What A Difference A Quarter Can Make - My 1st Quarter Portfolio Review

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Includes: ABBV, ARLP, AVA, BCE, BMO, BNS, CBRL, CLX, CMI, CNP, COP, CSCO, CVX, D, DLR, EPD, ETP, HAS, HCN, HCP, JNJ, KHC, KMB, KMI, KO, LMT, LNT, MCD, MMP, MO, MSFT, NNN, O, OHI, PAA, PEP, PFE, PG, PM, QCOM, RAI, RCI, RDS.B, SCG, SDRL, SO, STAG, STR, SXL, T, TGT, VTR, VZ, WEC, WPC
by: Bob Wells

Summary

Each quarter I conduct a comprehensive quarterly review.

As a retired investor, my chief goals remains stable income without touching principle growing at a rate greater than inflation.

Income increases are compared to those experience the 1st quarter of 2015.

I am pleased to present my 1st Quarter 2016 portfolio review. Portfolio reviews are conducted each quarter per our business plan and help further clarify my approach to dividend growth investing. This review should be read as representing an approach that best matches our personal risk tolerance.

Before I begin my 1st Quarter review I have some catching up to do. I underwent surgery during the final quarter of 2015 which prevented me from completing my final report of the year in a timely manner. So let me begin with a short report of that quarter.

Fourth Quarter 2015 Review

There are always lessons to be learned as the result of dividend cuts and reductions in distributions. In 2014 with Seadrill (NYSE: SDRL), the lesson was don't invest in stocks that fail to have investment grade credit. In 2015 the lesson came as part of the Kinder merger. Like so many of you my shares of KMP were converted into shares of Kinder Morgan (NYSE: KMI). KMI as a result became an overweight position representing about 2.5% of my portfolio. It represented about 3.7% of my income.

With the conversion came a downgrade of investment grade credit to BBB-.

KMI no longer enjoyed a margin of safety when it came to credit as any further reduction meant falling to junk bond status. Ultimately KMI elected to cut its dividend 75% to prevent that from occurring. My portfolio business plan and overall portfolio goals requires that a stock incurring such a large dividend cut be sold. After KMI was sold and the income was redeployed I incurred an overall loss to income of 1.85%

I should have sold shares when I noticed the position had become overweight and most importantly I should have sold at least half of my shares when I learned credit had been reduced.

I also faced another income headwind due to declining income from each of my four Canadian holdings.

My original income goal for 2015 was a 6% increase. This percentage increase is in addition to my core objective of an increase equal to twice inflation. I did not achieve a 6% increase. After incurring both a dividend cut and losses due to currency exchange rates I did see an increase in income of .36%. Ironically I discovered that inflation for the year was recorded as .12% meaning my income was three times that of inflation.

I incurred a loss of capital for the year of 2.73% compared to SPY with a 1.38% gain. This is the first year since starting out in 2011 that I incurred a loss of capital.

Three positions were sold in the quarter:

  • Kinder Morgan - (NYSE:KMI)
  • Bank of Montreal - (NYSE:BMO)
  • Rogers Communication - (NYSE:RCI)

I continued during the quarter to reduce my exposure to lower quality MLPs, significantly reducing my positions in Alliance Resources - (NASDAQ:ARLP) and Energy Transfer Partners - (NYSE:ETP).

I used much of the funds from sales to both add and add to utility positions with my overall goal to have utilities represent around 20% of my holdings.

During the quarter I added:

  • CenterPoint Energy - (NYSE:CNP)
  • Alliant Energy - (NYSE:LNT)
  • Questar Corp - (NYSE:STR)

During the same time period I sold my position in my lower credit energy holding Avista Corporation - (NYSE:AVA) since I was able to increase both quality and yield by taking the action.

No sooner had I made my last purchase of shares in STR than it was announced that the company had been taken over. I decided to take the large gain and sell the position.

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

1st Quarter - 2016

The quarter was off to a rough start and I saw my third dividend cut in the Energy space with Conoco Phillips - (NYSE:COP) announcing a cut. This position was sold and again funds were redeployed.

I made the decision to sell a small position I had begun a few months early because of its low yield and high volatility. The position had accrued a small profit at the time of sale.

