XYLD - My Income Portfolio: The Power Of Storytelling

Summary

• Constantly swaying between narrative and reality, financial markets are supported and fueled by emotions, feelings, dreams, aspirations, and fears.
• When the narrative is shared, financial markets take a definite direction, drawing scenarios of growth or recession, as in the current economic environment.
• However vague the future may present itself, the most important thing is to be able to survive until the sun comes out again.
• A dividend strategy can provide a cash flow that allows the proceeds to be reinvested by buying stocks at cheaper prices, thus “shortening” the waiting time.

Narrative in Images

Giotto was born around the year 1267 in a remote Mugello place called Vespignano, not far from Vicchio. Mugello is a wide and green valley located north of Florence, the homeland of the Medici family, some 20 kilometers from the Tuscan capital and now world-famous for its racing circuit.

Mugello is a Sunday destination for Florentines because of its gastronomic specialty, represented by potato tortelli served mainly with meat-based sauces. It is still a "free-range" corner of Tuscany, in which to go and discover rare and precious works of art among small villages clinging to the flanks of the Apennines, with stores and "trattorias" offering the flavors of yesteryear.

Echoes of the Mugello landscape return in the frescoes of Giotto, the painter who revolutionized medieval art by giving his characters realistic traits and creating figures with weight and volume. No longer just gold or solid-colored backgrounds, but a new, natural representation made of familiar, everyday settings and architecture that brings the sacred episodes closer and makes them comprehensible to even the simplest souls.

His stories and characters go beyond the conventional norms of Byzantine tradition: each figure naturally enters space and takes on a perspective volume, set as it is against natural backgrounds and three-dimensional architectural spaces. It is a narrative in images, breaking into art history and filling it with new content. As in the "Sermon to Birds" in the Upper Basilica of St. Francis of Assisi, the words seem to gush forth in rivers from the saint's hands to the point we almost perceive their sound.

My Giotto Portfolio

Giotto was a painter and architect. I decided a few years ago to dedicate one of my portfolios to this artist. It is a slender portfolio, like Florence's cathedral bell tower that bears his name and is the most eloquent testimony to 14th-century Florentine Gothic architecture. Today, my Giotto Income Portfolio consists of five ETFs that adopt a covered-call strategy.

• JPMorgan Equity Premium Income ( JEPI )
• JPMorgan Nasdaq Equity Premium Income ( JEPQ )
• Global X Nasdaq 100 Covered Call ( QYLD )
• Global X Russell 2000 Covered Call ( RYLD )
• Global X S&P 500 Covered Call ( XYLD )

As the painter Cennino Cennini said in his Book of Art (c. 1390), "Giotto changed the art of painting from Greek into Latin and reduced it to the modern." Spatial solidity and narrative fluidity were his hallmarks. Narrative art is art that tells a story, and we all need to recognize ourselves in stories. This is the power of storytelling, an important tool for interpreting reality and for interacting with the social world of which we human beings are a part. A way to understand what surrounds us and to transmit it to others.

When I was in charge of art books for the publisher Vallecchi in Florence, where we also produced facsimiles of medieval works, the key to the commercial success of our volumes was the power of the stories from which they originated and which were hidden within their pages.

No one is impervious to the power of narrative, least of all the financial markets.

The Power of Storytelling

Narratives about why a decline occurred make them easier to talk about, worry about, and frame a story around what you think will happen next-usually, more of the same. Even if you don't own stocks, those kind of things will grab your attention. Only 2.5% of Americans owned stocks on the eve of the great crash of 1929 that sparked the Great Depression. But the majority of Americans-if not the world-watched in amazement as the market collapsed, wondering what it signaled about their own fate. This was true whether you were a lawyer or a farmer or a car mechanic." (Morgan Housel, The Psychology of Money )

Financial markets are sustained and fueled by emotions, feelings, dreams, aspirations, and fears, and they continually sway between narrative and reality. When the narrative is shared, financial markets take a definite direction, whether positive or negative, encouraged by media that feed its imaginary component, drawing future scenarios of growth or recession, as in the current economic environment.

Newspapers act as interpreters of investors' feelings, conveying caution or concern, and this narrative guides their choices like a self-fulfilling prophecy. Until, almost imperceptibly, day by day the narrative changes, and the sun gradually peeps back into the financial markets.

The most important thing is to be able to survive until we see the sun come out again. In the meantime, those who, like me, have chosen a dividend strategy can count on cash flow (net of any cutbacks due to the worsening economic situation) that allows them to reinvest the proceeds by buying stocks at cheaper prices and thereby "shortening" the time they have to wait.

