Micro Blog #7: I Survived The Crazy Day

I woke up this morning thinking it would be a nice day to buy some stocks after the Friday's selloff.

I had some money sitting in my brokerage account from a recent sale and some dividends. I also had a good idea of what I wanted to buy, since I keep a buy list at all times. But little did I know that today was going to be one of the largest one day declines market has seen in a long long time.

So what gives? What caused such a decline?

I heard all types of reasons from computers going crazy to somebody with a fat finger executing a huge sell order to stop orders executing one after another like dominoes. There was no single reason what caused the market to crash, at least that's what the experts thought.

Whatever the reason may be, it was a great opportunity to buy some accidentally high yielding stocks. Therefore, I got into action and took advantage of the deals available to me today.

I picked some ED and PPL, both utilities. ED was easy as it was its turn to be buildup in my portfolio. I debated between PPL, SO, and T, all 5% yielders. I'm overweight in T and full position in SO, so, PPL was the logical choice for me. Now, SO, PPL, and D are of same position size, which is what I wanted.

My ED position was slightly smaller, mainly because I've been waiting for the yield to come up a bit.
It is one of the highest performing and financially strongest utilities. After today's selloff, ED was yielding close to 3.7% that was enough for me to pull the trigger.

Over the weekend, I worked on adding Value Line ranking to all my stocks. From 1 highest to 5 lowest. Below is a snapshot of all my utilities including telecom stocks and their VL ranking as well as credit ratings. It helps me see my strongest and weakest positions and where I should be adding most of new shares.


Almost forgot to mention, I also picked up a few shares of JNJ today, when it took a nose dive of almost 9%. The new shares have a yield of 2.55%, not often you get a deal like this on a AAA company.

How did you handle the market selloff today? Did you buy anything?

Comments

  1. Interesting last 6 trading days Mr. ATM. I was looking back at some of my stock analysis from weeks back. I was thinking JNJ would be a good buy at $120 (for me, given its already large size in my portfolio). It seemed almost impossible a few weeks ago it would get back to that, but it is getting very close. Tom

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    1. Tom, $120 would put you slightly under a forward P/E 15 based on 2018 FG estimates. Last time JNJ hit close to that multiple (15.2) was in sept. 2015. Since then it has never gone below a P/E of 16.6.

      A 20 year Normal P/E (where the stock has been trading most of the time) is 19.4. It's a premium stock that demands premium.

      So you may be asking a bit too much of a discount ;) It could happen, but you could also miss it.

      For stocks like JNJ, I don't pay attention to P/E or valuation. I just go for the yield, if it gets into my target yield range, then I would buy it, no questions asked.

      JNJ is the only stock on my list that I would buy under 3% yield. My target was at least a 2.5% and today it hit my target. I got almost 2.6%, so I'm pretty happy about that.

      Will see what market brings tomorrow, good luck to us all :)

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  2. Hi Mr. ATM, I saw from your Twitter feed that you freed up some cash to buy more JNJ. Just curious if you keep dry powder for an extended downturn. Will you be buying with cash on hand or will you have to sell off other positions? What's your philosophy here?

    Thanks!

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    Replies
    1. Hi,

      That's a great question.

      My philosophy has evolved over the years as we got deeper into a bull market. It used to be that I would keep anywhere between 5-10% of cash on the side at all times. But then I realized that the cash was just sitting there and doing nothing for me while I waited for a correction to come, which nobody knew when.

      Instead, I could easily put that cash to work by buying more shares in great companies, which would generate additional cash-flow/dividends plus potential gains that I could redeploy and generate even more cash/gains. The cycle continues over and over again.

      Now, in between all this, if a correction does occur, I would use any left over dividend cash as well as look to trim any overvalued or under performing positions. There are always stocks in my portfolio that have run up too high and are candidate for a trim. Such stocks would also have a much lower current yield since they have overvalued a lot. Boeing is a recent example. I haven't had the need to trim it yet, but when the time comes, I wouldn't hesitate.

