Another month has passed. No big additions have entered the 401k, so I haven't been in the buying mode. Thus, I also haven't liberated any cash in the IRAs. The recent correction has re-corrected. Not having cash, I couldn't take advantage of it. That is the eternal dilemma; hold cash for opportunities, or invest it so it's at work; I can't have it both ways.
This month has been characterized by sitting on my hands. I've thought about liquidating the few bond funds I have held for several years. They have performed miserably over the last few years. I don't see much reason to assume it'll be better any time soon. I think the best thing going is the DRIP programs. If I weren't DRIPing, I'd have about half a position worth of cash every 3 months to take advantage of price corrections in stocks I own or want to own. On the other hand, I wouldn't be growing each position. I still like the fact that each position grows by 2.5-5% yearly through the DRIP.
I don't have any intention to sell stocks, so fluctuations in their valuation doesn't concern me as much as the growth and safety of their dividends. Another interesting feature of the DRIP is that the dividend DOES grow every year, even if the dividend per share doesn't, because reinvestment is increasing the share count by the percentage yield every year. Fortunately, the dividend per share does grow yearly for almost all of my holdings, so the compounding is accelerated by that fact.
I see conditions in my profession continuing to deteriorate. I see stressers tearing at the fabric of our mutual goodwill. I'm still almost 12 years from eligibility for full social security. I'm looking for another pathway; one that replaces dread with anticipation. There are still a few things in the world of work that charge me up. I'm ready to jettison everything else. Unwinding the last entanglements is the hardest task, as these are the most entrenched entanglements of all.
I guess it's getting to be time to figure out exactly how much it will take to live, so I can begin to zero in on that target date for retirement.
Monday, March 28, 2016
Thursday, March 10, 2016
March Madness
Crazy; spring came a month early. There's a bar fight going on at the highest level of politics, the presidential election. The pundits calling for the sky to fall amongst the world's economies. There's a super-regional disaster continuing to evolve in the middle east. The Arab spring has turned into a nightmare. What is it about those tribal peoples that makes them want to gouge each other's eyes out and worse?
I'm trying to keep my equilibrium in the midst of instability at work, a desire to make big changes in our financial footprint at home, a serious process of re-evaluating priorities about work and life in general. In the middle of that, I'm continuing to attempt to make progress for our long term income security with retirement investments.
My wife has about 12% of our liquid assets in company retirement vehicles. These are tax deferred, invested in mutual funds. We don't have a lot of choice in choosing funds, so they are deployed to broad market index funds. I think they are loaded up with fees, because they haven't performed particularly well, but perhaps better than a savings account. That means 88% of the liquid assets are in my IRAs and 401K accounts. I am as deeply into Roth vehicles as I can get at the moment. I am not converting pre-tax to post-tax, but I did roll 401ks to IRAs when my business merged and changed it's tax ID.
I have written about the dividend production and it's growth. That continues. At the moment, values have recovered to a point that we are about 2% off the all-time high for the portfolio. Dividends are also near their high point. A couple of melt-downs in the energy sector have produced a temporary setback, but I think it will be temporary, as most of my companies are continuing to raise dividends and I am reinvesting dividends. Nothing new there.
So, what IS new? Well, I'm thinking of doing some "asset swapping". My 401k account is a self directed account, but it has some restrictions. The plan policy prevents me from using options or a margin account. I don't have any desire to trade on the margin. I would like some "overdraft protection" in case I make a market rate purchase and the price rises beyond my cash position between the order and the execution. I don't have much desire to trade options, but I wouldn't mind creating some additional cash returns on my assets. If I purchase shares in the 401ks and sell the same shares out of the IRAs, I'll create some cash in a place where I can use it differently.
There are companies I'd like to own at lower prices. I could collect put premiums while waiting for my price. There are companies whose price doesn't move all that much. I could consider selling some calls. I'd need a new strategy for selling calls, as I don't own companies at the moment that I'd like to have called away. It's never a good strategy to make a decision you'll regret if things don't go exactly as you desire. If you sell a call, it should be ok to have the call exercised. If you sell a put, you should want the shares at the strike price. So, it's easier to use options to buy shares that you don't own, since the price at which you'll receive them should always be better than the alternative; buying them outright, at the time you deploy the cash one way or the other.
