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Summary

  • One Industrial Stock and Two Consumer Discretionary Stocks Added.
  • One Fast-Rising REIT Added to the Portfolio.
  • Six Positions Closed Since 12/31/13.
  • A Review of Portfolio Sector Allocations.

Portfolio Review, Part 3

This is Part 3 of a three-part article to describe changes in my Retirement Income Portfolio since 12/31/13.

Part 1 was published on April 16: Retirement Income Portfolio: A Stronger Focus on Dividend Champions. It described the purchase of Procter & Gamble (NYSE:PG), PepsiCo (NYSE:PEP), WGL Holdings (NYSE:WGL) and HCP Inc (NYSE:HCP).

Part 2 was published on April 21: Adding Triangle Capital, Main Street Capital and BCE Inc to Retirement Income Portfolio. It described my reasoning for purchasing Triangle Capital Corporation (NYSE:TCAP), Main Street Capital Corporation (NYSE:MAIN), and BCE Inc (NYSE:BCE). Part 2 also included a table containing price, dividend and yield information about the 45 holdings in the portfolio.

This installment describes the purchase of Deere & Co (NYSE:DE), Tupperware Brands Corporation (NYSE:TUP), Mattel Inc (NASDAQ:MAT) and American Realty Capital Properties (NASDAQ:ARCP). It also provides a table describing the portfolio's current sector allocations and a brief review of why positions of previously-held securities were sold.

In my year-end article, I presented a 2014 strategy, which named two stocks on my watch list: Procter & Gamble and Deere & Co. In the early months of 2014, I made a "full" purchase of PG, which brought it close to the goal of 3.0% of the portfolio. A "two-thirds" position of DE was purchased, bringing it to 1.6% of the portfolio, about 2/3 of the way toward the goal of 2.5% of the portfolio.

Deere & Company

On 12/31/13 , industrial stocks comprised 7.7% of the portfolio. The goal was, and is, 10.0%. Two industrial stocks were held at year-end, Emerson Electric (NYSE:EMR) and Eaton Corp (NYSE:ETN). In my sector weightings, I count as an industrial Monmouth Realty (NYSE:MNR), a real estate investment trust with a heavy exposure to the industrial sector--particularly FedEx (NYSE:FDX). My goal for 2014 is to complete the 10.0% allotment for industrials, with 2.5% each allocated for EMR, ETN, DE and MNR. The industrials currently comprise 9.0% of the portfolio.

Before deciding to purchase Deere, I considered a variety of possibilities, including Dover (NYSE:DOV), 3M Company (NYSE:MMM), Stanley Black and Decker (NYSE:SWK), Nucor (NYSE:NUE), Illinois Tool Works (NYSE:ITW), General Electric (NYSE:GE), Ford (NYSE:F), and Boeing (NYSE:BA).

I have owned several of these in the past, and I hope to own some of them in the future. When I was doing this research, DE seemed to be the most undervalued of the group.

Deere was founded in 1837, and it currently operates in three segments: Agriculture & Turf, Construction & Forestry and Financial Services. Deere is headquartered in Moline, Illinois. From the company website:

By 2050, the world's population is expected to expand to 9 billion people. We're at more than 7 billion today. That growth will come mostly from emerging economies, such as China and India, where incomes are increasing, and diets improving. An increased demand for food, fuel, and fiber will require an approximate doubling of agricultural output in that timeframe.

Also expected to continue is the migration from rural areas to cities. In 2010, for the first time in history, over 50% of the world's population lived in cities. By 2050 that number is expected to reach 70%. A smaller labor pool in rural areas creates the need for more mechanized farming, as manual labor is replaced by more productive equipment solutions. Increasing urban populations also creates the need for housing, roads, bridges, and other infrastructure investments.

