The Million-Dollar Retirement Portfolio: 6-Month Follow-Up

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Includes: BLK, CLX, COP, CVX, ETO, FAX, GIS, HCP, HYH, JNJ, KHC, KMB, KMI, KO, LO, MCD, MO, NNN, O, PEP, PG, PM, PNY, RDS.B, SBUX, SDRL, SO, T, V, VTR, VZ, WEC
by: Dividend Math Guy

Summary

Six months ago I published a hypothetical million-dollar 4%-yield retirement portfolio.

The portfolio is on track to meet its income goals.

The portfolio has slightly underperformed the market in total return, but produces far more income and provides more downside protection.

I'm dealing with the portfolio's first dividend cut, and it taught me a valuable lesson.

Introduction

Six months ago I asked myself, "What would you do with a million dollars?" My response was that I would put together a 4%-yield dividend growth portfolio whose income stream is projected to grow at a rate exceeding inflation and retire on the dividends. I put together a hypothetical portfolio meeting these requirements and published it here. I have been tracking the portfolio and so far it has met expectations - with one exception. Seadrill (NYSE:SDRL) was a small part of the portfolio and the company recently suspended its dividend. I decided to sell Seadrill as soon as the suspension was announced. By the time I got to my computer shares were selling for $16.94, so I liquidated the position at that price. I will detail my plans for the proceeds from that sale later in the article.

Despite this setback the portfolio has managed to perform admirably. Since its inception 6 months ago it has generated $19673.18 in dividends, and I am confident it will be able to generate the required $40,000 of income during its first year of existence. Its total return since inception has been 5.45%, slightly underperforming the broader S&P 500, which has returned 6.86% in this timeframe. However, I was very pleased to see that the portfolio held up well during the market volatility in October, falling less than 5% while the S&P 500 fell nearly 10%.

It's also worth mentioning that there have been several points in time where this portfolio was beating the S&P 500 in total return, even though that is not the portfolio's objective. I would not be surprised to see it ahead again soon, especially if the market dips again.

The portfolio

Here is the portfolio as it currently stands. All prices are as of December 2, 2014.

Name

Ticker

Shares

Held

%

Weight

$ Market

Value

% Unrealized

Gain/Loss

Since Purchase

% Forward

Dividend

Yield

Estimated Dividend Growth (%)

Actual Dividend Growth This Year (%)

Dividends This Year

Procter & Gamble Co.

(NYSE:PG)

625

5.37

56,600.00

13.04

2.86

6

1618.76

Philip Morris International Inc.

(NYSE:PM)

568

4.68

49,381.92

-1.09

4.62

6

6.38

2281.44

Altria Group Inc

(NYSE:MO)

968

4.62

48,738.80

21.94

4.14

5

8.33

2017.79

Kinder Morgan, Inc.

(NYSE:KMI)

1,155.00

4.56

48,094.20

20.28

4.3

5

4.76*

2068.05

Ventas Inc.

(NYSE:VTR)

609

4.18

44,048.97

10.14

4

4

1761.96

Coca-Cola Co.

(NYSE:KO)

978

4.13

43,501.44

8.78

2.74

6

1191.94

Southern Co.

(NYSE:SO)

906

4.12

43,410.99

8.6

4.4

3

1910.08

Realty Income Corp.

(NYSE:O)

906

3.98

41,965.92

5.01

4.72

2

0.17*

1980.79

Johnson & Johnson

(NYSE:JNJ)

387

3.97

41,908.23

4.91

2.59

6

1085.42

National Retail Properties Inc.

(NYSE:NNN)

1,098.00

3.95

41,658.12

4.2

4.42

1.5

3.7

1841.29

HCP Inc.

(NYSE:HCP)

917

3.93

41,475.91

6.07

4.8

2

1990.84

Verizon Communications Inc.

(NYSE:VZ)

811

3.81

40,144.50

0.45

4.4

2

3.77

1766.36

General Mills Inc.

(NYSE:GIS)

722

3.62

38,186.58

-4.43

3.12

6

1191.42

AT&T Inc.

(NYSE:T)

1,086.00

3.56

37,532.16

-1.54

5.25

2

1970.44

Chevron Corp.

(NYSE:CVX)

323

3.49

36,815.54

-7.72

3.83

6

1410.04

Royal Dutch Shell PLC ADR Class B

(NYSE:RDS.B)

485

3.32

34,968.50

-12.45

5.34

2

1867.32

ConocoPhillips

(NYSE:COP)

499

3.28

34,580.70

-13.43

4.31

6

5.8

1490.43

PepsiCo Inc.

(NYSE:PEP)

341

3.24

34,144.33

14.1

2.63

6

898.00

Visa Inc. Class A

(NYSE:V)

117

2.87

30,256.20

21.85

0.74

12

20

223.90

CASH

28,143.18

2.67

28,143.18

0

0.00

McDonald's Corp.

(NYSE:MCD)

292

2.63

27,687.44

-7.45

3.55

6

4.94

982.90

Starbucks Corp.

