Jane's January Retirement Account Update - Pay Attention To The P/E Ratio

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

Jane's retirement accounts generated a total of $1,904.17 of dividends in 2019 vs $535.11 of dividends in 2018.

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.

December and January presented the opportunity to add some high-quality dividend-payers at a discount and allowed us to sell some shares of richly-valued stock.

A total of six companies paid increased dividends during the month of January.

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. Check out the article on the Taxable Account - John And Jane - January Taxable Account Update - Taking A Fresh Approach To Dividend Investing. Let me know what you think about the new format and I'd love to hear any suggestions or requests that would improve it.

In this article, I will focus on the year-over-year (YoY) changes that have taken place in my client Jane's Traditional IRA and Roth IRA portfolio. This series specifically focuses on what companies paid increased dividends and looks at the various changes that positively or negatively impact Jane's retirement accounts.

Client Background

First of all, I want to emphasize that this is an actual portfolio with actual shares being traded. This article focuses on Jane who is a few years out from retirement and has requested my help in managing her own portfolio instead of paying a financial advisor. It is important to understand that I am not a financial advisor and merely provide guidance for her account based on a friendship that goes back several years. In this article I will refer to Jane as "my client" and I do this for simplicity's sake but I do not charge her for what I do. The only thing Jane offers in return is allowing me to write anonymously about her financial journey with the hope that I can potentially help others who are wanting to achieve the same thing.

Jane is still working and has aspirations of retiring in the next two years which is part of the reason why I write this series separately from her husband John (who is currently retired). Because Jane is not currently retired, I have focused her portfolio on slightly more aggressive investments than her husband and plan to transition to a slightly more conservative mix over the next two years. From a day-to-day finance perspective readers should be aware that Jane and her husband currently have no debt or mandatory monthly obligations other than what is expected (such as property taxes, water, etc.)

Jane and her husband 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. To briefly summarize this, Jane and her husband are onboard with the idea of building a portfolio of stocks that will provide a steady stream of growing dividend income that will supplement their income during retirement.

Because of Jane's age, we are not overly concerned with the impact of required minimum distributions (RMD) from her Traditional IRA. RMD's are important for retirees to pay attention to since the penalties for not withdrawing the mandatory amount is 50% tax on the difference between the RMD and what was actually withdrawn. For example, at the current balance of $284,000 Jane would be required to withdraw $10,365 at the age of 70.5. If Jane failed to withdraw any funds she would be forced to pay approximately $5,183 as a penalty to the IRS. If she only withdrew $5,000, she would still owe $2,683 (the difference between the RMD and what was actually withdrawn).

The goal for Jane's retirement accounts is that she will be able to rely on dividends for the majority of her near-term Traditional IRA distributions. By doing this, we are making sure that Jane won't need to sell shares from her Traditional IRA until it is absolutely necessary to meet the RMD. Living on dividends vs selling shares is the key difference between living on the cash flow generated by her investments and needing to sell shares as a means of "funding her retirement".

Here are some important characteristics to keep in mind about the Retirement 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. I am more inclined to purchase shares that pay an ordinary dividend instead of a qualified dividend because the accounts are sheltered from taxes. With the new tax changes that have taken effect (which I briefly discussed in the Taxable account found at the link at the beginning) the benefit of reduced taxes is diminished vs the previous tax code from 2017.
  3. I do trade stocks in the retirement portfolio on a more regular basis because the gains are sheltered from taxes. The number of trades that take place on any given month depends on market volatility and whether or not a stock has reached the price target that I have set for it. I adjust these targets regularly and will be incorporating more information as to how I set these price targets over the next few months.

Dividend And Distribution Increases

The following companies from the Traditional IRA and Roth IRA paid an increased dividend during the month of January. This includes:

  • Iron Mountain (IRM)
  • Realty Income (O)
  • Preferred Bank (PFBC)
  • PolyOne Corp (POL)
  • Synnex (SNX)
  • WP Carey (WPC)

Since I have already covered IRM, O, and WPC in the Taxable review, I will not write my personal take (which can already be found above) but will include the information on the dividend increases.

