One thing this will not be is another article on the justification to buy, sell, or hold HCP Inc. (NYSE:HCP) prior to its reported spin-off of its Manor Care Properties. Everyone has to make that decision based on their own situation. I pretty much made the decision to sell while reading the Q2 earnings report, which is something I do for every stock I own in my DGI10, because each one is an integral part of my income strategy.
In a previous article, which you can find here, I laid out the starting positions of my two portfolios. One is a dividend income portfolio I call the DGI10 (10 dividend stocks) and the other is a total return portfolio I call the TR7 (7 ETFs where shares are sold to fund the income). Both of these started at the end of 2015 with about $100,000 each. The income drawn from both will be based on the IRS Required Minimum Distribution table III, from IRS publication 590b, appendix B, starting at age 73 in the table. For 2016 this income for the DGI portfolio will be equal to $100,081/24.7, or $4051.86 per year, or $1012.965 per quarter. So even though the plan will vary from year to year, during the calendar year the income is fixed based on the ending value of each portfolio on December 31 st of the previous year. I know on January 1 st each year what the income from these two portfolios will be. For 2016 the income for the TR7 portfolio will be $100,069/24.7 or 4051.38 per year, or $1012.845 per quarter. For 2017, the income from each portfolio will be its ending value this year divided by 23.8 and so on down the RMD table.
As you might already know by reading some of my previous articles on this subject, when using this variable withdrawal method you have to be flexible in how much money you expect to spend in retirement. However, in most cases this variable income is especially welcome because it is usually better than just living off of the dividends and interest of a retirement account, while still giving room for principal appreciation. In a previous article found here, I showed some hypothetical outcomes using total returns ranging from about 4% to 12% over a 15 year time span, which would get you to age 88 in the RMD table.
In my last article I mentioned that I was looking to sell HCP at a price above $38, or to sell the spin-off, whichever happened first. What happened first was my limit order got exercised and I sold the 193 shares at a price of $38, for proceeds of $7333.84. A couple weeks later I used a portion of the proceeds to buy 240 shares of Select Income REIT (NYSE:SIR) at a price of $27.70. This left 685.84 cash, which I plan to use to rebalance the account at the end of the year. The increased dividends of SIR resulted in an improvement to the income that was coming from HCP by about 10%. Also because SIR had just increased its dividend in July of this year, I am not expecting another increase in this dividend until next year.
3rd Quarter Results - DGI10
Below is a table showing where these investments have gone after 9 months.
It should be noted that 6 of the 10 positions have already increased their dividend this year, three others have announced a dividend increase for the fourth quarter, while SIR is a new position. The amount withdrawn this year will be a constant annualized rate of 4.05% as dictated by the RMD tables I displayed in my previous article. After the RMD amount of $1012.97 is withdrawn, the cash remaining in the account is $871.09, which is a sum of this month's cash and the previous cash position from the last quarter, plus the $685.84 cash left over from the HCP/SIR transaction.
3rd Quarter Results - TR7
Below are a couple of tables showing where my ETF investments have gone after 9 months.
As can be seen from the above, even after taking a 3% distribution from the TR portfolio so far this year, it is still up by about 7.8% so far this year, with the SPY up about 7.8% as of September 30 th as well. What also should be noticed is that to rebalance the account I had to sell more of both Vanguard S&P Small_Cap 600 ETF (NYSEARCA:VIOO) and Vanguard Small-Cap Value ETF (NYSEARCA:VBR) due to their out-sized gains over the last 3 months.
Unlike some income portfolios that rely totally on the corporate board actions of companies to define their income, these two RMD rule based portfolios have their income defined for the full year from the previous year-end totals and that will not change. For these portfolios the total income I will receive in 2016 is $4051.38, plus $4051.86, which will be $8103.24 or $2025.81 withdrawn per quarter. Not a large amount by most retiree standards, but everyone's income is different.
It is quite common that DGI and value slanted portfolios have outperformed the market so far this year, so I offer nothing new in that regard. What I do offer is a comparison of a concentrated dividend growth portfolio earning greater than 4% income to an ETF portfolio with a similar value slant to it. As time goes forward my hope is that you can compare and contrast these two portfolios and take away what is appropriate for your own situation.
Once again as I pointed out in the article, I certainly would not want to imply that someone who wants to do DGI for retirement do it with 10 stocks invested in 100% of their retirement savings. As I have mentioned many times, I have one bucket or account that produces consistent checks to pay the bills that don't get paid from other sources, such as pensions or pension-like sources. A second bucket sits in a different account accumulating value with reinvested dividends from mutual funds, ETFs, and a couple of stocks.
This study is only as good as the data presented from the sources mentioned in the article, my own calculations, and my ability to apply them. While I have checked results multiple times, I make no further claims and apologize to all if I have mis-represented any of the facts or made any calculation errors.
You also must realize that past performance is no guarantee of the future, and in that regard all the information presented here is past performance up to this point. The information provided here is for educational purposes only. It is not intended to replace your own due diligence or professional financial advice.
Disclosure: I am/we are long D, MO, O, OHI, PM, SIR, SO, VTR, WFC, WY, IEI, TLT, VBR, VIOO, VNQ, VOO, VTV.
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.