Take a Bite From This Apple (No, Not That Apple)

As part of my goals for this year, every interesting stock idea must successfully pass through my investing framework. This is a series of qualifications on both an individual and portfolio level.

The first company under that lens is Apple Hospitality (APLE).

Apple Hospitality is a real estate company that owns a portfolio of hotels across the United States. You may not realize it but the companies that operate hotels rent them from real estate companies. Just take a look at the hotel brands that operate inside of the hotels owned by Apple. Brands such as Hilton, Hampton, Courtyard and Marriott to name a few.

From Finviz, here is a quick look at the competitors to Apple in the hotel / motel REIT industry. They are not the largest player in the space but they do currently sport the best dividend yield.

Not only do they sport the highest dividend but they actually have the lowest debt/capitalization than any peer!

Valuation

From Fast Graphs, the company has actually seen declining stock price since it first IPO’d. The reason is quite obvious to me, funds from operation (FFO) has simply not grown. What has happened is the market has repriced shares and will not grant them a premium. They traded at approximately 15x FFO (equivalent to a P/E of 15) but have trended down to under 11. What this has done is boost the yield to the current juicy 7.6% level.

This has resulted in a very reasonable payout ratio which gives them room to maintain the current dividend. The dividend has not increased in years but that can be OK. My thesis does not involve an increasing dividend from Apple. If they are able to maintain the dividend this is a high yielding cash cow.

Correlation

Be sure to read my primer on correlation if you need more background information.

Part of the investing framework is defaulting to using ETFs in place of individual holdings where possible. An ETF can give broad exposure to an asset class while avoiding individual name risk. It’s also easier to monitor and doesn’t require digging through quarterly or annual reports.

The correlation matrix for Apple Hospitality versus some peers is quite telling. I added VNQ, SRET, KBWY and REM for my Real Estate ETF comparisons. All ranked as only having an average correlation of 0.50 which actually shows that Apple does not move much in conjunction with other Real Estate ETFs. Finally, I added the S&P as a proxy and interestingly enough, the results were similar at 0.47 for the S&P.

With that information as a backdrop, I want to mesh those thoughts against some of the questions I’ve outlined as part of my investing framework.

How does this fit into my portfolio?

Apple Hospitality fits into my portfolio as a high yielding opportunity. As part of this process, I created a pie chart approximating my investments by category. Approximately 2/3 is already in what I would consider “dividend growth stocks”, which can include ETFs by the way. I decided to include Visa and MasterCard in this group though they blur the lines between growth and dividend growth since they have lots of both.

About 18% is in growth stocks which includes Amazon, Facebook, Google and the broad S&P. “High Yield” holds my REITs and AT&T currently. I have Altria as a dividend growth stock, though the current yield is quite high over 7%. Finally there is a cash component and my “Former Dividend Growth” is CVS which I have not been happy with.


I am still working on the final allocations of a target portfolio but I approximately see 60% as core “dividend growth”, 20% growth and 20% “high yield”.

With all of that said, Apple Hospitality fits into my portfolio as a high yielding opportunity.

Am I excited about the business?

I wouldn’t say I’m necessarily excited about the business but I see it as a stable business that may offer some low growth over time. I am optimistic given the low debt profile when compared to other players in their space.

What are expected returns?

I’m expecting about 8% returns, virtually all from the dividend yield. There may be some small growth over time from actual business growth.
I’m not actually expecting the dividend to grow at this time. It has been fixed at $1.20 per year ($0.10 per month) since the IPO. Additionally, market gyrations may provide an opportunity to add or subtract from my holding.

Should the stock rise materially, without a fundamental change in the business, I may write covered calls to generate more income. Alternatively should the price drop significantly, again, without a fundamental change, I may either add to my stake or sell puts to generate income and possibly add to my stake.

Does it offer something materially different than an equivalent ETF?

This is where I ran the correlation calculation above and did not see much linkage to current ETFs within the REIT space. It also does offer a higher yield than many REIT ETFs.

Conclusion

Apple Hospitality is a select-service REIT with strong brands such as Hilton and Marriott operating their businesses within their hotels. Though the business seems like it is not currently growing, it sports a fat 7.6% dividend yield and has the lowest debt metrics in its class.

It does not seem to be correlated to passive alternatives and seems like a stable business to add to my portfolio. The high yielding component of my portfolio could use some shares of Apple Hospitality to bring that allocation closer in line with my target 20%.

In conclusion, I added 100 shares, a small starter position to my portfolio. I have the flexibility to add more down the road depending on market opportunities. Dividend reinvestment is not turned on, I will be receiving the income generated as cash while exploring my next investment opportunity.


Reviewing 2018 and Moving Forward In 2019

Introduction

First, I have to apologize for my lack of adding content to my personal blog. It’s not that I have lost any interest or focus in dividend investing, but my time that I can allocate for personal blogging is less than what I may have hoped. I hope to get into a better cadence this year and jot thoughts down on what I am looking at in real time.

With that said, 2018 wrapped up and it’s time to move forward in 2019. In 2018, I collected over $7,000 in dividends! That was over 20% more than I earned in 2017.

