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Portfolio Experiment - Month 7 - 02 Jul 2017 12:58

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Month seven into the Motif portfolio experiment and the markets were churning in June from a proposed Amazon buyout of Whole Foods and a Tech sell-off but that didn’t slow the markets as the S&P 500 ytd return grew from 7.73% to 8.24%. The motif portfolio was no slouch either as it also grew its ytd return to 11.15% from 9.56%.

Dividend Income

Projected June dividend income $35.39
Actual April dividend income $36.27
Growth of +$0.88

Income grew thanks to a raise from Travelers Insurance (TRV).

Now that the first half of the year is behind us we have 14 out 25 holdings who have increased their dividend payouts and we should start to see more significant increases of actual to planned monthly dividends.

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $11,156 $11,156
Cash Balance $207.11 -
Cash Distributed - $207.11
Total Portfolio Value $11,363 $11,156
Total Return 11.36% 11.15%

Petmed Express (PETS) continues to knocked it out of the park as their share price has risen from $35/share to $40/share. I happened to own PETS in my personal portfolio and did sell a significant portion of this position at $41/share and re-deployed the money. However for this experiment we are letting it fly.

From a sector perspective, Commodities improved slightly but are still down 17%. Consumer staples has soared but that is slightly skewed thanks to PETS. Tech took a big drop but it was offset with gains from Financials, Industrials, and Healthcare. All year long I have seen sectors rise and fall, this really shows how a diversified portfolio can offset losses and allow it to grow.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% -16.5%
CONSUMER DISCRETIONARY - 12% 2.00%
CONSUMER STAPLES - 12% 26.92%
FINANCIALS - 10% 4.3%
HEALTHCARE - 10% 11.5%
INDUSTRIALS - 10% 13.2%
REAL ESTATE - 15% 15.0%
TECH/COMMUNICATIONS - 13% 13.7%
UTILITIES - 6% 16.8%
BONDS & INCOME - 8% 4.23%
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Know your REIT Terminology - 18 Jun 2017 12:17

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If you are investing for dividend income Real Estate Investment Trusts (REITs) will be a major investment in your portfolio and is a subject I do not touch on often enough on this blog but I should being as REITs make up 15% of my personal portfolio. That said, I am sharing a post of a recent Motley Fool Article written by Matthew Frankel that I thought was worth sharing that defines common REIT terminology.

(here is a link to the full article)

1. Funds from operations (FFO)
This is perhaps the most important term you need to know to be able to properly evaluate REITs. Most other stocks are judged based on "earnings" or net income, and ratios based on earnings, such as the price-to-earnings multiple. However, net income doesn't accurately reflect a REIT's profits because of a real estate-specific accounting metric known as depreciation. In a nutshell, the REIT version of earnings is "funds from operations" (FFO), so you should consider it as such when reading a REIT's financial results.

2. Adjusted funds from operations (AFFO)
Going a step further, most REITs emphasize adjusted or normalized FFO figures in their reporting. Simply put, this is a company-specific way of expressing FFO in a way that's most relevant to shareholders and analysts. Keep in mind, however, that this is not a standardized accounting metric, and its calculation can be slightly different between companies.

3. Capitalization rate (cap rate)
This is the net operating income generated by a property, relative to its purchase price. A property that costs $1 million and generates $60,000 in net operating income would have a cap rate of 6%. When evaluating properties to buy, an REIT looks for the highest cap rates available for the desired level of risk the REIT's management is comfortable taking on.

4. Funds available for distribution (FAD)
This is similar to FFO or AFFO, but subtracts recurring real estate expenditures and some other items to express how much money is available to pay out as dividends.

5. Cost of capital
REITs have two basic ways to finance the acquisition of new properties — issuing equity, or taking on debt. The cost of capital refers to the dividend rate and expected growth of issued stock, or to the interest expense incurred on debt. Lower costs of capital generally translate to more favorable environments for acquisitions. As an example, a low cost of capital allowed retail REIT Realty Income Corp. to roughly double its initial acquisition goal for 2016.

