If I Had To Build An Income Portfolio Today - Update 20

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Includes: CALM, CLDT, EPD, HASI, OHI, ORI, PEGI, PFF, RY, STWD, T, TD, VDIGX, VGHCX, VMGRX, VTR, VZ, WELL, WES, WSR
by: D.S. Leach & C.E. Leach
Summary

This article is Update 20 to my original article entitled "If I Had to Build An Income Portfolio Today."

My original article laid out the basis and goals for a portfolio of a retired relative.

Since the September 2015 initiation, I've steadily added to the portfolio and sold out of 9 positions.

The risk of an economic softening or recession is rising.

This update to the original article presents the portfolio performance update and my thoughts on the economy going forward.

Introduction

Two years ago, I wrote an article titled "If I Had to Build an Income Portfolio Today," which was published by Seeking Alpha on October 23, 2015. The article described the development of a portfolio for a relative that recently came into a significant sum of money and wanted to conservatively invest the funds to supplement their retirement income and help the grand kids with college costs. The series of articles through update nineteen has been very well received by Seeking Alpha readers, generating over 245,000 page views to date.

As I mentioned in the original article, after establishing the initial portfolio, there remained a significant cash account yet to be invested. In the sixth update, I discussed the decision to invest the balance of the cash in the iShares US Preferred Stock ETF (NYSE: PFF). With most of the funds invested except for a modest money market account for emergencies, the portfolio updates have, for the most part, focused on the capital appreciation and income produced by the portfolio and the modest changes to the portfolio holdings between updates. This article is the 20th update in the series, though previous readers will note that I changed the title of Update 8 to reflect the portfolio's performance. To be clear, it has been a little over 22 months since the portfolio was initiated.

July 2017

The month of July brought a bit more of a dovish tone from the Federal Reserve on future rate hikes but reinforcement of the Fed's plan to begin unwinding the assets acquired through their quantitative easing (QE) program. Investors need to recognize that the Fed will begin selling those QE assets this fall and it will likely put direct upward pressure on long term rates. The more typical past actions by the Fed impacted very short term rates through increases in the Federal Funds Rate (FFR). This time will be different because the maturities of the QE assets the Fed will unload are significantly longer. We are in uncharted territory with the reversal of the QE program.

On the political front, the Republican's efforts to replace the Affordable Care Act (a.k.a Obamacare) appear to be dead. A revision to the US income tax code and an infrastructure bill seem to be getting more remote. The Trump administration is losing patience with North Korea's continued push to miniaturize nuclear warheads and develop a reliable ICBM capable of delivering them to the US mainland. China's inability or unwillingness to curb North Korea's nuclear ambitions along with China's continued claim to islands (natural and manmade) in the South China Sea are causing continued friction between the US and China. The rhetoric from the Trump Administration continues to heat up with respect to North Korea's aggressive stance and China's unwillingness to rein in their ward.

As a result of all of the above, my risk meter continues to register higher risk of an economic downturn in the next year. I'll discuss what this means for management of the portfolio at the end of this article.

Portfolio Capital Appreciation and Income

The chart below, compliments of Yahoo Finance, shows the financial performance of the portfolio as of market close July 28, 2017.

Source: Yahoo Finance

During the month of July, the portfolio gained a bit of value over June's closing. Healthcare REITs shed a bit of value, but I'm expecting share prices to climb now that it is clear that the ACA will not repealed or replaced any time soon.

In Update 15, I decided to include a new table summarizing the sales and the gains on each sale. There were no changes to the portfolio in the month of July.

Symbol

# of Shares

Price Paid

Price Sold

Gain

% Gain

Update Link

VGENX

846.64

$41.34

$47.18

$4944

14.1%

Update 2

O

200

$45.25

$62.50

$3450

38.1%

Update 5

CALM

100

$50.40

$53.40

$300

6.0%

Update 7

SBRA

300

$23.83

$26.27

$732

10.2%

Update 14

LXP

500

$8.00

$10.90

$1450

36.3%

Update 15

AEE

200

$39.75

$54.75

$3000

37.7%

Update 15

AEP

100

$53.60

$67.00

$1340

25.0%

Update 15

PEB

200

$25.50

$32.60

$1420

33.1%

Update 18

STAG

200

$19.20

$27.90

$1740

45.3%

Update 18

Source: Author

The links in the table above provide more detailed background on the sales of each equity. With the exception of Cal-Maine Foods (NASDAQ: CALM), I'm pleased with the results achieved to date. While I did pick up some rich special dividends from CALM during the bird flu epidemic, I held CALM a bit too long and missed out on the best gains from CALM.

