This income-centric portfolio was launched in October of 2014 with two simple goals. The primary goal of this portfolio was to provide roughly an 8% income while preserving the capital. The secondary goal was to provide some capital appreciation over the long term (please see full disclosure at the end of the article). Since then, we have provided regular updates on the progress and performance of this portfolio on SA. You can read our original article here and previous year’s update here.
As you will see below, the portfolio continues to generate high income, thus meeting its primary goal, while holding its total value in-spite of the headwinds in the last few months. First, most income securities have faced a tough time in rising interest-rate environment recently. Secondly, the overall market has been highly volatile since the end of January and tested 10% lows from its peak, at least twice.
To recap, a total amount of $100,000 was initially allocated to the portfolio, and another $100,000 was contributed in the next 12 months ($8,333 in 12 installments). No more fresh money was added thereafter.
|Initial Investment 10/17/2014:||$100,000|
|From Nov. 1st, 2014
until Oct 1st, 2015
|$100,000||12 installments of $8333.33|
As stated before, the main goal of this portfolio was to generate high income while preserving the capital. The investment strategy was to utilize CEFs (closed-end funds), which generally use some amount of leverage to generate high distributions. Initially, we had chosen to invest in as many as 13 funds (11 CEFs, one ETN and one ETF) to provide us a broad diversification, high distributions, and exposure to different types of assets such as equity, bonds/credit securities, utility, infrastructure, energy MLPs, preferred income, floating-rate income, technology sector, healthcare etc. Besides 13 CEFs/funds, we have added three individual company stocks in the portfolio from the BDC/mREIT sectors. Altogether, they form less than 10% of the portfolio size.
Here is the current portfolio composition:
|Fund/Stock Name||SYMBOL||Fund’s composition|
|1||DNP Select Income (NYSE: DNP)||DNP||Utility (80%)|
|2||Kayne Anderson MLP (NYSE: KYN)||KYN||(MLP – Master Limited Partnership)|
|3||Guggenheim Strategic Opp Fund (NYSE: GOF)||GOF||Equity CEF fund|
|4||Columbia Seligman Premium Tech Growth (NYSE: STK)||STK||Equity CEF fund|
|5||Nuveen Muni High Inc Opp (NYSEMKT: NMZ)||NMZ||Muni Tax-Free ( Tax-free yield)|
|6||PIMCO Dynamic Credit Income (NYSE: PCI)||PCI||Global Income, including corporate debt, mortgage-related and other asset-backed securities|
|7||PIMCO DYNAMIC INCOME FD (NYSE: PDI)||PDI||Debt obligations and other income-producing securities|
|8||ISHARES US PREFERRED STOCK ** ETF **
|PFF||Preferreds 90% (This is an ETF, not CEF)|
|9||COHEN & STEERS TOTAL RETURN REALITY Fund (NYSE: RFI)||RFI||REIT (Real Estate) CEF|
|10||COHEN & STEERS REIT & Preferred Income Fund (NYSE: RNP)||RNP||Preferred is 48%, 50% REIT|
|11||Cohen & Steers Infrastructure (NYSE: UTF)||UTF||Utility+Infrastructure (50% is International)|
|12||UBS ETRACS Monthly Pay 2xLeveraged ETN (NYSEARCA: CEFL)||CEFL||Exchange Traded Note (based on the index of CEFs)|
|13||Tekla Healthcare Investors ( HQH)||HQH||Healthcare/Biotechnology|
|14||Annaly Capital Management, Inc (NYSE: NLY)||NLY||mREIT|
|15||Main Street Capital Corp (NYSE: MAIN)||MAIN||BDC (Business Development Co)|
|16||Ares Capital Corp ( ARCC)||ARCC||BDC|
Sale/Purchases made since January 2018:
MAIN, NLY, and ARCC:
MAIN, NLY, and ARCC are the only three individual company securities in this portfolio, which are not funds (every other security is a fund). MAIN and ARCC are in the BDC sector, whereas NLY is a mREIT. ARCC was added in 2017. All three put together form only 9.3% of the portfolio value.
This is an ETN (exchange-traded note) sponsored by UBS ETRACS and is linked to the 2x leveraged performance of the underlying ‘ISE High Income Index.’ We have not invested any new money in this security in a long time, at least since mid-2015. If you were to look at it only from the price-performance point of view, you would find its performance to be disappointing. But that is just half the picture. Since this is a 2x leveraged product and provides hefty dividends normally in the range of 17-20%, after adding the dividends, it has performed quite well, providing roughly 26.06% gain on the invested capital when we include the dividends compared to 21.71% loss without including dividends. Even though it has performed well for our portfolio, this is still high-risk security; that’s why we have limited our position to just 3.12% of the portfolio size. That said, we intend to hold our current position and may add more at an opportune time. We like to caution that there are additional risks that come with an ETN product, which the investor should be aware of. They are widely discussed in many other articles on the SA forum.
The table below shows the funds in the portfolio in order of performance (from best to worst) as of April 6th, 2018. The performance has been calculated and sorted after including the dividends.
