The Retiree's Dividend Portfolio - Jane's March Update - Dividend Increases Galore

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

Jane's retirement accounts generated a total of $1,496.76 in dividend income for March 2019 vs. $850.98 of dividends in March of 2018.

We took advantage of some high stock prices in March and exchanged them for shares of undervalued stocks and hoarded the rest in cash.

A whopping total of eight companies paid increased dividends during the month of March.

This article was longer than expected but the reason why is because so many companies paid increased dividends during the month of March (I think we can all agree that this is a great reason for an article to be longer than normal).

We continue to see mixed reports with a number of companies easily beating or missing when it comes to their earnings reports. One of the most profound news items in the last 10 days included reports that United States GDP was of 3.2% compared with the same point last year. Although this is considered to be a major win for those who continue to be bullish there are real threats to the current environment that include:

  • Inflation
  • Interest Rates (potential increases)
  • Trade War Negotiations (with China specifically)

All of these items are worth considering as an investor but one index I have found particularly helpful in the past is the VIX index that represents the market's expectation of 30-day forward-looking volatility. The main reason that I found the VIX index to be helpful is that a major jump in the index can have a profound impact on the market. The impact of the VIX when compared with the S&P over a 10-year period shows that significant short-term drops in the S&P 500 coincide with major/significant spikes in the VIX index.

Chart Data by YCharts

I believe that investor fear/uncertainty is absolutely critical when deciding how to invest. In the case of Jane, her portfolio is subject to slightly more risk than her husband John's which means that her portfolio is likely to drop in value more during the downturn but increase in value more during the market rally. I regularly review Jane's portfolio to determine if positions should continue to be held, and in some cases, determine if shares that are sitting at a loss should be eliminated from the portfolio.

While we attempt to purchase shares that may have a little more risk we always try to take into consideration mitigating factors when we do decide to engage in additional risk. For instance, purchasing regular shares of a dividend paying stock might represent too much risk whereas the preferred issues still carry some risk they have a better guarantee of continuing to pay dividends even when the standard shares experience a dividend cut or is eliminated altogether.

During the month of March, there were quite a few dividends paid but we decided to eliminate our position in CBL Properties Preferred Series D (CBL.PD) because the long-term risk to these shares increased significantly to the point where their preferred status means almost nothing if the company cannot turn around their real estate portfolio. Usually, my articles are full of nothing but good news but it is important to remember that decisions like this will occur and that it is important for you to establish a risk threshold that tells you when to fold them. Most importantly, the loss associated with the sale of the shares is minimal because we limit risky positions in order to reduce the risk and impact associated with these types of situations.

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 March. This includes:

  • 3M (MMM)
  • Archer Daniels Midland (ADM)
  • Digital Realty Trust (DLR)
  • Eaton (ETN)
  • Enbridge (ENB)
  • Gilead Sciences (GILD)
  • Intel (INTC)
  • The Williams Companies (WMB)

I would also like to point out that there is one stock in the portfolio that cut its dividend payment effective in the month of March.

  • CenturyLink (CTL)

**I will not provide a market update for ADM because I already addressed this in my Taxable Account article The Retirees' Dividend Portfolio - John And Jane's March Taxable Account Update - Tax Season. I will still provide a basic synopsis of the dividend increase.

3M - MMM is often considered to be one of the best dividend stocks investor an investor can own and when the price is appropriate it is worth adding to any dividend growth portfolio. The main issue with 3M's stock price is that it is not factored in lower profit growth and concerns about margin. We have used recent prices to sell the most expensive shares of MMM and currently hold a 1/2 position. Before I published this 3M earnings report came out and completely confirmed my thoughts about the market.

3M - FastGraphs The dividend was increased from $1.36/share per quarter to $1.44/share per quarter. This represents an increase of 5.9% and a new full-year payout of $5.76/share compared with the previous $5.44/share. This results in a current yield of 2.64% based on a share price of $218.54.

Archer Daniels Midland - The dividend was increased from $.335/share per quarter to $.35/share per quarter. This represents an increase of 4.5% and a new full-year payout of $1.40/share compared with the previous $1.34/share. This results in a current yield of 3.28% based on a share price of $42.66.

