My Wife's IRA: Cutting Losses, What Next To Buy, And Why? - August 2013

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 |  Includes: BP, CBRL, CL, CLX, CPG, CVC, CVX, DCM, DRI, KMR, LINE, LNCO, MCD, MTGE, PEP, PG, RBCAA, RCI, SO, TGH, WR, XOM
by: J.D. Welch

Once again it's time to take a look at my wife's IRA and see what, if anything, I've been able to do. Or, in this case, what I felt I had to do.

Stopping The Bleeding

In the three months since I last took action in my wife's IRA account, I've been watching it closely and trying to determine what would be the best next steps to take with it. I had hoped to make a somewhat substantial contribution to the account, aiming for one half of a one quarter of a year's allowance, which comes out to $812.50, but unfortunately we've had some unexpected expenses crop up and the outlook for our cash flow at the end of the year wasn't looking very healthy.

Since this is a rather small account, it doesn't accumulate much in the way of dividends on a monthly basis; not in the same manner that my IRA account does. This limits the things I can buy to add to existing positions, and makes it very difficult to start a new position with any meaningful amount of cash. I had hoped that the 1/8th annual contribution could be used to initiate a new position in my wife's IRA so that the total number of holdings would increase to 12. This would help all of the positions that were below the current "parity" target of a 9.09% allocation of the account's total value to improve.

However, what really caught my eye were two stocks that were having some very serious problems, and were dragging the entire portfolio down in value. These were Linn Co., LLC (NASDAQ:LNCO) and American Capital Mortgage (NASDAQ:MTGE). MTGE was having the same problems as the rest of the mREITs across that sector, so that was no surprise, but I spent a good deal of time considering whether continuing to hold on to this position for its beefy 16% yield was worth the risk that it posed to this somewhat fragile account. MTGE was down -14.29% in my wife's IRA from its initial cost back in early February of this year, which by itself isn't that terrible, but the continued outlook for mREITs and the small balance of the account had me concerned about hanging on to it.

LNCO, on the other hand, had recently run into trouble with the SEC because its parent company, Linn Energy (NASDAQ:LINE), had been using non-GAAP numbers to report recent earnings, and its price had taken a considerable hit. LNCO had shed -30.24% of its value in my wife's account since I switched over from the Master Limited Partnership [MLP] LINE to LNCO in late January to avoid any issues in future years with holding an MLP in an IRA.

After reading a few articles about Linn's troubles and the possibility of future sanctions by the SEC (which would result in even further losses to what had become an already diminished holding), I decided that the time had come to part ways with LNCO and seek a safer harbor for the remaining cash. This was disappointing in that we would be losing the 11.89% yield that LNCO had been producing, but discretion seemed the better part of valor in this case, and there were a few very promising prospects on my wife's My Mad Method [MyMM] watchlist that I felt would make suitable replacements.

Finding Replacements

So it was that I sold off the MTGE and LNCO positions in an effort to limit further losses, albeit at the cost of some very juicy yields. Those yields, on the other hand, were looking a bit shaky, so I set my sights on a couple of replacements in order to keep the number of positions in my wife's IRA at the current 11.

Using the MyMM spreadsheet, I adjusted my wife's watchlist for possible new additions by weighting the Yield and 5 Year Dividend CAGR from the baseline 6.25% (which produces a weighting multiplier of 1) to 30% (resulting in a weighting multiplier 4.80). Weighting both of these metrics with the same multiplier is essentially the same as weighting by the Chowder Dividend Rule [CDR] number. Since I'm looking to load up my wife's IRA with as many Dividend Champions, Contenders and Challengers [CCCs] that I can as I add new positions, I also weighted the CCC Rank by 30%. Those weightings produced the following results for the Top 10 options for new positions (ordered by the calculated Weighted MyMM Rank):

Orig

Weighted

Delta

MyMM

MyMM

MyMM

Ratio

Rank

Avg

Rank

Company

Ticker

Reading

CDR

8

7.8

1

Darden Restaurants, Inc.

(NYSE:DRI)

Falling

29.0%

4

7.9

2

Rogers Communications

(NYSE:RCI)

Holy Cow!

20.8%

2

8.5

3

Chevron Corp

(NYSE:CVX)

Too High

11.3%

9

8.9

4

Cracker Barrel Old Country

(NASDAQ:CBRL)

Screaming!

20.7%

3

9.1

5

ExxonMobil Corp

(NYSE:XOM)

Stable

11.1%

5

9.7

6

Procter & Gamble Company

(NYSE:PG)

Screaming!

12.4%

5

9.9

7

Colgate-Palmolive

(NYSE:CL)

Too High

13.2%

11

10.2

8

Southern Company

(NYSE:SO)

Buy!

8.3%

1

10.2

9

Textainer Group Holdings Limited

(NYSE:TGH)

Stable

23.1%

7

10.9

10

PepsiCo, Inc.

(NYSE:PEP)

Too High

9.0%

Click to enlarge

Looking at these results, and the underlying numbers behind them, it was clear to me that DRI and RCI, with yields of 4.51% and 4.37% respectively, were solid contenders for taking the place of LNCO and MTGE. Their Weighted MyMM Averages were different by only 0.1, and significantly smaller than #3 Ranked CVX. Also, their Delta Ratio Readings, while not always a deciding factor for me, were a good indication that despite the overall run up in the market in recent weeks, the prices of these two stocks were in ranges that made them very appealing. In addition, both DRI and RCI were Dividend Challengers, with DRI having had 9 straight years of growing its dividend, and RCI 8 straight years.

