The Retiree's Dividend Portfolio - John's March Update - Let Your Dividends Do The Work

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Includes: APLE, ARESF, BA, BBT, BF.B, BML.PL, BP, BRX, CDUAF, CLDT, CONE, CVS, CVX, D, DLR.PJ, DUK, EAFAX, EPR, EPR.PG, GD, HTA, IRM, JPM, KIM.PL, KMI, KO, KRG, LTC, MAIN, MO, O, OMI, OXY, OZK, PACW, PEGI, PEP, PK, PONAX, POR, RF, SCE.PD, STAG, T, TD, TROW, UMPQ, VLO, VLY, VTR, WBA, WELL, WPC, WRK
by: Matthew Utesch
Summary

John's retirement accounts generated a total of $1,790.15 in dividend income for March 2019 vs. $927.78 of dividends in March of 2018.

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

John's account balances continue to grow and he is closing in on his portfolio producing $20,000/year of dividend income from his retirement account.

We continue to actively trade with the sole purpose of reducing some of the larger positions costs basis whenever the market presents an opportunity.

When I write these articles I do my best to avoid politics because I believe nothing ruins a positive finance article like tainting it with the division that comes from politics. With that said, I couldn't help but think about how the steady nature of John's retirement portfolio and the dividends it produces stands in direct contrast to the crazy ideas and grandstanding our politicians engage in.

I would have to imagine that most people who pay attention to everything that happens in politics on a daily basis have a higher tendency to go insane from the constant negativity. Ironically, poor habits when it comes to finance can have almost the exact same effect.

During this last week, I read an interesting article that talked about how people who struggle to pay their bills results in a lower IQ (roughly 13 points). In many ways, I can say that I'm not surprised but at the same time, the concept of money issues has for the most part been foreign to me because my parents drilled the concept of saving into my head along with a clear understanding of the difference between a want and a need.

What makes John's portfolio unique is the lack of volatility and the consistency of dividends that gives him peace of mind. When I first met John he would regularly talk about his retirement portfolio and how scared he was about the idea of meeting his retirement needs through an almost exclusively mutual fund-based retirement. After I presented him and his wife with a few mock retirement portfolios John began to understand that his frustration stems from the concept of selling shares to meet his retirement needs versus creating a portfolio with the primary purpose of generating income. In John's mind, we flipped the equation when it comes to explaining how his retirement income will be generated.

  • Mutual Fund-Based Retirement Portfolio = Capital Gains + Distributions/Dividends
  • Dividend-Based Retirement Portfolio = Distributions/Dividends + Capital Gains

During the month of March, John and his wife Jane generated a total of $4,404.25 in distribution/dividend income plus an additional $171.47 from interest earned on short-term CD's. Personally, I don't think that John was down 13 IQ Points before I began helping him but if we assume the stress was impacting his cognitive performance then the steady paychecks leading to an improved quality of life was well worth the effort.

March Articles

Included below are the links for those who are interested in reading the rest of John and Jane's story for March.

The Retirees' Dividend Portfolio - John And Jane's March Taxable Account Update - Tax Season

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

I want to apologize for the delay in this article as I continue to balance my full-time job, summer home renovation projects, and writing on SeekingAlpha. For my readers' who enjoy home renovation projects, I will make sure to include a few before and after pictures when I finish!

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

John had a total of four companies that paid an increased dividend during the month of March. Since none of these companies were included in the Taxable account or in his wife's retirement accounts I will provide a summary of recent events and provide information concerning the dividend increase made by each company. The four companies that increased their dividend include:

Canadian Utilities - We added CDUAF back in October when the stock price dipped into the $22 range and pushed the yield above 5%. Since then, we have been happy with the stock's performance when it reached its 52-week-high. CDUAF qualifies as a Canadian Dividend All-Star and has the longest streak of continuous dividend increases with 47 consecutive increases.

CDUAF - FastGraphs The dividend was increased from $.3933 CAD/share per quarter to $.4227 CAD/share per quarter. This represents an increase of 7.5% and a new full-year payout of $1.71 CAD/share compared with the previous full-year payout of $1.57 CAD/share (Approximately $1.25 USD/share annually based on current exchange rates). This results in a current yield of 4.60% based on a share price of $27.47.

Chevron Corporation - Things have gotten really interesting at CVX now that it looks like Occidental Petroleum (OXY) is going to win the bid for Anadarko (APC). Only time will tell if this is really the case because every day it seems like there is a new development whether it be Carl Icahn building a position or T. Rowe Price at 2.8% owner of OXY opposing the Anadarko bid. Excluding this drama, we are fond of Chevron's operations and see upside at its current price.