My Cupolone and Masaccio Portfolios

As you may know, my investments are divided into three different income portfolios; Cupolone, my primary CEF portfolio; Masaccio, my "tactical" portfolio; and indeed, Giotto.

Cupolone Income Portfolio (named after Brunelleschi's Florentine dome) is my strategic, primary investment portfolio, the backbone of my overall portfolio. Its solid, structured foundation is based on the following sixteen CEFs:

• BlackRock Science And Technology Trust ( BST )
• Calamos Dynamic Convertible and Income ( CCD )
• Calamos Global Total Return ( CGO )
• Eaton Vance Enhanced Equity Income II ( EOS )
• Eaton Vance Tax-Adv. Global Dividend Opps ( ETO )
• Eaton Vance Tax-Adv. Dividend Income ( EVT )
• Guggenheim Strategic Opp ( GOF )
• John Hancock Tax-Adv. Dividend Income ( HTD )
• Pimco Corporate & Income Strategy ( PCN )
• Pimco Dynamic Income ( PDI )
• John Hancock Premium Dividend ( PDT )
• Pimco Corporate & Income Opportunities ( PTY )
• Cohen & Steers Quality Income Realty ( RQI )
• Special Opportunities Fund ( SPE )
• Cohen & Steers Infrastructure ( UTF )
• Reaves Utility Income Trust ( UTG )

Masaccio Income Portfolio is my third, "tactical" portfolio, which contains these five titles:

• Ares Capital Corp ( ARCC )
• Crescent Capital ( CCAP )
• Royce Value Trust ( RVT )
• Credit Suisse X Links Crude Oil Shares Covered Call ETN ( USOI )
• XAI Octagon FR & Alt Income Term Trust ( XFLT )

There are 26 titles in total. They all offer monthly distribution with the exception of ARCC, CCAP, and RVT, which have quarterly distributions.

The rebound in recent weeks has offset the year-end losses, bringing them back to a few percentage points, which is, all in all, an acceptable situation given the markets' performance during 2022. Several CEFs (ETO, EVT, HTD, PDT, RQI, UTF, UTG) are still in good gain relative to their load price in my portfolio, but all the positions built during the year are now in the red.

The recent rise of the euro has hurt the overall performance of my portfolio, but for years I have decided to consider rises and falls of my titles only in relation to the currency of denomination, and not the exchange ratio. This is also because I always try to keep enough liquidity in euros (my everyday currency) that I am not forced to liquidate my positions to meet sudden needs. Inflation is not a friend of liquidity, but I have seen that liquidity eases my sleep, which makes me live better.

Some of the liquidity, however, is ready to be used for possible purchases of securities already in my Cupolone portfolio (e.g., ETO, EVT, HTD, RQI, UTF) in order to increase their positions if their prices should fall again, as in mid-October. These would be purchases that I would make more with a view to future growth than current returns, given the origin of their latest distributions, based mainly on long-term capital gains, as shown in the tables below.

After the cut made with the November distribution, ETO resorted to a substantial return of capital in December and January, while its NAV over the same period bounced more than 12%.

EVT also cut its distribution in November, and has since been able to guarantee its distribution through long-term capital gains.

The distributions of HTD , consisting mainly of income and long-term capital gains, has been regular throughout 2022, even increasing by nearly 20 percent for the month of December.

RQI also had regular distributions throughout 2022. As of the huge, special dividend of almost three monthly payments in December, distribution is based entirely on long-term capital gains.

Long-term capital gains are also the backbone of UTF 's distributions, which has remained steady through 2022.

As I said, the fact that the distributions of these five CEFs are mainly based on long-term capital gains makes me a little cautious because I wonder how sustainable these types of payments can be over time, even though their recent market performance is undoubtedly positive.

Fairy Dust

Nobody knows if a stock is going to go up, down, sideways or in circles, least of all stockbrokers, right? It's all a fugayzi, you know what a fugayzi is?" "Fugayzi. It's fake." " Fugayzi, fugazi. It's a whazy. It's a woozie. It's fairy dust. It doesn't exist. It's never landed. It is no matter. It's not on the elemental chart. It's not real." (Dialogue between Mark Hanna and Jordan Belfort from the movie The Wolf of Wall Street ).

For a person like me, who is not looking for fairy dust, the financial markets are a playing field on which to build day after day a strategy that allows me to survive, possibly protecting capital and increasing it with the fruit of distributions or dividends, without dreaming of getting rich with a touch of a magic wand. Because when you chase fairy dust, there is a risk that, at midnight, the horses will go back to being mice and the coach a pumpkin.

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