Sunday, July 7, 2013

Problems in the Portfolio

I own a portfolio of 35 stocks.  Each holding is supposed to pay a rising dividend that will be reinvested to create even more dividends.  Compounding is achieved through reinvestment coupled with the dividend growth itself.  In 15 years I will retire from the military, at that point I simply stop reinvesting and use the income for living expenses.  Pretty darn simple. 

For this to work, I need my holdings to raise distributions over time.  I expect most will announce a dividend increase every year.  That is my expectation for holdings such as JNJ, KO, and XOM.  I have some other holdings where I am a bit more tolerant of irregular increases.  LTC and EIFZF fall into that category.

Lately I have become a bit concerned with a handful of my holdings:

Boardwalk Pipeline Partners (BWP)

Portfolio Weighting: 2.77%
Distribution History:
Cause for concern:  Frozen distributions
Background:  When I purchased Boardwalk it had a history of increasing distributions every quarter.  The distributions in fact matched my expectations for the first year and a half.  Then all the sudden the increases stopped.  I did some research and came to the conclusion that the distribution is safe, but it will probably be a while until the increases start back up.  At that point I reduced my stake in this company.
Plan of action:  BWP sports a 7% yield, continue to hold & monitor.  Reinvest the income into other dividend paying stocks.  If the opportunity arises, consider selling and using the proceeds to invest in a more attractive company with a comparable yield.  Do not even think about buying more units!

ConocoPhillips (COP)
Portfolio Weighting: 2.76%
Dividend History:
Cause for concern: Frozen dividend

Background:  I've been a COP shareholder for over 2 years now.  During this time it spun off PSX, but has not raised the dividend even once!  OUCH :(  COP has a history of irregular increases, it's not always clockwork like CVX or XOM. 
Plan of action:  COP is a high quality company; give it a little more time (6-12 months) for a dividend increase.  If it does not cooperate, replace with a different company with a comparable yield.  Royal Dutch Shell or Altria are good replacements.  Use dividends to purchase shares in other companies, do not increase the weighting at this time!

Linn Energy (LINE)

Portfolio Weighting: 1.73%
Cause for concern: SEC investigation into accounting practices
Background:  Phew!  LINE has been the hot topic lately.  It has been reported that the SEC is investigating Linn right now.  Not good.  It's my understanding that the SEC is looking at its past hedging costs not being accounted for in its reported DCF.  Some have even called Linn a ponzi scheme, which is way out of line in my opinion.  I am concerned for two reasons: #1 will this squash the Berry deal (and future acquisitions)?  #2 Was Linn lying to unit holders and share holders?

I have spent a lot of time looking at Linn.  I knew this was a risky company and did not go into it blindly.  But if the company was lying to me, what could I do?  It's a tough one. 

Plan of action:  Be glad this is a small holding.  Wait to see what the SEC finds, ignore authors on seeking alpha (and other sites) who write outlandish articles bordering on libel for attention and page views.  Linn is very, very shareholder friendly; give them the benefit of the doubt.  Use the income to purchase other dividend paying stocks.  Do not increase weighting now or even if it is exonerated.  Move away from purchasing companies like LINE.  Instead buy companies such as KO, CVX, JNJ, and XOM.

Lessons to be Learned:

Diversification is KEY!  As much as you may like one particular business, there are no guarantees in investing!  All of the above stocks were my best idea at the time of purchase.  I bought them because I believed good things were coming!  Do not fall into the trap of a concentrated portfolio.  Unless you have the track record of Warren Buffet, you will need more than 10 positions.  My future will still be on track if LINE goes to zero because it constitutes a small portion of my portfolio.  A set back to be sure, but I'm fine either way!  Originally I thought 30-40 companies is a good number.  Now I think 40-50 is even better!

Diversification is KEY! It is worth mentioning again.  Even trusty old COP is not meeting expectations.  Look back at the past 5 years.  Powerhouse companies such as WFC and even the mighty GE were forced to cut dividends.  Perhaps those businesses weren't as strong as people believed.  No guarantees... and you aren't going to right every time!

Be careful with MLPs and High Yield Stocks.  Not only are they typically harder to understand, but it's difficult to replace the income if you are forced to sell.  If I have to sell LINE, I will not be able to recoup the lost distributions.  It's yielding 13% right now, impossible to replace.  If you are going to buy a high yield position, make sure the weighting is small.  Personally, I haven't used fresh capital to purchase LP units in two years.  I recognized the income replacement dilemma a while back.  If I had to replace something yielding 3-4%, it's not a big deal!

Slow and steady wins the race.  I don't need to invest in high flying companies with huge yields to achieve my goals.  A better plan is to go with quality.  I am starting to understand this concept more and more as time goes by.  I need more stocks like GIS, PEP, SO, or ABT.  I even believe that long term you are better off with a quality company than a lessor company that is undervalued right now.  I'm going to spend a little more time investigating some names I currently do not own.  KMB, GPC, MDT all belong in my portfolio, yet I do not own them.  Shame on me!

Observation: All my problem stocks are in the energy sector.  COP, BWP, and LINE are all energy stocks.  I'm going to stick with CVX and XOM from this sector going forward.  Those are the two best names around.


  1. That "Why U No Increase?" graphic is hilarious.

    I wonder if COP is waiting for things to shake out following its divestment of PSX (and its subsequent reshuffling of assets) before reinstating an increasing dividend policy. It does seem like the should be due for another one before the close of 2013, though.

    1. Haha I had a lot of fun making that meme, I'm glad you liked it! At the time of the spinoff COP stated it was planning to do dividend increases. So far nothing and the spinoff was over a year ago...

