Quarter Three - First Month Portfolio Review. Time For Defense

|
Includes: ABBV, ARCC, CBRL, CSCO, DLR, DUK, EPD, ET, FEI, GIS, HAS, JNJ, KMB, KO, LMT, MCD, MMP, MO, MSFT, O, OHI, PEP, PFE, PG, PM, QCOM, RDS.B, SKT, SO, T, TGT, TPZ, VFC, VTR, VZ, WEC, WELL, WPC
by: Bob Wells
Summary

As I get ready for my first Required Minimum Distribution, I am making changes in the positions making up our portfolio.

What follows is a portfolio that stresses defense moving forward.

Here are the changes made in the last month alone.

Welcome to my first ever interim portfolio quarterly review. During the past month a lot has changed as you'll learn in a moment. The changes made are part of a designed effort to build the size of many of our positions considered core and to prepare the portfolio to be managed passively, should that be required in the future.

Positions Bought and Sold

I start with the decision to sell my position in Simon Property Group (NYSE:SPG). I know from comments last time that many were surprised at my decision to sell a position I had only held for a quarter. No one was more surprised than I was. SPG was not on my watch list at the time of purpose, and I decided to open a small position more quickly than was commonly the case. I was impressed by its value, credit rating and strong dividend growth. A short time later, another mall REIT caught my attention: Tanger Factory Outlet Centers (NYSE:SKT). SKT enjoyed the distinction of being among those that I labeled "Dividend Growth Safety Superstars" back in 2012 when I was doing my first large-scale research. The "Superstars" shared the following characteristics:

  • Each was a Dividend Champion, or Contender, meaning it had maintained and grown its dividend in each year from the start of 2002 to the end of 2011. As a group, the stocks had enjoyed a five-year Dividend Growth Rate of 9.94% at the end of 2011.
  • Each stock had suffered less than half the loss of the S&P 500 during bear markets in 2002 and 2008.
  • Each stock had incurred no more than two down years during this turbulent period.

Back in 2012, SKT was oversold, and after a few years I no longer followed it. In June, I learned I would have another chance. Both SKT and SPG had a lot in common. The big difference is SPG cut its dividend during two bear markets - 2000 and 2009. I also believe SKT's outlet model has proven particularly strong during tough economic times. I picked up roughly 1% additional yield in making the swap.

I also closed positions in Alerian MLP ETF in July after distributions were cut for the second time. I particularly didn't like the fact that its largest position remains Energy Transfer Partners (ETP) with its credit rating of just BBB-. After the sale, I added to Tortoise Power and Energy (NYSE:TPZ) and opened a new position in First Trust MLP (NYSE:FEI). FEI is a CEF with a particularly strong group of top positions led by Enterprise Products Partners (NYSE:EPD), Spectra Energy Partners and Enbridge (NYSE:ENB).

I sold two energy positions early in the month, enabling me to increase the size of the four remaining positions. I elected to sell my overvalued position in Center Point Energy (NYSE:CNP), and did so when shares of Dominion (NYSE:D) became available at a 4% yield. The strength of D's dividend growth could, in my opinion, no longer be overlooked.

I also sold my half-size position in PPL Corp. (NYSE:PPL) in order to build the size of remaining energy positions I feel more comfortable holding.

I decided to sell my position in STAG Industrial (NYSE:STAG). Moving forward, I decided to capture exposure to industries through triple-net REITs rather than those devoted exclusively to that sector. This, plus the fact that STAG was my only non-recession proven REIT, helped finalize my decision.

The 6th position I closed in July was perhaps the hardest. I decided to close my small position in Coca-Cola (NYSE:KO). Its payout ratio and a multi-year slowing of dividend growth had left me with a position I no longer felt comfortable adding to. I sold and added to my shares in PepsiCo (NYSE:PEP), Kimberly-Clark (NYSE:KMB) and General Mills (NYSE:GIS).

Below are the holdings making up my portfolio as of the end of July 2017. 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 I traditionally track. I did this in part to give readers a better idea of what now makes up our entire family portfolio.