Earlier in the Quarter I sold my remaining two Canadian positions:

  • Bank of Nova Scotia - (NYSE:BNS)
  • BCE Inc. - (NYSE:BCE)

I continued to build my exposure to utilities adding Dominion - (NYSE:D) as well as adding to existing positions on weakness.

During the same time period I sold my position in National Retail Properties - (NYSE:NNN) as well as trimming overbought positions in Realty Income - (NYSE:O) and Well tower- (NYSE:HCN).

I added two more positions during the quarter:

  • Pfizer - (NYSE:PFE) and a half position in
  • Cisco - (NASDAQ:CSCO), a half position

A funny thing happened as the quarter moved on. I started to see more and more green with solid returns in energy, utilities and REITs.

Ultimately I ended the quarter with solid increases in both income and capital. Most importantly income increased just under 7% when compared to the first quarter in 2015.

Total return was 7.93% for the quarter vs. 1.35% for the market. My capital ended the quarter at an all time high. I also ended the period with an all time high of nearly 9% in cash.

My portfolio finished the quarter with just 36 holdings and yields roughly 4.5% 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. In addition to core CCC holdings, there are additional stocks from the "Frozen Angel List" also complied by David. 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 for 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 principle to focus on income generated from dividends and growing at a rate greater than inflation.

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.

We conduct a review at the end of each quarter. 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. 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.

You will recall that during 2014, we experienced the first-ever dividend elimination among our holdings when Seadrill (NYSE: SDRL) announced it would be suspending the payment of its dividend. Many will also remember my portfolio business plan requires that I consider selling in the case of a dividend cut. With a complete elimination of the dividend the decision was easy to make. The stock was sold and the funds were redeployed into stocks with lower yields than SDRL at the time of the dividend elimination. This resulted in a reduction of the income produced by the portfolio.

We began 2015 with the expectation that we would not achieve our stated goal of a 6% increase in income. During the first 3 quarters, additional positions particularly those lacking BBB or higher credit were sold or reduced and again funds were redeployed into holdings enjoying stronger credit.

During the year it became more apparent that foreign exchange rates were resulting in reduced distributions particularly from our Canadian holdings. By now most have been removed from the lists of Dividend Champions, Contenders and Challengers for just that reason. I made a tough decision to sell and again redeploy funds from my Canadian holdings. In all cases I was able to do so without a loss of income and in most cases with little or no loss in capital.

With the new income from these sells I begin to increase my holdings in the utility sector. Fortunately the market cooperated with my plan and I now have a full position in D, a stock I've had on my watch list for some time. Between my wife and I we have over 16% of our holdings in Utilities.

It's an understatement to say the Energy sector has been hit hard with the Energy ETF - XLE losing more than 25% of its value over the past 52 weeks. Unfortunately I had more in this sector than I will moving forward. Between stocks sold and general stock losses, I am now 11% invested in the sector. At my peak I had about 18% of my portfolio invested in this sector. In the future I aim to have no more than 10% invested in this sector.

The lesson learned here was to pay more attention to the amount of capital invested in any one sector, particularly non-defensive sectors.

I can't emphasize enough the positive nature of my actions this year moving forward into 2016. I have significantly increased the overall credit worthiness of my portfolio with all positions now enjoying investment grade credit. I now have more than 50% of my capital invested in defensive sectors.

There are a few things I know as I look to the future; one, I will not chase yield; two, I will 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.

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 a number of these holdings are not currently available at fair value. Please do you 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.

For the 1st time I have listed both my wife's positions and the one's I owned exclusively and have 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 for the first time 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% Mlps have been intentionally downsized since time of purchase. I have added 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 A-

(NYSE: T)

5.0

2.3

2.2

5.1

Philip Morris A

( PM)

4.2

11.2

6.4

5.8

Southern A

(NYSE: SO)

4.5

3.6

3.5

3.4

Ventas BBB+

(NYSE: VTR)

4.9

8.8

9.0

19.5

Verizon BBB+

( VZ)

4.5

3.0

3.1

8.3

Altria BBB+

(NYSE: MO)

