Third-Quarter Portfolio Review: An Active Management Quarter

by: Bob Wells

Summary

The third quarter saw continuing strength in dividend growth.

As with last quarter limited changes were made in preparation for the distribution stage of investing.

For the second year, Required Minimum Distributions will be made without the need to sell shares of IRA holdings.

Summary

How much do you need?

When do you need it?

How sure are you that it will be there?

The above mantra from SA Contributor Chowder represents his most often repeated advise when it comes to portfolio construction.

How it is applied depends in large part on how many years before the investor starts to draw dollars from the portfolio for income. We had originally planned to start drawing dividend income this year, but major health problems prevented that from happening. Instead, the focus quickly shifted to structuring the portfolio in order that it be managed passively by my wife with the assistance of my oldest daughter. A passive management portfolio business plan was developed and implemented with my admission for a lung transplant in December of last year. A taxable account was set up as well as instructions for monthly payment of after-tax dividends to our checking account should something happen to me.

Now over nine months later, I pleased to report that I'm doing fine along with our passively managed accounts.

I'm a 72-year-old Dividend Growth investor, in my second year of Required Minimum Distributions. 90% of my investments are in tax advantaged IRAs. I am adding no new dollars to these accounts. I have 42 positions with all but 6 full or overweight. I have no expectation of selling any of these 34 positions subject to the guidelines of my portfolio business plan. Our portfolio currently yields 4.3%.

Next year, again if all goes as planned, will represent the first year that we will be using after-tax Required Minimum Distributions (RMDs) for income. We are hoping to begin travel again. Just three years ago, we were planning withdraws for more overseas travel when I was suddenly diagnosed with a terminal lung disease that restricted travel and required among other things preparation for a lung transplant.

Going back to Chowder's mantra, I learned firsthand the importance of knowing both:

How much do you need?

How much will you or your spouse need if there is only one? I'm sure many of you have portfolio business plans; however, unless you have a "passive management" portfolio plan, there's still work to be done.

When do you need it?

Perhaps a better way to express this as we age is: When is the earliest we might need it?

How sure are you that it will be there?

Perhaps again as we age, we need to look at it just a bit differently. Something like: How sure are you that it will be there and remain there?

As we finish our second round of Required Minimum Distributions, we are continuing to make changes in both positions and their size. More about that later.

I'm pleased to announce that for the 3rd Quarter of 2018, my portfolio income increased by over 11% when compared to the same quarter for 2017. During the same period, my wife enjoyed even stronger income growth with an increase of over 12.2%.

If you have followed me in the past, you know that our focus is the safe and steady growth of our income. We are putting the final touches on a portfolio that stresses both defense and simplicity.

We believe when finalized this portfolio can be managed "passively" with very little effort.

During this period, please note that no new money was added to either account. We made our first Required Minimum Distributions (RMDs) last year, dividends have been collected to make this year's payments. Like last year we will make the RMDs without the need to sell stock shares.

We opened our first ever taxable investment account at the end of last year. RMDs were taxed and the remaining dollars transferred to this account for investment. I am currently invested in mostly low yield/high growth stocks in this account. We are currently collecting dividends and distributions and will be again able to make RMDs without the need to sell shares of stocks from the portfolio. Our goal is to make payments in this manner through age 79 when the withdraw rate will be 4.37%. Whether we achieve this goal will likely hinge on avoiding dividend cuts.

From December of 2017 to June of 2018, our portfolios were "passively managed" with no stocks bought or sold.

Here are the changes made since our last review available here:

Positions Bought, Sold, Increased and Reduced:

I decided to reduce exposure to Energy, now 7% of our portfolio value, resulting in my first Sell since December 2017 Royal Dutch Shell (RDS.B). I took the dollars from this position and purchased PPL Corporation (PPL).

Besides reducing exposure to Big Oil, I increased exposure to Utilities, a defensive sector. I increased income slightly and picked up a bit of Dividend Growth.

I also traded 52 shares of Magellan Midstream Partners (MMP) with which I purchased DNP. Again this action reduced exposure to Energy, increased income and increased exposure to Utilities.

I trimmed Microsoft (MSFT) back to a 3/4 sized position to increase income. It had grown to an oversized position with a yield of just 1.55%. I used the dollars to purchase additional shares of International Business Machine (IBM) and DNP Select Income Fund (DNP) greatly increasing income.

Finally I rebalanced two REIT holdings with nursing room exposure, Welltower (WELL) and Ventras (VTR), trading shares of WELL for shares of VTR. In the trade I reduced nursing home exposure while slightly increasing Income and Dividend Growth.