Iron Mountain - The 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 6.91% based on a share price of $35.39.

Realty Income - The 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 3.87% based on a share price of $69.92.

Preferred Bank - PFBC remains one of the largest bank holdings in Jane (or her husband's portfolio for that matter) and the stock has begun to rebound nicely after dropping from nearly $70/share to a low of just below $40/share. Credit issues have been a small concern at the bank, although these appear to be one-time situations rather than an actual loan portfolio issue. There is quite a bit of room to recover when it comes to the price of shares and Jane's cost basis on the whole position is currently just under $60/share.

Source: Fastgraphs - PFBC

PFBC's dividend was increased from $.25/share per quarter to $.30/share per quarter. This represents an increase of 20% and a new full-year payout of $1.20/share compared with the previous $1.00/share. This results in a current yield of 2.33% based on a share price of $51.46.

PolyOne Corp - POL is another entity that saw its share price take a beating starting back in October 2018. I recently wrote an article on POL and found that its share price temporarily dropped below a P/E ratio of 11.0x (which hasn't been seen since the financial crisis in 2008). In my opinion, I believe that the company is significantly undervalued and I expect to see shares move back into the $35-$38/share range over the next several months. If earnings end up being more favorable than what is expected I would suggest an optimistic price target is $47.50.

Source: Fastgraphs - POL

POL's dividend was increased from $.175/share per quarter to $.195/share per quarter. This represents an increase of 11.4% and a new full-year payout of $.78/share compared with the previous $.70/share. This results in a current yield of 2.35% based on a share price of $33.23.

Synnex - SNX was one of the biggest disappointments of 2018 as the share price fell from over $140/share to a low of just over $70/share. SNX is one of the largest behemoths that you've never heard of and is instrumental in providing distribution, logistics, and integration services for the technology industry. SNX made its debut on the Fortune 500 list in 2007 as the 360th largest US-based company (by revenue) and has since moved up to be the 169th largest company in 2018. Shares still appear to be undervalued and the Q4-2018 beat propelled the stock price back above $100/share.

Source: Fastgraphs - SNX

SNX's dividend was increased from $.35/share per quarter to $.375/share per quarter. This represents an increase of 7.1% and a new full-year payout of $1.50/share compared with the previous $1.40/share. This results in a current yield of 1.48% based on a share price of $101.43.

WP Carey - The 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.

Retirement Account Positions

There are currently 18 different positions in Jane's Roth IRA and 33 different positions in Jane's Traditional IRA. While this may seem like a lot, is important to remember that many of these stocks are held in both accounts and are also held in the Taxable portfolio.

Traditional IRA - The following stocks were added to the Traditional IRA during the month of January.

  • Laurentian Bank of Canada (OTCPK:LRCDF) - Buy 50 shares @ 31.95/share

Roth IRA - The following stocks were added to the Roth IRA during the month of January.

  • Toronto Dominion Bank (TD) - Buy 25 shares @ $50.74/share
  • Gaslog Partners Preferred C - (GLOP.PC) - Buy 50 shares @ $22.73/share
  • Bank of America (BAC) - Buy 50 shares @ $25.30/share
  • Microsoft (MSFT) - Buy 15 shares @ $102.85/share
  • Gaslog Partners Preferred C - (GLOP.PC) - Buy 50 shares @ $21.90/share

The following stocks were sold from the Roth IRA during the month of January.

  • Microsoft (MSFT) - Sell 15 shares @ $105.52/share
  • Investor Realty Trust (IRET) - Sell 20 shares @ $57.12/share
  • Duke Energy (DUK) - Sell 75 shares @ $87.77/share

MSFT, IRET, and DUK have never been "core holdings" in Jane's portfolio which is one reason why these positions were eliminated. MSFT has been a regular stock that I have bought and sold (I sold it early in order to purchase additional shares of GLOP.PC). The FastGraphs for MSFT and DUK show that the stocks are trading at exceptionally high price-to-earnings (P/E ratio).

