If I Had To Build An Income Portfolio Today - Update 22

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Includes: CALM, CLDT, EPD, HASI, HCN, OHI, ORI, PEGI, PFF, RY, STWD, T, TD, VDIGX, VGHCX, VMGRX, VTR, VZ, WES, WSR
by: Dirk Leach

Summary

This article is Update 22 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 portfolio performed well in September.

This update to the original article presents the portfolio performance update.

In October 2015, I wrote an article titled "If I Had to Build an Income Portfolio Today" that described the development of a portfolio for a relative who 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. This series of articles through update twenty one has been very well received by Seeking Alpha readers, generating over 257,850 page views to date.

As stated 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 (NYSEARCA: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 22nd update in the series, though previous readers will note that I changed the title of Update 8 to reflect the portfolio's performance for that month. To be clear, it has been a little over 24 months since the portfolio was initiated. Roughly, this is the second anniversary of the portfolio.

September 2017

The month of September brought continued volatility to the markets with a war of words and insults between Kim Jong-un and President Trump. North Korea's continued testing its of ballistic missiles and development of advanced nuclear weapons. The US recommended and the United Nations agreed to stiffer economic sanctions against North Korea.

The Federal Reserve decided to leave the federal funds rate at its current level, but indicated that the market should expect another rate hike before the year is done. More importantly, the Fed clearly indicated their intent to begin in October allowing previously acquired qualitative easing (QE) assets to mature without replacement. In other words, to begin pushing QE assets out into the market. This is uncharted territory for the Fed and the U.S. economy. It bears watching.

With the potential to repeal the Affordable Care Act essentially dead, the Trump administration turned its attention fully to revising the U.S. income tax code. The administration released its vision for what the new personal and corporate tax code should look like. The administration's plan makes some fundamental changes that are long overdue in my opinion. Lowering both the corporate and personal income tax rates, doubling the standard deduction, doing away with a number of deductions that benefit only the higher income taxpayers, and ending the estate tax (a.k.a "the death tax") is a good starting point. It took about 15 seconds for some to begin howling about some proposed changes benefiting the rich and some proposed changes hurting the lower and middle income taxpayers.

While I'm sure that some of the changes will be a benefit to some of the wealthy in this country and some of the changes will hurt some of the lower and middle class wage earners, any plan must be considered as a whole package. It is simply not possible to craft a tax plan that uniformly helps all lower income and middle class taxpayers and shifts that burden uniformly to all wealthy taxpayers. As long as the lower income and middle class taxpayers benefit as a group and the more well-heeled taxpayers pick up more of the overall income tax tab as a group, I think it is a fine place to start the debate. With the tax code having become full of partisan-favored tax breaks, any significant revision to U.S. corporate and individual tax policy will be a steep uphill battle.

Portfolio Capital Appreciation and Income

The chart below, compliments of Yahoo Finance, shows the financial performance of the portfolio as of market close Sept. 30, 2017.

Source: Yahoo Finance

During the month of September, the portfolio as a whole picked up about $4300 in value along with dividend payments of $1212 during the month, roughly a return of 1.2%.

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 September.

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: Created by the 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 September is a light month for collecting dividends.

Source: Created by author

The overall annual yield for the portfolio increased slightly in September even with the increase in portfolio valuation. The overall yield increase is due to me correcting a slight error in one of my spreadsheets. In my spreadsheet, I had entered only 400 shares of Whitestone REIT (NYSEMKT:WSR) instead of the correct value of 600 shares. The error only affected the forward portfolio yield calculation.

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. Additionally, the Bank 1 savings rate was recently bumped to 1.2% from 1.05%.

Source: Created by author

Including the interest earned in September of $1227, the total interest earned since portfolio inception is $23,275 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest, since portfolio inception, up to $136,120 over 24 months and puts the total return percentage at 11.32% based on the original amounts invested and banked of $1,202,520. The total portfolio value as of Sept. 30 has grown to $1,269,340 with the roughly $69,000 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.

In addition to PFF and WSR, 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), and Toronto-Dominion Bank (NYSE: TD). 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 in previous recent updates, my risk meter is rising. 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, HASI, HCN, OHI, ORI, PEGI, PFF, RY, STWD, T, TC, VTR, VZ, WSR, VMGRX, VDIGX, VGHCX.

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.

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