It may be that what's really happening is that I am getting itchy fingers. I know one thing; As I deploy new contributions, I have a very hard time simply holding cash. I tend to invest it in the best opportunity I can identify, then wish I had some cash when prices drop. Selling cash covered puts would play directly to the problem and the desired strategy; put cash to work AND get shares at lower prices.
I'm going to think about this one a little more...
I'm trying to keep my equilibrium in the midst of instability at work, a desire to make big changes in our financial footprint at home, a serious process of re-evaluating priorities about work and life in general. In the middle of that, I'm continuing to attempt to make progress for our long term income security with retirement investments.
My wife has about 12% of our liquid assets in company retirement vehicles. These are tax deferred, invested in mutual funds. We don't have a lot of choice in choosing funds, so they are deployed to broad market index funds. I think they are loaded up with fees, because they haven't performed particularly well, but perhaps better than a savings account. That means 88% of the liquid assets are in my IRAs and 401K accounts. I am as deeply into Roth vehicles as I can get at the moment. I am not converting pre-tax to post-tax, but I did roll 401ks to IRAs when my business merged and changed it's tax ID.
I have written about the dividend production and it's growth. That continues. At the moment, values have recovered to a point that we are about 2% off the all-time high for the portfolio. Dividends are also near their high point. A couple of melt-downs in the energy sector have produced a temporary setback, but I think it will be temporary, as most of my companies are continuing to raise dividends and I am reinvesting dividends. Nothing new there.
So, what IS new? Well, I'm thinking of doing some "asset swapping". My 401k account is a self directed account, but it has some restrictions. The plan policy prevents me from using options or a margin account. I don't have any desire to trade on the margin. I would like some "overdraft protection" in case I make a market rate purchase and the price rises beyond my cash position between the order and the execution. I don't have much desire to trade options, but I wouldn't mind creating some additional cash returns on my assets. If I purchase shares in the 401ks and sell the same shares out of the IRAs, I'll create some cash in a place where I can use it differently.
There are companies I'd like to own at lower prices. I could collect put premiums while waiting for my price. There are companies whose price doesn't move all that much. I could consider selling some calls. I'd need a new strategy for selling calls, as I don't own companies at the moment that I'd like to have called away. It's never a good strategy to make a decision you'll regret if things don't go exactly as you desire. If you sell a call, it should be ok to have the call exercised. If you sell a put, you should want the shares at the strike price. So, it's easier to use options to buy shares that you don't own, since the price at which you'll receive them should always be better than the alternative; buying them outright, at the time you deploy the cash one way or the other.
It may be that what's really happening is that I am getting itchy fingers. I know one thing; As I deploy new contributions, I have a very hard time simply holding cash. I tend to invest it in the best opportunity I can identify, then wish I had some cash when prices drop. Selling cash covered puts would play directly to the problem and the desired strategy; put cash to work AND get shares at lower prices.
I'm going to think about this one a little more...
Thursday, January 28, 2016
How do you decide if your portfolio is doing ok?
A lot of the dialogue in the dividend growth investing community centers around taking a different view of performance than the dominant view of total return and portfolio valuation. DGI practitioners ascribe to rising dividends exceeding the rate of inflation as the primary metric of success with a stock and/or a portfolio. measuring dividend growth in a stock or portfolio isn't difficult; you simply add up the numbers and compare this year to last.
I'm a little more interested in looking at my portfolio as a business; a conglomeration of holdings that produce income. I have capital expenses, very low operating expenses, revenues and profit. What do I do with my profits? I spend them all on new revenue producing assets. I could spend all my time observing the market value of the assets; more important is how those assets produce revenues.
A share of stock is a discrete fractional claim on the earnings of a company. A fraction of those earnings are returned to owners as dividends; a cash payout that can be reinvested or used for other purposes. If the company earns more per share next year, there's a good chance that the dividend paid per share will also rise. However, you won't have any larger proportional claim on future earnings. To get a higher proportional share of earnings, you need to own a larger share of the company stock. Therein lies the added value of dividend reinvestment. If my portfolio yields 3.5% in dividends per year and I reinvest all of that in new shares. I have a 3.5% larger cash producing engine the next year. If each share captures a higher per-share payout, the cash producing engine grows more, because the dividend payment has risen and even more shares are purchased.
