This is an update to my December 31, 2012 article, "A Retirement Income Portfolio."
Thanks to everyone who responded to that article. Several of you suggested more diversification. Several of you suggested using mutual funds or ETFs alongside (or in lieu of) individual stocks.
At year-end 2012, the portfolio consisted of 14 stocks plus a small position in one closed-end fund that writes call options. I try to follow each stock closely by keeping up with Seeking Alpha articles, press releases, and quarterly earnings calls. My general rule of thumb has been to limit a single stock to 5% of the portfolio, but in 2012 I sold some stocks that I believed were a bit overpriced. Each of the remaining stocks averaged about 7% or so of the portfolio.
Beyond the stocks in the portfolio, I track about 35 additional stocks, mostly blue chips. I monitor these to see whether any of them are approaching a target "buy price." If a stock approaches the buy price, I'll do more study to see if it is a candidate for purchase. At year-end I wanted more diversification but only one of my "prospects," Diebold (NYSE:DBD), was within 10% of the target buy price.
In January I began to adjust the portfolio. I sold some shares in the five REITs, bringing NNN down from 6.9% of the portfolio to 4.9%; WPC down from 7.9% to 5.1%; STWD down from 7.4% to 5.0%; NLY down from 6.8% to 5.0%; and LTC down from 7.8% to 4.8%. I reluctantly closed out my position in UHT, which was 7.3% of the portfolio at year end. My cost basis in UHT was $37.61, with an initial purchase in February, 2008 (at a yield of 6.7%) and a final purchase in August, 2012. One of the purchases was at a 7.6% yield. I believe it is a soundly managed REIT. It has increased its dividend annually since 1987, including the recession years, and I would not hesitate to own it again. When I sold it, UHT was yielding 4.7%. Part of me said to hold 5% in UHT and sell NLY. Part of me said I'll have a chance to sell NLY at a higher price and buy UHT at a lower price (or a higher yield) than present. We'll see which part of me was right.
I lowered the utility stocks by bringing SO down from 6.9% to 4.9% and PPL down from 7.1% to 5.0%.
I sold a few shares of NS and NRP as they rallied in the New Year. NS went from 7.5% of the portfolio to 7%. NRP went down slightly, from 7.5% to 7.4%. I sold a few shares of ETN (7.6% to 5.4%) and LNCO (7.0% to 6.1%) just for diversification.
The percentage of cash was raised from 2.5% to 5.7%.
My goal is to lower the percentage of all the stocks in the portfolio down to 5% each. I may rotate out of NLY entirely. The inner debate continues on this one.
During the closing months of 2012, I read Douglas Albo's Seeking Alpha articles about closed end funds, so I began to research. I was intrigued by funds that write call options to enhance yield, although initially I approached this practice with skepticism. Near year end, I established a small position in the Nuveen Equity Premium Advantage Fund (NYSE:JLA).
In addition to writing options, some funds use leverage. Douglas Albo's articles explain those dynamics. One of the lessons I learned in the Great Recession was to avoid highly leveraged companies and to avoid funds that use indebtedness to enhance yield. So, I eliminated from consideration CEFs that use leverage.
I decided to include in the portfolio some closed-end funds that write (or sell) call options. This would broaden the diversification of my portfolio, particularly through funds that invest in large cap stocks, tech stocks, and international stocks. Funds that write call options can give you a higher yield if you are comfortable with receiving distributions that are largely return of capital. Some people are not comfortable with this, because in lean times many funds have returned capital to maintain payouts because their portfolios were losing money. Seeking Alpha articles by Douglas Albo and others explain that this is a tax strategy resulting from the nature of the income provided through the options strategy.
I decided to invest in five call-writing CEFs, each representing about 5% of the portfolio, for a total CEF percentage of 25%. My 2013 portfolio allocation goal is to hold roughly 10% in cash (particularly when the overall market is up) and 65% in individual stocks. The revised sector goals are:
10% Healthcare (including one healthcare REIT)
15% Utilities (two stocks and one utility CEF)
20% Other CEFs.
During the first three weeks of January I invested in the following five CEFs, which together now make up a bit less than 25% of the portfolio:
BlackRock Utility & Infrastructure Trust (NYSE:BUI). The yield at the $18.63 January 18 market price was 7.8%.