On 12/27/13, Consuelo Mack interviewed Brian Rogers, Chairman and Chief Investment Officer of T. Rowe Price (NASDAQ:TROW) and manager of their Equity Income Fund. Each WealthTrack guest is asked to name one investment that should be in every long-term, diversified portfolio. Rogers named Deere:

Deere is a stock that, not unlike some of the utility stocks or telecommunication companies, is down this year. In response to that price weakness, they announced a buyback of about 25% of the company. Great dividend history, two and a half percent, maybe a little bit less than a two and a half percent dividend yield right now, and when you say long term, buy and hold, don't worry about, I think in 10, 20, 30, 40, 50 years, Deere will still be making the equipment that feeds the world. And when you say one for the long term, I think the company will be… it's been around for a long time. It's going to be around for a long time. It's under performed. It's inexpensive. It's a really high-quality company, great source of income, great source of benefiting from capital allocation and a unique franchise globally.

As I studied Deere, I read several SA articles about DE, including one by Jeroen Jongbloed on 12/17/13 and one by Brian Gilmartin on 2/11/14.

DE has raised its dividend every year since 2004, and it is now on David Fish's list of Dividend Contenders. He cites DE's 5-year dividend growth rate as 13.4% and this give DE a "Chowder Rule" value of 15.8.

Here are the price ranges, the earnings per share, dividends and the high yield achieved in each of the past five fiscal years (ending in October):

YearLow PriceHigh PriceEPSDividendHigh Yield

2009

$24.51$56.87$2.06$1.124.6%
2010$48.33$84.85$4.35$1.162.6%
2011$59.92$99.80$6.63$1.522.5%
2012$69.51$89.70$7.63$1.792.6%
2013$79.50$95.60$9.09$1.992.5%

I completed a Stock Selection Guide on DE. This tool was developed by the National Association of Investment Clubs in the 1950s. The SSG looks at ten years of history to determine a potential price range during the next five years. Data is from Morningstar via the NAIC website.

At a 4/17/14 price of $93.40, the Price/Earnings ratio was 10.1, below the 5-year average PE of 12.9 and the 3-year average of 10.7. The current yield is 2.2%, below the high yields seen in each of the past five years.

I projected a possible high price during the next five years of $159.40, and a possible low price of $81.60. This study determined a "buy" zone from $81.60 to $101.00 and a "sell" zone from $139.90 to $159.40.

The 4/17/14 price of $93.40 (which is in the "buy" range) reflects a potential compound annual return of 13.7% including dividends over the next five years, if the high price of $159.40 is achieved (and if the average yield on a $93.40 purchase over the next five years is 2.4%).

In February, I made an initial purchase of DE for $84.85. I targeted $81.60 as the "buy price" to complete the allocation, which equates to a 2.5% yield. Since then, the stock price has increased to the low $90s. I have been waiting for a pullback. I have since adjusted my "add to" price up from $81.60 to $88.00. (If purchased at $88.00, the projected annual return--if the possible high price is achieved--would be 15%.)

Tupperware Brands Corporation

In 1946, Earl Tupper developed a way to store food by introducing airtight seals patterned after the inverted rim on a can of paint which prevented food from drying out, wilting or losing its flavor in a refrigerator.

From the company's website:

Tupperware Brands Corporation is a global direct seller of innovative, premium products across multiple brands and categories through an independent sales force. Product brands and categories include design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand and beauty and personal care products through its Armand Dupree, Avroy Shlain, BeautiControl, Fuller, NaturCare, Nutrimetics, and Nuvo brands.

Tupperware operates five reporting segments in three geographic regions: Europe (Europe, Africa and the Middle East), Asia Pacific and the Americas.

The company website affirms:

an unwavering commitment to Enlighten, Educate and Empower women and their families across the globe. We are passionate about changing lives and instilling confidence in every one of our nearly 3 million sales force members.

In 2012, HaloSource entered into a development and production agreement with TUP provide HaloSource's patented HaloPure technology in cartridges for Tupperware's new line of gravity-based water purifiers that were initially launched through Tupperware India.

Chuck Carnevale and FAST Graphs have produced two SA articles about TUP and provide good background data: Tupperware Brands: Fundamental Stock Research Analysis on 2/25/13 and Is Tupperware Brands The Perfect Dividend Growth Stock For Retirement Portfolios? on 4/4/14.

