My Third Quarter Portfolio Review - Focus On Dividend Growth And Quality

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Includes: ABBV, AMLP, CBRL, CLX, CNP, CSCO, CVX, D, DLR, DUK, EPD, ETP, GIS, GSK, HAS, HCN, HCP, JNJ, KHC, KMB, KO, LMT, LNT, MCD, MMP, MO, MSFT, O, OHI, PAA, PEP, PFE, PG, PM, QCOM, RAI, RDS.B, SCG, SO, STAG, SXL, T, TGT, TPZ, VTR, VZ, WEC, WPC, XLE
by: Bob Wells

Summary

Each quarter I conduct a comprehensive quarterly review.

As a retired investor nearing Required Minimum Distribution, my goal is stable income without touching principle growing at a rate greater than inflation.

Income increases are compared to those experienced 3rd quarter 2015.

I am pleased to present my 3rd Quarter 2016 portfolio review. Portfolio reviews are conducted each quarter per our business plan and help further clarify our approach to income investing. This review should be read as representing an approach that best matches our personal risk tolerance.

As I continue to highlight actions taken, keep in mind that all my holdings are in non-taxable accounts.

My portfolio finished the quarter with 48 holdings yielding roughly 4.2% at today's cost. Each holding represents less than 4% of the overall portfolio, with most positions under 2%.

My portfolio continues to be constructed as it has been starting in 2011 from the lists of Dividend Champions, Challengers and Contenders (CCCs) maintained by Seeking Alpha Contributor David Fish and available here. Nearly every stock selected from this list has the distinction of not only maintaining its dividend during the bear market of 2008, but also growing it each year, with most growing at a rate greater than inflation. I have made my quarterly reviews, including buy and sell decisions, available on Seeking Alpha for your review each quarter since 2012.

I am a retiree who, unlike most contributors on Dividend Growth investing, built my portfolio after retirement. I did so in part because I didn't feel comfortable with the mix of stock and bond index funds recommended by our advisers at the time of our retirement. My goal from the start has been to construct and maintain a portfolio that would substitute the traditional concept of selling holdings each month to provide necessary retirement income.

Our portfolio continues to act as a substitute for the traditional 4% withdrawal of capital gain plus an additional withdrawal each year equal to inflation, recommended by our former advisers. We chose instead of drawing down principal to focus on income generated from dividends and growing at a rate greater than inflation. Since the beginning I have tracked our success compared to the approaches suggested by our advisers. The most recent comparison is available here.

I believe our continuing success as investors is a direct result of constructing and following a portfolio business plan that sets out specific guidelines for buying, selling and on occasion, trimming portfolio positions. Our plan available here, was developed after first defining our retirement income requirements and our personal risk profile. It defines our principal investment goals and sets out the clear performance benchmarks upon which success will be measured.

As risk-averse investors, we seek to construct and maintain a low beta portfolio. Our overall portfolio beta remains .70 as recommended as part of our plan.

Many of you have witnessed our renewed emphasis on dividend growth and dividend quality over the past year. We have continued to increase the number of holdings with investment grade credit of BBB or higher and strong dividend growth. All of our holdings now have investment grade credit. Most enjoy credit rankings of BBB+ or higher following the recommendation of Lowell Miller. Strong credit provides an important margin of safety I believe is particularly important for retired investors.

It's an understatement to say the Energy sector was hit last year with the Energy ETF - XLE losing more than 25% of its value. Unfortunately I had more in this sector than I will moving forward. At my peak I had about 18% of my portfolio invested in this sector. I have practiced patience and as prices improved and positions returned to "Green" I have begun the process of reducing positions and as of the end of the quarter I have just less than 10% invested in the sector. In the future I will cap this sector at no more than 10%.

Lessons learned are important and the lesson learned here was to pay more attention to the amount of capital I have invested in any one sector, particularly non-defensive sectors.

I can't emphasize enough the positive nature of my actions in 2016 as I prepare for my first Required Minimum Distribution starting next year. I have significantly increased the overall credit worthiness of my portfolio with all positions now enjoying investment grade credit. In addition, I now have more than 50% of my capital invested in defensive sectors.

