Jane's FY-2018 Dividend Income Totals - Why Being Patient Pays

|
Includes: ABBV, ADM, AFL, BAC, BNS, BP, BTI, CBL.PD, CM, CMI, CTL, DLR, DUK, DWDP, EAFAX, EMRAF, ENB, ETN, EWBC, GILD, GIS, HON, IBM, INTC, IRET, IRM, ITW, JCI, JNJ, LRCDF, LYB, MAIN, MMM, MO, MSB, MSFT, O, ORI, OXLCM, PEP, PFBC, PM, POL, PPL, R, RY, SCHF, SNX, TD, TRV, USB.PH, VZ, WBA, WMB, WPC
by: Matthew Utesch
Summary

I have officially tracked dividend income for my client Jane's Traditional and Roth IRA Accounts for the last 10 months. Her dividend income totaled $1,769.88 for December.

This article looks at dividends received in December and also reviews the portfolio from a FY-2018 perspective.

We sold four companies in order to close select positions and lock in gains as we recycled the funds to add to undervalued positions.

Only one stock paid a special dividend during the month of December.

The stock market has rallied in the first two weeks of 2019 which has reduced unrealized losses significantly.

Investment Thesis

Being told to "be patient" is something no human wants to hear and there is probably no other aspect of life where you hear it more than when it comes to the world of personal finance. I'd like to think that I've learned patience in my 29 years on this earth, but I feel like this is one of those areas where there is always room for improvement.

One area of life I have learned to be patient is anything regarding finances. I've learned that basically everything can wait and that there is a certain degree of pleasure that comes from being responsible and maintaining a frugal mindset.

Developing a patient attitude didn't come cheap because it was learned through a series of poor choices as I taught myself how to invest. As frustrating as it is to think about the years of squandered returns by purchasing penny stocks and making brash decisions, I can appreciate the lesson because it has become ingrained in who I am today. During the time that I was making poor decisions, I began to notice that the most successful people I knew all had one thing in common - that they took the time to create a consistent gameplan and implemented it in the same way that someone of strong Christian faith applies the lessons from the Bible to their everyday life. This analogy isn't intended to be a religious-based argument but is meant to emphasize the conviction with which these people adhere to the "financial' rules that they created.

A consistent game plan is nothing more than a set of habits that can be used to achieve a goal. Habits are hard to build if you don't give them the attention they deserve and finance is an area of our lives that is neglected because most people are uncomfortable with talking (or even thinking about) their finances. The ignorance of the average individual when it comes to their finances sets up a scary narrative, after all, if we can't figure out our everyday finances than what will things be like when we attempt to talk about something as complicated as retirement?

For those of us who have exercised patience in regard to recent market volatility, we are all looking remarkably better off as every major index has rallied in January.

Chart ^DJI data by YCharts

Where would we be if we had panicked and sold at the end of December and at what point would we actually have put our money back into the market?

Background

Jane is an investor who is approximately 2 to 3 years away from retirement and will ultimately depend on these retirement accounts to provide the lifestyle that she wants in retirement. All of the funds in these accounts come from saving her own money in Traditional and Roth IRAs over the last 35+ years (her employer does not offer a 401(k) option).

Because Jane still has 2 to 3 years before retirement, we have positioned her portfolio so that it is slightly more aggressive than her husband John's (for more on her husband's account see John's November Retirement Accounts - The Dividend Growth Investor Vs. Bear Market). Ultimately, the goal is to build a portfolio of high-quality stocks that continue to pay increased dividends and even offer special dividends (when appropriate).

This article will specifically focus on a review of Jane's account in the changes that we have made during the month of December. All dividends will be collected as cash and will only be used to purchase additional shares (at my or Jane's discretion).

November YTD 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 through the end of November 2018.

  • Total dividends YTD (November) 2018 (Traditional & Roth) - $11,802.19
  • Total earnings YTD 2018 (dividends and capital gains) - $24,119.48
  • Average monthly income (January through November) - $2,192.68/month (previous monthly average last update - $2,294.87/month).

December Dividend And Distribution Increases

Only one stock paid an increased dividend in the form of a special dividend during the month of December.

Main Street Capital (MAIN) - MAIN has been a fan favorite of income and dividend growth investor community for almost 10 years. The true power of MAIN has to do with its equity investments in lower middle market companies that are rapidly growing and have the potential to increase net asset value (NAV) per share. MAIN is currently valued at a Price/Earnings of 14.3x and has historically come with a P/E of 14.8x and typically comes with a yield of around 6% when we consider the regular monthly dividend only (yield does not include the special dividend).

Chart MAIN data by YCharts

MAIN's special distribution was $.275/share in December. Including the special dividend from June, MAIN paid a total of $.55/share of additional income or a total of $110 (on 200 shares Jane owns) in 2019. MAIN's current regular dividends amount to $2.34/share or a yield of 6.37%. When we add in the additional $.55 special dividend, this increases the yield to 7.87%.

