"Finally, I have this portfolio about the way I want it." When I say this to my wife, she nods her head politely, paying no attention because she knows I will say the same thing after the next batch of trades. Saying it, however illusory, gives me a sense of progress. It's like saying, "Finally, I have my golf game the way I want it," while looking for the ball I just hit into the weeds.
So, once again I have more trades to report than I anticipated when I gave my last update on May 23rd.
Some Reluctant Sales Locked In Profits and Raised Cash
From late May to mid-July, as the broad market continued to make new highs, I began to raise some cash. I reluctantly sold three Dividend Champions with relatively low Chowder Rule numbers. I parted with Leggett & Platt (NYSE:LEG) to lock in some profits. LEG's Chowder Rule number was 6.7 (a 3.2% five-year dividend growth rate, coupled with a 3.5% yield). I sold Consolidated Edison (NYSE:ED). ED's Chowder Rule number was 5.6 (a 1.0% five-year dividend growth rate, plus a 4.58% yield). Also, I sold Universal Health Realty Trust (NYSE:UHT). UHT's Chowder Rule number was 7.0 (a five-year dividend growth rate of 1.3% and a yield of 5.78%). It's tough to let go of Dividend Champions, but it seemed wise to take some profits and raise some cash. The average 5-year DGR of these three stocks was 1.83%.
I like utility stocks. I like them so much that nine of the 44 portfolio companies held on May 23 were utilities. Earlier this summer, many utility stocks had appreciated nicely. So, in addition to selling ED, I reluctantly sold two other utilities, both Dividend Contenders, to lock in some profits and to raise some cash - PPL Corp. and Westar Energy. PPL's Chowder Rule number was 6.1 (a 4.25% yield and a 1.8% five-year dividend growth rate). WR's Chowder Rule number was 7.5 (a 3.88% yield, plus a 3.6% five-year dividend growth rate). The PPL sale was made easier by George Archer's June 23 SA article. I hope to buy Westar Energy at some point in the future when the yield is greater.
Two MLPs Sold for Tax Purposes
For the past two years, I have been considering selling contenders Kinder Morgan Energy Partners (NYSE:KMP) and Enterprise Products Partners (NYSE:EPD), not because of anything related to performance, but because my portfolio is in an IRA and I want to avoid any possible complications related to the IRS treatment of Master Limited Partnerships in IRAs. I decided that the time had come to make this move. EPD had been a strong performer, and the yield was down to 3.80%. The five-year dividend growth rate was 5.7%, giving it a Chowder Rule number of 9.5. EPD is a great company, and I hope to own it in the future in a taxable account.
The sale of KMP was less painful because I bought KMI. I hope to own KMP in the future in a taxable account. KMP's yield was a strong 7.26%, and the five-year dividend growth rate was a respectable 6.2%, giving KMP a Chowder Rule number of 13.5. I repeat - my decision to sell was for tax purposes, not because I was dissatisfied with the performance of EPD or KMP. The discussion of taxes and MLPs can be a wearisome tangent in an article's discussion thread. I would simply point the reader to a 2012 SA article by Philip Trinder and to his helpful comments about K-1s and UBTI following Avi Morris' January 2013 SA article.
Principles and Data Points for Buy and Sell Decisions
We investors develop strategies and formulas to make our buy and sell decisions as simple as possible. Over time, each of us develops an investment style or philosophy, giving more or less weight to various principles and data points. Stock picking and portfolio management are daunting challenges because a wide range of data is involved. A beginning investor simply may buy the stock of a familiar company. Several years ago, a friend who inherited some money asked me to help with the investment process. The only stipulation was that this person wanted to buy shares of Kraft because it was a trusted brand. As investors develop more skill, we incorporate data such as price/earnings ratios, payout ratios, debt levels, the 52-week price range, etc., to provide a framework and basis for our decision-making.
Incorporating the Five-Year Dividend Growth Rate in the Decision Process
In the past, I operated with a vague consciousness of the Chowder Rule and the resulting Chowder Rule Number. When I decided to take advantage of the bull market and trim some stocks, I considered selling part of my position in JNJ and GPC, for example. However, I chose instead to eliminate a few entire positions (as indicated above). For the first time, I was very conscious and very intentional about comparing the Chowder Rule number for each of the holdings. A stock's five-year dividend growth rate (one component of the CR number) became a key factor in deciding which positions to close.
I built the portfolio's cash position through the above sales, and then I deployed some of this cash by purchasing shares of two Dividend Champions, two Dividend Contenders and two relative newcomers.
