This is an update on my Retirement Income Portfolio. No action occurred during the week of February 15-19. The week of February 8-12 saw initial purchases of Qualcomm (NASDAQ:QCOM), Cisco (NASDAQ:CSCO), General Electric (NYSE:GE) and Pfizer (NYSE:PFE).
In 2015, I began the process of moving to higher credit quality stocks (as rated by Standard & Poor's). One of my 2016 goals is to complete this transformation before I reach age 66 at the end of this calendar year, when I reach "full retirement age."
My desired portfolio design is to have 30 holdings, or six groups of five. Here are the target portfolio allocations for each of the 30 stocks:
- Five holdings with 5.0% each, for a total of 25%;
- Five holdings with 4.2% each, for a total of 21%;
- Five holdings with 3.4% each, for a total of 17%;
- Five holdings with 2.6% each, for a total of 13%;
- Five holdings with 1.8% each, for a total of 9%; and
- Five holdings with 1.2% each, for a total of 6%.
The target cash allocation is 9.0%.
The portfolio is listed below, giving the company name, ticker symbol, percentage of the portfolio represented by each holding, the price as of the close on February 22, the annual dividend yield, the S&P credit rating, the number of consecutive years of dividend increases (as given by David Fish), the "Chowder Rule" number, percentage of portfolio income generated by each holding, the cost basis for each security, the yield on cost, the target buy price, and the target percentage allocation of the portfolio for each holding. *Genuine Parts (NYSE:GPC) is not rated by S&P, but the company has an A+ rating by Value Line.
|Int Bus Mach||IBM||4.6||133.77||5.20||3.9||AA-||20||18.5||4.6||141.96||3.7||115.56||4.2|
|NW Nat Gas||NWN||0.0||52.44||1.87||3.6||A+||60||05.6||0.0||42.51||3.4|
|WEC Energy Gr||WEC||1.8||57.10||1.98||3.5||A-||13||21.7||1.6||41.24||4.8||49.50||1.8|
|Main Street Cap||MAIN||2.1||27.96||2.16||7.7||BBB||5||13.6||4.1||29.02||7.4||25.41||1.2|
The portfolio yields 4.0% and is up 3.3% for calendar year 2016.
|S&P||Sectors & Portfolio Companies||Value||Income|
|20.68||Technology (MSFT IBM CSCO QCOM TXN)||18.7||16.4|
|REITs (WPC STAG HASI)||4.5||8.3|
|15.20||Healthcare (JNJ MRK PFE)||13.9||12.0|
|10.11||Consumer Staples (PG WMT PEP ADM)||14.8||11.8|
|9.96||Industrials (MMM GE CMI DOV EMR UNP)||23.2||19.1|
|6.53||Energy (EPD EVA PEGI)||5.2||10.1|
|2.98||Utilities (CNP SO WEC)||9.7||11.3|
There are two "vacancies" in the portfolio. I am considering adding another utility and another real estate investment trust to the portfolio. I like both of these sectors, and I think they provide useful components to a dividend portfolio. In many sectors, a company may or may not be "dividend friendly," but utilities and REITs understand that their investor base includes a large percentage of dividend-seekers.
One more utility, with a 3.4% or so allocation, would bring that sector to about a 13% target allocation. I am comfortable with the utility sector comprising 12%-15% of the portfolio.
Northwest Natural Gas
In the past I've owned shares of Northwest Natural Gas, which is number 3 on David Fish's "CCC" list. It has raised its dividend for 60 years. Only American States Water (NYSE:AWR) and Dover Corporation have longer tenure on the list.
As indicated in the above table, I have placed NWN tentatively in the #11 position in the portfolio. I am also considering American States Water and WGL Holdings (NYSE:WGL). Each of these utilities is given an A+ credit rating by Standard & Poor's.
In addition to the A+ credit rating and the 60-year record of annual dividend increases, NWN has a relatively low debt ratio. FAST Graphs shows a 38% Debt/Cap ratio. The graph also indicates that the stock is rarely undervalued. The price is more than midway into the light green area of the graph, significantly above the dark green area, where I prefer to buy a stock. This is simply a graphic way of seeing that the stock price is high relative to earnings. The P/E ratio is a relatively high 23.4, according to FAST Graphs. The yield was 3.57% as of the close of trading on February 22.
The above paragraph indicates what I like about NWN and what I don't like. I like the sector in which it operates, its conservative balance sheet, and its long history of dividend increases. What I don't like is the price and the relatively low yield.
Which utility would you add to the portfolio?
I am also considering American States Water. This would give me exposure to a water utility. AWR has developed an entrepreneurial, dividend-growth culture in recent years. It is located in the Pacific Northwest and it has operations at various US military installations across the country. I once owned shares of AWR when it dipped to a 3.0% yield a few years ago. It tends to rarely be undervalued. AWR has an A+ credit rating from S&P and it is #1 on David Fish's "CCC" list, with 61 consecutive years of dividend increases. The yield, as of February 22, was a very low 1.9%.
Another utility I am considering is WGL Holdings, a utility in the Washington, D.C. area. It is a Dividend Champion with 39 consecutive years of dividend increases. It has an A+ credit rating from S&P. It has a progressive approach to alternative, distributed energy, and it has operations in the energy transmission business. The yield, as of February 22, was a relatively low 2.9%. I've owned shares of WGL in the past and I have followed their progress.