6. EBITDA or NOI
Also known as net operating income (NOI), EBITDA is a common financial metric, and stands for "earnings before interest, taxes, depreciation, and amortization." In evaluating REITs, the debt-to-EBITDA ratio is often used for assessing a company's debt level.

7. Equity REIT
This refers to a real estate investment trust whose primary business is owning and renting properties. This is as opposed to a mortgage REIT, which is a company that invests in mortgages and/or mortgage-backed securities. A hybrid REIT invests in a combination of properties and mortgages.

8. Leverage
Simply put, leverage refers to debt. Specifically, REIT leverage is often expressed as either a percentage of total capitalization or a percentage of equity capitalization. For example, if a REIT reports leverage of 30% of total capitalization, this means that 30% of the REIT's total capitalization is made up of debt, with the other 70% made up of the market value of its equity capital.

9. Net asset value (NAV)
This refers to the total market value of all of a company's assets. For a REIT, this means the market value of its properties, plus the value of any other assets it owns. Admittedly, this is a somewhat subjective metric, because there are several ways to assess the value of the same property.

10. Total return
REITs are "total return" investments, which means that their goal is to produce a combination of income and share-price growth. Total return refers to the combination of the two, and is generally expressed on an annualized basis. For example, a stock that pays a 4% dividend yield and rises in price by 6% in a year would have generated a total return of 10% for that year. - Comments: 0

Portfolio Experiment - Month 6 - 31 May 2017 22:40

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Month six into the Motif portfolio experiment and the markets keep chugging upwards as the portfolio return grew to 9.56% from last month’s 6.75%. As a basis the S&P has grown 7.73% so we have a nice beat versus the market.

Dividend Income

Projected April dividend income $35.77
Actual April dividend income $36.64
Growth of +$0.87

Income grew thanks to raises from P&G (PG), Petmed Express (PETS), Omega Healthcare (OHI), Apple (AAPL) and Artesian Resources (ARTNA).

Good news received came from Cracker Barrel Restaurants (CBRL) who announce a dividend increase and a special dividend for the next quarter so we should see a nice pop in future dividends.

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $10,956 $10,956
Cash Balance $170.84 -
Cash Distributed - $170.84
Total Portfolio Value $11,126 $10,956
Total Return 11.13% 9.56%

What happened to sell in May? The market keeps on moving higher and my tech stocks (AAPL & MSFT) keep leading the charge but they were not alone for driving portfolio returns.

Petmed Express (PETS) knocked it out of the park when they reported earnings and the market rewarded them by sending their stock price from $24/share to $35/share. Another contributor was 3M (MMM) as this stock soared above $200/share and has risen 18.6% since it was acquired.

In our pre-retirement account after we factor in dividends the total return is a whopping 11.12%. Never did I believe the portfolio would be at this point by May.

From a sector perspective, Commodities are still getting severely hit (down 18%) but all other sector are positive however I will note that financials did retreat slightly.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% -17.75%
CONSUMER DISCRETIONARY - 12% 2.42%
CONSUMER STAPLES - 12% 19.33%
FINANCIALS - 10% 1.7%
HEALTHCARE - 10% 10.5%
INDUSTRIALS - 10% 11.7%
REAL ESTATE - 15% 11.8%
TECH/COMMUNICATIONS - 13% 17.38%
UTILITIES - 6% 14.83%
BONDS & INCOME - 8% 4.13%
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Investment with Unlimited Dividends - 29 May 2017 13:45

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There is an investment that has paid unlimited dividends that I will never take for granted. What is this magical investment you wonder? It is the human investment our service men & women make to ensure the safety and freedoms we enjoy are guaranteed. Their commitment and service allows me to:

  • Express my opinions without fear of persecution.
  • Walk safely out of my house without fear of my life.
  • Envision a future for my children.
  • Pray to any God I so wish to.
  • Own my own home.
  • Marry who I want and when.
  • Being charitable.
  • Imagine and plan for a peaceful retirement.
  • Opportunity to build wealth and invest freely

These are elements that support what is precious to me and many men and women have sacrificed their lives or livelihoods to ensure my freedoms. The responsibility hoisted upon their shoulders is immense but never do you hear them complain, in fact they do so willingly.

