Building A 10% Income Portfolio Today

seekingalpha05-30

Six years ago, I wrote my first article on investing, in which I outlined the criteria that had guided me when constructing my first income portfolio.I have tried to retrace here the steps leading up ...

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The Semifonte Chapel capturedessence/iStock via Getty Images A Dome of Florence in Miniature The chapel of St. Michael the Archangel at Semifonte is a small temple with an octagonal base that stands near the medieval village of Barberino Val d’Elsa, about 30 kilometers from Florence in the direction of Siena. Erected to a design by Florentine architect Santi di Tito in the second half of the 16th century, the building is surmounted by a faithful 1:8 scale reproduction of the dome of the Florence Cathedral built by Brunelleschi. Semifonte was a castle founded by the Counts Alberti, imperial feudal lords of Prato, in the second half of the 12th century as an outpost on the Via Francigena to control its rich trade. The settlement was the fulcrum of an elaborate strategy to project imperial power into the Florentine countryside, but in 1202 the militia of Florence conquered it, razed it to the ground and decreed a perpetual ban on building in the entire territory of Semifonte. A ban broken, however, only three centuries later with permission to build the chapel of St. Michael the Archangel, a small sacred edifice that represents the emblem of Florentine power in one of the places symbolic of the battles of the medieval communal age. Surrounded by a small frame of cypress trees, the chapel is now nestled in a rural fabric of vineyards and olive groves, among which it is nice to loiter with one’s hands in one’s pocket, on the route of old rural roads that lose themselves in the countryside. Inspired by Brunelleschi’s Dome, years ago I gave my main portfolio the Florentine name of “Cupolone.” Today, I want to imagine the creation of a miniature replica of it, like the Semifonte Chapel, according to my current financial security selection criteria. Going Back Six Years As we’ve already seen, yesterday’s winners often become tomorrow’s losers. But researchers have shown that one thing is almost certain: Yesterday’s losers almost never become tomorrow’s winners. So avoid funds with consistently poor past returns–especially if they have above-average annual expenses.” (Jason Zweig, Commentary on Chapter 9 to The Intelligent Investor) In the fall of 2018, I wrote my first article on investing (published here in SA under the title “Building a 10% Income Portfolio”). In it, I outlined the criteria that had guided me during the construction of my first income portfolio. At the time, I was a firm believer in a selection based on two parameters, which I called “the best tools available to investors”: Morningstar Risk Rating and Risk Grades, a risk assessment tool supplied by Nasdaq, subsequently discontinued. Six years later, I tried to retrace the steps that preceded that article and then subsequent developments in creating my current portfolio. The CEFs that were part of my stable in various capacities between 2015 and 2019 were no less than twelve, namely:  Doubleline Opportunistic Credit (DBL) NY Mellon High Yield Strategies (DHF) DoubleLine Income Solutions (DSL) Eagle Point Credit Company (ECC) Western Asset Global High Inc (EHI) Eaton Vance Limited Duration Income (EVV) Guggenheim Credit Allocation (XGGMX) Guggenheim Strategic Opportunities (GOF) Western Asset High Inc II (HIX) NexPoint Strategic Opportunities (NHF) Pimco Dynamic Income (PDI) Pimco Corporate & Income Opportunity (PTY)  GOF, PDI and PTY are still part of my portfolio today, although the performance of their NAVs leaves much to be desired over the past decade, as can be seen from this chart: GOF-PDI-PTY (YCharts) GGM and NHF no longer exist, the former absorbed within GOF, the latter transformed into NexPoint Diversified Real Estate Trust (NXDT). DBL, DHF, EHI, EVV and HIX are five securities that marked my entry into the world of CEFs and were part of my portfolio between 2015 and 2018. I looked at the performance of their NAVs since the launch of the most recent one (2012) and it looks interesting because today they are all showing almost overlapping and, unfortunately, invariably negative trends: DBL-DHF-EHI-EVV-HIX (YCharts) DSL and ECC, present in my 2018 portfolio and subsequently sold by me and no longer purchased, in turn show the following performances over the past decade, also not very different from each other and equally negative as for the previous CEFs: DSL-ECC (YCharts) In retrospect, it is evident from the graphs just shown that the criteria I used for stock selection were suboptimal at the time, or at least revisable, in light of the largely and inexorably negative performance of all the securities just illustrated. These simple considerations make me all the more aware of the fact that a career as an investor is long, arduous, and cluttered with obstacles. Only perseverance and constancy can lead to satisfactory results, the pursuit of which takes years, as is the case for any professional training. Building a Miniature Portfolio Consequently, if I were to construct a “miniature” income portfolio today, like the Semifonte Chapel versus the Florence Cathedral, my current selection criteria would favor securities that, in addition to offering regular dividends/distributions, have proven to generate value over time in spite of the crises experienced by the markets since 2020. Unfortunately, I arrived at these conclusions in the aftermath of the creation of my current portfolio, the foundations of which were laid by me in the fall of 2019. This led to a choice of securities that, upon testing of the facts, did not all turn out to perform as I had been led to believe based on their previous performance and my selection criteria at the time. For me, today, having a clear idea of all the errors to be avoided is the most important thing in forming one’s portfolio. For this reason, for the past few years I have focused on titles that in addition to the dividends (or distributions) paid have also grown over time, thus creating added value. It is a matter of observing and evaluating the only available data in my possession, that is, the data relating to the path taken by each security over its lifetime, as an outcome of the ups and downs of the market and the choices made by its managers, which will hopefully allow for better results in the long run. If dividend investing means generating wealth through income and capital growth, then