My 4% Dividend Yield Portfolio: Pulling Out 60% Back To Cash

It has been exactly five years ago, back in November 2014, that I initiated the dividend growth portfolio and reported every change here in SA ever since.

The goal was to prove to myself that dividend-growth investing does work and that it can deliver an ever-growing dividend stream that can serve as an income solution during retirement or as a constant source of cash for reinvestment.

Throughout the years, the dividends indeed increased, and the total quarterly dividend went up from $1,000 to almost $1,500.

The total value of the portfolio also grew in a similar proportion, growing from a starting point of $100,000 to about $148,000.

The experience I gained during the recent five years allowed me to develop and to test my philosophy. Those who followed me throughout the years know that I was hardly making changes in the portfolio, adding new holdings from time to time during times of a market pullback.

But the recent year, and especially when I am extrapolating things into the coming 12 to 18 months, led me to reach the conclusion that the risks are much higher than before.

There are couple of alarming factors that caught my attention and led me to the decision to sell 60% of my portfolio, preferring cash and looking for a better investment opportunities.

The first factor that caught my attention is the strength of the dollar. The zero or close to zero interest rates around the globe led much of the government bonds, mainly in Europe and in Japan, to trade at negative yields.

A negative yield is a phenomenon the world has yet to fully understand, and the first effect that I noticed is that money that is looking for positive yields found safe heaven within the U.S. Treasury bonds.

This could be one of the drivers for strength in the dollar compared to the main major currencies, and we’ve witnessed this situation before.

Back in the first half of 2015, there were a lot of concerns that the strength of the dollar would impact big corporations’ results, as a strong dollar is seen as a competitive disadvantage when growth is expected to come from export. It resulted with a massive market pullback during the month of August 2015.

My portfolio’s performance is very much tied to the drop in the long-term U.S. bond yield. The REITs and Utilities mainly enjoyed that trend, but on the same note, as stock prices went up, the dividend yield fell sharply.

The strong dollar concerns the president and a lot of presidential tweets are dedicated to urge the Fed to cut rates below zero and by that to weaken the local currency.

The Fed assumingly runs its own monetary policy agnostically from all the noise out there. But in the recent 10 months, it demonstrated an amazing 180-degree flip in policy. It was less than a year ago that we were at the middle of an interest rate hike trajectory considering several hikes in 2019 and probably also in 2020, which was bluntly transformed to 2-3 cuts in 2019 and who knows how many in 2020.

The Fed’s actions explained as a means to deal with some softness in the economic indicators and concerns that are driven by slowness in the global economy and trade wars. So, if indeed there is such urgency to change the monetary policy so quickly and so aggressively, things are probably more severe that what is being communicated. My concern is that if there are more bad news, future growth in the coming years could be much lower than we’ve seen in the past.

The response of the markets to Fed’s actions is also something we witnessed before: When there is bad news, that could lead the Fed to lower interest rates or injecting more money into the system through QE and the stocks will rally in advance.

I am not sure that it would hold this time based on a simple reason: currently there is no real QE. The Fed announced an early halt to its QT program, but not too much new money is expected to get into the system. If any, the ongoing $1T government yearly deficit could lead to additional liquidity problems.

The Fed’s concern about the trade war brings us back to the president and the massive tariff policy he is using.

I for one understand why the president is trying to slow down China’s plans to take over the East and reach a status of a superpower.

The Chinese do not hide their plans to become a big threat to the U.S. hegemony all across the world. Whether it is the Made-in-China 2025 or the enormous Belt and Road Initiative, their plans are clear and mighty.

But I don’t buy the self-confident rhetoric regarding the ability to get the Chinese to sign a deal 12 months before the next election. It could be somewhat naïve.

The Chinese regime holds a narrative of a comeback from a hundred years of national humiliation. It was formed 70 years ago and it is still relevant today. This is not something to take lightly. This is the main motivation that gets it to implement its strategy and to drive these mega projects. I do not believe any real deal could be achieved with it by a president who could be an ex-president a year from now.

The bottom line is that I see the coming year to be full of political maneuvers, confused monetary policy, and a weakening economy. Even though I see myself as a long-term investor, I prefer to put some of my capital aside and wait for a clearer horizon and for better buying opportunities.

In order to prioritize the holdings and decide which ones to sell, I’ve looked at the list of specific company holdings and mapped two factors: The current dividend yield and the average dividend growth rate.

The yellow highlighted list in the table below is the list of holdings I decided to sell in the days to come.

The gross value of these holdings sums to 60% of my gross portfolio’s worth. After taxes, it would probably be closer to 40-45% of the net worth, and this is a reasonable amount of cash I prefer to hold for now or to move to an alternative investment.

The portfolio that was aimed to deliver a 4% dividend yield and grow over time delivered the expected growth on dividend and portfolio value fronts and in five years delivered a ~50% increase.

As markets are getting closer to all-time highs and the amount of uncertainties piles up, I prefer to move a big chunk out of the market and wait on the sidelines.

Disclosure: I am/we are long BBL, UL, O, OHI, SO, SCHD, T, PM, CVX, CMI, ETN, ICLN, VNQ, CBRL, MAIN, CONE, WEC, HRL, NHI, ENB, JNJ, SKT, HCP, VTR, SBRA. 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: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision. If you want to get frequent updates on my portfolio, please push on the “Follow” button. Happy investing!

Post time: Feb-21-2020
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