As a major oil company, Dividend Champion Chevron (NYSE:CVX) operates in the energy sector. Total capitalization is $173.7 billion. 2013 sales were $228.8 billion and pre-tax profit was $35.9 billion. CVX has increased its dividend annually since 1988. The 52-week price range for CVX is $109.27 to $135.10. Long-term debt as a percentage of capital is 11.5%. The payout ratio for the past four years has averaged 28.6%. The average high yield for the past four years has been 3.8%, and this has trended lower in our low-yield environment. Earnings per share for the past four quarters (ending June 30) were $10.48. At Friday's closing price, the price/earnings ratio was 12.2. The average P/E ratio for the past five years has been 9.5. I view this as a solid company selling at a fair price, but not at a bargain price.
I made an initial purchase on July 11 at $128.45. At the time of purchase, Chevron's yield was 3.3% and the five-year dividend growth rate was 9.0%, giving it a Chowder Rule number of 12.33. I took half a position in CVX, hoping to add to the position at a lower price.
I have owned shares of Dividend Champion 3M Company (NYSE:MMM) in the past, and it is a stock that I regretted selling, particularly after its strong dividend increase in 2014. MMM has raised its dividend annually since 1958. 3M operates in the industrial sector with these business segments: industrial and transportation; healthcare; consumer and office; safety, security and protection services; display and graphics; and electro and communications. Total capitalization is $24.8 billion. 2013 sales were $30.9 billion, and pre-tax profit was $6.6 billion.
MMM's 52-week price range is $112.36 to $146.43. Long-term debt as a percentage of capital is 21.4%. The payout ratio for the past four years has averaged 37.3%. The average high yield for the past four years has been 3.0%, and this has trended lower in our low-yield environment. Earnings per share for the past four quarters (ending June 30) were $7.10. At Friday's closing price, the price/earnings ratio was 19.7. The average P/E ratio for the past five years has been 14.7. Like Chevron, I view 3M as a solid company selling at a fair price, but not at all cheap.
I bought a half position at $143.12 on July 31, also hoping to buy the other half at a lower price. MMM's yield was 2.4% and the five-year dividend growth rate was 4.9%, giving it a Chowder Rule number of 7.3. The price is higher than I wanted to pay and the CR number is lower than I would like, but I decided to take an initial stake. I think of MMM as my 10-Year Treasury Note - with the "kicker" of a long history of dividend increases.
Two Dividend Contenders were added to the portfolio, both in the consumer discretionary sector: Meredith Corporation (NYSE:MDP) and Cracker Barrel (NASDAQ:CBRL). Meredith is a near-champion. MDP has raised the dividend annually since 1994.
Meredith is in the communication business, publishing magazines and related brand licensing, television broadcasting, integrated marketing, interactive media and video production. The company operates in two segments: national and local media.
From the company website:
Meredith is the leading media and marketing company serving American women. Meredith features multiple well-known national brands - including Better Homes and Gardens, Parents, Family Circle, Fitness, More, American Baby, Every Day with Rachael Ray and FamilyFun - along with local television brands in fast-growing markets. Meredith is the industry leader in creating content in key consumer interest areas such as home, family, health and wellness and self-development. Meredith uses multiple distribution platforms - including print, television, online, mobile, tablets, and video - to give consumers content they desire and to deliver the messages of its advertising and marketing partners.
A hallmark of Meredith's business model and financial profile is its ability to consistently generate substantial free cash flow by leveraging the strength of its multi-platform portfolio. Meredith is committed to increasing Total Shareholder Return through dividend payments, share repurchases, and strategic business investments. Meredith has paid a dividend for 64 straight years, and increased its dividend for 18 consecutive years.
Total capitalization is $1.4 billion. 2013 sales were $1.5 billion, and pre-tax profit was $197.4 million.
Meredith's 52-week price range is $40.11 to $53.84. Long-term debt as a percentage of capital is 32.3%. The payout ratio for the past four years has averaged 48.0%. (The dividend was raised 44% in 2012, 12.8% in 2013, and 9.5% in 2014.) The average high yield for the past four years has been 4.8%. Earnings per share for the past four quarters (ending June 30) were $2.50. (MDP's fiscal year ended June 30.) At Friday's closing price, the price/earnings ratio was 18.4. The average P/E ratio for the past five years has been 12.9. I was impressed with management's ability to clearly articulate their strategy in a changing print and digital media environment.
