1st Quarter Portfolio Results - Better Than Expected

|
Includes: ABBV, CBRL, CNP, CSCO, D, DLR, EPD, ETP, GIS, GSK, HAS, JNJ, KHC, KMB, KO, LMT, MCD, MMP, MO, MSFT, OHI, PEP, PFE, QCOM, RDS.B, SPG, STAG, SXL, TGT, VFC, VTR, WEC, WPC
by: Bob Wells

Summary

Each quarter I conduct and post a comprehensive portfolio review.

This year I face required minimum distribution (RMD) for the first time.

Quarter income increases for the 1st quarter are compared with the same quarter in 2016.

Summary

Each quarter I conduct a comprehensive quarterly review.

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

Income increases are compared to those experienced in 2016.

I am pleased to present my 1st 2017 Quarter 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 highlight actions taken, keep in mind that all my holdings are in non-taxable accounts.

Our combined portfolio finished the quarter with 47 holdings, yielding roughly 4.1% at today's cost. Each holding represents less than 4% of the overall portfolio, with most positions under 2%. Keeping the number of positions in our combined portfolio at 50 or less remains part of our goal to simplify portfolio management should I be unable to do so.

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 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 most recent plan, available here, was developed after first defining our retirement income requirements and our personal risk profile. It marks our principal investment goals and sets out the clear performance benchmarks upon which success will be measured.

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

Many of you have witnessed our renewed emphasis on dividend growth and dividend quality over 2016. We have continued in 2017 to increase the number of holdings with investment grade credit of BBB or higher and strong dividend growth. All our holdings now have investment grade credit. Most enjoy credit rankings of BBB+ or higher. Strong credit provides an important margin of safety I believe is particularly important for retired investors.

Many will recall I set a goal to reduce exposure to Energy and cap my future exposure to this sector to no more than 10%. I reach that goal this quarter by making no more purchases in this sector.

I can't emphasize enough the positive nature of my actions in 2016 as I prepared for my first Required Minimum Distribution to be taken before the end of 2017. I feel strongly that during the distribution stage it is particularly important that 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 capital preservation takes on even greater importance.

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

Portfolio Performance Goals

Our portfolio exceeded our targeted dividend growth for 2016 of 5%. For 2016 my income from dividends increased by 8.7%, while my wife's portfolio achieved an increase in dividend income of 13.0% by the end of the year. Both figures reflect a combination of dividend growth and growth due to dividend reimbursement. Those numbers are sure to decline as dividend reimbursement slows.

My 1st quarter 2017 dividend growth rate increased just over 9% when compared to the 1st quarter rate of 2016. Again this rate exceeds our target rate of 5%.

We are subject to Required Minimum Distributions for the first time this year. I'm pleased to report that we will be able to withdraw the required amount equal to 3.65% of the value of the portfolio without having to sell any shares, a vital component of capital preservation.

Positions Sold

I elected to sell my position in Kraft/Heinz (NASDAQ:KHC). In my last review, I discussed many reasons I was leaning in the direction of selling including its BBB- credit and the chances of it being involved in some kind of merger in the future. Add low yield and low dividend growth given that yield and I found myself ready to act.

I also trimmed Digital Realty (NYSE:DLR) as it had become an overbought position and my largest REIT position. The trim enabled me to purchase a new starter position in Simon Property (NYSE:SPG), a position with stronger credit (A), better yield and stronger dividend growth rate.

Another sell is coming soon. This time the result of an announced merger between Energy Transfer Partners (NYSE: ETP) and Sunoco Logistics (NYSE: SXL). Prior to the announcement, I had already been reducing my exposure to ETP largely because of its BBB - credit rating. I had planned to continue to hold SXL due to its BBB credit and strong history of dividend growth.

The merger, when complete, would result in an uncomfortably large position in an MLP with BBB - credit. I don't plan for that to happen. What I am likely to do sell about 50% of the shares of the combined company and increase my positions in both AMLP and TPZ. This would leave me with two BBB+ MLPs - EPD and MMP - along with exposure to the above ETF and CEF.

Positions Bought

I purchased one new position at a discount this quarter as the result of my sell of KHC. V.F. Corporation (NYSE:VFC) great addition to our portfolio with its combination of solid A - credit and strong yield.

