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This is a sequel to How Do You Know When You've Found "Alpha"?

This Retirement Income Portfolio is comprised of forty securities, listed below. Companies are "ranked" according to the number of consecutive years of dividend increases. For example, American States Water has increased its dividend annually since 1954.

The 12/31/13 closing price is given, along with the annual per share dividend and the dividend yield as of the 12/31 closing price. The overall yield of the portfolio at year-end was 5.2%.

The "Port" column lists the percentage of the portfolio represented by each stock. The "Target" column lists the target percentage goal for each stock. For example, Northwest Natural Gas comprises 1.5% of the portfolio, which is less than the 2% target percentage goal.

The cash position at year-end was 2.0%, less than the 6.0% goal.

CompanyTickYr12/31DivYieldPortTarget
American St WaterAWR'5428.73.812.8%2.1%2.0%
Northwest Nat GasNWN'5742.821.844.3%1.5%2.0%
Emerson ElectricEMR'5770.181.722.5%2.5%2.5%
Genuine PartsGPC'5783.192.152.6%3.0%3.0%
Coca-ColaKO'6341.311.122.7%3.0%3.0%
Johnson & JohnsonJNJ'6391.592.642.9%3.3%3.0%
Leggett & PlattLEG'7230.941.203.9%1.1%1.0%
Consolidated EdisonED'7555.282.464.5%2.0%2.0%
SyscoSYY'7736.101.163.2%1.3%1.5%
AT&TT'8635.161.845.2%2.5%2.5%
Universal Hlth RltyUHT'8840.062.506.2%1.4%1.5%
National Retail PropNNN'9030.331.625.3%2.2%2.5%
Realty IncomeO'9537.332.195.9%4.0%3.5%
Kinder Morgan PrtKMP'9780.665.406.7%2.9%3.0%
Enterprise Prod PrtEPD'9766.302.764.2%2.1%2.5%
WP CareyWPC'9761.353.485.7%4.4%3.5%
Southern CoSO'0241.112.034.9%4.4%3.0%
Avista CorpAVA'0328.191.224.3%2.0%2.0%
General MillsGIS'0449.911.523.0%1.8%2.0%
HasbroHAS'0455.011.602.9%2.0%2.0%
Wisconsin EnergyWEC'0441.341.533.7%1.5%1.5%
Digital RealtyDLR'0549.123.126.4%3.5%2.5%
Westar EnergyWR'0532.171.364.2%2.3%2.0%
Starwood Prop TrustSTWD'0927.701.846.6%5.0%3.5%
Eaton CorpETN'1076.121.682.2%2.7%2.5%
Linn CoLNCO'1030.812.909.4%2.2%2.0%
EPR PropertiesEPR'1049.163.166.4%1.8%1.5%
LTC PropertiesLTC'1035.392.045.8%1.3%1.5%
VentasVTR'1057.282.905.1%4.1%3.0%
RayonierRYN'1042.101.964.7%1.5%1.5%
Prospect CapitalPSEC'1111.221.3311.8%2.4%2.0%
Orchids Paper ProdTIS'1132.841.404.3%1.2%1.0%
Merck & CoMRK'1150.051.763.5%1.8%2.0%
PPL CorpPPL'1230.091.474.9%3.3%3.0%
Royal Dutch ShellRDS.B'1275.113.604.8%2.7%2.5%
Chambers StreetCSG'137.65.5046.6%2.1%2.0%
Medical Prop TrustMPW'1312.22.846.9%1.3%1.5%
Monmouth Real EstMNR 9.09.606.6%2.5%2.5%
Natural Resource PrtNRP 19.942.2011.0%2.9%2.5%
Eaton-Vance FundETV 14.011.339.5%2.0%2.0%

Four New Stocks Added to the Portfolio

Since the October 28 portfolio update, four new companies were added to the portfolio: Consolidated Edison (NYSE:ED), Wisconsin Energy (NYSE:WEC), Rayonier (NYSE:RYN), and Medical Properties Trust (NYSE:MPW). The four new stocks are italicized in the table.

Since October 28, two high-yield positions were closed to reduce the portfolio's "high yield" component. PennantPark (NASDAQ:PNNT) was sold at an average price of $11.93. The cost basis was $10.93, for a gain of 9.1% excluding dividends received.

Shares of the Eaton-Vance Tax-Managed Global Buy-Write Opportunities Fund (NYSE:ETW) were sold at an average price of $11.77. The cost basis was $11.47, so there was a small profit of 2.65%, excluding cash distributions.

Consolidated Edison Inc.