(NASDAQ:SBUX)

329

2.50

26,369.35

7.27

1.58

12

23.08

416.64

Kimberly-Clark Corp.

(NYSE:KMB)

225

2.48

26,124.75

4.51

2.9

6

757.62

Kraft Foods Group Inc.

(KRFT)

424

2.41

25,423.04

1.7

3.67

5

4.76

933.03

BlackRock Inc.

(NYSE:BLK)

64

2.15

22,668.16

14.28

2.17

8

491.90

Clorox Co.

(NYSE:CLX)

223

2.13

22,436.03

12.5

2.92

5

655.13

Wisconsin Energy Corp.

(NYSE:WEC)

436

2.05

21,643.04

8.22

3.14

5

679.59

Piedmont Natural Gas Co.

(NYSE:PNY)

552

1.98

20,860.08

4.31

3.41

3

711.33

EV Tax Adv Global Div Opps. Common

(NYSE:ETO)

779

1.93

20,367.19

1.89

0

20

1402.20

Aberdeen Asia-Pacific Income Common

(NYSEMKT:FAX)

2,381.00

1.30

13,690.75

-7.56

0

1000.02

Lorillard Inc.

(NYSE:LO)

168

1.01

10,637.76

6.82

3.89

5

413.81

Halyard Health Inc.

(NYSE:HYH)

28

0.10

1,065.40

0.00

0

0

0.00

Total

1,054,529.18

39,010.42

*: KMI and O typically raise the dividend each quarter. These entries reflect the dividend growth over the course of the last 6 months, so it is still possible for both companies to hit their 1-year target.

The "estimated dividend growth" column is my own conservative estimate of the short-to-medium-term dividend growth potential of the position, taking into account past dividend growth behavior and forward earnings growth estimates. The portfolio has an estimated overall income growth of 3.85% from year 1 to year 2, but this will accelerate as the lower-yield higher-growth positions begin to comprise a larger part of the overall income from the portfolio.

The "actual dividend growth this year" column records all announced dividend increases since I made my predictions 6 months ago. Most dividend increases to date have been in line with or have exceeded expectations. Empty entries simply mean that dividend increases have not yet been announced.

The "dividends this year" column records how much dividend income the portfolio will produce in the coming 12 months, assuming no further dividend increases or cuts. Since this is a dividend growth portfolio, the actual dividend income realized over the course of the next 12 months is likely to be higher.

ETO recently increased its distributions from $.15/share to $.18/share per month. However I am not sure if this new distribution level will continue so I have continued to project the yearly income from this position at the $.15 distribution level.

The portfolio currently holds $28,143.18 in cash, which has come from dividends and the sale of Seadrill. After 1 year I will reduce the cash holdings by $40,000 to simulate the first year of withdrawals from the portfolio. After year 2 I will reduce the cash holdings by $41,200 (to account for a 3% inflation rate), and so on.

The lessons learned from Seadrill

I learned two important lessons from holding and then selling Seadrill in this portfolio. The first is not to speculate for income. At the time I constructed the portfolio Seadrill seemed to offer a nice way to round out the last $2000 in yearly income needed for the portfolio to achieve its $40,000 first-year dividend target. We all know now how that went.

The second and far more important lesson I learned is the value of a small cash pile heading into retirement with a dividend growth portfolio. I am not going to redeploy the $8470 I received from the sale of Seadrill. Instead I am going to hold it in cash and slowly liquidate it by withdrawing it as necessary to meet my yearly income requirements. Actually I anticipate only having to dip into this cash buffer during the first few years, after which the faster-than-inflation dividend growth from the rest of the portfolio should overcome any shortfalls in dividend income during the first few years. Obviously the portfolio would have been better off holding the whole $19,495.00 originally invested in Seadrill in cash instead.

Think about that - using that amount as a cash buffer would have amounted to nearly 10 years worth of the dividends I was hoping to get from Seadrill. Did anyone really think the Seadrill position would really be necessary to meet my income requirements 10 years from now, especially considering that I didn't expect the distribution to grow at all? I certainly didn't - I expected to need the Seadrill income for a few years at most, and selling when the dividend was suspended was a way to salvage the situation and still get what I needed out of the position.

The power of a small cash pile to supplement withdrawals during the first few years of the distribution phase is so strong that it's probably worthy of an in-depth article on its own.

Conclusion

Putting together and tracking this portfolio has been a great learning experience for me. If you have not already put your actual retirement portfolio together, I highly recommend putting a hypothetical retirement portfolio together, tracking it like you would track your own portfolio, and seeing how it does and how you react to it. Pretend you have a million dollars, allocate it as you see fit, and see how you do. I am using the portfolio tracking service at Morningstar for this portfolio and it more than meets my needs.

Disclosure: The author is long BLK, COP, CVX, GIS, JNJ, KMI, KO, KRFT, MCD, MO, O, PEP, PG, PM, SBUX, V, VTR, WEC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.