Wednesday, September 24, 2014

Never Stop Learning and Improving

Some of my readers know that I own a lot of stocks. I even dedicated a whole article on the topic.

Readers also know that I have more than one brokerage account. I also dedicated another article on the topic here.

What can I say - I try a lot of different things. I think I do all of that because I like tinkering, and testing in real time what happens, and see how I react to it. Investing is all about having a method, and then trying to improve it, drop things that don't work. The lessons from all that have been invaluable, and have shattered my beliefs time and again. But as a result, I have become much more successful.

One account I own has exclusively low yield, high growth securities in the initial stage of dividend growth. An example includes the company Visa (V). From time to time, I also do something else, like participate in merger arbitrage, or buy a really under loved and undervalued security like I did with Gazprom in 2013 and early 2014. This portfolio has a myriad of small positions, which could mushroom to very big opportunities, particularly if they grow at mid-to-high teens for long periods of time. I believe it is important to try and monitor the dividend growth universe for the next big dividend growth story.

Another account is used exclusively for selling long-term puts. Check this article on selling puts if you are unsure what this means or how I approach that strategy. The account can have up to 25% of value in naked long-term puts I have sold. Meaning if account value was $100,000, I have sold puts on securities I like. If those puts are exercised at the same time, I would have to buy $25,000 worth of securities. Usually this would occur at lower prices, and into the future, matching expected inflows with future outflows. Too bad most long-term puts expire in Jan 2015 or Jan 2016. There aren't any long-dated put options on companies I am interested in going beyond that yet (unless you want to invest in ETFs like SPY, which goes as far out as December 2016). The main portfolio is fully invested, and the options expirations are layered into the future, so that they do not occur at the same time. This means that the $100,000 is invested in dividend paying stocks, and in addition, I have sold puts which would trigger a purchase of $25,000 worth of stocks, if puts are exercised. The put selling is a way to mostly try and buy certain companies at a discount, and generate some float in the process. I only do companies now, although for a while I sold puts on S&P 500. A recent example is the sale of puts on Hershey, which would result in an entry price of approximately $84/share, provided that the stock price is below $90 by January 2016.

Another account has up to 15% of value on margin. Check this article on leveraged dividend investing. Meaning if account is $100,000, I have bought 15,000 worth of securities on margin. I have figured out that this margin would be paid off by my dividend income within 3- 4 years. At the current time, the interest rate is a paltry 1.09% - 1,59%/year. Actually, several of the purchases I have made in 2014 occurred in this account at Interactive Brokers. I am also considering moving some of the options selling to this account as well, given the low commissions and super low margin rates I enjoy at this broker. However, I might need to beef up the equity there first before I combine both activities. I find investing using borrowed money to be a very interesting exercise, which could be disastrous however. This is why I am only doing this with one of the accounts, because the risks are high. However, I strongly doubt that it is that risky to buy shares on margin today, which would be paid off by my dividends alone in three to four years, while paying a very low margin rate.

A third account has some CD’s, which will likely expire in 2015. I had high hopes of putting approximately 20% of my portfolio in treasury bonds, and CD’s, but the low interest rate environment means this would be unlikely. This account used to be very high in 2007 and 2008, but has been steadily decreasing since 2008. I used to own a ladder of CD's, which have been expiring since 2008. I also owned some Treasury Bonds at one time a few years ago, but I sold them all in 2010. As those remaining CD's have expired, I allocated the proceeds into dividend paying stocks.

Another account simply collects all dividend, interest and other portfolio income received. It then distributes the cash to the account which I am trying to build up. I do not automatically reinvest dividends, but allocate them in the best values at the moment. This is honestly a very important account.

Over time, the activities in those portfolios have added to cash flow, and provided extra power to deploy in dividend paying securities.

I am not going to even list the retirement account such as 401 (k), which lets me defer taxes today, and which I hope to convert to a Roth IRA tax free when or if I drop out of the rat race, and reduce my effective taxable income to the lowest brackets possible. Nor am I going to discuss the SEP IRA, Roth IRA, Rollover IRA or Employer Stock I hold. The retirement accounts are mostly a cash outflow right now, since they are being built out and limited by the maximum contributions by our friends at the IRS. The employer stock plan provides the opportunity to buy shares at a discount, which are then hedged, and sold at the first possible opportunity. Small investors have opportunities to generate "alpha" all the time, particularly those employed at companies with benefits.

All of these accounts holds a purpose, despite the fact that the picture looks complicated on the surface. The retirement accounts are essentially taking care of themselves, and so are most of the other accounts I hold that are fully built up. A lot of the work involves having a list of holdings in a spreadsheet, and then monitoring the actual holdings and overall allocation to those. The rest is covered in my monitoring process, which involves researching companies to invest, looking at dividend increases, checking material company information such as quarterly or annual financials as well as other major items such as mergers and acquisitions. Those might or might not be driven by tax inversions.

At tax time, each brokerage account generates a 1099 that is just inputted into the tax form, and it is sent out to our friends at the IRS.

I often get asked why don't I simply buy 20 dividend stocks, and concentrate myself to those. The things is, if I had limited myself to a set number of companies, without looking for my own strategy that fit my way of investing, I would not have been as successful as I have been today. Investing environments change, which is why you need to be adaptable to the situation, and not impose your own set of values on the environment. If you place self-imposed limits on your growth as an investor, you are wasting your potential.

Full Disclosure: Long V

Relevant Articles:

Why do I own so many individual dividend paying stocks?
Dividend Portfolios – concentrate or diversify?
My Retirement Strategy for Tax-Free Income
Stress Testing Your Dividend Portfolio
How to become a successful dividend investor

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