Consolidated Edison provides electricity, natural gas and steam to customers in New York City and Westchester County. Through the Orange and Rockland Utilities, electricity and natural gas is provided to customers in southeastern New York, northern New Jersey and northeastern Pennsylvania. In addition to these regulated utilities, ED owns Consolidated Edison Solutions, a retail energy services company; Consolidated Edison Energy, a wholesale energy supply and services company; and Consolidated Edison Development, which develops and participates in infrastructure projects.

Dividend Champion ED has raised its dividend annually since 1975. The current yield is 4.5% and the dividend has grown by 5.1% over the past five-years. The payout ratio is 70%. Total debt is $11B, of which $10B is long-term debt. LT debt to total capitalization is 50%. (Data from SA.)

The high yield for ED in 2009 was 7.2%; the high yield in 2010 was 5.7%; the high yield in 2011 was 4.9%; the high yield in 2012 was 4.5%; the high yield in 2013 was 4.5%. (Data from Morningstar.)

Earnings per share growth averaged 4.3% over the past five years. The average percentage of pre-tax profit divided by sales for the past five years was 12.3%. The average percentage earned on equity for the past five years was 9.1%. The average PE ratio for the past five years was 13.8 and the current PE is 15.7. (Data from Morningstar.)

The price range for ED in 2011 was $48.55 to $62.74. The range for 2012 was $53.63 to $65.98. The range for 2013 was $54.17 to $64.03.

A Stock Selection Guide for ED indicated a possible high EPS in the next five years of $4.69. A 16.3 multiple, the average high PE of the past five years, gives a possible high price of $76.59. A 12.4 multiple, the five-year average low PE, to a possible low EPS of $3.88 (the 2012 EPS) gives a possible low price of $48.04.

These possible high and low prices give a potential five-year price range of $48.04 to $76.59. I divided this $28.55 range into fourths, or $7.14. Adding 1/4 of the price range to the possible low price of $48.04 gives a possible target buy price for ED of $55.18 or less. Subtracting 1/4 of the price range from the possible high price of $76.59 gives a possible target sell price for ED of $69.45 or more. The range between the possible buy price of $55.18 and the possible sell price of $69.45 is the "hold" range. The 12/31 closing price of $55.28 was in the "hold" range, slightly above the target buy price of $55.18.

If ED achieves the possible five-year high price of $76.59, it would provide a 7.7% annual appreciation from the 12/31 closing price. Coupled with a potential yield of 5.2% (assuming an annual dividend increase rate of 4%), ED gives a possible average total return of 12.9% (approximately 10.2% compounded).

Wisconsin Energy Corp.

Wisconsin Energy provides electricity and natural gas to customers in areas of Wisconsin and the Upper Peninsula of Michigan. Regulated utility subsidiaries are Wisconsin Electric Power Company and Wisconsin Gas, which operate together under the trade name We Energies. Non-regulated subsidiaries include W.E. Power, which designs, builds and owns power plants, and Wisvest, which owns and operates electric generating facilities and invests in other energy-related entities. Wispark and Bostco develop and invest in real estate.

WEC has raised its dividend annually since 2004. Since 2010, WEC began increasing its target payout ratio (see below).

The current yield is 3.7% and the dividend has grown by 167.6% over the past five-years. The payout ratio is 59%. Total debt is $5.1B, of which $4.4B is long-term debt. LT debt to total capitalization is 50%. (Data from SA.)

The high yield for WEC in 2009 was 3.7% The high yield in 2010 was 3.4%; the high yield in 2011 was 3.9%; the high yield in 2012 was 3.6%; the high yield in 2013 was 3.8%. (Data from Morningstar.)

Earnings per share growth averaged 12.6% over the past five years. The average percentage of pre-tax profit divided by sales for the past five years was 16.3%. The average percentage earned on equity for the past five years was 11.6%. The average PE ratio for the past five years was 14.4 and the current PE is 17.9. (Data from Morningstar.)

The price range for WEC in 2011 was $27.00 to $35.38. The range for 2012 was $33.62 to $41.48. The range for 2013 was $37.03 to $45.00.

In December, 2010, WEC announced a "target payout ratio of 50 to 55 per cent of earnings in 2011 and subsequent years. The company expects to remain at or near the bottom of his new payout range for at least the next two years ..." At the Q3 2013 earnings call in October, 2013, WEC announced that the directors "reaffirmed the dividend policy that calls for our payout ratio to rise to 65% to 70% of earnings in 2017, a level that we believe will be much more competitive with our peers across the regulated utility sector."

A Stock Selection Guide for WEC indicated a possible high EPS in the next five years of $3.29. An 18 multiple, the average high PE of the past two years, gives a possible high price of $59.22. By applying a 14.5 multiple, the two-year average low PE, to a possible low EPS of $2.45 (the 2013 estimated EPS) gives a possible low price of $35.53.

