John And Jane: May Dividend Income Tracker - Taxable Account

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Includes: AAPL, ABR, ADM, APLE, BP, BPL, CAH, CINF, CLX, CMI, COP, EAFAX, EBGUF, ECCA, ECCB, EEP, EEQ, EMR, ENB, EPR, ET, GIS, HP, HRL, IDCC, IRM, JCI, LTC, MIC, MO, MSB, NRZ, O, ORI, OXLCM, OXLCO, PEP, SCL, SEP, SJM, SKT, SO, SPG, T, TLP, VZ, WASH, WLKP, WPC, XOM
by: Matthew Utesch
Summary

This is the seventh month I have officially tracked the taxable account's dividend income, and it was slightly below expectations with a total of $1,642.46 of dividends received.

Apple, Arbor Realty, Clorox, Spectra Energy Partners, Tanger Factory Outlet Centers, TransMontaigne Partners, and Westlake Chemical Partners all delivered increases in the month of May.

A brief overview and discussion of the current state of the stock market.

The taxable account has very few changes left to be made, but this doesn't mean we set it on auto-pilot and forget it.

This article includes all payout updates for May as well as a brief overview of what we are expecting in June.

Investment Thesis

May marks the seventh month that John and Jane have had a well-established concentration of stocks in their taxable portfolio. A total of seven stocks in the taxable portfolio delivered increased dividend payments during the month of May.

As I continue to document John and Jane's success, my long-term goal is to create a database that allows for year-over-year (YoY) comparisons that demonstrate the power and simplicity of dividend investing. In addition to documenting the past, I also like to forecast the upcoming month of dividends because I believe it helps keep expectations in check.

As always, I would like to include a disclaimer that states this article is based on an actual portfolio for clients of mine. The goal is to build a portfolio of dividend-paying stocks, bonds, etc. that will continue to produce a growing and long-lasting income stream with a minimal emphasis on capital appreciation.

Previous Comments & Suggestions

In my last monthly update, Tim McPartland offered up some interesting term preferred stock and baby bond candidates that I have mulled over for John and Jane's portfolio. At first, I chose to not act on any of these largely because of their premium-to-par value. In the end, I found two term-preferred issues to be quite compelling. The remainder of this section will be used to examine the differences between the two and the logic I used to determine which issue presented a more compelling value. The two preferred issues are:

  • Eagle Point Credit (NYSE:ECCB) - 10/26/2026 Redemption
  • Oxford Lane (NASDAQ:OXLCM) - 6/30/2024 Redemption

Both of these funds have a term preferred that precedes them, and it is extremely likely that they would be called prior to ECCB or OXLCM (I am referring to ECCA and OXLCO. I am not a big fan of paying a premium over PAR value, but I believe that the call date protection and distant redemption date offered by these funds offer a reasonable reward for the risk assumed. Here are some of the other reasons why I find these funds attractive:

  1. Both funds pay monthly distributions (on the last day of the month).
  2. Many of the other preferred stocks John and Jane are invested in are called "perpetual" preferred stock, which means that there is no mandatory redemption date. Therefore (hypothetically), there is a risk that a company could choose to never redeem shares. Both ECCB and OXLCM provide an explicit guarantee that their principal will be returned by the dates mentioned above.

For readers who are interested in preferreds, there are quite a few "perpetual" preferreds currently available at a significant discount to PAR. I plan on writing a separate article to focus on these and this subject. While "perpetual" preferreds at a discount may appear extra attractive, it is important as an investor to consider the risk associated with these shares in the event that a company chooses to not redeem them (especially in a rising interest rate environment).

Ultimately, we ended up choosing to purchase 100 shares of OXLCM in Jane's Traditional IRA. Here is the rationale we used to determine that OXLCM is more attractive than ECCB:

The assumption I made when running these calculations was that I wanted a conservative estimate of the cash flows in the event that the funds were redeemed on their first call date. The other advantage that I see in OXLCM is that there is approximately 72 months of dividends possible (until the redemption date) compared with approximately 101 months of dividends possible for ECCB (until the redemption date). I find 72 months far more attractive than 101 months primarily because we are currently experiencing low delinquency and default rates. As interest rates rise, it is expected that we will see an increase in delinquencies and default rates (especially when it comes to collateralized loan obligations). In the end, OXLCM represented a lower risk with a stronger short-term reward and nearly 2.5 years less potential exposure.

