7 Additions To Retirement Income Portfolio

by: Dividend Sleuth

Since the June 10 update I raised the cash position from 11% to 18%. After some purchases during the June 19-21 sell-off, the cash position was reduced to 4%, well below the target of 12.5%. In light of this flurry of activity, I'm posting this update sooner than I had planned.

For some background about movement within my "shopping list," you can read "Shopping List Revisited" and the follow up article, "It Helps to Have a Shopping List."

Here is the current portfolio, followed by some commentary:

Company (Ticker) % of 6/21 Yr Market Basis Buy
Recent adds in italics Portf Price Div Yield More
Am St Water (NYSE:AWR) 2.6% 52.38 1.62 3.1% 53.20 46.33
Genuine Parts (NYSE:GPC) 2.8% 76.31 2.15 2.8% 47.81 71.67
Johnson & Jnsn (NYSE:JNJ) 3.1% 82.20 2.64 3.2% 58.86 75.43
Vodafone Grp (NASDAQ:VOD) 2.0% 27.27 1.51 5.5% 27.32 26.17
Nat'l Ret Prop (NYSE:NNN) 3.0% 32.19 1.58 4.9% 23.69 31.60
Realty Income (NYSE:O) 4.2% 40.83 2.18 5.3% 44.00 39.64
Kinder Morgan (NYSE:KMP) 3.0% 80.67 5.20 6.4% 82.84 78.79
WP Carey Inc (NYSE:WPC) 4.4% 63.66 3.36 5.3% 33.53 62.52
PennantPark (NASDAQ:PNNT) 2.4% 10.84 1.12 10.3% 10.98 10.19
Southern Co (NYSE:SO) 3.6% 43.10 2.03 4.7% 42.99 40.60
NuSTAR Energy (NYSE:NS) 4.5% 43.85 4.38 10.0% 46.47 41.71
AGL Resources (NYSE:GAS) 0.4% 42.19 1.88 4.5% 41.53 40.87
Nat Res Prtnrs (NYSE:NRP) 3.6% 21.51 2.20 10.2% 20.38 20.37
Digital Rlty Tr (NYSE:DLR) 3.0% 58.34 3.12 5.3% 59.79 54.26
Starwood Prp (NYSE:STWD) 4.8% 23.39 1.84 7.9% 19.89 22.72
Eaton Corp (NYSE:ETN) 2.8% 63.96 1.68 2.6% 37.93 55.14
LinnCo (LNCO) 4.3% 36.98 3.08 8.3% 38.28 32.94
EPR Properties (NYSE:EPR) 2.9% 49.01 3.16 6.4% 51.44 45.14
Prospect Cap (NASDAQ:PSEC) 5.5% 10.52 1.32 12.6% 11.23 9.81
LTC Properties (NYSE:LTC) 3.1% 37.27 1.86 5.0% 31.14 33.82
PPL Corp (NYSE:PPL) 4.3% 28.98 1.47 5.1% 28.20 28.00
Monmouth Rl Es (NYSE:MNR) 1.4% 9.68 .60 6.2% 9.80 9.23
Annaly Cap Mgt (NYSE:NLY) 4.7% 12.66 1.60 12.6% 15.12 11.43
Chmbrs St Prop (NYSE:CSG) 3.9% 8.86 .50 5.6% 9.62 8.33
BlRk Util & Infra (NYSE:BUI) 2.6% 17.45 1.45 8.3% 18.57 15.26
Etn Vnce BW Op (NYSE:ETV) 2.5% 12.94 1.33 10.3% 12.80 11.57
NFJ Div In & Prm (NYSE:NFJ) 2.4% 16.11 1.80 11.2% 16.47 12.86
Etn Vnce Gl BW (NYSE:ETW) 4.1% 11.02 1.17 10.6% 11.47 9.75
Nuveen Eq Prem (JPG) 4.0% 13.57 1.12 8.3% 14.10 11.20
Cash 4.0%

American States Water Company

AWR is the parent company for Golden State Water and American States Utility Services. AWR provides water service to one out of 36 Californians in 75 communities in 10 counties in northern, coastal and southern California. AWR also provides electricity to 23,250 customers in the Big Bear recreational area through Bear Valley Electric Services. AWR provides operations, maintenance and construction management services for water and wastewater systems on military bases throughout the country.

