Sunday, February 04, 2018

My 50 Position Income Stock Portfolio With Robinhood

The big drop in the equity markets on Friday certainly got people chattering. A 666 point decline in the Dow Jones in a single session gets noticed, even though in context that's just a 2.54% decline. Maybe it's a sign of things to come though as rising wages potentially spur price inflation, which could prompt the Fed to continue to raise interest rates and thereby lower the appeal of equities.

The prospect no doubt frightens a lot of people. Me though, I like it.

My primary motivation for holding stocks is to collect dividends from them. Since dividend yields move inversely to share prices, I get more bang for my invested buck as prices decline and dividend payouts remain level or even increase.

At the beginning of each month, I move whatever cash I have earmarked for share purchases into my Robinhood account, and that is where things get really interesting: because Robinhood does not charge commissions on trades, I've built a portfolio of 50 positions there.

I know what some of your are probably thinking: "50 positions is too many companies to keep track of!"

You're right, it probably is. If you're a fundamental analysis kind of guy or gal. And if you are, my portfolio would probably drive you nuts, because I really only track two things: the current relative dividend yield, and the percentage of the total income of the portfolio contributed by each position.

Those two things establish the simple rule I run the portfolio by: new cash will be plugged in to the position that is the highest yielding opportunity within the portfolio at the moment that also offers an increased yield over my yield-on-cost on that position due to a share price decline or a dividend increase, and it must not currently contribute 2% or more of the total income of the portfolio. I track this with a spreadsheet I created that flags each position in green if it meets these criteria, or red if it currently does not.

This has resulted in a portfolio that contains domestic equities, international, heavy and light industry, health care, telecom, property and debt REITs, energy production, movement, and storage, corporate bonds, municipal bonds, exchange-traded funds, closed-end funds, even some exotic, risky stuff, such as leveraged exchange-traded notes. It's highly diversified and spread out such that when the Dow plunged 2.54% on Friday, my portfolio declined by only about half of that percentage amount.

You've probably noticed then that 50 positions yielding 2% of the total portfolio income adds up to 100%. You could do the same thing with ten positions each kicking in 10%, 100 positions each kicking in 1%, etc. The reason I went with 50 is I found it to be a nice balance between simply finding enough things to buy in to, and 2% max of the portfolio income coming from each is small enough for it to serve its purpose: limiting the damage to overall income should any of these companies cut their dividend, which sometimes goes hand-in-hand with high yields.

And that does happen. This morning I went through the entire list and updated dividend payouts. While there were many dividend increases, there were a handful of cuts, but overall the total income of the portfolio increased. It's currently sporting a 10.61% yield, which I'm actually hoping will go higher if stock markets enter a broad decline.

On Thursday morning last week, I added to five of my positions, following the rules I spelled out above, which resulted in share purchases of 6, 1, 14, 1, and 13. The total invested was about $475 and it added a bit more than $55 to the annual total income of the portfolio.

Those single share purchases are specifically why I use Robinhood for this. They were purchases that offered the highest yield I could get, but the positions I was adding to were so close to the 2% income cap on each that buying just 1 share was all I could do to avoid exceeding my 2% limit on total portfolio income from those stocks. In any other brokerage account, commissions would kill your cost basis and your yield if you bought only one share at a time, but because Robinhood is commission-free, I can use it to tightly tailor the income of each of my 50 positions without incurring exorbitant costs.

If you haven't checked out Robinhood before, Give it a try. Signing up gets each of us one share of a randomly chosen stock, and it could save you hundreds or even thousands of dollars per year in commissions, added costs that drag down your returns over time.

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