We open up our eyes every day and are confronted with all sorts of investment decisions that could be made. The Federal Reserve is squawking about tapering off of QE, or not. The market indices are making new highs almost every day, in spite of a relatively lousy economy, with nearly 8% unemployment and no income growth for those lucky enough to even have a job.
As dividend income investors, we should have one focus: Making sure our stream of income stays consistent and reliable. The temptation to do something, anything, is greatest when we view the markets as in a state of confusion. Sometimes we hold our breath just waiting for the bottom to fall out of all of our investments.
The financial world we live in is confusing and challenging at best. I believe the best way to approach our retirement investment portfolio can be summed up in a few basic steps:
- Review the core stocks in your portfolio.
- Make sure nothing has fundamentally changed in each company and business sector that could have a long term negative impact on your income.
- Make certain your expenses are less than your income.
- Continue saving money at an ever increasing pace if possible. This could include both cutting expenses as well as adding more dollars to your savings strategy. (Dollars NOT spent are worth just as much, if not more, than extra savings)
- If a core position has dropped in price and can be purchased to increase your income stream, consider adding shares if the company fundamentals have not changed.
- Avoid selling for no other reason than you "feel" the current share price is too high.
- When in doubt, do absolutely NOTHING.
Seems easy right? Actually it is the toughest test of a dividend income investors discipline.
Team Alpha Retirement Portfolio Is Being Put To The Test
The Team Alpha portfolio consists of Ford (NYSE:F) Chevron (NYSE:CVX) Apple(NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson(NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp.(CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Newmont Mining (NYSE:NEM), Intel (NASDAQ:INTC), and Wells Fargo (NYSE:WFC).
With the Dow at all time highs and the S&P 500 and Nasdaq making multi-year highs every day, many investors would say the market, and the stocks in this portfolio, are overvalued. While they are certainly more expensive than when we first bought them, I do not believe they are overvalued at all (yes, several of the stocks are under our original price).
Several basics I would look at for a quick view to suggest an overvalued portfolio (or undervalued for that matter), is the current P/E ratio, and the current Price/Book value. I would also look at the current dividend yield of each stock as well.
Let's take a look at our portfolio:
|Stock||Forward P/E||Price/Bk||Yield Now|
As of July 12th, the PE ratio of the S&P 500 stands at an estimated average of 19.42, which happens to be lower than it was in 2010. While it has risen the last 2 years, it is far from the averages of the early and mid 2000s when the "norm" was averaging OVER 23.0.
The average P/E of our portfolio currently stands at 13.91. Well below the average.
The current Price/Book value of the S&P 500 stands at 2.52 which also happens to be well below the early to mid 2000s ratio of nearly 3.75. It is only up about .50 from 2010 as share prices have recovered.
The average Price/Book of our portfolio currently stands at 2.74. Well within range of the averages.
While our current dividend yield on cost stands at a sweet 5.01%, based on our purchase prices, if one were to allocate an equal amount of dollars in each position (not something I would suggest by the way) the current yield on cost of this portfolio is 4.39%.
By using our current allocations, an investor starting a position today would have a dividend yield on cost of roughly 3.95%. Yes, our portfolio is "tweaked" with some "dividend opportunity stocks, such as Annaly (NLY), BlackRock Kelso Capital (BKCC), and KKR Financial Holdings (KFN). Given our allocation into these particular stocks, the risk/reward is acceptable as long as we monitor these stocks more closely.
Here is our current allocation:
|Stocks Held||Allocation %|
NLY, BKCC, and KFN make up only 12% of our portfolio and the riskiest of them all, NLY, only has a 4% allocation. I would monitor that particular stock more closely than any other stock within the portfolio.
Are There Any Stocks Within The Portfolio Worth Adding To Now?
As I have said previously, this portfolio can take a breather, and aside from following the basic steps outlined above, doing nothing for now is a very viable strategy. That being said, there are a few stocks I happen to believe are undervalued based on the metrics I have outlined, as well as our allocations.
I would look at the following stocks to potentially increase our position in:
Each of these stocks has a relatively low P/E ratio, as well as very modest Price/Book value. Based on our current allocations, I would take a look at each of these stocks to bump up our allocation by 1%-2% maximum, on any price dip of 5% or greater.
By judiciously adding shares, we could tweak our dividend income stream, as well as have some room for capital appreciation.
While I might have jumped the gun by adding more NLY when I did, I believe that the portfolio can handle a 4% allocation. That being said, I also believe that by following some very basic dividend income investing strategies, we can learn to become more disciplined to our overall approach, and give our financial future the best chance to succeed for the long term.
Stay focused out there!