John's January Retirement Account Update - Locking In Gains As Stocks Move To 52-Week Highs

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Includes: APLE, AVA, BA, BBT, BF.B, BML.PL, BP, CDUAF, CLDT, CONE, CVX, D, DLR.PJ, DUK, EAFAX, EPR, EPR.PG, FRT.PC, GD, HRNNF, HST, 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, T, TD, TROW, UMPQ, VLO, VLY, VTR, WELL, WPC
by: Matthew Utesch
Summary

John's retirement accounts generated a total of $2,396.87 in dividend income for January 2019 vs. $1,146.84 of dividends in January of 2018.

Like the other articles, I have decided to play with a new format that involves more visual data because the previous articles were too wordy.

We took advantage of adding some high-quality dividend payers during the months of December and January.

A total of six companies in John's retirement accounts paid increased dividends during the month of January.

We have begun to trim positions now that many of these stocks have moved out of the BUY range and are currently sitting on $25k in cash between these accounts.

I am testing out my new format for this article series with the hope that it makes the articles easier to write by building tables and charts that do a better job of explaining the situation. There are two other articles that are a part of this series for the month of January:

  1. John And Jane - January Taxable Account Update - Taking A Fresh Approach To Dividend Investing
  2. Jane's January Retirement Account Update - Pay Attention To The P/E Ratio

In this article, I will be focusing on the year-over-year (YoY) changes that have taken place in my client John's Traditional IRA and Roth IRA portfolio. This series focuses on:

  • What companies paid increased dividends in the month of January.
  • The addition or elimination of certain positions and the rationale behind those moves.
  • Discussion of sell target prices.
  • Market news that may have positively or negatively impacted the portfolio.

Client Background

First of all, I want to emphasize that this is an actual portfolio with actual shares being traded. This article focuses on John who is a recent retiree (retired on January 1st, 2018) who has requested my help in managing his 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 his account based on a friendship that goes back several years. In this article, I will refer to John as "my client," and I do this for simplicity's sake, but I do not charge him for what I do. The only thing John offers in return is allowing me to write anonymously about his financial journey with the hope that I can potentially help others who are wanting to achieve the same thing.

John was able to set himself up for a comfortable retirement by eliminating all of his debt so that the only bills are the absolute basics like property tax, water, etc. John has sources of income that have provided him with a comfortable retirement outside of the investments discussed in this article, and he has not needed to draw funds from his retirement accounts.

John is only a few years away from needing to satisfy his required minimum distributions (RMDs) from his Traditional IRA. It is important to remember that the Roth IRA does not have this requirement, which means John can withdraw funds at will from his Roth. On his Traditional IRA, it is important to be more strategic because we want to make sure that the cash being generated by his investments outpaces his minimum distribution for as long as we possibly can. Based on the current balance of $248k John would be required to take approximately $9,050 if he needed to satisfy his RMD.

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 game plan.
  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)
  • Bank OZK (OZK)
  • Park Hotels & Resorts (PK)
  • Ventas (VTR)
  • W.P. 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 6.87% based on a share price of $35.58.

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 3.80% based on a share price of $69.74.

Bank OZK - OZK is an interesting play because the company has experienced a tremendous amount of turmoil stemming from two loans that experienced a write-down in Q3-2018. In my article on the company titled Bank OZK: A Sober Review Shows The Concerns Are Priced In, I determined that these write-downs were not indicative of the rest of the portfolio and investors had punished the stock far more than it should've been. With my credit quality concerns alleviated, we established a small position to capture what I believed was significant upside potential. Based on 2018 earnings of $3.24/share and a 52-week-low price of $21.02/share, it became very clear that a P/E ratio of 6.5x was completely unreasonable.

fastgraph PE Ratio

Source: Fast Graphs - Bank OZK

The dividend was increased from $.21/share per quarter to $.22/share per quarter. This represents an increase of 4.8% and a new full-year payout of $.88/share compared with the previous $.84/share. This results in a current yield of 2.67% based on a share price of $33.36.

Park Hotels & Resorts - Hotels aren't always my favorite investment, but PK makes the list because it has a size advantage and a cost of capital advantage. As the second largest publicly traded lodging REIT (Host Hotels (NYSE:HST) is first), it only makes sense that we would purchase shares when they look undervalued. The dividend situation for PK is a little more complicated and consists of multiple factors.

  1. A regular dividend of $.43/share was issued.
  2. A special dividend of $.27/share was issued.
  3. An additional $.30/share was issued to compensate for capital gains on sales.

