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.