My 9.5% Income Portfolio - Reinvesting Dividends

seekingalpha04-23

As known, compound interest is the mechanism of earning interest on both the principal amount and the accumulated interests.Automatic reinvestment of dividends can passively trigger this mechanism for...

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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMy 9.5% Income Portfolio - Reinvesting Dividends\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-23 00:11 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685093-my-9-5-percent-income-portfolio-reinvesting-dividends><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>As known, compound interest is the mechanism of earning interest on both the principal amount and the accumulated interests.Automatic reinvestment of dividends can passively trigger this mechanism for...</p>\n\n<a href=\"https://seekingalpha.com/article/4685093-my-9-5-percent-income-portfolio-reinvesting-dividends\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"QYLD","symbol_name":"纳斯达克100 Covered Call ETF-Global X","start_time":0,"source_url":"https://seekingalpha.com/article/4685093-my-9-5-percent-income-portfolio-reinvesting-dividends","article_id":"2429763699","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1469233870/image_1469233870.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2429763699","pubTimestamp":1713802268,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"As known, compound interest is the mechanism of earning interest on both the principal amount and the accumulated interests.Automatic reinvestment of dividends can passively trigger this mechanism for","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"QYLD":"纳斯达克100 Covered Call ETF-Global X","GOF":"Guggenheim Strategic Opportuniti","CGO":"CGO基金","BK4588":"碎股","BK7035":"电影和娱乐","BK7095":"多种金属与采矿","LU2360032135.SGD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","BST":"BlackRock Science and Technology Trust","BK7104":"黄金","LU2125154778.USD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (USD) INC","QYLD.AU":"GLB X NASDAQ100 COVCALL ETF","BK7021":"服装零售","ARCC":"阿瑞斯","UTG":"Reaves 公用事业收益基金","BK4135":"资产管理与托管银行","RVT":"ROYCE SMALL-CAP TRUST INC","PDT":"约翰汉考克爱国者基金","XFLT":"XAI Octagon Floating Rate & Alternative Income Term Trust","PTY":"PIMCO企债收益机会基金","LU2125154935.USD":"ALLSPRING (LUX) WF GLOBAL EQUITY ENHANCED INCOME \"I\" (USD) INC","RYLD":"Global X Russell 2000 Covered Call ETF","MCI":"Babson Capital Corporate Investors","RQI":"Cohen & Steers Quality Income Realty Fund","CCD":"Calamos Dynamic Convertible and Income Fund","RVT.AU":"RICHMOND VANADIUM TECHNOLOGY","USOI":"X-Links Crude Oil Shares Covered Call ETN","ETO":"Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund","FDUS":"Fidus Investment Corporation","SPE":"Special Opportunities Fund Inc","EOS":"Eaton Vance Enhanced Equity Inco","XYLD":"Global X S&P 500 Covered Call ETF","CCAP":"Crescent Capital BDC Inc","PDI":"PIMCO Dynamic Income Fund","PCN":"太平洋投资管理企业投资基金","JEPI":"JPMorgan Equity Premium Income ETF","EOS.AU":"ELECTRO OPTIC SYSTEMS HOLDIN","JEPQ":"J.P. MORGAN NASDAQ EQUITY PREMIUM INCOME ETF","BK7115":"航天航空与国防","BK4585":"ETF&股票定投概念","HTD":"HTD收益基金","BST.AU":"Best & Less Group holdings Ltd","PDI.AU":"PREDICTIVE DISCOVERY LTD","UTF":"Cohen & Steers Infrastructure","EVT.AU":"EVT Ltd","JEPI.AU":"JPMORGAN EQ PREM INCOME ACTIVE ETF","NAV":"纳威司达"},"translate_title":"我的9.5%收益投资组合——股息再投资","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"QYLD.AU":1,"JEPI.AU":1,"ARCC":1,"MCI":1,"NAV":1,"PCN":1,"PDI":1,"PDI.AU":1,"PDT":1,"PTY":1,"QYLD":1,"JEPQ":1,"RQI":1,"RVT":1,"RVT.AU":1,"RYLD":1,"SPE":1,"USOI":1,"UTF":1,"UTG":1,"XFLT":1,"XYLD":1,"HTD":1,"BST":1,"BST.AU":1,"CCAP":1,"CCD":1,"CGO":1,"EOS":1,"EOS.AU":1,"ETO":1,"EVT.AU":1,"FDUS":1,"GOF":1,"JEPI":1},"content_text":"As known, compound interest is the mechanism of earning interest on both the principal amount and the accumulated interests.Automatic reinvestment of dividends can passively trigger this mechanism for any security in our income portfolio.While I am aware of the benefits of compound interest, I have chosen not to automatically reinvest dividends from my stocks.In this article, I explain why I don’t and illustrate the alternative “escape routes” of my personal strategy.  