These possible high and low prices give a potential five-year price range of $35.53 to $59.22. I divided this $23.69 range into fourths, or $5.92. Adding 1/4 of the price range to the possible low price of $35.53 gives a possible target buy price for WEC up to $41.45. Subtracting 1/4 of the price range from the possible high price of $59.22 gives a possible target sell price for WEC of $53.30 or above. The range between the possible buy price of $41.45 and the possible sell price of $53.30 is the "hold" range. The 12/31 closing price of $41.34 was in the buy range, slightly below the target buy price of $41.45.

If WEC achieves the possible five-year high price of $59.22, it would provide a 8.65% annual appreciation from the 12/31 closing price. Coupled with a potential yield of 4.46% (assuming a payout of 65% on the estimated earnings), WEC gives a possible average total return of 13.1% (approximately 10.5% compounded).

Rayonier Inc.

Rayonier is a forest products company organized as a real estate investment trust. RYN manages 2.7 million acres of working forest timberland located in ten U.S. states and New Zealand, providing wood for lumber, paper, oriented strand board and other wood-based products. RYN produces and sells cellulose fibers and fluff pulp.

RYN operates in four business segments: Forest Resources, which include all activities related to harvesting timber; Real Estate, which include all property sales, including land designated for higher and better use; Performance Fibers, which manufactures cellulose fibers and absorbent materials; and Wood Products, which manufactures and sells dimension lumber.

RYN has raised its dividend annually since 2010. The current yield is 4.7% and the dividend has grown by 39.8% over the past five years. As a REIT, the payout ratio is 80%. Total debt is $1.66B, of which $1.65B is long-term debt. LT debt to total capitalization is 50%. (Data from SA.)

The high yield for RYN in 2009 was 9.0%; the high yield in 2010 was 5.1%; the high yield in 2011 was 4.4%; the high yield in 2012 was 4.1%; the high yield in 2013 was 4.96%. (Data from Morningstar.)

Earnings per share growth averaged 8.2% over the past five years. The average percentage of pre-tax profit divided by sales for the past five years was 20.8%. The average percentage earned on equity for the past five years was 20.1%. The average PE ratio for the past five years was 17.0 and the current PE is 17.2. (Data from Morningstar.)

The price range for RYN in 2011 was $34.68 to $45.37. The range for 2012 was $41.33 to $51.87. The range for 2013 was $39.49 to $60.62.

A Stock Selection Guide for RYN indicated a possible high FFO in the next five years of $5.48. An 11.6 multiple, the average high P/FFO of the past three years, gives a possible high price of $63.77. To estimate a possible low price, I chose $36.35, the low price for 2010.

These possible high and low prices give a potential five-year price range of $36.35 to $63.77. I divided this $27.42 range into fourths, or $6.86. Adding 1/4 of the price range to the possible low price of $36.35 gives a possible target buy price for RYN up to $43.21. Subtracting 1/4 of the price range from the possible high price of $63.77 gives a possible target sell price for RYN of $56.91 or above. The range between the possible buy price of $43.21 and the possible sell price of $56.91 is the "hold" range. The 12/31 closing price of $42.10 was in upper end of the buy range.

If RYN achieves the possible five-year high price of $63.77, it would provide a 10.3% annual appreciation from the 12/31 closing price. Coupled with a potential yield of 5.5% (assuming a payout of 47% on the estimated FFO), RYN gives a possible average total return of 15.8% (approximately 12.0% compounded).

Medical Properties Trust

Medical Properties Trust is a self-advised real estate investment trust that invests in and owns triple-net leased healthcare facilities across the U.S. In December 2013, the company bought eleven rehabilitation hospitals in Germany. MPW acquires and develops acute care facilities and leases the facilities to healthcare operators. At Dec 31 2012, company-owned properties consisted of 82 properties, including 27 general acute care hospitals, 24 long-term acute care hospitals, 15 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers. The eight non-owned facilities consist of three general acute care facilities, two long-term acute care hospitals, and three inpatient rehabilitation hospitals.

MPW began paying a 17-cent quarterly dividend in 2005. By Q4 2006 the dividend was 27 cents, where it remained through Q3 2008. In Q4 2008 (during the Great Recession), the quarterly dividend was cut to 20 cents, where it remained until Q4 2013. On November 8 2013, the company announced a 5% increase in the quarterly dividend, to 21 cents, for an annual rate of $.84.

As a REIT, the payout ratio is 110%. Total debt is $1.09B, which is all long-term debt. LT debt to total capitalization is 40%. (Data from SA.)

The high yield for MPW in 2010 was 10.0%; the high yield in 2011 was 9.8%; the high yield in 2012 was 9.2%; the high yield in 2013 was 6.97%. (Data from Morningstar.)

