Protected Principal Retirement Strategy: Retiring Without A Million-Dollar Nest Egg - Part XII: Putting It All Together

by: Akaralph

In previous articles, we have discussed the concept of the Protected Principal Retirement Strategy, addressed the need for a well thought out portfolio allocation process, and presented information relative to each of the different asset classes that together comprise the portfolio.

During the time that I spent researching and writing this series, I was also undertaking a portfolio review and re-allocation, which is the focal point of this article.

The Protected Principal Retirement portfolio does not "chase" excessively high yields, but includes a variety of stocks and funds which together will afford us mid-rangers the opportunity to obtain a yield-on-principal around the eight percent level together with the potential for price appreciation.

As I have mentioned in a previous article, the portfolio strives for a total return in the 15 percent range in a decent market scenario. In a down market, most of the stocks while certainly having the potential to decline in price (as will just about all dividend payers) should retain current dividends, and in some cases continue to increase them (as did many MLPs in 2008 - 2009).

Nothing is foolproof, regardless of what anyone says, and what I have advanced in this series is nothing more than one possible strategy to address retirement years' financial needs, while not having to sell the underlying stocks that generate the portfolio yield.

I am in no way recommending purchase of any of the stocks in the portfolio - do your own due diligence, and I am certain many of you can come up with ideas that I have not yet uncovered.

The Portfolio

The stocks and funds identified as portfolio components are owned (some still are under limit orders) by me. For the purpose of providing a quantifiable example, I have selected a hypothetical portfolio value of $500,000, although my portfolio and/or yours might have a different total value. Many of the stocks were purchased in June/July of this year.

The percentage allocations to each asset class are goals, and in a few cases actual values and percentages may be more or less, until such time as all outstanding orders are filled.

For each asset class, a tabular summary is presented that depicts each stock, the number of shares held, the cost basis, annual dividend, yield, and annual dividends received. The yields depicted are based upon the average purchase price of each stock or fund.

Master Limited Partnerships

The master limited partnership (MLPs) component of the portfolio comprises 40 percent of the total value of $500,000, or $200,000. The objective is to hold those MLPs that have a proven record of maintaining, or increasing distributions over time.

Ten percent of the total portfolio ($50,000) has been allocated to upstream (exploration/production) MLPs, 20 percent ($100,000) to midstream (pipelines), and 10 percent ($50,000) to downstream (transportation, storage and specialty MLPs).

The following Table presents a summary of these holdings:

Stock Shares Cost Basis Distrib Yield $ Received
VNR 1,100 $29,000 ($26/Sh) $2.40 9.2% $2,640/Yr
BBEP 1,200 $21,000 ($17.50/Sh) $1.84 10.5% $2,208/Yr
EPD* 3,700 $77,700 ($21/Sh) $2.54 12.1% $9,398/Yr
RGP 1,000 $22,300 ($22.30/Sh) $1.84 8.3% $1,840/Yr
CLMT 1,150 $28,200 ($24.50/Sh) $2.36 9.6% $2,714/Yr
EROC 1,000 $9,000 ($9/Sh) $0.88 9.8% $880/Yr
GSJK 1,000 $12,800 ($12.80/Sh $1.55 12.1% $1,550/Yr
Click to enlarge

* EPD has been a holding since they acquired Teppco Partners.

The annual amount received from the MLPs per year is $21,230 for a present yield of 10.6 percent.

Royalty Trusts

Royalty trusts comprise 15 percent, or $75,000 of the total portfolio value. Twelve percent of the total portfolio ($60,000) is allocated to U.S. royalty trusts and the remaining three percent ($15,000) to Canadian trusts (or, in some cases, corporations).

These are summarized in the following Table:

Stock Shares Cost Basis Div Yield $ Received
CHKR* 1,540 $30,000 ($19.50/Sh) $2.44 12.5% $3,760/Yr
PER* 1,500 $30,000 ($20.00/Sh) $2.30 11.5% $3,450/Yr
OTCPK:FRHLF 890 $15,000 ($16.90/Sh) $1.68 9.9% $1,495/Yr
Click to enlarge

* Each of these pays a variable dividend.

The annual amount received from the royalty trusts each year is $8,705 for a present yield of 11.6 percent.

Equity Real Estate Investment Trusts

The equity real estate investment trust (eREITs) component of the portfolio is allocated a ten percent share, or $50,000. Approximately four percent of the portfolio, or $20,000 is invested in a closed-end fund having the majority of its holdings in U.S. REITs, and the remaining $30,000 in a closed-end fund having the majority of its holdings in international REITs. I am still evaluating a few individual U.S. REITs for inclusion in this asset class.