3.7

8.4

8.3

7.8

Digital Realty BBB

(NYSE: DLR)

4.0

11.9

6.4

2.6

CenterPoint Energy A-

5.0

4.9

4.0

3.7

AbbVie Inc.A

(NYSE:ABBV)

3.7

Reynolds American BBB

(NYSE: RAI)

3.5

8.2

16.67

8.2

Omega Healthcare Investors BBB-

(NYSE: OHI)

6.6

9.9

8.6

3.2

Lockheed Martin A-

(NYSE: LMT)

2.8

18.4

14.9

8.2

Dominion BBB+

D

4.0

7.2

6.0

General Mills BBB+

GIS

3.0

10.5

5.4

GlaskoSmithKline A+

GSK

5.5

SCANA BBB+

(NYSE: SCG)

3.5

2.2

3.3

5.4

Wisconsin Energy A-

(NYSE:WEC)

3.5

16.9

8.0

6.8

W.P. Carey BBB

(NYSE: WPC)

6.3

11.7

13.7

6.4

Target A

(NYSE:TGT)

2.7

20.8

7.69

11.2

Alliant Energy A-

3.4

6.8

6.82

6.7

Realty Income BBB+

(NYSE: O)

4.0

5.6

2.1

4.6

Johnson and Johnson AAA

(NYSE:JNJ)

2.7

7.14

6.9

5.3

Main BBB

( MAIN)

8.5

7.0

7.0

Cracker Barrel Value Line 2

(NASDAQ: CBRL)

2.97

27.6

40.0

8.8

Pfizer AA

3.6

7.14

9.2

5.9

Pepsi A

(NYSE: PEP)

3.0

8.2

7.12

6.5

Royal Dutch Shell AA

(NYSE: RDS.B)

7.2

6.7

4.0

Procter & Gamble AA-

(NYSE: PG)

3.4

6.9

3.0

6.0

McDonald's A

(NYSE: MCD)

2.8

7.0

4.71

7.1

Magellan Midstream Partners BBB+

(NYSE: MMP)

4.6

14.9

11.3

7.4

Plains All American BBB+

( PAA)

11.5

8.0

2.8

Microsoft AAA *

(NASDAQ: MSFT)

2.8

18.5

16.13

7.0

Kimberly-Clark A *

(NYSE: KMB)

3.0

7.4

7.2

7.0

Hasbro BBB

(NASDAQ: HAS)

2.3

16.1

8.3

12.4

Enterprise Products Partners BBB+

( EPD)

5.8

5.7

5.9

6.9

Clorox BBB+

(NYSE:CLX)

2.5

7.5

4.05

7.0

Cummin A+

(NYSE:CMI)

3.4

32

25

(3.1)

Qualcomm A+

(NASDAQ:QCOM)

4.0

20.2

10.42

11.3

Welltower BBB

(NYSE: HCN)

5.0

2.5

3.8

13.1

Cisco Systems AA-

3.7

31.6

3 yr.

23.81

8.2

Chevron AA

( CVX)

4.2

9.6

7.9

5.2

STAG Industrial BBB

(NYSE:STAG)

6.8

5.5

Coca Cola AA-

(NYSE:KO)

3.1

8.4

6.06

2.2

Kraft Heinz BBB-

(NASDAQ: KHC)

2.9

Sunoco Logistics BBB

( SXL)

6.6

23.3

21.5

10.4

Energy Transfer Partners BBB-

(NYSE: ETP)

11.8

.4

7.0

2.65

HCP, Inc. BBB+

(NYSE: HCP)

6.02

3.4

3.7

3.1

As always, I look forward to your feedback and discussion concerning the actions I have taken. I interested to hear about your actions during the turbulent last quarter as well as your thoughts on the year just past.

Disclosure: I am/we are long CNP,ABBV,JNJ,TGT, GIS,QCOM,CSCO,PFE,LNT,GSK,CLX,CBRL, CMI, CVX, DLR, EPD, ETP, HAS, HCN, HCP, KHC, KMB, KMI, KO, LMT, MCD, MMP, MO, MSFT, NNN, O, OHI, PAA, PEP, PG, PM, RAI, RDS.B, SCG, 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.

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