Jane's February Retirement Account Update - Why You Should Consider Capital Recycling

by: Matthew Utesch

Jane's retirement accounts generated a total of $1,028.71 of dividends in February of 2019 vs $463.22 of dividends in the same month of 2018.

A total of three companies paid increased dividends during the month of February.

Capital recycling is important because it builds up cash reserves and can be used to eliminate certain stocks that have a high cost-basis.

I added a new feature that tracks the month end account balance.

It wasn't that long ago that the market was tanking and we saw even more articles than normal on MarketWatch implying that the results were in and the best of the market had already passed us by. For those who were paying close attention to their portfolios, it wasn't uncommon to see a drop of 15-20% from December 1, 2018, to December 25, 2018. Since then, the S&P 500 has steadily recovered and is now 2.64% above the December 1st price.

Chart Data by YCharts

Since the market is back to "fully valued", I have made more of an effort to review my price targets in which I am willing to sell some or all of a position. When individual stocks are highly valued, it encourages me to find which companies in the portfolio have hit their price ceiling. 3M (MMM) is one company that hit its ceiling and is particularly relevant to Jane's retirement portfolio. MMM's stock price has struggled to move above $210/share over the last six months.

Chart Data by YCharts

Previously I had decided on a price point of $214/share but a repeated pattern of resistance at the $210/share marker was enough to convince me that it was best to sell 30 of the 100 shares my clients own. Although this resulted in almost no gain, the important part was:

  • We sold our highest cost shares and reduced the cost basis for the remaining 70 shares down to $192/share.
  • We now have dry powder and plan to use the additional cash for purchasing stocks that are undervalued.

The point of this brief discussion is that setting a price point and revisiting that information can be extremely useful in recycling capital and reducing the cost basis you have (shares are typically sold first-in-first-out or FIFO but the option is available to sell last-in-first-out or LIFO). Since I began assisting my clients with their portfolio, I have found this to be an excellent tool for taking gains and redistributing to undervalued positions.

Some investors may criticize selling a dividend king like MMM but when a clear ceiling is in on the price of the stock it only makes sense to reduce exposure and purchase the stock again when it becomes undervalued. I personally believe that there is no time that I can think of where I would be willing to overpay for a stock.

February was a fairly active month for Jane's retirement accounts as a handful of positions were bought and sold using this approach. Seeing the results of this methodology over the last year underscores how important it is that investors establish a "capital recycling" program that they are comfortable with.

Client Background

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 not concerned with owning stocks that have a qualified/nonqualified dividend because both of these accounts are tax-sheltered (Traditional IRA and Roth IRA).
  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 February. This includes:

  • AbbVie (ABBV)
  • Realty Income (O)
  • Mesabi Trust (MSB)

Two of these increases (O and MSB) were already covered in the Taxable Account update John And Jane - February Taxable Account Update - Building Up Cash Just Makes Sense. I will not include my summary on them but I will include information about the dividend increase.

AbbVie - ABBV's decline of 28% presents an opportunity for some investors but remains too risky for others. The arena of healthcare (especially prescription drugs) has become a targeted talking point for politicians and advocacy groups alike. The main problem is that ABBV is highly dependent on the continued success of Humira and ABBV has been forced to cut the price tag overseas to compete with cheaper alternatives. Although these risks are clear, ABBV has a promising pipeline of drugs that should help them diversify away and they are willing to pay investors a fat yield of 5.26% at the current price of $81.34/share. This puts ABBV at a P/E ratio of 10.1x compared with its historical average of 14.5x.

FastGraphs - ABBV FastGraphs - ABBV

ABBV's dividend was increased from $.96/share per quarter to $1.07/share per quarter. This represents an increase of 11.5% and a new full-year payout of $4.28/share compared with the previous $3.84/share. This results in a current yield of 5.26% based on a share price of $81.34.

Mesabi Trust - MSB's dividend was increased from $1.18/share in Q1-2018 to $1.39/share in Q1-2019. This represents an increase of 17.8% on a year-over-year basis. This results in a current yield of 9.88% when we use FY-2018 dividend payments and a share price of $28.38.

Realty Income - O's dividend was increased from $.2210/share per month to $.2255/share per month. This represents an increase of 2% and a new full-year payout of $2.71/share compared with the previous $2.652/share. This results in a current yield of 3.81% based on a share price of $71.24.

Retirement Account Positions

There are currently 17 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 in the Traditional IRA during the month of February.

  • Honeywell (HON) - Bought 15 shares @ $152.11/share.
  • Archer Daniels (ADM) - Bought 75 shares @ $41.88/share.
  • AbbVie - Bought 25 shares @ $79.78/share.
  • Williams Co (WMB) - Bought 75 shares @ $27.40/share.
  • Logmein (LOGM) - Bought 25 shares @ $82.55/share.
  • Philip Morris (PM) - Bought 25 shares @ $87.15/share.
  • Logmein - Bought 25 shares @ $79.93/share.
  • Canadian Imperial Bank of Commerce (CM) - Bought 25 shares @ $87.17/share.
  • Eaton (ETN) - Bought 30 shares @ $80.25/share.
  • Laurentian Bank CDA (OTCPK:LRCDF) - Bought 50 shares @ $30.66/share.

