The Retirees' Dividend Portfolio - John And Jane's April Taxable Account Update: Tariff Wars Create Some Interesting Discounts

by: Matthew Utesch

The Taxable account generated $846.78 of dividends in April of 2019 compared with $620.45 of dividends in April of 2018.

Fixed Income holdings added an additional $228.49 of income.

I am still sticking with short-term CD's while researching the best alternative for protecting capital and generating moderate income.

Two stocks in the portfolio paid increased dividends in the month of April.

We recently added a small position in Parker-Hannifin to the Taxable account.

April was an overall strong month for the dividend growth portfolio in terms of both dividends generated and capital appreciation. A few words tweeted about the slow progress on China trade talks reversed the capital appreciation and has created a number of discounts that are starting to look interesting. Prior to Trump's comments, the market looked overvalued and we were taking gains off the table and reducing the size and/or cost basis of some of our positions.

As I've mentioned before in the past, we rarely sell shares from the Taxable account and we are mainly looking to add to positions when it seems appropriate. The following stocks are currently held in the Taxable account but have reached (or are close to) a price point that seems extremely attractive:

  • Archer Daniels Midland (ADM)
  • Hormel Foods (HRL)
  • Iron Mountain (IRM)
  • Leggett & Platt (LEG)
  • Schlumberger (SLB)

Chart Data by YCharts

For the record, we recently increased the size of ADM's position from 75 shares to 150 shares in Jane's Traditional IRA. Although the share price is up over the last three months it still looks like a potentially attractive position to add to if it drops below $42/share.

Hormel Foods is probably the most attractive stock on this list because it has been trading above its 10-year P/E ratio average of 21.6x for the last six months and recently dropped to a P/E ratio of 21.0x. HRL has increased dividend payments for over 52 consecutive years and maintains a payout ratio of approximately 44%. HRL's 10-year average dividend growth rate comes in at 14.8% and the stock carries 5-year dividend yield average of 1.65% compared with its current yield of 2.13%.

Hormel Foods FastGraphs

The most interesting higher risk/reward play is IRM as it currently sits just above its three-year low of $30.22/share. The sell-off appears to be triggered by poor Q1-2019 results that were down significantly compared with Q1-2018. IRM currently trades at a seven-year low P/E ratio of 10.1x which is well under its average of 12.2x. Investors who are willing to accept some risk in exchange for a nearly 8% yield will find IRM to be an extremely attractive option.

Iron Mountain FastGraphs I expect that the market will continue to shake out a few more discounts before the week is over but the stocks mentioned above already look attractive without more of a discount.

Client Background

John and Jane are two real people who asked me to help manage their retirement portfolios. It is important to understand that I am not a financial advisor and merely provide guidance for my clients' account based on a friendship that goes back several years. I call them my clients for simplicity sake, but I do not charge them for what I do. The only request I made to them was that they allow me to anonymously write about them so that I can potentially help others who are wanting to achieve the same thing.

John retired in January of 2018 and is collecting social security along with other benefits while Jane is still working with aspirations of retiring in the next two years. John and Jane have done an excellent job heading into retirement because they currently have no debt or mandatory monthly obligations other than what is expected (such as property taxes, water, etc.)

John and Jane 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. In a nutshell, what John and Jane want is a portfolio of stocks, bonds, and other investments that will provide a steady stream of growing dividend income that will supplement their income during retirement. At some point, it will be necessary for John and Jane to sell shares from their Traditional IRA, the goal of the Taxable and Roth IRA is that they will never need to sell any shares (unless they want to) because the income generated will prevent them from needing to sell shares as a means of "funding their retirement."

Here are some important characteristics to keep in mind about the Taxable 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. In the past year, I have typically focused on stocks that paid a qualified dividend because they qualify for the lower long-term capital gains tax rate vs. ordinary dividends which are taxed as ordinary income. This has become less important now that 2018 was John's first year of retirement. Changes in the tax brackets also support this approach because the ranges have been expanded and include basically all of their income in the 22% bracket. (Qualified dividends are subject to a 15% tax so the difference has become less-important).

