It's important to think long-term about portfolio management.
As early as August, 2013, I conversed with some Seeking Alpha participants about how to provide for the ongoing management of my retirement income portfolio without my involvement.
During 2015, I began to think more about several "what ifs," such as "What if I become incapacitated or otherwise unable or unwilling to manage a portfolio of individual stocks?"
I was helped in this thought process by David Van Knapp's April, 2015 article about his purchase of Schwab's US Dividend Equity ETF (NYSEARCA:SCHD) because of its low fees (.07%) and because it best approximated his investment philosophy.
My Retirement Income Portfolio of individual securities is essentially intact. I provided a March 18 portfolio update at my Instablog, and below you will find a brief update as of March 29.
Last week, I read several articles by Income Surfer, a 30-something Seeking Alpha contributor who is integrating ETFs into his portfolio of individual stocks. His articles have focused on several Vanguard ETFs that I have looked at from time to time. Income Surfer helped me see a way to embed in my current portfolio a group of ETFs that can at some point become the main (or perhaps exclusive) focus of the portfolio.
Income Surfer's most recent article about this process focused on Vanguard's FTSE Emerging Markets ETF (NYSEARCA:VWO). I appreciate his analytical approach to stock-picking and his current strategy for blending individual securities and ETFs.
I may gradually phase-in some ETF exposure.
My present portfolio is close to the maximum number of individual companies that I want to manage. Also, I'm looking ahead to a time when I may want to spend more time doing other things, and eventually to the time when my survivors will manage the portfolio.
I've accomplished most of my goals for credit quality and diversification. The "top ten" stocks are all rated AA- or higher by S&P. Twenty-three of the top 25 are rated A- or better. The two exceptions are Enterprise Products Partners (NYSE:EPD) and WP Carey (NYSE:WPC).
The inclusion of some ETFs could achieve more diversification and this could lay the groundwork for my son to assume management of the portfolio at some point in the future. It would be easy to add to shares of existing ETFs in the portfolio if he did not want to continue to manage individual stocks or partnerships.
Five ETFs currently are on my radar, including the Schwab US Dividend Equity ETF.
At present, my idea is to add five ETFs to the portfolio over the course of 2016.
David Van Knapp brought the aforementioned Schwab US Dividend Equity ETF to my attention, and it has been on my watch list for several months. David's article presents a good argument for considering SCHD.
Morningstar gives SCHD a 5-star rating and says SCHD is "a suitable core holding for investors who want a high dividend yield without tilting toward distressed and deep-value stocks." SCHD market cap weights 100 high-yield U.S. stocks "with solid fundamentals and a consistent track record of paying dividends."
However, SA contributor Chowder uses SCHD as an illustration of why he chooses to invest in individual stocks, and his conclusion is worth considering: "ETF's simply don't provide me the downside protection I desire in building a personal portfolio of equities."
My rationale for not including ETFs or mutual funds before now has been that I have been able to build a portfolio of individual stocks that has met my goals of income and income growth in a way that I could not find via ETFs or mutual funds.
Chowder's comment (above) was part of the comment thread to Chuck Carnevale's article March 24, 2016 article, Dividends' True Contribution to Total Return May Surprise You. Here's more of Chowder's comment:
SCHD seems to be a favorite. It hasn't been through a recession yet, and Mama Mia when it does.
In the breakdown between cyclical, sensitive and defensive, 47% of that fund is in companies defined as sensitive to the economy. There is another 13% of the portfolio held in cyclical companies.
You are looking at 60% exposure to companies that don't do well in recessionary times. That's opposite of what my personal portfolio holds.
I have over 50% of my portfolio in defensive companies. These are the companies that better represent the ability to pay and grow the dividend regardless of market conditions or the economy.
SCHD holds just 0.67% in utilities. Are you kidding me? Less than 1% in an industry that is known to hold up well in declining markets, well better than most, and is as reliable as an industry can be in paying dividends.
SCHD's closing price on March 25 was $39.72. The trailing 12-month yield is 3.02%. The 52-week price range has been $31.75-$40.48. The annual turnover is 19%. The annual expense ratio is .07%. My target price for initiating a position in SCHD is $39.12.
The top ten holdings represent 44% of the portfolio's assets:
- Microsoft (NASDAQ:MSFT)
- Verizon (NYSE:VZ)
- Chevron (NYSE:CVX)
- Exxon (NYSE:XOM)
- Coca-Cola (NYSE:KO)
- Johnson & Johnson (NYSE:JNJ)
- Pfizer (NYSE:PFE)
- Intel (NASDAQ:INTC)
- Procter & Gamble (NYSE:PG)
- PepsiCo (NYSE:PEP)
I like SCHD's extremely low fees and I am comfortable with the ETF's concentration with just 100 stocks, particularly since I am looking to include several other ETFs.
Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM)
I think the broader VYM is a good companion to the more concentrated SCHD. The VYM appears to be a dividend-focused variation of the S&P 500.
Morningstar gives VYM a 5-star rating and says it "offers equity investors higher yields without sacrificing diversification or quality." VYM is a market cap weighted "broad basket of high-yielding U.S. stocks" with a "value tilt," suitable as a core holding.
VYM's closing price on March 25 was $68.42. The ETF holds 433 stocks and the trailing 12-month yield is 3.29%. The 52-week price range has been $48.05-$70.66. The annual turnover is 11%. The annual expense ratio is .09%. My target price for initiating a position in VYM is $66.26.
The top ten holdings represent 32.2% of the portfolio's assets:
- Johnson & Johnson
- General Electric (NYSE:GE)
- Wells Fargo (NYSE:WFC)
- AT&T (NYSE:T)
- Procter & Gamble
- JPMorgan Chase (NYSE:JPM)
This is a classic collection of the type of large, blue chip companies that I believe are vital to a dividend portfolio. When one looks at the individual stocks in my Retirement Income Portfolio, one might ask why I would include VYM because of the duplication. As I mentioned above, part of my reason for introducing ETFs to the portfolio is to provide a structure for my survivors to eventually manage the portfolio.
Vanguard FTSE Emerging Markets ETF
Like many U.S. investors, I tend to be U.S.-centric. Even though many of my individual stocks are multi-national corporations with global operations, I have limited exposure to international companies. VWO offers low-cost, broad exposure to emerging markets.
Morningstar gives VWO a 3-star rating and says it "provides market-cap-weighted exposure to equities from 22 emerging-markets countries. With an annual fee of 0.15%, it is one of the cheapest emerging-markets funds available."
VWO's closing price on March 25 was $33.81. The ETF holds 3,473 stocks and the trailing 12-month yield is 3.48%. The 52-week price range has been $27.98-$45.08. The annual turnover is 7%. The annual expense ratio is .15%. My target price for initiating a position in VWO is $33.04.
The top ten holdings represent 17.5% of the portfolio's assets:
- Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM)
- Tencent Holdings Ltd. (OTCPK:TCEHY)
- China Mobile Ltd. (NYSE:CHL)
- China Construction Bank Corp. (OTCPK:CICHY)
- Naspers Ltd. (OTCPK:NPSNY)
- Industrial & Commercial Bank of China Ltd. (OTCPK:IDCBY)
- Hon Hai Precision Industry Co. Ltd. (OTC:HNHAY)
- Infosys Ltd. (NASDAQ:INFY)
- Bank of China Ltd. (OTCPK:BACHY)
- Housing Development Finance Corp. Ltd. (OTC:HSDGY)
For more about VWO, you can read Income Surfer's March 19, 2016 SA article.
Vanguard REIT ETF (NYSEARCA:VNQ)
Morningstar gives VNQ three stars and says "VNQ is far and away the largest REIT exchange-traded fund" and "VNQ's 0.12% expense ratio makes it one of the cheapest options available" to investors seeking exposure to the domestic real estate market.
VNQ's closing price on March 25 was $80.46. The ETF holds 153 stocks and the trailing 12-month yield is 4.07%. The 52-week price range has been $70.89-$86.89. The annual turnover is 8%. The annual expense ratio is .12%. My target price for initiating a position in VNQ is $79.09.
The top ten holdings represent 36.8% of the portfolio's assets:
- Simon Property Group (NYSE:SPG)
- Public Storage (NYSE:PSA)
- Equity Residential (NYSE:EQR)
- AvalonBay Communities (NYSE:AVB)
- Welltower (NYSE:HCN)
- Equinix (NASDAQ:EQIX)
- Prologis (NYSE:PLD)
- Ventas (NYSE:VTR)
- Boston Properties (NYSE:BXP)
- General Growth Properties (NYSE:GGP)
I like the quality reflected in VNQ's top holdings, particularly Simon Property Group and Public Storage, the only two REITs with a Standard & Poor's credit rating of A. Equity Residential and AvalonBay are both rated A-. VNQ gives you exposure to these high quality REITs and it also has a strong yield.
Vanguard's website provided this helpful information about the yield:
The current unadjusted effective yield is 4.07% as of 02/29/2016, which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).
The current adjusted effective yield is 2.77% as of 02/29/2016. The adjusted yield reflects a reduction in the income included in the yield based on the average return of capital and capital gain distributions received from the fund's REIT investments for the past 2 calendar years. (These percentages are 29.91% for 2015 and 31.44% for 2014.)
Income Surfer has a recent SA article about VNQ.
