SHARPE INCOME … Yield Concentration

Posted on Feb 16 2015 - 11:19am by Sharpe Trade

The original Sharpe Income post can be found here.

The Sharpe Income category be be found by clicking on that red ‘Sharpe Income’ tag next to this post title, or by clicking here.

We continue the discussion from the last entry.


I have complained time and time again of ‘high yield junkies’ getting their ‘fix’ for dividends and distributions via nothing more involved than a screen of ‘who has the highest yield’.

But there is another mistake that I see new investors make repeatedly, when they begin to look for some sort of income strategy.  It’s this tendency to jump from instrument to instrument, and to collect a multitude of instruments.

“Oooh, that yield pays 9%!”

“I’ve got another over here that pays 15%” (of course, with a 115% payout ratio, but who minds such pesky details?).

“And look at that yield over that, I could pick that one up and it pays …”

 Jumping around from asset to asset as if struck by “Yield ADD” until they end up with 60 instruments in their account.  After which point, they seem to congratulate themselves on such a “well diversified income portfolio”.

Well … I suppose that’s one way to go about it.  I guess.

But what about concentrating the yield of just a few instruments?  Myself?  I use two strategies, and only 12 instruments within my Fixed Income accounts.

That’s all I ever use.

Two strategies between 12 instruments.

If one builds a Fixed Income account of fifty or sixty instruments (and yes, I have seen that happen) to try to provide income, the only thing you are really doing is diluting that yield, thereby making the entire process of building the income account that much slower.   You are slowing down the compounding process. Worse yet, if you try to track the actual processes and strategies of the businesses within such a large portfolio … you’re stuck trying to read complex reports that need a PhD to decipher.

Instead, I get a bit of yield that is stable (relatively speaking of course ) 

And then allow that yield to concentrate over time tighter than a black hole, which mathematically accelerates the compounding process.  Dividend growth, and the selection of only a few instruments with stable yield and lower dividend payout ratios allows me to do just that.

So instead trying to collect every listing in the S&P 500 Index that pays a dividend or distribution … 

Perhaps the easier … lower-effort, faster and more profitable method is to simply concentrate the yield of a few stable instruments so that your yield on cost more quickly accelerates to 300% and beyond.

Actionable View of Markets for ‘Sharpe Income’

IBM has gone ‘ex-dividend‘, meaning that since we have held IBM during this time, we are entitled to the next dividend paid on March 10, 2015.  And at the beginning of each month, JNK will begin to pay us dividends as well.

We put in the time, persist, and let let these cash dividends pile up.  That’s the plan of action at this point.  As you will note within the attached PDF, we only have $163.30 in the project account at this time.  So we persist, and wait.

Although I will say that I am salivating over this 2 standard deviation move in American Express (AXP).

But I can wait. 

The link to the Google Drive Spreadsheet that you can view, that we will edit, build upon and refer to over time can be found at this link.

We continue the Sharpe Income project with this next entry.

The Sharpe Income PDF breakdown for week 12 can be found here …

2 Comments so far. Feel free to join this conversation.

  1. Willie Washington February 16, 2015 at 5:18 pm - Reply

    Will future Sharpe Income detail guidelines that you have about adding more shares of an already held position within the Sharpe Income portfolio? Example: As we continue to add weekly cash contribution, when would it be a good idea to buy more shares of IBM or any other of the holdings within the Sharpe Income?

    I understand that I may be asking questions that might appear in upcoming posts, if this is the case. You can feel free to let me know that it will appear in future posts 🙂

    Thanks Sharpetrade in helping with my investment/trade education.

  2. Dan Shy February 16, 2015 at 7:54 pm - Reply

    Heyya Willie,

    Good hearing from you.

    Yeup … that’s definitely something we’ll be explaining in future updates … of when it’s time to add-in to the positions that already exist in the portfolio.

    🙂

    Regards,
    Dan

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