I first wrote about how I've taken an active role in managing my wife's IRA and the positions in it in late November of last year. Since then, I've been waiting for dividends to accumulate so that I can make some additional purchases for the account without burning through the 100 free trades that we get from Wells Fargo (WFC) too quickly. In addition to the small amount of dividends that have accumulated in her IRA since late last November, I was able to make a $1,500 2012 contribution to her account last week after receiving part of my semi-annual bonus, which gave me a bit more cash to work with. So the time has come to do some trading and see where we stand with this little nest egg.
So Long, MAKO, and Best of Luck
To start off with, I decided that after watching MAKO Surgical (MAKO) flounder around for a few more months, I needed to stick to my Dividend Growth Investing [DGI] guns and sell it since it pays no dividend, even though we took a horrendous -67.55% loss on this small investment. Thus, the last vestiges of my dalliance with speculation have been shed from my household's IRA accounts, and my wife's IRA is fully focused on only dividend-producing equities.
I still think MAKO has a bright future ahead of it with its knee and hip replacement systems, but decided I didn't want to stick around and wait for it to finally get its act together and start hitting its sales numbers like Wall Street wants it to. I wish MAKO well, and also those who have decided to stick with it until it hits its stride.
Hello, Linn Co.!
In order to replace MAKO as a position in the wife's IRA, I finally purchased some shares of Linn Co., LLC (LNCO), the "umbrella" company of Linn Energy, LLC (LINE), a Master Limited Partnership [MLP], which I hold in my own IRA. As many folks will tell you, holding an MLP in a tax-deferred account such as an IRA tends to neutralize the tax advantages that investing in an MLP offers. However, I like the Linn family of companies and their distributions, so decided to start our "transfer" from LINE to LNCO by making this initial purchase in my wife's IRA now.
Looking at My Mad Method [MyMM] and how I've applied it to my wife's "superlist" combination of the stocks I've put on her watch list, plus the stocks she currently holds, LNCO scored very poorly, turning up with an unweighted MyMM Rank of just 29 out of 30. However, a primary cause for this poor score is that LNCO is a very new stock, having only been issued for the first time in Q3 of 2012; as a result, its scores for certain MyMM metrics such as Payout Ratio, 5 Year Dividend Compound Annual Growth Rate [CAGR], P/E, ROE and the BMW Method numbers are terrible. So, since LNCO is essentially just a holding company for LINE, I looked to LINE's much more impressive unweighted MyMM Rank of 7th out of 30, along with LNCO's 7.12% yield (which is close enough to LINE's yield of 7.46% for me) as the basis for selecting LNCO to replace MAKO in my wife's IRA.
This is where the bulk of the 2012 contribution money I mentioned above was put to work, to give her a good starting balance in this "replacement" position. As is the case with my own IRA, I'd like to grow the number of positions in my wife's IRA well beyond the current nine so that we're not too exposed to any one company taking a hit to its value, or its dividend. At only nine positions, that puts her "parity" number (the target percentage that represents the allocation of each position having an equal weighting in the portfolio) at 11.11%, which makes me a bit uncomfortable.
Unfortunately, looking ahead to expected expenses for this year, it's going to take a while for me to add more positions to her IRA and shrink that parity number down to a more tolerable level. This IRA is much smaller than mine was when I started writing about it here on Seeking Alpha, so it's going to take a concerted effort and some creative budgeting to scrape up the necessary funds to make the most contributions to it that I can each year. But you have to start somewhere, right?
But Wait, There's More!
As part of the aforementioned ongoing effort to achieve parity in the positions currently held in my wife's IRA, I used the larger portion of the dividends that had accumulated in her account since November to purchase an additional 50% more shares of Alliance Resource Partners, L.P. (ARLP), bringing the percent allocation of that position from 8.94% up to 12.51%, boosting it above her 11.11% parity level.
"But, wait!" I hear you cry in disbelief. "Didn't you just say that you were trying to move away from investing more in MLPs?" Well, yes, this is true, and it's also true that I hold quite a bit of ARLP in my own IRA. The way I see it, however, I had already gotten her into ARLP back in November, so adding to it now isn't quite the same as adding a brand new MLP to her portfolio. OK, maybe that's rationalizing a bit, but ARLP has been very, very good to me in my portfolio, and with a yield of 6.81%, it will pull its weight in terms of generating more dividends to plow back into my wife's portfolio in my efforts to bring other positions up to her parity level, and, hopefully, adding another position or two this year.
And to be honest, adding 50% more to her existing position in ARLP didn't involve that much of a cash commitment. ARLP is holds the #1 MyMM Rank in her portfolio, and it holds an unweighted MyMM Rank of #3 out of 30 on her superlist, so I felt pretty solid about bringing this position up to parity.
Once I do our 2012 taxes and get a feel for how it goes working with the dreaded K-1 forms (and see how things stand after factoring in the sale of another MLP, StoneMor Partners, L.P. (STON) earlier last year), I'll have a better feel for what it's like to hold an MLP in an IRA. Then I can make a more informed decision about whether to keep ARLP in our IRAs, or whether to seek safer ground in terms of potential UBTI tax exposure and dispose of the MLPs we hold in our IRAs sooner rather than later, and hope to be able to establish a taxable account in the not-too-distant future in which I can get back into the MLP game.
Last, but (hopefully) not least, there was enough cash left over after all of these other moves to add 22.2% more shares to her existing position in Westar Energy, Inc. (WR), bringing that position to within spitting distance of her current parity, with a 10.60% allocation of her total. Why WR and not something else? Well, it was the stock that had performed the least while still being within striking distance of hitting parity with this month's allocation of dividends and contributions, so it seemed like the best place to put the remaining batch of cash, improving her cost basis in it along the way.
Here's a look at my wife's IRA portfolio, including each position's Combined Rank, MyMM Rank, % Allocation of the total, and some other (I think) interesting numbers:
Alliance Resource Partners, L.P.
The Clorox Company
Crescent Point Energy Corp
Linn Co., LLC
MV Oil Trust
Republic Bancorp, Inc. - Class A
Westar Energy, Inc.
Obviously, MV Oil Trust is a bit of a disappointment, and while I've realized a 12.02% gain in ARLP since I started adding it to my portfolio back in May of last year, it's a wee bit down in my wife's IRA so far. Otherwise, year-to-date (such as it is), her IRA is out-performing the S&P 500 (SPY) by 1.97% (not including the recent contribution I made to it) and, much more importantly, the projected dividends that this portfolio will receive this year are a 106.01% improvement over the dividends that it received through all of 2012. So it's off to a nice start, I think.
This Little Engine That Can won't earn enough dividends through February to make it worthwhile to burn a free trade then, but by mid-March, we should have enough cash collected to do something worthwhile. I'll keep an eye on things and let you know when that happens.
(As always, please keep in mind that I am not an investment professional or advisor; I'm just a regular guy trying to manage my own IRA portfolios so that I can eventually replace my regular paycheck with the income from dividends from my investments when I retire. The purpose of this article is not to promote any one stock, but to document my process and journey of selecting stocks for my portfolios and, hopefully, watch them grow.)
Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.