If I Had To Build An Income Portfolio Today - Update 27

Summary

• This article is Update 27 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 11 positions.
• February was a rough month with a lot of volatility, a lot of it down.
• I took the volatility as an opportunity to add equities to the portfolio at valuations much lower than just a couple of months ago.

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. This series of articles through update twenty-six has been very well received by Seeking Alpha readers, generating approximately 290,000 page views.

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 U.S. Preferred Stock ETF (NYSE: PFF) which I have since exited. With most of the funds invested except for a money market account (brokerage settlement fund) 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-seventh 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 29 months since the portfolio was initiated.

February 2018

The month of February brought back volatility in spades and brought us a roughly 10% correction in all three major US exchanges. Dividend income stocks were hit particularly hard, suffering the market correction and new found fears of rising interest rates.

Firstly, the market had achieved valuation metrics not seen in roughly 30 years. If this was not a direct catalyst, it certainly provided some fuel for the fire that burned roughly 10% off the DOW, S&P 500, and NASDAQ. Job growth remains strong and wage growth is beginning to heat up. Both of these issues increase the risk and anticipation of higher inflation. As a consequence, interest rates have been trending up and the trend accelerated markedly at the end of January. All of these separately or in combination put downward pressure on equity valuations.

Towards the end of the month, President Trump came out hard in favor of tariffs on imported steel (25%) and aluminum (10%). The market was not impressed. While US steel and aluminum production companies and their union employees were happy with this announcement, most other companies that use steel and aluminum in manufacturing products were not pleased. The concerns being an increase in the cost of other goods produced in the US and exported overseas and the possibility of retaliatory tariffs on US exports. Tariffs are also a shotgun approach to leveling the playing field and may end up hurting our neighbors and allies (e.g. Canada and Germany) more than our non-allies (e.g. Russia and China). Hopefully, there will be a bit more thought on the idea of steel and aluminum tariffs before they are implemented across the board.

Portfolio Capital Appreciation and Income

The chart below, compliments of Yahoo Finance, shows the financial performance of the portfolio as of market close March 2, 2018.

Source: Yahoo Finance

Readers will note that I added several new holdings and added to two existing holdings during the month. The largest investment holding previously in the portfolio, PFF, was liquidated in January. This left a significant cash balance to invest and put a dent in the annual income the portfolio provides. The holdings added in February made a small dent in the cash balance and raised the annual stock portfolio yield 42 basis points.

During February, I added STAG Industrial (NYSE: STAG), Physicians Realty Trust (NYSE: DOC), Iron Mountain (NYSE: IRM), and The GEO Group (NYSE: GEO). I also added additional shares of Starwood Property Trust (NYSE: STWD) and Pattern Energy Group (NASDAQ: PEGI). All of these names have been severely beaten down in the last couple of months. However, all are solid companies and should provide both dividend income and capital appreciation over the long haul.

In Update 15, I decided to include a new table summarizing the sales and the gains on each sale.

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
WSR	600	$13.71	$14.90	$714	8.7%	Update 24
PFF	3896.1	$150,000	$148,442	-$1558	-1.0%	This Update

Click to enlarge

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) and PFF, 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. PFF recently took a beating due to the fear of rising interest rates. I may pick up shares of PFF again when interest rate increases moderate as it is a very low beta high income ETF.

The dividends from the portfolio continue coming in as can be seen in both the Annual Income column and the Cumulative Dividends Collected column in the chart below.

Source: Author

While the new equity additions brought the portfolio yield up, the annual income thrown off by the portfolio is still down by roughly $7000 as a result of the liquidation of PFF. Replacing that income is proving difficult.

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 2017, I also 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 January of $1469, the total interest earned since portfolio inception is $30,653 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest, since portfolio inception, up to $145,524 over 29 months and puts the total return percentage at 12.1% based on the original amounts invested and banked of $1,202,520. This is down by 1.2% from January due to the drop in unrealized gains. The total portfolio value as of March 2, 2018, is $1,272,117, a drop of roughly $14,300 in the last month. February was rough.

