I’m going to spend the next several points discussing how I construct an income centric portfolio to support a higher than 4% withdrawal rate in early retirement.

music selection: “Runaround” — Van Halen

I went FIRE on 5OCT2012 with a withdrawal rate just a hair over 9%.  That was a little steep for comfort but it was during the middle stages of a roaring bull market and I was comfortable applying some leverage.  Today, my withdrawal rate is a hair over 6% (and falling!).  The core of the portfolio is built around high yield issues.  My portfolio wide yield on cost is 8.44% even with a few positions that have no yield.

The first leg of that approach is leveraged instruments such as MORL and BDCL.  I’ve covered MORL before but BDCL is new to the raptor.  That is a double levered basket of “Business Development Companies”.  These operate quite a lot like REITs in that they deploy mostly short term capital long term and exploit the yield curve.  These invest in start up to mid size businesses providing a mix of debt and equity financing.  Yields are fat, 90% of cash flow must be distributed to shareholders to maintain tax advantages, and BDCL carries leverage.  It currently yields almost 18%.

The second leg is the use of MLPs.  These are “Master Limited Partnerships.”  Like the REITs and BDC’s, these are tax exempt so long as they distribute 90% of cash flow to shareholders.  They operate in physical resource infrastructure so as pipelines and timber.  I currently like Hi Crush Partners (HCLP) in this space quite a lot.  Current yield is 8.5%.  The company has a profitable sand business providing sand to electronics manufacturers and glass companies.  There is also a profitable and growing sideline in Frak sand for shale drilling.  Any return to 100 dollar oil will provide a nice boost to yield.

I also have some shipping companies purchased when the time was right (not now!), the best of which is CPLP which has a yield on cost of 14.15%.  I have 22% capital gains there and am pondering an exit (buy low, sell high!)   The rest is made up of some oil and gas companies that are in some cases struggling a little at the moment.

I’ll be back on Wednesday to talk about fixed and semi fixed income which provides reasonable yield while reducing volatility.

Devour your prey raptors!

Portfolio construction – Part one of many

Never miss another opportunity to devour prey!

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14 thoughts on “Portfolio construction – Part one of many

  • July 11, 2015 at 2:13 pm

    Hi Lizard King,
    I am doing exactly the same thing. Closed out my Tradeking, went to Interactive Brokers, using a blended approach of a Dual Core Processor DGI and High Yield, with Dollops of REITs, MLPs , ETNs and lately Muni CEFS. A little bit of Dumbo T Rex for me, using some margin at IB, but well backed up with a LOC at 4% from my friendly regional local banker. I hate American Big banks ….

    Still not writing options, but as the core is being built out, and once I have loaded up on Munis on sale, here I come…

    You have, more than any single Financial Blogger, instituted and practiced the savviest Multi-Pronged Synergistic Purposeful Planning Strategy I have ever come across. I say this after lurking at Seeking Alpha, The Fool, Dailytradealert, all the DGI blogs, at least 50 of them. Your writing style is clear. concise, crisp, and most important of all, never, ever condescending. Some of the DGIs are too set in their ways, and thin skinned, but as we all know, there is more than one road to Rome and FI…

    Hats off, Raptor King, I would tell all the visitors to this blog , follow the king , and you will never go wrong.

    As an aside, i have several other High Yield Positions, other than what you have mentioned above.
    I also prowl overseas looking for possible high yield candidates..

    Among my favorite hunting grounds are:
    Canadian REITs:

    Muni CEFS: IQI BTA NQM VKQ VGM, in additon to NIO NEA

    Thanks for everything


    • July 11, 2015 at 3:54 pm

      Thanks for reading Vish. Appreciate the kind words!

      You are at the right place if you are going to use margin. IB has the lowest rates. One of my dirty little secrets is I hold no emergency fund in FIRE. When something comes up like the A/C going out, I put it on a 1.5% cash back credit card and pay it off immediately with an IB margin loan. As long as I replenish within 11 months (always so far!), I come out ahead on net interest. I can’t offer personalized investment advice to you (that requires a license in the states) but I will say I am increasingly leary of margin as the markets are starting to look toppy.

      Among your list, I hold small positions in OXLC, REM, and CPLP (this one has done well!)

      I’d like to say I’m smarter than the other bloggers. Truth is, I used to be more aggressive than any of them and learned some hard lessons the T. Rex way. My current approach is driven by intent to not repeat past mistakes. Experience is the best teacher!