The dividends from the portfolio continue coming in as can be seen in both the Annual Income column and the Cumulative Dividends Collected column, though July is a light month for collecting dividends.

Source: Author

The overall annual yield for the portfolio was steady in July with valuation increases in the portfolio balanced with dividend increases.

Total Portfolio

In update 3 of this series, I explained the rationale for placing a large portion of the portfolio into bank savings accounts and certificates of deposits. There has been no change to that portion of the portfolio. However, because I've accumulated a significant amount of excess cash from the stock sales in January, February, and May, I have included the cash available for reinvestment now sitting in the settlement account. Readers will note that the interest rate on the funds in the settlement account has increased significantly from the roughly 0.1% paid previously.

Source: Author

Including the interest earned in June of $1204, the total interest earned since portfolio inception is $20,844 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest, since portfolio inception, up to $128,305 over 22 months and puts the total return percentage at 10.67% based on the original amounts invested and banked of $1,202,520. The total portfolio value as of July 31 has grown to $1,275,789, with the roughly $55,000 difference having gone to pay for income taxes, for a rebuild of the front porch, a bit of leisure travel, and for a new Subaru to replace a 10-year-old Honda Accord. An interesting note on the Subaru. Clearly, the owner of the portfolio could have bought something a bit more upscale to replace the aging Honda. At 69 years of age, she chose a Subaru Crosstrek with a 6 speed manual transmission. This was not by accident or because that was what was available on the lot. My sister-in-law ordered the Crosstrek specifically with the manual transmission because the dealer did not have any on the lot and she waited 6 weeks for it to be delivered. Yes, it is her daily driver. I hope I'm that ambitious when I get to be her age.

In addition to PFF, the portfolio consists of the following stocks: Enterprise Products Partners (NYSE: EPD), Omega Healthcare (NYSE: OHI), Western Gas Partners (NYSE: WES), Welltower (NYSE: HCN), AT&T (NYSE: T), Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI), Pattern Energy Group (NYSE: PEGI), Ventas (NYSE: VTR), Chatham Lodging Trust (NYSE: CLDT), Old Republic International Corporation (NYSE: ORI), Verizon Communications (NYSE: VZ), Starwood Property Trust (NYSE: STWD), Royal Bank of Canada (NYSE: RY), Toronto-Dominion Bank (NYSE: TD), and Whitestone REIT (NYSE: WSR). The portfolio also includes the Vanguard Mid-Cap Growth Fund (NYSE: VMGRX), Vanguard Dividend Growth Fund (NYSE: VDIGX), and Vanguard Health Care Fund (NYSE: VGHCX).

Going Forward

As I discussed above, my risk meter is rising for all the reasons cited in the section above titled "July 2017." Unless the economy, labor and wages, and the political climate show some improvement, I am more inclined to take profits than I am to make additional investments. I rode out the 2009 recession and was able to make additional investments near the bottom of the trough. Given that my sister-in-law is 69 years old, I'm not inclined to have her portfolio ride out the next recession. So it may be that I am being overly cautious and overly conservative, but I believe that is a better approach when you may not have several years to ride out the next downturn.

If there is a market correction or I find a truly undervalued equity, I may change my mind and make additional investments for this portfolio. However, in general, my current view is that taking profits and de-risking the portfolio is the more prudent approach.

Disclaimer: This article is intended to provide my opinion to interested readers and to serve as a vehicle to generate informed discussion in the comment posting. I have no knowledge of individual investor circumstances, goals, portfolio concentration or diversification. Readers are strongly encouraged to complete their own due diligence on any stock, bond, fund or other investment mentioned in this article before making their own investments.

Disclosure: I am/we are long CLDT, EPD, HASI, HCN, OHI, ORI, PEGI, PFF, RY, STWD, T, TD, VGIX, VGHCX, VMGRX, VTR, VZ, WES, WSR. 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.