Over the last 2 weeks, my portfolio has undergone some significant reshuffling. I’ve closed many of my positions, while adding to a few and initiating of couple of new ones as well. I’m not a big fan of making huge changes like this, but in this case it was high time that I give my portfolio a soft reboot of sorts. I have been at this DGI thing for a little over a year now, and a lot of the mistakes I made in the early days of my investing endeavor simply necessitated correcting.
You may be wondering what mistakes I am referring to. Well, my biggest plunder to date has been overexposing myself to the highly cyclical oil/commodities industry, which has led to my portfolio suffering from far too many dividend cuts than it should have. Just a few days ago, National Oilwell Varco (NOV) announced that it was cutting its dividend by 89%, effectively marking the fifth dividend cut I’ve experienced in less than 6 months. This was the last straw for me; I no longer felt comfortable “waiting it out” as I initially chose to do when I was handed my first couple of dividend cuts. With the oil situation looking bleak as shit and the future financial prospects of most of these companies looking even bleaker, I decided to cut my losses and move on. Let’s take a quick trip down memory lane to review all the cuts I’ve had so far:
– BBEP, which completely eliminated its distribution in November.
– TGH, which cut its distribution in half in November.
– KMI, which slashed its distribution by 75% in December.
– BBL, which reduced its distribution by 75% in February.
– NOV, which as I mentioned just announced it was lightening its dividend by 89%.
Ouch. Talk about some serious hurt right there! Now, in the case of BBEP and TGH, those were two of my very first investments back when I didn’t know how to evaluate companies correctly, and I really never should have bought them. They were already in trouble when I initiated positions in them, but I didn’t realize it at the time.
KMI, though a more recent investment, is also a good example of buying into a company whose business model I didn’t fully understand. As a pipeline operator that charges flat fees, KMI is somewhat insulated from oil prices as it depends on volume, not the price of oil itself, to make money. As such, I thought it would be safe from the current trouble in the oil sector and I blindly followed the heards of investors who were touting the company’s awesomeness.
What I failed to realize was that KMI relies heavily on debt and equity to finance its aggressive capex projects. Since the company had already become highly leveraged in the last couple of years due to the attractiveness of the current low-rate environment, taking on additional debt wasn’t really an option anymore. And unfortunately, with its share price being dragged through the mud like the rest of the oil sector, it no longer had enough equity to tap into as well. Issuing new shares could have been a possibility, but doing so at the current super depressed prices would have undoubtedly destroyed shareholder value, bigtime. As such, the company decided to slash the divi as the only solution to get its hands on the cash it needed for its projects. This was definitely not a shareholder-friendly move either, and I’m not too happy that the company would go after aggressive projects at all costs instead of cleaning up its balance sheet. Lesson learned: always take a close look at a company’s balance sheet and make sure you understand exactly how it operates and generates cash before you invest in it.
BBL and NOV are the only two investments of those five that I don’t really blame myself for, as they are both great companies that simply got crushed by the extreme situation of the oil/commodities sector that I, like many other investors, did not expect to get this bad. I have no doubts that both are going to survive this downturn and eventually return to profitability; however, I have no desire to wait for that eventuality as it could take many years, and the tiny yields they now sport no longer make them acceptable stocks for a dividend-focused investor.
Beyond all these dividend cuts, another reason I decided to change up my portfolio was because I wasn’t too happy with the dozens of small (i.e. less than $500) positions I had accrued. While there’s nothing wrong with that, I’ve come to realize that I would prefer to initiate positions in larger chunks of at least $1000, preferably even $2000-$3000, as that is an amount of capital that constitutes a full position for me at this point in time. Diversification is great, but I would rather build my portfolio one position (or half-position at the minimum) at a time rather than nibbling a tiny bit here and there in tons of different companies. Just a matter of personal preference.
Enough with all the ranting though! Here’s a list of all the changes that occurred over the last 2 weeks:
– Sold my 6 shares of SBUX at $60.95/share for a total of $365.70
– Sold my 5 shares of VZ at $52.22/share for a total of $261.10
– Sold my 2 shares of LMT at $226.00/share for a total of $452.00
– Sold my 3 shares of AMGN at $155.74/share for a total of $467.22
– Sold my 6 shares of AXP at $59.43/share for a total of $356.58
– Sold my 10 shares of BBL at $25.65/share for a total of $256.50
– Sold my 15 shares of KMI at $18.15/share for a total of $272.25
– Sold my 32 shares of NOV at $27.59/share for a total of $882.88
– Sold my 15 shares of TGH at $14.67/share for a total of $220.05
– Sold my 100 shares of BBEP at $0.4001/share for a total of $40.01
– Bought 8 shares of STWD at $19.16/share for a total of $153.28
– Bought 28 shares of OHI at $35.52/share for a total of $994.56
– Bought 16 shares of VTR at $63.14/share for a total of $1010.24
– Bought 68 shares of MAIN at $30.81/share for a total of $2095.08
Whew! What a laundry list of shit, lolz. Let’s go through it really quickly.
I sold SBUX because it has a very low yield and having 6 shares of it felt kinda pointless, and I already own 40 shares of it in my 401(k) anyway. I sold VZ, LMT, AMGN, and AXP because here too, it just felt kinda ‘meh’ to own such a small position in them. Don’t get me wrong, all four are fantastic companies that I certainly wish to buy again in the future (though AXP’s low yield and current headwinds give me a moment’s pause). I sold BBL, KMI, NOV, TGH, and BBEP because they no longer served a purpose in a dividend-focused portfolio, as explained in my rant above. I wanted to rip off the bandage and move forward.
I bought a tiny bit of STWD, just to bring my position to a round 150 shares and a $3000 cost basis. I love this REIT and am now satisfied to have a full position in it with a cost basis per share under $20, which I consider to be a steal.
I bought some OHI to bring my cost basis around $3000 and make a full position out of it, while averaging down a bit as well. This is one of the best healthcare REITs out there with an excellent track record of dividend growth, and it is currently selling at an attractive price. (I just wish I had snagged some when it dipped under $30 back in February!)
I initiated a position in VTR because it is another high-quality healthcare REIT selling at good prices. Will definitely be adding more to it in the coming months.
I initiated a position in MAIN because it is a fantastic BDC (business development company) with a monthly dividend to boot. Any price under $31 seems like a good deal to me, so I was happy to get in on the dip last week.
Voila! There you have it. The new and improved ZtZ portfolio is leaner and meaner, down from 26 scattered holdings to 18 stronger positions. I sleep better at night now that my exposure to oil/commodities is limited to just Chevron (CVX) and Spectra Energy (SE), and moving forward I will be more mindful of my sector allocation and stick to less cyclical areas like consumer defensives, healthcare, and real estate (mostly healthcare REITs, that is).
While I ended up losing a couple hundred bucks on my original investment by closing out the five oil/commodities companies and AXP (the others were all closed at a small profit), it’s really not a big deal. My dividends and Forex profits easily erase that small loss, a loss which I will also be able to harvest for tax purposes at the end of the year.
Furthermore, my portfolio’s projected annual income is actually now higher than it’s ever been before, sitting close to $1175. That’s only $25 away from my goal of averaging $100/month in dividend income by the end of 2016! Yay! 😀