This article marks the 13th month that I've been keeping track of John and Jane's Taxable portfolio. While this is the 13th month since I started managing the portfolio, it is only the 11th month of the 2018 calendar year, so we still have one more month before we can get an accurate snapshot of how this method has worked in 2018 (dividend payments in 2017 were light largely because we were transitioning the portfolio from mutual funds to individual stocks).
For those unfamiliar with the series, John and Jane are two real people who I have decided to help manage their retirement portfolios. John is already retired and collecting social security along with other benefits while Jane is still working with aspirations of retiring in the next few years. Because of these retirees' current life goals we are focusing on creating a portfolio of stocks that will provide a steady stream of growing dividend income that will supplement their income during retirement.
By doing this, it is our intent that John and Jane will never need to sell any shares from their Taxable portfolio (unless they want to) because the income generated will prevent them from needing to sell shares as a means of "funding their retirement."
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!
Two separate events occurred since the last month's update in John and Jane's Taxable portfolio:
Both of these events were Taxable events and therefore have been added to the Taxable portfolio.
Due to market turbulence, we have adopted an extremely conservative approach in the allocation of these funds. At this point, the majority of funds have been used to take large positions in short-term CDs, adding to the Schwab Value Advantage Money Fund (SWVXX), or kept as cash. I will include these updated items in the Taxable Account Tracker below.
Companies that increased their dividend or paid a special dividend during the month of November include:
It is also worth noting the following changes that negatively impacted future income/distributions:
Arbor Realty - ABR has been one of the best performers in the Taxable portfolio from both a dividend growth and capital appreciation perspective. The year-over-year (YoY) in quarterly dividend payout has increased from $.19/share up to $.27/share which is a 42% YoY increase. The icing on the cake is the 44% improvement in share value (based on the original cost-basis). Although these results are impressive, ABR is still one of the riskiest stocks held in the Taxable portfolio due to its business model and structure. As the real estate market cools off I will continue to keep an eye on this position and likely begin trimming it if necessary.
ABR's dividend was increased from $.25/share per quarter to $.27/share per quarter. This represents an increase of 8% and a new full-year payout of $1.08/share compared with the previous $1.00/share. This results in a current yield of 9.15% based on a share price of $11.80.
Mesabi Trust - Dividend increases can be difficult to track because the stock pays a variable dividend based on tons of iron ore extracted and the spot price of iron ore. I have decided that the easiest way to update MSB is to do it on an annualized basis (which we just reached). The annual payout for MSB is $2.79/share in 2018 compared with $1.49/share in 2017. I am bullish on MSB going forward and intend to add to this position on any perceived weakness.
MSB's dividend was increased from $1.49/share (All 2017) to $2.79/share (All 2018). This represents an increase of 87.2% based on YoY full-year payout comparisons. This results in a current yield of 10.77% based on a share price of $25.91.
Spectra Energy Partners - SEP delivered its last distribution before it is acquired by Enbridge Corp. (ENB). Due to the fact that ENB is a Canadian company I will likely sell shares after they are converted in order to avoid the tax complications from owning a Canadian company in a taxable account.
I expect that I will be reinvesting the funds into a high-quality MLP like Phillips 66 Partners (PSXP) (which we recently established a small position for John and Jane based on weakness and a 52-week low. This means that there will be an overall reduction in John and Jane's income when this happens. With that said, I expect PSXP to perform more consistently than SEP (in terms of share price) going forward.
SEP's dividend was increased from $.7638/share per quarter to $.77625/share per quarter. This represents an increase of 1.6% and a new full-year payout of $3.11/share compared with the previous $3.05/share. This results in a current yield of 8.76% based on a share price of $35.44.
TransMontaigne Partners - In the August update, I mentioned I was slightly concerned about TLP's acquisition offer from ArcLight Energy of $38/share (which I noted seemed low to me at the time). Well, my gut instinct was right on that one as ArcLight Energy sweetened the offered to $41/share and I gladly sold all shares and reallocated the capital to a position in PSXP. From this trade, we were able to exit the position with a small short-term loss of $75.98.
TLP's distribution was increased from $.795/share per quarter to $.805/share per quarter. This represents a 1.3% increase quarter over quarter with a new full-year payout of $3.22/share compared with the previous $3.18/share. This results in a current yield of 7.84% based on a share price of $41.06.