Active Trading Log

I have utilized an active trading method in tandem with a dividend growth model because it helps recycle capital and reduces exposure to stock prices that have improved too quickly. I cannot emphasize enough that this is not day-trading or some crazy scheme to make a lot of money quickly but a methodical approach that is based on the following criteria.

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.

Realty Income (O) - We sold 100 shares of our Realty income position because shares are looking too richly valued with the current share price just under $65/share. Fortunately, we were able to sell shares at an average cost of $66.42/share or just under the 52-week-high of $66.91/share.

Walgreens (WBA) - We sold WBA for similar reasons as Realty Income but decided to eliminate the position altogether because it was a position I did not see Jane adding to in the near future. We ultimately sold all 50 shares of WBA at an average price of $81.25/share. At first, it felt like we may have jumped the gun, but that was prior to the December turmoil that dropped its share price to roughly $65/share.

AbbVie (ABBV) - We eliminated this position from the Roth IRA because it was a small position that I intended to sell when the price increased. I changed my target price when the market experienced significant volatility during the month of December. Selling the position for a small gain was worth replenishing the cash reserves in the Roth IRA.

Aflac (AFL) - Same reasoning as ABBV's summary.

The following images are a summary of these trades and the gains received.

Jane Traditional IRA - December Realized Gains

Jane Roth IRA - December Realized Gains

In total, the realized gains in the Traditional and Roth IRAs generated an additional $2,047.88 of income in the month of December.

December Income Tracker And FY-2018 Review

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.

Additional dividends paid on shares that are no longer held are included in a separate table.

Jane's Traditional IRA

Traditional IRA - 2018 Dividend Tracker

Traditional IRA - December Dividends and FY-2018 Income Tracker

Traditional IRA - Extra Dividends Traditional IRA - December Dividends and FY-2018 Income Tracker (Extra Dividends)

In the month of December, Jane received a total of $1,351.25 in dividend income from her Traditional IRA (including the extra income from WBA).

Jane's Roth IRA

Roth IRA - Dividend Tracker

Roth IRA - December Dividends and FY-2018 Income Tracker

Roth IRA - Dividend

Roth IRA - December Dividends and FY-2018 Income Tracker (Extra Dividends)

In the month of December, Jane received a total of $418.63 in dividend income from her Roth IRA and includes the extra income from Aflac.

Total Traditional And Roth Income - December

During the month of December, Jane received the following from her Traditional and Roth IRAs:

  • Realized capital gains of $2,047.88.
  • Total dividends of $1,769.88.

This results in a total gain of $3,817.76 for Jane's Traditional and Roth IRAs during the month of December.

Traditional & Roth - FY-2018 Results

Jane's IRAs weren't fully established until around mid-2018 and as a result of this, the dividend income at the beginning of the year was light in comparison to what we expect in 2019. With this in mind, the FY-2018 results had the following attributes:

  • My active trading approach resulted in realized gains of $14,365.17 FY-2018 or an average gain of approximately $1,197.10/month
  • Total dividends from shares currently held totaled $12,458.63 or an average dividend stream of $1,038.22/month.
  • Total (Extra) dividends from shares not currently held totaled $1,111.74.

When we combine these three groups, it amounts to $27,935.54 FY-2018 or approximately $2,327.96/month.

Conclusion

Watching the market rally after it has been sold off is always a firm reminder that things can always change in that we have very little control over any of the variables that influence said change. By establishing a gameplan for Jane, we were able to generate real cash-flow from dividends and realized gains even though a majority of the stocks in her portfolio are currently in the red. Because we have continued to adhere to a gameplan of purchasing higher-quality stocks being in the red doesn't concern me whatsoever and it means that we will have the ability to pick up shares at a major discount. Currently, the following stocks are at the top of my list as companies I would like to add to the portfolio or increase (if they are currently owned):

  • Microsoft (MSFT)
  • Ryder Systems (R)
  • Pepsi (PEP)
  • Honeywell (HON)

One position (100 shares) we did add on significant weakness was Laurentian Bank of Canada (OTCPK:LRCDF) at a blended cost of $29.47/share compared with its current share price of $33.24/share. At its current price, LRCDF offers a well-covered yield of just under 6%.

To the original statement of my article, I want to emphasize that everything I have discussed was made possible by exhibiting patience and letting my gameplan dictate my actions instead of market irrationality. The key point is that anyone who took their money out as the market fainted would likely still be sitting on the sidelines waiting for a bottom that was a good entry point.

As Jane's portfolio becomes more entrenched, I am particularly excited to see how much income will be generated in each month of 2019 when compared to 2018.

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), BP (BP), British American Tobacco (BTI), CBL Properties Pref Series D (CBL.PD), 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), Honeywell (HON), 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), Laurentian Bank of Canada (OTCPK:LRCDF), LyondellBasell (NYSE:LYB), Main Street Capital (NYSE:MAIN), 3M (NYSE:MMM), Mesabi Trust (NYSE:MSB), Microsoft (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), Williams Companies (WMB), W.P. Carey (NYSE:WPC).

Disclaimer: 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.

Disclosure: I am/we are long CTL, GIS, SCHF, SNX, 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.