So how would it look if I simply kept track of the number of shares I own in all companies, the total dividends received each year and calculated the rate of share growth, the rate of dividend growth and the rate of dividend/share growth as indicators of overall investment performance? I wonder if that would be a more simple means of determining how the income generating capacity of my portfolio is changing year to year.
I'm a little more interested in looking at my portfolio as a business; a conglomeration of holdings that produce income. I have capital expenses, very low operating expenses, revenues and profit. What do I do with my profits? I spend them all on new revenue producing assets. I could spend all my time observing the market value of the assets; more important is how those assets produce revenues.
A share of stock is a discrete fractional claim on the earnings of a company. A fraction of those earnings are returned to owners as dividends; a cash payout that can be reinvested or used for other purposes. If the company earns more per share next year, there's a good chance that the dividend paid per share will also rise. However, you won't have any larger proportional claim on future earnings. To get a higher proportional share of earnings, you need to own a larger share of the company stock. Therein lies the added value of dividend reinvestment. If my portfolio yields 3.5% in dividends per year and I reinvest all of that in new shares. I have a 3.5% larger cash producing engine the next year. If each share captures a higher per-share payout, the cash producing engine grows more, because the dividend payment has risen and even more shares are purchased.
So how would it look if I simply kept track of the number of shares I own in all companies, the total dividends received each year and calculated the rate of share growth, the rate of dividend growth and the rate of dividend/share growth as indicators of overall investment performance? I wonder if that would be a more simple means of determining how the income generating capacity of my portfolio is changing year to year.
Sunday, January 17, 2016
Is it working?
My IRA accounts hit the same value this week that they held in February 2014 and September 2015.
I am calm. I didn't sell anything. I didn't rebalance. I didn't do anything other than resist the temptation to feel bad that most of the stocks I own are on sale. As usual, I don't have cash to put to work. I deployed what I had last month.
I checked the dividend performance; $37,552 in the last 12 months. In addition, the 401k paid out around $6564, for a total of $44,116
New 401k contributions in 2016 will give me about $1650 in dividends. I can expect the existing holdings to raise dividends around 5%. Also, reinvestment will produce an additional $ 1350. That would mean that 2016 dividends could top $49,000. That would be an 11% increase in dividend income from all sources.
It seems like the strategy is working. It's important to realize that the new 401k contributions and the reinvested dividends will add about 7% to my share count. The DRIP adds 3.7% and new purchases closer to 5%. If dividend growth and the compounding throw in another 2% or so, it'll take me to the goal.
That is why I am calm. I should be downright happy, since at lower prices I'll be buying shares at a discount. However, I'll be buying across 2016 and who knows what prices will do in that interval. I could also see 1-2% shaved off it one or more companies melts down like KMI and TGP did in '15.
How will I feel if we enter a bear market and valuations drop further? What if the economy dips back into recession? What will happen if every dividend payout freezes and my dividend growth is limited to new purchases, or 5%. Provided I'm able to contribute to the 401k similarly to previous years, I can't see a likely scenario where dividend cash flow will diminish in the next year. Valuations may vary, but cash flow should remain positive and increase. That's a sign of a healthy business. My little retirement conglomerate is producing revenue and profits. Because I plow all profits back into the business, I can expect 7-10% composite growth in the business due to new investment and reinvestment of dividends. I can live with that.
There is a huge temptation to listen to the popular press follow the ticker tape and feel glum about current volatility and short term declines in the stock market indices. Tuning it out is nearly impossible. Bargain shopping for great companies in the coming months should help counter some of the tendency towards angst.
I am calm. I didn't sell anything. I didn't rebalance. I didn't do anything other than resist the temptation to feel bad that most of the stocks I own are on sale. As usual, I don't have cash to put to work. I deployed what I had last month.
