Saturday, July 9, 2022

Week in Review - Q3 Rebalancing

Hope everyone had a great week! 

On Tuesday this week I rebalanced the Dividend Town portfolio for Q3. Overall there are a lot of themes in play to help shape Q3. Let's go over a few of them.

Overall there's more headwinds and risk going forward than opportunities, so it's time to downshift a little more and reduce the overall portfolio risk. How can we do that and keep income rolling in as a dividend focused investor?  There's a couple ways.
  • Shift allocations into more cash, treasuries and bonds, and away from equities.

  • Shift the equity sectors towards 'recession' friendly sectors. Bump up utility, staples and commodities (US Dollar/GLD) and away from Tech, Discretionary. 
  • Since I cannot go short in my IRA accounts, I can purchase longer term puts to hedge against less friendly sectors to offset risk. Currently I'm sitting on ~$9K of puts covering about $60K in value to bring my portfolio to net negative coverage in Tech, Financials and Discretionary. 
    • I have a mixture of Sep/Dec puts in play for XLK, XLF, XLY & XRT. 
  • Reduce the equity beta. Companies like $LMT, $KR, $MRK, $POR, $VZ all have beta lower than 0.30, meaning when the market goes up/down 1%, these companies will perform at about 30% of that 1%. 
After considering all that I had to change some positions that I wanted to keep but did not make sense.  $TGT, $MED, $MAIN & $TXN didn't make the cut and were instead replaced by $KO, $TSCO, more $CSCO and $PG. While Dollar General is considered Discretionary, I consider this a good place for recessionary environment so I took a higher stake.

After the first week, I'm down 2% while the market rose ~2%. Not good, however I have conviction that Q3 earnings season will not be as strong as we think and the continuing rising rate environment will play out in unfavorable ways to the consumer.  

Dividends: For the month of June the portfolio returned $642 of dividends. After the rebalance, the PADI is at $7.4K annually, so we're still drawing good income with a defensive portfolio.  

Performance: Overall we're at ~ -8.6% vs. S&P of -12.8% since the start of the portfolio in October. We lost some of that gap this week with an up market vs. put exposure and closing out some untimely shorts, but I think we're positioned well for Q3.

Next steps: A whole of lot of waiting! Earnings season begins soon so we'll keep a close eye on forward indicators and look for opportunities to deploy some cash.  

Hope everybody has a great weekend!!

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