September marks the seventh month that I have been tracking John's retirement accounts in an article. Since the beginning of January 2018, his portfolio has produced the following results:
- $10,011.01/Dividend Income through August 31, 2018.
- On February 1, 2018, we began tracking the active tracking active trades which have provided a total realized gain of $8,119.90 through August 31, 2018.
- If we combine trading income and dividends, we can approximate an average monthly income of $2,140.18/mo.
Over the last month, we have seen challenging market conditions as stocks from nearly every industry have been negatively impacted. Fortunately, John has a number of real estate investment trusts (REITs) and utility stocks that have helped provide stability for his portfolio and helped reduce the paper losses when compared to his wife Jane's retirement account.
As you can see, REITs and utilities as a whole have outperformed the Dow Jones and the S&P 500 over the course of the last month. Utilities were clearly the strongest performer followed by REITs (which quickly leveled off around -3%). The Dow Jones and the S&P 500 continued to fall during the month of October and have continued to struggle even as REITs and Utilities have continued to perform well.
Because of this, we saw reduced paper losses in John's retirement accounts when compared with the paper losses in Jane's retirement accounts. If we compare beginning and ending balances from John and Jane's retirement portfolios, we can see that John's portfolio did a better job of preserving capital than Jane's did during the month of October:
|John's Retirement Accounts|
|Date||Traditional IRA||Roth IRA|
|10/1/2018||$ 241,324.28||$ 164,916.94|
|10/31/2018||$ 234,575.45||$ 159,612.55|
|Total Change %||-2.80%||-3.22%|
|Jane's Retirement Accounts|
|Date||Traditional IRA||Roth IRA|
|10/1/2018||$ 280,225.27||$ 134,048.57|
|10/31/2018||$ 267,441.25||$ 127,179.69|
|Total Change %||-4.56%||-5.12%|
I attribute John's outperformance during this period to the following reasons:
- A mostly income-focused portfolio with a reasonable exposure to REITs.
- A modest exposure to good utility stocks.
- Well-timed trades that reduced losses from more volatile stocks.
Ironically, the chart below shows that REITs and Utilities have largely lagged the broader market since November of 2017 but staged a strong recovery including downside protection in the month of October.
I think it is interesting for readers to consider this narrative as they read this article. I believe the charts are self-explanatory when it comes to reasons #1 and #2 but reason #3 will be better explained later in the article.
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!
I also want to apologize again for the tardiness of this article as I escaped for a few days to enjoy a much-needed vacation with my girlfriend. Between working full-time and making repairs to her home before the sale could be finalized, we definitely needed some time away. I plan to get caught up by the end of this weekend so you can expect a number of articles very soon!
Dividend And Distribution Increases
Companies that increased their dividend or paid a special dividend include:
Since I've already covered BP and DUK in my previous article on Jane's September Dividend Increases And Income Tracker - Retirement Accounts (I don't currently have a link because the article has been submitted but not posted yet), I will only write a summary for BBT but will include my normal information for the dividend update associated with BP and DUK.
BB&T Corporation - Like most banking stocks, BBT has not been spared from the craziness that took place in the month of October even though it looks like there is some potential for financials to rally back because the Federal Reserve recently proposed that it wants to ease banking regulations for institutions with less than $700 billion in assets. The good news is that this proposal is highly actionable because it stems directly from "a law Congress passed in May that ordered the Fed to reduce regulatory burdens on community and regional lenders." Overall, I expect this to be very good news for BBT.
BBT's dividend was increased from $.375/share per quarter to $.405/share per quarter. This represents an increase of 8% and a new full-year payout of $1.62/share compared with the previous $1.50/share. This results in a current yield of 3.30% based on a share price of $49.16.
British Petroleum - BP's 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 5.67% based on a share price of $43.37.
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. The purpose of this section is to provide readers with a better insight into my philosophy and to provide full disclosure that this method isn't for everyone.
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 executed two trades in John's Retirement Portfolios.
Boeing (BA) - Unfortunately, Boeing is a good example of when I've sold out of a position too quickly and missed out on potential gains. At the same time, by selling out Boeing we were to reestablish a position at a much lower cost basis than this position was held at. The main reason why we executed this trade was that we wanted to build a larger stockpile of cash.
I mentioned previously that I like Boeing stock under $350/share but I am a major buyer whenever it hits $330/share. In this case, I was looking to increase cash reserves due to the uncertainty of the market and because shares seemed to stagnate around $360/share. Here is an image of the realized gains associated with that trade:
I have followed this strategy multiple times (and most recently) in mid-October to early November.
It's not that I think it's a mistake to buy BA at $360/share but more so that I don't think that it's a good idea to establish a full position without additional funds in reserve that would allow us to load up the truck when the price drops to $330/share.
Caterpillar (CAT) - Given CAT's size and industry dominance, one would think that it would be a highly-stable and predictable stock especially when it continues to break EPS records nearly every quarter.
