John's November Retirement Accounts - The Dividend Growth Investor Vs. Bear Market

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Includes: APLE, BA, BAC, BBT, BF.B, BML.PL, BP, CAT, CDUAF, CLDT, CONE, CVA, CVX, D, DLR.PJ, DUK, EAFAX, EPR, EPR.PG, FRT, FRT.PC, GD, HRNNF, HTA, IRM, JPM, KIM.PL, KMI, KO, KRG, LTC, LXP, MAIN, MO, O, OMI, OXY, OZK, PACW, PCG.PD, PEGI, PEP, PK, PONAX, POR, RDS.A, RF, SCE.PD, SCG, T, TD, TROW, UMPQ, VLY, VTR, WELL, WPC
by: Matthew Utesch
Summary

This is the ninth month I have officially tracked dividend income (in an article) for John's Traditional and Roth IRA Accounts. His dividend income totaled $955.22.

The potential of a bear market looks real and presents dividend investors with a modern-day David vs. Goliath scenario.

I created this series to serve as a helpful guide for the aspiring DIY investor. The details of this article represent a real portfolio.

We have continued to use active trading to boost John's income by $1656.26 in the month of November.

In the conclusion section, I provide my thought on utilities and REITs as a hedge to the current volatility and demonstrate why they belong in a DGI's portfolio.

Investment Thesis

The story of David Vs. Goliath is one of the most well-known parables to come from the Bible and the lessons from it transcend language and culture barriers across the world. In the end, it was David's agility and precision that helped him overcome Goliath.

It would be difficult to fault an investor for feeling like they are up against Goliath at the moment, after all, there are a number of macroeconomic events that are all converging at once that have contributed to the rapid fall of the Dow, S&P 500, and the NASDAQ Composite.

Chart ^DJI data by YCharts

Like David, we have taken the last year to fortify John's account against such volatility. While the principal balance is down, the potential for income remains the same as we have seen little reason to be concerned with the positions in John's portfolio. In a sense, John's slingshot is the sturdy nature of his portfolio and the income it generates.

Background

John is an investor who has been retired for nearly one year and depends on his retirement accounts to provide the additional funds he needs to live the lifestyle he wants in retirement. All of the funds in these accounts come from saving money from his own paycheck over the last 35+ years since his employer did not offer a 401k or similar option.

The plan is to create a conservative dividend growth portfolio for John that will provide him with a dependable stream of income that comes from dividends and distributions. Not only will this income stream be dependable, we expect that it will continue to grow as companies in the portfolio increase their dividend payout and even offer special dividends when appropriate.

This article will specifically focus on a review of John's account and the changes we have made to it during the month of November. By focusing the portfolio on stocks and investments that pay consistently growing dividends we will be able to create a stream of income that John can use to supplement his income (all dividends are collected as cash and not reinvested). Collecting the dividends as cash is extremely important for John's scenario because our intended goal is that he should never need to sell his stocks (with the exception of his Traditional IRA since there are mandatory withdrawals at age 70.5) in order to fund his retirement. By creating this stream of income, we believe John will live a more comfortable and well-funded retirement since his withdrawals will be less influenced by erratic market fluctuations.

October Synopsis

In order to provide additional insight, I like to inform the readers of the most recent figures from the previous month. The figures below represent dividend and trade gains from the beginning of January 2018 thru the end of October 2018.

  • Total earnings in 2018 (dividends and capital gains) - $22,948.72
  • Average monthly income (January through October) - $2,294.87/month (previous monthly average last update - $2,170.89/month).

Dividend And Distribution Increases

There were no dividend increases in John's retirement accounts (Traditional and Roth IRAs) during the month of November. This doesn't shock me because November tends to be a light month for dividend payments (especially when we consider there were a total of eight companies that paid increased dividends in October).

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:

  1. 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.
  2. 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).
  3. 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.

Boeing (BA) - For those who have read my series before you know that I am no stranger to trading Boeing stock. Boeing is an extremely profitable cash cow and any time there is extra cash in the account I add to the position when shares drop below $330/share. I typically will sell those same shares when valuation exceeds $350/share. Based on recent movements in price I am going to reduce the price I am willing to buy from $330/share to $320/share.

Chart BA data by YCharts

Federal Realty Investment Trust (FRT) - FRT isn't a bad investment for a conservative portfolio but I wouldn't consider it a great one either. I wanted to sell FRT primarily to limit the number of positions in John's portfolio while also avoiding the loss of a major income stream ($160.32/year based on 40 shares). We were able to sell the position just above the original cost basis.

Chart FRT data by YCharts

The images below represent the sale of positions during the month of November in the Traditional and Roth IRAs.

Traditional IRA - November Realized Gains

Roth IRA - November Realized Gains

During the month of November, John benefitted from $1,656.26 in realized gains from his IRAs. Since we began executing this strategy on February 1, 2018, to November 30, 2018, John's Traditional and Roth IRAs have benefited from realized capital gains totaling $11,332.36 or an average of $1,030.21/month (over the course of 11 months in 2018). This is roughly $63/month higher than the $967.61/month average we calculated in October (over the course of a ten-month period).

