Portfolio Four Updated January 2013

Portfolios four and five are both three and a half years old. The beneficiary has contributed $2000 and the trustee has contributed $4000, for a total of $6000. The value of the portfolio is $7123, for a gain of $1123, or 18.7%, which is about 7% / year when adjusted for the timing of contributions. You can see the portfolio here or go to the links on the right side of the page.

This year we sold one stock that fell significantly in value, Exelon, since the pressure on that stock seemed unrelenting. The remaining stocks are all above the price we paid for them, and we will watch them to see if they become overvalued. Westpac, an Australian bank, has done well bolstered by a strong dividend and the rising Australian dollar (or the falling US dollar, depending on how you look at it) and Wal-Mart, that ferocious US retail competitor.

For taxes, there was one sale for a long-term loss (Exelon) of $236, and there was $209 in dividends paid.

Portfolio One Updated January 2013

Portfolio One is our longest portfolio, with a duration of almost 11 1/2 years. It began immediately after 9/11, an auspicious time for stocks.

Portfolio One has a current value of $28,635. The beneficiary contributed $5500 and the trustee contributed $12,500 for a total of $18,000. Thus the fund has gained $10,635 or 59% vs. the original investment, or 7.4% when adjusted for the timing of cash flows (annual contributions). You can see the portfolio here or on the right side of the links.

During the year we sold 2 stocks that were headed the wrong way – Exelon, the utility and large nuclear operator that came under question of whether they’d have to reduce their dividend due to lower profitability caused by cheap natural gas (a competing fuel), and Canon, a Japanese company that was seemingly well run and a long term holding which just kept falling.

With those 2 gone there is nothing really on our watch list right now, since Urban Outfitters has turned it around and is actually above our initial purchase price. We will watch that stock and probably sell if it seems to trend down.

Right now a bigger concern is over-valuation. We will watch stocks that have had strong gains in the recent market rally and we aren’t going to stand by and watch them go way down if we don’t feel that they are good long term investments.

We sold too soon on some stocks – one is Amazon which continues to DEFY LOGIC and climb even while essentially profitless. Oh well, that is a bit defensive, but we bought at $14 and sold at $90, and re-invested that money in other stocks that did well (like P&G which has returned very well especially when dividends are factored in). Today the stock continues to defy gravity and is at $284. When you do the math we left > $8000 on the table depending on assumptions by selling when we did.

If you look at other stocks we sold, a lot of them continued downward (some into bankruptcy), but others have come back a bit in the recent market rally, some even above the price we sold it at. No broker would typically “look back” like this but I want to be clear and transparent and learn (if possible) from our own investing history.

For taxes this year, we had almost $700 in dividends. Dividends are rising because companies are paying out a higher proportion of their cash and we also often select stocks with strong dividends. We sold 2 stocks with capital losses (long term) this year, as well. We didn’t sell any winners so this can be offset against income (up to $3000 / year), to the extent that the trustee has sufficient income.

Mis-Steps on Dividend Stocks

Recently I started a dividend portfolio to try to capture a 3% – 4% yield since my CD’s had matured and I was tired of locking up money to receive a 1% interest payment. ┬áThe portfolio is over on the right and I summarize it here.

The “traditional” way to select stocks involves reading the annual reports, 10k and other SEC filings from that company. In general that is a lot of work and with disclaimers and confusing notes and footnotes and the “backwards orientation” of those reports I generally don’t learn a lot.

The first place I usually go when I am thinking of stocks is the “stock screener” over at Google Finance where you can put in criteria like market capitalization, profitability, yield, and stock price moves within a range of positive or negative and it will give you a list of stocks where you can start your search. Many of the stocks that pop up are ones I’ve already thought of but there are always a few surprises, especially the non US companies.

The next place I go are the general blogs like “Seeking Alpha” which have many articles on stocks. I would treat all of these with a grain of salt but they often spawn useful ideas that you can research on your own.

For another good source of information I go to the company’s web site and bypass the formal earnings files and look at the analyst presentations. These are power point slides (usually saved as PDF’s) that the company includes with their quarterly earnings call, or that the company provides analysts on “analyst day” when they meet and speak. Companies have to distribute the same information to all investors by SEC regulations (in general) so this is way to accomplish that, by putting it on the web.

I find these quarterly presentations to be very good. The company tries to be forward-looking, not backwards looking, and you understand the company’s motivation (to try to tell as rosy a story as possible). On the other hand, the company also has to temper their share holders’ enthusiasm, because high expectations by investors have to be backed up with strong results or the stock will likely be punished.

