If I Had To Build An Income Portfolio Today - Update 23

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

This article is Update 23 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.

October turned out to be a rough month for the portfolio.

I took the opportunity to add two REITs to the portfolio since my last update.

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 grand kids with college costs. This series of articles through update twenty two has been very well received by Seeking Alpha readers, generating over 263,000 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 (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 third 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 25 months since the portfolio was initiated.

October 2017

The month of October brought significant volatility to the portfolio, unfortunately most of that volatility was negative.

The Federal Reserve [Fed] 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 began allowing previously acquired qualitative easing [QE} assets to mature without replacement. In other words, the Fed began pushing QE assets out into the market. This action appears to have caused some increase in the 10 year and shorter maturity treasuries. In addition to the Fed's reverse QE action, President Trump named Jerome Powell as Janet Yellen's replacement for the Chairman of the Federal Reserve. Powell is considered dovish on interest rate policy, at least as dovish as Yellen. However, the uncertainty prior to Trump's announcement of Powell for the Chairman position did roil the markets, in particular equities sensitive to interest rate changes.

At the end of October, the house GOP rolled out their half baked fast track attempt at revising the tax code. With a lot of the details not yet worked out, the GOP plan is more of a framework for tax code changes. Equity markets don't like uncertainty, and the GOP plan caused some significant volatility in equities as investors and institutions attempted to sort out the winners and losers under the new "plan".

I did pick up two new equities for the portfolio during the month of October. Both are REITs but the investment thesis for each is very different. I picked up 200 shares of Uniti Group Inc. (NASDAQ: UNIT) at $14.50/share. This is a speculative investment but after significant due diligence on my part and a couple of very good articles on UNIT by Dividend Sensei and Rubicon Associates, I decided to take a small position in this oversold REIT. So far, it has worked out well with an unrealized gain of 13.6% plus a 4% dividend payment. Please note that this is a speculative investment and I'll be monitoring this one very closely.

The second investment I made in October was SABRA Health Care REIT (NASDAQ: SBRA). I bought a total of 400 shares at an average share price $20 for the portfolio. The investment thesis on SBRA is based on their purchase of Capital Care Properties Inc., an improved credit rating, continued progress in reducing exposure to Genesis Healthcare, Inc. (NYSE: GEN), and continuing to pay down long term debt. The investment is down about 3.4% as of Friday, 11/3/17 but I expect to get significant positive returns on SBRA by the middle of 2018. It looks like SBRA fell in sympathy with Omega Healthcare (NYSE: OHI) over the last few days. It also appears that there was some confusion over SBRA's dividend going forward. When the purchase of Capital Care Properties completed in August, SBRA made a prorated dividend payment of $0.36/share with the provision that the balance of that quarter's dividend ($0.07) would be paid in November. Many, maybe even most, of the financial websites were incorrectly reporting SBRA's dividend at $1.44 annually (4 x $0.36) instead of the correct value of $1.72 annually. On November 1, SBRA declared a $0.45 quarterly dividend (a 2.5% increase) plus the $0.07 dividend balance from the August dividend. Many of the financial sites have yet to pick up the increase or the $0.07 balance payment (e.g. Yahoo Finance is still reporting $1.44 annually). Once it is clear that the dividend going forward is actually $1.80 (4 x $0.45), and not $1.44, SBRA's valuation should improve. At $1.80, the forward yield is actually 9.3%.

Portfolio Capital Appreciation and Income

The chart below, compliments of Yahoo Finance, shows the financial performance of the portfolio as of market close November 3, 2017.

Source: Yahoo Finance

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: 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 October is a light month for collecting dividends.

Source: Author

The overall annual yield for the portfolio increased in October by 19 basis points due to the addition of SBRA and UNIT and their very high yields plus a couple small dividend increases in other holdings.

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. At the beginning of October, I moved $250k from a high yield savings account into a 5 year CD with a 2.40% yield. This increased the annual interest paid going forward by exactly $3000.

Source: Author

Including the interest earned in October of $1470, the total interest earned since portfolio inception is $24,745 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest, since portfolio inception, up to $136,184 over 25 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 October 31 has grown to $1,269,441 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, UNIT, SBRA, CALM, and OHI the portfolio consists of the following stocks: Enterprise Products Partners (NYSE: EPD), 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), Whitestone REIT (NYSE: WSR), 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

My risk meter is no longer rising but neutral. The economy, labor, and wages have shown some improvement. The political climate, however, remains rather bitter. 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 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, SBRA, STWD, T, TD, UNIT, VTR, VZ, WES, WSR, VDIGX, VMGRX, 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.