TUP has raised its dividend every year since 2009, and it is now on David Fish's list of Dividend Challengers. He reports TUP's 5-year dividend growth rate as 20.3% and this give TUP a "Chowder Rule" value of 23.6.

Here are the price ranges, the earnings per share, dividends and the high yield achieved in each of the past five years:

YearLow PriceHigh PriceEPSDividendHigh Yield
2009$10.91$50.20$2.76$.918.3%
2010$36.12$54.15$3.54$1.052.9%
2011$45.18$71.99$3.56$1.202.7%
2012$50.90$67.82$3.42$1.442.8%
2013$63.57$97.14$5.16$2.483.9%

I completed a Stock Selection Guide on TUP. Data is from Morningstar via the NAIC website and FAST Graphs.

At a 4/17/14 price of $86.32, the Price/Earnings ratio was 16.7, above the 5-year average PE of 14.7. The current yield is 3.15%, below the high yield of 3.9% seen in 2013.

I projected a possible high price during the next five years of $131.50, and a possible low price of $73.10. This study determined a "buy" zone from $73.10 to $87.70 and a "sell" zone from $116.90 to $131.50.

The 4/17/14 price of $86.32 (which is in the "buy" range) reflects a potential compound annual return of 10.8% including dividends over the next five years, if the high price of $131.50 is achieved (and if the average yield on a $86.32 purchase over the next five years is 2.0%).

In February, I purchased shares of TUP for $82.62.

TUP is in the consumer discretionary sector. My target portfolio goal for this sector is 10%. The consumer discretionary stocks currently comprise 8.9% of the portfolio, spread out over five companies: Genuine Parts (NYSE:GPC); Leggett & Platt (NYSE:LEG); Tupperware; a real estate investment trust, EPR Properties (NYSE:EPR), which owns theaters, recreational facilities and charter schools; and another newcomer to the portfolio: Mattel .

Mattel, Inc.

Mattel was launched in 1945 out of a garage workshop in southern California by Ruth and Elliot Handler and Harold "Matt" Matson. The company first made picture frames. Elliot developed a side business of making dollhouse furniture made from picture frame scraps. Matson sold out to the Handlers. Based on the success of the doll furniture, the Handlers turned the focus of the company to toys.

MAT is headquartered in El Segundo, California and it employs nearly 30,000 people in 40 countries and territories. The company sells products in more than 150 nations. The company's website states that the Mattel family of companies is the worldwide leader in the design, manufacture and marketing of toys and family products. Mattel's portfolio of best-selling brands includes Barbie, the most popular fashion doll ever produced, Hot Wheels, Monster High, American Girl, Thomas & Friends and Fisher-Price brands, including Little People and Power Wheels. The company also sells a wide array of "entertainment-inspired toy lines." Mattel's theme is Creating the Future of Play.

Several SA contributors have written about Mattel in recent months. Don Dion described MAT's purchase of Mega Brands in his 3/4/14 article, Mattel Builds on Lego's Success, as did Lutz Miller in his 3/31/14 article, Mattel Buys Mega - How Will It Change The Toy Landscape?

MAT has raised its dividend every year since 2009, and it is now on David Fish's list of Dividend Challengers. He gives MAT's 5-year dividend growth rate as 13.9% and a "Chowder Rule" number of 17.7.

Here are the price ranges, the earnings per share, dividends and the high yield achieved in each of the past five years:

YearLow PriceHigh PriceEPSDividendHigh Yield
2009$10.36$21.05$1.46$.0757.2%
2010$19.07$26.70$1.88$.834.4%
2011$22.70$29.40$2.21$.924.1%
2012$27.73$37.96$2.24$1.254.5%
2013$35.47$48.48$2.60$1.444.1%

I completed a Stock Selection Guide on MAT. Data is from Morningstar via the NAIC website and FAST Graphs.

At a 4/17/14 price of $37.47, the Price/Earnings ratio was 15.2, above the 5-year average PE of 13.1. The current yield is 4.06%, below the high yields of each of the last five years.