Although the Q3-2018 earnings report was good, we saw it contribute to the massive drop in share price reaching $112.06/share. With the idea of volatility in mind, I decided that it would be best to sell 50% of the position to reduce John's overall exposure to CAT.
Since we began executing this strategy on February 1, 2018 to September 30, 2018, John's Traditional and Roth IRAs have benefited from realized capital gains totaling $8,489.76 or an average of $943.31/month (over the course of a nine-month period).
September Income Tracker And October Estimates
I have created the following charts to assist with keeping track of John's retirement portfolios, 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.
- Yellow represents dividend estimates that haven't occurred yet (estimates).
- Red indicates a position that's no longer held.
In order to de-clutter these charts going forward, I am going to start including the dividend earned from sold positions in a separate chart. If shares are repurchased, I will move the position from the "sold" chart back to the current holdings chart.
In total, John's Traditional IRA produced $801.57 of recurring dividend income during the month of September. It is projected to generate $1,155.38 of dividend income in the month of October.
In total, John's Roth IRA produced $353.69 of recurring dividend income during the month of September. The Roth IRA is projected to generate $841.32 of dividend income in the month of October.
January-September - YTD Results - Traditional IRA
In total, John's Traditional IRA has produced $5,878.55 of recurring dividend income from January through September and $786.05 of non-recurring dividend income for a total dividend income of $6,664.60.
January-September - YTD Results - Roth IRA
In total, John has received total earnings (dividends and capital gains) in the amount of $19,538.06 over the course of nine months (January through September) resulting in an average monthly income of $2,170.89. (This is slightly down from last month's average of $ 2,266.36).
John's portfolio has continued to perform well even as market volatility has increased towards the end of September. We have begun replacing some of the riskier equities and begun building up cash reserves and using those reserves to enter into secure dividend-paying positions that should ultimately help stabilize John's portfolio for the uncertainty ahead.
Based on the comparison of John and Jane's retirement portfolios, I find the strategy for generating maximum dividend income and stability of the overall account balance to be largely credited to the heavy emphasis on utilities and REITs that have maintained and even increased in value.
While some REITs are inherently riskier than others, it is important to remember that there are many quality REITs that are undervalued and producing well-covered yields in excess of 7%. These can be used to help improve the overall yield of the portfolio even while the majority of funds are invested in quality dividend-paying stocks that are paying a 3-4% yield.
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's Traditional and Roth IRAs, he is currently long the following mentioned in this article: Apple REIT (APLE), Boeing, BB&T, Bank of America Preferred Series L (BML.PL), British Petroleum, Brown Forman Class B (BF.B), Caterpillar, Canadian Utilities (OTCPK:CDUAF), Chatham Lodging Trust (CLDT), Chevron (CVX), Covanta (CVA), CyrusOne (CONE), Dominion Energy (D), Digital Realty Preferred Series J (DLR.PJ), Duke Energy, Eaton Vance Floating-Rate Advantage Fund A (EAFAX), EPR Properties (EPR), EPR Properties Preferred Series G (EPR.PG), Federal Realty Trust (FRT), Federal Realty Trust Preferred Series C (FRT.PC), General Dynamics (GD), Hydro One (OTC:HRNNF), Healthcare Trust of America (HTA), Iron Mountain (IRM), JPMorgan Chase (JPM), Kimco Preferred Series L (KIM.PL), Kimberly-Clark (KMB), Kinder Morgan (KMI), Coca-Cola (KO), Kite Realty Group (KRG), LTC Properties (LTC), Lexington Realty Trust (LXP), Main Street Capital (MAIN), Altria (MO), Realty Income (O), Owens & Minor (OMI), Occidental Petroleum Corp. (OXY), Bank OZK (OZK), PacWest Bancorp (PACW), Pacific Gas & Electric Preferred Series D (PCG.PD), Pattern Energy (PEGI), PepsiCo (PEP), Park Hotels & Resorts (PK), PIMCO Income Fund Class A (PONAX), Portland General Electric (POR), Regions Financial (RF), Royal Dutch Shell Class A (RDS.A), South California Edison Preferred Series D (SCE.PD), Scana Corporation (SCG), AT&T (T), Toronto-Dominion Bank (TD), T. Rowe Price (TROW), Valley National Bancorp (VLY), Umpqua Bank (UMPQ), Ventas (VTR), Welltower (WELL), Walmart (WMT), and W.P. Carey (WPC).
Disclosure: I am/we are long GD, GIS, PEP, PACW, T, UMPQ. 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. I would like to emphasize that I am employed by Umpqua Bank which is a company held in John's Retirement Portfolio. The inclusion of this stock is for informational purposes only and is not an attempt to promote this stock. Please understand that I will not answer any questions that are specifically related to Umpqua Bank.
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.