I checked the dividend performance; $37,552 in the last 12 months. In addition, the 401k paid out around $6564, for a total of $44,116
New 401k contributions in 2016 will give me about $1650 in dividends. I can expect the existing holdings to raise dividends around 5%. Also, reinvestment will produce an additional $ 1350. That would mean that 2016 dividends could top $49,000. That would be an 11% increase in dividend income from all sources.
It seems like the strategy is working. It's important to realize that the new 401k contributions and the reinvested dividends will add about 7% to my share count. The DRIP adds 3.7% and new purchases closer to 5%. If dividend growth and the compounding throw in another 2% or so, it'll take me to the goal.
That is why I am calm. I should be downright happy, since at lower prices I'll be buying shares at a discount. However, I'll be buying across 2016 and who knows what prices will do in that interval. I could also see 1-2% shaved off it one or more companies melts down like KMI and TGP did in '15.
How will I feel if we enter a bear market and valuations drop further? What if the economy dips back into recession? What will happen if every dividend payout freezes and my dividend growth is limited to new purchases, or 5%. Provided I'm able to contribute to the 401k similarly to previous years, I can't see a likely scenario where dividend cash flow will diminish in the next year. Valuations may vary, but cash flow should remain positive and increase. That's a sign of a healthy business. My little retirement conglomerate is producing revenue and profits. Because I plow all profits back into the business, I can expect 7-10% composite growth in the business due to new investment and reinvestment of dividends. I can live with that.
There is a huge temptation to listen to the popular press follow the ticker tape and feel glum about current volatility and short term declines in the stock market indices. Tuning it out is nearly impossible. Bargain shopping for great companies in the coming months should help counter some of the tendency towards angst.
Wednesday, December 23, 2015
A new view of debt
It happened to KMI. Then it happened to Teekay. Now it's threatening to happen to Conoco Oil.
There was little revenue with energy prices in retrenchment to service their debt. That led to dividend cuts and devaluation of the capital value of the stock.
When 3/4 of the dividend is diverted to managing debt and development projects, the market responds with a similar devaluation of the stock price. This may not seem rational, given that cutting the dividend when facing earnings shortfalls is a prudent move that keeps cash for higher priority items, maintains debt ratings and avoids dilution of shareholder value by issuing more stock, avoids taking on more debt to pay a dividend, etc. The market isn't rational.
It IS rational for Saudi Arabia and Iran to produce all the oil they can if they can afford to sell it on the cheap.
So, you either take the haircut or sell and take the haircut, redeploying the reduced capital into another sector. I don't actually want to abandon energy stocks. I know that this time and it's distorted conditions will pass. I hate learning lessons this way, but how else?
If an entire sector melts down, my portfolio will surely take a hit. It won't be 1%; more like 5%.
That's painful. Oil has done similar things in the past. Oil is a commodity and commodity prices can be very volatile at times.
So, what should my response to this turn of events be? Should I take my lumps like every other investor in the industry? Should I rotate out at depressed valuations? My basic buy and hold mentality says "take it". My anxiety says "sell". I experienced this before, with banks. They have recovered substantially but I left a bunch of money on the table when I abandoned BAC a long time back. I lost my shirt on WaMu. My basic instinct is to avoid panic and stay the course. I think that's what I'll end up doing.
There was little revenue with energy prices in retrenchment to service their debt. That led to dividend cuts and devaluation of the capital value of the stock.
When 3/4 of the dividend is diverted to managing debt and development projects, the market responds with a similar devaluation of the stock price. This may not seem rational, given that cutting the dividend when facing earnings shortfalls is a prudent move that keeps cash for higher priority items, maintains debt ratings and avoids dilution of shareholder value by issuing more stock, avoids taking on more debt to pay a dividend, etc. The market isn't rational.
It IS rational for Saudi Arabia and Iran to produce all the oil they can if they can afford to sell it on the cheap.
So, you either take the haircut or sell and take the haircut, redeploying the reduced capital into another sector. I don't actually want to abandon energy stocks. I know that this time and it's distorted conditions will pass. I hate learning lessons this way, but how else?
If an entire sector melts down, my portfolio will surely take a hit. It won't be 1%; more like 5%.
That's painful. Oil has done similar things in the past. Oil is a commodity and commodity prices can be very volatile at times.
