week we’ve seen a full blown pullback that quickly erased a month’s worth of gains and wiped out all instances of overbought levels. As long as the long term uptrend remains intact, this correction was needed will prove to be a good thing.
So with the new backdrop of a sideways market anticipated, it will be a time to get positioned for the next leg higher, but depending on YOUR situation, there is no rush, be patient, pick your spots.
So while we have a consolidation phase now, there is no need to abandon the three sectors that will be the beneficiaries of improved earnings, Technology, Materials and Healthcare. Six weeks into the year isn’t time to start making any drastic changes to strategy with the bull market backdrop still in place.
Selecting stocks which have put forth great earnings reports and raised guidance that are now being tossed aside, is the strategy to follow. Step back, take a deep breath, and realize that other than a change in the short term mindset of investors, these solid fundamental stories have not changed. In fact in many cases, they have IMPROVED.
A while ago I mentioned that we were transitioning from a liquidity driven market to an earnings driven one. That has indeed happened, and it looks to continue. Earnings growth was the primary driver behind the equity resurgence in 2017 following a 3 year lull. I expect the same for 2018. This bodes well for the big earnings growth sectors like Health Care and Technology.
Sorry, you won’t find me in the camp that says we are in a runaway growth situation at this point in time that brings runaway interest rates with it. In fact I believe that is absurd thinking today. What we will probably see is a moderate growth trajectory for GDP and yes, inflation as well. The tax bill is focused on getting businesses to invest in the economy. Although expected to deliver strong results over time, these investments likely will take time to be reflected in actual economic output. As a result, a 4% or higher GDP or inflation level is not likely tomorrow. I still expect earnings quality to drive equities higher, benefiting growth stocks.
OK, that’s great but this new market mindset will not go away tomorrow. It is important to remind ourselves. We had an overheated market that met up with a change in investors view of the underlying economy. The result is irrationality. In a normal situation, all of us could have expected a simple reversion to the mean. Well we did get that, but it also came with a stick of dynamite, called investors emotions. When emotions enter the picture, there is no telling what may occur, and how long irrationality lasts.
The earnings picture could surely stall any real downside, the give and take we can expect now will come from the emotional reactions on the interest rate scene, and any other headline that spooks nervous investors. The secular trend remains powerfully bullish, all of us need to be reminded of that. Ask yourself. Ever see a bear market start with earnings growing at double digits? Ever see a recession or a bear market start at the beginning of a rate hike cycle? Is the yield curve inverted?
In my view anyone selling now on what they fear regarding interest rates is making a mistake. They aren’t looking at ALL of the facts. Sure there was a need for a correction, stocks got overbought. Now the pendulum has swung and the sentiment might lead to an overshoot on the downside as well. Emotion is a powerful thing, and when it enters the picture, common sense is tossed aside. It’s best to have an open mind, so we keep ALL views on the table. It is a time to watch, pick our spots, but rest assured, I am not selling stocks now.
to all of the readers that contribute to this forum to make these articles a better experience for all.
Best of Luck to All !
I spoke about market volatility . It is here now. Are you prepared. This is part of the Fear and Greed Cycles that the market presents that trips up the average investor.
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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.
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.
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.
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)
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.
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.
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.
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).
Bank Of Nova Scotia (BNS) – low risk, 4% target yield, current yield 3.9%
NextEra Energy (NEE)- low risk, target yield 3.0%, current yield 2.5%
NextEra Energy Partners (NEP):- low risk, target yield 4.0%, current yield 3.8%
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.
Main Street Capital (MAIN) low risk, target 8% yield, current yield 7.1%
STAG Industrial (STAG) medium risk (unproven in recession), target 6% yield, current yield 5.2%
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:
Boeing (BA) – low risk, 3% target yield, current yield 2.3%
Johnson & Johnson (JNJ) – low risk, 3% target yield, current yield 2.4%
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.
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%.
New Residential Investment Corp.
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.
Enterprise Products Partners (EPD)
Tanger Factory Outlet Centers (SKT)
EQT Midstream Partners (EQM)
Brookfield Property Partners (BPY)
TransAlta Renewables (OTC:TRSWF)
Simon Property Group (SPG)
Realty Income (O)
EQT GP Holdings (EQGP)
Brookfield Infrastructure Partners (BIP)
Dominion Energy (D)
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.
Uniti Group: 18.7%
New Residential Investment Corp: 14.2%
Omega Healthcare Investors: 6.9%
Macquarie Infrastructure Corp: 5.8%
Pattern Energy Group: 5.3%
CONE Midstream Partners: 4.7%
TransAlta Renewables: 4.4%
Enterprise Products Partners: 4.3%
Iron Mountain: 3.4%
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.
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.
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).
Remember that Morningstar classifies some MLPs as energy and some as industrial. In reality, my portfolio is currently about:
33% Pipeline MLPs
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.
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.
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 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
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%
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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Google is a rival of Apple in smartphones and other devices, but such deals are common among tech companies in areas where they don’t compete.
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The iPhone 6s and the iPhone 6s Plus will ship with iOS 9.0.
The update is nothing major. It fixes a couple of bugs, including a “Slide to Upgrade” dialog problem that was preventing some users from upgrading to iOS 9. The update also fixes an issue that caused some paused video images in Safari and Photo to appear distorted, and another that cause some alarms and alerts not to sound.