Also, by selecting DRI and RCI, I would be adding some nice diversity to not only my wife's IRA, but our overall portfolio as a couple. Some readers have expressed concerns in the past that I was overly exposed to the energy sector, and while I found Dividend Champions CVX and XOM to be very tempting, their CDR numbers were significantly lower than those for DRI and RCI, as well as being below the 12% threshold that is recommended for non-utility companies. This helped account for CVX and XOM having poorer Ranks than DRI and RCI.

All of these candidates are companies that I'd like to own, but in the end I had to make choices, so I went with the MyMM Ranked #1 and #2 companies and used the funds that I'd liberated by shedding LNCO and MTGE (plus a bit of accumulated dividends) to initiate a 6.48% allocation position in DRI and a 6.67% allocation position in RCI.

But Wait, There's More

Remember how earlier I had mentioned that I wanted to make a small contribution to my wife's IRA for this quarter? Well, after reviewing my finances, and reminding myself that we needed to make hard budget decisions in order to make sure we saved and contributed as much as we could to both of our IRAs each year in order to enable us to retire anywhere close to comfortably, I realized that I needed to think outside the box a little.

I knew I couldn't contribute enough to initiate a 12th position in my wife's IRA at this time, so I looked over the existing positions, including the new DRI and RCI spots, to see where, if anywhere, an even smaller contribution could be applied.

I reasoned that while I didn't feel comfortable making an $800+ contribution at the moment, with just a little belt-tightening we could afford a $400 contribution. (That's not going too far "out of the box," I'll admit, but until I looked at the problem from the perspective of "What can I do?" instead of "How can I do what I want to do?" I was stuck with the notion that I couldn't make any contributions at this point in time.)

Combined with what was left over from buying DRI and RCI, plus a little bit of dividend income that trickled in unexpectedly, I turned to the existing positions worksheet for my wife's IRA in the MyMM spreadsheet to see what the likely candidates might be.

In this case I weighted everything with the baseline 6.25% weighting percentage except for Yield, 5 Year Dividend CAGR (which combined denote the CDR Rank), and Percent Allocation, all of which I weighted to 30% for a 4.80 weighting multiplier. Here are the results, once again sorted by the final Weighted MyMM Rank:

Orig

Weighted

Delta

MyMM

MyMM

MyMM

Ratio

%

Rank

Avg

Rank

Company

Ticker

Reading

Alloc

1

6.5

1

NTT DoCoMo, Inc.

(NYSE:DCM)

Too High

4.94%

2

7.1

2

Rogers Communications, Inc.

RCI

Buy!

6.67%

3

7.5

3

Kinder Morgan Management, LLC

(NYSE:KMR)

Stable

9.38%

6

8.0

4

Darden Restaurants, Inc.

DRI

Buy!

6.48%

3

9.5

5

BP plc

(NYSE:BP)

Buy!

6.90%

9

9.8

6

Cablevision Systems Corporation

(NYSE:CVC)

Too High

7.09%

3

10.8

8

McDonald's Corporation

(NYSE:MCD)

Too High

12.90%

10

11.0

9

The Clorox Company

(NYSE:CLX)

Too High

9.49%

8

11.7

10

Westar Energy, Inc.

(NYSE:WR)

Falling

9.78%

7

11.9

11

Republic Bancorp, Inc. - Class A

(NASDAQ:RBCAA)

Screaming!

10.00%

NR

NR

NR

Crescent Point Energy Corp.

(CSCTF.PK)

NR

13.54%

Click to enlarge

(You'll note that I don't rank CSCTF.PK in anything other than the final Weighted MyMM Rank, primarily because its current percent allocation is so much higher than any of the other holdings. With a yield of 7.51% and a price just below its cost basis, this Canadian energy trust is the last gem that remains from the old days when I used a professional broker to manage our IRAs. I consider it a "keeper", but don't include it in any rankings of all the other existing positions.)

Even though it had a Delta Ratio Reading of "Too High," DCM had the lowest percentage allocation out of her existing holdings, and (not surprisingly considering how I weighted the portfolio) the #1 Weighted MyMM Rank. What's interesting to note is that DCM also had the #1 Original (unweighted) MyMM Rank, as well. So, without further ado, and in plenty of time to catch the next ex-dividend date, I added 54.5% more DCM to the current position, bringing its percentage allocation up to a healthy 7.64%.

Finale

That does it for the recent activity in my wife's little IRA. Some of you might not agree with what I did in selling off LNCO and MTGE, but I thought long and hard about it and decided that what money remained from those positions would be put to better use adding the respectable yields of DRI and RCI to the portfolio. Adding more DCM was also a no-brainer at this time.

Next, I need to see if I can somehow manage to squeeze a bit more out of our budget, and pinch plenty more pennies before the end of the year, and see if I can somehow make a decent contribution to my wife's IRA. I might not be able to, and will then have to live with what little it generates in dividend income to add to existing positions, but then again, you never know what might happen in the months to come. Whatever happens, I will be sure to let you know.

Disclosure: I am long BP, CLX, CSCTF.PK, CVC, DCM, DRI, KMR, MCD, RBCAA, RCI, WR. 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.

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.