  • July 11, 2015 at 2:17 pm


    I love JPS, as well as FPF, PGF in preffered space. Also PFN EFF for floating rate.

    HCLP is another fave, averaging down here. August 21 put looks juicy, what say the King …..


    • July 11, 2015 at 3:57 pm

      I haven’t written enough about HCLP but I own a 100 shares and have an open short strangle on it (written put, written call) to play both ends against the middle.

      The yield is tasty and they have security to cash flow as the majority of their business comes from non-oilfield sand demand. When oil prices climb again (they always do!), they will get a nice bonus selling frak sand.

  • August 13, 2015 at 1:15 pm

    MR Lizard King!

    Call me a skeptic as I don’t understand the high yield products well but what’s the risk in these? Maybe just in the back of my mind when yields such as MORL are 27%, it’s screaming at me that you are compensated for the risk you are taking. Why bother with DGI when you can load your portfolio of high yielding REITs?

    Great content on your blog as usual!

    • August 13, 2015 at 1:49 pm

      Hey Justin.

      You are correct there is more ‘risk’ in MORL. First of all, it is a unique class of investment, a bundle of mortgage REITS. These historically yield more than DGI type stocks. This is partly because they are in a high margin finance business and partly because they are required to maintain a payout ratio of 90% of free cash flow to qualify for tax exempt status. Short version is there is some interest rate risk built in as these mREITs borrow short term and lend long term (the good ones hedge risk). MORL doubles down by adding 2x leverage. So your yield is roughly twice what buying the basket yourself would be and your upside/downside risk are likewise doubled. No such thing as a free lunch. I’ll be the first to admit I have large unrealized capital losses in MORL. But I’m not selling as my dividends collected to date more than make up for my paper losses.

      BDCL is similar. It invests in a bundle of ‘Business Development Companies’. That is a high yield area of the market that must maintain 90% payout ratio to receive tax benefits and they add similar 2x leverage. I own both.

      My approach has been to build out my minimum income with high yield stocks first. I now focus more on DGI and insurance as my immediate needs in early retirement are met. I expect those approaches to outperform high yield over multi-decade time periods. I just simply wasn’t prepared to wait 20 years to retire so I took a temporary shortcut. Your mileage may vary.

  • August 13, 2015 at 5:52 pm

    Well I’m 25 and writing to you from a corporate chair. My time frame seems to be shorter and shorter the more meetings I attend. I have enough saved up where if my entire portfolio was MORL I could retire and earn more than my full time job. But 27% just seems far too risky. Thank you for the reply, I am still refining my “vanilla” approach.

    What do you think of Selling SPX Put Spreads 45 DTE and laddered weekly + DGI/High Yield might be enough to meet my retirement needs.

    One of the reason your blog is entertaining is because you have done it, you live the retired life. That and, other places only seem to advocate indexing. Keep it up!

    • August 13, 2015 at 6:58 pm

      The dreaded Corporate Chair. I’ve been there and they are all the same. I wouldn’t put my entire portfolio in any one issue. You want good diversification. Imagine you bet the farm on MORL and Congress changes the law to eliminate their tax benefits, you’d suffer a ruinous loss! A good rule of thumb is no more than 5% of your portfolio in any one issue. You can get higher than normal yields with REITs including MORL (REM if you want to avoid the double leverage), BDC’s such as BDCL, and various MLPs (these also receive tax benefits for distributing most of their cash flow to shareholders.) Foreign bonds are an interesting sector for those who are chasing yield as well. I like EHI in that space (11.70% yield in boring old bonds…) I try to keep my allocation to high yield stocks around 30% of my portfolio, although this is falling now that I have all the income I need and am building my DGI and insurance positions.

      But 25 is young; still a hatchling. I didn’t retire until 40 and I still feel plenty young.

      I’m not a big fan of spreads. Or a big fan of writing puts on indexes; yields are kind of low. I’m sure that reflects lower risk but it still requires a greater scale. And I manage risk by making my ‘downside’ to buy great companies at discounts to spot price at the time the trade opens. It’s win/win.

      I’ll also note I retired with a withdrawal rate around 9.25%. My cash returns were about 11% though and now my withdrawal rate is under the 8% range (give or take some basis points) depending on Mr. Market’s overall mood on any given day. I was comfortable with 9% but would have been nervous at 10/11/15/etc. I think there is room to be more aggressive than index-and-four-percent crowd preaches, but there are naturally limits to what is ‘safe.’