Dividends Collected In 2018

Part way through the year I decided to allocate a bit of my portfolio to growth stocks. I sold out of some dividend paying names and rolled those proceeds into stocks that either pay no or very low dividends. I sold my shares of the U.S. Schwab Dividend Equity ETF (SCHD), Verizon (VZ), Duke Energy (DUK) among others. In turn I bought shares of Visa (V), MasterCard (MA), Square (SQ), PayPal (PYPL), Twitter (TWTR) and even iQiyi (IQ).

My income on the tail end of the year obviously took a nose dive with all of those funds diverted.

During my 2018 analysis write-up (read here), I highlighted a few thoughts I had opined about while reflecting how the year went.

Dividend reinvestment is not black or white

Historically I have always reinvested my dividends across the board. Every holding, no exceptions was reinvested. The math is solid behind that rationale, you dollar cost average your way into positions over long periods of time with free reinvestment. Some stocks even offer discounted shares for reinvested dividends though the vast majority don’t.

I ran into two potential issues with reinvesting for some names. Higher yield holdings I own partly for their cash flow. I want that cash flow in hand to re-apply as I best see fit. With every dollar reinvested, I lose that flexibility.

The second issue which dovetails off of that was having positions providing too much of my income. It sounds like a first world problem but having one individual holding providing 10%+ of my dividends actually made me a little uncomfortable. Any sort of hiccup like a dividend cut would put a noticeable dent in my dividend stream and is what I am trying to avoid.

My feelings are that transaction costs are virtually negligible and dividends will still be compounded back into dividend earning shares, it just may not be the original company. I like to have a steady stream of firepower that I can apply as I see fit throughout the year.

Being more data-dependent

As a corollary to my first point, I am going to be more data-dependent with my investment timing. I built Custom Stock Alerts to facilitate the timing of my investments.

I love looking for companies that are going through temporary headwinds (or not) and are hitting a new 52 week low. That gives me the best purchase price and highest yield of any investor that year. Depending on “why” the stock has hit a low, it also gives me the largest margin of safety. Everyone loves a good bargain so why is the stock market any different?

Just like a new low may make an interesting time to buy shares, a new high may signal an opportune time to trim some shares. With a large watchlist like mine, something is always on sale and something is always at a premium. Shares can be sold, profits gained and rolled into lower valuation stocks. This process can perpetually add to my dividend stream.

The ex-dividend alert tool on Custom Stock Alerts will also give me a heads up before a stock is set to pay a dividend. Depending on other factors, it may make sense to dive in before a dividend to capture the payment. For the majority of my investing, this is in a tax advantaged retirement account. Of course be aware there are tax implications if you do this in a taxable account.

Lastly, using some of these techniques lend themselves to the exciting world of options. I haven’t actually used this yet so I don’t pretend to be any sort of expert in the topic but writing covered calls or selling puts can enhance income. This is a topic well out of scope for this post but it fits in nicely using data available to me.

You don’t have to swing at every pitch

Patience is a virtue in life and investing is no different. If you manage your portfolio at all, you need to be willing to sit and wait for a good investment opportunity.

To be honest, I started getting really excited Christmas Eve. My own personal feelings aside, seeing the market hit levels it did was exciting for an investor with some cash available. Unfortunately it did not last though I am optimistic we may see a pullback before long. Just remember high stock prices only benefit net sellers.

Passive investing is OK!

There are a slew of great ETF options that can be added to make a well-rounded portfolio. ETF is not a four letter word. Some dividend investors will avoid ETFs at all costs – in literal sense too – because of perceived shortcomings.

Yes, payments may be variable, the holdings may be variable and there are some expenses associated with owning ETFs. On the flip side, they are incredibly diverse and can fit into every niche you can imagine. Want REIT exposure? There are ETFs for that. Want more specific mortgage REIT exposure? There are ETFs for that.

I’m looking to round out my portfolio with some different ETFs, in particular in areas where I feel my knowledge is lacking. I don’t feel comfortable buying things like individual MLPs, mortgage REITs, BDCs, it’s just out of my area of expertise. I’m more comfortable analyzing C-corps and some larger REITs.

A Defined Investing Framework

One of my other goals for 2019 is to fully flesh out my investing framework. At a high level, I’m going to further define the proportion of my portfolio that fits into these areas; growers, dividend growers and high yielders.

When presented with an investment idea I will have a series of questions to answer beyond just analyzing whether it may be a good company or not.

  • What is the opportunity here?
  • Am I excited about the business?
  • What are expected returns?
  • What are the risks and downside?
  • How does this fit into my portfolio?
  • Does it offer something materially different than an equivalent ETF?

Those are just a sample and the framework will be defined as the year progresses. The aim is to ultimately make sure I am allocating my investment dollars as best as possible to fit my goals.

Conclusion

I love dividends and how they are helping me progress towards my financial goals. To recap, I collected over 20% more dividends in 2018 than in 2017 and over $7,000.

After I scratched the itch of adding a few growth stocks, I am ready to really push hard with more dividend paying stocks this year. I’m working on allocating a percent of my portfolio towards high yielding opportunities. ETFs can be a great tool to help me build this portion where I personally feel that I lack the expertise required.

By combining some of the lessons that I reflected on with a-to-be-defined investing framework, I’m looking forward to moving forward in 2019.

Be sure to check out my dividend portfolio in real time, any time, here.