I projected a possible high price during the next five years of $54.80, and a possible low price of $32.50. This study determined a "buy" zone from 32.50 to $38.10 and a "sell" zone from $49.20 to $54.80.

The 4/17/14 price of $37.47 (which is in the "buy" range) reflects a potential compound annual return of 11.2% including dividends over the next five years, if the high price of $54.80 is achieved (and if the average yield on a $37.47 purchase over the next five years is 3.3%).

In March, I purchased shares of MAT for $37.27.

American Realty Capital Properties

ARCP CEO Nicholas Schorsch has been involved in several successful REIT businesses. In the 1990s, he co-founded American Financial Realty Trust to acquire surplus bank branches. He brought the company public in 2003, and it was acquired in 2008 by what is now Gramercy Property Trust (NYSE:GPT). Schorsch brought ARCP public in 2011. The company raised $70 million to pay debt and fund acquisitions. At that time, the company owned 63 assets, including 60 properties that were leased to two banks, plus two vacant bank branches and one property leased to Home Depot (NYSE:HD). The company website is www.arcpreit.com.

Schorsch and co-founder Brian Block, ARCP's chief financial officer, began with the goal of growing the new company into a $10 billion public company. They saw high quality properties available at depressed prices in the wake of the recession. They believed consolidation would occur in the net lease market, and they were positioned to take advantage of the opportunity. The company has already reached $22 billion.

ARCP is no stranger to Seeking Alpha readers with an eye for dividends. A host of articles about ARCP have been published on SA. The company made a big splash by merging with Cole to become the largest net lease REIT, with 3,730 properties leased to 600 different tenants in 49 states and Puerto Rico.

The company has not been public long enough to be effectively evaluated by a Stock Selection Guide. After reading a number of articles about ARCP on SA and elsewhere, I made a decision to take a relatively small position in ARCP on the strength of Schorsch's track record, the early success of their business model, their expressed commitment to income-oriented shareholders, and their dividend.

For more information about ARCP, see "Casting a Wider Net," 3/23/14, by Anna Robaton in REIT.com.

The following SA contributors have provided excellent recent commentary about ARCP:

Brad Thomas: Is American Realty Capital a Monster or a Machine;

Bret Jensen: American Realty: 7 Percent Yielder Continues to Deliver;

David White: American Realty Capital Properties is the Newly Minted Must-Own Blue Chip Lease REIT.

I made two purchases of ARCP in Q1 at an average cost of $13.86.

Positions Closed Since 12/31/13

I closed my position in the Eaton-Vance Tax Managed Buy-Write Opportunities Fund (NYSE:ETV). This is a closed-end fund that writes call options to enhance income. It does not use leverage. I held the fund for eleven months. The fund appreciated 7% from the time of purchase to the final sale, and it yielded about 10% during the time I held it. Over the course of two years, I owned several call-write funds, thanks to the good writing of Doug Albo. I viewed these funds as cash substitutes at a time when the market was expensive. When I became more focused on diversifying the portfolio, I decided to give up some yield and buy more Dividend Champions. For those interested in a buy-write fund, in my opinion, ETV is worth a look. Eaton Vance buys shares of their closed-end funds if the market price sells at a 10% discount to NAV.

In a January 13 article, I reflected on a distribution cut by Natural Resource Partners (NYSE:NRP). About two months after writing the article, I decided to look for an opportunity to rotate funds out of NRP.

I made several trades shortly after the end of Q1, when a constellation of factors surfaced. Rayonier (NYSE:RYN) had shown some price strength after the announcement that they would spin off their cellulose fiber business. Then, the price drifted down a bit. I used this weakness as an opportunity to buy more shares of RYN, which is in the materials sector with NRP. Although RYN's yield is lower, for me it has a higher SWAN factor (sleep well at night). My cost basis was $19.27 and I sold NRP at $16.11, for a 16.4% loss. This does not count distributions, which offset much of the loss.