in my opinion it is essential to study the track record of the securities I am interested in, so as to exclude at least those that in their past have never reflected these characteristics. But let’s go step by step and see how my current portfolio is composed, before focusing on the possible composition of a new “miniature” income portfolio. My Overall Investments As you may know, my 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 Opportunities (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 I wrote in my last article, I consider BST, EOS, ETO, EVT, HTD, JEPI, JEPQ, MCI, RVT, UTF, and UTG to be the best CEFs and ETFs in my portfolio due to the fact that their NAV performance in most cases is largely positive since launch, demonstrating their ability to create wealth over time, as well as having paid regular dividends and distributions over the years. Considering that funds such as these have their main focus on generating income, one must learn to live with the fact that they alternate between moments of growth and periodic collapses that almost wipe out previous gains. For this reason, their growth has followed a “saw tooth” pattern, that is, prolonged rises followed by sudden falls, in turn followed by new restarts, albeit incremental. In the graphs below you can see the performance of the NAVs of the 9 best CEFs– subdivided into three groups– since the launch of the most recent fund in each grouping. BST-EOS-ETO-EVT (YCharts) HTD-UTF-UTG (YCharts) MCI-RVT (YCharts) The following is the summary of the market price to NAV ratio of all 9 of these CEFs, with MCI quoting at a premium of more than 6.5% right now. All others are quoting around parity or at a discount of several percentage points, up to a maximum of -13% for RVT. CEF Discount/Premium (Morningstar) As for the two ETFs, since they are quite recent, I have separated them by showing the NAV performance of each since launch. JEPI (YCharts)JEPQ (YCharts) To these 11 securities I would certainly add the three BDCs already in my portfolio, namely ARCC, CCAP and FDUS, although for me as an Italian they present a tax penalty, as I explained in my last article. I show the performance of the two older stocks, ARCC and FDUS, together and separate from CCAP alone, which was launched only in 2020 (please note that with regard to the three BDCs, I decided to report the price and not the NAV, due to the lack of charts covering the trend of the underlying assets). ARCC-FDUS (YCharts)CCAP (YCharts) This following is the price/NAV ratio of these 3 BDCs, with CCAP at a steep discount while the other two quote at a premium. BDC Discount/Premium (Morningstar) Finally, from my current portfolio, I might also fish out PDT, SPE and XYLD to a small extent as long-distance horses since they have positive NAV (or at least around parity) since launch, although their performance in recent years leaves something to be desired. In any case, PDT quotes at a discount of 8.5%, while SPE is at a discount by more than 15%. Outstanding Candidates In view of the fact that I do not have sufficient expertise to venture down the uncharted paths of individual stock selection, nor do I know enough about sectors such as REITs or MLPs (on which I would also have to delve into possible tax implications as an Italian), as possible candidates for my new miniature portfolio I would just add two more CEFs: MPV and THQ, paying attention to the fact that MPV today quotes at a premium. Barings Participation Investors (MPV) Morningstar Category: High Yield Bond Market Value: $170.2 Mil Total Leverage Ratio: 11.64% Last Actual Disc/Prem: 3.96% Total Dist. Rate: 8.99% Dist. Frequency: Q MPV (YCharts) abrdn Healthcare Opportunities Fund (THQ) Morningstar Category: Health Market Value: $832.9 Mil Total Leverage Ratio: 20.21% Last Actual Disc/Prem: -6.24 Total Dist. Rate: 10.72% Dist. Frequency: M THQ (YCharts) The miniature portfolio I have drawn in this article, with equal shares for each security, would offer a yield of around 9 percent if purchased at current market prices. Of course, in the case of purchases made after a possible correction (i.e., having the patience to wait for the next market drop) this yield could rise and become even more attractive, reaching and perhaps exceeding the fateful 10% threshold. Even now, however, this seems to me to be a respectable result, not least because of the growth prospects it could offer in the medium to long term. It is true that the portfolio I created in 2018 offered a 10% return, but as we have seen (in hindsight) most of the securities that comprised it have shown a decidedly negative performance between then and now, despite the fact that at the time I was convinced otherwise, based on selection criteria that I have since abandoned. I will conclude this roundup by adding, again, two other interesting “complementary” CEFs, GDV and STK, whose yields at the moment, however, are lower than those of all the other securities examined so far (again, STK quotes at a slight premium): Gabelli Dividend & Income Trust (GDV) Morningstar Category: Large Blend Market Value: $2.0 Bil Total Leverage Ratio: 12.46% Last Actual Disc/Prem: -16.09% Total Dist. Rate: 5.85% Dist. Frequency: M GDV (YCharts) Columbia Seligman Premium Technology Growth Fund (STK) Morningstar Category: Technology Market Value: $534 Mil Total Leverage Ratio: – Last Actual Disc/Prem: 1.35% Total Dist. Rate: 5.71% Dist. Frequency: Q STK (YCharts) Bottom Line As repeatedly pointed out on previous occasions, I personally consider it a mistake to open a position or increase an already open position by averaging the purchase price upward at times when the markets have the wind in their sails (and even less in moments of euphoria.) Rather, I would invest at a later time, when the market discards the securities I’m interested in: they become less risky and therefore more attractive to my eyes. Since buying expensive stocks can leave one vulnerable to disappointment, I refrain from buying at times when the market –and therefore the price of my securities– is going up, 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 that if I averaged too much upward.  The story of Semifonte Castle illustrates that when aims get too ambitious, there is a risk of eliciting hostile reactions from neighboring cities. Similarly, investment experience has taught me that if I fly too high when everything seems to be going well, market corrections can raze my portfolio to the ground, as Florence did with Semifonte. I would rather avoid that.","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/2439106356"}