Retirement Strategy: Team Alpha Update And Addition

by: Regarded Solutions

Prior to the end of the year, and while the share price is down, "Team Alpha" will be adding McDonald's (NYSE:MCD) back into the portfolio. If you recall we sold the stock at its all time high months ago and now that the price has dipped, and the dividend yield is over 3.60%, the stock once again becomes attractive for both dividend income investors as well as capital appreciation seekers.

MCD is a solid stock for our retirement portfolio, which now consists of McDonald's, Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Linn Co, LLC (LNCO), Wal-Mart (NYSE:WMT), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), and General Dynamics (NYSE:GD).

The Basic Fundamentals

This morning, Seeking Alpha published my in-depth look at why I believe McDonald's will be a solid stock for 2013. That article can be viewed right here. For Team Alpha's purposes, let me highlight the key fundamentals that drive the decision to purchase the stock today.

McDonald's: Price: $86.24/share, Dividend Yield: 3.60%, ESS Rating: Bullish

  • An enterprise value of nearly $100 billion.
  • A global footprint that far surpasses any other company in its business sector, with 33,000 locations worldwide.
  • Operating margins that exceed 30%.
  • Nearly $7 billion in operating cash flow.
  • A reasonable dividend payout ratio of only 53%, with a strong track record of dividend payments.
  • The stock goes ex-dividend on 11/29/2012, payable on 12/16/2012.
  • Nearly 70% of all outstanding shares are held by institutions.
  • A lowered P/E ratio for 2013 of 14.29 down from 16.85.

The stock has recently bounced off of its 52 week low of about $83.00/share, which is over 20% off of the $102.00/share high set back in January. I believe we could see the share price return to those high water marks rather quickly.

The recent management shakeup (Stratton replaced Fields as US President of Operations) noted in my previous article (see above) should have the company back on track in short order.

As you can see from this chart, the recent dip in revenues (the first in nearly a decade) was the driver behind the pullback in the stock price. Since the dividend has actually increased, buying the stock now makes sense for our retirement portfolio.

Price Dips Have Increased Dividend Yields For "Team Alpha"

Take a look at this chart showing the recent dips in each stock and the current yield:

Dip% Yield Now Stock
-2% 2.7 XOM
-3% 3.6 JNJ
-4% 5.2 T
-2% 3.3 GE
0% 10.5 BKCC
-4% 8.2 LNCO
-2% 3.3 PG
2% 2.9 KO
-3% 2.1 XLV
-4% 4.7 INTC
-4% 4.7 O
-3% 8.4 KFN
-9% 2.7 WMT
0% 3.1 CSCO
-5% 3.2 GD
0% 4.1 BMY

By picking and choosing which stocks you want to open a position, or add to one, you can tweak your dividends going forward. The yield on Team Alpha has been 4.62% overall. The chart shows that if one were to begin a portfolio now, using the same allocation as Team Alpha has, the total yield would be over 4.75%.

Here is the way Team Alpha is allocated: (Remember we use a baseball lineup analogy for our "team")

Starting Lineup Allocation% Goal Current Allocation %
O 6% 6%
KO 3% 3%
GE 8% 8%
JNJ 8% 8%
XOM 7% 7%
T 8% 8%
PG 6% 6%
WMT 6% 6%
CSCO 6% 6%
Starting Pitcher
LNCO 7% 7%
BMY 4% 4%
KFN 3% 3%
BKCC 3% 3%
GD 6% 6%
XLV 6% 6%
INTC 3% 3%
Cash 10% 10%

My Opinion

"Team Alpha" will be using cash reserves (dry powder) to open a new position in MCD today (8% allocation maximum). I feel that the stock has a 15-20% upside potential from here, and the dividend can be caught today for payment in December.

Refer to the in-depth article and review the fundamentals to determine if this stock fits within your portfolio.

Disclosure: I am long XOM, JNJ, GE, T, BKCC, KFN, WMT, MCD, GD, KO, XLV, O, LNCO, BMY, INTC, CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.