Seeking Alpha

If I Had To Build An Income Portfolio Today - Update 21

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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
D.S. Leach & C.E. Leach
Long only, dividend investing, dividend growth investing, energy
Summary

This article is update 21 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 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 risks to our economy going forward.

Introduction

In October 2015, I wrote an article entitled "If I Had to Build an Income Portfolio Today," which was published by Seeking Alpha, 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 grandkids with college costs. The series of articles through update nineteen has been very well received by Seeking Alpha readers, generating over 251,300 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 twenty first 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 23 months since the portfolio was initiated.

August 2017

The month of August brought in some volatility to the markets, particularly at the end of the month. The market recovered most if not all of the dip it took in August. The tone from the Federal Reserve on future rate hikes, as I interpreted it, seemed a bit more hawkish on both continued rate hikes and beginning to divest of the QE assets previously accumulated. Investors need to recognize that the Fed will likely begin selling those QE assets this fall and it will 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 will be in uncharted territory when the Fed begins selling QE assets.

It appears that the Republican-controlled Congress has turned its attention to revising the US income tax code. With the tax code having become full of partisan favored tax breaks, any significant revision to US corporate and individual tax policy will be a steep uphill battle. North Korea's testing of a mid-range missile over the northern island of Japan has ruffled a number of political feathers again. This time, however, the market's collective response was not much more than a yawn. The response from the Trump Administration this time around appears to have moved from a military response to a focus on trade restrictions on North Korea and its allies (China). More or less a "hit them in the pocketbook" approach.

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 August 31, 2017.

Source: Yahoo Finance

During the month of August, the portfolio as a whole lost a bit of value over July's closing, about $1100.

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 August.

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 August is a light month for collecting dividends.

Source: Author

The overall annual yield for the portfolio rose slightly in August due only to the slight drop in the portfolio valuation.


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 August of $1204, the total interest earned since portfolio inception is $22,048 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest, since portfolio inception, up to $129,372 over 23 months and puts the total return percentage at 10.76% based on the original amounts invested and banked of $1,202,520. The total portfolio value as of August 31 has grown to $1,263,855 with the roughly $68,000 difference having gone to pay for income taxes, for a rebuild of the front porch, a bit of leisure travel, a new Subaru to replace a 10 year old Honda Accord, and tree clearing of property around the home. 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 entitled "August 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 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. It is more likely that I will be lowering the portfolio's common stock holdings over time.

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, HCN, HASI, OHI, ORI, PEGI, PFF, RY, STWD, T, TC, VTR, VZ, WES, WSR, VDIGX, VGHCX, VMGRX. 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.