I didn’t do enough (or much of any) research with a couple of stocks I could have avoided a miss on – Exelon and Avon. Exelon (EXC) has seen its stock price come under fire, decreasing from around $44 to about $29 in a year, as investors assume that the dividend (currently 7%) is unsustainable. Here is a link to the EXC corporate events & presentations page where you can read their latest report that contains forward-looking information. While it is too late for me (I already bought the stock, saw it drop 20% in a heartbeat, and sold it, I will look at this presentation as if it COULD have helped me. It is the EEI investor conference in November, 2012.

That EEI presentation is densely populated with data and information and attempts to explain key, inter-related elements of Exelon’s business across multiple geographies. You gain a sense of how staggeringly complicated their business is. As someone inherently interested in energy and energy policy, I enjoyed reading it, and in some ways it is an elaborate document that describes how they intend to increase margins and efficiencies while deferring capital projects in order to 1) protect their credit rating 2) preserve their dividend. They don’t specifically address the dividend payout ratio in this document (anything above 70% of earnings isn’t sustainable in the medium term, and above 100% isn’t even sustainable long in the short term. Exelon is currently pretty far above 100%), on page 11 they have a projected cash flow statement for 2012 with “sources and uses of cash” and you can see that they have the dividend in at $1.75B and a beginning cash balance of $500M and an ending cash balance of $1.1B – but this also includes the cash contributed by the company they acquired so that one-time infusion is now gone.

While Exelon hasn’t reduced their dividend yet and the stock pressure is on because many analysts think they MIGHT reduce their dividend (and the company is attempting to publicly address the issue), Avon on the other hand DID cut their dividend and as a result the stock suffered an immediate loss. I lost 16% on that stock in short order. They don’t have the same types of forward looking PDF presentations on their web site, but tend to put more information in their conference call materials which include quarterly SEC information and margins, but doesn’t have much forward-looking information.

Avon does have a page here which showed WHY their stock was a long time favorite of dividend investors – go to this page where they showed their dividend history plus growth in the dividend over time back to around 1990. This pattern of steady growth of more than 5% / year is what attracted many investors to the stock and allowed them to include imputed forecasted growth in their projection for future stock values. However, Avon’s dividend proved unsustainable and this cut in dividends severely hit the stock price.

Portfolio Four Updated December 2012

Portfolio Four is in its fourth year of investing (along with portfolio five). The beneficiary invested $2000 and the trustee invested $4000, for a total of $6000. The portfolio is worth $6626, for a gain of $626 or 10%, about 4% / year when adjusted for the timing of cash flows. You can see the portfolio on the left or by going to this link.

Exelon was recently sold because that company is under pressure to cut their dividend based on a change in the underlying utility business model – natural gas has reduced the average amount that power is sold for and Exelon is now making less money as a result. The other stock on negative watch is Nucor, a well run US steel company, whose dividends have offset half the drop in the stock price (which is why we track not only share price changes but also accumulated dividends, as well).

Winners include the Australian bank Westpac with a high dividend that has benefited from the increase in the value of the Australian dollar vs. the US dollar, and Wal-Mart the low price retailer that continues to perform well.

Portfolio One Updated November, 2012

Portfolio One is our longest lived portfolio. It began in 2001 right after the 9/11/01 incident and thus has a duration of 11 years. Total investment by the beneficiary is $5500, investment by the trustee is $12,500 for a total investment of $18,000. The current value of the portfolio is $27,145, for an increase of $9,145 or 51% on invested cash. The annual return is approximately 6.6% when the timing of cash flows is taken into account. See the spreadsheet with full details on the right side of the site updated through November 2012 or go here.

Recently we did a couple of sells in the portfolio. Canon (CAJ), which had performed well for years, did a nose dive along with most of the Japanese market. Many of the Japanese electronics companies are falling on hard times, given that the value is moving to software and the Korean companies like Samsung seem to be dominating. While Canon still has a strong position in cameras and imaging, it was time to sell.

Exelon, the US utility that is one of the largest nuclear operators in the United States and has been well run in recent years, has also fallen on hard times. The switch to natural gas overall in the US has changed the economics of power for years to come and the nuclear and coal fleet is having difficulty competing. Their dividend is under pressure which is critical to the valuation of any utility stock. We reluctantly sold.

Looking over time, the current holdings are doing pretty well. There are 16 stocks in the portfolio, making it relatively diversified, and recent purchases have been in Canada, South Africa and Norway to provide some US dollar diversification. The stocks are mostly about $1500 each, with some under $1000 and a couple over $2000. This is likely about the total amount of stocks to have in the portfolio, so future purchases could be consolidation of existing purchases or tied with sales.

