It's been quite a while since I last wrote about what I've been doing to manage my wife's IRA, but that's not too surprising given that it's a very small portfolio with a very small value, generating very small amounts of dividends that I can then re-invest into it. However, having said that, it's actually been a busy couple of months for this Little IRA That Might. Without further ado, let's jump into the details.
To start off with, just like I did with my own IRA, I sold off the positions in Alliance Resource Partners, L.P. (ARLP) and MV Oil Trust (MVO) from my lady's IRA. I won't re-hash the reasons for these sales here, as you can read about why I came to the (personal) understanding that holding a Master Limited Partnership [MLP] such as ARLP in an IRA may not be the best way to invest in MLPs here. Likewise, I also felt the time was right to get away from MVO before dropping share value and the eventual expiration of this oil trust eroded away too much more value from her portfolio.
In retrospect, I probably shouldn't have put ARLP and MVO into my wife's IRA at the same time that I held them in my own IRA. I guess I was looking for an easy way to boost the yield on her portfolio, and both of these stocks had impressive numbers in terms of dividends and distributions. Yeah, I'll admit it: I was chasing yield.
So when the time came to dump these two out of my portfolio, I took the opportunity to do the same with hers. I'd still like to have and hold some ARLP, as I love this company and how it's managed to weather the anti-coal hate that is burdening its whole industry, but I will do so when I'm able to open a taxable account in which I can hold it, which won't be for a few more years at this point. But eventually, all the kiddies will have flown the coop and I'll have more expendable cash on hand with which to start having adventures with a taxable account.
The sale of ARLP and MVO from the wife's IRA meant that in order to maintain the same number of positions that had been there (9), I needed to replace them with a couple of stocks that were new and, hopefully, would prove to be better in the long term. I would like to grow her IRA up to 50 positions in the same manner that I'm growing my account, so that each position is relatively balanced vis-à-vis the others with a parity value of a 2% allocation of the total balance of the account. By reducing all positions to a low percentage allocation of the total portfolio, I limit any one position's ability to tank the entire ship should something untoward happen to it or its industry.
In order to figure out where to put these newly liberated funds, I of course turned to My Mad Method [MyMM] as I've applied it to her account. Looking at what I had on her wishlist of possible new positions, I decided that I wanted to really focus on dividend growth, and companies with a long history of growing their dividends, and not just yield for yield's sake. So I weighted the metrics Yield, 5 Year Dividend Compound Annual Growth Rate [CAGR], and CCC (Dividend Champions, Contenders and Challengers) up to 20% each, which gave these three metrics a weighting factor of 3.40 as compared to the remaining 14 metrics which retained their weighting factor of 1.00.
By weighting both Yield and the 5 Year Dividend CAGR, I was effectively weighting the Chowder Dividend Rule [CDR] number of all of the stocks on her wishlist. By weighting the CCC number that I'd assigned to each stock, I was further narrowing my search to companies with the best histories of consistently increasing their dividends over consecutive years.
The following was the resulting Top 5 positions out of 20, along with their Delta Ratio Reading results:
- NTT DoCoMo, Inc. (DCM) - Holy Cow!
- Kinder Morgan Management, LLC (KMR) - Screaming!
- Lockheed Martin Corporation (LMT) - Falling
- ExxonMobil Corporation (XOM) - Too High
- Procter & Gamble Company (PG) - Screaming!
Once again, DCM was at the top of the heap, but I still wasn't ready to jump into the Japanese telephony company's waters just yet. I knew that my wife wanted to have a strong energy presence in her portfolio, and I knew from past comments from chowder and others that KMR was a great alternative to its MLP big brother, Kinder Morgan Energy Partners, L.P. (KMP).
The only problem with KMR for me was that it didn't pay dividends in cash, but in new shares. This may not sound like such a big "problem" to have, but my philosophy has always been to re-invest cash dividends where I want to, rather than let the positions they come from grow on their own accord. As a result, I don't have any positions that have a Dividend Re-Investment Plan (DRIP) turned on in my IRA.
However, in this case, her portfolio being so small and really not generating that much in dividends on a quarterly basis yet, I reasoned that having one well respected dividend grower out of the whole bunch effectively DRIPping itself would still accomplish my goal of growing this little IRA into something that could substantially contribute to our income in retirement. So it was that I selected KMR and its (at that time) 6.29% yield as the first replacement for ARLP and MVO, even though it had a Delta Ratio Reading of "Screaming!".
The rest of her Top 5 were all good contenders for being selected next; but there were a few bumps in the road. First of all, I had my eye on LMT for my own IRA, and didn't want to get back into the trap of duplicating positions in both of our IRAs again, at least not at this stage of the game. Also, with BP, plc (BP), Crescent Point Energy Corporation (CSCTF.PK), Linn Co, LLC (LNCO) and now KMR in her stable, XOM, although a great stock with a fabulously low P/E and one I'd love to eventually own, posed too much of a risk of us being overexposed to energy across both of our IRAs, and especially in hers. So XOM didn't make the cut, either (this time).
That left PG in the Top 5, and when the Delta Ratio Reading said it was "Screaming!", it wasn't kidding. I've been tracking PG since October of 2011, and in that time it's gone up almost 19%, and has had a very steady upwards trajectory. I keep hoping and wishing for it to pull back a bit (well, quite a bit, actually) so I can bite some off in either of our IRAs, but I haven't been able to bring myself to pull the trigger, and it just keeps moving further and further away from my comfort zone for jumping in. Add to that a relatively pale yield of 2.97% at the time I was looking at it, and reminiscing about the fabulous yields of ARLP and MVO that I had to let go, I decided to once again pass on PG and hope for some point in the future that I could muster the guts to just buy it.