So, what should my response to this turn of events be? Should I take my lumps like every other investor in the industry? Should I rotate out at depressed valuations? My basic buy and hold mentality says "take it". My anxiety says "sell". I experienced this before, with banks. They have recovered substantially but I left a bunch of money on the table when I abandoned BAC a long time back. I lost my shirt on WaMu. My basic instinct is to avoid panic and stay the course. I think that's what I'll end up doing.
Sunday, December 6, 2015
Panic in the oil patch
I have been watching the story unfold with Kinder Morgan over the last few months. I'm watching a 150% capital appreciation melt like an ice cube on the hot pavement.
It seems the credit rating agency, Moody, is concerned that KMI won't have the cash flow to service it's debt with energy prices in the toilet and many of it's upstream customers on the ropes. I guess the fee-based revenues are at risk if less gas is pumped. I hear that KMI has twice the leverage of it's peers, putting the dividend at risk. The market is rapidly discounting it's shares to account for a potential credit rating cut to "non-investment" status and a freeze or cut in the dividend.
So, here's where the rubber meets the road. Do I believe that KMI's business model is at risk?
Will debt take them down? Is a dividend cut and the valuation haircut that is already occurring enough to make me bail out and purchase something else with what remains of the value in that holding? Do I believe the long term thesis about natural gas? Could Richard Kinder take the company private and wipe out my ability to ride it back up when times change for the energy industry?
Interestingly, the "don't panic" folks point out that KMI's revenue streams are bullet-proof and their cash flow is secure, so the debt and the dividend are both secure. They say that the problem is that KMI can't raise more capital for expansion by either issuing equity at these low valuations, or by issuing more debt with their shaky credit rating, so growing new revenue won't work. They need the cash flow from the dividend to pay down debt. hmm....
I have ridden other companies down when the market got nervous. Actually, several: GE, BAC, LIN and LINCO, some energy storage speculative stocks. This may be another lesson learned about debt and credit rating. KMI has a BBB- credit rating, one tick above junk. When the debt gets too high and the revenue stream is considered to be at risk, down goes the credit rating, up goes the price of rolling over debt that is coming due. Debt service coverage and available revenue to grow the business...I'm continuing to learn, but this kind of learning is always painful.
I won't suffer too much; if KMI goes to zero, this year's dividends from the whole portfolio will more than cover the loss. That's the value of diversifying; a meltdown doesn't hurt you too much, but that's still hard on my future and points out what I don't know about protecting my portfolio from risk.
It seems the credit rating agency, Moody, is concerned that KMI won't have the cash flow to service it's debt with energy prices in the toilet and many of it's upstream customers on the ropes. I guess the fee-based revenues are at risk if less gas is pumped. I hear that KMI has twice the leverage of it's peers, putting the dividend at risk. The market is rapidly discounting it's shares to account for a potential credit rating cut to "non-investment" status and a freeze or cut in the dividend.
So, here's where the rubber meets the road. Do I believe that KMI's business model is at risk?
Will debt take them down? Is a dividend cut and the valuation haircut that is already occurring enough to make me bail out and purchase something else with what remains of the value in that holding? Do I believe the long term thesis about natural gas? Could Richard Kinder take the company private and wipe out my ability to ride it back up when times change for the energy industry?
Interestingly, the "don't panic" folks point out that KMI's revenue streams are bullet-proof and their cash flow is secure, so the debt and the dividend are both secure. They say that the problem is that KMI can't raise more capital for expansion by either issuing equity at these low valuations, or by issuing more debt with their shaky credit rating, so growing new revenue won't work. They need the cash flow from the dividend to pay down debt. hmm....
I have ridden other companies down when the market got nervous. Actually, several: GE, BAC, LIN and LINCO, some energy storage speculative stocks. This may be another lesson learned about debt and credit rating. KMI has a BBB- credit rating, one tick above junk. When the debt gets too high and the revenue stream is considered to be at risk, down goes the credit rating, up goes the price of rolling over debt that is coming due. Debt service coverage and available revenue to grow the business...I'm continuing to learn, but this kind of learning is always painful.
