Seeking Alpha
Long only, value, portfolio strategy, dividend investing
Profile| Send Message| ()  

I am pleased to present our 2nd Quarter portfolio review. Our portfolio now contains 51 holdings and yields just below 5%. All of our holdings represent less than 3% of our overall portfolio with most positions under 2%.

Our portfolio was constructed from the lists of Dividend Champions, Challengers and Contenders (CCCs) maintained by Seeking Alpha Contributor David Fish and available here. Each stock from this list has the distinction of not only maintaining its dividend during the bear market of 2008 but growing it each year, with most growing at a rate greater than inflation. In addition to these core holdings, we own two additional stocks from the "Frozen Angel List" and four additional from the "Near Challengers List."

As retirees, our goal was to construct and maintain a portfolio that would substitute for selling holdings each month to provide our necessary retirement income. Our portfolio serves as a substitute for the 4% withdrawal of capital gain plus an additional withdrawal equal to inflation -- the rule recommended by our former advisors -- relying instead exclusively on income generated from sample dividends growing at a rate greater than inflation. We set two major goals for our dividend growth investments: increased annual income and capital preservation.

Since we began in February of 2011, I believe our continuing success as investors lies in having our portfolio business plan that sets out specific guidelines for buying, selling and on occasion trimming portfolio positions. Our plan, available here, was developed over a period of nearly a year after first defining our retirement income requirements and our personal risk tolerance. This plan defines our principal investment goals and sets out the clear performance benchmarks upon which success will be measured. What follows is the comprehensive quarterly review we conduct at the end of each quarter and as required by our plan.

Our portfolio began this year yielding just below 4.9%. Our overall goal for 2012 of 4.5% income exclusively from dividends was surpassed by 10%, an amount far greater than inflation for the year. It was exciting to experience firsthand the direct results of strong consistent dividend growth for the first time. Since our portfolio is designed to produce growing dividend income, applying the metric, referred to by many as the "chowder rule," at the time of purchase has proven instrumental in our success. Six months into the current year again, we are on track for another year of 10% dividend growth or more. As risk averse investors, our overall portfolio beta remains under .70 as required by our plan. It is currently registered at .65.

We experienced our first dividend cut this quarter when American Capital Mortgage (MGTE) cut its dividend. Our business plan requires that a position be sold following any cut in its dividend. After the sale of MGTE, we opened a new position in Pennant Park (PNNT). We also trimmed a number of holdings this quarter to help balance portfolio weights. Profits were taken from Kimberly Clark (KMB), McDonald's (MCD), Pepsi (PEP), Sunoco Logistics (SXL) and Magellon Midstream (MMP). We added to the following positions: Enbridge Energy (EEP), Realty Income (O), LinnCo (LNCO), Digital Realty (DLR), Triangle Capital (TCAP), National Health (NHI), Energy Transfer Partners (ETP), Enterprise Product Partners (EPD), Alliance Resources (ARLP), BCE Inc., (BCE), Lorillard (LO) and Southern (SO). These actions resulted in a slight increase in monthly dividend income.

Two of our holdings will spend the next 90 days on the bench due to losses in excess of 10% -- LNCO and DLR. They will be re-evaluated at the start of the next quarter, again as spelled out in our plan.

Capital preservation, a key objective for our portfolio, continues to exceed expectations, particularly for a portfolio with 35% less risk than the S&P 500 Index. We are pleased that since starting in February of 2011, our cumulative total return is 34.41% vs. 31.71% cumulative total return for the S&P 500 Index. Since we are in the distribution stage of our investments, capital returns do not directly affect our monthly income received from dividends. Capital gains do, however, help ensure our holdings maintain their dividends and hopefully increase the growth of their dividends. Remember it is through dividend growth, not capital growth, that our monthly income increases.

Below are the current holdings making up our portfolio. They were purchased at fair value or better between 2011 and today.

Stock

Ticker

Yield %

5-Year

DGR

%

10 Year

Ave Return

5 yr.