Digital Realty Trust - Although we decreased the size of the position over the last year I am beginning to warm to the idea of adding shares again and adjusting my buy price up from the $110/share range to $115/share. Data Centers owned by DLR are absolutely critical to the growing number of devices that are generating exponential amounts of data on a daily basis. One of the craziest estimates I've seen is that autonomous cars will generate about 4,000 GB of data per day (which is more than 2,500 times the amount of data a typical person generates on a daily basis). DLR provides services for a large number of investment grade companies, many of which, are part of the Fortune 500.

DLR FastGraphs The dividend was increased from $1.01/share per quarter to $1.08/share per quarter. This represents an increase of 6.9% and a new full-year payout of $4.32/share compared with the previous $4.04/share. This results in a current yield of 3.62% based on a share price of $119.81.

Eaton - I traded ETN a few times over the course of 2018 but saw the opportunity to snag shares at under $80 each. At present, ETN looks like it has a room especially if it can find a buyer for its lower-margin segments that include lighting and its auto fluid conveyance business. Based on FastGraphs ETN looks fairly valued at present but I believe this can go much higher if these low-margin segments are sold. ETN was recently upgraded by KeyBanc to overweight with a $93 price target.

Eaton - FastGraphs

The dividend was increased from $.66/share per quarter to $.71/share per quarter. This represents an increase of 8% and a new full-year payout of $2.84/share compared with the previous $2.64/share. This results in a current yield of 3.33% based on a share price of $83.80.

Enbridge - Jane originally held shares of Spectra Energy (SEP) in her taxable account but those were sold upon conversion to ENB shares because of tax purposes. ENB's most recent dividend increase follows a consistent history of regular dividend increases. Furthermore, I am encouraged by the election of Jason Kenney who has been an advocate of Alberta's oil industry and has pushed back against the carbon tax. As stability becomes more certain I expect that Canada's oil sands will flourish once again. The stock price is now 29% higher than it was at the same time last year.

Chart Data by YCharts

The dividend was increased from $.67/share CAD per quarter to $.71/share CAD per quarter. This represents an increase of 8% and a new full-year payout of $2.19 USD/share compared with the previous $2.08 USD/share. This results in a current yield of 5.81% based on a share price of $37.78.

Gilead Sciences - There has been a lot of negative news for GILD over the last few years as positive developments in the HIV treatments help to offset the impact of drugs whose patents were expiring. Most authors on Seeking Alpha are either neutral/bullish on the stock but it looks like the optimism comes mostly from optimism that revenue will grow in 2020. Looking at a 10-year average P/E ratio of 11.1x GILD looks undervalued at a P/E ratio of 9.6x. For GILD, I consider a short-term P/E ratio to be much more accurate because it has not been able to maintain its long-term P/E ratio average of 21.1x (growth slowed tremendously around August 2015).

Gilead FastGraphs The dividend was increased from $.57/share per quarter to $.63/share per quarter. This represents an increase of 10.5% and a new full-year payout of $2.52/share compared with the previous $2.28/share. This results in a current yield of 3.93% based on a share price of $65.15.

Intel - I have been looking to offload the remaining INTC shares in Jane's portfolio for a while because they were added at a cost basis that was far too high given the competitive pressures in the semiconductor space. I want to emphasize that I would gladly add INTC to the portfolio again, however, I would like to see share prices drop below $50/share before I would consider taking an interest. Jane was able to collect the dividend for the month of March but we were fortunate that we sold shares prior to INTC's earnings release on April 16 at $56.35/share.

Intel - FastGraphs The dividend was increased from $.30/share per quarter to $.315/share per quarter. This represents an increase of 5% and a new full-year payout of $1.26/share compared with the previous $1.20/share. This results in a current yield of 2.40% based on a share price of $52.43.

The Williams Companies - WMB has performed well over the last few months as its stock price has recovered from the low $20 range. The main driver for WMB's strong performance was due to a colder than expected winter that increased natural gas demand. I like WMB because it offers a generous dividend and also operates some of the most critical pipeline infrastructures in the United States. WMB has a current dividend coverage of 1.7x which makes it an exceptionally safe investment option.

Williams Companies - FastGraphs

The dividend was increased from $.34/share per quarter to $.38/share per quarter. This represents an increase of 11.8% and a new full-year payout of $1.52/share compared with the previous $1.36/share. This results in a current yield of 5.30% based on a share price of $28.47.