Total capitalization is less than $800 million. Long-term debt as a percentage of capital is 41.7%. The company has raised dividends at least annually since 1954, which tops the Mergent's Dividend Achiever list, along with Proctor & Gamble (NYSE:PG) and Diebold (NYSE:DBD). I've looked at this company occasionally for many years. It always seemed to be flat, with tiny dividend increases. The company has experienced stronger growth in recent years. Pre-tax profit rose from $29.7 million in 2008 to $54.1 million in 2010 to $90.1 million in 2012. The historical sales growth for the last five years has been 9.6% and the earnings per share growth has been 21.3%. EPS was $1.26 in 2008, and it was $2.82 in 2012. EPS for the trailing four quarters is $2.97. The current PE is 17.6 and the average PE for the past five years is 19.9. (Data from Morningstar)

The threshold for a 3% dividend yield is $54. I purchased AWR during the June 19-21 market swoon. The company recently announced an upcoming 2-for-1 stock split.

Vodafone Group

VOD is a British-based wireless telephone company with over 400 million customers in over 30 countries on five continents. VOD has over 150 million customers in India. The group is organized into three regions: 1) Northern and Central Europe, 2) Southern Europe and 3) AMAP (Africa, Middle East, Asia Pacific). Vodafone also holds a 45% interest in Verizon Wireless.

VOD customers by market: 37% India, 14% Vodacom (Africa), 9% Germany, 9% Egypt, 6% Italy, 5% U.K., 4% Spain, 16% Other. The 12% of VOD's customers with ongoing contracts provide 33% of revenue, 81% are prepaid and account for 28% of revenue, and 7% are enterprise customers that provide 23% of revenue; 16 percent of revenue is "other."

Total capitalization is just under 200 billion. Long-term debt as a percentage of capital is 22.4%. VOD's revenues have been essentially flat for the past five years, moving from $69 billion in 2008 to $70 billion in 2012. Earnings per share has decreased since a 2009 high of $2.61. Excluding "low" EPS years 2008 and 2012, the average dividend payout ratio was 57%. (Data from Morningstar)

Revenue and profit has been hurt by the European recession, particularly in southern Europe. The May 21, 2013 conference call cited some positives, such as growth in Turkey, India and Africa. A money transfer (by wireless phone) program begun in Kenya a few years ago is now being offered in other African countries. Forty percent of VOD's contract customers have chosen the "Vodafone Red," which was described by CEO Vittorio Colao as having "unlimited voice, unlimited SMS, generous data, and more transparency on the device cost."

Reading VOD material or a conference call transcript is like reading a National Geographic magazine. Three key things to watch for are: 1) a European economic recovery, 2) continued growth in emerging markets, and 3) its 45% interest in Verizon Wireless.

A May 3 Seeking Alpha article by Dividend Growth Investor cites VOD's inclusion in the Mergent's International Dividend Achiever list, having raised dividends each year since 1989. It is difficult to chart VOD's dividend. Dividends are paid in British pence, which is translated to U.S. dollars for ADS shares. Dividends are paid twice yearly, with an "interim dividend" and a "final dividend." There is a 1 cent per share charge for the pence/dollar conversion, and currency fluctuation makes comparisons difficult.

Morningstar indicates the following dividend payments by VOD: $1.24 in 2008, $1.25 in 2009, $1.34 in 2010, $1.41 in 2011 and $1.51 in 2012, with a current annual dividend of $2.06, which would provide a 7.55% yield at the current price of $27.27.

To keep things simple, I've listed $1.51 as the dividend in the above chart, which is the trailing calendar year dividend as reported by Morningstar. The "final" dividend from VOD will be determined on July 24.

Kinder Morgan Energy Partners

KMP is familiar to many Seeking Alpha readers. This company profile is included on its website: "Kinder Morgan is the largest midstream and the third largest energy company (based on combined enterprise value) in North America. We own an interest in or operate approximately 80,000 miles of pipelines and 180 terminals. Our publicly traded companies include Kinder Morgan, Inc. (NYSE: KMI), Kinder Morgan Energy Partners, L.P. , Kinder Morgan Management, LLC (NYSE: KMR) and El Paso Pipeline Partners, L.P. (NYSE: EPB)."

The profile states that it is "The largest natural gas pipeline and storage operator in the U.S., the largest independent transporter of refined petroleum products in the U.S., the largest independent terminal operator in the U.S., the largest transporter and marketer of CO2 in the U.S., and the only oilsands pipeline serving the West Coast of Canada."

The company's 2013 Q1 Report shows total assets of $35.1 billion and total liabilities of $22.9 billion (including $18.4 billion in long term debt).

In his June 2 Seeking Alpha article, Ron Hiram says "I am uncomfortable with KMP's distribution coverage. If distributions to KMR had been funded by cash instead of issuing additional capital, I estimate coverage for the TTM ended 3/31/13 would have been 1.03 as reported by KMP, and 0.90 if calculated on the basis of sustainable DCF." Perhaps this is one reason KMP's yield is higher than some of its MLP peers.

I initiated a position in KMP during the market downturn of June 19-21.