In addition to STAG, DOC, IRM, and GEO, the portfolio consists of the following stocks: Enterprise Products Partners (NYSE: EPD), Omega Healthcare (NYSE: OHI), Western Gas Partners (NYSE: WES), Old Republic Insurance (NYSE: ORI), Uniti Group (NASDAQ: UNIT), Sabra Healthcare REIT (NASDAQ: SBRA), Ventas (NYSE: VTR), Pattern Development (NYSE: PEGI), Welltower (NYSE: HCN), Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI), Chatham Lodging Trust (NYSE: CLDT), Verizon Communications (NYSE: VZ), Starwood Property Trust (NYSE: STWD), Royal Bank of Canada (NYSE: RY), Toronto-Dominion Bank (NYSE: TD), AT&T (NYSE: T), and Hannon Armstrong Infrastructure. The portfolio also includes the Vanguard Mid-Cap Growth Fund (NYSE: VMGRX), Vanguard Dividend Growth Fund (NYSE: VDIGX), Vanguard Health Care Fund (NYSE: VGHCX), and Vanguard Energy ETF (NYSE: VDE).

Going Forward

The economy, labor, and wages are showing enough improvement that the market is getting interest rate increase jitters. Estimates of GDP growth for 2018 are being revised upward. The new lower corporate tax and the revised individual tax code may well provide some additional economic stimulus and push the market a bit higher. Finally, the possibility of tariffs on imported steel and aluminum are viewed as a potential drag on the economy. I'm expecting continued volatility and additional opportunities to add fairly or undervalued equities to the portfolio.

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.

Analyst’s Disclosure: I am/we are long CLDT, DOC, EPD, GEO, HASI, HCN, IRM, OHI, ORI, PEGI, RY, SBRA, STAG, STWD, T, TD, UNIT, VTR, VZ, WES, VDE, VDIGX, 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.

Comments

[GerryDiv]

I've been tempted to dump my PFF. But like you point out where do you put the $
I like the monthly income from PFF but overall its like treading water.

[D.S. Leach & C.E. Leach]

Jay,

I'm sorry but I don't understand your comment/question. What is an SEP?

[JAY PRABHAKAR]

Hi, Dirk, Wondering if adding some of your portfolio to an SEP would make sense? I have about $8K to invest.

[D.S. Leach & C.E. Leach]

Jay,

Did you mean an SEP-IRA? If so, here is the answer.

IRA contributions have to be from "earned" income (wages, tips, etc.). Can't contribute to an IRA using money from interest, dividends, SS, or pensions. The owner of this portfolio, my sister-in-law, is retired and hence, no earned income = no IRA contribution.

She actually has the opposite issue to deal with. She needs to start taking the RMD from her existing IRA/401k/403b accounts.

Cheer$!

[Mili21]

Dirk,
>>>"She actually has the opposite issue to deal with. She needs to start taking the RMD from her existing IRA/401k/403b accounts"<<<
That's why, for past 2 years, I aggressively started contributing my my ROTH 401...
No taxes in retirement, No RMDs, No K-1s (with some exceptions of companies that issue K1 with potential for UBIT)....
~V

[GerryDiv]

If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A.

[Rambo]

Dirk- Any thoughts on VNQ. Purchased some a few points lower. Thx

[D.S. Leach & C.E. Leach]

Rambo,

VNQ is on my watch list. I'm not generally a fan of index funds but VG doesn't have a managed REIT fund. I might add VNQ if there is continued weakness in the sector due to interest rate fears.

VG is a class outfit. I think as long as you have a long time horizon (5+ years), you should do well with VNQ.

Cheer$!

[brianant]

nyld or nyld/a and AY have better metrics and aren't deluting the company by floating more shares. A little less on the dividend, but not much when you only own 400 shares. As well I believe these companies have more sustainable dividends and better guidance.

[mmkkgg]

It is a cruel world. If you're born an antelope, you have to worry about getting eaten by lions all day.

[tikigod18]

Mr. Schwartz: "I believe that every person is responsible for paying for their own expenses."

So how seriously to you expect those who have worked hard all their lives to make ends meet, raise their kids, and now have little to pay for care in later retirement. Would you suggest private companies set up shelter care facilities in their lobbies? Have them live on the streets? Have them die because the cannot pay for medication? As a senior volunteer, I have already seen some elderly folks pass due to inability to pay for medication, much less care.

The WMT greeters I see are in their 70's-80's, and are often limping and obviously not physically in the most ideal jobs.

IDK.....maybe that is the country we now live in.

[Robert Allan Schwartz]

tikigod18, if you want to help those people, no one will stop you.