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 many of our holdings are not currently available at fair value. Please do your own due diligence.

I have listed both my wife's positions in bold in addition to 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 1st 20 positions are listed in the order of their weight. These may be considered Core Positions each representing between 2 and 4% of the value of the total portfolio. 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+

T

4.7

2.2

2.08

8.2

Verizon BBB+

VZ

4.7

3.0

2.2

3.2

Southern A-

SO

4.5

3.23

3.08

3.3

Ventas BBB+

(NYSE: VTR)

4.8

8.8

6.15

(4.6)

Digital Realty BBB

DLR

3.5

5.68

5.3

2.6

Philip Morris A

PM

3.7

8.8

2.00

5.8

Altria A-

(NYSE: MO)

3.4

8.3

8.0

7.8

CenterPoint Energy A-

(NYSE: CNP)

3.9

5.4

4.0

3.7

Dominion BBB+

(NYSE: D)

4.0

7.3

7.9

6.0

AbbVie Inc.A-

(NYSE: ABBV)

4.1

12.28

2

Omega Healthcare Investors BBB-

(NYSE: OHI)

7.6

8.8

6.6

3.2

W.P. Carey BBB

(NYSE: WPC)

6.4

8.1

3.7

6.4

General Mills BBB+

(NYSE: GIS)

3.2

9.7

4.35

5.4

Lockheed Martin A-

(NYSE: LMT)

2.7

15.8

10.3

8.2

Duke A-

DUK

4.2

2.5

3.6

4.4

Wisconsin Energy A-

(NYSE: WEC)

3.4

13.7

5.0

6.8

Realty Income BBB+

O

4.3

6.06

2.1

4.6

GlaxoSmithKline A+

(NYSE: GSK)

4.7

Target A

(NYSE: TGT)

4.4

16.1

7.14

11.2

Johnson & Johnson AAA

(NYSE: JNJ)

2.8

7.0

6.67

5.3

Pfizer AA

(NYSE: PFE)

3.9

7.14

7.14

5.9

Main BBB

(NYSE:MAIN)

5.8

7.0

7.0

Cracker Barrel Value Line 2

(NASDAQ: CBRL)

2.9

23.8

4.55

8.8

Kimberly-Clark A *

(NYSE: KMB)

3.0

6.3

5.43

7.0

Pepsi A

(NYSE: PEP)

2.7

7.9

7.12

6.5

Royal Dutch Shell A+

(NYSE: RDS.B)

6.0

Magellan Midstream Partners BBB+

(NYSE: MMP)

4.5

15.8

8.38

7.4

Procter & Gamble AA-

PG

3.0

5.4

2.0

6.0

STAG Industrial BBB

(NYSE: STAG)

5.9

5.5

Welltower BBB

HCN

4.9

3.9

4.24

13.1

Qualcomm A+

(NASDAQ: QCOM)

4.0

19.9

7.55

11.3

Cisco Systems AA-

(NASDAQ: CSCO)

3.4

31.6

.

11.54

8.2

McDonald's BBB+

(NYSE: MCD)

2.9

7.4

5.62

7.1

Microsoft AAA *

(NASDAQ: MSFT)

2.4

15.8

8.3

7.0

Hasbro BBB

(NASDAQ: HAS)

2.6

11.6

11.76

12.4

Enterprise Products Partners BBB+

(NYSE:EPD)

5.9

5.7

5.0

6.9

Coca-Cola AA-

(NYSE: KO)

3.5

5.7

8.3

2.2

Flowers Food BBB

FLO

3.3

10.3

10.00

9.2

Kraft Heinz BBB- (SOLD)

Sunoco Logistics BBB

(NYSE:SXL)

8.5

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

I face Required Minimum Distributions for the first time this 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.

Disclosure: I am/we are long CNP, ABBV, ABT, AMLP, JNJ, TGT, GIS, CBRL, QCOM,CSCO,PFE,LNT,GSK,CBRL, FLO, DLR, EPD, ETP, HAS, HCN, KMB, KO, LMT, MCD, MMP, MO, MSFT, O, OHI, PEP, PG, PM, RDS.B, DUK, SO, SPG, STAG, SXL, T, TPZ, VFC, 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.