Dividends make up $2704 of the total return, and the portfolio is full of strong dividend paying stocks going forward. Expenses (fees) have dropped almost to nothing the last few years because we have been getting free buys and sells on the account and no annual fee has been levied. On the other hand, interest income has drifted down to pennies and is almost not worth recording anymore.

Buy And Hold Works… Sometimes

For these trust funds we work to link stock selections with long-term thinking. These portfolios start when the beneficiary is 11 or so years old so they have a long time horizon.

With that, there are times that it is wise to sell. If you believe that a stock has been part of a huge run-up and gains are not sustainable, you should sell. We sold a number of stocks in 2007 when valuations were insanely high (such as China Mobile (CHL), which peaked near $100 in 2007-8 and now is settled back in around $50 / share) and many of them have not recovered back to those levels. Unfortunately, we re-invested the proceeds into new stocks which promptly went down with the rest of the market but it still was the right thing to do.

On the other hand, some stocks seem to get permanently impaired or on a downward spiral from which they never recovered. We bought Nokia (NOK) and then sold at a loss – and the stock has kept dropping since, damaged by their dismal position in the smart phone market. We also did the same with Cemex (CX) which also had a high near $40 in the 2007-8 time frame but has settled to around $10 / share.

It is hard to know when to capitulate, and when to hold on to wait for the rebound. Urban Outfitters (URBN) was selected because it had low debt and seemed well run – until they had a bad earnings report and the stock tanked. We held onto it for over a year after it had lost about a third of its value, and then a lot of their top management resigned. Yet recently it came back and is now above its original purchase price. Other stocks that we waited on until they came back include Comcast (CMSCA) and Ebay (EBAY). On the other hand, we are still waiting for recovery on Canon (CAJ), Riverbed (RVBD), WYNN, Exelon (EXC), and Alcoa (AA). I am bullish EXC in the long term as well as RVBD; I think there is hope for CAJ because they are well run; and watching WYNN and AA.

Portfolio One Updated August 2012

Portfolio One is our longest portfolio, going on 11 years soon. Here is the latest update or it is on the links on the right side of the dashboard.

Portfolio one is worth $24,609 on a beneficiary investment of $5000 and a trustee investment of $11,500, for a total of $16,500. Thus gains are $8,109 or 49% over that 11 year period, an average of approximately 7.1% / year when the investment pattern is taken into account (we have been adding to the portfolio annually since 2001).

Due to the fact that our brokerage company no longer charges an annual fee for an account and commissions are often waived (due to the trustee having a certain number of “free” trades each year), total expenses across from the life average about 0.3% / year and trending down. Since a large element of total return consists of minimizing fees, this is a positive statistic.

Current Portfolio Update

The main purpose of updating the portfolio now is to prepare for our annual process of stock selections. At this time we review the stocks in the portfolio to see if there are any that we should consider selling.

On the “down” side, we have three – 1) Exelon, the big utility, which I want to hold onto as a long term play because there will be a coming lack of baseload generation 2) Urban Outfitters, which lost almost 30% of its value due to a quarterly earnings miss but has since gained about 1/2 of that loss back, and 3) Canon (ADR), a Japanese company that recently has hit an uncharacteristic spell of bad performance.

Another stock which still has big gains from long term dividends (and share buybacks, which should have the same net effect) but has had poor performance relative to its peers is P&G. The CEO is now cutting costs at headquarters (including moving some elements out of Cincinnati, which makes sense given that it is a global company and that is a regional location) and is under pressure to improve results, which I view as a positive potential element for the stock price.

Ebay was down for a significant period of time but recently had a big run up and is net positive. Ebay pays no dividends so it is exclusively a bet on share price appreciation. We will monitor eBay going forward.

Sold Stocks

In order to “learn” from past decisions, I update the CURRENT prices of all stocks that we’ve sold in the past.

In general, with 20/20 hindsight (something the “real world” lacks), our sales were generally the right thing to do, with the exception of Amazon (AMZN) which continues to defy gravity and is now near $235 / share despite earning little in real earnings. It’s price / earnings ratio is over 200, which is generally a sign of a “bubble” stock that is overvalued (although, like everything else, there are always exceptions to the rule, such as when a write-off occurs).

Stock Concentration

There are 16 stocks in the portfolio. Assuming that the stocks are from different industries and / or countries without high correlation, when you get beyond 10 or so you can generally consider yourself “diversified”. There will be a couple of new picks this year, and we may consider buying more of an existing stock that we want to keep long term.


Given the size of the portfolio, we do try to keep some money in “cash” in case some liquidity is needed. We have about $2000 in cash now, and will draw down at least $750 of that as part of the 2012 investments.