2018 4th Quarter/End Of Year Portfolio Report

by: Bob Wells
Summary

2019 has been quite a year for our family, as you will learn in a minute.

Time once again to review portfolio success.

Finally goals are presented for the year ahead.

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 advice when it comes to portfolio construction.

How it is applied depends in large part on a lot of things, including how many years before the investor starts to draw dollars from the portfolio for income. Personal health is another factor impossible to control as we age.

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 you might need it?

How sure are you that it will be there?

Again as we age, we need to look at it just a bit differently.

Perhaps something like:

How sure are you that it will be there and remain there?

We had originally planned to start drawing dividend income in 2018. Unfortunately major health problems prevented that from happening. Instead, the focus quickly shifted in the final months of 2017 to restructuring the portfolio in order that it could be managed passively by my wife with the assistance of my oldest daughter.

It was just three years ago when we were planning withdraws for more overseas travel. I suddenly found myself diagnosed with a terminal lung disease that restricted travel and required among other things preparation for a lung transplant.

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 one year later, I pleased to report that I'm continuing to do fine along with our passively managed accounts. This 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 around June.

I'm a 72-year-old Dividend Growth investor, now beginning my third year of Required Minimum Distributions in 2019. 90% of my investments are in tax advantaged IRAs. I am adding no new dollars to these accounts. Collectively my wife and I have 42 positions. All but 6 are fully or overweight. Our portfolio currently yields 4.5%.

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

During 2018 no new money was added to either account. We made our second Required Minimum Distributions solely from collected dividends. Like the year before, we made the RMDs without the need to sell stock shares.

We opened our first ever taxable investment account at the end of 2017. Since then RMDs have been taxed and the remaining dollars transferred to this account for investment. In this account I am currently invested in mostly low yield/high growth holdings.

This year we are again collecting dividends and distributions. Again I project we will to make 2019 RMDs without the need to sell shares of stocks from the portfolio. Our goal is to continue making payments in this manner through 2023 when the withdraw rate will be 4.55%. Whether we achieve this goal will likely hinge on avoiding dividend cuts.

From December of 2017 to June of 2018, our portfolios were on pure "Buy and Hold" status. During this period there were no stocks bought or sold.

POSITIONS BOUGHT, SOLD, INCREASED AND REDUCED - 4TH QUARTER:

I decided that to operate as a true "passive management portfolio" I needed to further reduce exposure to positions in both Sensitive and Cyclical Sectors.

I added to the overall safety time when I sold Omega Health Investors (OHI) on 12/10 at 37.08 and Cracker Barrel (CRBL) on 11/19 at 173.97. Both positions lacked the BBB or higher credit I require today for new holdings.

These sales permitted me to build BEP and IBM to full size positions.

In addition I was able to further build the following positions:

General Mills (GIS)

AT&T (T)

W.P. Carey(WPC)

Tanger Factory Outlets (SKT)

DNP Select Income (DNP)

Reaves Utility (UTG)

Altra (MO)

Finally I re-balanced two of my larger positions: Verizon (VZ) and AT%T (T). This move will increase income in 2019.

As part of the 4th Quarter/Annual Review I reviewed our final portfolio sector breakdown.

To do this I referred to my portfolio business plan and its section on portfolio construction:

Portfolio Construction

Aim for a well-rounded portfolio. Diversify across sectors, industries and different ranges of yields and growth rates.

Aim to hold between 40 and 50 positions at any time.

The portfolio should maintain an overall beta of 0.7 or less, helping ensure 30% or less volatility than the general market. This serves as a substitute for the use of 30% bonds often recommended to help manage reduction of principal during bear market conditions.

Be alert to position sizing. Hold no more than 5% of the portfolio's value in a single stock, with 2% or less being the norm.

Stocks yielding 5% or more shall be purchased initially in an amount not to exceed 1% of the value of the portfolio. Adjustments may be considered as prices change, yields decline or perceptions of risk and reward change.