I purchased shares on June 19 at $44.03. The yield was 3.93% and the five-year dividend growth rate was 13.6%, giving it a Chowder Rule number of 17.5.
Many years ago, my investment club did a comparison study of Cracker Barrel, Bob Evans Farms, and McDonald's. I've never owned shares of a restaurant enterprise, although I hold shares of ARCP and I feel like Red Lobster has married into the family. Several months ago, I put in a limit order to buy some shares of McDonald's around $92. It came within a few cents of that price, but the order didn't fill and MCD began its climb to $100+. Now, the restaurant stocks are coming under some pressure. I'm still watching McDonald's, and the price is becoming more attractive.
Dividend Contender Cracker Barrel Old Country Store (CRBL) was founded in 1969. It is headquartered in Lebanon, Tennessee, and it operates more than 600 restaurants/stores in 42 states. A major component of the company strategy is the gift section of the store.
From the company website:
Cracker Barrel welcomes approximately 6,700 guests into a typical store each week, serving meals for three day-parts and offering breakfast all day long. On their way into the dining room to enjoy some good country cooking, guests can wander through an authentic old country store that's fun to shop and discover unique gifts and self- indulgences, many reminiscent of America's country heritage. This shopping experience is one of the things that makes Cracker Barrel so unique. In fiscal 2013, the average Cracker Barrel Old Country Store generated over $3.3 million in restaurant sales and over $0.8 million in retail sales.
Cracker Barrel has raised the dividend annually since 2003. Recently, CBRL has been impacted by the activism of its largest shareholder, Sardar Biglari, who has called for a $20 special dividend. The company raised the dividend 10% in 2011, 30.7% in 2012, 95.6% in 2013 and 77.8% in 2014, moving it from 80 cents in 2010 to the current $4.00. The payout ratio for 2009-2012 averaged 25.1%. The payout ratio for 2013 was 46.0%.
Total capitalization is $887 million. 2013 sales were $2.6 billion, and pre-tax profit was $165.8 million.
CBRL's 52-week price range is $92.84 to $118.63. Long-term debt as a percentage of capital is 43.0%. The average high yield for 2010-2013 was 3.0%. Earnings per share for the past four quarters (ending April 30) were $5.32. (CBRL's fiscal year ended July 31.) At Friday's closing price, the price/earnings ratio was 18.2. The average P/E ratio for the past five years has been 12.2.
I bought some shares of CBRL on July 22 at $97.03, for a yield of 4.12%. Coupled with its five-year dividend growth record, CBRL's Chowder Rule number was 31.7.
United Development Funding
On July 16, I made a small initial investment in United Development Funding IV (NASDAQ:UDF), a mortgage REIT that loans money to single-family housing developers. This newly public company came onto my radar screen via Brad Thomas' June 6 article. At the time of purchase, UDF yielded 9.20%.
Hannon Armstrong Sustainable Infrastructure Capital
I have been intrigued by the emergence of "YieldCo" vehicles for investing in alternative energy sources. Several months ago, I made the decision to devote 2.5% of the portfolio (one-fourth of my target 10% energy sector allocation) to alternative energy. A search on Seeking Alpha for "YieldCo" directed me to Tom Konrad's July 17 SA article 15 Clean Energy YieldCos, Created Unequal. This led to further study of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (NYSE:HASI), which has received an IRS ruling that it can operate as a REIT. I usually dip my toe into the water and buy no more than half a position (around 1.25% of the portfolio). I felt good enough about HASI that I bought a full position at $14.40 on July 22. At the time of purchase, HASI yielded 6.11%.
I will say more about UDF and HASI in a follow-up article.
As stated in the May 23rd article, my goal at age 65 (in two years) is for 50% of the portfolio to be Dividend Champions (companies that have raised their payout for at least 25 consecutive years) and for 25% of the portfolio to be Dividend Contenders (companies that have raised their payout for at least 10 consecutive years). As of this writing, the portfolio consists of 44 equity holdings. Sixteen (36%) are Dividend Champions (including NNN), eleven (25%) are Dividend Contenders and six (14%) are dividend challengers. Eleven companies are in the "Other" category. National Retail Properties was added to David Fish's list of Dividend Champions in his August 1 spreadsheet update.