Dividend and Distribution Increases

There were a total of seven stocks that paid increased dividends in the month of May. The remainder of the section is used to give a brief overview/update of these seven companies and document the total dividend increase.

Apple (AAPL) - Apple's stock has been on a tear, and its most recent dividend increase and repatriation of funds have given a lot of fuel that has pushed the stock even higher. I believe that its continued expansion of services is an excellent complement to the revenues generated from iPhone sales. Services revenue came in at $9.2 billion in Q2-2018, and Tim Cook has stated the ultimate goal is to see services revenue grow to $50 billion by 2020. Services revenue is key to AAPL's continued growth because it provides a more balanced revenue compared to the cyclical nature of iPhone sales. If services revenue can continue to grow at the pace Cook suggests, there is significantly more room for AAPL's stock to run (with the dividend increases to follow).

Chart AAPL data by YCharts

AAPL's dividend was increased from $.63/share per quarter to $.73/share per quarter. This represents an increase of 15.9% and a full-year payout of $2.92/share compared with the previous $2.52/share. This results in a current yield of 1.52% based on a share price of $193.40.

Arbor Realty (ABR) - Arbor Realty has continued to perform strongly and regularly raises capital to continue expanding its business. I keep fairly close tabs on this company especially in regard to rising delinquency rates. Moody's CMBS conduit delinquency tracker rose to 5.58% in April relative to 5.53% in the month of March. This rate peaked in July 2012 at 10.06%. In simpler terms, CMBS conduit delinquency measures delinquency among apartment, industrial, office, and other commercial property types.

I remain largely unconcerned because the increase (as pointed out by Moody's) was in hotel and office. ABR's primary exposure is to multifamily and apartments which has one of the lowest delinquency ratios. ABR is one of the only positions in the taxable portfolio that I plan to liquidate as delinquencies increase due to the inevitability of higher interest rates and economic downturn. I believe that ABR still has approximately 1.5 years of growth and dividend increases before economic recession and delinquency begin to pose a real threat.

Chart ABR data by YCharts

ABR's dividend was increased from $.21/share per quarter to $.25/share per quarter. This represents an increase of 19% quarter-over-quarter and a full-year payout of $1.00/share compared with the previous $.84/share. This represents the third consecutive quarter that the dividend has been increased and produces a current yield of 10.63% based on a share price of $9.33.

Clorox (CLX) - CLX stock price has been riding a roller-coaster for the last three months, and management has recently acknowledged that it is currently undervalued by initiating a $2 billion stock repurchase program to replace its previous $750 million repurchase program. After reaching a 52-week-high of over $150/share, CLX then dropped to approximately $114/share. Share prices have since slightly recovered to over $120/share.

Chart CLX data by YCharts

CLX's dividend was increased from $.84/share per quarter to $.96/share per quarter. This represents a 14.3% increase with a new full-year payout of $3.88/share compared with the previous $3.36/share. This results in a current yield of 3.16% based on a share price of $121.40.

Spectra Energy Partners (SEP) - SEP has seen better days as far as the share price goes as Enbridge assimilates SEP's assets along with Enbridge Energy Partners (EEP), Enbridge Energy Management (EEQ), and Enbridge Income Fund (OTC:EBGUF) to create a single entity of Enbridge (ENB). SEP will be converted at a rate of 1.0123 common shares of Enbridge for each share currently owned. SEP is a small enough position that I plan to wait until shares are exchanged to reassess this position. While I am not a fan of the deal, I am encouraged that the oil industry and pipelines are set to benefit from reasonable prices and growth going forward.

Chart SEP data by YCharts

SEP's distribution was increased from $.73875/share per quarter to $.75125/share per quarter. This represents a 1.7% increase quarter-over-quarter with a new full-year payout of $3.005/share compared with the previous $2.955/share. This results in a current yield of 9.88% based on a share price of $30.88.

