The Perfect Portfolio: What We Are Buying Right Now (Part 2)

by: David Crosetti


The Perfect Portfolio is held in a taxable account.

The strategy behind The Perfect Portfolio is increasing dividend income to supplement Social Security.

The Perfect Portfolio does not ignore the opportunity for growth from capital appreciation.

The Perfect Portfolio seeks to increase dividend income at a rate of 6% or better, annualized.


I've written a number of articles that have to do with a portfolio that I refer to as The Perfect Portfolio, over the last couple of years. This portfolio, in and of itself, is not actually "perfect" in any sense of that word. However, it was a "perfect" solution to a problem that presented itself in 2009, when the portfolio was started.

My mother was a CD "investor" and was very adept at laddering CDs to lock in very good rates of return over extended periods of time. As many of you know, interest rates in the 2008-2009 market correction went south on CD investors and unless you had extended maturity dates, finding replacement CDs with healthy rates of return became almost impossible.

So our solution was to take the maturing CDs and roll them into a basket of dividend growth stocks, in order to get a dividend return that was in excess of what we could get from bank CDs.

As each CD matured, we rolled the money into fairly standard Blue Chip companies like Abbott (NYSE:ABT), Colgate Palmolive (NYSE:CL), Kimberly Clark (NYSE:KMB), Johnson and Johnson (NYSE:JNJ), Coca Cola (NYSE:KO), Chevron (NYSE:CVX), Altria (NYSE:MO), McDonald's (NYSE:MCD), AT&T (NYSE:T), and Procter & Gamble (NYSE:PG).

Again, I want to make it clear that this is not "the best" portfolio or a "perfect" portfolio in any particular way, except to say, it was a perfect solution to the problem that we were having with generating income.

What You Should Know:

Two years ago, I sold a house that I owned in California. We decided that since we were not using the house anymore as a vacation home, it was time to move on and sell.

The proceeds from that sale were used to purchase a house at the beach on the Gulf Coast. That property serves two purposes. First, it is a place for us to "get away" and second it is a property that we use as a rental property and that has been very profitable for us.

The second use of the proceeds was to fund Roth IRAs for my wife and myself at the maximum allowable contribution rates available to us. We will continue to use money from that sale to fund the Roths as we move forward, until my wife stops working and we no longer have earned income to count toward the Roth contributions.

The other things that we did was to purchase "toys." We bought a boat so that we could enjoy the waters around the Gulf Coast and we purchased a travel trailer recreational vehicle as I have a serious case of wanderlust and tend to travel on a moment's notice.

The balance needs to be invested in income producing stocks and it is our intention to do just that with the remaining funds in our taxable account, The Perfect Portfolio.

Disclaimers about The Perfect Portfolio:

Again, this portfolio is in a taxable account. When my mother passed away, I inherited the portfolio and along with it, a stepped up basis for the stocks held in the portfolio. I use the income from this portfolio to supplement my Social Security benefit, since I am retired, and will continue to use the dividend income from this account moving forward.

When the last CD matured, we invested more money into the original 10 positions, but we also added new ones (2011). Those new investments were Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Verizon (NYSE:VZ), Reynolds American (NYSE:RAI), and Exxon Mobil (NYSE:XOM).

When Abbott spun off AbbVie (NYSE:ABBV) we received 524 shares of that company, which we still hold.

This year, in February, we purchased shares in Cisco (NASDAQ:CSCO) and JP Morgan Chase (NYSE:JPM) to bring the portfolio up to 18 holdings.

In our last article concerning this portfolio, we shared the year end value for the portfolio, the dividend yield for the portfolio, and shared the purchase notifications for both CSCO and JPM.

We have made a commitment to be as transparent as we can, relative to this portfolio and instead of buying or selling and then reporting our activity to you, we are going to attempt to write about what we are planning to do and sharing it with you before we actually do it.

Let's Get Started, Shall We?

I have to admit that the stocks I own are pretty boring. I look for companies that have a history of paying dividends, increase those dividends annually (dividend growth stocks), and have the cash flow to continue increasing those dividends in the future.

