John And Jane - January Taxable Account Update - Taking A Fresh Approach To Dividend Investing

by: Matthew Utesch

The Taxable account generated $818.68 of dividends in 2019 compared with $983.04 of dividends in 2018.

If we exclude the special dividend of $400 from the Old Republic International in 2018 the dividend income from 2018 would have been $583.04.

January marks the start of a new year and I have decided to make changes to the series that give it a fresh look that makes it easier to read.

The recent focus has been to add extremely high-quality companies because the current yield is satisfactory.

A special dividend from ABR was icing on the cake for one of the best dividend growth stocks of 2018.

My goal for the new year is to improve the format of my series so that it takes less time to write (it's about as manual of a process as it can get) and to create more tables that do a better job of balancing my articles that might seem a little too wordy for the average investor. After all, the goal is to write an article that aids the average investor in their quest for creating a dividend-based stock portfolio.

In this article, I will focus on the year-over-year (YoY) changes that have taken place in my clients' portfolio. This includes a January update that looks at what companies what companies are providing the most growth in the portfolio.

Client Background

John and Jane are two real people who asked me to help manage their retirement portfolios. It is important to understand that I am not a financial advisor and merely provide guidance for my clients' account based on a friendship that goes back several years. I call them my clients' for simplicity sake, but I do not charge them for what I do. The only request I made of them was that they allow me to anonymously write about them so that I can potentially help others who are wanting to achieve the same thing.

John retired in January of 2018 and is collecting social security along with other benefits while Jane is still working with aspirations of retiring in the next two years. John and Jane have done an excellent job heading into retirement because they currently have no debt or mandatory monthly obligations other than what is expected (such as property taxes, water, etc.)

John and Jane have adopted my philosophy of focusing on cash-flow from investments instead of drawing out large sums of money by selling shares of currently held investments. In a nutshell, what John and Jane want is a portfolio of stocks that will provide a steady stream of growing dividend income that will supplement their income during retirement. Although it will be necessary for John and Jane to sell shares from their Traditional IRA, the goal of the Taxable and Roth IRA is that they will never need to sell any shares (unless they want to) because the income generated will prevent them from needing to sell shares as a means of "funding their retirement."

Here are some important characteristics to keep in mind about the Taxable Portfolio:

  1. Capital appreciation is the least important characteristic of this portfolio. This doesn't mean we don't care about it (because all investors do to some degree) but it does mean that we are less concerned about the day-to-day fluctuations of stock prices. Since the goal is to never sell (although I make occasional changes by eliminating or adding positions) a focus on capital appreciation doesn't mean a lot when it comes to the gameplan.
  2. In the past year, I have typically focused on stocks that paid a qualified dividend because they qualify for the lower long-term capital gains tax rate vs. ordinary dividends which are taxed as ordinary income. This has become less important now that 2018 was John's first year of retirement. Changes in the tax brackets also support this approach because the ranges have been expanded and include basically all of their income in the 22% bracket.

Tax Brackets - 2018 Vs 2017

I want to start by emphasizing that I am not a tax professional and that this should not be taken as advice on the subject. The changes in tax brackets over 2017 is my main reason for considering more stocks that pay dividends which are classified as ordinary income.

In 2017, a married couple that is filing jointly saw the tax rate jump from 15% for incomes ranging from $18,650-$75,900 to 25% for incomes ranging from $75,901-$153,100.

In 2018, a married couple that is filing jointly saw their tax rate dropped to 12% for incomes ranging from $19,051-$77,400 while the next tier dropped to 22% for incomes ranging from $77,401-$165,000.

I created the following chart for readers who are interested in seeing how this impacts them.

Tax - 2017 vs 2018 Source: Consistent Dividend Investor, LLC.

The previous chart is meant to show the maximum impact of taxes based on the bracket you fall in. For instance, if someone earned all ordinary income:

  • At $70,000/yr in 2017, a married couple would pay $1,865.00 (This satisfied the 10% bracket + (15% of $51,350 or $7,702.5) = $9,567.50
  • At $70,000/yr in 2018, a married couple would pay $1,905.00 (This satisfied the 10% bracket + (12% of $50,950 or $6,114) = $8,019.00

Stocks that typically pay ordinary dividend income include real estate investment trusts (REITs) and other tax-benefitted entities. Even if we exclude high-payout companies that appear unsustainable, the typical REIT is paying well above the going rate of the S&P 500. I will be writing an article looking at this subject more intensely but the main idea if that the increased yield of REITs and ordinary dividend-payers is more than the increased tax consequences of holding them in the Taxable Portfolio.

Fixed Income

I have chosen to separate the fixed income figures from the rest of the portfolio in order to avoid confusion which allows those reading to gain a better understanding of how John and Jane's Taxable Portfolio is generating interest and dividend income.