So at this point I still had a second replacement position to fill, and had talked myself out of the remaining members of the Top 5. What was I to do? Well, when in doubt, chase yield!
Just kidding, although that might seem to be what happened. In reality, at the time I was considering what to pick to fill the void in her IRA, I was also feeling more comfortable with owning mortgage-backed Real Estate Investment Trusts [mREITs], and their tasty yields. I already had nice positions in both American Capital Agency (AGNC) and Annaly Capital Management (NLY) in my IRA, and the #3 mREIT on my radar was American Capital Mortgage (MTGE). MTGE ranked in at a reasonably respectable 12th out of 20 on the wishlist for my wife's portfolio, and its yield of 14.3% would go a long way towards bringing the average yield of her portfolio up closer to where it was when it had ARLP and MVO in it. So, in the interest of some diversity and a bit of yield hunting, I made MTGE the next position in her IRA, bringing it back up to a total of 9 positions.
All of the above occurred in mid to late February, when a bit of writer's block (brought on by the workload of my day job) kept me from writing about it here on Seeking Alpha. As March rolled along I realized that the end of the first quarter of 2013 was approaching, and I really should consider making a one quarter contribution to my wife's IRA. Since she's over 50 the total I can contribute to her account this year is $6,500, so I cashed in a few of my employer's Restricted Stock Units [RSUs] that I still had on hand, and with a few clicks on Wells Fargo (WFC) online, I added $1,625 to her account and reset her MyMM spreadsheet to look for the next place to invest those funds.
At this point I decided to make a Great Leap and, in one fell swoop, add two new positions to her IRA and bring down the target parity number for percent allocation that all of her other positions were striving for by increasing the number positions from 9 to 11. Taking this step now would reduce the parity target from 11.11% to 9.09%, which would cause a few of the existing positions to slip above the new parity line, which is always a worthwhile result, at least in my mind.
This time, I adjusted her MyMM spreadsheet by adding quite a few new companies to her wishlist, trimming out some others that I'd become disillusioned with, and weighting the Yield and 5 Year Dividend CAGR metrics by 30%, upping these metrics' weighting factors to 5.10 each. In addition, I decided to narrow my search for the next two companies for us to hold by concentrating on stocks that appeared to be undervalued. To accomplish this second part, I also weighted the P/E Ratio metric and the Price-to-Book ratio by 30% as well. I also decided that having both the BMW RMS (Root Mean Square) Rank and BMW Return Factor Rank together was skewing results a bit too much in favor of those companies whose stocks were well below their historical averages, in essence giving the BMW Rank a double weighting, so I "turned off" the BMW Return Factor Rank by setting its weight to 0.00%. All of this helped things to line up nicely, and resulted in a new Top 5 out of a possible 15:
- NTT DoCoMo, Inc. - Falling
- Textainer Group Holdings Limited (TGH) - Too High
- Universal Insurance Holdings, Inc. (UVE) - Screaming!
- Cablevision System (CVC) - Stable
- Chevron Corporation (CVX) - Screaming!
Taking this as a sign from the heavens, and noticing that DCM's semi-annual ex-dividend date was fast approaching, I finally bit on what has consistently been the #1 Ranked position, or close to it, for a long time now, and took half of her contributions and accumulated dividends and picked up a starting position in DCM.
TGH certainly was a tempting target for the #2 pick of this round of additions to my honey's IRA, with a fantastic CDR number of 56.4%, riding off of a recent yield of 4.28%. However, upon closer inspection of the component parts of its MyMM Ranking, I noticed that TGH's TTM Cash Margin was ranked absolutely last at an alarming -324.41%! That did not bode well for TGH's ability to maintain the incredible growth to its dividend that made it otherwise so appealing, so I immediately struck it off the Top 5 list.
UVE looked like a distinct possibility, but after a second look I realized that it wasn't even a Dividend Challenger, whereas CVC was, and CVC had a much higher CDR of 41.55% compared to UVE's CDR number of 14.96%. I was also a little uneasy about investing in such a small insurance operation as Florida-based UVE, even in such a (currently) little portfolio. I've had my eye on CVC since June of 2012, and have watched it appreciate nicely during that time, up over 16%. So I monitored the whole watchlist for about a week, and watched as CVC took a bit of a hit during that period, while UVE kept "Screaming!" ahead. At that point I decided to go with the company that had a better history of consistently growing its dividend, and opted to finally pick up CVC as the second new addition to my wife's IRA.
I told you it's been a busy two months! Here's how things stand now with my wife's IRA:
The Clorox Company
Crescent Point Energy Corp
Cablevision Systems Corporation
NTT DoCoMo, Inc.
Kinder Morgan Management, LLC
Linn Co., LLC
American Capital Mortgage
Republic Bancorp, Inc. - Class A
Westar Energy, Inc.
Prior to selling ARLP and MVO, her IRA's average yield was 5.584%, and as you can see it now stands at 5.554%, so I'm pretty happy about that. Parity for her now is a 9.09% allocation, which 5 out of the 11 positions in the portfolio now have, with a few more that aren't too far behind that. So all in all, things are looking good for this little IRA, but we've still got a long way to go, so stay tuned!
Additional disclosure: 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.