RetirementRx: Progress And The Ill Effects Of A Job Change

by: Mike Wald


Dividend growth investing is a well-suited strategy for retirement planning.

My real life portfolio and plan, RetirementRx, is presented along with changes made thus far in 2017.

My yearly income target and my retirement projections are at risk due to a recent career change.

I present my strategy to make up for lost income and disclose my 1st investment following this strategy.

In 2013, I took my retirement planning to the next level by formulating a sensible plan to save for retirement via dividend growth investing. I published my first article on SA in Jan. 2017 detailing this plan, which I call RetirementRx. RetirementRx is both a real-life plan and a stock portfolio for retirement. The following article is a review of the plan's performance thus far through 2017, starting with the portfolio's makeup and position changes. During the second quarter of 2017, I decided to accept a new position at a local biotech company. The career move brings with it some excellent scientific, business, and leadership opportunities along with an improvement in salary and benefits. A drawback of this move is the sizable cash rollover from my 401K holdings into my Traditional and Roth IRAs which consequently now hold approximately 50% cash. With the S&P500 PE ratio nearing 25, I am short on options for investment and, after much deliberation I have come up with a plan to get my dividend income stream back on track. After outlining my strategy, I explain my first purchase using this strategy. I welcome and appreciate feedback from the SA community, particularly on how others might choose to invest a substantial sum of money in today's frothy market.

The RetirementRx Portfolio

As of August 31st 2017, RetirementRx constitutes 38 stocks across a Traditional IRA, Roth IRA, and individual, after-tax account. The current 401K balance with my new employer is small and will be ignored for the time being. The following list ranks the stocks in RetirementRx by % dividend income, leaving out my ~$1K investment in SCHD for performance comparison. In the Activity column, 'A' reflects an addition and 'N' reflects a new position. The red color fill indicates stocks without dividend increases over the past 12 months or with dividend increases that are below 5%. Stocks in these categories are not performing as desired and could be replaced.


Inputs into the portfolio have been modest thus far in 2017, with most of the contributions going to my employer-sponsored 401K. The transactions indicated in the table are summarized by account type. I will not be outlining my investment thesis for each investment as it is beyond the scope of the article.

Roth (R) IRA: I added the maximum to my Roth account for 2017 and used it to invest in four companies before the end of March 2017: 9 shares of Amgen (AMGN) at $153.30, 25 shares of Qualcomm (QCOM) at $57.09, 20 shares of CVS Drug Stores (CVS) at $78.66, and 70 shares of Chatham Lodging Trust (CLDT) at $19.77.

Traditional (T) IRA: I sold one position and made two purchases in my Traditional IRA prior to the 401K rollover. I closed my position in Ford (F) at (160 shares at $10.96 = 1753.60) and used the proceeds plus accumulated dividends to open a new position in Kroger (KR) at (73 shares at $24.39) and add to my CVS holdings (7 shares at $77.33) in June 2017. The reason I sold F was the lack of dividend growth potential. The special dividend was nice, but it is not a reliable source of dividend growth. The automobile manufacturing industry is facing multiple challenges including the rapid rise of ride-sharing, the growth of electric vehicles, and the uncertainty over NAFTA and ex-US manufacturing. I believe that Ford remains a decent long-term investment and the yield was strong at 5.3%, however I do not see it moving the dividend growth needle in the near term due to pressures on revenue and earnings.

My first purchase using funds from my recent 401K rollover was 100 shares of Lowe's Companies (LOW) at $73.91 on August 28th, 2017. I have been watching LOW for some time [along with Home Depot (HD)] and consider it an easy buy below $75. LOW is a solid growth play with expected double digit EPS growth and 55 years of paying increasing dividends. Home Depot is the leader in this space, but currently trades at a premium relative to Lowe's. I believe both companies offer solid business models and resilience to competition due to their vast inventory, convenient locations, and the knowledge/experience associated with home improvement projects and large appliance purchases. I am a customer at both and enjoy online ordering and local pickup at Lowe's for many of my home improvement projects.

After-tax (AT) account: A small regular deposit of cash into the after-tax account was used to purchase 41 shares of TD Bank (TD) on June 12 for $49.20. I have been looking to add to the financial sector and found TD to be trading at a discount and offering exposure to US consumer banking in a time of rising interest rates. TD is on the Canadian CCC list and was able to increase its dividend payment throughout the financial crisis of 2008. It has high single digit EPS growth expectations. I am an account holder at the local TD Bank in my town and like the neighborhood-friendly style of banking offered by TD.

The one dividend cut that occurred in RetirementRx was that of TEVA Pharmaceuticals (TEVA). TEVA cut their quarterly distributions from $0.34/share to $0.085/share. This is a 75% cut in income and a result of poor capital management by TEVA and its board during a time of patent expiry of its cash cow MS drug Copaxone, overreaching on the Actavis generics buyout, and rising pressures on generic drug prices. Fortunately, I have only a small investment in TEVA (<0.5%). As it is held in my after-tax account, it is likely to be sold as a way to offset capital gains taxes of a future sale.