As I look to the future, I will: one, Not chase yield; two, not overpay for a new position; and three, new positions will require BBB credit or higher. I will continue to have 50% of my capital invested in defensive sectors.

Our portfolio appears on track to meet target dividend growth for 2016 of 5%, resulting in a 5% increase in retirement income generated by the portfolio by the end of 2015. The first three quarters of this year have seen a 10% growth in dividend income over the same three quarters of 2015 due to a combination of dividend growth and compounding.

Of the stock positions in our portfolio, only eleven fail to have most recent dividend growth of 5 percent. These include: AT&T (NYSE:T), Verizon (NYSE:VZ), Southern (NYSE:SO), Phillip Morris (NYSE:PM), Digital Realty(NYSE:DLR), Duke (NYSE:DUK), Realty Income (NYSE:O), Welltower (NYSE:HCN), Royal Dutch Shell (NYSE:RDS.B), Proctor and Gamble (NYSE:PG) and Kraft Heinz (NASDAQ:KHC).

It was an active quarter for sells with three positions sold in the quarter. I decided to exchange my position in SCANA (NYSE:SCG) for Duke . In the exchange I gained over 1% in yield income and a position with stronger credit.

I also exchanged remaining shares of HCP Inc. (NYSE:HCP) for additional shares of OHI, HCN and STAG being careful to maintain the previous income. Too many question marks in my opinion moving forward.

I also sold my position in Plaines All American (NYSE:PAA) at a profit after learning of the proposed dividend cut. I began positions in The Alerian MLP ETF (NYSEARCA:AMLP) and Tortoise Power CEF (NYSE:TPZ). In addition I added a bit to ETP again to maintain the income received from PAA. I expect to write further on this during the current quarter.

Below are the current holdings making up my portfolio. Most were purchased at fair value or better between 2011 and today. I have included Credit Ratings for each holding. On further review, you will find several of these holdings are not currently available at fair value. Please do your own due diligence. Those of you building portfolios may also wish to consider some of the additional holdings, which I call my Dividend Safety Superstars. That series begins here.

I have listed both my wife's positions in bold and the ones I own exclusively and whose performance is traditionally tracked. I did this in part to give readers a better idea of what makes up the entire family portfolio. The positions are listed by weight with the 1st 20 each representing full positions. The final 10 positions are half positions or less. I consider a full position to be any holding at or above the average for the portfolio. I have only one double sized position, T. All positions are under 5% I have included a column of Most Recently Announced DGR to enable quick comparisons to 5-year rates.

Stock

Ticker

Current

Yield %

5-Year

DGR

MR

DGR

5-Year

EPS

Growth

AT&T BBB+

(NYSE: T)

4.9

2.3

2.12

8.2

Verizon BBB+

( VZ)

4.6

3.0

2.7

3.2

Southern A-

(NYSE: SO)

4.5

3.6

3.23

3.3

Ventas BBB+

(NYSE: VTR)

4.4

8.8

6.15

(4.6)

Digital Realty BBB

(NYSE: DLR)

3.9

11.9

3.25

2.6

Philip Morris A

( PM)

4.3

11.2

2.00

5.8

Altria A-

(NYSE: MO)

4.0

8.4

8.3

7.8

CenterPoint Energy A-

(NYSE: CNP)

4.6

4.9

4.0

3.7

Dominion BBB+

(NYSE: D)

3.9

7.2

8.11

6.0

AbbVie Inc.A-

(NYSE: ABBV)

3.6

Reynolds American BBB

(NYSE: RAI)

3.9

8.2

16.67

8.2

Omega Healthcare Investors BBB-

(NYSE: OHI)

7.1

9.9

8.6

3.2

W.P. Carey BBB

(NYSE: WPC)

6.4

11.7

13.7

6.4

General Mills BBB+

(NYSE: GIS)

3.1

10.5

4.35

5.4

Lockheed Martin A-

(NYSE: LMT)

3.1

18.4

10.0

8.2

Duke A-

4.4

3.6

2.2

4.4

Wisconsin Energy A-

(NYSE: WEC)