      Or I may have a position in a stock that hasn't done well for whatever reason or maybe I don't like the stock or company anymore. I would rather switch it with a better company. I call it fixing a mistake. For example, I sold a position in a bank stock on Friday upon first signs of market correction. It generated a small cap gains but freed up enough cash along with some dividends that I was able to take advantage of today's correction.

      Trick is to regularly review your portfolio with some guidelines or metrics to help you identify when a certain stock in your portfolio is overvalued or under performing based on your objectives or may be it has become too risky and is a good candidate for a trim or even elimination when the need for cash arises.

      Just as we like to have a stock buy list, we must also have a sell list, so that when the time comes, you can act quickly without spending too much time and effort trying to figure out what to do. The thinking should be done ahead of time, not when market is taking a plunge and everyone is panicking.

      So that's how I handle cash allocation.

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    2. Thanks for the reply. Sounds like you are fully invested. When making new stock purchases or portfolio changes during a downturn, it's possible that the stock you are selling is down even more than the one you want to buy?

      I keep a pretty large cash position, which obviously has been a bad move for the past few years.

      On big down days, do you bench mark against S&P 500? I am curious how a portfolio with a heavy tilt towards dividend payers has fared this week, presumably such a portfolio should be less volatile than the overall market.

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    3. Yes, sure it's possible that the stock I'm selling is down even more than the one I'm buying, but the price by itself or how much it is up/down any given day doesn't matter. What matters is the yield.

      Would the new stock earn me more dividend/share than the old stock without putting any new money in? That's what I care about. Again, this is going back to my objective of generating and increasing cash flow.

      The problem with keeping a large cash position is that people justify it by saying they would use it when market corrects or crashes, when market does correct, they become unsure or uneasy about deploying that cash, thinking the market may correct even more and then it's like a slippery slope, the more market corrects, the more unsure people become. Before they know it, they keep waiting and waiting for that perfect moment and the market passes by them.

      I don't benchmark against S&P 500. It's really not my objective to beat the market. But I can tell you this, since my portfolio is heavy on REITs and Utilities, it has done better than the overall market the last several years as the interest rates have been very low and these two sectors have done very well. I know this, because when I look at my annual return as reported by my brokerage, it has been better than the market the last few years.

      Now moving forward, my portfolio would likely lag the broader market as REITs and Utilities come under pressure from higher interest rates, this is already starting to happen.

      But again, it is not something I worry about. What I worry about is how much cold hard cash (actual dollars and cents) my portfolio is generating, month after month and whether it is on the trajectory of meeting my this year's objective.

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    4. Agree that it's hard to gauge when to put the cash to work. My plan is to scale in but at large increments. I put a little bit to work yesterday and this morning. Will put more in if we ever get to down 10%, and then even more at down 20%, etc. Who knows if we will see that day. I probably would never be fully invested unless we are down 40-50%.

      I should note that a good chunk of this cash has been sitting on the sideline for 0-2+ years due to diversifying out of a concentrated position (up 1600+% since 1/2014, so diversifying wasn't a good move).

      I do remember the dot.com crash and financial crisis though. Many people who had been on the sidelines became fully invested when the markets were down 20-30%, and the markets continued to go down 50+%.

      My concern with dividend payers is that dividends can be cut when times get rough. There are no guarantees. Dividend ETFs were dominated by financial stocks before the financial crisis, those were crushed, and dividends were cut to 0 for years.

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    5. That's great you were able to put some cash to work yesterday, will see happens today and the coming days and weeks. We may be entering a period of more volatility. Dollar cost average is a good strategy in any market.

      Regarding your concern, I would just say this much.

      There are currently 23 companies that are called Dividend Kings, who have paid and increased dividends every year, for at least 50 years without ever cutting a dividend.

      Then there are over 100 companies that are Dividend Champions. These are the companies that have paid and increased dividends every year for the last 25 years.

      Of course there are companies that have and may cut dividends when they get into trouble. It happens all the time, and especially during a recession or industry wide rut.

