Introduction To My DG Portfolio And Retirement Strategy

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Includes: AMGN, APLE, AVA, BA, CONE, DFT, DLR, ED, EPR, GM, HRZN, IBM, LTC, LYB, MAIN, MHLD, MO, NGLS, NHI, NRZ, O, OHI, OKE, ORC, ORIT, RHP, SBRA, SO, STAG, T, TIS, VGR, VTR, WPC, WSR
by: Tom Wilson

Summary

I discuss the thought processes that led me to invest in dividend stocks.

I discuss my retirement strategy and how it has played out over the last 6 years.

I review my 35 stock portfolio and some general growth metrics.

Back in 2010, I turned 50 years old and suddenly realized that retirement was now on the visible horizon. It was still quite a way out, but close enough that I needed to spend some time evaluating where I stood and whether I was on the right track.

My first thought experiment was, "What would happen if I retired today?" I felt an immediate panic when I truly considered that I would have no income. That seems obvious, but it doesn't sink in until you really stop to think about what that means for the rest of your life. The second panic suddenly hit when I remembered that I had a large mortgage payment that would still need to be made every month. That was enough, I needed a plan and I needed to start executing on it quickly.

The plan I came up with revolved around 3 basic steps that I would need to complete in order to get my plan off the ground. These steps are:

  1. Eliminate debt - I realize that debt is not necessarily a bad thing if the interest rate is lower than what you can achieve with investments, but the thought of having a large monthly payment during retirement just isn't palatable. Retiring the debt can also be considered a guaranteed return on investment equal to the interest rate being paid.
  2. Determine my cash flow needs - In order to retire comfortably and maintain a similar standard of living, I needed to know exactly what my spending levels were. In other words, I needed to know how much minimum monthly cash flow my plan needed to generate.
  3. Create a monthly cash flow income engine - As much as possible, I don't want to eat into my principle holdings. So I need investments that generate reliable, consistent income. To me, this meant investing in reliable dividend stocks.

Step 1: Debt Elimination

As my only debt, the mortgage become the focus of an intense effort to pull money together and get it paid off. I still had pockets of funds sitting idle as a result of getting out of everything before the 2008 market debacle (very lucky call on that one). Over the course of the next 2 years, I managed to liquidate almost all of my available non IRA cash and I made my final mortgage payment in December of 2012. That felt really good and I was convinced that I was on the right track.

The year 2013 was supposed to be the start of my portfolio development, but instead it turned out to be focused on further debt elimination when circumstances required me to purchase a new vehicle. Fortunately, without a mortgage, I was able to pay this off fully in about 8 months.

Step 2: Determination of Cash Flow Needs

Over the course of several years, I had been using a spreadsheet to track my monthly spending. I tracked all the typical monthly "needs" such as groceries, utilities, fuel, taxes, medical, and the typical "wants" such as dining out, gifts, vacations, and miscellaneous. Everything was accounted for in a category. Everything was accounted for in one way or another.

I generated enough data to know that my monthly cash flow (including projected medical insurance once I was retired, and a 10% buffer to help account for unknowns) was going to need to be about $2200. This may not sound like much to some, but I'm easily entertained and I live in an area with a pretty low cost of living. Also, keep in mind that this was just my minimum target.

Step 3: Create a Cash Flow Engine

With the recent recession still fresh in my mind, I wanted to ensure that the cash flow engine I created would be reliable in good times and bad. This created a bit of a dilemma, as the more reliable companies paying dividends generally paid lower dividends. Obviously, higher risk = higher reward.

With that in mind, I decided that my portfolio would need to stay fairly conservative with most selections but I would also allow myself to select some higher yield stocks that I thought were good companies in order to "juice" the yield a bit. I was targeting an overall average yield of about 5%.

Since I was working 8 to 5 and I didn't have much experience in evaluating company financials beyond the basics, I needed to rely heavily on other experts opinions and commentary. Seeking Alpha became a daily read for me and I quickly found many authors who had portfolios that seemed solid and enviable. I also discovered David Fish's CCC list (available here) and it seemed I had a very reliable source for selecting stocks.

In general, I made notes of the stocks contained in published portfolio lists on Seeking Alpha. Many of the stocks were owned by multiple authors which lead me to believe in their quality. I studied all the articles written by contributors such as RoseNose, George Schneider, Chowder, Eric Landis, Ron Honig, David Fish, Buyandhold 2012, Dividend Sleuth, Brad Thomas,... just to name a few that come to mind. I followed up by reading commentary articles on the stocks and checked to see if they were in the CCC list. Essentially, I was letting other well regarded authors do the heavy lifting and I was just cherry picking what I thought were the best selections.

