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My 4% Dividend Yield Portfolio: Why I Exchanged Universal For Main Street

  • My 4% dividend rate portfolio is aimed to deliver a 4% yearly dividend rate with a 5% growth rate.
  • Adjustments are required from time to time.
  • Here is my recent action: replacing UVV with MAIN.

Back in November 2014, I shared my 4% dividend rate portfolio here in SA. The portfolio is aimed to deliver a 4% yearly dividend yield with a 5% average dividend growth.

Though my goal was to maintain a buy-and-hold strategy, through tracking the market trends and companies' performance, I decided not to limit myself and to allow taking actions from time to time.

To be perfectly honest, making changes in the portfolio is not an easy task for me. For those who followed me during the recent year, I have been purchasing my different holdings in a pretty short period of time following the notion that since I have decided to invest my dollars in the market, and as I cannot time the market, I rather be in sooner than later. Selling seems to be harder than buying.

Universal (NYSE:UVV) was one of those holdings that I established when I initiated this portfolio. I held 108 shares at the price of $38.7. Based on the $2.08 yearly dividend, the stock delivered a 5.4% dividend yield on cost.

During the recent year, UVV's stock price recovered all the way up to the levels of $58. As the stock price went up, the dividend yield went down to the levels of 3.6%. This was an initial indication for me that maybe I need to take an action here.

I waited for the quarterly results and listened in to the late Thursday night Q1'16 earnings conference call. This was found to be a hurtful mistake. UVV's EPS went down to the red territory coming in at -$0.43. Moreover, as I was listening to the conference call, there were no real encouraging news in the outlook that indicated potential growth in the coming future. When management was asked about the outlook for the coming years, the comment was that "future demand is not as depressed as last year". Opportunities for growth were mainly assumed to be coming through avoidance of doing business in marginal countries. My personal take was that the risks are higher than the opportunity. I decided to sell my holdings but on Friday the stock was hammered and I sold my position at $50 per share.

My alternative for UVV was Main Street Capital (NYSE:MAIN). This BDC (Business Development Company) that I was following during the last several months just announced an increase of its monthly dividend going from $0.175 to $0.18, or to a $2.16 yearly dividend. Based on its history, the $2.16 is more of a dividend floor indication. The company is used to announcing special dividends from time to time, and just last month the paid dividend was $0.27.

Main Street is a Challenger in David Fish's CCC list published here. Based on Mr. Fish's work MAIN has paid a growing dividend for the last five years, with a 5-year Dividend growth rate of 5.9%. This is the first BDC in my portfolio.

My logic to replace UVV with MAIN was the following: As mentioned earlier, at $50 UVV delivers a 4.2% dividend rate. At $30, MAIN delivers a 7.2% dividend rate. UVV has grown its dividend at $0.01 in the last 5 to 10 years. That is a 2% increase per year. In order to get from a 4.2% to 7.2% dividend yield at a 2% growth rate, it would require waiting 28 years. This is based on the assumption that MAIN will not increase its dividend at all in the coming years.

As a well established company that was founded almost a century ago, back in 1918, UVV can be thought of as a less risky investment compared to MAIN. MAIN's headwind is driven by the approaching Fed interest rate increase. Listening to UVV's earning call brought to my attention that even a well-established business might face serious headwinds. Local regulations, soft demand, commodities prices, production inefficiencies or any other factor can impact its future growth. Growth cannot be assumed as a given.

Selling UVV while the stock dropped by more than 12% left a sour feeling. But I try to treat it as a tactical loss compared to the better dividend rate that my portfolio will deliver and my overall expected return.

I replaced the 108 UVV shares with 180 MAIN shares. The MAIN shares are expected to provide $388 in yearly dividends based on the $0.18 declared monthly dividend, while the UVV shares were supposed to deliver $225 in yearly dividends. This is a 70% growth in expected dividend which I hope would be delivered as planned.

As always, I appreciate your feedback.

Additional disclosure: The opinions of the author are not recommendations to either buy or sell any security. Please do your own research prior to making any investment decision.