September marks the seventh month that Jane's retirement (Traditional and Roth IRAs) have been established and received a steady flow of dividend income. Jane's retirement account from February 1st to August 31st of 2018 have demonstrated the following income characteristics:
- Traditional IRA - $5,410.46 in dividends.
- Roth IRA - $2,305.56 in dividends.
- Realized capital gains of $8,793.05.
- This works out to be an average of $2,063.63 of monthly income.
Instead of taking these gains as income (Jane is still working full-time and has no need to supplement her paycheck), she has given me permission to retain some as cash within the IRAs and to reinvest the rest. The benefit of this is that we are able to capitalize when the market overreacts to news (such as the Fed Rate Hike).
September was a much more active month with regard to treating (when compared to August) as we continue to focus on reducing the cost basis of select positions. While we were able to entirely escape the market slaughter that started in October, we were able to reduce the cost basis on a number of positions in order to increase the amount of cash on hand. In addition to these trades, we purchase a short-term CD in the amount of $5000 at 1.95% APY that is coming due on November 28, 2018. With the increased CD rates and market volatility, it is likely that we will continue using short-term CDs in order to boost the yield on excess cash.
Although this may sound repetitive, I would like to include a disclaimer that 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 and simultaneously preserve capital. Capital appreciation is the least important characteristic of this portfolio. It is important that you do your own research when creating a portfolio that meets your needs!
Dividend And Distribution Increases
The following companies paid increased dividends during the month of September:
- British Petroleum (BP)
- Cummins (CMI)
- Duke Energy (DUK)
- The Hershey Company (HSY)
- International Business Machines (IBM)
I have already covered BP and CMI in the taxable account and a writeup of those stocks can be found here. I will still include a summary of the dividend increase below.
British Petroleum - The dividend was increased from $.60/share per quarter to $.615/share per quarter. This represents an increase of 3.4% and a new full-year payout of $2.46/share compared with the previous $2.40/share. This results in a current yield of 5.99% based on a share price of $41.10.
Cummins - The dividend was increased from $1.08/share per quarter to $1.14/share per quarter. This represents an increase of 5.6% and a new full-year payout of $4.56/share compared with the previous $4.32/share. This results in a current yield of 3.54% based on a share price of $128.77.
Duke Energy - Utility stocks have withstood the market downturn that began in early October as they have actually increased in value in comparison to the total return of the S&P 500. DUK has 31,000 customers impacted by Hurricane Michael but this was eclipsed by Southern Company's (SO) roughly 350,000 customers who at some point lost power.
The dividend was increased from $.89/share per quarter to $.9275/share per quarter. This represents an increase of 4.2% and a new full-year payout of $3.71/share compared with the previous $3.56/share. This results in a current yield of 4.53% based on a share price of $81.89.
The Hershey Company - Hershey's climbed dramatically after beating Q2-2018 estimates and announcing their digital strategy which intends to capitalize on online trends which include higher margins, larger purchase sizes, higher average sale prices, and the ability to drop ship purchases which enhances convenience for the consumer. Although Q3-2018 earnings came in at a slight miss, HSY's business continues to look strong going forward. For the sake of full disclosure, we recently sold out of this position (a full 75 shares) at $105.91/share because we believe we can re-enter at a more attractive price in the lower $90/share range.
The dividend was increased from $.656/share per quarter to $.722/share per quarter. This represents an increase of 10.1% and a new full-year payout of $2.89/share compared with the previous $2.624/share. This results in a current yield of 2.82% based on a share price of $102.52.
International Business Machines - It would be an understatement to say that IBM's share price has been decimated over the course the last few weeks after it reported a -2.1% decline in Q3-2018 sales. This weekend, IBM and Red Hat (RHT) announced that IBM would acquire Red Hat in him all-cash transaction that amounts to an enterprise value of $34 billion (approximately $190/share which is a 63% premium over Friday's closing price of $116.68/share). I can at least appreciate that the deal was an all-cash offer and therefore is not dilutive to shareholders. My original target was to sell off the entire position at $150/share but decided to maintain the entire position based on upbeat analyst sentiment at the end of September.