November Income Tracker And December 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.
  • 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.

Traditional IRA Dividends - November (Actual) and December (Estimate)

In total, John's Traditional IRA produced $545.65 of recurring dividend income during the month of November. It is projected to generate $832.99 of dividend income in the month of December.

Roth IRA Dividends - November (Actual) and December (Estimate)

In total, John's Roth IRA produced $373.87 of recurring dividend income during the month of November. It is projected to generate $346.28 of dividend income in the month of December.

January - November - YTD Results - Traditional IRA

Traditional IRA - January - November Dividend History

Traditional IRA - January - November Non-Recurring Dividends

In total, John's Traditional IRA has produced $7,532.87 of recurring dividend income from January through November and $1,019.35 of non-recurring dividend income for a total dividend income of $8,552.22.

January - November - YTD Results - Roth IRA

Roth IRA - January - November Dividend History

Roth IRA - January - November Non-Recurring Dividends

In total, John's Roth IRA has produced $4,982.12 of recurring dividend income from January through November and $720.30 of non-recurring dividend income for a total dividend income of $5,702.42.

Portfolio Results - End of November

Based on the information collected in the previous section, John's total earnings have the following characteristics over this time frame:

  • Total earnings in 2018 (dividends and capital gains) - $25,587.00
  • Average monthly income (January through October) - $2,326.09/month (previous monthly average last update - $2,294.87/month).
  • In other words, John's average monthly income has increased by approximately $36 when we consider the dividend gains and the benefit from capital gains.

Conclusion

When the gameplan is focused on dividend growth investing it is important to constantly remind yourself that the gain/loss column is of minimal importance as long as you are buying quality stocks that fit in the acceptable "risk" box that only you can determine for yourself. It's also important to remember that almost every other investor is suffering right along with you (even if they aren't focused on dividend growth investing). Just look at how the S&P, DJIA, and NASDAQ have performed over the course of the last three months.

Chart ^SPX data by YCharts

The way I have compensated for the risk in John's portfolio is by focusing more funds on utilities and real estate investment trusts (REITs). In other words, think of these types of stocks as a natural hedge. Over the same time frame, the SPDR Utility ETF (XLU) and SPDR REIT ETF (RWR) show how much better these two sectors have performed relative to the big three indexes.

Chart XLU data by YCharts

To put this into perspective, approximately $110k of the Traditional IRA Portfolio (approximately 47% of total market value) is invested in a utility or a REIT. In the Roth IRA, approximately $76k (approximately 47% of total market value) is also a utility or a REIT. As demonstrated above, utilities and REITs (specifically triple-net-lease based) are known for showing better consistency during difficult times. Over the last 10 years, we can see that utilities and REITs have been steady performers while the major indexes have demonstrated a much more volatile path.

Chart XLU data by YCharts

As a result of this, I have grown increasingly interested in many of the major financial stocks (primarily in the banking sector) as their well-covered dividend yields continue to push higher. It is my belief that this is the next great category to find deals due to market fears about margin compression holding down share prices. The chart below shows the five banking stocks that I plan to continue accumulating in John's portfolio as their price is too low to ignore.

Chart JPM data by YCharts

  • JPMorgan Chase (JPM)
  • Bank of America (BAC)
  • Bank OZK (OZK)
  • PacWest Bancorp (PACW)
  • BB&T Bancorp (BBT)

For those of you who are interested, I have written articles on four of the banks mentioned above. They can be viewed at the links below:

JPMorgan: Industry Dominance Is Their Recipe For Success

Bank Of America: Dividend Growth And Share Buybacks Make This Stock A Buy

Bank OZK: A Sober Review Shows The Concerns Are Priced In

PacWest Bancorp's Merger With El Dorado Savings Bank Offers Significant Upside In 2019

I believe that these five banking stocks offer significant upside in the future and are at the point where they are worth considering (at least in the form of a starter position). When the banking sector begins to creep back and interest rate increases look like they are back on the table is the time when we will consider reducing utility and REIT exposure to lock in gains.

It is worth noting that we expect the majority of John's income to be funded by dividends and distributions going forward because it looks like we have reached peak valuation in the market (at least for the moment). This means that there will likely be significantly less Active Trading and capital gains from sold positions. Because of this, it is extremely important to remind readers' (and myself) that the core of this portfolio has always been about generating a sustainable dividend. As I perform a year-end review (which is coming in the next few weeks) I will be focusing on the amount of income generated by each position and the market value associated with it. In the end, we want to make sure that the portfolio is extremely well-balanced and that there is minimal exposure to high-yield equities and the potential that they may decrease their dividend.

In John's Traditional and Roth IRAs, he is currently long the following mentioned in this article: Apple REIT (APLE), Boeing (BA), BB&T (BBT), Bank of America Preferred Series L (BML.PL), British Petroleum (BP), Brown Forman Class B (BF.B), Caterpillar (CAT), 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 (DUK), 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), 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), and W.P. Carey (WPC).

Disclosure: I am/we are long GD, GIS, 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.