  2. I totally agree with you on high yielding stocks and difficulties replacing them. I already had such experience. My annual dividend was at some point at almost 1000 dollars but was forced to sell the stock and it dropped to 650 annually. Although in my 2nd Q I increased it a bit up to 750 annually I am still below.

    However, I still like them and will be adding them to my portfolio. I typically use them as income generating and use the cash to buy more "traditional" stocks. Well that is my plan. I do not have enough experience to judge whether this plan is feasible or not.

    1. My experience has been mixed with high yielders. T, LTC, SNH, and EIFZF have been fantastic! The dividends rolling in are a joy, plus they have appreciated in value too. BWP went nowhere, but still every quarter it pays me which I then use to buy a share of something else (for example in May I used the BWP income to buy a share of BAX, in Feb. I used it to buy KRFT, etc.). LINE has been a disaster so far, but I'm not ready to give up on it or sell. As long as the distributions aren't cut I can use the income to buy other companies and the compounding continues. I don't see where LINE is wrong. Linn's stance on the issue makes sense to me. Maybe I am missing something?

      But at this point I'm not as interested in buying high yield except perhaps one more REIT. I'd like to add O sometime.

  3. With COP you have to remember that if you owned COP before the PSX spinoff that you actually did get a raise. Before the merger you were getting .66/quarter. After the merger you were still getting .66 for the new and smaller COP but you were also getting .20/quarter for each of the PSX shares you got. you received 1 share of PSX for every 2 shares of COP. I made the huge mistake of selling off my PSX. PSX has raised its dividend twice since and is now paying out .3125. This is also why COP is still on David Fish's list as a Dividend Contender.

    1. Yeah I hear you. I received PSX shares too, but unloaded them too early. The spinoff was over a year ago, I need COP to raise the dividend again. If it doesn't happen soon (6-12 months or whenever my patience wears off), I'm moving on. I can always get back into it if starts performing as a dividend growth stock again.

  4. I'm really interested to see when COP is going to raise their dividend next. I counted the PSX spin off as a dividend raise so I was OK with them not raising the rate in 2012. However, I certainly expect to see a raise either in 2013 or for the first rate of 2014. Without I may be like you and look elsewhere for more consistent dividend increases.

    1. The spinoff happened over 14 months ago, COP needs to get its act together. I really do hope COP does a raise soon, I'd hate to sell it. I'd be happy with a 5% boost, nothing crazy!

  5. CI,

    I think your point on diversification was definitely worth repeating. I think that's what it's all about. If you own 45-50 companies and the weights are reasonably equal (within a point or so), then one company crashing and burning won't keep you up at night. A complete distribution cut or two would likely be made up by the 48 other raises over just a year, even if there was no new capital added.

    If you believe in LINE/LNCO this could be a good time to bet big. I looked at the company a while ago and I didn't totally understand the hedging policies, so I stayed away. I remember we had a conversation about that a while ago, as I asked you for some clarification with the company because I couldn't totally understand it all and I knew you were long. Plus, I like the midstream MLP's more than then E&P MLP's anyway.

    The yield is over 11% now. Crazy stuff. I wonder what's going to happen here. Could be the opportunity of a lifetime, or an epic crash waiting to happen.

    Best wishes!

    1. Yes I do believe in Linn. It's as big of a position as I want right now, but I did think of placing a short term trade (gasp!!!) on it last Friday. It appears way over sold to me.

      I had to take a look in the mirror and ask myself, "what am I trying to accomplish?"; "does trading fit my strategy?". The answer is NO, so I didn't do the trade. I would have made a tidy profit since it is up quite a bit today :( I just don't want to go down that road.

      One of my closest buddies is a full time day trader. He doesn't have a regular job at all and lives (squeaking by really) entirely off profits. We had some great discussions about the stock market on a camping trip last week. While I respect what he does, but it's not the way I want to do it. But he understands what I'm doing too. I bought a mega millions lotto ticket and told him I'd give him a $100K portfolio that couldn't be sold if I won. He said he wanted GE, UNP, KO, PM, and WFC (I pick the other 5). Clearly no dummy!

  6. I don't know if I'd want to replace my COP with RDS shares, they aren't exactly a dividend champion like CVX or XOM. They also froze dividends for a few years not that long ago. The yield is quite tempting though and I do like RDS but if your laser focused on dividend growth then the other two majors you mentioned might be a better fit.

    I also read a bit about LINE and it was saying that the dividend is safe despite the accounting irregularities. LINE went up 8% today, wow, could be a daytraders dream. :-o

  7. I really like how you explained your plan of action for each stock, that's a key part of maintaining a portfolio. I think each plan makes sense. However, if you are interested in internet stranger's opinions, I think you should go with you gut and get out of those companies or perhaps put in a stop-loss order. You might have to sacrifice higher yields for the safety of some more stable names. But it makes sense to do that. Do you want to be part owner of a company that is freezing the dividend with no explanation to the shareholders? If you sold all 3 and built up your XOM position, I'm guessing all your concerns would be gone.

    1. Adam,

      I really do appreciate the feedback my friend! That's very good advise. I actually am thinking about replacing BWP as I stated in my plan of action. I'm currently thinking about swapping it out with O (not in a rush though). I like to take my time since I don't fear a Boardwalk distribution cut. I think in the near future I'll no longer have a stake in BWP.

      I'm going to give COP some more time since I do like the business and know they are repositioning themselves post spinoff. They are strategically selling off assets and working towards becoming more profitable.

      As for LINE, I will NOT be selling that one anytime soon. I don't know if you follow that name, but right now is terrible time to sell.