[tikigod18]

Wonderful article! You now have a new follower and I have a new Dirk Leach folder that will include all your articles from today forward. Glad to see you owning UNIT. I have been selling puts monthly on it, basically getting the same premium as if I were collecting the divvy. Just wanted to see earnings, which seemed fine, yes?

[D.S. Leach & C.E. Leach]

tiki,

Yes, UNIT's earnings were fine. The problem UNIT has is the high div makes financing with secondary offerings impossible (or at least foolish) and, with a junk level credit rating, debt will be expensive. Hard to grow the business without credit. UNIT is a speculative holding that I'll likely exit in a couple of quarters.

Cheer$!

[lsuavecito]

UNIT, has an 8.25% bond, mat., 2023, trading well under par(93?).

[D.S. Leach & C.E. Leach]

Must be doing something right. This portfolio is up $3000 (0.80%) last time I looked today.

Cheer$!

[nbsomerset]

really, $3000, 0.80% from yesterday, from when...seems paltry to me...

[D.S. Leach & C.E. Leach]

nrb,

So, after the mutual fund prices came in for today (usually by 6:30 PM), the portfolio is up just under $4k (1.04%). Don't forget that the stock portfolio is also throwing off $15k per year in dividends.

Paltry?

[nbsomerset]

i think we are comparing apples to oranges...not your portfolio but David Fish's which lists about 100 positions above. FYI, my portfolio was up over $20k yesterday and throws off $41k/year in dividends. my portfolio is up ytd, $53k over the $4k/mo. i take out of my IRA rollover, so really its up $53 + 12 = $65k ytd...not bragging just stating performance.

[Dividend Ambassador]

Dirk, REITs are too risky for folks who need to live off the income their stocks produce and for those who need that income to reliably grow. I agree w brianant’s comment above. Look at large cap blue chip dividend payers and buy them only when fairly priced or mis-priced to the downside. Right now an investor looking for meaningful, reliable income at fair or better prices could look to buy MO, BNS, TD, CM, RY, CAH, IBM, T, UPS, SO, PFE, XOM, and MRK. Boy, a retiree sure can’t take their eyes off a bunch of REIT’s if they are sitting in her portfolio. AnYthing can and will happen w REITs, even those like OHI that sometimes put together a dozen or so good years. Wow.

[Robert Allan Schwartz]

"REITs are too risky for folks who need to live off the income their stocks produce and for those who need that income to reliably grow."

I don't know why you say that.
David Fish's lists of Dividend Champions, Contenders, and Challengers show that many utilities have paid (and raised) their dividend for 5, 10, 15, 20, 30, 40, 50, or more years in a row:

Brookfield Renewable Partners LP BEP MLP-Energy 9
Brookfield Infrastructure Partners LP BIP MLP-Energy/Timber 11
AmeriGas Partners LP APU MLP-Propane 13
Pattern Energy Group Inc. PEGI Utility-Diversified 5
AES Corp. AES Utility-Electric 7
American Electric Power Co. AEP Utility-Electric 8
Black Hills Corp. BKH Utility-Electric 47
Consolidated Edison ED Utility-Electric 44
DTE Energy Company DTE Utility-Electric 9
Edison International EIX Utility-Electric 15
El Paso Electric Co. EE Utility-Electric 7
Great Plains Energy Inc. GXP Utility-Electric 7
Idacorp Inc. IDA Utility-Electric 6
NRG Yield Inc. NYLD Utility-Electric 6
Otter Tail Corp. OTTR Utility-Electric 5
Pinnacle West Capital Corp. PNW Utility-Electric 6
PNM Resources Inc. PNM Utility-Electric 7
Portland General Electric Co. POR Utility-Electric 12
PPL Corp. PPL Utility-Electric 17
Southern Company SO Utility-Electric 17
Westar Energy WR Utility-Electric 13
Allete Inc. ALE Utility-Electric/Gas 8
Alliant Energy Corp. LNT Utility-Electric/Gas 15
Avista Corp. AVA Utility-Electric/Gas 16
CenterPoint Energy CNP Utility-Electric/Gas 13
CMS Energy Corp. CMS Utility-Electric/Gas 12
Dominion Energy Inc. D Utility-Electric/Gas 15
Duke Energy Corp. DUK Utility-Electric/Gas 13
Eversource Energy ES Utility-Electric/Gas 20
MGE Energy Inc. MGEE Utility-Electric/Gas 42
NextEra Energy Inc. NEE Utility-Electric/Gas 24
NiSource Inc. NI Utility-Electric/Gas 7
NorthWestern Corp. NWE Utility-Electric/Gas 14
OGE Energy Corp. OGE Utility-Electric/Gas 11
Public Service Enterprise Group Inc. PEG Utility-Electric/Gas 7
SCANA Corp. SCG Utility-Electric/Gas 17
UGI Corp. UGI Utility-Electric/Gas 30
Vectren Corp. VVC Utility-Electric/Gas 58
WEC Energy Group Inc. WEC Utility-Electric/Gas 15
Xcel Energy XEL Utility-Electric/Gas 15
Atmos Energy ATO Utility-Gas 34
Chesapeake Utilities CPK Utility-Gas 14
MDU Resources MDU Utility-Gas 27
National Fuel Gas NFG Utility-Gas 47
New Jersey Resources NJR Utility-Gas 22
Northwest Natural Gas NWN Utility-Gas 62
ONE Gas Inc. OGS Utility-Gas 5
RGC Resources Inc. RGCO Utility-Gas 15
Sempra Energy SRE Utility-Gas 15
South Jersey Industries SJI Utility-Gas 19
Southwest Gas Corp. SWX Utility-Gas 12
Spire Inc. SR Utility-Gas 15
WGL Holdings Inc. WGL Utility-Gas 41
American States Water AWR Utility-Water 63
American Water Works AWK Utility-Water 10
Aqua America Inc. WTR Utility-Water 25
Artesian Resources ARTNA Utility-Water 20
California Water Service CWT Utility-Water 51
Connecticut Water Service CTWS Utility-Water 48
Middlesex Water Co. MSEX Utility-Water 45
SJW Corp. SJW Utility-Water 51
York Water Company YORW Utility-Water 21

[D.S. Leach & C.E. Leach]

killion,

I'll just double down on what RAS said.

Cheer$!

[Ginny]

Won't the prices of these utilities get hammered as interest rates rise?

[Finici]

Dirk -

Did you own Sun - a while back?

Jay

[D.S. Leach & C.E. Leach]

No, never owned SUN.

[AFAHM]

Dirk: Nice update!

I am following you into OHI, but wondering if PEGI has strong enough management and funding?

[D.S. Leach & C.E. Leach]

AFAHM,

You should read up on PEGI's backing by the Canadian pension outfit. Deep pockets.

Cheer$!

[nbsomerset]

OHI is a terrible position to own. I am in at 33 and change from several years ago, so I am looking at a 20% loss. Sure, the divi is nice but total return is atrocious. IMHO, NRZ, STWD and STAG are the ones to be in. REIT's and Brad Thomas ain't doing so good. People rotate into REIT's when the market goes south, which in todays market, is a mistake. Of course this really depends on your risk and strategy. In todays world you should be looking at technology positions where most of the gain is going to come from going forward.

Dirk seems to like Brad as I see STAG, DOC and IRM as recent Brad recommendations.

[D.S. Leach & C.E. Leach]

nrb,

"OHI is a terrible position to own. I am in at 33 and change from several years ago, so I am looking at a 20% loss."

So, it is a terrible position because your holding is down 20%. I'd say you are down 20% because you bought too high.

" People rotate into REIT's when the market goes south, which in todays market, is a mistake."

Why would that be a mistake?

I do read a lot of Brad's articles and we do agree on a lot but not everything.

Examples:

I was in (and out) of SBRA before BT got behind the REIT. I made a good return on SBRA. Now, I think SBRA is at a good entry point again.

I believe traditional brick and mortar retail is in for yet more pain. I've stayed away from all mall and traditional shopping center REITs.

I don't believe farmland prices are going anywhere. Too much surplus grain and foods in the system.

However, I am on the same page with BT on VTR, SBRA, DOC, OHI, IRM, GEO.

Cheer$!

[brianant]

But it looks like you have done well. Congrats

[brianant]

Any reason why you don't really own any large cap companies other than EPD? I'm thinking on the lines of KO, HPQ, BAC, CS,ING or IBM. Some of these would give you some european exposure as well as more large cap and less Reit exposure. Curious what your thoughts are? And could give more than 1and 1/2% that you get on Vangaard.

