If I Had To Build An Income Portfolio Today - Update 28

Summary

• This article is Update 28 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.
• March wasn't much better than February with respect to administration induced-volatility.
• As in February, I used the volatility opportunity to add a little 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-seven has been very well received by Seeking Alpha readers, generating over 296,400 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 US Preferred Stock ETF (PFF) which I have since exited as interest rates started to climb. 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-eighth 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 30 months since the portfolio was initiated.

March 2018

The month of March brought continued volatility as the US and China went tit-for-tat over tariffs. The tariff poker talk that started at the end of February continued through March with the stakes being raised by both sides. President Trump came out hard in favor of tariffs on imported steel (25%) and aluminum (10%). China retaliated with tariffs on pork and wine. Trump found another $50B of imports on which to apply tariffs and China responded in kind. The market was not at all impressed. While US steel and aluminum production companies and their union employees were happy with this announcements, 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 additional retaliatory tariffs on US exports to China.

This is likely only a prelude to getting to the negotiating table but the market swings are painful.

Portfolio Capital Appreciation and Income

The chart below, compliments of Yahoo Finance, shows the financial performance of the portfolio as of market close April 6, 2018.

Source: Yahoo Finance

The only addition in March was adding 100 shares of the Vanguard Energy ETF (VDE) when the oil and gas equity prices got cheap. 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 and March made a small dent in the cash balance and raised the annual stock portfolio yield 43 basis points.

During February, I added STAG Industrial (STAG), Physicians Realty Trust (DOC), Iron Mountain (IRM), and The GEO Group (GEO). I also added additional shares of Starwood Property Trust (STWD) and Pattern Energy Group (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%	Update 27

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 (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 recent 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 March of $1604, the total interest earned since portfolio inception is $32,257 on the bank deposits. This brings the total return (realized and unrealized gains) including cumulative dividends and interest since portfolio inception up to $146,437 over 30 months and puts the total return percentage at 12.2% based on the original amounts invested and banked of $1,202,520. The total portfolio value as of April 6, 2018, is $1,273,022, an increase of $905 in the last month. March was not very profitable.

In addition to VDE, 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 (NYSE: ORI), Uniti Group (NASDAQ: UNIT), Sabra Healthcare REIT (NASDAQ: SBRA), Ventas (NYSE: VTR), Pattern Energy (NYSE: PEGI), Welltower (WELL), 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), 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

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, aluminum, and other Chinese exports 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, IRM, OHI, ORI, PEGI, RY, SBRA, STAG, STWD, T, TD, UNIT, VDE, VDIGX, VGHCX, VMGRX, VTR, VZ, WES. 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.