Also, here is the current portfolio as of 04/06/2017:
|1||Sold during the period (Jan 2018 – March 31st, 2018)||$0|
|2||New investments made during the period (Jan 2018 – March 31st, 2018)||$0|
|3||Net new money invested (2 -1)||$0|
|4||Net Cash deployed so far||$202,663|
|5||Total Dividends collected
(from Oct 17, 2014, until 31st March 2018):
|6||Net Cash position (04/06/2018)||$44,440|
|7||Cost basis (04/06/2018)||$200,000|
|8||Portfolio balance (as of 04/06/2018)||$251,121|
|9||Net profit/Loss (incl. dividends)
|10||Return on original invested capital (51,121/200,000)||25.56%|
|11.||Net Gain/Loss for the Portfolio YTD (since January 1st, 2018 until 04/06/2018)||-2.81%|
|12.||Net Gain/Loss in S&P500 YTD (since January 1st, 2018 until 04/06/2018)||-2.68%|
Total dividend earned from 1st January to 31st March 2018: 4453.74
Total dividends earned until end of 2017: $44019
Total dividends earned since portfolio inception: $48,473 ($44019 + 4454)
(this includes $1,382 from securities already sold)
The current yield-on-cost (YOC) is 8.91%. However, due to a large cash reserve ($40,000 – $50,000 most of the times), the yield on the current value of the portfolio comes to 7.10%. The current cash reserve of $44,000 represents about 17.7% of the portfolio, however, we intend to bring it down to about 12% range.
Security wise dividends:
|Symbol||in 1st Qtr. 2018||Dividend since portfolio inception until 2017||Symbol||in 1st Qtr. 2018||Dividend since portfolio inception until 2017|
Total dividend since inception = $48,473 ($44,019.18 + 4453.74)
Performance Comparison With Benchmark:
This portfolio is now over three and a half years old (42 months to be precise). Cash contributions were made over the first 12 months only. As such, this portfolio is meeting or exceeding all of its primary goals when the un-deployed cash is excluded. For performance comparison, we have been using the traditional Stock/Bond portfolio as a benchmark. Thus far, the portfolio has done reasonably well against the Stock/Bond portfolio. In 2018, it did lose some value in a rather difficult environment, but it is comparable to broader market represented by S&P500. In our original article on this portfolio, we set forth a very simple set of goals:
|1||Earn current income of 8% and preserve capital|
|2||Provide a lower volatility|
|3||Provide at least 2% capital appreciation over the long term.|
In a nutshell, here is how we have fared so far against our goals:
- We earned an income of $4,454 during the first quarter (equivalent to $17,816 at an annual rate) and $17,148 during the year 2017. The total of dividends/distributions, since inception, stands at $48,473.
- The yield on cost is at 8.91% currently. The current forward yield is lower at 7.10%, but that is when we include a cash reserve of about $44,000. Please keep in mind this cash reserve provides the extra margin of safety and lowers the risk profile for the portfolio. However, we intend to bring the cash reserve lower to about 12% in future.
- Capital preservation: Including dividends, the portfolio is up by 25.5% as of 04/06/2018. Morningstar portfolio calculated a 10.46% annualized return for this portfolio since inception if we were to exclude cash reserve.
- We will also want to compare the performance of our Income-centric portfolio with a traditional portfolio (40/20/40 Stocks/International Stocks/Bond allocation), assuming similar amounts were contributed on the same dates, and similar amounts were deployed. I will compare our Income-centric portfolio with a hypothetical stock/bond portfolio with 40/20/40 allocation to Vanguard Total Stock Market ETF (NYSEARCA: VTI), iShares MSCI EAFE – International (NYSEARCA: EFA), and (Vanguard Total Bond Market Etf (NYSEARCA: BND). During this period, our Income portfolio outperforms the Stock/Bond (60/40) portfolio on various metrics, total return, and income.
|As of 04/06/2018||Total value||Dividends|
|8% Income portfolio||$251,121||$48,473|
|60:40 Stock/Bond portfolio
As on 04/06/2018
Since we are not withdrawing income from this portfolio, our biggest challenge has been to utilize and invest cash faster than the cash generated from distributions. We still have a large cash reserve of $44,000, roughly 18% of the portfolio. Even though a large cash reserve provides an extra layer of safety and lesser volatility, especially during rough times, this is slightly higher than we want. We aim to bring down our cash position to about 12% in the next 6 months.
Author’s Note: In fact, we have bought additional shares of HQH and KYN for this portfolio on 04/09/2018. This is not reflected in the tables above as we sourced most of the data for this article as of 04/06/2018.
We would like to remind the readers that the CEF portfolio should not be considered a “core” portfolio. We do not recommend allocating more than 25-35% of the investment assets to this type of portfolio, though these decisions should be considered on a personal basis. Below is the allocation model that we like to follow:
Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.
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Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, MON, ADM, MO, PM, KO, DEO, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VTR, CVX, XOM, VLO, HCP, O, OHI, NNN, STAG, WPC, MAIN, NLY, PCI, PDI, PFF, RFI, RNP, UTF, EVT, FFC, KYN, NMZ, NBB, HQH, JPC, JRI, TLT, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VTR, CVX, XOM, VLO, HCP, O, OHI, NNN, DAE , STAG, WPC, MAIN, NLY, ARCC, PCI, PDI, PFF, RFI, RNP, UTF, EVT, FFC, KYN, NMZ, NBB, HQH, JPS, JRI, TLT..
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.
Additional disclosure: Please see our ‘SA Profile’ for our long positions.