EPS

Growth

Omega Healthcare

Investors

OHI

5.9

9.4

29.56

7.3

Reynolds American

RAI

5.2

7.8

10.91

7.8

W.P.Carey

WPC

5.0

4.8

11.99

6.4

Pepsi

PEP

2.8

9.3

7.80

7.0

Procter & Gamble

PG

3.1

10.2

7.73

8.4

National Retail Properties

NNN

4.5

2.2

12.2

3.8

Altria

MO

5.0

15.0

17.1

7.4

Magellan Midstream Partners

MMP

3.7

6.8

21.60

(3.0)

Verizon

VZ

4.0

4.1

5.75

6.0

Conoco

COP

4.2

12.9*

13.5

4.53

Stock

Ticker

Yield %

5-Year

DGR

%

10 Year

Ave Return

5-Year EPS

Growth

Chevron

CVX

3.3

9.2

15.54

1.0

Health Care Reit

HCN

4.7

5.4

13.19

13.4

Digital Realty

DLR

5.25

20.6

16.29

8.1

Kinder Morgan Partners

KMP

6.1

7.4

13.54

11.8

Coke

KO

2.8

8.4

6.8

8.2

McDonald's

MCD

3.1

13.9

22.56

8.7

AT&T

T

5.0

4.4

7.01

6.1

Kimberly Clark

KMB

3.3

7.0

9.33

7.3

Sunoco Logistics

SXL

3.6

10.6

24.09

8.65

Plains All American

PAA

4,1

5.2

18.60

5.1

Stock

Ticker

Yield %

5-Year

DGR

%

10 Year

Ave Return

5-Year

EPS

Growth

Southern

SO

4.7

4.0

7.7

5.1

Darden Restaurants

DRI

4.3

25.8

9.66

10.8

Realty Income

O

5.1

1.5

13.28

4.5

Enbridge Energy Partners

EEP

7.0

3.0

8.33

4.7

BCE Inc.

BCE

5.6

16.4

11.83

2.5

Royal Dutch Shell

RDS.B

5.5

6.7

9.54

Nat. Health Inv.

NHI

4.8

5.8

19.48

10.0

Vanguard Nat. Resources

VNR

9.6

45.5

17.11

(12.7)

Avista Corp.

AVA

4.5

14.3

12.04

4.0

Lorillard

LO

5.0

17.3

21.6

8.6

Rogers Communication

RCI

4.1

38.2

27.26

9.3

Stock

Ticker

Yield %

5Year

DGR

%

10 Year

Ave Return

5 Year EPS

Growth

Lockheed Martin

LMT

4.2

22.2

7.55

4.6

Leggett & Platt

LEG

3.7

10.1

6.50

8.7

Enterprise Product Ptrs.

EPD

4.3

5.4

14.88

6.9

Westar Energy

WR

4.4

4.3

11.99

6.4

Enterprise Transfer Prt.

ETP

7.1

0.8

18.42

21.35

PPL Corp.

PPL

5.0

3.4

9.15

.3

Hasbro

HAS

3.4

18.1

14.37

7.4

Waste Management

WM

3.6

8.1

7.30

7.3

Astrazeneca

AZN

7.9

10.2

6.96

(3.5)

Triangle Capital

TCAP

7.7

9.6

22.38 3 yr.

15.0

Stock

Ticker

Yield %

5-Year

DGR

%

10 Year

Ave Return

5 Year

EPS

Growth

Paychex

PAYX

3.5

*

5.42

9.54

Phillip Morris

PM

3.9

12.8

25.86 - 3yr

11.03

Eli Lilly

LLY

3.9

2.7

1.48

(6.0)

Dr. Pepper Scrapple

DPS

3.2

22.3 - 3 yr.

6.9

Kraft

KRFT

3.6

3.35

Alliance Resources

ARLP

6.3

13.6

22.83

1.42

Bank of Montreal

BMO

4.8

4.6

12.15

7.12

LinnCo

LNCO

6.8

Pennant Park Capital

PNNT

10.0

25.5

B&G Foods

BGS

3.4

18.0

28.87- 5 yr.

14.2

As always I look forward to your thoughtful comments and suggestions on how we might improve the process by which we invest. Take care.

Source: Our Retirement Income Portfolio And Its 2nd Quarter Review