Vanguard Utilities ETF (NYSEARCA:VPU)
Morningstar gives VPU four stars and says this market cap weighted ETF is "a strong, appealing option for investors who want broad exposure to defensive, high-yielding U.S. utilities companies. Morningstar points out that when large- and mid-cap stocks outperform smaller-cap stocks, this fund does better than an equal-weight approach, while an equal-weight ETF would do better when small-caps outperform.
VPU's closing price on March 25 was $105.87. The ETF holds 82 stocks and the trailing 12-month yield is 3.41%. The 52-week price range has been $87.84-$107.06. The annual turnover is 7%. The annual expense ratio is .10%. My target price for initiating a position in VPU is $98.07.
The top ten holdings represent 47.9% of the portfolio's assets:
- NextEra Energy (NYSE:NEE)
- Duke Energy (NYSE:DUK)
- Southern Co. (NYSE:SO)
- Dominion Resources (NYSE:D)
- American Electric Power Co. (NYSE:AEP)
- Exelon (NYSE:EXC)
- PG&E (NYSE:PCG)
- PPL Corp (NYSE:PPL)
- Sempra Energy (NYSE:SRE)
- Edison International (NYSE:EIX)
VPU provides a way to respond to Chowder's critique of SCHD, with its low percentage of utility holdings.
The only two trades last week were both on March 23. I sold a few shares of Emerson (NYSE:EMR) at $54.50, which reduced EMR to what I consider a core allocation for the portfolio, or 3.2%. My cost basis is now $52.30.
On March 23, I bought a few additional units of 8point3 Energy Partners, LP (NASDAQ:CAFD) at $13.83. CAFD is now 1.3% of the portfolio, above the target allocation of 1.0 to 1.2%. My cost basis is now $14.90.
Also on March 23, I placed a limit order to sell a few shares of Merck & Co Inc. (NYSE:MRK) at slightly above my cost basis of $53.72. MRK is now my largest holding and this would trim it down to what I consider a core allocation, keeping it in the top five but below JNJ, PG and 3M (NYSE:MMM). That order has not yet filled.
On March 29, I took advantage of the continuing broad market rally by closing two positions, STAG Industrial (NYSE:STAG) and Main Street Capital (NYSE:MAIN). Both have BBB credit ratings and in recent months I've been shifting the portfolio to higher rated stocks.
I sold STAG at $19.96. The cost basis was $17.34. I sold MAIN at $31.33. The cost basis was $28.22.
My concern is that STAG could be more vulnerable to an economic recession than some other REITs, and that while MAIN (in my opinion) is the strongest business development company, I believe that it--along with all BDCs--has more potential vulnerability in an economic downturn than other stocks. MAIN also trades at a strong premium, which I believe is justified in a growing economy. What I don't know is whether the premium would be sustained in a recession-inspired bear market.
The sale of STAG and MAIN should be understood as part of my effort to position the portfolio more conservatively and more defensively rather than a critique of the two holdings. They were both relatively small portfolio positions at 1.3% and 1.2%, respectively.
As of March 29, the portfolio is comprised of 32 holdings, including 27 common stocks, four master limited partnerships and one preferred stock.
|Procter & Gamble||PG||82.80||2.65||3.2%||4.9%|
|Johnson & Johnson||JNJ||109.14||3.00||2.7%||4.8%|
|Int. Business Mach.||IBM||149.33||5.20||3.5%||4.4%|
|Public Storage Pfd B||PSA.PRB||25.60||1.35||5.3%||3.0%|
|Enterprise Prod Prtnrs||EPD||24.31||1.56||6.4%||2.9%|
|Archer Daniels Mid||ADM||36.87||1.20||3.3%||2.6%|
|WEC Energy Group||WEC||59.59||1.98||3.3%||1.7%|
|8point3 Energy Prtnrs||CAFD||14.27||.90||6.2%||1.3%|
|NextEra Energy Prtnrs||NEP||27.00||1.23||4.6%||1.2%|
|Pattern Energy Group||PEGI||19.17||1.52||7.9%||1.1%|
|S&P||Sector||% Value||% Income|
Weightings are from Fidelity as of March 24, 2016.
The overall portfolio yield is now 3.4%. The cash position is high (for me) at 9.8%. The portfolio is up 10.6% year to date.
This year I intend to continue to regularly post transactions, either through an article or Instablog. I welcome your questions and suggestions. It is not my intent to encourage you to buy or sell any security. I offer this update to share ideas for stocks to study and as part of the journal of my ongoing effort to build a retirement income portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Everyone's situation is different. Please do your own due diligence.
Disclosure: I am/we are long JNJ, PG, MMM, MRK, IBM, MSFT, WMT, GE, PFE, CSCO, QCOM, CMI, EMR, PEP, PSA.PRB, GPC, TXN, DOV, ADM, UNP, CNP, SO, WEC, NUE, EPD, T, WPC, HASI, EVA, PEGI, NEP, CAFD.
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.