03-30-2021: What IS Working...

Yes, I know... the market is just flopping around and going nowhere.

And, for our growth models (Turner Quant Advantage, Leveraged Index and Tactical Growth), we need a trend more than anything else. But, even without a trend, there are opportunities that can become winning trades if the market cooperates. And, believe me, we are busting our butts to find those opportunities.

But, despite Scotty telling us what we already know, there is one model that IS working and working nicely in this whipsawing, going nowhere market.

It is the Diversified Income Strategy.

At this point (past performance having nothing to do with future returns, mind you), the DIS model is on track to generate almost 20% in dividend income for 2021. And, that's with being in cash (or mostly so) most of the time.

Last year, this model generated a boring +5.3%. Granted, it was (and still is) our lowest risk model and +5.3% is better than you can get at the bank, but that return is just not enough for me.

I am always looking at what is working and what isn't. I use this information to help adjust the strategies to take advantage of what is working and try to eliminate those elements that are not working.

At the end of last year, after reviewing the DIS model's performance for the year, I made the following observations:

  1. While Closed-End Funds pay wonderful dividends, the equities themselves are (to put it mildly) about as ugly, from a charting perspective, as you can find.

  2. Closed-End Funds (CEFs) are, for the most part, super-sensitive to any sell-off in the market. If the market was to drop 5%, a CEF might drop 10% or even 20%. They just are NOT good buy-and-hold-until-you-can-get-the-dividend equites to own.

  3. I also observed that there are patterns in each of these high-yielding (by high-yielding, I mean 8% to over 20% in annual dividend yield) that could be useful for trading. One such pattern surfaced in finding the best day to buy a CEF prior to the ex-div date (the ex-div date is the date you must be holding the equity in order to receive the dividend, which is paid out some days later). Another pattern was how quickly a CEF recovered post ex-div date.

  4. Another obvious observation was the painful realization that holding onto these high-yielding CEFs meant there was higher risk in the equity dropping to its stop loss and wiping out any gain and often, even wiping out the dividend income.

So, where is all of this headed... I know... your reading patience is very limited...

I came up with a new strategy that I call "Income Harvesting". The concept is really pretty simple and, boy, does it work... (so far). Here is how it works:

  1. We pick the best day to buy a CEF prior to its ex-div date.

  2. We set the sell price at the basis of the holding plus the amount of the dividend. If the CEF moves up to that price before the ex-div date, we sell it because we reached our goal of obtaining the gain we wanted from the dividend.

  3. Since most CEFs do not move up as much as the dividend prior to the ex-div date, we are holding the CEF on the ex-div date and lock in the dividend.

  4. As you know, equities that pay hefty dividends drop in price (generally) by at least the amount of the dividend on the ex-div date. So, now our holding is lower in price than the basis on the ex-div date.

  5. Next, we immediately put a sell order in at the basis price of the holding (or a bit more on a case-by-case basis). In other words, we want to sell the holding at what it cost us and pocket the dividend.

  6. Then, as soon as the CEF gets back to its basis, we sell it and take the risk of it dropping in price off the table.

So... what's is the goal?

Capture the highest dividends we can and hold the CEFs for the shortest period of time possible.

And... how is this working out?

  1. We are in cash a LOT more than we were last year. This gives the ability to buy more CEFs because we are not holding onto them and that way, we can capture more dividends.

  2. Last year, we generated about 11% in dividend income for the year.

  3. This year, we are on track to almost double that number (currently at over 19% projected income for the year if the rest of the year runs a good as it has for this first quarter).

  4. We have DRAMATICALLY reduced the number of losing trades. Last year, in the first quarter, we had 28 losing trades in the DIS model. This year, we have only 1 losing trade. That is a big, big deal.

  5. Last year, due to us holding onto these CEFs for longer periods of time, trying to pick up the monthly or quarterly dividends, we lost about 6% in capitalization, netting a total gain for the year of about 5.3% (11% income minus 5.7% in loss of capital) = 5.3% net for the year.

  6. This year, in the first quarter, we have realized income gains of 4.79% in dividend income and only -0.61% in capital loss. Extrapolated through the rest of this year would see a total dividend income of about +19% and a total capital loss of about -2.5% for a net gain of almost +17%. I MUST hasten to add this is a simple extrapolation from the first quarter of 2021 should NOT indicate that the rest of the year will be the same or worse or better!

But, the numbers do not lie and so far, our Income Harvesting strategy is working nicely.

Then, add to that, the draw-down risk is the lowest we have in all the portfolio models... AND, add to that, when we sell these CEFs, the risk of loss in them goes to zero because instead of holding a CEF that could drop in price precipitously at any time, we are in cash until we buy the next CEF.

Bottom-Line: The DIS model IS working and working nicely.

Recent Posts

See All

03-28-2021: A Fork in the Road?

I remember, growing up in small rural community where my dad tried to run a farm and a construction company at the same time. That meant there was always more work to do than there was time to do it.

03-25-2021: Bottom of the Ninth... 2 outs??

Do I believe this market is in the ninth inning? The data seem to support that conclusion. Does that mean there are 2 outs and the batter has just hit a simple fly ball to center field? That, my fri

Turner Capital

Call Us! We are the money management firm you have been looking for!
Quant-Based, Market-Directional Portfolios


Austin, TX

©2021 Turner Capital Investments. All Rights Reserved.