The Magic Square ChiccoDodiFC/iStock via Getty Images The Magic Square Twenty years ago I took a trip to Abruzzo, a beautiful region in southern Italy, quiet and secluded, far from the hysteria of mass tourism. I lingered mainly in the area around L’Aquila, later beaten by a tremendous earthquake, to admire its mountains, villages, castles and churches, some of which date back as far as the Lombard era (6th-8th centuries). One in particular, the Abbey of San Pietro ad Oratorium near Capestrano, caught my attention because of a detail present on the facade that I had never seen before: the magic square. Indeed, a block of stone bears a mysterious engraving, a symbol of medieval mysticism, consisting of a palindromic inscription formed by five superimposed words, obviously capitalized according to the Latin spelling: ROTAS OPERA TENET AREPO SATOR. The magic of this square consists in the fact that the same words can be read both horizontally starting from the first line and vertically from the first column, but also horizontally from right to left starting from the fifth line and vertically from bottom to top starting from the fifth column. If you do a similar read from the other corners, the vertical and horizon lines read the same, thus becoming SATOR AREPO TENET OPERA ROTAS, as it also appears from top to bottom in many other inscriptions. The enigmatic meaning of this square has given rise to many controversial interpretations, which I will not go into here, but I would like to emphasize its esoteric aspect represented by a composition of words that can be likened to the mathematical magic square formula. A mathematical magic square is in fact a table, consisting of an equal number of rows and columns, in which each square is occupied by a positive integer, with the special feature that the sum of the numbers in each row (i.e., horizontally), each column (i.e., vertically), and each of the two diagonals is constant. It is no wonder that such numerical interlocking could have hinted at something miraculous, just as in the case of the Latin inscription on the facade of the church. The Magic of Compounding Long before the scientific method was born, everything that appeared mysterious or mind-boggling, and thus eluded immediate understanding, was thought to belong to the sphere of magic. In this respect, magic and mathematics have long been traveling companions, and the magic square is a testament to this. Similarly for the concept of exponential growth, numerous studies have shown the tendency of people to underestimate its effects, as if our brains had evolved to understand linear phenomena while ignoring exponential ones. One of its most extraordinary applications is that of compound interest, which is the mechanism of earning interests on both the principal amount and the accumulated interests. A powerful tool that can help build wealth over the long term because, year after year, interest accrues on an increasing amount from the previous year, consisting precisely of the sum of the initial principal amount invested plus the interest already accrued: the greater the amount of this interest, the more rapid and “exponential” the growth in the value of our investment will be. This is the case, for example, with high-income instruments such as BDCs, CEFs and ETFs, the reinvestment of which will activate a virtuous circle destined to multiply its effects even while we sleep. This is why we speak not coincidentally of the “magic of compound interest.” Automatic reinvestment of dividends can then passively trigger this mechanism for any security in our portfolio, helping to exponentially increase the capital at our disposal. The fact, however, that many of us are income investors on leveraged instruments such as BDCs and CEFs, which moreover may price at a discount or premium to NAV, requires, in my opinion, that we make very precise choices before reinvesting (in whole or in part) this flow of money, to avoid deploying it suboptimally. I will explain myself further based on the stocks that make up my portfolio, but anticipating from the outset that I have chosen not to reinvest dividends automatically, for the reasons I will state. My Overall Portfolio As you may know, my overall investments today include 28 securities (19 CEFs, 5 ETFs, 3 BDCs, 1 ETN) divided into three different portfolios: Cupolone Income Portfolio (named after Brunelleschi’s Florentine dome) consists of seventeen CEFs with monthly distributions:  BlackRock Science and Technology Trust (BST) Calamos Dynamic Convertible and Income (CCD) Calamos Global Total Return (CGO) Eaton Vance Enhanced Equity Income II (EOS) Eaton Vance Tax-Adv. Global Dividend Opps (ETO) Eaton Vance Tax-Adv. Dividend Income (EVT) Guggenheim Strategic Opportunities (GOF) John Hancock Tax-Adv. Dividend Income (HTD) Pimco Corporate & Income Strategy (PCN) Pimco Dynamic Income (PDI) John Hancock Premium Dividend (PDT) Pimco Corporate & Income Opportunity (PTY) Cohen & Steers Quality Income Realty (RQI) Special Opportunities Fund (SPE) Cohen & Steers Infrastructure (UTF) Reaves Utility Income Trust (UTG) XAI Octagon FR & Alt Income Term Trust (XFLT)  Giotto Income Portfolio (named after the fourteenth-century Florentine painter and architect) includes five ETFs and one ETN with monthly distributions that adopt a covered-call strategy:  JPMorgan Equity Premium Income (JEPI) JPMorgan Nasdaq Equity Premium Income (JEPQ) Global X Nasdaq 100 Covered Call (QYLD) Global X Russell 2000 Covered Call (RYLD) Credit Suisse X Links Crude Oil Shares Covered Call ETN (USOI) Global X S&P 500 Covered Call (XYLD)  Masaccio Income Portfolio (named after the founder of Renaissance painting) contains three BDCs and two CEFs with quarterly distributions:  Ares Capital Corp (ARCC) Crescent Capital (CCAP) Fidus Investment Corp (FDUS) Barings Corporate Investors (MCI) Royce Value Trust (RVT)  As is well known, BDCs and CEFs almost always price at a discount or premium to the net value of their assets (NAV), resulting in misalignments of even many percentage points, which can have a substantial impact on stock performance and expected returns. In the case of ETFs and ETNs, on the other hand, price and NAV usually coincide (or deviate by only a few tenths of a percent.) In the first column of the following table, we see the current ratios of market price to NAV, while the second column shows the leverage ratios of each (ETFs and USOI are not leveraged). Author Note: The discount or premium for ARCC, CCAP and FDUS are calculated from the latest NAV, reported on December 31, 2023. No data on the leverage ratio of EOS. A Conscious Choice As I have repeatedly stated in previous articles, I am convinced that those of us who invest in high-income vehicles use dividends and distributions as a complementary source of income, and because of this, reinvestment often affects only part of the income, with the rest being used for daily living. Such investors are almost always people in their later years, for whom portfolio growth takes a back seat to employment and maintenance: none of us are trying to beat the market anymore, but rather to live off our dividends while keeping the engine idling. This is why dividend reinvestment can often become a discretionary choice, even in the case where we have in our portfolio CEFs or ETFs with a negative NAV performance over time, for which dividend reinvestment would be the only lifeline to keep them afloat. In my portfolio, this is the case with a fund like GOF, whose NAV since launch is at a loss of 38.06 percent but the purchase price shows a premium of +18.85 percent. It is true that it offers a double-digit return, but I personally would consider it risky to pay such a high premium to increase my positions in a security with such a negatively trending NAV, despite the fact that it is highly valued by savers. On the other hand, while holding on to my position, I wonder what prospect this CEF can offer me in the long term. The same considerations, albeit to a lesser extent, apply to the three Pimco funds (PCN, PDI, and PTY) as well as to Calamos CCD. Over the past ten years, all four of these funds have shown a fair loss in the value of their assets with a market price premium to NAV of more than ten percentage points, with a peak of +23.51 percent in the case of PTY, whose pricing probably reflects the market’s high opinion of its management. In my portfolio, all of these funds are in the red (although PCN -7.5 percent while PTY only -3.5 percent,) but given the premiums charged, I have no intention of increasing their positions. For different reasons, I do not think it appropriate to increase my positions in CGO and RYLD either, two completely different securities that share a rather disappointing NAV performance over the past three years, as their charts here below show. Data by YCharts A global allocation fund diversified by country and by sector, CGO seems to have been starting a very slow recovery for a few months now, the strength of which has yet to be demonstrated. I have a loss-making position that I decided to maintain, at least for the time being, with no intention of increasing it. Data by YCharts A recent Financial Times article headlined “US small-caps suffer worst run against larger stocks in over 20 years.” I am convinced that sooner or later better times will come for this asset class and that my RYLD covered call may also start a turnaround, but even for this ETF I have decided for now to hold my position without increasing it. A similar argument applies to other funds that are also