The dividend was increased from $1.50/share per quarter to $1.57/share per quarter. This represents an increase of 4.7% and a new full-year payout of $6.28/share compared with the previous $6.00/share. This results in a current yield of 5.03% based on a share price of $124.79.
Active Trading Log
As noted at the beginning of my article, I have utilized an active trading method in tandem with a dividend growth model. This is not day-trading, nor is it some crazy scheme to make a lot of money quickly.
My trading philosophy is based on a couple of key rules:
- Worthy of being held on a long-term basis - Some of the trades that I make can play out over a very short period of time, while others can take months, depending on various events. Because of the risk associated with trading, I will only purchase companies that I deem worthy of being held on a long-term basis (in the event that they do not reach my sellable price target). By purchasing only high-quality stocks, we are able to mitigate much of the risk associated with the process.
- Pays a dividend - Stocks that make my list almost always pay a dividend (at least that seems to be the case so far), which is important because this means that even while they are being temporarily held, they are fitting in perfectly with my dividend strategy - which, at its core, is focused on consistent dividend income. The primary reason for holding strong dividend-paying stocks is that it is the only reasonable way to be compensated for risk while waiting for the share price to recover (in the event of a downturn).
- Set price targets - This rule tends to be the most difficult one for people to implement and is in many ways the most important aspect of my strategy. The biggest problem that we all face with an active trading strategy (yes, myself included) is that most people do not initiate a price target at which they are willing to sell all or part of a position. Too many investors will "hold-on" hoping for an extra dollar per share even only to find that the market turns the other way and that their opportunity to sell at a reasonable price has slipped away. Every stock in Jane's portfolio has a specified price target that I regularly update based on changes in fundamentals and cost basis. On occasion, I will ignore this rule when I see a short-term opportunity.
During the month of September, we saw an increase in the number of trades over the month of August and this is primarily due to rising stock prices where we were able to take some gains in redeployed cash in undervalued positions. The following are examples of some of these trades and the rationale for selling these positions.
3M (MMM) - We originally purchased shares of 3M at too high a price (40 shares at an average cost of $213.59/share) and shares have continued to hover between $210-$215/share during the month of September. We were able to sell 20 of these shares at basically break-even so that the funds could be redeployed at a lower cost basis. Little did we know MMM's share price was going to be hammered by lower guidance due to foreign-currency headwinds. Nonetheless, we were able to redeploy the proceeds of those funds to purchase an additional 25 shares at $188.30/share
Eaton Corp (ETN) - Eaton falls in the same position as MMM in that we originally entered in at too high a price ($82.44/share) and when shares skyrocketed to the 52-week high we knew it was time to sell half the position and wait for prices to drop below $80/share. Fortunately for us, we did not anticipate the major sell-off which allowed us to repurchase the same 25 shares at a cost of $73.54/share
General Dynamics (GD) - This is the last example I will provide and it applies the same reasoning as the MMM and ETN trades with the exception that we are looking to eliminate the position because John has a 50 share position in GD at a much higher cost basis that we do not expect to recover in the near future (approximately $214/share versus Jane's cost basis of $196/share). We are glad we decided to eliminate this position entirely before the market fell out from underneath it to less than $170/share.
In total, Jane's trades resulted in a total of $363.20 of realized gains in her Traditional IRA. There were no trades executed in Jane's Roth IRA during the month of September.
Source: Consistent Dividend Investor, LLC
Since February 1, 2018, to September 30, 2018, Jane's Traditional and Roth IRAs have benefited from realized capital gains totaling $9,156.25 or an average of roughly $1,144.53/month.
