Portfolio rebalance for the new 2021 year

The 2020 year turned the world on its head and this means a portfolio rebalance is in order. It is the time to cut under-performing holdings ready for 2021.

Novel Coronavirus (COVID-19) had a major impact on the world in 2020, many of which will change the way we live and work forever.

Unfortunately my time was limited and the blog got ignored for many months. Work and family commitments come well before the Den of Dividends during the Rony-Rona. So in this post we will catch up for around 9 months worth of trades.

This post will cover my additional buys as well as my portfolio rebalance at the end of the year.

March correction

After my early March purchases covered in the last posting, I paused for a couple of weeks and then continued to purchase at far cheaper prices. Additional shares in Carnival Corporation (CCL) helped bring down my rather costly initial position where I am actually in the green on them today.

Vermilion Energy (VET) is in the red for 2020, but I believe can see profit in 2021.

I took advantage of an additional deep buy of Vermilion Energy (VET), one of my favourite dividend stocks at the time in late March. I had been buying them for some time however the negative oil prices and the high amount of debt they carry then cratered the share price. With the share price well below $3.00, I trebled my position for less than my existing investment.

The close of 2020 still sees me down significantly on VET and no dividend. The former CEO has been booted out the door and the founders have returned to right the ship. With rising oil prices expected in 2021 I believe I will be in the green later in the year.

I also took opportunity to purchases AT&T (T), Simon Property (SPG), The Interpublic Group (IPG) and Energy Transfer (ET). All of these were average down positions during the drop in the market.

April spinoffs

April brought corporate changes in my United Technologies (formerly UTX) holding as they spun off Carrier (CARR) and Otis (OTIS), and merged with Raytheon to form Raytheon Technologies (RTX).

I took the opportunity to buy a few extra Carrier and Otis shares after relisting under their own identities. Both of these stocks have done very well, especially Carrier. I am now up well over 130% on my CARR holdings. Both stocks now look very expensive and have significant debt which UTX kindly gave them in the divorce proceedings.

I have yet to purchase additional RTX shares since the UTX/RTN merger. It feels like I have missed the boat on that where it was trading below $60. The Dividend CAGR is currently negative so while I am happy to hold, I do not think I will be purchasing any more unless shares drop significantly.

Spirit Realty Capital (SRC) started as a new position in April, where I picked up a small tranche. This REIT was well undervalued at the time and has provided some needed capital growth on a new position. The fact it is doing well in rent collections and still has a starting yield of over 6% makes SRC my preferred Retail REIT. It is fairly priced below $40.

May Madness

I again purchased Simon Property in May under $58 per share to average down my position. With the lockdowns in many US Markets and a horribly timed merger with Taubman Centers (formerly TCO) put on hold, the unrealized loss was over 60%. The only thing you can do when a stock is on sale is to buy more. I am still well down on Simon however it is a quality comany with great assets. I will continue buying SPG to average down.

Building positions June and July

During the ‘summer market’ period, I really started to accumulate into Spirit Realty (SRC). A low $30’s price and a 6.5% starting dividend yield, while collecting a high percentage of their rents, it has been a great performer. SRC is also a rare company that pays dividends in January, so I like how that fills in that income hole.

Spirit realty Capital owns a diverse portfolio of single tenant, triple net lease properties including Restaurants, Service Stations, big-box retail and office space. (Image source: SRC)

SRC has a much lower exposure to Movie Theatres in its property portfolio, something that Realty Income (O) is now struggling with. AMC has been doing very badly this year due to lockdowns while AT&T (T) and Disney (DIS) have taken advantage with their streaming platforms and released movies to streaming. This cuts out theatrical releases and in the current state of the world this is a good thing.

I have never personally been much of a ‘go to the movies’ guy, although it is nice now and again. Movie theatres struggling and streaming is starting to take its place. Streaming is now the growing distribution channel at the expense of theatres. While theatres are not going away, their capacity or numbers will need to fall due to lower demand. I do not believe the public will go as often as they did before 2020.

November brings Viatris

With a small holding of Pfizer (PFE), I ended up with a new holding of Viatris (VTRS) in November. Pfizer decided to spin out their Upjohn generic drug division and merge it with Mylan. Unfortunately the share consolidation left me with less than 1 share , so I purchased a few more.

VTRS has done pretty well, with an 11% gain in 2 months and mostly in the last few days of the year. I do not see this going anywhere much higher yet due to the amount of debt that the new company carries, with only about $10b in cash from Mylan’s balance sheet. The Q4 results will be interesting to watch.

December purchases and portfolio rebalance

More purchases in December for SRC, as I again started to look forward to the January dividend payment. I only have a few stocks that pay in January like Altria (MO), Pepsi (PEP), Cisco (CSCO) and Cyrus One (CONE).

I also took a look at a number of small positions in December which I decided top cut loose and invest the proceeds in more core holdings. So just prior to Christmas I said goodbye to a few stocks.

SELL: Prospect Capital (PSEC)

I decided to cut Prospect Capital loose at a slight profit and some decent dividends. The current low-interest environment does not suit their business model at all. There has also been some significant dilution of shareholders due to new issuance of shares. I may come back to them in the future, and probably with preference shares rather than the common stock.