Please do not take this for granted. The next time you pass a grave marker of a fallen soldier bow your head in respect. When you see a servicemen thank him for his service. And finally when they return home from a deployment welcome them with open arms and cheer for them.

Enjoy Memorial Day and Remember! - Comments: 0

Investing for Tomorrow - 13 May 2017 12:42

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Recently, a friend at work asked my opinion about buying Facebook (FB) in a Roth IRA for his adult children. My response was it sounds like a decent investment and possibly a motivator for his young adult children to save. He responded that he plans on keeping the accounts a secret and surprise them with it 20-30 years later when the FB investment would be worth a small fortune. Wait…what?

This made me wince and change my response entirely. You want a set-it and forget-it investment in one stock for 20-30 years! While Facebook is currently a great technology company you have no idea if it will be relevant that far into the future. 20 years ago Microsoft was the king of technology and today they are trying to rediscover their mojo to remain relevant. Facebook could be in the same or worse position that far down the line. He appreciated the comment and understood the gravity of his 20-30 year time frame and that maybe Facebook was not the right long term investment.

This little exchange with a co-worker got me thinking, what industries today will still be relevant in 20-30 years that I should be basing my long term portfolio on? After thinking it over here is my list:

  1. Toiletries - Folks will still be going to the bathroom and showering and still coveting their personal grooming products. Toilet paper is still king of the bathroom.
  2. Garbage & Recycling - People have been making trash for thousands of years and will continue on.
  3. Medicine - Over-the-counter, first aid, or prescription medication. Can’t stop folks from getting hurt or sick.
  4. Water - Unless we somehow evolve into a new species we will need clean drinking water.
  5. Shipping of Goods - Even as we evolve in our shopping trends someone (or some robot) still needs to move goods from point A to point B.
  6. Communication - Unless we develop ESP there will still be a need to communicate with others.
  7. Food - Food has been a necessity since the dawn of time.
  8. Shelter - You have to sleep safely somewhere.

Did I miss any? Let me know - Comments: 0

Portfolio Experiment - Month 5 - 30 Apr 2017 11:03

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Month five into the Motif portfolio experiment and the markets returned back to the upside lifting the portfolio return to 6.75% from last month’s 5.68%. As a basis the S&P has grown 6.49% so we have a slight beat versus the market.

There was some interesting news abut the free stock trading brokerage firm Loyal3 closing down. Offering free trades is a tough business model to execute and not entirely a shock that the doors have closed. However, it does beg the question if other low discount brokerages (such as Motif and Robinhood) are viable into the future.

Dividend Income

Projected April dividend income $29.72
Actual April dividend income $30.12
Growth of +$0.40

Income grew thanks to raises from Wal-Mart (WMT) and W.P. Carey (WPC).

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $10,675 $10,675
Cash Balance $134.20 -
Cash Distributed - $134.20
Total Portfolio Value $10,809 $10,675
Total Return 8.09% 6.75%

April allowed the portfolio to return to its winning ways. We already noted that the Retirement portfolio has a slight edge on the S&P 500 (6.75% vs. 6.49%) but the pre-retirement funds total return is starting to show a considerable edge.

Considering the S&P 500 averages a ~2% yield the total return (equity + dividends) would be 6.49% + 0.67% = 7.16% whereas our total return for the Pre-retirement is 8.09%.

From a sector perspective, Commodities are still getting severely hit (down 15%) but April saw a resurgence in REITs and Industrials.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% -15%
CONSUMER DISCRETIONARY - 12% 0.1%
CONSUMER STAPLES - 12% 4.3%
FINANCIALS - 10% 2%
HEALTHCARE - 10% 6.1%
INDUSTRIALS - 10% 10.2%
REAL ESTATE - 15% 11.3%
TECH/COMMUNICATIONS - 13% 15.2%
UTILITIES - 6% 17.3%
BONDS & INCOME - 8% 3.25%
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Portfolio Experiment - Month 4 - 16 Apr 2017 13:00

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Month four into the Motif portfolio experiment marks the end of the first quarter and I ran into a bit of a surprise mostly from my ignorance.