September Income Chart And October Income Estimates
I have created the following chart to assist with keeping track of Jane's Traditional and Roth IRAs. As mentioned in the intro, I've built these tables so that we can easily compare month-to-month and YoY changes.
- Green represents when dividends were actually received.
- Yellow represents dividend estimates.
Jane's Traditional IRA
Source: Consistent Dividend Investor, LLC.
Jane's Roth IRA
Source: Consistent Dividend Investor, LLC.
Below are four tables that show the total dividends received in the Traditional and Roth IRA accounts (smaller secondary charts are dividends received for stocks no longer held), respectively, for the first nine months of the year.
In total, Jane has received total earnings (dividends and capital gains) in the amount of $18,392.68 over the course of nine months (January through September), resulting in an average monthly income of $2,043.63.
By focusing on a DGI model and by utilizing active trading, we have been able to generate a fairly consistent income stream in Jane's retirement accounts. September marked another slight decrease in total average monthly income but this is to be expected due to less trading and portfolio rebalancing that came with continued positive trends for the market as a whole. It is worth noting that the portfolio values used for cost basis and market value are based on today's figures (10/30/2018) and reflect the actual portfolio value after the current market downturn.
As mentioned in my previous article Jane's August Dividend Increases And Income Tracker - Retirement Accounts, I have begun incorporating the use of short-term CD's to help balance out the account and will label these in the tables above with their maturity date since this seems to be the best way to provide clarity for readers.
We expect Jane will receive a total of $1,064.72 of dividend income in her Traditional IRA and $533.57 of dividend income in her Roth IRA for a total of $1,598.29 of retirement account income during the month of October.
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In Jane's Traditional and Roth IRAs, she is currently long the following mentioned in this article: AbbVie (ABBV), Aflac (AFL), Archer Daniels Midland (NYSE:ADM), Bank of America (BAC), Bank of Nova Scotia (BNS), British Petroleum (BP), CBL Properties Pref Series D (CBL.PD), Clorox (CLX), Canadian Imperial Bank of Commerce (CM), Cummins (CMI), CenturyLink (CTL), Digital Realty (DLR), DowDupont (DWDP), Duke Energy (DUK), Eaton Vance Floating-Rate Advantage Fund A (MUTF:EAFAX), Enbridge (NYSE:ENB), Eaton Corporation (NYSE:ETN), Emera Inc. (OTCPK:EMRAF), EastWest Bancorp (EWBC), General Mills (NYSE:GIS), Gilead Sciences (GILD), Hershey (NYSE:HSY), International Business Machines (NYSE:IBM), Illinois Tool Works (ITW), Intel (NASDAQ:INTC), Investors Real Estate Trust (NASDAQ:IRET), Iron Mountain (NYSE:IRM), Johnson Controls (NYSE:JCI), Johnson & Johnson (NYSE:JNJ), LyondellBasell (NYSE:LYB), Main Street Capital (NYSE:MAIN), 3M (NYSE:MMM), Mesabi Trust (NYSE:MSB), Microsoft (NASDAQ:MSFT), Altria (NYSE:MO), Realty Income (NYSE:O), Old Republic International (NYSE:ORI), Oxford Lane Capital Corp 6.75% Cum Red Pdf Shs Series 2024 (NASDAQ:OXLCM), Preferred Bank (NASDAQ:PFBC), Philip Morris (NYSE:PM), PolyOne Corp. (NYSE:POL), PPL Corporation (NYSE:PPL), Royal Bank of Canada (NYSE:RY), Schwab International Equity ETF (SCHF), Synnex Corp. (NYSE:SNX), Toronto-Dominion Bank (NYSE:TD), Travelers Co. (NYSE:TRV), US Bank Preferred H-Series (USB.PH), Verizon (NYSE:VZ), Walgreens (NASDAQ:WBA), Williams Companies (WMB), W.P. Carey (NYSE:WPC).
Disclosure: I am/we are long CTL, GIS, SCHF, SNX.
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.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.