Two energy holdings, Kinder Morgan Energy Partners (NYSE:KMP) and LinnCo (NASDAQ:LNCO) became, in my opinion, undervalued. So, I added shares of KMP and LNCO and closed my position in Royal Dutch Shell (NYSE:RDS.B). This was a tough decision. It's a great company. I began buying RDS.B in July, 2013 and accumulated a position at a cost basis of $67.90. RDS.B has had a nice run and I sold it at $78.64, for 15.8% gain in less than a year, not counting dividends.

I bought shares of Hasbro (NASDAQ:HAS) in September, 2013 for $47.19 and sold it shortly after the end of Q1 for $54.07, a gain of 14.5%, not counting dividends. I did not sell HAS in order to buy Mattel. For a brief period, I held both of these toy manufacturers. I would not hesitate to hold HAS again. When I bought HAS, it seemed relatively undervalued vis-a-vis MAT, but within a few months, the situation appeared to have reversed. At this point, I felt like one toy maker in the portfolio was enough.

I bought shares of Orchids Paper Products (NYSEMKT:TIS) in July and August, 2013, at a cost basis of $27.60. The stock appreciated strongly in the closing months of 2013, trading over the $30 mark in November and trading in the $33-34 range in February-March. The company recently installed a new CEO, and there has been a negative reaction within some in the investment community about the new CEO's compensation. On March 21, the stock dropped almost $4 a share on a closing price basis to $27.72. It has rebounded to the $30 range. The company has a relatively brief dividend history, paying an initial dividend in 2011 ($.50), raising it to $.85 in 2012 and to $1.35 in 2013. I sold TIS at $30.04, using the proceeds to buy more shares of Main Street Capital .

A final part of this constellation of trades was my decision to sell Starwood Waypoint (NYSE:SWAY), the residential equity REIT that I received as a spinoff by Starwood Properties Trust (NYSE:STWD). I used these proceeds to buy more STWD and WP Carey (NYSE:WPC). For both TIS and SWAY, I decided to rotate into some stocks with which I am more familiar, and in some cases have been stalwart performers for the portfolio.

Portfolio Sector Allocations as of April 17, 2014

SectorGoalActualSecurities
Energy10.0%12.8%KMP,EPD,LNCO
Materials2.5%3.1%RYN
Industrials10.0%9.0%EMR,ETN,DE,MNR
Cons Discretionary10.0%8.9%GPC,LEG,TUP,MAT,EPR
Consumer Staples10.0%8.8%PG,KO,SYY,PEP,GIS
Healthcare12.5%13.3%JNJ,HCP,UHT,LTC,VTR,MRK,MPW
Equity REITs15.0%17.1%NNN,O,WPC,CSG,ARCP
BDCs and mREITs5.0%8.7%STWD,TCAP,MAIN
Information Tech2.5%1.9%DLR
Telecommunications2.5%2.8%T,BCE
Utilities12.5%12.6%AWR,NWN,ED,WGL,SO,AVA,WEC,WR,PPL
Cash7.5%1.1%

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

SectorGoalCurrent
Equity REITs15.0%17.1%
All REITs35.0%39.9%
All Financials37.0%43.0%

Disclosure: I am long AWR, NWN, PG, EMR, GPC, KO, JNJ, SYY, LEG, PEP, ED, WGL, T, HCP, UHT, NNN, O, KMP, EPD, WPC, SO, AVA, GIS, WEC, DE, DLR, WR, TCAP, STWD, BCE, TUP, MAT, ETN, LNCO, EPR, LTC, VTR, RYN, MAIN, MRK, PPL, CSG, MPW, ARCP, MNR. 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.

Additional disclosure: I offer this as a journal of how I am approaching my retirement income portfolio. It is not a recommendation to buy or sell any security. Everyone's situation is different. It is crucial that you perform your own due diligence. These "long" positions are presented to give you some ideas for stocks to study. Just because a position has been closed does not mean I have a negative view of these investments. Sometimes a sale was made to take a profit or to rebalance the sector allocation of the portfolio.

Source: Adding Deere, Tupperware, Mattel And American Capital Properties To Retirement Income Portfolio