Rebalancing Season: 7 Adjustments, 3 New Positions, and an Honest Look at Underperformance

Let's start with the part most newsletters bury. Since January 1, this book is up +10.6% on a price-only basis, sitting at $110,631 against a $100,000 inception value. Over the same window, SCHD returned +16.5% price-only — a gap of roughly 6 percentage points. Add the cash income this book collected and it's about +12.4%, versus +18.6% for SCHD with dividends reinvested. Either way you slice it, the portfolio trailed. I'm not going to spin that.

The gap is architecture, not stock picking. Roughly 34.3% of this book sits in rate-sensitive sectors — utilities, REITs, and communication services — that SCHD holds at near-zero weight, while the book holds 0% in Industrials where SCHD carries a heavy sleeve. In a risk-on half-year, that composition lags by construction. It's also the sleeve that holds the floor when the tape turns, and it's what buys a cash yield the benchmark doesn't pay. That's the trade I signed up for — but you deserve to see the cost of it in plain numbers.

That comparison also exposed a structural problem with the benchmark itself. SCHD is a dividend-growth fund: return-on-equity and cash-flow screens, a big Industrials sleeve, zero REITs. A 4%-income mandate will trail it in every risk-on year and lead it in every risk-off year — the gap measures the market regime, not the manager. So effective this quarter, SPYD (S&P 500 High Dividend — equal-weight, roughly 4% yield, and it actually holds the REITs and utilities this book owns) becomes the mandate benchmark on the strategy page and performance chart. SCHD stays as a permanent reference in every report. I want to be judged against something that shares my job description — but I'm publishing the switch in the same document that discloses the SCHD gap, not after quietly hiding it.

Every one of these trades was triggered by a written rule, not a mood. The trims come from the drift band: each position targets 5% of the book, and once a name runs above 6% (that's +20% of target), I trim it back. Three names breached the band this quarter — JNJ at 7.1%, CVX at 6.4%, and JPM at 6.2%. Trimming winners feels wrong every single time, and that's exactly why it's a rule.

The exits are where discipline earns its keep. AVGO has been a phenomenal holding — and that's the problem. The price ran so hard that its yield decayed to 0.69%, far below the 2.5% minimum-yield floor this mandate requires at entry. In a growth portfolio it stays; in a rigid income portfolio, a 0.69% yielder is dead weight against the income objective, so it's rotated out at full size. T and DLR went a different way: both tripped the Dividend Freeze Exit — four consecutive quarters without a raise. The manual says liquidate, no exceptions. T hasn't raised since its 2022 reset; DLR showed no raise in the trailing year. An income position that stops growing its payout has stopped doing the one job it was hired for.

One position gets topped up: CMCSA, at 2.7% the only name far below the 4% lower band.

The six sells raise $21,458. After the $1,596 CMCSA top-up, that leaves $19,862 to deploy — which brings us to the fun part.

Each new name takes a standard ~5% slot (about $5,532 at current marks) and each had to clear the same screens every holding faces: the 2.5% yield floor at entry, a real dividend growth record, and a payout the balance sheet can actually defend.

VICI replaces DLR in the REIT sleeve — gaming and experiential net lease, a raise every year since its 2018 IPO, CPI-linked rent escalators, and no overlap with O's retail book. TROW takes the newly reweighted Financials slot: 38 consecutive years of increases and a debt-free balance sheet — the kind of boring that compounds. ACN is the one I'll get mail about: yes, the yield is only elevated because the market is pricing AI-disruption fear into consulting. I think that's a price risk, not an income-safety risk — a roughly 20-year raise streak, a low-40s payout ratio, and a net-cash balance sheet buy a lot of time to be wrong. Its entry is conditional on clearing the 2.5% yield floor at execution, same as everyone else. If the thesis breaks, the same rules that fired T and DLR will fire ACN — that's the point of having them.

Amendment one: sector targets. Communication Services drops from 15% to 10%, and Financials rises from 5% to 10%. T's rule-driven exit exposed something structural: post-2018 GICS, the Communication Services income universe is painfully thin — the sector is dominated by near-zero-yield growth names, and the two investable ad-agency payers are merging into one company. Rather than force a lower-quality third name into the sleeve just to hit a number, the 5% moves to Financials, where the quality-income bench is deep. TROW takes the slot. All other limits are unchanged.

Amendment two: the benchmark. As covered above, SPYD becomes the mandate benchmark and SCHD remains a permanent reference. I'll say it once more because it matters: changing your benchmark in a quarter you underperformed it is exactly the kind of move that deserves suspicion. That's why the change ships in the same document as the underperformance, with the old comparison still printed in every future report.

Here's the finding that shaped this whole rebalance. The book yields 3.5% forward — under its 4.0% target and roughly level with its benchmark. How does a portfolio built for income end up with a benchmark-grade yield? Because equal capital slots say nothing about income balance: a 5% slot in AVGO at a 0.7% yield dilutes the paycheck the same as a 5% slot of cash would, while the top 5 payers carry 41% of the entire income stream.

This quarter's trades attack the problem from both ends: exiting the yield diluter (AVGO) and the frozen payers (T, DLR) while adding higher-yield replacements pushes the forward yield toward the 4.0% target — and because T was the #6 income name, spreading its paycheck across three new positions makes the income stream less concentrated at the same time.

A rebalance isn't a finish line; it's a checkpoint. Four things are already logged for the Q4 policy review: whether this mandate should own an Industrials sleeve at all (the composition question behind most of the benchmark gap); confirming ACN cleared its entry yield floor and that the thesis is tracking; watching the band-edge names (PEP, PG, PFE) that sit just under 4%; and the first full quarter of reporting against SPYD, with SCHD printed alongside it. If a rule fires between now and then, you'll read about it here — the same way you read about T and DLR today.

If you want the condensed version of everything above — every trade, every weight, every sector exhibit, marked to market from the live position file — read the condensed rebalance report. And if you want to run this kind of discipline on your own portfolio, that's exactly what we built Dividend Wealth to do.