The eREIT portion of the portfolio is depicted in the following Table:

Stock Shares Cost Basis Div Yield $ Received
RQI 2,600 $20,000 ($7.70/Sh) $0.72 9.4% $1,872/Yr
AWP 5,100 $30,000 ($5.88/Sh) $0.60 10.2% $3,060/Yr
Click to enlarge

The total dividends received per year from the eREIT asset class is $4,932 for a present yield of 9.9 percent.

Mortgage Real Estate Investment Trusts

Mortgage Real Estate Investment Trusts (mREITs) have an allocation of only five percent, or $25,000 of the total portfolio. I believe this asset class carries the highest risk (although currently the greatest reward) in the portfolio.

At present there is only one holding; however there is a limit order in for the second.

The Table that follows depicts the mREIT asset class.

Stock Shares Cost Basis Div Yield $ Received
NCT 2,400 $15,000 ($6.25/Sh) $0.80 12.8% $1,920/Yr
MFA* 0 $10,000 ($N/A) $0.92 N/A 0/Yr
Click to enlarge

* Have a limit order in for MFA below $8.00.

The dividend amount currently received from the mREITs is $1,920 per year for a present yield of 12.8 percent.

Business Development Companies

Ten percent ($50,000) of the total $500,000 portfolio has been allocated to business development companies (NYSEARCA:BDCS).

As with the mREITs the portfolio presently holds only one BDC. I have a limit order in for a second BDC.

The following Table presents the holdings within this asset class.

Stock Shares Cost Basis Div Yield $ Received
MCC 2,000 $25,000 ($12.50/Sh) $1.44 11.3% $2,880/Yr
PSEC* 0 $25,000 ($N/A) $1.22 N/A 0/Yr
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* Have a limit order in for PSEC below $11.00.

The $2,880 currently received from MCC results in an 11.3 percent yield.

Foreign Stocks

Foreign stocks receive a 15 percent allocation in the $500,000 portfolio, of a total of $75,000. This is sub-allocated into $60,000 for equity/income stocks and $15,000 for emerging markets. Due to the recent poor performance of emerging markets, we presently hold two closed-end funds that have positions in both developed countries and emerging market nations (I'm cheating a bit here).

The subsequent Table illustrates the portfolio's foreign stock holdings.

Stock Shares Cost Basis Div Yield $ Received
SDRL 1,500 $46,350 ($30.90/Sh) $3.36 10.9% $5,040/Yr
OTCPK:NATDF 5,000 $8,250 ($1.65/Sh) $0.18 10.9% $900/Yr
PBKEF.PK 500 $5,400 ($10.80/Sh) $0.96 8.9% $480/Yr
AOD 1,460 $6,000 ($4.10/Sh) $0.66 16.1% $964/Yr
IGD 1,030 $9,000 ($8.74/Sh) $1.12 12.8% $1,154/Yr
Click to enlarge

Annual dividends from the foreign stock asset class total $8,538, for a present yield of 11.4 percent.


This asset class currently is allocated a five percent portion of the total portfolio, or $25,000. At present, there is only one holding, and it is shown in the following Table.

Stock Shares Cost Basis* Div Yield $ Received
GGN 1,260 $17,000 ($13.50/Sh) $1.44 10.7% $1,814
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* There remains $8,000 cash in the currencies/commodities asset class.

The $1,814 in dividends received equates to a present yield of 10.7 percent for this asset class.


So that constitutes the example of the Protected Principal Retirement portfolio using $500,000 for the total portfolio value. Using the percentage allocations for each asset class, you can easily develop a spreadsheet for a portfolio value of $300,000, $400,000, $600,000, or any amount that fits your situation.

Taking all of the asset classes together, we would receive a total of $50,019 (assuming I added correctly) for a present yield of 10.0 percent on our $500,000 portfolio.

If one were to purchase these stocks at today's market prices, I believe the overall yield would closely approximate eight percent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: The purpose of this article was to depict how one strategy could generate a substantial yield for persons approaching, or at retirement age. None of the stocks mentioned are recommendations as I am not an investment advisor. Anyone considering such a portfolio is encouraged to do their own research on a continuing basis. I am long VNR, BBEP, EPD, RGP, CLMT, GSJK, EROC, CHKR, PER, FRHLF, RQI, AWP, NCT, MCC, AOD, SDRL, NATDF, IGD, PBKEF and GGN.