I consider a full position to be any holding at or above the average for the portfolio. I have placed an asterisk next to positions I consider core which are currently undersized.

The first three positions below are each double-sized ones. Each of these are under 5% of the portfolio's value. I have included a column for the most recently announced DGR to enable quick comparisons to 5-year rates.

Positions are listed in order of their current weight.

Stock

Ticker

Current

Yield %

5-Year

DGR

MR

DGR

AT&T BBB+

(NYSE: T)

5.2

2.2

2.08

Verizon BBB+

(NYSE: VZ)

5.2

2.2

2.2

Dominion BBB+

D

4.0

7.3

7.9

Southern A-

(NYSE: SO)

4.9

3.5

3.57

Philip Morris A

(NYSE: PM)

3.5

8.8

2.00

Johnson & Johnson AAA

(NYSE:JNJ)

2.8

7.0

6.67

Ventas BBB+

(NYSE: VTR)

4.7

8.2

6.16

AbbVie Inc. A-

(NYSE:ABBV)

3.5

12.28

Altria A-

(NYSE: MO)

3.3

8.3

8.0

Realty Income BBB+

O

4.6

6.06

2.1

Lockheed Martin A-

(NYSE: LMT)

2.6

15.8

10.3

W.P. Carey BBB

(NYSE: WPC)

6.1

8.1

3.7

Duke A-

(NYSE: DUK)

4.1

2.5

3.6

Target A

(NYSE:TGT)

4.7

16.1

3.33

Welltower BBB

(NYSE: HCN)

4.7

3.9

4.24

Omega Healthcare Investors BBB-

(NYSE: OHI)

7.6

8.8

6.6

Pfizer AA

(NYSE:PFE)

3.9

7.14

7.14

General Mills BBB+

GIS

3.5

9.7

2.1

V.F. Corporation

VFC

2.9

18.6

13.5

Digital Realty BBB

(NYSE: DLR)

3.3

5.3

5.68

Tanger Factory Outlet Centers

SKT

5.3

9.7

5.4

Wisconsin Energy A-

(NYSE: WEC)

3.4

13.7

5.0

Main BBB

(NYSE:MAIN)

5.8

7.0

Qualcomm A+

(NASDAQ:QCOM)

4.1

19.9

7.55

*Kimberly-Clark A

KMB

3.0

6.3

5.43

*Pepsi A

PEP

2.8

7.9

7.12

*Procter & Gamble AA-

(NYSE: PG)

3.2

5.4

3.0

Microsoft AAA

(NASDAQ: MSFT)

2.4

15.8

8.3

Cisco Systems AA-

CSCO

3.7

31.6

11.54

Royal Dutch Shell A+

(NYSE: RDS.B)

6.0

McDonald's BBB+

(NYSE: MCD)

2.3

7.4

5.62

*Cracker Barrel Value Line 2

(NASDAQ: CBRL)

2.9

23.8

4.55

Hasbro BBB

(NASDAQ: HAS)

2.0

11.6

11.76

Magellan Midstream Partners BBB+

(NYSE: MMP)

4.5

15.8

8.38

Energy Transfer Partners BBB-

ETP

10.5

.4

7.0

Enterprise Products Partners BBB+

EPD

6.1

5.7

5.0

Tortoise Power & Energy Infrastructure Fund

TPZ

7.2

First Trust MLP

FEI

9.0

Ares Capital BBB

ARCC

9.0

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.

I leave you with this final question. What changes did you make or do you expect to make in the design of your portfolio as you ready for the distribution stage of investing?

Disclosure: I am/we are long ABBV, ARCC, JNJ, TGT, GIS, CBRL, QCOM, CSCO, PFE, CBRL, DLR, EPD, ETP, HAS, HCN, KMB, KO, LMT, MCD, MMP, MO, MSFT, O, OHI, PEP, PG, PM, RDS.B, DUK, SKT, FEI, SO, T, TPZ, VFC, VTR, VZ, WEC, WPC AS OF 7/30/2017. 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.