Fixed Income

I have chosen to separate the fixed income figures from the rest of the portfolio in order to avoid confusion which allows those reading to gain a better understanding of how John and Jane's Taxable Portfolio is generating interest and dividend income.

Certificates of deposit (CDs) are the primary recipient of these funds because we are looking for zero volatility and FDIC insured product. Typically I invest only in short-term CDs (1 to 3 months) because the increase 20 bps in yield isn't enough to justify a year-long CD in my mind. Unlike last month, It should also be noted that many of the local CD specials have expired while 1-month CDs on Charles Schwab (SCHW) now offer up to 2.32% APY.

So far, only one fund has been suggested so I would love to hear additional feedback in the comment section if there are any other funds used by my readers' that focus on the safety of principal and is capable of paying a modest monthly distribution.

Funds suggested to me include:

Vanguard Money Market Fund (VMMXX): The current yield is 2.45%, but the problem is it doesn't appear to be supported by Charles Schwab.

The table below represents the income generated by John and Jane's fixed-income investments YTD-2019.

Fixed Income - April Source: Consistent Dividend Investor, LLC.

The amount of money invested in the fixed-income segment is down $5,000 compared to March as we decided to hold more in cash reserves after moving a total of $13,000 ($6,500 each) into Traditional IRAs as the contribution for 2018. The current value of John and Jane's Taxable account was $454,333.31 as of market close on April 30, 2019. This means that approximately 36% of the Taxable account holdings are in cash or extremely conservative investments (in this case, CD's).

The following colors were used to represent the following details:

  • Green: Dividend received confirmed (an actual dollar amount).
  • Red: Security has been sold or has expired and no longer exists.

In total, interest from fixed income provided John and Jane with an additional $228.49 in the month of April. Looking at this figure on a YTD basis we can say that the fixed income portfolio has added an average of approximately $227.00 of monthly income in 2019.

Dividend And Distribution Increases

April was a light month for companies that paid an increased dividend and includes the following two companies:

  • Realty Income (O)
  • WP Carey (WPC)

Realty Income: Is it weird that I never get tired of seeing O's regular quarterly dividend increases? Sure, they are nothing to get overly excited about, but between the dividend and the amount of capital appreciation, it becomes really difficult to hold back a smile. With that said, investors may want to consider trimming this position because it is wildly overvalued in treating at a Price/AFFO of 21.8x compared with its 10 year Price/AFFO average of 18.8x. I believe that O would be trading at fair value if the price were to drop below $62/share. We have already sold a small number of O shares to reduce our cost basis (in John's retirement account) into the low $50 range but will likely sell more if prices reach $75/share or more.

Realty Income FastGraphs

O's dividend was increased from $.2255/share per month to $.226/share per month. This represents an increase of .2% and a new full-year payout of $2.712/share compared with the previous $2.71/share. This results in a current yield of 3.86% based on a share price of $69.96.

WP Carey: WPC continues to exceed analyst estimates when it comes to FFO and AFFO for the last several quarters. Most importantly, management has reaffirmed its 2019 guidance that suggests $4.95-$5.15 AFFO/share which means that the new dividend of $1.032/quarter results in a payout ratio between 80.1% and 83.4%. WPC's price has run up more than I believe is sustainable which is why we sold some shares from John's Traditional IRA. Based on the average ten-year P/AFFO of 12.8x WPC is currently trading at closer to 14.9x. Using an AFFO midpoint of $5.07/share we can determine that WPC would be reasonably valued at approximately $64.90/share.

WP Carey - FastGraphs The dividend was increased from $1.03/share per quarter to $1.032/share per quarter. This represents an increase of .2% and a new full-year payout of $4.128/share compared with the previous $4.12/share. This results in a current yield of 5.21% based on a share price of $78.86.


