Team Alpha Retirement Portfolio: The 1 Ingredient That Can Increase Your Income With Less Risk

Includes: BKCC, GE, JNJ, KKR, NLY, XOM
by: Regarded Solutions

Since I began sharing my strategy on dividend investing here on Seeking Alpha, I have faced plenty of dividend investors who are quite critical of some of my stock selections. Since I am not a "pure" dividend growth investor, it places me in the unique position of being some sort of hybrid investor who reaches too much for yield.

Nothing can be further from the truth. While I do seek out dividend opportunity stocks to increase my overall current yield, increase my income stream, and enhance my overall yield on cost, I also employ perhaps the most effective strategy at the same time; prudent allocation.

The Team Alpha Retirement Portfolio Seeks Income Alpha

Much has been written recently about total return versus income stream. Since there is never any perfect answer as to which focus is best, I have found that by taking advantage of riskier dividend opportunity stocks, with a prudent allocation of funds, an income seeking investor can lessen the loss of total return and increase the income stream at the same time.

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 Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE: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), and Wells Fargo (NYSE:WFC), and Intel (NASDAQ:INTC).

Just by glancing at the current make up of the stocks in this portfolio, any portfolio manager can see which stocks do not always belong in a prudent, SWAN retirement portfolio. I admit that for risk averse investors, they should seek calmer waters, but it just might be at the expense of having enhanced income.

Here is how the portfolio has performed as of the last update:

Stock #Shares 8/1/2013 TotValue Orig. Price
XOM 100 93/shr 9300 75
JNJ 100 94/shr 9400 62
T 100 36/shr 3600 27
GE 500 24/shr 12000 15
BKCC 600 10/shr 6000 10
AAPL 20 456/shr 9012 436
PG 100 81/shr 8100 61
KO 100 40/shr 4000 34
NEM 200 29/shr 5800 33
WFC 100 44/shr 4400 37
O 200 43/shr 8600 32
KFN 600 11/shr 6600 10
NLY 400 12/shr 4800 13
CSCO 400 26/shr 10400 18
CVX 50 126/shr 6300 116
BMY 100 44/shr 4400 32
MCD 100 99/shr 9900 86
CSX 200 25/shr 5000 19
F 300 17/shr 5100 13
INTC 200 23/shr 4600 24
Cash Rsvs x x 8317
Tot Value x x 145629

With roughly $137,000 invested, and a yield on cost of a drop over 5%, the annual income stream currently stands at about $6,850.

There are 3 stocks that can be classified by just about every "pure" DGI investor as being too hot to handle for a retirement portfolio; NLY, BKCC, KFN

Briefly, each of these stocks will never become typical dividend champions, as the businesses they are in fluctuate much too much for that steady, year in, year out, reliable dividend that will always be increased.

NLY is an mREIT and the ever changing world of interest rates are unpredictable. BKCC, and KFN are both in the business of either lending to, and/or taking equity stakes in either small or start up businesses that the regular banks shy away from lending. While this business has the risk of lending to less than pristine business entities, they also are held hostage by the changing interest rate environment.

That being said, and very accurately, these stocks have very attractive dividend yields.

  • NLY: 13.75%
  • BKCC: 10.13%
  • KFN: 8.01%

The problem for many income investors is that the yields are so attractive they "reach" for the dividends by putting far too much money, as a percentage of the overall portfolio value, at risk. When they do, and the stocks get creamed, as has been the recent case for NLY, these very same investors head for the hills and take unnecessary losses.

Take a look at the amount of money allocated in each of these three stocks in the Team Alpha Portfolio:

  • NLY: 3%, $4,800
  • BKCC: 4.3%, $6,000
  • KFN: 4.5%, $6,600

While each of these stocks carry greater risks than the plain vanilla DGI stocks in the portfolio, by keeping an allocation of about 3-4% in each of these equities, an income investor can enjoy the dividends they produce. Combined, these 3 stocks currently pay about $1,768 annually, in dividends. That works out to about 38% of the annual dividend stream currently being received.

With a total portfolio value of $145,000, and only $17,800 "at risk" in total, the portfolio can very easily take a few bumps and bruises in these stocks while they continue paying us quite well. There is the risk that all 3 could disappear tomorrow, and that would sting. The likelihood of that event actually happening is slim to none.

Of course XOM, JNJ, and GE also have that risk, albeit much less, but the exposure in those stocks is currently $30,700 which is pretty close to double the exposure. Of course that's the way it should be in a well allocated dividend income portfolio.

Less exposure in riskier assets, more exposure in less riskier assets.

Prudent Allocation And Diversification, Combined With Active Portfolio Management, Can Increase Income And Reduce Risk

The reason I can suggest taking a position in NLY, or BKCC, or KFN at current share prices almost has nothing to do with the actual precise share price. Is the entry price of importance? Of course, but it is secondary to me.

I know that I can, and will, monitor the actions and the fundamentals of these stocks, and have the flexibility of selling each, or all, if events dictate that action. I also know that I want to have the income being paid to me while I own the stocks, and continue to search for those delectable dividend opportunities, perhaps in greener pastures if need be.

That is my Alpha for a secure financial future. What is yours?

Disclosure: I am long AAPL, BKCC, BMY, CSCO, CSX, CVX, F, GE, INTC, JNJ, KFN, KO, MCD, NEM, NLY, O, T, WFC, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.