Chart Data by YCharts

The dividend was increased from $1.12/share per quarter to $1.19/share per quarter. This represents an increase of 6.2% and a new full-year payout of $4.76/share compared with the previous $4.48/share. This results in a current yield of 4.09% based on a share price of $117.27.

Valero Energy Corporation - VLO is the largest independent refiner in the United States and has seen major growth over the last few years. Since 2011, VLO has focused on reducing share count (570 million shares in 2011 reduced to 428 million shares by the end of 2018) while at the same time increasing the dividend from $.30/share in 2011 to $3.20/share by the end of 2018 (now $3.60/share).

Chart Data by YCharts

The dividend was increased from $.80/share per quarter to $.90/share per quarter. This represents an increase of 12.5% and a new full-year payout of $3.60/share compared with the previous $3.20/share. This results in a current yield of 4.08% based on a share price of $88.25.

T.Rowe Price - On April 24th, TROW announced Q1-2019 earnings which sought assets under management (AUM) increased by 12% quarter-over-quarter and blew out earnings expectations at $2.09/share compared with the average analyst estimate of $1.63/share (this is also a substantial improvement over $1.77/share in Q1-2018). One of the most appealing aspects of TROW is that the company remains debt-free. Even if we use a slightly slower pace of growth (TROW's 10-YR P/E ratio average is 17.6x) and at $105.26/share this puts the company at a P/E ratio of 14.2x. Assuming FY-2019 estimated earnings of $7.71/share we can say that TROW would be fully valued at $135.70/share on a forward basis if it were to move back in line with its historical P/E ratio of 17.6x (represented by the blue line below).

Trowe Price FastGraphs The dividend was increased from $.70/share per quarter to $.76/share per quarter. This represents an increase of 8.6% and a new full-year payout of $3.04/share compared with the previous $2.80/share. This results in a current yield of 2.89% based on a share price of $105.26.

Retirement Account Positions

There are currently 22 different positions in John's Roth IRA and 33 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/or are also held in the Taxable portfolio.

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

  • Regions Financial (RF) - 50 shares @ $14.05/share.
  • Chevron Corp (CVX) - 25 shares @ $122.76/share.
  • PacWest Bancorp (PACW) - 50 shares @ $35.92/share.
  • Boeing (BA) - 10 shares @ $375.81/share.
  • Stag Industrial (STAG) - 100 shares @ $28.05/share.
  • Boeing - 10 shares @ $395.34/share.
  • Artis Real Estate (OTCPK:ARESF) - 100 shares @ $8.32/share.
  • Main Street Capital (MAIN) - 50 shares @ $37.24/share.
  • CVS Health Corp (CVS) - 50 shares @ $54.23/share.
  • Artis Real Estate - 100 shares @ $8.37/share.

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

  • Brown Forman (BF.B) - 80 shares @ $49.82/share.

Traditional - Realized Gains

The main reason why we sold BF.B is that the dividend yield is minimal and we expect that dividend increases will be small/modest going forward. We accepted the break-even point on these shares and reinvested the proceeds in a number of stocks yielding approximately 4% or higher.

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

  • Bank OZK (OZK) - 50 shares @ $27.72/share.
  • BB&T Corp (BBT) - 25 shares @ $44.77/share.
  • Walgreens (WBA) - 75 shares @ $62.96/share.
  • Westrock (WRK) - 100 shares @ $38.03/share.
  • General Dynamics (GD) - 15 shares @ $169.82/share.

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

  • Portland General Electric (POR) - 100 shares @ $51.69/share.
  • Coca-Cola (KO) - 100 shares @ $45.84/share.
  • Chevron Corp (CVX) - 50 shares @ $120.03/share.

Roth IRA - Realized Gains John originally owned 50 shares of CVX in his Roth IRA and another 50 shares in his Traditional IRA. We ultimately decided to sell the shares in his Roth to consolidate his position. The sale of POR was tough, but the stocks rapid climb to a new all-time high and a sub 3% dividend yield was enough of a reason to close this position (although we will definitely consider adding it again if shares drop below $45).

POR - FastGraphs Lastly, we eliminated the position in Coca-Cola because we wanted to condense the portfolio and build an additional cash reserve from which we can purchase additional stocks. KO appears to be fully valued at present (and in my opinion over-valued) with a current P/E ratio of 23.3x which is well above its 10-year average P/E ratio of 20.8x.