I like to purchase companies when they are priced at a value, but that does not mean that I can always purchase companies at their 52 week low. It also means that I rarely if ever purchase a company at the 52 week low and have reservations about people who claim that they can purchase stocks at the lows.

I have purchased stock in the past at what I believed to be a good value, only to see the stock decline further in price. By the same token, I have purchased stock in companies that have taken off in price and while that is pleasing, my primary focus is on creating an increasing income stream. But the guiding principle for me is that I am investing with a longer term view and I do not worry a whole lot about fluctuations in the market price of the companies that I own.

With that in mind, there have been a number of companies that have hit my radar, in terms of being potential purchases.

The Goals of the Perfect Portfolio:

The last couple of days have been really interesting in terms of the overall market moving higher. I don't know if the market will continue in this direction or if it will revert back to the market that we saw in January.

Over the long haul, it really doesn't matter all that much to me. Up or down, sideways, whatever. The Perfect Portfolio has one objective and that is income from dividends. If the stocks in the portfolio appreciate in value, then that's just fine with me. If the stocks in the portfolio decline in value, that's fine with me. The price of the stock is going to be determined by the markets. I have little or no control over that.

My main concern is with the company that I'm buying and not the popularity contest that often seems to be the driving force behind market price swings.

Buying quality companies that have a history of increasing dividends annually, that have the earnings and cash flow to continue increasing dividends, and that are likely to continue increasing dividends is how I approach investing.

A Brief Recap of Current Events:

As mentioned earlier in this article, we had two limit orders filled on 2/11/2015. Those two limit orders were for new positions in Cisco and JP Morgan. Those two are a done deal and it is what it is.

The two companies had impressive gains right after we purchased them. I would love to say that I'm a genius, but the gains in those two companies and our ownership of them was nothing more or less than "coincidence."

JP Morgan announced that the CEO was purchasing 500,000 shares of the stock. Guess what? The stock went up dramatically from our purchase price as investors rushed to purchase JPM as they believed that the action of the CEO was some sort of expression of confidence.

Cisco announced a good earnings report and then shocked everyone by increasing the dividend from .84 a share to $1.04 a share. That was a 24% increase. The stock price rallied from our purchase price. Another "coincidence."

Don't want to beat a dead horse here, but the reasons we purchased both of these companies in our taxable account is because they are also in our retirement IRA. So we were familiar with both companies and feel that they represented a relative value as additions to The Perfect Portfolio.

Companies On Our Radar:

Right now, we have identified these companies as potential additions to The Perfect Portfolio. We currently have placed limit orders for Centerpoint Energy (NYSE:CNP), additional shares of Verizon which we already own in The Perfect Portfolio, Southern Company (NYSE:SO), Phillip Morris (NYSE:PM), Pfizer (NYSE:PFE), Emerson Electric (NYSE:EMR), and Qualcomm (NASDAQ:QCOM).

The table below shows the price, dividend, and yield for each company as of 1/31/16. We have provided a column with a recent price (earlier today) and the yield based on that price. We have also included our limit price and the expected yield, based on the current dividend, relative to that strike price.

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Summary and Conclusion:

It is my intention to keep this project as much in real time as is humanly possible. I will not tell you after the fact that I bought XYZ stock for $25 a share without telling you ahead of time that I want to buy XYZ at $25 a share.

I will post the stocks that I am wanting to purchase BEFORE I purchase them and the price point will be relative to yield goals for the purchase.

That does not mean that I am throwing valuation out the window. I'm not. I am buying these stocks because, in my opinion, they represent companies that I want to own in my portfolio and they make "perfect sense" for what my portfolio is attempting to accomplish. That is income and income growth moving forward.

At this point in time, none of the 7 companies in this article have been purchased and none of them, with the exception of Verizon is currently held in The Perfect Portfolio.

We will follow up with recaps of any activity in this portfolio and plan to keep you informed as to quarterly results or any issues of immediate concern to the portfolio.

Disclosure: I am/we are long ABT ABBV CL CVX INTC JNJ KMB KO MSFT PG RAI T VZ XOM.

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.