When I originally set up the rules for the experiment I was supposed to reinvest the dividends at the end of each quarter. However, I discovered Motif has a $250 minimum transaction of which I was substantially short. It appears I will not be able to reinvest until the end of month nine. Not much I can do except to roll with the punches on this one but I may have to extend the length of the experiment from 12 to 18 months to compensate for my stupidity.

Inability to reinvest aside, March was a downtrend overall. Not sure of the reason why and it doesn’t matter as we are tracking up and downs of the market and not the reasons why. The portfolio return for the month dropped from 6.57% to 5.68%, still a respectable return.

Dividend Income

Projected March dividend income $32.69
Actual March dividend income $33.02
Growth of +$0.33

The ETFs in the portfolio continue to be the wild card in how difficult it is to predict income, for March the ETF’s were $0.17 below my forecast and dragged down portfolio performance. Despite the ETF’s, the portfolio had a 1% increase in income thanks to dividend increases from Archer-Daniels Midland (ADM) and 3M (MMM).

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $10,568 $10,568
Cash Balance $104.08 -
Cash Distributed - $104.08
Total Portfolio Value $10,672 $10,568
Total Return 6.72% 5.68%

March was not generous as the total return decreased however the pre-retirement portfolio’s loss was less due to retaining the dividends for future reinvestment.

From a sector perspective, everything except industrial suffered but commodities are still getting severely hit as they are down 13%.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% -13%
CONSUMER DISCRETIONARY - 12% -0.08%
CONSUMER STAPLES - 12% 1.16%
FINANCIALS - 10% 4.9%
HEALTHCARE - 10% 7.6%
INDUSTRIALS - 10% 8.6%
REAL ESTATE - 15% 9.2%
TECH/COMMUNICATIONS - 13% 15.05%
UTILITIES - 6% 6.43%
BONDS & INCOME - 8% 2.38%
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Portfolio Experiment - Month 3 - 28 Feb 2017 23:03

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A third month into the Motif portfolio experiment and it was a great month for gains as the S&P 500 is up 5.57% year to date and our portfolio is beating the S&P by 1% (not including dividends).

Dividend Income

Projected Feb dividend income $35.74
Actual Feb dividend income $35.72
Growth of $-0.04

February came in 2 cents below our projected income and the loss was attributable to the variable payout of the ETFs. If we discount the ETF’s, income actually went up $0.17 or 0.5% thanks to a dividend increase from Omega Healthcare (OHI).

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $10,657 $10,657
Cash Balance $70.82 -
Cash Distributed - $70.82
Total Portfolio Value $10,727 $10,657
Total Return 7.27% 6.57%

The market appears to be lifting all stocks with the exception of basic materials which has done a complete reversal, I’d attribute this to the Trump effect as he still has not laid out a plan for his infrastructure improvements making investors nervous. For the month Technology is still the hot sector but Real Estate made the biggest gains.
Interestingly we are starting to see money rotate into safer investments sectors as we are starting to see gains in the Staples, Utilities, and Bonds. Of course one month does not create a trend and we will need to see where this goes in coming months.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% -3%
CONSUMER DISCRETIONARY - 12% 0.3%
CONSUMER STAPLES - 12% 3.66%
FINANCIALS - 10% 6.7%
HEALTHCARE - 10% 8.4%
INDUSTRIALS - 10% 7.3%
REAL ESTATE - 15% 10.54%
TECH/COMMUNICATIONS - 13% 13.1%
UTILITIES - 6% 6.8%
BONDS & INCOME - 8% 2.8%
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Book Review: Common Stocks and Uncommon Profits - 18 Feb 2017 12:44

Tags: book_review

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Common Stocks and Uncommon Profits by Phillip Fisher is one of the legendary investing books that has been on my “To Read” list and I’ve finally gotten around to knocking it off.

Before I jump into my review I will start off by stating that this book is not about teaching or educating you in the use of valuation tools but is instead an overview of Fisher’s investment philosophy and how his philosophy developed over time. The latest edition is forwarded with commentary by his son Ken Fisher whose commentaries were respectful of his father but he tends to drone on too long about their family and relationship.

