05-03-2021: Can it Really Be that Good?

As a fiduciary, I have to be very, very careful about bragging about performance. As you know, there is an absolute fact that past performance is NOT a guarantee of future returns, so commenting on good performance has to be done with all the disclaimers and caveats possible.

But... having said that, I have to tell you that our "Income Harvesting" strategy is working far better than I expected. Better in terms of performance... Better in terms of lower risk... And, very surprisingly, better in terms of capital in play (more on this in a bit).

You really need to hear about this strategy... it is THAT good...

First a little background...

Last year was the first full year for our Diversified Income Strategy (DIS). I put this model together for our clients who wanted a low risk, income-centric portfolio. I even had some clients say to me, "Mike, if you can just get me 2 percent that is very low risk, I will be happy!" Well... 2% doesn't do it for me and it doesn't for most people, but there are a LOT of folk who would like to get 6% to 8% and at reasonably low risk... so that was my initial goal.

But, last year, we didn't quite get there...

We got to about 5.3% total gain (NOT including management fees) and, frankly, that just wasn't good enough for me. While (amazingly) most of my DIS clients didn't complain, I was not satisfied at all with a 5.3% gain.

And, I didn't like how we got that gain either...

We captured over 11% in dividend/premium income, but ended the year just a bit over 5% in total gain. That meant we lost 6% in capital depreciation... meaning, the holdings we used to capture that 11% in dividend income lost 6% in share prices.

I was NOT happy with that and set about to find a way to correct the situation before the start of 2021. Here were some observations...

1. The highest yielding equities (those with an average of 8% to as much as 20%) are, typically, closed-end funds.

2. These CEF's have (generally) good track-records for paying consistent dividends and at very attractive rates.

3. But... and this is a BIG BUT... These same CEF's tend to be "hyper-sensitive" to down-trending markets. For example, the broader market might sell off 6% or so and some of these CEF's would drop 2 to 3 (sometimes more) times that amount. In other words, these high-yielding CEF's were a nightmare to buy and hold just to pick up the dividends.

So, these observations led me to the following conclusions:

1. The shorter the period of time we can hold these CEF's the better, and

2. The more of these high-yielding CEF's we can buy to capture the dividends, the better.

You might think (rightly so) that these two conclusions are at odds with each other... and, of course, they are. But... I did come up with a plan to do execute both of these conclusions and, frankly, the results are more than good... much more.

I (along with my very talented team) came up with a strategy that we call, "Income Harvesting" and here is how it works:

• First, we find the top CEF's in the market that have a strong, reasonably reliable track-record of paying good (high) yields, and then

• We analyze the pricing history of each of these CEF's to find the best day to buy them prior to when they go ex-div (the date that the owner of the shares is guaranteed to receive the dividend), and then

• We analyze the propensity (likelihood) of the best of these CEF's to bounce back (in price) after the ex-div date.

Then... armed with this information, we select the best of the group.

Here is how (mostly how) we put the above research to work (I am leaving out some of the really important proprietary elements of this process for obvious reasons):

• We buy the CEF on the historically lowest price day prior to the ex-div date. This becomes our basis price.

• We (generally) hold the CEF until its ex-div date when it drops in price by an amount equal to (again, generally) the amount of the dividend.

• Then, we put a sell order in at our basis price plus a small profit.

99% of the time, these particular CEF's will get back to our basis + profit within a few days after the ex-div date when we sell them.

This results is the following:

1. Almost zero losing trades. So far this year, we have only experienced one losing trade out of 24 round-trip closed trades and that loss was tiny, and

2. We were in cash most of the time since we would get in, get the dividend and get out in a matter of days. This dramatically reduces risk. If you are not holding an equity you can't lose money in it when the market swoons, and

3. We captured these high-yields without having to hold onto these hyper-sensitive to down-trending markets Closed-End Funds (CEF's) for more than a few days, and

4. Since we moved back to cash as soon as we cleared a capital gains profit, we had more capital to put to work, meaning we can buy more of these CEF's than if we were buying-and-holding them. In other words, we got to multiply our capital by not having that capital tied up in holdings, making our capital far more productive.

As a result, the DIS model is up +6.28% year-to-date. The model has generated +4.15% in dividend/premium income and a little over 2% equity price appreciation.

This results in an annualized return of almost +19%! (Again... Keeping in mind that past performance does not guarantee future returns!!)

Couple that with a drawdown estimate of less than 2% and our goal of generating exceptional returns in a low-risk strategy appears to be working and working well.

Here is the current chart:

Granted... this "Income Harvesting" strategy is new... and only in play since January 1, 2021. But, I love the way it is working. Will we make 19%+ this year? No one knows. A bear market could jump out at us at any time and when that occurs, the Diversified Income model will have very few CEF's to choose from. We may have to wait for bottoming actions in the market and may rely a bit more on covered calls, while we mostly sit in cash. But, for now I love how this strategy is working.

If you are a client of mine and would like to add the Diversified Income Strategy to your total portfolio with us (if you haven't already done so), just let me know. If you are not a client of mine (and, I am wondering exactly why not??), this DIS model is certainly worth almost anyone's consideration. Give me a call to discuss: 855-678-8200