Over time, as I read the commentaries and researched the data in the CCC list, I have picked up more and more of an understanding of all the financial data and feel more comfortable in evaluating company data on my own.

2014

I did a good job initially in buying mostly blue chip, reliable stocks. Companies like AT&T (NYSE:T), GE (NYSE:GE), Coca Cola (NYSE:KO), Altria (NYSE:MO), Kraft (KRFT), Phillip Morris (NYSE:PM), and Southern Company (NYSE:SO) made up a large portion of my portfolio; while companies like Realty Income (NYSE:O), Digital Realty (NYSE:DLR), Kinder Morgan (NYSE:KMI), Ensco (NYSE:ESV), WP Carey (NYSE:WPC), and Orchid Island (NYSE:ORC) were added to help juice the yields.

I initially had a preference for investments in senior healthcare facilities since that seemed like a growing demographic that would only continue to grow. Investments were made in Omega Healthcare (NYSE:OHI), National Health Investors (NYSE:NHI), and HCP (NYSE:HCP) to take advantage of this.

One important thing I learned this first year was patience. I made a lot of knee-jerk adjustments by selling stocks that didn't immediately start performing. Later I would find that in almost every instance, I regretted selling the stock. I also chased yield a little more than I had intended, so my average yield was about 6% vs my goal of 5%.

Here is a table showing my portfolio growth and resulting monthly dividend cash flow for the 4 calendar quarters of 2014:

Quarter Positions Avg Yield Avg Monthly Cash Flow Income
Q1 10 6.05 $379
Q2 25 5.90 $1045
Q3 31 6.85 $1211
Q4 35 5.38 $1352

During this first year, I discovered that it takes a LOT of investment to generate a significant amount of dividends. I also discovered that dividend growth investing is very addictive and I was hooked. My average monthly income from dividends at the end of the year was up to $1352 and I had all the positions set to DRIP and purchase more shares.

2015

2015 turned out to be a year of set-backs and readjustments. I had previously put myself into too many oil related stocks and suffered with major price declines and some dividend cuts. It was a painful lesson, but fortunately the carnage was limited to a handful of stocks.

I ended up selling the likes of Kinder Morgan, Ensco, Williams Co (NYSE:WMB), Seadrill (NYSE:SDRL), and BHP Billiton (BBL). I learned that you can't believe everything you hear or read about companies, even if it is the CEO making the statements. Its not that they are lying, but they can be overly exuberant about their prospects in the face of changing market trends.

I continued to chase yield a bit. There were so many good deals available in the REIT area that yielded in the high single digits, and I had been very successful with them so far.

I also did some experimentation during this time with selling puts on AT&T around the $34 level. I got some good premiums from this, but after a couple months, the puts got executed and I became the proud owner of a much larger position in AT&T. I've held this ever since and it has been a big winner for me.

Here is a table showing my portfolio growth and resulting monthly dividend cash flow for the 4 calendar quarters of 2015:

Quarter Positions Avg Yield Avg Monthly Cash Flow Income
Q1 34 5.45 $1145
Q2 34 5.93 $1473
Q3 32 6.81 $1581
Q4 33 6.36 $1574

2016

2016 started off with a fairly large market pull back. It was hard to hold the course and not sell, but I had to remember that none of my stocks seemed to be considering dividend adjustments and my dividend reinvestment's were buying more shares at great prices. I learned my lesson in the past 2 years and held my shares and did not try to time the market.

I shifted my focus to larger, more established, and what I saw as reliable companies. I added companies like IBM (NYSE:IBM), Amgen (NASDAQ:AMGN), Boeing (NYSE:BA), General Motors (NYSE:GM), and a few more speculative stocks like Horizon Technology Finance (NASDAQ:HRZN), Apple Hospitality (NYSE:APLE), Targa Resources (NYSE:TRGP), and LyondellBasell (NYSE:LYB).

As years were going by, I was finding that it was going to be difficult hitting my $2200 a month goal without reaching for a higher yield level. Instead of a target of 5%, I had been mostly running around 6% and things had been progressing very well; so that became my new target (which I was already basically at). Still...I wanted reliability so there was a dilemma to deal with.