Overall the book is a fairly easy to read story and if you enjoy reading about historic investors and their investment philosophy for achieving that success you will enjoy the book. Personally I give it a B+ grade and thought it was a punch in the gut but validating at the same time. The book essentially starts off telling you that a main street investor does not have the access or tools to successfully invest in growth companies and should rely on an investment professional. My initial reaction to this was “oh great, another sales pitch for an investment firm” but the author does fair job of explaining why.

Fisher explains that a main street investor simply lacks the accessibility to corporate management to ask the right questions and get the answers to help with an investment decision. This is a method he refers to as “Scuttlebutt” where an investor has access to senior leaders (CEO, CFO, etc…) to ask pointed questions to evaluate items you cannot find in a company’s financial statements or annual report such as the quality of a company’s sales staff or how they treat employees. You may not agree with this but for me personally it answered why my past success in growth investing only yielded a mild return of 5.7%. This was my "punch to the gut" moment and I got the message even though I did not like what I read. It is a plain simple reality that a main street investor like myself has no inside access to look at a company beyond its financials.

The second part of the book discussed his philosophy on conservative investing which resonated a bit more with my value investment philosophy that I employ today. One of the elements he touches on that often goes overlooked is placing a company’s investment(s) in R&D, capital expenditures or even acquisitions as a fairly high weighting when evaluating a company. This is a concept I regularly employ when evaluating potential dividend growth by using tools like R&D investment trending or employing my CAPEX ratio and felt validation that I was properly employing these tools and having success.

The third and final section of the book describes how Fisher developed his initial philosophy and how it matured over time.
If you enjoy history then this final section will appeal to you.

Overall it wasn’t a bad read and some reviewers are pretty harsh stating the book is completely out of date and worthless. These comments are not entirely incorrect as the original book was written in 1958 and yes market conditions have changed since then that make some parts out of date. My answer to that is, “DUH”! In 1958 company stock buybacks were not as prevalent as they are today making earnings per share manipulation that much easier so his focus on earnings growth is a bit out of touch however like any growth number it is up to you the investor to interrogate the numbers and determine how valid is the growth and can it continue. I don’t care if its EPS or dividend growth, the same level of due diligence is required by any investor. Take this book for what it is (an investment philosophy) and don’t be so anal. - Comments: 0

Portfolio Experiment - Month 2 - 04 Feb 2017 16:03

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January we saw the Dow break the 20K level only to retreat a small bit and then trade sideways for the remainder of the month. A second month into the Motif portfolio experiment and one thing is becoming clear is that diversity by sector pays off.

Dividend Income

Projected dividend income $26.77
Actual dividend income $26.81
Growth of $0.04

Dividend income for January was much easier to predict as the ETFs (which have a variable dividend payment) do not have distributions during the month of January. Actual dividend income came in 4 cents more than planned thanks to a small dividend increase from W.P. Carey (WPC). This small increase represent an increase of 0.15% and while small is much better than no increase (or a decrease).

Portfolio Value

Pre-Retirement Retirement
Starting Value $10,000 $10,000
Current Value $10,279 $10,279
Cash Balance $35.10 -
Cash Distributed - $35.10
Total Portfolio Value $10,314 $10,279
Total Return 3.14% 2.79%

With the markets zig-zagging all month I was surprised to see our portfolio total return increase from 2.71% in December to 3.14% & 2.79% for the two different scenarios. I attribute the slight gain in thanks to a well-diversified portfolio. Consumer Discretionary & Staples performed less than December’s performance but this was compensated with gains in Basic Materials, Healthcare and Technology.

Portfolio Sector & % Allocation Gain/Loss
BASIC MATERIALS - 4% 4.75%
CONSUMER DISCRETIONARY - 12% -3.33%
CONSUMER STAPLES - 12% 0.33%
FINANCIALS - 10% 2.90%
HEALTHCARE - 10% 1.3%
INDUSTRIALS - 10% 2.9%
REAL ESTATE - 15% 4.4%
TECH/COMMUNICATIONS - 13% 10.9%
UTILITIES - 6% 0.66%
BONDS & INCOME - 8% 1.1%
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