Be alert to sector size. No sector should represent more than 25% of the portfolio holdings.

50% or more of the portfolio value will be invested in defensive sectors which include: Consumer Staples, Utilities, Tele-con, and Drugs.

Less than 20% will be invested in REITs.

Since this is an income-generating portfolio favoring low beta, the following five sectors should be underweight and represent less than 10% of the portfolio value each: Industrial, Material, Technology and Consumer Discretionary, Energy and Financials. All sectors need not be represented. I chose not to invest in Banks.

No stock in an underweight sector should added to any time it represents more than 1.5% of the value of the portfolio.

No single stock position yielding 6% or more should represent more than 1.5% of the value of the portfolio.

When any position in a non-defensive sector grows to exceed 3%, consider selling the excess and re-deploying the proceeds. Consideration should include examination of dividend growth rate and payout ratio.

Make opportunistic switches from one stock to another if such a swap will upgrade the portfolio in terms of credit and yield. The expected frequency of such exchanges is low.

After reviewing my portfolio construction objectives, I tabulated our 2019 Portfolio Sector Breakdown:

Utilities

22%

Consumer Staples

15.8%

Real Estate

15.8%

Health Care

11.0%

Communication Tech

9.5%

Tech

9.2%

Consumer Discretionary

6.0%

Energy

5.3%

Financial

3.1%

Industrial

2.0%

I have more than 50% in Defensive Sectors

No sector contains more than 25% of the portfolio holdings

All non-defense sectors are within the established caps

Overall portfolio beta remains less than .7%

2019 PORTFOLIO TOTAL RETURN

My portfolio total return for 2018 was -0.78% vs. -4.38% for SPY.

My portfolio total return for the last 3 years was 29.98% vs.30.42% for SPY

My portfolio annualized return since inception in February 2011 is 9.32%

2019 PORTFOLIO GOALS

Our primary goal for 2019 is to make our 2019 Required Minimum Distributions solely from collected dividends.

Our principle income goal is to increase income by a minimum of 5%

2019 PORTFOLIO HOLDINGS

Below are the holdings making up our portfolio at the end of this year. 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 positions which are currently undersized.

The first twelve positions below are each over-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

8.44

Southern A-

(NYSE: SO)

5.50

3.5

3.4

AT&T BBB

(NYSE: T)

5.96

2.2

2.0

Verizon BBB+

(NYSE: VZ)

4.51

2.2

2.1

AbbVie Inc. A-

(NYSE: ABBV)

4.06

15.5

11.46

Altria A-

(NYSE: MO)

5.31

6.1

14.29

Philip Morris A

(NYSE: PM)

5.59

8.8

6.54

Johnson & Johnson AAA

(NYSE: JNJ)

2.81

7.1

7.14

W.P. Carey BBB

(NYSE: WPC)

6.38

11.4

.488&

Realty Income BBB+

O

4.65

6.06

.227&

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

5.88

Lockheed Martin A-

(NYSE: LMT)

2.54

12.4

10.0

Microsoft AAA

(NASDAQ: MSFT)

1.61

13.9

9.52

Qualcomm A+

(NASDAQ: QCOM)

3.44

18.3

8.77

Target A

(NYSE: TGT)

2.90

3.2

3.27

Pepsi A

PEP

3.32

7.9

15.22

V.F. Corporation

VFC

1.97

9.5

10.87

PPL.Corp A-

PPL

5.60

3.8

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

2.19

Wisconsin Energy A-

(NYSE: WEC)

3.31

13.7

6.78

*McDonald's BBB+

(NYSE: MCD)

2.77

7.5

14.85

*Duke A-

(NYSE: DUK)

4.61

2.5

4.27

*International Business Machines

IBM

4.15

12.3

4.67

Brookfield Renewable Partners BBB+

BEP

7.57

6.4

6.78

Energy Transfer Partners BBB-

ET

10.5

19.3

3.39

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

Magellan Midstream Partners BBB+

MMP

6.85

14.6

7.6

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.