Source: Fastgraphs - MSFT

MSFT is currently trading at a P/E ratio of 25.6x compared to its normal P/E ratio of 21.3x. A much more reasonable entry price for MSFT would be below $95/share (a normal P/E ratio of 21.3x based on 2019 estimated earnings of $4.42/share).

Source: Fastgraphs - DUK

DUK is currently trading at a P/E ratio of 18.5x based on FY-2018 earnings of $4.72/share. Historically, DUK has treated closer to a P/E ratio of 13.1x, which would result in the price of $61.83/share. Given the current interest rate environment, I believe that a more reasonable entry point would be at a P/E ratio of 15x or approximately $70.80.

January Income Tracker - 2018 Vs 2019

It is important to remember that in January of 2018 this portfolio primarily consisted of a handful of mutual funds which was converted around that time to a stock-based portfolio. As a result of this, there was very little income produced during the month of January since these shares were not purchased prior to the ex-dividend date.

SNLH = Stocks No Longer Held - Dividends in this row represent dividends collected on stocks that are no longer held in that portfolio. We still count the dividend income even though it is non-recurring.

On the lists provided below, it is important to know that not all stocks on that list were owned at that point in time (2018 tables represent what holdings were still held at the end of 2018). All of the stocks you see were acquired over the course of a year.

Traditional IRA - Holdings Source: Consistent Dividend Investor, LLC.

Roth IRA Holdings

Source: Consistent Dividend Investor, LLC.

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

Dividend Graph

Source: Consistent Dividend Investor, LLC.

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

Dividend Graph

Source: Consistent Dividend Investor, LLC.

Based on the current knowledge I have regarding dividend payments and share count, the following tables are a basic prediction of the income we expect the Traditional IRA and Roth IRA to generate in FY-2019 compared with the actual results from 2018.

2019 Estimates Source: Consistent Dividend Investor, LLC.

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.

Here is the Gain/Loss associated with Jane's Traditional IRA.

Source: Consistent Dividend Investor, LLC.

Here is the Gain/Loss associated with Jane's Roth IRA.

Source: Consistent Dividend Investor, LLC.

Much like the Taxable Portfolio, Jane's retirement accounts have recovered significantly over the course of the last 30+ days. As I mentioned in the Taxable article, I credit a dovish Fed and optimistic reports about a final resolution between the US-China Trade Dispute.

  • Traditional IRA - Current gain/loss of -$2,022.70 vs -$19,009.44 when the December retirement article was written.
  • Roth IRA - Current gain/loss of -$7,062.91 vs -$13,120.71 when the December retirement article was written.

Conclusion

Jane's portfolio is working exactly as we intended and will continue to trim positions when they are overvalued and add to others when they are undervalued. The examples provided in this article suggest that Jane will be averaging just over $1,400/month from these two retirement accounts for an annual income of $17,104.22.

When reading this article, it is important to consider that not all of this came from increasing dividend payments as other important changes include:

  • A significant portion of funds was tied up in mutual funds on 1-2018.
  • Collected dividends were exclusively deployed to purchase more stock.
  • The only funds added to Jane's account was a 2017 Traditional IRA contribution of $6,500.

In Jane's Traditional and Roth IRAs, she is currently long the following mentioned in this article: AbbVie (ABBV), 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), 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), Gaslog Partners Preferred C (GLOP.PC), Honeywell (HON), International Business Machines (NYSE:IBM), Illinois Tool Works (ITW), Intel (NASDAQ:INTC), 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), Altria (NYSE:MO), NetApp (NTAP), Realty Income (NYSE:O), 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), US Bank Preferred H-Series (USB.PH), Verizon (NYSE:VZ), Williams Companies (WMB), W.P. Carey (NYSE:WPC).

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

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.