SELL: Realty Income (O)

As a very small and non-core position, it was time to cut Realty Income too. Their ongoing lower rent collections and yield than peers, exposure to AMC and other theatre operations, and an under-performing share price all led to my decision on this. I took a 5% loss however this was less than a $500 position so no major issues.

SELL: Macquarie Infrastructure (MIC)

Macquarie Infrastructure shares did lose value after the dividend was suspended early in the year. I did get a 10% starting yield for reinvestment, but after the dividend cut there was little reason to stay. Once the share price spiked in late December and got me close to by cost average, I got out.

SELL: Brookfield Infrastructure Corp (BIPC)

I received free shares of BIPC from the BIP split in March. BIPC carries a premium due to the demand for C-Corp shares over Partnership Units. The time arrived to cash this small position in and reinvest somewhere else. I still hold BIP and will likely keep adding to it in the hope that I will be able to convert BIP to BIPC, and profit from that premium.


Proceeds of the above stocks are redeployed into Mastercard, Bank of America, AT & T, and Spirit Realty Capital.

Mastercard and Bank of America are two positions with excellent longterm CAGRs and should provide substantial growth in the long term from reinvestment. Neither position is at a size I am happy with, and Mastercard is quite low yield. There will be many more years of building that position, and the share price continues to rise over time.

AT&T and Spirit Realty are both current yield buys, returning 7.2% and 6.5% respectively. Some people are concerned over AT&T’s dividend coverage, I have no such concerns. I believe the growth from HBO Max streaming and a reopening economy in the middle of 2021 should help them pay down debt even faster.

And so ends 2020

The US Portfolio achieved 4.91% capital return, and 5.56% dividend yield for the year. I am very pleased with this result after quite a few dividend cuts. It could have been significantly better with some better capital allocation and smarter buying, however these are learning experiences.

2021 will see some more changes to the portfolio, including new positions and a few growth stocks. While dividend investing is my main thing, we should also not be blind to capital growth opportunities also.

The author is long on the following US-listed stocks at the time of publication: CCL, VET, T, SPG, IPG, ET, CARR, OTIS, RTX, SRC, PFE, VTRS, MO, PEP, CSCO, CONE, BIP, MA, BAC.
The author has no position on other stocks mentioned, including no short positions.

Vts or IVV?

VTS vs IVV, and why they are both stupid choices

So, you have decided that 1.5% interest on your money is unappealing. Bank account returns no longer beats inflation. Your pile of money in the bank is worth less every day. Your research into what new investors should start investing in will find a pervasive theme that Exchange Traded Funds or ETFs are a good idea. Rather than pick one or more individual companies, purchasing an ETF instead represents many stocks within one. The best part is that you can buy these ETFs through your stockbroker just like a normal company share.

The US market is the biggest in the world and has seen incredible growth since the Global Financial Crisis. The investing community usually suggest two ETFs to gain exposure to the US markets. These are VTS, Vanguard US Total Market Shares Index ETF, and IVV, iShares S&P500 ETF. Both these ETFs trade on the ASX in Australian Dollars.

The US Market is now reaching some quite dizzying heights. Financial analysts are questioning if the market is overvalued. Will the low interest rates and cheap debt cause a market correction and see the US economy slip into a recession? Are these two ETFs a good idea to invest in today? Looking at what is on offer, I do not believe these ETFs are suitable for new investors looking to start their investing journey with a Dividend Growth Investing (DGI) strategy. Lets discuss why I have come to this conclusion.

High unit cost & unfavourable AUD rates

After the GFC, pricing on the US Index ETFs were quite low for Australian Investors with a strong AUD, at one point buying in excess of USD$1.10 per AUD courtesy of our stronger interest rates and the carry trade. This maintained pricing within a range even as the US Market started to improve. Once our interest rates started to come back more in line with the US, the carry trade unwound and the AUD slid back below the 80 cent mark. Meanwhile the US markets started to fire on Helicopter money in Quantitative Easing from the US Federal Reserve.

Today, we are seeing VTS above AUD$230/unit, and IVV at an eye-watering AUD$457. This means a $2,000 investment in either only sees 8 and 4 units of each respectively. Since the price is so high, the inability to take dividend returns and reinvest to get the compounding effect that we all love to drive our wealth higher simply does not exist.

Yield dragged down by Tech Stocks

One of the major changes to the S&P 500 over since the dot-com bubble popped is that massive tech stocks are now some of the most valuable companies in the world, and take up a huge chunk of the index. While Microsoft and Apple are the two largest companies in the world and do pay a dividend, both are yielding less than 1.4% p.a. each. The remaining big tech companies in the ten largest companies on US Markets, Amazon, Alphabet (Google) and Facebook all do not pay a dividend.

Between all 6 companies (Google counted twice with two separate stock listings) the overall yield is very low. Adding to this low yield, Berkshire Hathaway famously run by Warren Buffett is the 5th largest company on the US Market. Berkshire also infamously do not pay a dividend. All you are left with is Johnson & Johnson (JNJ), Exxon Mobil (XOM) and JP Morgan Chase (JPM) who do pay a reasonable dividend of 2.8% p.a. or greater.