I won't suffer too much; if KMI goes to zero, this year's dividends from the whole portfolio will more than cover the loss. That's the value of diversifying; a meltdown doesn't hurt you too much, but that's still hard on my future and points out what I don't know about protecting my portfolio from risk.
Thursday, October 22, 2015
Betwixt and Between
I'm between contributions to the 401k; should be one last addition this year based on my calculations.
I pulled the trigger and dumped BXT and BXLT in the IRA due to a cut in the combined dividend and distributed the cash into 4-5 of my existing holdings that had fallen to under fair value.
The market has recovered substantially from it's correction a few months ago. I don't know why exactly; earnings haven't been electrifying, and the news out of China, Europe and elsewhere isn't exactly encouraging either.
Newsmakers continue to fixate on Federal Reserve policy with respect to interest rates. It seems like a non-issue to me. I can't imagine they will raise them much when they do, so I'm just not worrying about a market reaction. I learned to enjoy the opportunity to buy at a bargain this last dip and I'll look to the market's reaction to higher interest rates to augment my holdings in the best of my dividend payers.
I have continued to focus on the DRIP versus selective dividend investment issue and cannot convince myself to change my current strategy. I'm continuing to consider reigning in my company count, coordinating the 3 accounts a bit better and limiting the total holdings to around 50. The problem is, I like all of the holdings I have. There are still a few I'd like to own as well. Perhaps I'll just have to decide that my personal mutual fund will have 100 holdings and stop worrying about how closely I can monitor all of them. Some don't need that much monitoring after all.
I keep a nervous eye on that dividend cash flow, continuing to need the reassurance that it is steadily rising. Fortunately, that is exactly what is happening, so at the very least the strategy is delivering what it promises. I'd be more reassured if the total valuation of the portfolio were also rising; I'm still 5% below peak valuation in December 2014. Maturity in investing is a hard-won state of equanimity, and I have not achieved it yet.
In the bigger picture, I keep thinking about the overall financial picture, how to reduce expenses, lighten the footprint, free up space to do things other than work for wages, shorten the run to retirement. The biggest dilemma for me is whether or not to dump some cash value life insurance and get out from under the premium requirements. I have been in a huge funk about dissatisfaction with my work, making it that much harder to tolerate all of the financial obligations.
I don't have any new and profound insights, so it's time to hit the lights...
I pulled the trigger and dumped BXT and BXLT in the IRA due to a cut in the combined dividend and distributed the cash into 4-5 of my existing holdings that had fallen to under fair value.
The market has recovered substantially from it's correction a few months ago. I don't know why exactly; earnings haven't been electrifying, and the news out of China, Europe and elsewhere isn't exactly encouraging either.
Newsmakers continue to fixate on Federal Reserve policy with respect to interest rates. It seems like a non-issue to me. I can't imagine they will raise them much when they do, so I'm just not worrying about a market reaction. I learned to enjoy the opportunity to buy at a bargain this last dip and I'll look to the market's reaction to higher interest rates to augment my holdings in the best of my dividend payers.
I have continued to focus on the DRIP versus selective dividend investment issue and cannot convince myself to change my current strategy. I'm continuing to consider reigning in my company count, coordinating the 3 accounts a bit better and limiting the total holdings to around 50. The problem is, I like all of the holdings I have. There are still a few I'd like to own as well. Perhaps I'll just have to decide that my personal mutual fund will have 100 holdings and stop worrying about how closely I can monitor all of them. Some don't need that much monitoring after all.
I keep a nervous eye on that dividend cash flow, continuing to need the reassurance that it is steadily rising. Fortunately, that is exactly what is happening, so at the very least the strategy is delivering what it promises. I'd be more reassured if the total valuation of the portfolio were also rising; I'm still 5% below peak valuation in December 2014. Maturity in investing is a hard-won state of equanimity, and I have not achieved it yet.
In the bigger picture, I keep thinking about the overall financial picture, how to reduce expenses, lighten the footprint, free up space to do things other than work for wages, shorten the run to retirement. The biggest dilemma for me is whether or not to dump some cash value life insurance and get out from under the premium requirements. I have been in a huge funk about dissatisfaction with my work, making it that much harder to tolerate all of the financial obligations.
I don't have any new and profound insights, so it's time to hit the lights...
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