Retirement Income Portfolio as of August 1, 2014
|Amer St Water||AWR||55||30.79||.85||2.8%||1.1%||1.0%||.6%||8.7%|
|Northwest Nt. Gas||NWN||56||43.07||1.84||4.3%||1.5%||2.0%||1.2%||3.7%|
|Procter & Gamble||PG||56||79.65||2.57||3.2%||2.8%||3.0%||1.7%||8.8%|
|Johnson & Johnson||JNJ||62||99.90||2.80||2.8%||3.4%||3.0%||1.8%||7.6%|
|Old Republic Inter||ORI||81||14.50||.73||5.0%||1.0%||1.0%||.9%||1.4%|
|National Retail Pr||NNN||90||35.58||1.68||4.7%||1.2%||2.0%||1.1%||1.6%|
|Kinder Morgan Inc.||KMI||97||35.49||1.72||4.8%||2.5%||2.5%||2.2%||6.2%*|
|Deere & Co.||DE||04||84.96||2.40||2.8%||2.9%||2.5%||1.6%||13.4%|
|Digital Realty Trust||DLR||05||64.09||3.32||5.2%||2.2%||2.5%||2.2%||20.3%|
|Starwood Prop Trust||STWD||09||23.69||1.92||8.1%||7.0%||2.5%||10.6%||**|
|Main Street Cap.||MAIN||10||30.85||1.98||6.4%||2.1%||2.0%||2.6%|
|Merck & Co.||MRK||11||56.80||1.76||3.1%||2.0%||2.0%||1.1%|
|American Rlty Cp||ARCP||13||13.20||1.00||7.6%||2.7%||2.5%||3.9%|
United Dev Fund
"Yr." indicates the year the company began increasing its dividend or distribution. For example, American States Water has increased its dividend annually since 1955. (This list differs slightly from my previous lists. Since companies increase their payouts at different times of the year, sometimes one company would be temporarily "ahead" of another company that had not yet increased its payout in a given calendar year. I have simplified this by using the CCC ranking number assigned by David Fish. This is another reason to say "Thank you" to David. By using his ranking order, my future lists will be consistent with this one.)
"Div." is the annual dividend or distribution. "Yield" is the yield as of August 1. "Port" is each holding's market value as a percentage of the total portfolio. "Target" is the portfolio allocation goal for each holding. "Inc." is the percentage of portfolio income provided by each holding. "DGR" is each holding's 5-year dividend growth rate, as indicted by David Fish's August 1, 2014 spreadsheet.
The portfolio is significantly overweight in three positions: WPC, LNCO, and STWD. I was also overweight in O, but this position was reduced when O's yield dipped below 4.8%. Ordinarily, I would not recommend being this overweight, but WPC and STWD are "high conviction" positions for me. The portfolio's yield is currently 4.9%. I am currently withdrawing only 3.1% from the portfolio. If the monthly withdrawal rate was close to the portfolio yield, I would not be so heavily overweight in these three holdings. I recognize there is vulnerability with having a high percentage of income derived from three holdings: WPC (7.0%), STWD (10.6%), and LNCO (11.3%).
The portfolio cash position as of August 1 was 3.9%. The only stock currently on my "shopping list" is Hercules Technology Growth Capital (NASDAQ:HTGC). My goal is to obtain a 2.5% position. Along with a 2.5% target allocation for DLR, this would be a 5.0% position in the technology sector.
Unless otherwise noted, stock information about CVX, MMM, MDP, and CBRL came from Morningstar via BetterInvesting.org. Dividend Growth Rate information came from David Fish.
* KMI has been a public entity since 2011. I have included KMI as a Dividend Contender, since KMP has increased distributions since 1997. KMI's payout increases have been stronger than KMP's distribution increases, but I have used KMP's DGR as indicated by David Fish's spreadsheet.
** David Fish does not indicates STWD's five-year dividend growth rate, although he includes STWD in his list of Dividend Challengers. Morningstar reports STWD's payout as 11 cents in 2009, $1.20 in 2010, $1.74 in 2011, $1.76 in 2012, and $1.82 in 2013. The indicated payout for 2014 is $1.92.
I present this portfolio as a journal of one person's idea of how to structure a retirement income portfolio. Everyone has different goals, needs, and risk tolerance. This is not a recommendation to buy or sell any security, but it is presented to give you ideas for stocks to study. Please perform your own study and due diligence.
Disclosure: The author is long AWR, NWN, GPC, PG, EMR, MMM, KO, JNJ, SYY, PEP, WGL, ORI, T, HCP, CVX, NNN, MDP, O, KMI, WPC, SO, AVA, CBRL, WEC, GIS, DE, DLR, TCAP, STWD, BCE, MAT, ETN, TUP, LNCO, EPR, LTC, VTR, RYN, MAIN, MRK, CSG, ARCP, UDF, HASI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.