An overall dividend return between 1.40% and 1.60% p.a. on these indexes is really not strong enough for dividend-focused investors. Much of this low yield is caused by a vast number of overvalued companies at P/E ratios that are generally to high. You can get better returns on a Bond ETF, or even sticking your money in a bank with far less risk.

Reinvestment problems

Most of the audience here will prefer dividends to be paid at reasonable yields, lets say greater than 2.8%. We also want to grow investment positions over time by reinvesting these dividends and unlocking compounding returns over a period of 20 years or more.

Only IVV provides a Dividend Reinvestment Plan (DRP) as part of the ETF. This allows for your dividends to be ‘paid’ as shares onto your holding balance without incurring brokerage fees. At the much higher level of unit cost, you would need around $50,000 invested in IVV in order to gain one single share per year at the current yield. I do not believe you are really going to see any meaningful compound effect with that unit quantity increase.

VTS on the other hand is a trust structure under Vanguard and domiciled in the US. Tax laws state that they must pay cash as a dividend. While the same $50,000 investment in VTS would gain you a cash payment worth around two additional units per year, you would need to buy this as an on-market transaction and incur a brokerage fee. While some brokers can be around a $10 brokerage fee per trade, a number of brokers charge $15 or even in excess of $20 per trade. This eats into your profits and increases your cost price average up significantly. You can add additional cash to make your purchase larger to offset the impact of brokerage however.

When is VTS and IVV appropriate to purchase?

Quite simply – at far lower P/E multiples, and ideally with a strong AUD at around 85c or higher. The benefit of these ETFs is snapping them up at low prices such as the opportunity we had in 2008-2011 with the AUD so strong against the USD.

You then let the market drive the capital growth of the underlying stocks to increase the value of your holdings instead of dividends. A $10,000 investment in 2009 with dividends and capital growth would now be a holding worth around $40,000.

As a result, for dividend focused investors, these are less suitable for long-term growth of your holdings, and later converting those dividends to income in retirement.

Alternative US-market ETFs for Dividends and compounding

At this stage there really is no low-cost, high-yield ETF for Australian investors trading on the ASX. Both VTS and IVV offer very low management fees of 0.03% and 0.04% p.a. annually. This is a tiny loss in yield while the alternatives have far higher fees.

Protect yourself with a MOAT?

MOAT is one that often mentioned and seems to be a favourite with some writers at Motley Fool Australia. This is an ETF of companies with a ‘wide moat’ meaning harder to disrupt or competition is hard to come by. One concept that or that reason they are expected to do well and continue growing and paying safe dividends. The yield on MOAT of 1.0% p.a. and a management fee of 0.49% p.a. is twelve times higher than IVV for example which seems too high. Dividends on MOAT will only be paid annually. This further cuts down compounding returns. I will pass on MOAT, thanks.

This could be the answer….

ZYUS is the most interesting candidate on the ASX. The ETFS S&P 500 High Yield Low Volatility ETF gives ASX investors a compelling option. For US-based exposure with a great dividend return this ETF provides excellent yield while having a manageable management fee when taking the yield into account. I am not a massive fan of some the holdings in the fund like Iron Mountain being the single largest holding. I do hold many of the individual stocks in this ETF with my US broker.

Returning a far larger dividend payment than any other US-based ETF at comparatively high 7.72% p.a. yield on a trailing 12-month basis, it makes the competition look weak in comparison. Price is also reasonable, trading between $12 and $14 for the last 12 months which opens up a serious opportunity for reinvestment. ETF Securities has a DRP available as well, which means that you can get compounding returns without brokerage fees.

If I can get a 7% return on investment, I can double my money every 10 years. While past performance cannot indicate future performance, it seems like ZYUS is the best dividend investment on the ASX for US exposure while beating bank interest by a factor of 4. This performance does come at a price however, with a 0.35% p.a. Management Fee it is high in comparison with many other funds. It could be argued that the fee is justified by the returns. It also compares favourably with SPHD in the US at a 0.30% Management Fee, but only a 4.1% dividend return. SPYD has a sightly higher return, but a 0.07% p.a. Management fee. Based on this, I would hope for an MER reduction over time for ZYUS as the fund grows to a larger size.

Based on last closing price of $13.72, a single $2,000 investment in ZYUS would net you 164 shares. Highly beneficial quarterly dividends and compounding give approximately 11 additional shares in your holdings in the first year with DRP. The 10 year projection on dividend income reinvested alone gives a 114% gain or a doubling of your money. If you are smart with investing at a lower price and averaging down in any correction then ZYUS might be one of the ultimate long-term holdings for future income.

The data shows the incredible dividend-only compounding effect of a seven percent interest or dividend rate, before consistent additional cash added to the holdings over time. If this looks like a interesting ETF for your portfolio, then please do your research and consult with a licensed Financial Planner before making investment decisions.

DISCLOSURE: At the time of writing, the author held no positions in any ETF mentioned: VTS, IVV, MOAT or ZYUS, and no planned trades on these positions within the next 7 days. Figures shown are based on past performance. Past performance is not an indicator of future performance.