Source: Fast Graphs - PK

Assuming the regular dividend of $.43/share per quarter is maintained, the expectations for total dividends paid in 2019 are for PK to dish out $2.29/share. This is equal to a 7.24% annual yield based on a current share price of $31.63. This compares with a normal dividend income of $1.72/share or 5.44%.

Ventas - Long considered one of the blue-chip REITs, VTR has become one of my favorites to sell when it looks too richly valued and to buy again when its price becomes too good to pass up. Interestingly enough, in Brad Thomas' recent article, he noted that VTR's low cost of capital makes a merger/acquisition a potentially powerful play. Brad might be on to something because of the recent pricing of $700 million in notes. I plan to stay on the sidelines and continue holding the shares John currently has and buying/selling more accordingly.

The dividend was increased from $.79/share per quarter to $.7925/share per quarter. This represents an increase of .3% and a new full-year payout of $3.17/share compared with the previous $3.16/share. This results in a current yield of 4.99% based on a share price of $63.61.

W.P. 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 5.51% based on a share price of $74.75.

Retirement Account Positions

There are currently 25 different positions in John's Roth IRA and 32 different positions in his Traditional IRA. While this may seem like a lot, it 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.

  • Valero Energy (VLO) - Bought 20 shares @ 82.31/share

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

  • W.P. Carey - Sold 100 shares @ 74.66/share

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

  • Dominion Energy (D) - Bought 34 shares @ $68.79/share
  • Bank OZK - Bought 50 shares @ $26.62/share

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

  • Hydro One Limited (OTC:HRNNF) - Sold 150 shares @ $15.37/share.

WPC was sold because it is one of our largest positions and allowed John to collect some gains off of a position that had a higher cost basis (just under $70/share while the rest of his WPC position is in the mid-60s). HRNNF was sold after the failed acquisition of Avista Utilities (AVA), which boosted the share price to a point where I was happy to eliminate the position. I plan to initiate the position in WPC if the price drops back into the mid-60s, but I do not plan on initiating a position in HRNNF again in the foreseeable future.

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 the dividends collected on stocks that are no longer held in that portfolio. We still count the dividend income earned during that time period 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.

Traiditional IRA 2018 vs 2019

Source: Consistent Dividend Investor, LLC

Roth IRA 2018 vs 2019

Source: Consistent Dividend Investor, LLC

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

Source: Consistent Dividend Investor, LLC

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

Roth IRA Monthly Dividends 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.

Traditional and Roth IRA Projections 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 John's Traditional IRA:

Traditional Gain Loss Source: Consistent Dividend Investor, LLC

Here is the Gain/Loss associated with John's Roth IRA:

Roth Gain Loss Source: Consistent Dividend Investor, LLC

It should be noted that the dividend in the far right column of both the Traditional and Roth IRA isn't always accurate because these accounts are more regularly traded and aren't always updated when it comes to the dividend. The Gain/Loss is exact and represents prices from market close on February 27th.

We have recently sold additional positions (which will be covered in the February update) that have resulted in a larger than normal cash position between the Traditional and Roth IRAs. Personally, the market has started to look more richly valued, and so we have continued to take a certain amount of chips off the table with the idea of capitalizing when shares become more attractive.

Conclusion

John's portfolio continues to look solid and has experienced less volatility because we continue to focus on REITs and utilities. At the same time, we have taken the opportunity to add companies in the energy and finance sector when they look undervalued. Based on the current forecast/model, I believe that John will be averaging just under $1,640/month from these two retirement accounts for an annual income of $19,676.28.

When reading this article, it is important to consider that not all of the YoY change came from increasing dividend payments. Other factors that impacted the YoY results 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.

As time goes on, the spread between YoY monthly income is expected to decrease and will begin to reflect the true impact of dividend increases.

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), BP (BP), Brown-Forman Class B (BF.B), Canadian Utilities (OTCPK:CDUAF), Chatham Lodging Trust (CLDT), Chevron (CVX), 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 Preferred Series C (FRT.PC), General Dynamics (GD), 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), AT&T (T), Toronto-Dominion Bank (TD), T. Rowe Price (TROW), Valero (VLO), Valley National Bancorp (VLY), Umpqua Bank (UMPQ), Ventas (VTR), Welltower (WELL), and W.P. Carey (WPC).

Disclosure: I am/we are long T, OZK, PACW, UMPQ, VLO. 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.