AGL Resources

Atlanta-based AGL Resources gets its name from the Atlanta Gas Light Company, which was founded in 1856 to install gas streetlights in Atlanta. In 2011, AGL Resources merged with Illinois-based Nicor and took Nicor's ticker symbol, GAS.

The company website states: "Our business segments consist of natural gas distribution operations, retail operations, wholesale services, midstream operations and cargo shipping." Their gas distribution segment "features seven natural gas utilities that safely deliver clean, efficient natural gas to nearly 4.5 million customers and is the largest component of our business. These utilities construct, manage and maintain intrastate natural gas pipelines, distribution facilities and peaking and storage facilities."

At its 2013 Q1 earnings call company executive Peter Tumminello said GAS has a contract to provide UPS with 500,000 gallons of LNG (liquefied natural gas) per month for its fleet, mainly in the Tennessee area.

The company reported these earnings for the past five quarters: 2012 Q1 $1.16, 2012 Q2 $.30, 2012 Q3 $.08, 2012 Q4 $.84, and 2013 Q1 $1.31. The four-quarter trailing EPS is $2.53, for an EPS of 16.7. This is above the 5-year average PE of 13.9. The recent 5-year EPS trend shows increases through 2010, and a dip from $3.00 a share to $2.12 in 2011 (the year of the AGL/Nicor merger). Earnings grew to $2.31 in 2012. The average dividend payout ratio for 2008-2010 was 59.2%, which rose to 89.6% in 2011 and came down to 74.9% in 2012. Total capitalization is just under $8 billion. Long-term debt as a percentage of capital is 41.8%. (Data from the company and from Morningstar)

I owned shares of pre-merger AGL but sold prior to the merger. Enough dust has settled now, I believe, to merit a re-entry. So, I purchased an initial position during the downturn of June 19-21.

Digital Realty Trust

DLR's website offers this profile: "Digital Realty Trust, Inc. focuses on delivering customer driven data center solutions by providing secure, reliable and cost effective facilities that meet each customer's unique data center needs. Digital Realty's customers include domestic and international companies across multiple industry verticals ranging from information technology and Internet enterprises, to manufacturing and financial services. Digital Realty's 122 properties, excluding three properties held as investments in unconsolidated joint ventures, comprise approximately 22.7 million square feet as of April 26, 2013, including 2.6 million square feet of space held for development. Digital Realty's portfolio is located in 32 markets throughout North America, Europe, Asia and Australia."

This real estate investment trust leases facilities that are specially designed to meet the infrastructure needs of technology companies (electrical, HVAC, emergency power supply, floors/ceilings designed for elaborate wiring), etc. Tenants (with annual base rent percentages) include: CenturyLink (9.1%), Telx (4.3%), Softlayer (4.0%), Equinix (3.3%), Morgan Stanley (2.7%), Facebook (2.6%), AT&T (2.5%), Verizon (2.2%), Deutche Bank (2.1%), NTT Communications (1.9%). Tenant type by percentage of annualized rent: IT Services (29%), Telcom Network Providers (27%), Financial Services (19%), Other Corporate Enterprise (18%), Internet Enterprise (7%).

DLR has been in the news recently because a hedge fund has shorted the stock and is waging a negative publicity campaign against the company. Brad Thomas has written about this extensively, most recently in his June 21 article.

DLR reported these funds from operations per share for the past five quarters: 2012 Q1 $1.06, 2012 Q2 $1.09, 2012 Q3 $1.13, 2012 Q4 $1.02, and 2013 Q1 $1.16. FFO for the four trailing quarters is $4.40. The current annual dividend is $3.12, for a yield of 5.3%.

DLR's total capitalization is just over $8 billion. Long-term debt as a percentage of capitalization is 58.3%. The dividend has grown from $1.26 per share in 2008 to the current $3.12. PE ratios are not always helpful for analyzing REITs, but Morningstar reports these earnings per share for DLR: 2008 $.41, 2009 $.61, 2010 $.68, 2011 $1.32, and 2012 $1.48. The trend is steadily up, as it is for FFO and the dividend. The high price in the last five years was $80.59 (in 2012). The low price in the last five years was $18.00 (in 2008). (Data from Morningstar)

I made an initial purchase of DLR during the market downturn of June 19-21.

EPR Properties

From the company website, EPR targets "long-term investments in a limited number of market segments in which we maintain a depth of knowledge and relationships, and which offer sustained performance throughout all economic cycles. We typically structure our investments as triple net, placing the operating responsibilities and costs of the property on our tenants. We believe this structure translates to reduced risk and reliable cash flow.

"Our investment portfolio of over $3.1 billion includes specialty investments within our three primary investment segments of Entertainment, Recreation and Education. We currently have over 180 locations spread across 37 states with over 250 tenants."