We sold the following stocks in the Traditional IRA during the month of February.

  • Travelers (TRV) - Sold 100 shares @ $128.38/share.
  • Digital Realty Trust (DLR) - Sold 50 shares @ $118.29/share.
  • 3M (MMM) - Sold 30 shares @ $210.83/share.

Realized Gains - Traditional IRA Source: Charles Schwab - Traditional IRA

We sold the entire position in TRV because the stock has not performed as well as we had expected and given the discounts in many of the stocks purchased above, we felt that it was a better use of funds to add to these positions. The focus in selling shares of 3M was to eliminate shares with the highest cost basis. Lastly, we sold part of our DLR position because the stock is too richly valued at $118/share and will consider adding to this position again if the share price drops below $108/share.

Roth IRA - The following stocks were added/sold in the Roth IRA during the month of February.

  • Altria (MO) - Bought 25 shares @ 49.01/share.
  • NetApp (NTAP) - Bought 50 shares @ $62.89/share.

We continued to add to the MO position and luckily we were able to bite off a few shares before the price ran up to its new price of $56.75/share. NTAP is a new holding for my clients' portfolio and we like the prospects for growth and locked in yield on cost of 2.5%. With NTAP, I believe that the stock is fairly valued at P/E ratio of 17.6x which would suggest a price of $80/share based on 2019 earnings estimates of $4.55/share.

February Income Tracker - 2018 Vs 2019

It is important to remember that in February of 2018 this portfolio had just been converted from a handful of mutual funds to a portfolio that is focused on individual stocks. As a result of this, it took a while for dividend income to start flowing in 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 Dividends

Source: Consistent Dividend Investor, LLC.

Roth IRA - February Dividends Source: Consistent Dividend Investor, LLC.

The two tables above show investors where income was generated in the month of February for each respective account. In total, Jane's retirement accounts generated $463.22 in the month of February 2018 and managed to generate a whopping $1,028.71 in February 2019. As mentioned previously, in large part, this difference is specifically impacted by the process of changing Jane's account from mutual funds into individual stock positions. As the year goes on, the impact of those changes will diminish as the portfolio became more seasoned (in 2018).

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

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.

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.

Retirement Account Prediction - February Update

Source: Consistent Dividend Investor, LLC.

In the February Taxable account article, I added a new section that should help readers' understand how the account balance fluctuates on a monthly basis. I often receive questions asking if I am able to tolerate a portfolio sitting at a loss and feel that this should help readers understand the big picture.

Starting with the Traditional IRA, we ended February with an account balance of $284,409.85 in 2019 compared with an account balance of $253,796.59 at the end of February 2018. For full disclosure, $6,500 of the year-over-year difference is the result of Jane's contribution for 2017.

Traditional IRA - 2-2019 Month End Balance Source: Consistent Dividend Investor, LLC.

The Roth IRA had a total balance of $135,716.75 at the end of February 2019 compared with an account balance of $133,856.31 at the end of February 2018.

Roth IRA - February Month End Balance Source: Consistent Dividend Investor, LLC.

Part of the reason why the current positions are sitting at a loss (shown in the next illustration) is due to the fact that we regularly engage in trades in the retirement accounts which means that capital gains are removed from the gain/loss equation. Both accounts generated significant realized gains during 2018.

  • Traditional IRA realized gains in 2018 - $37,441.28.
  • Roth IRA realized gains in 2018 - $16,733.06.

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.

Traditional IRA - February Gain-Loss

Source: Consistent Dividend Investor, LLC.

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

Roth IRA - February Gain-Loss Source: Consistent Dividend Investor, LLC.

The Gain/Loss associated with both accounts was down month-over-month when we compare the current market value to what was in the January update.

  • Traditional IRA - Current gain/loss of -$298.88 vs -$2,022.70 when the January retirement article was written.
  • Roth IRA - Current gain/loss of -$6,516.98 vs -$7,062.91 when the January retirement article was written.


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 $1,427.39/month from these two retirement accounts for an estimated annual income of $17,128.70.

I can't emphasize enough how important it is to set a price point in which it is a no-brainer to sell a stock. Be as conservative (or not) as you want in how you set this up, but never get so attached to a stock/company that you're unwilling to sell it. At the same time, it is important to also remember the opposite concept which is that no stock is worth paying too much for. In Jane's case, this process has worked well by increasing her account balances and generating consistent dividend income.

New Article Format - Let me know what you think about the new format (what you like or dislike) by commenting, liking, following, etc. I appreciate all forms of criticism and would love to hear what I can do to make the articles more useful for you!

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), 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), Logmein (LOGM), 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, LRCDF, MAIN. 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.