Here is a table showing my portfolio growth and resulting monthly dividend cash flow for the first 3 calendar quarters of 2016:

Quarter Positions Avg Yield Avg Monthly Cash Flow Income
Q1 27 5.80 $1535
Q2 31 5.67 $1680
~Q3 35 6.05 $1842

This is where I currently stand, however, I'm nervous about the upcoming effects to my portfolio from possible rate increases by the Fed. I don't plan to sell anything though, but will hold further investments and wait for good buying opportunities.

Finally, here is a full look at my currently portfolio as it stands today. The portfolio is a blend of different accounts, including regular, IRA, and Roth IRA: (all values include reinvested dividends)

Company Portfolio Weight% Cost Basis, $ Gain, %
Altria Group 3.9% 39.91 58.1%
Amgen 1.1% 157.96 10.6%
Apple Hospitality 2.5% 19.10 -2.9%
AT&T 7.1% 31.93 25.7%
Avista (NYSE:AVA) 2.7% 33.55 27.4%
Capital Care Property (CCP) 1.8% 28.93 -1.9%
Consolidated Edison (NYSE:ED) 1.1% 58.24 31.7%
CyrusOne (NASDAQ:CONE) 2.4% 31.18 58.1%
Digital Realty 4.0% 64.58 45.7%
DuPont Fabros Technology (NYSE:DFT) 3.5% 25.45 69.4%
EPR Properties (NYSE:EPR) 3.2% 54.82 40.4%
General Motors 0.9% 30.05 5.8%
Horizon Tech Finance 2.6% 13.65 0.1%
Intl. Business Machines 2.7% 143.45 9.6%
LTC Properties (NYSE:LTC) 2.7% 45.22 13.9%
LyondellBasell Ind. 1.3% 72.95 7.9%
Maiden Holdings (NASDAQ:MHLD) 1.4% 10.72 23.7%
Main Street Capital (NYSE:MAIN) 6.3% 27.73 23.5%
National Health Inv. 3.1% 57.39 36.9%
New Residential (NYSE:NRZ) 3.5% 12.58 10.2%
Omega Healthcare Inv. 5.2% 31.13 12.4%
ONEOK Inc. (NYSE:OKE) 3.0% 40.17 17.8%
Orchid Island Capital 3.8% 10.40 3.6%
Orchids Paper Products (NYSEMKT:TIS) 2.3% 23.15 21.7%
Oritani Financial (NASDAQ:ORIT) 1.9% 14.29 11.5%
Realty Income 7.1% 46.19 42.1%
Ryman Hospitality Prop. (NYSE:RHP) 1.2% 50.02 0.4%
Southern Co. 3.1% 42.19 25.9%
STAG Industrial (NYSE:STAG) 1.3% 24.64 -3.7%
Targa Resources 1.4% 37.21 27.3%
The Boeing Co. 1.3% 132.82 -2.6%
Vector Group (NYSE:VGR) 2.8% 16.98 28.9%
Ventas (NYSE:VTR) 2.5% 52.40 32.5%
W. P. Carey 3.0% 58.50 11.5%
Whitestone REIT (NYSEMKT:WSR) 3.2% 14.30 -1.7%

I'm pretty happy with these numbers so far, given that I just started 2-1/2 years ago. All of my positions are up big except for a few that were established more recently and haven't had a chance yet. The outlier is STAG, which I have owned for a long time but I got in just before it suffered a huge downturn. I'm actually happy now for it to be back near breakeven.

My portfolio mix is a little heavy on REITs and I intend to tone down the "yield chasing" a bit with future purchases. There is an obvious overweighting of the healthcare and data center areas, but they have been extremely successful for me and I feel I can understand those sectors pretty well.

I'm also happy about the way that I have achieved a pretty consistent monthly cash flow. Currently, my lowest month is February with only $1616, and my highest is September at $2215. I am approaching my overall goal of $2200 per month and should meet that level very soon with additional funds I have available.

Going forward, I have a large amount of "dry powder" that I am going to be deploying on market pull-backs. I anticipate that I will be holding to my strategy and investing the bulk of this in large companies with positive earnings and earnings growth, reasonable P/Es, and a solid record of dividend growth.

I'll update my progress as I go further. Please let me know what you think and good luck to all of you.

Disclosure: I am/we are long ALL STOCKS LISTED IN MY PORTFOLIO.

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.