KO - FastGraphs

March Income Tracker - 2018 Vs. 2019

March has consistently produced a healthy chunk dividend income but John more than doubled the amount of dividend income produced in March 2019 when compared with the results from March 2018. It is still worth noting that some of this year-over-year change was the result of having not fully deployed all of John's funds in 2018 or that recent share purchases were passed the ex-dividend date. We expect this variance to continue to diminish and eventually disappear over the next 3-4 months.

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.

Traditiona IRA Dividends - 2018 vs 2019

Source: Consistent Dividend Investor, LLC

Roth IRA Dividends - 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.

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 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.

Retirement Dividend Projections

Source: Consistent Dividend Investor, LLC

When it comes to 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 IRA - Gain Loss

Source: Consistent Dividend Investor, LLC

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

Roth IRA - Gain Loss

Source: Consistent Dividend Investor, LLC

It should be noted that the dividend total in the far right column of both the Traditional and Roth IRA isn't always accurate because these accounts are more regularly traded and I have been guilty of forgetting to update the dividend when additional shares are added/sold. The Gain/Loss is exact and represents prices from market close on May 3rd.

Cash reserves have remained strong even as we made a number of purchases in the Traditional IRA. We plan to maintain or increase these cash levels as long as the market continues to look fully-valued.

Lastly, I recently created a table to demonstrate how the account balances have changed on each of the retirement accounts. The balances used are representative of the month-end account balance that shows up on the monthly statement.

Month End Balance History

Source: Consistent Dividend Investor, LLC

We are pleased to see that the accounts have increased over time and now sit at all-time highs. **For the record, the increase from February to March in the Traditional IRA balance is partially due to the $6,500 contribution for the 2018 tax season. Outside of this, the remaining growth has been entirely organic.

Conclusion

One of the most interesting things to observe is the difference in account balances between John and his wife Jane. As of the market close on May 3, 2019, the total balance in John's retirement accounts stood at $437,905.88 compared with his wife Jane's retirement account balance of $437,328.56. Ironically, John's account has typically trailed his wife Jane's by approximately $5000.

John's retirement account exhibits less volatility in total value intends to slowly but surely climb. Meanwhile, Jane's account has a tendency to make more rapid swings (both up and down) and I believe that this has a lot to do with John's heavy reliance on REITs and utilities.

The most important thing is that we continue to see the building of wealth and solidifying positions that have become the core of John's portfolio. We continue to actively trade in the retirement accounts with our primary focus being on reducing the average cost per share whenever possible. Outside of this, we only sell shares when they appear to be overvalued or they no longer represent the kind of investment we want in John's retirement portfolio.

Based on the current forecast/model, I believe that John will be averaging just under $1,652/month from these two retirement accounts for an annual dividend income of around $19,840.

In John's Traditional and Roth IRAs, he is currently long the following mentioned in this article: Apple REIT (APLE), Artis Real Estate Trust (OTCPK:ARESF), Boeing (BA), BB&T (BBT), Bank of America Preferred Series L (BML.PL), British Petroleum (BP), Brixmor Property Group (BRX), Canadian Utilities (OTCPK:CDUAF), Chatham Lodging Trust (CLDT), CVS Health Corporation (CVS), 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), General Dynamics (GD), Healthcare Trust of America (HTA), Iron Mountain (IRM), JPMorgan Chase (JPM), Kimco Preferred Series L (KIM.PL), Kinder Morgan (KMI), Kite Realty Group (KRG), LTC Properties (LTC), Main Street Capital (MAIN), Altria (MO), Realty Income (O), Owens & Minor (OMI), Occidental Petroleum Corp. (OXY), Bank OZK (OZK), PacWest Bancorp (PACW), Pattern Energy (PEGI), PepsiCo (PEP), Park Hotels & Resorts (PK), PIMCO Income Fund Class A (PONAX), Regions Financial (RF), South California Edison Preferred Series D (SCE.PD), STAG Realty (STAG), AT&T (T), Toronto-Dominion Bank (TD), T. Rowe Price (TROW), Valero (VLO), Valley National Bancorp (VLY), Umpqua Bank (UMPQ), Ventas (VTR), Walgreens (WBA), Welltower (WELL), Westrock (WRK), and W.P. Carey (WPC).

Disclosure: I am/we are long T, MAIN, 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.

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.