RetirementRx: Progress towards income goal for 2017

Through August, the self-managed portion of the portfolio is generating 22% more dividends than it did in 2016. The month-to-month dividend payments are summarized below. As of Aug 31st, the forward dividend yield of RetirementRx is 2.88% and the weighted-average dividend growth rate for the TTM is 9.05%. This compares to the ETF SCHD which yields 2.8% and has a TTM dividend growth rate of 9.2%. Both score a Chowder number of about 13.

Below is the sector break-down of the self-managed components of RetirementRx. Sector allocation is important to consider when planning transactions. I want to avoid adding to a sector that already contributes 20% or more of my dividend income or total portfolio value. Therefore, I will not be adding to the Consumer Discretionary sector as it already represents over 20% of the portfolio's dividend income and will only add to existing positions in the technology sector as it represents 18.8% of the portfolio by value.

The below chart shows the yearly dividend cash-flow performance as of August 31st, 2017 for all of RetirementRx (includes cash from 401K rollover). Just to remind readers, I have decided to target an annual income stream equivalent to my 2013 inflation-adjusted salary for retirement. The blue line reflects the trajectory towards this income target in %. The red line is the actual % of the target cash flow generated by RetirementRx. When the red line hits 100%, I will have reached my target retirement income. If the red line falls too far below the blue line, I will need to make adjustments or start preparing for a less comfortable or delayed retirement.

I am achieving just over 1.2% of my target retirement goal which is down from over 3% in 2016. Relative to the yearly income goals, I am achieving only 32% of my 2017 cash flow goal versus 105% at the end of 2016. This undershoot is entirely a result of the 401K rollover and how I have been accounting for dividend returns from my 401K holdings. My 401K funds had been producing an unrealized dividend payout which was retained within the funds instead of being paid out as cash. When the 401K holdings were sold, the estimated dividend cash flow for all of 2017 stopped and was rolled into the fund's total return. If I had left the money invested and used an estimated dividend yield of 2%, I would currently be achieving approximately 70% of the 2017 target with a third of the year remaining.

While the above graph is a bit misleading, I prefer to use it as a reflection of my current situation. The actual deficit is smaller than presented and consists of lost employer matches during the transition period and missed dividends due to my desire to not instantly invest the rollover into the market. Due to having to close one 401K and wait for another to open at my new employer, I missed a few contributions and two 6% matches by my employer. I will assume the missed matches can be made up for by bigger contributions to my 401K afforded by my new position. Secondly, and more importantly, I will not be receiving dividends from the rollover cash until it is fully invested in DG stocks. This will take 3-6 months to deploy. The amount of lost dividend income from the uninvested cash can be estimated at around 3-6 months of dividends at a rate of 2.5% on the ~100K principal which equates to $600-1200. For simplicity, I will take the average of $900 as my actual lost dividend income that I must recover through adjustments to my plan.

My strategy for regaining lost dividends

To make up for the lost dividend income, I will continue investing in dividend growth stocks as usual while adding a modest amount of leverage to my new positions via covered calls. In addition to investing the cash in the next 3-6 months, I will be writing out-of-the-money covered-calls on new positions to generate additional income. I consider this a relatively safe approach to generate additional income from my investments as the market is at a relative high. I expect even the more undervalued stocks to face correlation resistance from the overall market. I will only be selling covered calls on companies that I am willing to sell and I will restrict the option writing to my Traditional IRA to shield the options income from taxes. I hope that through this strategy, I will be able to achieve my target income trajectory by end of 2018 and the underperformance created by my change in jobs will only look like a small blip on trajectory to my goal.

Putting the strategy into action

As mentioned already, I purchased 100 shares of Lowe's Companies at $73.91 on August 28th, 2017. This purchase was then followed by selling the $82.50 covered call for LOW expiring Jan 19, 2018 for a total premium of $96.30 after fees. I will count this premium as dividend income only after the contract expires or is exercised. In addition to the expected October dividend payment of $0.41/share, the expected cash flow return on this position is 1.8% or ~5% annualized should it expire worthless versus 0.55% or 1.5% annualized for the dividend alone.

I plan to make up-to 6 more similar trades with the money available over the next 6 months. I will spread out the expiration dates over the next year and reevaluate the effect of this strategy on my projected dividend income in my 2017 portfolio review. In the meantime, I will be preparing an article on my investment selection process to highlight and why I invested in Lowe's Companies in the first place.


Dividend growth investing is a sound strategy for retirement planning as it forces one to focus on income generation and long-term investments. Despite RetirementRx performing well, I am augmenting my plan to recover lost income from a 401K rollover. I had not come across this situation previously and I found myself worrying about it more than anticipated. There was no blue print to follow here, but I believe I have come up with a suitable strategy to replace lost income. I must credit the writings of FerdiS and RoseNose as without their voices, I might not have thought to use options to help enhance my returns. I am very interested in what others in the SA community think of this strategy and how they have already or might now deal with such a situation …?

Happy investing!

Disclosure: I am/we are long ALL STOCKS MENTIONED.

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.