Tanger Factory Outlet Centers (SKT) - SKT has finally caught a well-deserved break after share prices reached a 52-week low of $19.86/share. SKT's break came from encouraging reports that retail same-store sales have increased 4% year-over-year. SKT (which is a fan favorite of retail bears) has seen a dramatic improvement in share price over the last month as a result of these encouraging stats. In addition to this, the CEO recently announced that the company is forecasting 95% to 95.5% occupancy for full-year 2018. If this holds true, it would represent the 37th consecutive year with occupancy above 95%.

It has also been less advertised that SKT has been quietly repurchasing shares under a $125 million authorization which has $65.7 million currently remaining. At a current share price of $22.14, this would represent approximately 3 million shares or roughly 3.2% of total shares outstanding.

Chart SKT data by YCharts

SKT's dividend was increased from $.34/share per quarter to $.35/share per quarter. This represents a 2.2% increase with a new full-year payout of $1.40/share compared with the previous $1.36/share. This results in a current yield of 6.32% based on a share price of $22.14.

TransMontaigne Partners (TLP) - The earnings call for TLP held some great points for long-term investors:

  • Distributable cash flow (DCF) of $23 million versus total cash distributions of $16.6 million.
  • Distribution coverage ratio of 1.39 times (which includes the distribution increase to $.785/share per quarter).
  • Year-over-year revenue of $56.4 million, or 26% growth YoY.

Chart TLP data by YCharts

TLP's distribution was increased from $.77/share per quarter to $.785/share per quarter. This represents a 1.9% increase quarter-over-quarter with a new full-year payout of $3.14/share compared with the previous $3.08/share. This results in a current yield of 8.19% based on a share price of $38.35.

Westlake Chemical Partners (WLKP) - The earnings call from May 5th presented some of the following details:

  • DCF was $15 million or approximately $.45 per limited partner unit.
  • This results in a distribution coverage ratio of 1.13 times (which includes the distribution increase to $.3975 per quarter).
  • 95% of ethylene sales are based on a take-or-pay agreement that protects the partnership's cash flows.

Share prices have since recovered from their recent low of just over $21/share and have begun pushing back towards the $24/share. I would consider adding to John and Jane's position if shares fell to the $22/share range again.

Chart WLKP data by YCharts

WLKP's distribution was increased from $.3864/share per quarter to $.3975/share per quarter. This represents a 2.9% increase quarter-over-quarter (and a 12% increase YoY) with a new full-year payout of $1.59/share compared with the previous $1.5456/share. This results in a current yield of 6.85% based on a share price of $23.80.

May Income Chart and June Income Estimates

I have created the following chart to assist with keeping track of John and Jane's taxable portfolio, with the intention of maintaining a database that can be compared on a month-to-month and YoY basis. Green is used to show when dividends were actually received while yellow represents dividend estimates that haven't occurred yet.

Here is a chart that shows the total dividends received in the taxable account for the first four months of the year:

Here are a few things to remember about this portfolio:

  • Dividends are not reinvested. John and Jane are at the point where they don't need the money, but we also want to build a cushion that allows us to purchase additional stocks in case the market drops and equities become more attractive.
  • Since dividends are not reinvested, the only time payments increase is when the dividend is raised or when additional shares are purchased with excess cash.
  • At the end of May, the total cash balance was $4,398.25. This means that $1,086.26 of the dividend has been redeployed to purchase additional shares.

Where Is The Value At?

Recently, we have seen the Dow jump back to 25,000 and it once again begs the question of where is the value in the market? The trend I have noticed is that many consumer-defensive and discretionary stocks have begun to fall on the fear of rising commodity prices while oil giants and other commodity-centric companies have seen their valuations soar. Here are some of the key players on my radar:

Chart SJM data by YCharts

J.M. Smucker (SJM) has seen its share price reach its 52-week low and may even touch its five-year low of close to $90/share. I believe that the opportunistic dividend investor will find SJM's yield of 3.13% and a payout ratio of 38% more than satisfactory given that the stock has not been available at this yield since the financial crisis in 2009.