  • August 16, 2015 at 6:47 pm

    Wow 8% withdrawl! Here I thought 4% was a bit too risky for me. I have so many questions to ask… sorry if I’m making the comment section a chat forum.

    1. I’m really liking the idea of high yield issues mortgage reits, BDC and MLP’s to cover immediate retirement needs. What sort of metrics do you look for when evaluating great entries in here? (I know it’s a broad question). How about CEF’s that trade at a discount to NAV?

    2. You mentioned you learned some lessons the T.Rex way! What were they and how can we try to avoid them? 🙂

    3. What are your exit/risk management criteria for strangles that get tested on the call side? This goes slightly against “writing puts on great issues you wouldn’t mind owning”

    I know those are loaded questions! Thanks for your help for someone aspiring to FI!

    • August 16, 2015 at 8:10 pm

      The 8% withdrawal isn’t so scary when you have an average yield over 8%. So long as there are no dividend cuts, it is sustainable forever. In reality the raises from my DGI picks outweigh the cuts from my high yield stuff. And the options stuff far outpaces 8%. No sweat.

      1. I like CEF’s a lot. The NAV data is published and updated daily for all of them (it is usually easy to find on the CEF website). I look more at payout ratio (compare the dividend expense to free cash flow using the cash flow statement – DO NOT use the net income statement to make this judgement).

      2. If I tell you something is a dumbo T.Rex move, it is a sure bet I either stepped in it exactly that way or at least had a nasty scare to set me straight. The biggest stupid move of my investing career was getting greedy with naked calls on VXX (unleveraged version of UVXY). I took a 10k dollar credit on the front month expiry right at the money one month. It worked great so I wrote 20k the next month. Then 30k. And then 40k! And that was just the premium. My look through exposure was over a quarter a million dollars on a portfolio that was worth maybe 150k in liquidation value. The Greek Crisis hit (for the first time) and I got margin calls. I lost six figures in about 12 minutes. More than my annual salary at the time. Forrest Gump’s mamma always said “stupid is as stupid does” but the Lizard King says “stupid is as doesn’t learn from their own mistakes.” I have made it quite clear that writing naked calls is sort of stupid. Trust me, learn that lesson the easy way.

      3. Usually, I put more money in the trade and roll the long call up and out for a net debit to cash. You can alternately sell the long call at a profit and use the proceeds to close the short position after assignment. The net P&L from those two choices are theoretically a wash. I like rolling up and out usually because taking a temporary short position on short call assignment eats up margin. It isn’t a lot but see #2 about me getting margin calls on VXX; it is a sick in the gizzard feeling you don’t want to experience twice.

  • August 18, 2015 at 2:24 am

    Thanks for sharing. #2 was seriously entertaining and serious balls. 40k in option PREMIUM ALONE? insane.

    I’m confused slightly at number 3. I’m assuming your strangle is a SHORT strangle…but I guess you don’t put those positions on anymore.

    • August 18, 2015 at 1:41 pm

      Greed is a powerful emotion. Learn to keep it under control.

      My strangles are short, yes. I’m confused as to what your question is on a long strangle. You can never lose more than you paid in premium. Exercise is matter of deciding to take shares or roll up/out…

  • August 18, 2015 at 3:18 pm

    Sorry I wasn’t clear. My question was how do you defend the SHORT strangle when the call side gets tested. What is the risk management criteria. Roll up and out? Take the loss? Roll up?

    I assume you were talking about being long strangles because the answer was slightly confusing

    ” I put more money in the trade and roll the long call up and out for a net debit to cash. You can alternately sell the long call at a profit and use the proceeds to close the short position after assignment.”

    • August 18, 2015 at 4:02 pm

      I had a dumbo T.Rex moment and was thinking of diagonal calls! My apologies. You wrote a covered call with the knowledge your shares could be called away. It is usually best to just let your shares get called. You can’t be both called and assigned new shares unless you picked some crazy strikes (why would anyone do that?!?) So you earn full profit on the put and partial profit on the call (you lose out on upside above the strike, which is the agreement you made when you sold the contract.) The lesson is, don’t wrote covered calls on anything you aren’t willing to sell at the defined strike. Either go up a strike when writing or find another trade.


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