loss-making, and for which I could then mediate downward on my load price, but this would expose me to overweighting them too much with respect to my portfolio construction criteria, which I outlined in the last article. This is, for example, the case with PDT, QYLD, SPE, XFLT and XYLD, all stocks that provide good dividend income, but whose performance over the past three years leaves something to be desired, as can be seen from the charts below. Data by YChartsData by YChartsData by YChartsData by YChartsData by YCharts I have no intention of lightening my positions on these five stocks, but increasing them is also not on my horizons. As for USOI, finally, its loss since launch exceeds 84 percent but its descent has slowed down a lot over the past four years, which prompted me to include a small amount in my portfolio, being the only stock for the Italian tax system that can offset my past losses. Its coupon is therefore “tax free” for me, and that’s why it is here, but I am not going to expose myself further on this stock. If anything, I could sell it at a gain of a few percentage points (since I would not pay tax on it) and possibly wait for a correction of it to rebuild the position, but here we get out of the investment field and into the trading one: as we know, there is a clash of cultures on this topic, so I’ll leave it aside and go on like this for the moment. Securities to Focus On Unless you buy a stock at the exact bottom, which is next to impossible, you will be down at some point after you make every investment.” (Joel Greenblatt) To the inescapable fate illustrated by Joel Greenblatt’s words, we must match the fact that market pullbacks are part of the game. Which means, based on history, that we should expect drawdowns of increasing severity starting every: 11-12 months (down 10%), four years (down 20%), and approximately 10 years (down 30%). Moreover, since the turn of the millennium, two +40% drawdowns have also taken place. Investing with a long time horizon means inexorably having to prepare for each of these cyclical events, the impact of which on one’s psychological resilience can prove devastating, even given the fact that BDCs and CEFs often operate with leverage, which increases their volatility in times of uncertainty. In my last article I pointed out that after I make my purchases, I do not usually rebalance my portfolio, that is, once the initial percentages are decided, the weight of all my securities remains such unless I can average their purchase price downward, while rarely averaging it upward to avoid finding myself overly exposed during the next drawdowns. The best CEFs and ETFs in my portfolio are BST, EOS, ETO, EVT, HTD, JEPI, JEPQ, MCI, RQI, RVT, UTF, UTG. Some of them are in profit while others are still in loss, but that is not what matters to me: what matters more is the historical performance of their NAV, in most cases largely positive since launch, demonstrating their ability to create wealth over time. Of course, their growth has been in a “sawtooth” pattern, that is, an alternation of prolonged rises and sudden falls, resulting in continuous restarts, albeit incremental. I will take the performance of ETO and UTF since launch as an example: Data by YChartsData by YCharts Considering that funds such as these have their main focus on distributions, which makes them ideal instruments for an income portfolio, one must learn to live with the fact that they alternate between moments of growth and periodic collapses that almost wipe out previous gains. This is why I personally consider it a mistake to average the purchase price upward in moments of euphoria, because inevitably, sooner or later, there will be a retracement that will undo most of the gains, taking me back to where I started or even below if I averaged too much upward. Despite the fact that I consider all of these twelve stocks to be good investments, which would prompt me to increase my positions in them to benefit from both their dividends (or distributions) and their possible capital growth in the long run, I refrain from doing so at times when the market –and therefore also their price– is going up. Rather, I would reinvest at a later time when the market discards them and they become attractive again to my eyes. As Benjamin Graham wrote, “...buying expensive stocks leaves you vulnerable to disappointment.” And that I would like to avoid, or at least limit the negative effects as much as possible, knowing even now that sooner or later it will happen. The Case of BDCs The same considerations made above also apply to reinvesting in instruments such as the three BDCs (ARCC, CCAP, FDUS), to which is added the fact that, for me as an Italian, they present a tax penalty. Individual stocks like BDCs, are, in fact, considered “tax-harmonized” and their dividends are subject to a variable final tax of 15% in America and 26% on the remaining 85% (so called “net frontier”) in Italy, for an overall tax of 37.1% that does not have to be brought to the tax return, as is the case below with dividends/distributions from CEFs and ETFs. American CEFs and ETFs are considered in Italy as “non-tax-harmonized” instruments on whose dividends we are subject to a withholding tax of 15% in America and 26% in Italy, for a total amount of 41%. In this case, however, the Italian-American treaty to avoid double taxation provides that the 15% withheld in America is treated as taxes already withheld at the source. For capital gains, on the other hand, we have only the Italian withholding tax of 26%, because they take place in Italy. The accumulation of all sums (dividends plus capital gains) from non-tax-harmonized instruments has to be taken to the tax return. According to the income bracket reached, also adding income from work, the taxable amount is calculated using the applicable rate. If the tax is less than what has been withheld, we can ask for a refund of the excess amount, otherwise we have to pay the difference. Personally, I have always been reimbursed for taxes withheld in excess, which is why I consider investing in CEFs and ETFs to be tax-efficient for me, because no tax benefit has ever been lost, since everything gets recalculated and offset in my tax return. This is not the case for BDCs, although I have recently opened a position in FDUS that I intend to increase only in the event of a substantial pullback, accepting the disadvantages of penalizing taxation in the face of a double-digit dividend and the prospects for the stock’s value growth over time. The Way Out Buying an asset that is expensive means that you are reliant upon all the good news being delivered. There is no margin of safety in such stocks.” (James Montier) The objective of investment is not to buy at fair, or even less, at growing value, but to make purchases being careful to maintain a margin of safety. Giving up automatic reinvestment of dividends (which I limit to precise choices, decided on a case-by-case basis) has two ways out for me, pending the conditions to operate with more margin:  On the one hand, invest excess liquidity by concentrating my purchases on only one or two stocks, whose load price will inevitably rise exposing me to the risks mentioned above, but limited to those stocks. I am doing this, for example, with MCI, which I have been including in my portfolio for a few months, but which I increased during the recent pullback, even though it resulted in a rise in my initial load price; On the other hand, prepare myself for long waiting periods by setting aside this liquidity in short-term U.S. ETFs (which I discussed in the article “SGOV And BIL-What The Hell Is Water?”) or in zero-interest Italian government bonds, which grow slowly day by day until the maturity date, thus guaranteeing me a small euro yield without the exchange rate risk.  It is obvious that such a strategy prevents me from benefiting from dividend growth over time, but after years of investing (and related suffering during downturns) in high income vehicles I have realized that psychologically, the benefits of dividend growth are completely wiped out for me by the frustration of watching my portfolio sink in the dark times without having the liquidity to buy the stocks I would like at bargain prices. If you will, I prefer to forgo feeling better when things are going well in order to avoid feeling worse when things are going bad: that is, I prefer to try to preemptively “buffer” against subsequent negative emotions by trading a higher dividend today for a promise of a better book price and (hopefully) quieter sleep tomorrow. And in this vein, as Lorenzo de’ Medici, lord of Florence in the late fifteenth century, wrote, “chi vuol esser lieto, sia: di doman non v’è certezza” (Whoever wants to be happy, let him be so: of tomorrow there’s no knowing.)  P.S. My three Eaton Vance funds (EOS, ETO, and EVT) as of next month have restored their distributions to levels prior to the cut made at the end of 2022, demonstrating more of a focus on prudent resource management than on creating a stir by offering bombastic returns. With this increase, my current portfolio yield, on an annual basis, has gone back up to near 9.5 percent.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429763699"}