As 2013 unfolded, I became convinced that my Retirement Income Portfolio was too concentrated. My earlier opinion was that 15-20 was the maximum number of individual stocks that I could effectively manage.
Several other SA contributors, particularly Bob Wells, convinced me that the risk of too little diversification was greater than my risk of not adequately managing a larger portfolio, particularly if it included a good portion of dividend champions and dividend contenders (as defined by David Fish) and a number of stocks I have followed for many years, some of which I previously owned.
As the broad market advances moved higher, it appeared that Mr. Market's first name is Fickle. Market reaction to quarterly earnings reports has grown more extreme and more vulnerable to "headline risk" (note the recent big swings by negative news at IBM and positive news at Google). In my mind, this atmosphere argues for better diversification.
Market volatility influenced a buy decision last week:
I have been studying Ventas (VTR), a healthcare REIT that I owned several years ago but sold when I thought it had become overvalued. Last week I realized that VTR, a blue-chip REIT, was selling at 21% below its 52-week high. Brad Thomas has featured VTR in several articles. The day before VTR's quarterly report, Forbes anticipated good news. Immediately I bought a full allotment of VTR "at the market," or $65.95. The next day, after its earnings release and conference call, VTR closed at $67.33. In the big scheme of things, that's not a big jump, but at $65.95, VTR was "on the bubble," at the upper end of my "buy" target. I was concerned that a good quarterly report would push it out of my buy range, and given the fact that VTR (and many other REITs) have yet to recover from the recent "taper scare" and severe downturn in that sector, my instincts tell me that REITs could be relatively strong in the coming weeks and months.
My last article about the portfolio was June 24, 2013. At that time, the portfolio included 22 stocks, five "buy-write" closed-end funds, two business development companies, and 4% cash. As of October 26, the portfolio includes 33 stocks, two "buy-write" closed-end funds, two business development companies and 8.2% cash, which is slightly above the 7.5% goal for cash. I try to keep cash in the 5% to 10% range.
As the broad market advanced, I became more conservative. On June 24, the portfolio yield was 7.2%. At that time my goal was "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." The current portfolio yield is 5.12%, which is driven by my decision to be more conservative than I first planned and by the recent market upswing, which has raised the portfolio's value (thus lowering the percentage yield).
My current Retirement Income Portfolio is listed below, with a few comments regarding changes since the June 24 article.
Stocks are listed according to the number of consecutive calendar years of dividend increases. For example, American States Water has increased the dividend each year since 1954. (If Natural Resource Partners doesn't increase the dividend by 12/31/13, it will drop to the bottom of the list.) The two closed-end "buy-write" funds are placed at the bottom of the list.
The fourteen stocks in italics were purchased since June 24. The 10/25/13 closing price is listed, the annual dividend, the current yield, the stock's percentage of the portfolio, the target allocation goal for each stock, and my current "add to" price (which generally is the price to which the stock would need to drop to maintain the same percentage of the portfolio).
Retirement Income Portfolio October 26 2013
PPL Corp (PPL)
Securities Sold Since June 24
I sold Vodafone (VOD) after the announced sale of its stake in Verizon Wireless. I sold NuStar Energy (NS) after an investor day presentation made me question whether its current distribution can be maintained. I sold AGL Resources (GAS) after I was unable to get a full position at my target buy price. I sold Annaly Capital (NLY) as part of my decision to move the portfolio in a more conservative direction. I sold three closed end funds (BUI, NFJ and JPG) as part of the move toward more individual blue chip stocks.
Securities Bought Since June 24
When I sold GAS, I bought a full position of Northwest Natural Gas, which was trading near the bottom of a four-year price range. I've followed it at a distance for many years. This dividend champion has raised the dividend annually since 1957. My basis in NWN is $40.30.
My most recent purchase was a small position in dividend champion Emerson Electric, a stock I owned in the past and hoped to own again. If EMR yielded 3.0% rather than 2.4%, I would have bought a full position. My basis is $66.49, which is higher than I would like but I wanted to establish a small position so I will be motivated to watch it more closely. I plan to add to EMR during any weakness. EMR has raised the dividend annually since 1957.
I've owned Coca-Cola in the past and I decided the stock price had dropped enough to warrant another purchase. My basis is $38.17. This dividend champion has increased the payout annually since 1963.
Leggett & Platt is another former holding that continues to impress me with its commitment to growing the business and the dividend. I needed a consumer discretionary stock and this is a stock I'm happy to own. My basis is $29.05.
I added yet another previous holding, Sysco, at $32.15. It is a slow-but-steady performer and a dividend champion in the wholesale food business. The dividend has been increased annually since 1977.
This sounds like "old home week." I've bought and sold AT&T several times through the years. I re-entered T to replace Vodafone. The dividend has been raised annually since 1986. My basis is $33.31.
Universal Health Realty Income Trust was a long-time holding that I sold when I thought it was over-extended. It has managed to increase its dividend (slowly) since 1988. The recent price drop in REITs created what I considered a good entry point. My basis is $40.64.
With the departure of NS, I bought some Enterprise Products Partners, another previous holding that I've long respected. My basis is $59.42. EPD has grown its payout handsomely since 1997.
I added General Mills at $49.00. This is one I've never owned before but I have watched it for many years. It's been a "premium value" stock that was never in my "buy" range at a time when I had money to buy it. GIS has increased the dividend since 2004.
Hasbro is experiencing strong international growth. Its CEO expects the (combined) emerging middle class markets of Brazil and China will equal the size of the US middle class market. I needed another consumer discretionary stock, so I added HAS at a basis of $47.19.
Westar Energy, is a Kansas utility that I've owned before and decided I would add to the portfolio at $29.99. WR has increased the dividend annually since 2005.
The decision to purchase Ventas is described above.
Orchids Paper Products, is a fast-growing producer of paper towels, tissue, and other paper products. It has a new commitment to grow the dividend. I have a relatively small position in this company at $27.60.
I decided to reduce my exposure to LNCO and I bought some Royal Dutch Shell at $67.90.
Sectors Represented in the Portfolio
Here is the current sector breakdown for the portfolio, with the following caveat/confession: Monmouth Realty is a REIT that has a large exposure to industrial properties such as FedEx, so I've included it in the industrial sector. EPR Properties is a REIT with a large exposure to movie theaters and other recreational properties, so I've included it in the consumer discretionary sector. UHT, LTC and VTR are healthcare REITs that I've included in the healthcare sector. Digital Realty focuses on IT properties, so it is listed in the Info Tech sector. I have had a long-time bias toward REITs, so I guess this is my "non-GAAP' sector breakdown.
Since several specialty REITs are listed in non-REIT industry sectors, I keep track of the total percentage of REITs and financials.
All Financials (including BDCs)
This is not presented as a recommendation to buy or sell any security, but is offered to provide some ideas for stocks to study. Everyone's situation and risk tolerance is different. Please perform your own due diligence.