2007 Curious Investments Equity Income Strategy In Depth
And, in the final report on my current investment strategies, we’re looking at my dividend income based strategy. The portfolio has lost pretty significant value over the last few months, but this portfolio is built for the long term. While I do stress capital appreciation a little bit more than most dividend strategies, the intention is for this portfolio to produce strong dividend income to offset “waiting time” for capital appreciation on the portfolio’s holdings. So, here’s a little position-by-position breakdown.
Bank of America (BAC, down 25%, 5% dividend at purchase)
This might be the most interesting stock in the portfolio for many as Bank of America seems to be a favorite of many pundits for the those interested in investing in a financial rebound. I, too, am very optimistic about the Bank of America investment. Even more now that they have purchased Countrywide Financial. In fact, the only reason I’m not happy is that I announced this portfolio so early. In fact, I think Bank of America’s stock represents an even more impressive value now than in August. Why is this? Countrywide will undoubtedly add to the losses that Bank of America is feeling here in the near term. But, as the country scales back its loss leading investment banking division, refocuses on its core business, and adds Countrywide which should make it a veritable juggernaut in mortgages. Bank of America, like all financials, is going to get hit hard in this slow down and regardless of a purchase of Countrywide, it was going to write down losses. Countrywide only adds upside as Bank of America has the resources to absorb Countrywide’s delinquencies and position itself for success when housing and financials rebound. In fact, Countrywide even comes close to approximating its previous success, Bank of America essentially purchased $2 billion in additional yearly profit for just $6 billion. Yes, it will take years for this rehabilitation, but, if you have a long enough time horizon, you’ll be taking 6+% a year in dividend payments while owning a stock trading at just 3 or 4 times those projected earnings.
Masco (MAS, down 25%, 3.7% dividend at purchase)
I discussed my investment thesis on Masco when I first proposed CIEIS and it hasn’t changed. The stock is being punished due to the current slow down, but the company seems well positioned to weather the storm and has strong turn around potential. Unfortunately, the cycle down has fallen even further since I established this strategy, but that’s the beauty of dividends!
Autoliv (ALV, down 18%, 2.8% dividend at purchase)
Autoliv was on a good technical run, but it fell apart as the credit crunch hit. It’s hard to figure out what’s going on with this stock. And, it sits on my watch list to sell. Fundamentally, Autoliv’s success is tied to the success of the American auto industry and, in August, I was bullish on the turn around stories in GM and Chrysler. I admit to have fallen behind on my research on this stock. I’ll take a deeper dive and anticipate some commentary in the near future. For now, I thank my lucky stars that this CIEIS portfolio is hypothetical.
Abbott Labs (ABT, up 17%, 2.5% dividend at purchase)
This stock is the lone bright star in the group. It seems that maybe I’m not so strong at picking “value stocks,” or maybe it just is a testament to the short term gratification brought to investors from “growthy” stocks. Abbott Labs is one of the few big pharma companies which is not facing dire circumstances in the coming years due to expiring patents (I’m looking at your Pfizer). Instead, Abbott has a few promising drugs on the horizon and has some great earnings growth momentum. On a technical basis, the stock set up a beautiful intermediate term base and has since broken out (though a little tepidly) on news of EU and FDA drug testing OKs. This stock is a great example of how chart news and supply and demand analysis can clue you into information which the market knows that you might not. Good charts typically precede good news.
Vector Group (VGR, position sold at 12.4% loss, 1.75% dividend earned)
As usual, my sell discipline is based on chart technicals unless I sell for profit. In this case, I bought Vector group as the stock seemed to be peaking into an intermediate term base. It seemed the company was doing well and I was okay with reaping a near 5% annual dividend and waiting for whatever happened next. Unfortunately, the base broke down before fully forming. In the above chart, we see line 1 which is the original uptrend I defined. Next, we watch as the uptrend pulls down and I redrew a projected trendline, line 2. Unfortunately, the higher low did not lead to a higher high and furthermore, the stock’s price broke down below the projected trend and quickly broke down through a major resistance point established in the prior uptrend which I defined as the stock’s price level. Losing traction at the bottom of a price level can often result in a free fall back to the stock’s previous base a chance I was not willing to take and, so, I have removed this stock from the CIEIS portfolio listing and replaced it with BlackRock Kelso Capital (BKCC).
BlackRock Kelso Capital (BKCC, 12% dividend at purchase)
This company operates as a close-end fund investing in middle market companies. While other companies are reeling due to the credit crunch, this company is able to charge higher rates on its debt placements and theoretically should be making more money. The issue is that asset value can fluctuate with problems in the debt markets. Furthermore, should we see a business cycle slowdown or recession as many fear, payments on loans could come in deliquent. Thus far, we haven’t seen problems of this type yet and I remain confident that the markets should not fall into an all out recession unless of course fear mongering in the media turns a recession into a self-fulfilling prophecy. The good news is that this stock seems to trade in a pretty tight range and provides an enormous dividend and should provide a nice base for return on the CIEIS.
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Comments
[...] The Curious Investor finished the review of his investment strategies – something akin to what I am doing in my process series here at The Dividend Guy. [...]
I like both BAC and MAS as long-term turnaround plays. As you said you are being paid in dividends nicely until it turns around as well, so its not a bad deal as long as it does turn. MAS is one of the best positioned to come out of the housing slowdown that is hurting so many.
[...] August, I proposed the hypothetical Curious Investments Equity Income Strategy with five dividend stocks – Abbott Labs, Bank of America, Masco, Autoliv, and Vector Group. Some [...]
I really like your take on BAC and the effect Countrywide will have on it.