The change in earnings per share for the past five years averaged a negative 6.0%. The average percentage of pre-tax profit divided by sales for the past five years was 28.5%. The average percentage earned on equity for the past five years was 4.2%. The average PE ratio for the past five years was 39.6 and the current PE is 18.3. (Data from Morningstar.)

The price range for MPW in 2011 was $8.17 to $12.65. The range for 2012 was $8.65 to $12.07. The range for 2013 was $11.54 to $17.73.

A Stock Selection Guide for MPW indicated a possible high FFO in the next five years of $.95. An 19.6 multiple, the average high P/FFO of the past five years, gives a possible high price of $18.63 (which is less than $1.00 above the high price achieved in 2013). MPW recently seems to have found some support at the 7.0% yield level. To be a bit more conservative, I estimated a possible low price of $10.50, which would represent an 8% yield on the current annual dividend of $.84.

These possible high and low prices give a potential five-year price range of $10.50 to $18.63. I divided this $8.13 range into fourths, or $2.03. Adding 1/4 of the price range to the possible low price of $36.35 gives a possible target buy price for RYN up to $12.53. Subtracting 1/4 of the price range from the possible high price of $18.63 gives a possible target sell price for RYN of $16.60 or above. The range between the possible buy price of $12.53 and the possible sell price of $16.60 is the "hold" range. The 12/31 closing price of $12.22 was in the buy range.

If MPW achieves the possible five-year high price of $18.63, it would provide a 10.5% annual appreciation from the 12/31 closing price. Coupled with a potential yield of 7.2% (assuming a payout of 100% of the estimated FFO), MPW gives a possible average total return of 17.7% (approximately 13.2% compounded).

Sectors in the Portfolio

Here is a breakdown of the portfolio by sectors.

SectorGoalActualSecurities

Energy

10.0%10.0%KMP,EPD,LNCO,RDS
Materials4.0%4.4%RYN,NRP
Industrials10.0%7.7%EMR,ETN,MNR
Cons Discretionary7.5%7.9%GPC,HAS,LEG,EPR
Consumer Staples7.5%7.3%KO,SYY,GIS,TIS
Healthcare12.5%13.3%JNJ,UHT,LTC,VTR,MRK,MPW
Equity REITs12.5%12.7%NNN,O,WPC,CSG,SWAY*
BDCs and mREITs5.5%7.4%STWD,PSEC
Information Tech2.5%3.5%DLR
Telecommunications2.5%2.5%T
Utilities17.5%19.2%AWR,NWN,ED,SO,AVA,WEC,WR,PPL
Closed-End Funds2.0%2.0%ETV
Cash6.0%2.0%

*Regarding SWAY, see the "Strategy for 2014" section below.

Since several REITs are listed in non-REIT industry sectors, this table gives the total portfolio percentage of REITs and financials :

SectorGoalCurrent
Equity REITs12.5%12.7%
All REITs28.5%33.7%
All Financials30.5%41.1%

Brief Review of 2013

At the beginning of 2013, if you had told me that the S&P 500 would be up 29.6% and that I would have only a 2.0% cash position, I would have said, "No, I'll build a large cash position if the market goes up that much." Beginning with Ben Bernanke's first mention of tapering on May 22 2013, most REITs and utility stocks were under pressure for the remainder of 2013. I viewed this as a buying opportunity and I became overweight in REITs and utility stocks.

Strategy for 2014

There is a 1% target allocation in the portfolio for Starwood Waypoint Residential Trust (NYSE:SWAY), a planned equity REIT spin-off from STWD. The expected date for the spin-off is January 24 2014.

STWD is currently 5% of the portfolio. Depending on the STWD price action after the spin-off, some STWD shares may be sold since it is now significantly above the target allocation.

Other overweighted candidates for trimming, should prices recover in 2014, are Digital Realty (NYSE:DLR), Realty Income (NYSE:O), WP Carey (NYSE:WPC), Southern Company (NYSE:SO), Ventas (NYSE:VTR), Prospect Capital (NASDAQ:PSEC) and Natural Resource Partners (NYSE:NRP).

Two stocks are currently on my watch list: Deere (NYSE:DE) and Procter & Gamble (NYSE:PG). However, the cash position is very low and any new stock purchases in 2014 would come from cash that is accumulated by dividends and/or the sale of any stocks that might be trimmed because of becoming overweighted.

Caveat Emptor

This article goes into considerable detail to describe how one might use Better Investing's Stock Selection Guide as a tool for studying a stock. This is offered as a demonstration of how four "buy" decisions were made. Those who have used the Stock Selection Guide in investment clubs that are affiliated with the National Association of Investors (NAIC) understand that projecting possible five-year high and low prices for a stock involves individual judgment. This article 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.

Source: 4 Stocks Added To Retirement Income Portfolio