      But as an investor when we are investing in dividend paying companies, we have a choice to pick a company that matches our risk tolerance.

      You want a near guaranteed dividend, then pick individual companies from Dividend King or Dividend Aristocrat list. Sure, these companies demand higher premiums, but you get the assurance that dividend is as safe as it gets.

      You want more risk and high yields, then you pick riskier companies, but know that dividends can be cut during hard times. Such as the case with many financial stocks.

      With regards to ETFs, yes certain ETFs, especially the high dividend ones had higher concentration of financial or other riskier stocks which suffered the most.

      On the other hand, if you were invested in a more conservative dividend ETFs such as Dividend Aristocrat ETF SDY or even Dividend Appreciation ETF like VIG, you would have been just fine.

      Though, one point to note is that with ETFs, dividends do fluctuate as ETFs re-balance their portfolio. An individual investor does not have any control over that. This is why I prefer investing in individual stocks, where I get to pick each and every stock based on my on risk/reward preference and balance when I need to.

      The point I'm trying to make is you can't generalize risk in dividend payers by using a single ETF example, you have to look at the broader picture or universe of dividend paying stocks and then decide how far or close you want to be from the safest possible dividend.

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    6. Man it's a choppy day today (2/6/18). Looks as though the market can't decide to be up or down. I hate the machines that are hard at work manipulating things.

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    7. I know, that's what they are saying, it was all machines. Another reason I don't use Stop orders. Also the Margin calls owners likely getting squeezed by their brokers too.

      I want to pick up some more utilities, DUK is next on my list, getting close to 5% yield.

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    8. Thank you for the additional color on your strategy. I think it works better than holding dividend ETFs. You mentioned SDY, this ETF went down 54% during the financial crisis. I'm not sure what the ETF was holding back at that time, I'm guessing it was overweight financials. DVY had a similar performance during the financial crisis, it definitely was overweight financials. They eventually recovered (but are under-performing vs S&P 500) likely because they replaced the financial stocks with something else.

      Before the financial crisis, there were quite a few financial stocks that were Dividend Aristocrats, obviously they no longer are. These included Bank of America, Fifth Third Bank, Regions Financial, US Bank, State Street Bank, etc. Dividend Aristocrats stay on the list, until they don't.

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    9. Financial crisis of 2009 was an extremely bad situation that took down a few dividend aristocrats as well. But again those aristocrats for the most part did survive the meltdown. There are far more aristocrats and even non aristocrats who paid and even raised dividend during that time.

      When you buy an ETF you are outsourcing risk management of your investment to somebody else.

      There is nothing risk free in stock market but risk can be managed well and for me at least, dividend stocks provide an additional layer of protection from market meltdowns and tantrums.

      But again, you do what makes sense for you and what meets your objectives.

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    10. Thanks for the dialogue. Unfortunately, my strategy is dictated more by taxes than anything else. They say don't let the tax tail lead the investment dog, but in my case, the taxes really are the biggest consideration. My positions are maybe 80+% capital gains, and my largest position is 99+% capital gains. Going with a dividend strategy only generates more taxes for me, I'd rather be in control of when to sell to generate those gains. However, I really enjoy following your blog!

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    11. You welcome, I always enjoy a good dialog.

      Taxes, oh yeah they are a consideration for me as well and what prevents me from taking too many cap gains, since I'm more heavy on the dividend side. That's why I keep my trimming to minimum to stay within my preferred tax bracket. It's a balancing act.

      But you know, you can have a hybrid approach ;) Qualified dividends have preferential tax treatment, just like capital gains, and now I hear with 2018 tax reform, the first 20% of REIT dividends are not taxed at all.

      So there you go, you can have a portion of REIT dividends tax free (don't quote me on that), but that's my understanding.

      Anyway take care and thanks for visiting and conversing. BTW, pick a screen name when commenting next time, so I don't confuse you with numerous anonymous spam comments I get each day, which I promptly delete :)

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