Chart PEP data by YCharts

Pepsi (PEP) falls in the same category of being unloved. As sales continue to dwindle in the United States, Pepsi has emphasized its push to expand internationally as the best method to combat this problem. International growth appears extremely promising and the recent increase of 15.2% on the dividend demonstrates that management is confident in Pepsi's 46+ year continuous dividend growth. What the chart to the left doesn't show is Pepsi's current yield is actually 3.67% (with the increase included), which as you can see means that Pepsi is currently selling at a yield that has never been available before. The opportunistic dividend growth investor can rest assured that there is still a lot more room for Pepsi to run. For those who want a deeper look, I suggest looking at my previous Pepsi article entitled: PepsiCo: There Has Never Been A Better Time To Buy.

Conclusion

John and Jane's Taxable portfolio has performed as the account has recovered from significant paper losses. Overall, with the dividends and paper losses/gains included, John and Jane's Taxable Account is currently sitting at a small gain for the year of around 1.3% over the original cost basis. Excluding the paper losses, the Taxable Account is yielding approximately 5.23% based on the portfolio's original cost basis. Even if we assumed that all companies froze their dividend for the rest of the year, I would still expect the total of dividends produced to be $12,121.79.

Even as volatility appears to have settled down, there are still many micro/macro economic/political events that could add a healthy dose of uncertainty to the marketplace and therefore I would recommend caution when looking to add any shares. Examples like SJM and PEP are perfect for the Taxable portfolio and represent a strong buying opportunity at current prices.

May's income represents a high point for John and Jane's Taxable Account; in fact, May produced the highest amount of dividend income yet (when compared to the first four months of the year). Overall, John and Jane's Taxable Account benefited from a number of dividend increases and increased seasoned stocks that are now currently paying a dividend. Based on the chart above, I believe that John and Jane should be receiving approximately $682.61 of dividend income into the taxable account during the month of June.

For those who are interested, I plan to release the retirement articles (Traditional and Roth) for John and Jane's in the next ten days.

It can be difficult to keep track of all the available investments out there, so I would love to hear some feedback in the comment section about any investments you think would be beneficial for John and Jane's portfolio. I want to thank all of you who provided ample suggestions for stocks/funds worth additional consideration.

Final Note: If you enjoy my articles, please take the time to follow me. While I enjoy performing analysis, following me is the best method for showing me that SA subscribers are finding my work useful. I welcome all meaningful feedback and I enjoy using the Seeking Alpha platform to enhance and improve my own knowledge as well. My promise to readers is to be as open and transparent as I can be. The numbers presented are accurate as of the time I wrote this article.

In John and Jane's taxable account, they are currently long the following mentioned in this article: Apple, Arbor Realty, Archer Daniels Midland (ADM), Apple REIT (APLE), BP (BP), Buckeye Partners (BPL), Cardinal Health (CAH), Cincinnati Financial (CINF), Clorox (CLX), Cummins (NYSE:CMI), ConocoPhillips (COP), Eaton Vance Floating-Rate Advantage Fund A (EAFAX), Emerson Electric (NYSE:EMR), EPR Properties (EPR), Energy Transfer Partners (ETP), General Mills (GIS), Helmerich & Payne (HP), Hormel (HRL), InterDigital Corp (IDCC), Iron Mountain (IRM), Johnson Controls (JCI), LTC Properties (NYSE:LTC), Macquarie Infrastructure (MIC)), Altria (MO), Mesabi Trust (MSB), New Residential (NRZ), Realty Income (O), Old Republic International (ORI), Stepan Co. (SCL), Spectra Energy Partners, J.M. Smucker, Tanger Factory Outlet Centers, Southern Corp. (SO), Simon Property Group (SPG), AT&T (T), TransMontaigne Partners, Verizon (VZ), Washington Trust (WASH), Westlake Chemical, W.P. Carey (WPC), and Exxon Mobil (XOM).

John and Jane are also long the following stocks mentioned in this article (in their Traditional and Roth IRAs): Pepsi.

Disclosure: I am/we are long GIS, PEP, T, SCL. 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.

Additional disclosure: This article reflects my own personal views and is not meant to be taken as investment advice. It is recommended that you do your own research. This article was written on my own and does not reflect the views or opinions of my employer.