The Taxable Portfolio in 2018 had 40 different positions and currently includes 43 unique positions as of 5/6/2019. While we did not have any plans to add new positions to the portfolio, we did pull the trigger on Parker-Hannifin (PH) because the stock looks reasonably valued and has an average 10-year dividend growth rate of 12.6%. In April we took advantage of some temporary weakness and added to the following (already existing) positions towards the end of the month:

  • Leggett & Platt (LEG) - 25 shares @ $38.75/share.
  • Ryder System (R) - 25 shares @ $62.14/share.
  • Phillips 66 Partners (PSXP) - 25 shares @ $50.54/share.

April Income Tracker - 2018 Vs 2019

April 2019 saw income increase by 36.5% over the previous year and was partially due to the additional funds invested throughout the year in addition to the regular dividend increases.

Images will explicitly state if they take into consideration the income generated by the Fixed Income holdings.

April YoY Comparison

Source: Consistent Dividend Investor, LLC.

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

April monthly dividend chart

Source: Consistent Dividend Investor, LLC.

Based on the current knowledge I have regarding dividend payments and share count, the following table is a basic prediction of the income we expect the Taxable Portfolio to generate in 2019 compared with the actual results from 2018.

April total annual estimate

Source: Consistent Dividend Investor, LLC.

As a new feature going forward I also want to include account balances to help readers' understand how the size of the portfolio has changed over time. By showing when additional funds were added to the account I hope it will help explain certain changes in income, etc. Please note that this includes the Fixed Income holdings in the total account balance.

April month end balance

Source: Consistent Dividend Investor, LLC.

To wrap up March's assessment I always like to include a gain/loss for each position in the Taxable Portfolio because it is important to consider that some positions will be the gain and others at a loss. If you plan to have your own dividend growth portfolio you will need to learn to live with this volatility because even the highest quality portfolio will be subject to some degree value of fluctuation.

April Gain-Loss

All figures in the images above were accurate as of market close on 5/7/2019.


Remember, the primary reason a dividend investor builds cash reserves is to take advantage of selloffs that occur from swift market reactions like this. ADM and HRL are both excellent examples of stocks that investors should take comfort in when the market is in turmoil. Personally, I think it is important to remind ourselves that there is a lot to be appreciated about a temporarily chaotic market.

If we include the fixed income holdings in John and Jane's Taxable Portfolio it results in a total income of $1,075.27 in the month of April. If we exclude the fixed income portion of the income, the Taxable Account is estimated to be generating an average of $1,117.24/month of regular dividend payments.

What does your dividend growth portfolio look like? I'd love to hear feedback on your personal strategy and potential stocks you think I should consider.

In John and Jane's Taxable account, they are currently long the following mentioned in this article: Apple (AAPL), Arbor Realty (ABR), Archer Daniels Midland (ADM), Air Products & Chemicals (APD), Apple REIT (APLE), BP (BP), Buckeye Partners (BPL), Cardinal Health (CAH), Clorox (CLX), Cummins (CMI), Dover Corporation (DOV), Eaton Vance Floating-Rate Advantage Fund A (EAFAX), Emerson Electric (EMR), EPR Properties (EPR), Energy Transfer (ET), General Mills (GIS), Helmerich & Payne (HP), Hormel (HRL), Iron Mountain (IRM), Johnson Controls (JCI), LTC Properties (LTC), Leggett & Platt (LEG), Macquarie Infrastructure (MIC), Altria (MO), Mesabi Trust (MSB), New Residential (NRZ), Realty Income (O), Old Republic International (ORI), Parker-Hannifin (PH), Phillips 66 Partners (PSXP), Ryder Corporation (R), Tanger Factory Outlet Centers (SKT), Schlumberger (SLB), Southern Corp. (SO), Simon Property Group (SPG), AT&T (T), Texas Instruments (TXN), United Technologies (UTX), Verizon (VZ), Washington Trust (WASH), Westlake Chemical (WLKP), W.P. Carey (WPC), and Exxon Mobil (XOM).

Disclosure: I am/we are long APLE, ET, GIS, T. 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.