Would you choose? Is there an anther utility that you would put in this slot? If so, which one?
A Real Estate Investment Trust
One more REIT, with a 2.6% or so allocation, would bring that sector to about a 7% target allocation. I am comfortable with the REIT sector comprising 5%-7% of the portfolio.
Simon Property Group
I have looked at Simon Property Group from time to time, but I have never owned shares, primarily because the yield tends to be lower than most REITs. SPG is a Dividend Challenger that has raised its dividend for six consecutive years.
As indicated in the above table, I have placed SPG tentatively in the #20 position in the portfolio. I am also considering Public Storage (NYSE:PSA). Each of these REITs is given an A credit rating by Standard & Poor's. It's my understanding that these are the only two US REITs with an A credit rating.
In this FAST Graph, I used the Adjusted Funds From Operations (AFFO) option. FAST Graphs shows the A credit rating, an 81% Debt/Cap ratio, which is relatively high compared with the Debt/Cap ratios shown on FAST Graphs for three other triple-net REITs: Realty Income (NYSE:O), 41%; for National Retail Properties (NYSE:NNN), 37%, and WP Carey , or 47%. This merits further research, especially since S&P gives SPG a higher credit rating than Realty Income (BBB+), National Retail Properties (BBB+) and WP Carey (BBB).
The graph also indicates that the stock was relatively undervalued 1997-2010, but since the recession has been given a premium valuation by the market. The price is almost midway into the light green area of the graph, significantly above the more attractive dark green area. This is simply a graphic way of seeing that the stock price is high relative to earnings. FAST Graphs shows an 18.0 Price/AFFO ratio for SPG, compared with a 21.7 Price/AFFO ratio for O, a 20.4 Price/AFFO ratio for NNN, and an 11.3 Price/AFFO ratio for WPC. The yield was 3.38% as of the close of trading on February 22, compared with 3.98% for O, 3.88% for NNN, and 6.96% for WPC.
So, why consider SPG given the other triple-net options? One factor is relative dividend growth. SPG's 5-year dividend growth rate, as shown by David Fish, is 19.9%, compared with 5.6% for O, 2.5% for NNN, and 13.6% for WPC.
I've identified two areas for more study:
- Why does SPG have a significantly higher credit rating, even though FAST Graphs shows it with a much higher debt load?
- How does the credit-worthiness of SPG's tenants compare with the credit-worthiness of the other triple-net REITS? (This may answer the first question!)
Which REIT would you add to the portfolio?
I am also considering Public Storage. It, like SPG, is given an A credit rating by Standard & Poor's. PSA is in the self-storage business. At first glance, it appears to be more overvalued than SPG. FAST Graphs indicates a 28.9 Price/AFFO ratio, a price line that is in (what I call) the "stratosphere," the white area above the light green dividend area of the graph. Since PSA reinstated dividends in 2009, the REIT has consistently been given a premium valuation by the market. FAST Graphs shows a 3% debt/cap ratio, which is worthy of more study. The yield is a relatively low 2.7%.
Recently, Bill Stoller offered a helpful review of PSA.
Which of these two REITs would you choose? Is there an alternative REIT that you would put in this slot? If so, which one?
The Portfolio's "Bottom Tier"
If I add AWR, NWN, or WGL to the portfolio, and if I add SPG or PSA to the portfolio, the top 25 positions will have a credit rating of A- or better.
If two new securities are added to the portfolio, this would give me 33 holdings. My preference would be to hold just 30 securities, which would mean selling three of the bottom tier companies:
If you managed this portfolio and were asked to limit the bottom group to five securities, which three positions would you close?
AT&T is my only holding in the Telecommunications sector. EPD is my only fossil-fuel related energy holding. WPC is a long-time holding that has been one of my most profitable securities. I view MAIN as the best business development company. STAG is a REIT that holds industrial properties. HASI is a REIT that specializes in financing sustainable energy sources. EVA is a master limited partnership that makes wood pellets and wood chips as bio-fuel for the power industry. PEGI owns windmills for making electricity.
One simple solution would be to sell the three non-rated issues (HASI, EVA, and PEGI), but I am happy to have these alternative energy stocks that are relatively new to the market. Another simple solution would be to sell the three BBB rated securities (WPC, MAIN and STAG). The price of each of these three is severely depressed, and I am in no hurry to sell any of them.
I welcome your feedback, questions and suggestions. I always learn a great deal from our conversations. I'm offering this article as companion resource for the Dividend Health Checkup episode published on February 23 by Doctor Dividend and DGI Guy.
This article is part of the journal of my effort to design a retirement income portfolio. It is not intended as a recommendation to buy or sell any security. I offer this as part of Seeking Alpha's ongoing community conversation about stocks to study and how to design a portfolio. Please do your own due diligence.
Disclosure: I am/we are long JNJ, PG, MMM, MRK, MSFT, WMT, IBM, GE, PFE, CSCO, GPC, QCOM, TXN, CMI, EMR, PEP, ADM, UNP, DOV, NUE, CNP, SO, WEC, T, EPD, WPC, MAIN, STAG, HASI, EVA, PEGI.
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.