It is interesting to see how the yield associated with certificates of deposit (CDs) have dropped since the Fed indicated that they would take a more devilish approach to rate hikes in 2019. It was only a few weeks ago that 1-month CD's were offering 2.30% APY but these are now more common to find at 20 fewer basis points.

At the same time, the Schwab Value Advantage Money Fund (SWVXX) is offering a seven-day yield of 2.33% which has encouraged me to push more funds towards it since the average 1-year brokered CD is only offering approximately 2.5% APY.

Fixed Income Source: Consistent Dividend Investor, LLC.

The following colors were used to represent the following details:

  • Green - Dividend received confirmed (actual dollar amount).
  • Yellow - Expected dividend to be received (Estimate)
  • Red - Security has been sold or has expired and no longer exists.

In total, interest from fixed income provided John and Jane with an additional $213.41 in the month of January.

Dividend And Distribution Increases

To companies from the Taxable portfolio paid an increased dividend during the month of January. This includes:

  • Arbor Realty (ABR)
  • Iron Mountain (IRM)
  • Leggett & Platt (LEG)
  • Realty Income (O)
  • Washington Trust Bank (WASH)
  • WP Carey (WPC)

Arbor Realty - ABR is one of the most successful dividend growth stories of 2018. Over the course of 2018, ABR's dividend has increased from $.84/share up to $1.08/share and then included a juicy special dividend of $.15/share for a total of $1.23/share in 2018. ABR is one of the riskier stocks in John and Jane's portfolio and I tend to keep a close eye on any major changes regarding ABR. When we begin to see an increase in loan defaults I will likely trim or eliminate the position altogether. Historically, ABR currently has a Price to Funds From Operations (P/FFO) of nearly 10x but has traded in recent years towards a P/FFO ratio of roughly 8.3x.

Arbor Realty - Price to FFO Source: Fastgraphs - ABR

ABR's special distribution was $.15/share in January. ABR's current regular dividends amount to $1.08/share or a yield of 9.03%. When we add in the additional $.15 special dividend, this increases the yield to 10.4%.

Iron Mountain - IRM is growing at a rapid pace and is one of the main holdings in John and Jane's portfolio (Taxable and Retirement). IRM is doing a great job of moving beyond physical file storage as the need for digital file storage becomes even more important. Buying IRM on weakness around $32/share is a great entry point that comes with a juicy 7.6% yield. The Q4-2018 earnings call also revealed that the dividend is getting safer as the AFFO payout ratio decreased by 160 basis points to 78%.

Chart Data by YCharts

IRM's dividend was increased from $.5875/share per quarter to $.611/share per quarter. This represents an increase of 4% and a new full-year payout of $2.44/share compared with the previous $2.35/share. This results in a current yield of 6.96% based on a share price of $35.12.

Leggett & Platt - We recently added LEG on some weakness for a couple of reasons. First, it was just plain cheap at a PE of 14.7 (based on a purchase price of $37.29/share) and typically has an average PE of 18.4x. Second, this dividend machine has 46 years of continuous dividend increases and a dividend yield of 4.12% compared with a 4-year average yield of 3.12%. When we added shares in November, LEG was trading at a discount to its normal PE that hasn't been seen since the Great Recession.

Leggett & Platt Source: Fastgraphs - LEG

LEG's dividend was increased from $.36/share per quarter to $.38/share per quarter. This represents an increase of 5.6% and a new full-year payout of $1.52/share compared with the previous $1.44/share. This results in a current yield of 3.38% based on a share price of $44.95.

Realty Income - As always, O provides stable and consistent dividend increases that add up over time. As of lately, the valuation on O has reached ridiculous levels and we even sold some out of the retirement account because it is too highly valued. While I still love the consistency and value that O brings its easy to see from Fastgraphs that it is way overvalued at a P/AFFO of 21.7x. O will need to drop into the upper $40's/low $50's to become a potential buy again.

Realty Income Fastgraphs AFFO

Source: Fastgraphs - O

O's dividend was increased from $.2205/share per month to $..2210/share per month. This represents an increase of .2% and a new full-year payout of $2.652/share compared with the previous $2.646/share. This results in a current yield of 3.86% based on a share price of $70.09.

Washington Trust Bank - America's oldest community bank continues to reward shareholders and the price is back in the buy range so we are looking to potentially add to this holding. With 8 years of consecutive growth and an average five-year dividend growth rate of 11.31%, it's hard not to love this holding.

Washington Trust Bancorp Fastgraph Source: Fastgraphs - WASH

WASH's dividend was increased from $.43/share per quarter to $.47/share per quarter. This represents an increase of 9.3% and a new full-year payout of $1.88/share compared with the previous $1.72/share. This results in a current yield of 3.55% based on a share price of $52.99.