I am a strong advocate for trimming positions for those nearing their 70's in order to create more income. I encourage those interested in this subject to become actively participants in my blog, link located here.

Below are the holdings making up our portfolio as of the end of this quarter. Most were purchased at fair value or better between 2011 and today. I have included credit ratings for each holding. On further review, you may find many of our holdings are not currently available at fair value. Please do your own due diligence.

I have listed both my wife's positions in bold in addition to the ones I own exclusively and whose performance I traditionally track. I did this in part to give readers a better idea of what now makes up our entire family portfolio.

I consider a full position to be any holding at or above the average for the portfolio. I have placed an asterisk next to core positions which are currently undersized.

The first six positions below are each double-sized. Each are under 5% of the portfolio's total value. I have included a column for the most recently announced DGR to enable quick comparisons to 5-year rates.

Positions are listed in order of their current weight. Master Limited Partnerships (MLPs) and Business Development Corporations (BDCs) and CEFs with the exception of MAIN (MAIN) all represent less than full positions with most half sized or less.

Stock

Ticker

Current

Yield %

5-Year

DGR

MR

DGR

Dominion BBB+

D

4.75

7.3

7.9

Southern A-

(NYSE: SO)

5.50

3.5

3.7

AT&T BBB

(NYSE: T)

5.96

2.2

2.04

Verizon BBB+

(NYSE: VZ)

4.51

2.2

2.2

AbbVie Inc. A-

(NYSE: ABBV)

4.06

15.5

35.21

Altria A-

(NYSE: MO)

5.31

6.1

8.2

Philip Morris A

(NYSE: PM)

5.59

8.8

6.54

Johnson & Johnson AAA

(NYSE: JNJ)

2.81

7.1

6.67

W.P. Carey BBB

(NYSE: WPC)

6.38

11.4

2.0

Realty Income BBB+

O

4.65

6.06

6.0

Cisco Systems AA-

CSCO

2.71

17.1

13.8

Ventas BBB+

(NYSE: VTR)

5.81

7.6

1.94

Pfizer AA

(NYSE: PFE)

3.08

6.25

7.8

Omega Healthcare Investors BBB-

(NYSE: OHI)

8.06

8.8

6.7

Lockheed Martin A-

(NYSE: LMT)

2.54

12.4

9.9

Microsoft AAA

(NASDAQ: MSFT)

1.61

13.9

7.7

Qualcomm A+

(NASDAQ: QCOM)

3.44

18.3

8.77

Target A

(NYSE: TGT)

2.90

3.2

3.33

Cracker Barrel Value Line 2

(NASDAQ: CBRL)

3.40

3.

4.55

Pepsi A

PEP

3.32

7.9

7.12

V.F. Corporation

VFC

1.97

9.5

15.5

PPL.Corp A-

PPL

5.60

Welltower BBB

(NYSE: WELL)

5.41

3.9

2.0

Procter & Gamble AA-

(NYSE: PG)

3.45

5.4

4.0

General Mills BBB+

GIS

4.57

8.9

2.08

Kimberly-Clark A

KMB

3.52

3.1

3.09

Main BBB

(NYSE: MAIN)

6.08

5.5

2.7

+spec

Digital Realty BBB

(NYSE: DLR)

3.59

5.0

8.6

Tanger Factory Outlet Centers BBB+

SKT

6.12

2.2

5.4

Wisconsin Energy A-

(NYSE: WEC)

3.31

13.7

5.0

*McDonald's BBB+

(NYSE: MCD)

2.77

7.5

5.62

*Duke A-

(NYSE: DUK)

4.61

2.5

3.6

*International Business Machines

IBM

4.15

Magellan Midstream Partners BBB+

(NYSE: MMP)

5.66

14.6

7.6

Energy Transfer Partners BBB-

ETP

10.5

19.3

2.73

Enterprise Products Partners BBB+

EPD

5.92

5.7

5.0

Tortoise Power & Energy Infrastructure Fund

TPZ

7.87

First Trust MLP

FEI

11.99

Ares Capital BBB

ARCC

9.08

Reaves Utility

UTG

6.65

DNP Select Income

DNP

7.20

Brookfield Renewable Partners BBB+

BEP

6.48

As always, I look forward to your feedback and discussion concerning the actions I have taken and those being considered.

Disclosure: I am/we are long ALL STOCKS MENTIONED.

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.