As of 9/28/12, BUI's holdings included 29.3% electric utilities, 19.2% multi-utilities, 13.6% diversified telecommunication services, 11.0% water utilities and 8.2% oil, gas and consumable fuels. "The Trust considers the "Utilities" business segment to include products, technologies and services connected to the management, ownership, operation, construction, development or financing of facilities used to generate, transmit or distribute electricity, water, natural resources or telecommunications and the "Infrastructure" business segment to include companies that own or operate infrastructure assets or that are involved in the development, construction, distribution or financing of infrastructure assets."
NFJ Dividend & Premium Strategy Fund (NYSE:NFJ). At the $16.53 January 18 market price the yield was 10.9%.
Allianz Global Investors manages this fund. According to their website, the 1,000 largest stocks are screened for low P/E, high dividend yield, and visible earnings. NFJ applies a quantitative grid measuring price momentum, earnings revisions, fundamental change, and insider trading. In-depth fundamental research is done on the remaining 250-300 companies focusing on earnings, cash flow generation, and product potential. They construct a portfolio of 40-50 companies and they regularly monitor for buy and sell candidates. They sell a stock when an alternative stock with equally strong fundamentals demonstrates a substantially lower price-to-earnings ratio, and/or a substantially higher dividend yield. NFJ utilizes both broad index options and narrower based sector index options with the objective of optimizing the correlation between the NFJ stock portfolio's sector allocation and the option strategy's exposure. Their holdings may include convertible securities. The fund's top holdings as of 12/31/2012 were: Pfizer (3.54%), GlaxoSmithKline PLC (3.08%), Total SA (3.05%), ConocoPhillips (2.96%), and AstraZeneca PLC (2.89%).
Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV). The yield at the $12.96 January 18 market price was 10.3%.
ETV owns individual stocks and writes call options on the S&P 500 Index and the NASDAQ 100 Index. As of 9/30/2012, their largest holdings were Apple (11.2%), Microsoft Corporation (4.9%), Google (4.1%), Oracle (2.9%) Intel (2.5%), QUALCOMM Inc (2.3%). This is clearly tech-heavy, but I own no individual tech stocks in the portfolio.
Nuveen Equity Premium Advantage Fund . The yield at the $12.44 January 18 market price was 9.1%.
Nuveen's website indicates that JLA invests in an equity portfolio that seeks to substantially replicate price movements of a 50% / 50% combination of the S&P 500 Stock Index and the NASDAQ- 100 Stock Index, respectively. The fund also sells S&P 500 and NASDAQ index call options in the same 50% / 50% ratio covering approximately 100% of the value of the fund's equity portfolio, seeking to enhance risk-adjusted performance relative to an all equity portfolio.
ING Global Advantage & Premium Opportunity Fund (NYSE:IGA). The yield at the $12.05 January 18 market price was 9.3%.
The ING website indicates that IGA Invests in 750 to 1500 common stocks, seeking to reduce exposure to individual stock risk. IGA seeks a target holding of 60% in U.S. stocks and 40% in international stocks. IGA sells call options on selected security indices and/or ETFs, on an amount equal to approximately 60-100% of the value of the Fund's common stock holdings and the fund hedges major currency exposure to reduce volatility of returns.
Each of these five CEFs is managed by a different company and there is some variety in the stocks they purchase. At the time of purchase, each of the funds sold at a substantial discount to the net asset value and each charges approximately 1% or less in net fees.
So, as of January 22, the portfolio consists of thirteen stocks and five CEFs:
Genuine Parts Company (NYSE:GPC) 3.7%
Johnson & Johnson (NYSE:JNJ) 5.5%
National Retail Properties, Inc. (NYSE:NNN) 4.9%
W.P. Carey Inc. (NYSE:WPC) 5.1%
Southern Co. (NYSE:SO) 5.0%
NuSTAR Energy L.P. (NYSE:NS) 7.1%
Natural Resource Partners LP 7.5%
Starwood Property Trust Inc. (NYSE:STWD) 5.0%
Eaton Corp. PLC (NYSE:ETN) 5.4%
LinnCo LLC (NASDAQ:LNCO) 5.6%
LTC Properties Inc. (NYSE:LTC) 4.9%
PPL Corp (NYSE:PPL) 5.0%
Annaly Capital Management Inc. (NYSE:NLY) 5.0%
BlackRock Utility & Infrastructure Trust 5.0%
NFJ Dividend & Premium Strategy Fund 4.9%
Eaton Vance Tax-Managed Buy-Write Opportunities Fund 4.9%
Nuveen Equity Premium Advantage Fund 4.9%
ING Global Advantage & Premium Opportunity Fund 5.0%
The portfolio yield as of January 22, 2013 was 6.7%, up from 6.4% at year-end.