EPR's portfolio includes these real estate properties in an Entertainment segment: 113 megaplex theatres, nine entertainment retail centers, and seven family entertainment centers. The company owns these properties in the Recreation segment: 13 metropolitan ski areas, three water parks and three golf entertainment complexes. EPR owns 44 real estate properties that are leased to public charter schools.

The company reports these funds from operations per share for the past five quarters: 2012 Q1 $.86, 2012 Q2 $.92, 2012 Q3 $.94, 2012 Q4 $.87, and 2013 Q1 $1.03. FFO for the four trailing quarters is $3.76.

EPR's capitalization is $2.84 billion. Long-term debt as a percentage of capital is 48.7%. The dividend was $3.36 per share in 2008, and was lowered to $2.60 in 2009. That level was maintained in 2010, and was raised to $2.80 in 2011 and to $3.00 in 2012. The current dividend is $3.16, for a yield of 6.4%. Revenues for the past five years reflect the recession and the recovery: 2008 $215.2 million, 2009 $198.1 million, 2010 $2.38.3 million, 2011 $230.0 million, and 2012 $235.1 million. (Data from Morningstar.)

I initiated a position in EPR during the market drop of June 19-21.

Monmouth Real Estate Investment Corporation

According to the company website, MNR was organized in 1968 as a real estate investment trust "specializing in net-leased industrial properties subject to long-term leases primarily to investment grade tenants." Current tenants include: Anda Pharmaceuticals, Inc., Anheuser-Busch, Best Buy, Caterpillar Logistics Systems, Coca-Cola, FedEx, Keebler/Kelloggs, Sherwin-Williams and Siemens. "The company's property portfolio consists of 72 industrial properties and one shopping center located in 26 states, totaling approximately 9.2 million square feet of gross leasable area. In addition, the company owns a portfolio of REIT securities."

MNR reported the following funds from operations (FFO) per share: For the 3 months ending 3/31/12, $.26, for the 3 months ending 6/30/12, $.11, for the 3 months ending 9/30/12, $.10, for the 3 months ending 12/31/12, $.17, and for the 3 months ending 3/31/13, $.21. (Data is from company's quarterly releases.)

MNR's capitalization is just under $600 million. Long-term debt as a percentage of capitalization is 42.1%. Revenue for the past five years: 2008 $24.6 million, 2009 $23.3 million, 2010 $32.9 million, 2011 $41.6 million, and 2012 $47.8 million. (Data is from Morningstar)

Monmouth's largest tenant is FedEx, with 43.1% of MNR's square feet and 52.7% of MNR's annual base rent receipts. In a January 25 Seeking Alpha article, Brad Thomas gives an in-depth analysis of MNR, with particular emphasis on the FedEx relationship.

I made an initial purchase of MNR on June 12, and another purchase on June 20.

Here are the sector goals and the current allocations:

S&P Sectors Goal Actual
Weight 6/21/13
11% Energy 7.5% 11.7%
3% Materials 2.5% 3.6%
10% Industrials 7.5% 2.8%
12% Consumer Discretionary 5.0% 5.7%
11% Consumer Staples 7.5% 0%
13% Healthcare 7.5% 6.2%
16% REITs (Financials) 20.0% 26.4%
BDCs (Financials) 5.0% 7.9%
18% Information Technology 2.5% 3.0%
3% Telecommunications 2.5% 2.0%
4% Utilities 12.5% 13.5%
Closed-end Funds 7.5% 13.0%
Cash 12.5% 4.0%

I have made some modification in the portfolio targets. I have begun to reduce exposure to BDCs (previously 10%) and CEFs (previously 20%). For purposes of this portfolio, three REITs are included in non-financial sectors (LTC is listed in the Healthcare sector, EPR is counted in the Consumer Discretionary sector, and DLR is included in the Information Technology sector.) If you put these three REITs in the Financial sector, it bumps the REIT percentage to 35.5%. Including the BDCs, this makes a heavy 43.4% weighting in financials. My goal is to move the portfolio closer to the "goal" column above and below.

The current portfolio yield is 7.2%. My goal is to lower this to around 6.0% to 6.5% by increasing the cash position, by adding some of the less represented sectors, and by further reducing the weight of CEFs and BDCs.

Goal Actual
All REITs 25% 35.5%
All Financials (REITs & BDCs) 30% 43.4%

Disclosure: I am long AWR, GPC, JNJ, VOD, NNN, O, KMP, WPC, PNNT, SO, NS, GAS, NRP, DLR, STWD, ETN, LNCO, EPR, PSEC, LTC, PPL, MNR, NLY, CSG, BUI, ETV, NFJ, ETW, JPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not intended to be a recommendation to buy a particular stock but rather as a suggestion for some stocks to study. Everyone's situation is different. Do your own due diligence.

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