After my previous article was published detailing my retirement portfolio, it was ridiculed for a lack of diversification. Many accused me of being reckless and using poor judgment and even jeopardizing our retirement. Ninety percent of the comments predicted my portfolio would eventually blow up. Does the proposed Kinder consolidation change anything regarding my portfolio? Am I being foolish believing that I am in the driver's seat going forward? Am I counting my chickens before they hatch? Maybe. The market is a humbling living breathing organism. I once read that in one of Ken Fisher's books. He warns of being too cocky. I hope I am not crossing that line. I am writing this article as an update. I know the market could take back my unrealized gains as fast as they materialized.
So why am I happy about today's news? My KMR position appreciated 24% in my taxable account in one day. Sometimes being over-concentrated pays off. I had a sizable position in KMR in my taxable account prior to the 24% gain in KMR. I now have an even bigger position. I considered selling a portion of my KMR shares in pre-market trading yesterday morning when I saw KMR bidding $102; I decided to hold. When I saw the bid at $106+ I was astonished; I decided to hold. Sure, 20-20 hindsight says I should have sold and bought back at $94 (not expecting to buy yesterday's low for the day, $91). I refrained from getting into a trading mode. I did decide to buy more KMR in my SEP IRA when I saw it drop to $94. I believe that KMI will continue to appreciate in price and I like the 2.485 KMI shares I will receive when the consolidation is finalized. I like the projected 16.3% dividend growth in 2015 and the 10% annual dividend growth from 2016-2020. I wrote a previous article on KMR, which can be seen here: Why I Love KMR More Than KMP For High Dividend Income.
I now realize that the 24% gain in KMR is meaningless. It was an emotional roller coaster yesterday. I should have known better. I am being honest. The only important variables are how many shares of KMR I own and the price of KMI. KMR will eventually be converted to KMI shares by a factor of 2.485. Therefore, the price of KMI will determine my unrealized gains. Since the majority of my KMR shares are held in our taxable account and I have large carry-forward losses from the internet days, they will offset the capital gains tax when I sell KMI. I will sell a portion of my KMI if it trades up to $50/share.
My tax situation regarding KMR and the exchange to KMI shares:
The KMR exchange for KMI will be a NON taxable event. My cost basis in KMR will be transferred to KMI. My KMI cost basis can be calculated by dividing the KMR cost basis by the conversion factor of 2.4849. When I sell KMI shares I will owe a capital gains tax, however my past carry forward losses will be used to offset the capital gains tax. Once my capital gains become greater than my past carry forward losses I will owe a capital gains tax. As KMI continues to appreciate in price it will eventually outweigh my past carry forward losses (if I sell KMI), at that point in time I will really celebrate and be happy to pay my capital gains tax due.
My portfolio as presented in my prior article was yielding 8.8% (as of the close on 7/22/14) .
You can see my previous article here: My High Dividend Yield Retirement Portfolio Delivers 8.8% Of Income For This Retiree.
My entire retirement portfolio is listed below with my allocations. I will not disclose the actual value of my retirement portfolio. It is not needed to track results. I am going to use $1M for simplicity sake to represent my retirement portfolio in order to track future results.
My main objective here is to be transparent from July 22, 2014, going forward. I will update my readers with any changes to my portfolio when appropriate. I will report the current dividend income and show how the reinvested shares increase from quarter to quarter, thereby increasing the income.
Retirement portfolio as of July 22, 2014 close: I list the percentage allocation, dollar amount, share count, closing price, annual dividend and the income.
American Capital Agency (NASDAQ:AGNC) = 40.3% = $403,000 = 17,230 shares, price = $23.39 the current annual dividend= $2.60= Income= $44,798
Altria Group (NYSE:MO) = 38.3% = $383,000 = 9,134 shares, price = $41.93 the current annual dividend= $1.92= Income= $17,537
Prospect Capital (NASDAQ:PSEC) = 21.4% = $214,000=19,705 shares, price = $10.86 the current annual dividend= $1.325 = Income=$26,109
Total value of the portfolio = $1M Total Income =$88,444 = a yield of 8.8%
My Taxable Account is:
Kinder Morgan (NYSE:KMR) = 100%
Allocation when combining Retirement Accounts + Taxable Account:
AGNC = 29% rounded
KMR = 29% rounded
MO = 27% rounded
PSEC = 15% rounded
Total Yield = 8.5%
My current portfolio as of the close on 8/11/2014 yielding 8.4%:
Since I am going to sell shares from our taxable account to use for our living expenses, I am not going to report the details of this account going forward. I will continue to disclose all changes regarding the retirement accounts (ROTH IRAs and a SEP IRA) going forward. MO is the core of our retirement portfolio, and I will not sell any MO shares unless some extraordinary event occurs. PSEC and AGNC are under my watchful eye and will be added to or sold based on their respective book values (BV). For example, if AGNC trades at a 10% premium to its BV, I would sell a portion of it. I will rebalance AGNC, PSEC and KMR based on my judgment of their value. I received an AGNC dividend since my last article and it was reinvested and accounted for.
I have sacrificed some income for growth by selling approximately one-third of my PSEC position (in my SEP IRA) and a small amount of my AGNC position to buy KMR shares. I decided that taking some money off the table regarding PSEC was the prudent thing to do. I will continue to update this portfolio based on material changes going forward. If our taxable account is not depleted in 4 1/2 years (I will turn 59 1/2), this will enable me to continue reinvesting our retirement account dividends. My portfolio has outperformed the S&P 500 YTD. The total return of my portfolio YTD is approximately 31%. The best part in my opinion is that AGNC is trading well below its BV, and I will receive 2.485 shares of KMI for each KMR share as long as the deal gets shareholder approval and no regulatory issues prevent it. Richard Kinder is not concerned with any issues preventing the consolidation: Kinder Morgan to Consolidate Empire.
Disclosure: The author is long KMR, AGNC, PSEC, MO, ED. 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.
Additional disclosure: This is my portfolio. I am not recommending anyone buy the stocks I own. Please do your own due diligence to decide which investments meet your individual goals and income needs. I take 100% responsibility for my decisions to buy or sell stocks and for managing my portfolio. I advocate all investors do the same with their investments and portfolio. Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal holdings may not fit each investor's current investing strategy.