3.5

16.9

8.2

6.8

Realty Income BBB+

(NYSE: O)

3.9

5.6

2.1

4.6

GlaxoSmithKline A+

(NYSE: GSK)

4.7

Target A

(NYSE: TGT)

3.5

20.8

7.69

11.2

Alliant Energy A-

(NYSE: LNT)

3.2

6.8

6.82

6.7

Johnson & Johnson AAA

(NYSE: JNJ)

2.7

7.14

6.67

5.3

Pfizer AA

(NYSE: PFE)

3.6

7.14

7.14

5.9

Main BBB

( MAIN)

8.3

7.0

7.0

Cracker Barrel Value Line 2

(NASDAQ: CBRL)

2.7

27.6

40.0

8.8

Kimberly-Clark A *

(NYSE: KMB)

3.0

7.4

4.55

7.0

Pepsi A

(NYSE: PEP)

2.8

8.2

7.11

6.5

Royal Dutch Shell A+

(NYSE: RDS.B)

6.9

6.7

4.0

Magellan Midstream Partners BBB+

(NYSE: MMP)

4.4

14.9

8.92

7.4

Procter & Gamble AA-

(NYSE: PG)

3.0

6.9

2.0

6.0

STAG Industrial BBB

(NYSE: STAG)

6.3

5.5

Welltower BBB

(NYSE: HCN)

4.9

2.5

4.24

13.1

Qualcomm A+

(NASDAQ: QCOM)

3.1

20.2

10.42

11.3

Cisco Systems AA-

(NASDAQ: CSCO)

3.3

31.6

3 yr.

23.81

8.2

McDonald's BBB+

(NYSE: MCD)

3.3

7.0

4.71

7.1

Microsoft AAA *

(NASDAQ: MSFT)

2.7

18.5

16.13

7.0

Clorox BBB+

(NYSE: CLX)

2.3

7.5

3.8

7.0

Hasbro BBB

(NASDAQ: HAS)

2.5

16.1

10.87

12.4

Chevron AA -

( CVX)

4.1

9.6

7.9

5.2

Enterprise Products Partners BBB+

( EPD)

5.5

5.7

5.1

6.9

Coca-Cola AA-

(NYSE: KO)

3.4

8.4

6.06

2.2

Flowers Food

4.4

10.0

10.34

9.2

Kraft Heinz BBB-

(NASDAQ: KHC)

2.6

Sunoco Logistics BBB

( SXL)

6.8

23.3

21.5

10.4

Energy Transfer Partners BBB-

(NYSE: ETP)

11.0

.4

7.0

2.65

Alerian MLP ETF

AMLP

8.64

Tortoise Power CEF

TPZ

7.0

Click to enlarge

I face Required Minimum Distributions for the first time next year and expect to make further adjustments in our portfolio as we near the end of the year. In addition, I am continuing work on the legacy portion of our portfolio investment plan so that it supports passive investing should I be unable to continue active management. I expect to write more on each subject in the months ahead.

As always, I look forward to your feedback and discussion concerning the actions I have taken. I am interested to hear about your plans moving forward in the year. I am particularly interested in hear the plans of those who like me face RMDs in 2017.

Disclosure: I am/we are long CNP,ABBV,JNJ,TGT, GIS,QCOM,CSCO,PFE,LNT,GSK,CBRL, FLO, CVX, DLR, EPD, ETP, HAS, HCN,KHC, KMB, KMI, KO, LMT, MCD, MMP, MO, MSFT, NNN, O, OHI, PEP, PG, PM, RAI, RDS.B, DUK, SO, SXL, T, VTR, VZ, WEC, WPC.

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.

Disclosure: I am/we are long I AM/WE ARE LONG CNP,ABBV,JNJ,TGT, GIS,QCOM,CSCO,PFE,LNT,GSK,CBRL, FLO, CVX, DLR, EPD, ETP, HAS, HCN,KHC, KMB, KMI, KO, LMT, MCD, MMP, MO, MSFT, NNN, O, OHI, PEP, PG, PM, RAI, RDS.B, DUK, SO, SXL, T, VTR, VZ, WEC, WPC.

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.