Texas Instruments - We used recent weakness in TXN to make a reasonable entry point for this strong dividend tech stock. TXN looks pretty attractive after a massive dividend increase and a 20%+ drop off from its 52-week high. TXN comes with a 5-year dividend growth rate of 24.11% and carries a payout ratio of 55.3%. The Ychart below does not reflect the new yield of 3.28%.
TXN's distribution was increased from $.62/share per quarter to $.77/share per quarter. This represents a 24.2% increase YoY with a new full-year payout of $3.08/share compared with the previous $2.48/share. This results in a current yield of 3.28% based on a share price of $93.80.
Westlake Chemical Partners - Q3 2018 earnings were lower due to slimmer margins on ethylene sales but it's important to remember that 95% of sales are formed under the basis of a 12-year take-or-pay agreement with the sponsor Westlake Chemical (WLK). The margins built into this contract is $.10/lb which es essentially pure profit.
We would consider adding to this position if it drops below its 52-week low of $21.75/share.
Westlake Chemical's distribution was increased from $.4088/share per quarter to $.4207/share per quarter. This represents a 2.9% increase quarter over quarter with a new full-year payout of $1.68/share compared with the previous $1.63/share. This results in a current yield of 7.56% based on a share price of $22.35.
I have created the following chart to assist with keeping track of John and Jane's taxable portfolio. 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.
Taxable Portfolio - Monthly Tracker
Because of the additional funds added to John and Jane's account, I have decided to create a fixed income section. I think it is important to separate the traditional dividend growth model from a fixed income portfolio since the fixed income portfolio isn't focused on regular growth/increases.
The tables below represent an 11-month look at how the portfolio has performed.
The table above represents the Taxable Portfolio's recurring dividend income tracker.
Ultimately, the Taxable portfolio is represented by the following characteristics:
I think it is important I reiterate the following:
John and Jane's Taxable Portfolio has dropped in value as a number of market headwinds have created a significant amount of uncertainty.
The best indicator I have found to represent the uncertainty is the Volatility Index or VIX. What happens on the VIX is the inverse of what happens in the market, for example:
The chart below shows what has taken place on the VIX index over the course of the last year. Generally speaking, the market at its best performance during times when the VIX was more constant and was below 16. At present, the VIX index currently stands at just under 23. For reference, a VIX reading closer to 10 is considered to be extremely low volatility.
Market indicators aside, it is important to remember that the goal of this portfolio is to create a sustainable long-term income from trusted companies with promising business models. Although we shouldn't be frivolous and buy at the top of the market, we can't avoid investing altogether for fear that the market may drop.
It is because of this dichotomy that we must find ourselves positioned somewhere in the middle. For my clients' that involves maintaining a large cash horde and utilizing short-term CDs and the Schwab Value Advantage Money Fund in order to obtain a higher-yield with practically no risk whatsoever. As it stands, the portfolio is comprised of the following groups:
Due to the fact that the bulk of these funds were recently added to the Taxable portfolio, it will take some time to make the necessary adjustments needed to optimize the portfolio (similar to what happened when I first took over the account). We will be keeping our eyes open for any opportunities where we can add to beaten-down positions.
In John and Jane's Taxable account, they are currently long the following mentioned in this article: Apple (NASDAQ: AAPL), Arbor Realty (ABR), Archer Daniels Midland (ADM), Apple REIT (APLE), BP (BP), Buckeye Partners (BPL), Cardinal Health (CAH), Clorox (CLX), Cummins (NYSE:CMI), Eaton Vance Floating-Rate Advantage Fund A (EAFAX), Emerson Electric (NYSE:EMR), EPR Properties (EPR), Energy Transfer (ET), General Mills (GIS), Helmerich & Payne (HP), Hormel (HRL), Iron Mountain (IRM), Johnson Controls (JCI), LTC Properties (NYSE:LTC), Leggett & Platt (LEG), Macquarie Infrastructure (MIC), Altria (MO), Mesabi Trust (MSB), New Residential (NRZ), Realty Income (O), Old Republic International (ORI), Phillips 66 Partners (PSXP), Spectra Energy Partners (SEP), J.M. Smucker (SJM), Tanger Factory Outlet Centers (SKT), Southern Corp. (SO), Simon Property Group (SPG), Schwab Value Advantage Money Fund (SWVXX), AT&T (T), Texas Instruments (TXN), United Technologies (UTX), Verizon (VZ), Washington Trust (WASH), Westlake Chemical, W.P. Carey (WPC), and Exxon Mobil (XOM).
This article was written by
Disclosure: I am/we are long GIS, T. 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.