[D.S. Leach & C.E. Leach]

brianant,

The portfolio does include TD, RY, T, VZ which are all large cap.

KO and IBM, in my opinion, are not good investments. IBM has lost its way (20 years ago) and KO's primary business line is stuff that is bad for your health.

I have a number of large caps on my watchlist (BA, PFE, etc.) but they are all still too expensive.

Cheer$!

[mmkkgg]

GEO has no trade war risk.

With all the Broadcom hubub, it is obvious (to me anyway) that Qcom is way undervalued. Qcom shares will join Elon Musk's Starman when any of the following materialize....

1) FTC withdrawals complaint when the empty seats get filled (with Republicans)
2) Apple loses and apologizes to Qcom for tortuously interfering in Qcom's affairs so badly.
3) 5G starts to take effect,
4) NXPI acquisition closes.
5) Microsoft or Google or ??? makes counter buyout/ merger proposal for Qcom. (the best)

Long Qcom, & GEO!

[D.S. Leach & C.E. Leach]

mmk,

Unfortunate but, GEO also has a never ending supply of criminals to house.

Cheer$!

[pietrusikm]

do like the hotel reits at these levels aple cldt stwd ,,,,,,,,,,,,,,,,,,,,

[D.S. Leach & C.E. Leach]

pie,

Brad Thomas has an article today on CLDT. You should note that STWD is a commercial mortgage REIT and not a hotel REIT. Starwood Hotels' symbol is HOT.

Cheer$!

[rmccallay]

pietrusikm, I own all three and have not previously thought of STWD as a hotel reit, but I can see your point is as far as they do own a pot load of hotels, but mostly they originate loans for all kinds of commercial real estate. Thanks for giving me another point of view.

[Mili21]

What comforts you holding OHI/VTR in your portfolio?

[stuartn]

I dumped OHI as I always lost money with it.

[D.S. Leach & C.E. Leach]

134,

In the past, I've done very well investing in broad economic trends, what I call macro trends. OHI, VTR, HCN, DOC, and SBRA are all healthcare REITs and, for the most part, are focused on the senior crowd.

With the boomers reaching retirement age now, we have roughly 10,000 people reaching retirement age every day, 7 days a week, 52 weeks a year. As the boomers age, they will require more healthcare including skilled nursing, senior housing, hospital beds, and MOBs. The over 85 crowd will grow from 8M today to 20M in 2045.

VTR and OHI are both long term investments in that macro trend.

Cheer$!

[Robert Allan Schwartz]

"As the boomers age, they will require more healthcare including skilled nursing, senior housing, hospital beds, and MOBs. The over 85 crowd will grow from 8M today to 20M in 2045."

I don't think anyone disagrees with the increasing demand for healthcare.
I do think it is worthwhile to ask some related questions:
"How much will it cost?"
"Who will pay for it?"
"Can it be produced at a profit by a private-sector enterprise?"

[AlieGee]

You can keep going on and on adding to the list. It almost never ends.

[D.S. Leach & C.E. Leach]

AlieGee,

??? Which list?

[AlieGee]

Dirk -

The lists on SA.
Guess I wasn't clear !

Al

[dolson]

Seems pretty REIT heavy. What about some companies like ADM, ABBV, CAH, CBRL, CM, CSCO, GIS, INTC, JNJ, OMI, PFE, QCOM, BIP, FLO and other such companies?

[Nick Kearney]

some funny business with abbv lots ofinsiders selling lately.

[D.S. Leach & C.E. Leach]

dolson,

I've had CSCO, INTC, QCOM, and PFE on the watchlist. Two reasons I've not pulled the trigger on any of these.

1. Despite the recent dip, these companies are still richly valued. Another ~10% drop and I'd be looking much harder at these names.

2. Whether we are near the end of the business cycle is certainly debatable. But, I think most would agree we are not at the beginning of the business cycle. I'm skeptical that growth names have a lot of remaining upside.

Note the portfolio does have exposure to health care and technology issues through the VG healthcare fund and mid-cap growth.

Cheer$!

[zenstar666]

Dirk, thanks for this instructive post. I see you are long UNIT, as are other moderately conservative investors on SA. Would appreciate any comments which you may wish to provide on this REIT since there have been much gloom and doom notions about where UNIT is going to end up, given the WIN problem. Thanks!