WP Carey - Like O, WPC has become overvalued which encouraged us to sell 100 shares from John's retirement accounts (WPC still remains one of John and Jane's largest positions) at roughly $75/share. If shares drop below $67 then we will consider adding to the position again. What I value most about WPC's approach is their extremely conservative dividend growth policy considering shares are already yielding nearly 5.5%.

Chart Data by YCharts

WPC's dividend was increased from $1.025/share per quarter to $1.03/share per quarter. This represents an increase of .5% and a new full-year payout of $4.12/share compared with the previous $4.10/share. This results in a current yield of 5.48% based on a share price of $75.20.


The Taxable Portfolio in 2018 had 40 different positions and currently includes 42 unique positions as of 2/16/2019. I would consider 40 unique positions or less to be more manageable but I took the opportunity to add a couple high-quality positions that were too good to pass up during the month of December.

  1. Air Products & Chemicals (APD)- 10 shares - Avg Cost $159.84/share
  2. Dover Corporation (DOV) - 10 shares - Avg Cost $86.63/share
  3. Ryder (R) - 75 Shares - Avg Cost $53.49/share
  4. Schlumberger (SLB) - 125 Shares - Avg Cost $37.43/share
  5. Texas Instruments (TXN) - 35 Shares - Avg Cost $93.42/share
  6. United Technologies (UTX) - 50 Shares - Avg Cost $114.87/share
  7. Exxon (XOM) - 50 Shares - Avg Cost $68.86/share

As you can see, the one thing all of these positions have in common is that they are relatively uncontroversial in the dividend investing mainstream. The goal is to continue adding sound companies like these now that the portfolio has begun generating the kind of income John and Jane need. In a sense, adding more of these stabilizing companies won't juice the yield (in fact, it is likely going to drop it overall) but it will create consistency when we experience a real correction.

January Income Tracker - 2018 Vs 2019

As mentioned in the bullet points, one of the major reasons that 2018 saw higher dividend income in January was because of a one-time special dividend from Old Republic International (ORI) that amounted $400 based on $1/share. It is also true that the account still had plenty of money sitting as cash because we were continuing to fill out John and Jane's positions. Because of these issues, the reduced income in 2019 is not concerning because it is not indicative of the actual portfolio performance.

None of the following images take into consideration the income generated by the Fixed Income holdings.

January - 2018 vs 2019 Comparison Source: Consistent Dividend Investor, LLC.

Here is a graphical illustration of the dividends received on a monthly basis.

Monthly Dividend Graph Source: Consistent Dividend Investor, LLC.

Based on the current knowledge I have regarding dividend payments and share count, the following table is a basic prediction of the income we expect the Taxable Portfolio to generate in 2019 compared with the actual results from 2018.

2019 Income Estimate

Source: Consistent Dividend Investor, LLC.

To be completely transparent, I want to emphasize that a significant portion of this increase came from the deployment of additional capital that was added to the account after John and Jane received their capital back from a separate investment. While dividend increases have certainly contributed to this YoY increase, it was not enough to generate an estimated 18% gain in monthly income.

Lastly, on the topic of transparency, I like to show readers' the actual gain/loss associated with each position in the portfolio because it is important to consider that in order to become a proper dividend investor it is necessary to learn how to live with volatility.

2019-1 Gain Loss Source: Consistent Dividend Investor, LLC.

Since December, the portfolio has recovered dramatically as the stock market continues to rally (I credit a Dovish Fed and hopes of finalization to the US-China Trade Dispute). In my last article (here), the gain/loss was -$11,345.08 at the time it was written compared with a positive gain of $7,570.01 as of market close on 2/16/2019.


The decrease in income YoY for January is easily explained if we exclude the $400 special dividend from ORI. Taking this into account, regular dividend income increased from $583.04 in 1-2018 to $818.68 in 1-2019. This represents an increase of 40.4% YoY. It is important to consider that not all of this came from increasing dividend payments as other reasons include:

  • A significant portion of funds was still held in cash on 1-2018.
  • Collected dividends were exclusively deployed to purchase more stock.
  • John and Jane added $200,000 to the account from a separate investment that was finalized. $160k of which is in Fixed Income (CD's and SWVXX) and $26.7k in Cash. Remaining funds were used to purchase additional shares.

If we include the fixed income holdings in John and Jane's Taxable Portfolio it results in a total income of $1,032.09.

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), Air Products & Chemicals (APD), Apple REIT (APLE), BP (BP), Buckeye Partners (BPL), Cardinal Health (CAH), Clorox (CLX), Cummins (NYSE:CMI), Dover Corporation (DOV), 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), Ryder Corporation (R), Tanger Factory Outlet Centers (SKT), Schlumberger (SLB), 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 (WLKP), W.P. Carey (WPC), and Exxon Mobil (XOM).

Disclosure: I am/we are long APLE, 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.