Dividend Cuts

CenturyLink - it's rare that I have to discuss when a company in my client's portfolio cuts its dividend but CTL was definitely one of the holdings that we consider to be more speculative than others. There are quite a few authors on Seeking Alpha who have strong opinions about the outlook for CTL. My personal opinion is that the current stock price will remain hampered for quite some time because management has lost a significant amount of credibility with shareholders. I believe that author Michael Boyd's article CenturyLink Plunges On Disclosed Internal Material Weaknesses summarizes my sentiments exactly. Realistically, there is potential value in CTL but investors' need to be realistic on how much time it will take to restore the credibility of its management.

Chart Data by YCharts

The dividend was decreased from $.54/share per quarter to $.25/share per quarter. This represents a decrease of -53.7% and a new full-year payout of $1.00/share compared with the previous $2.16/share. This results in a current yield of 8.61% based on a share price of $11.62.

Retirement Account Positions

There are currently 16 different positions in Jane's Roth IRA and 32 different positions in Jane's Traditional IRA. While this may seem like a lot, is important to remember that many of these stocks cross over 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 March.

  • Canadian Imperial Bank (CM) - Purchased 25 Shares @ $79.17/share.
  • East West Bancorp (EWBC) - Purchased 25 shares @ $47.06/share.
  • East West Bancorp - Purchased 25 shares @$49.39/share.
  • Main Street Capital (MAIN) - Purchased 50 shares @ $37.18/share.
  • Enbridge (ENB) - Purchased 50 shares @ $34.95/share.
  • Main Street Capital - Purchased 50 shares @ $38.42/share.

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

  • CBL Properties Preferred Series D (CBL.PD) - Sold 200 Shares @ $11.04/share.
  • Honeywell (HON) - Sold 15 shares @ $155.96/share.
  • Illinois Tool Works (ITW) - Sold 25 shares @ $142.88/share.
  • Johnson & Johnson (JNJ) - Sold 35 shares @ $138.12/share.

Traditional IRA Realized Gains Source: Charles Schwab - Traditional IRA

I can already tell that the DGI's out there are probably wondering if I am insane because we sold HON, ITW, and JNJ but the key thing to remember was that these were all purchased at a high cost relative to the remaining shares (except for JNJ which we took a small loss on to eliminate because shares were purchased at record highs). Jane still maintains reasonable positions in HON and ITW but at a much lower cost basis than shares are currently trading for. This entire strategy is focused on continuing to move the cost basis lower whenever possible to act as a buffer and to rebuild cash reserves that can be redeployed during a market correction.

Roth IRA - The following stocks were added in the Roth IRA during the month of March.

  • Bank of America (BAC) - Purchased 50 shares @ $26.82/share.
  • GasLog Partners Preferred Series C (GLOP.PC) - 50 shares @ $23.91/share

We sold the following stocks in the Roth IRA during the month of March.

  • DowDupont (DWDP) - Sold 50 shares @ $56.10/share.

Roth IRA Realized Gains Source: Charles Schwab - Roth IRA

Buying BAC at a low proved to be a solid move while eliminating DWDP was worthwhile because it was a non-core holding.

March 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. With this in mind, dividend income for the month of March was light in comparison to the portfolio now.

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 March YoY

Source: Consistent Dividend Investor, LLC.

Roth IRA March YoY

Source: Consistent Dividend Investor, LLC.

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

Traditional IRA Dividends

Source: Consistent Dividend Investor, LLC.

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

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 Projections

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.

Here is a table to show how the account balances stack up year-over-year (I previously used a graph but believe the table is more informative).

Account Balances

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.

Traditional IRA - Gain Loss

Source: Consistent Dividend Investor, LLC.

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

Roth IRA - Gain Loss

Source: Consistent Dividend Investor, LLC.

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

  • Traditional IRA - Current gain/loss of $556.74 vs -$298.88 when the February retirement article was written.
  • Roth IRA - Current gain/loss of -$4,057.15 vs -$6,516.98 when the February retirement article was written.

Conclusion

Jane's account continues to plug along and all signs look positive as we see the gain loss continuing to improve even though we are also selling certain positions in order to rebuild cash reserves. Personally, I think that much of the market outside of the field of finance looks fully-valued which means that good deals are getting harder to find. Earnings reports have been both spectacular and awful across a number of sectors which has created some short-term volatility. I recently received some criticism for selling 3M (MMM) stock at around $214/share and was extremely glad that I did before earnings became available.

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), 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), Iron Mountain (NYSE:IRM), Johnson Controls (NYSE:JCI), 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.