The Retiree's Dividend Portfolio - Jane's April Update: Why You Should Consider Canadian Banks

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

Jane's retirement accounts generated a total of $1,972.96 in dividend income for April 2019 vs. $1,291.48 of dividends in April of 2018.

We made a few sales to reduce higher cost shares from select positions, most specifically Bank of America and Intel.

A total of seven companies paid increased dividends during the month of April.

We encourage readers' to further research the Canadian banking system and look at three potential stocks Jane currently holds in her portfolio.

It's hard to top a month like March (my article can be found here) when it produced a massive amount of dividend income and eight companies paid increased dividends. So when April produced even more dividend income and had an additional seven companies that raised their dividend, I couldn't be more ecstatic to do a writeup on the results.

April is one of the months for the Canadian banks in Jane's portfolio to announce their increases and includes the following bank stocks:

  • Bank of Nova Scotia (BNS)
  • Canadian Imperial Bank of Commerce (CM)
  • Toronto-Dominion Bank (TD)

The first two banks on the list increase their dividends twice per year, usually during the months of April and October. TD on the other hand typically pays an increased dividend during the month of April. What should make dividend investors interested in Canadian banks is their history of paying dividends (albeit not always increasing) but consistent nonetheless.

  • BNS has paid an uninterrupted dividend since 1832.
  • CM has paid an uninterrupted dividend since 1868.
  • TD has paid an uninterrupted dividend since 1857.

Chart Data by YCharts

TD has recently outperformed its counterparts since 2017, which has put pressure on its yield even as it continues to push double-digit increases. It also means that BNS and CM are both currently trading at a discount relative to their historical pricing. With that said, TD's most recent earnings report looks more promising than BNS and CM.

Chart Data by YCharts

In addition to the consistency of these banks dividend policies, it is also important to remember that these three banks are included in the top five banks that essentially control/run the Canadian financial market. Many of these banks have focused on international expansion in order to promote growth and diversify away from being wholly dependent on the Canadian market.

Another reason why dividend investors should consider these Canadian banks is that they aren't just "big" by Canadian economy standards, but they are all included in the World's 100 Largest Banks coming in at the following positions:

  • BNS - Ranked as the 45th largest bank in the world by assets.
  • CM - Ranked as the 63rd largest bank in the world by assets.
  • TD - Ranked as the 26th largest bank in the world by assets.

Needless to say, the resiliency of the Canadian banking system is something that dividend investors should be paying attention to. It is also important to mention that these stocks are held in Jane's Traditional or Roth IRA in order to avoid paying Canadian taxes on the dividends (15% for US Residents). In other words, by holding these stocks in a retirement account, a US resident can avoid all Canadian taxes in addition to avoiding US taxes until funds are withdrawn (specifically in the case of a Traditional IRA).

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 April. This includes:

  • Bank of Nova Scotia (BNS)
  • Canadian Imperial Bank of Commerce (CM)
  • Main Street Financial (MAIN)
  • PPL Corporation (PPL)
  • Realty Income (O)
  • Toronto-Dominion Bank (TD)
  • WP Carey (WPC)

**I will not provide a market update for O or WPC because I already addressed this in my Taxable Account article The Retirees' Dividend Portfolio - John And Jane's April Taxable Account Update: Tariff Wars Create Some Interesting Discounts. I will still provide a basic synopsis of the dividend increase.

Bank of Nova Scotia: BNS has seen its stock price drop consistently after it rallied going into the end of March. The goal right now is to continue growing the bank's international operations as a way of diversifying away from its primary market in North America. As of Q1-2019, International Banking makes up 36% of earnings and this has been propelled by gains in market share for the countries of Chile and Peru in particular. At the same time, BNS has exited countries it does not see as profitable dropping from 57 countries to 37 countries. Based on the FastGraphs image below, BNS looks undervalued and is trading close to a 10-year low P/E Ratio of 9.2x (currently at 9.9x).

BNS - FastGraphs

The dividend was increased from $.85 CAD/share per quarter to $.87 CAD/share per quarter. This represents an increase of 2.4% and a new full-year payout of $3.48/share compared with the previous $3.40/share. This results in a current yield of 4.84% based on a share price of $53.08.

Canadian Imperial Bank of Commerce - CM rallied going into the end of February before seeing its stock price plummet by the end of March. CM's primary exposure is to the Canadian market and one of the biggest developments is that Q1-2019 provision for credit losses was $338 million compared with $153 million in Q1-2018. CM remains a large position in Jane's portfolio, but we will not be adding more shares unless the price drops below $75/share or a P/E ratio of around 8x earnings.

CM FastGraphs The dividend was increased from $1.36 CAD/share per quarter to $1.40 CAD/share per quarter. This represents an increase of 2.9% and a new full-year payout of $5.60/ CAD share compared with the previous $5.44/ CAD share. This results in a current yield of 4.96% based on a share price of $82.18.

Main Street Financial - MAIN recently released its Q1-2019 earnings and demonstrated that it's business model is solid by beating analyst estimates and continuing to deliver more dividends on a monthly basis while winding down its special dividend that is paid on a semi-annual basis. Most notable was the increase of 1.3% in NAV for Q1-2019. MAIN's premium to NAV is a topic that is usually used to frame MAIN in a negative way because it is often around 160% of NAV relative to its BDC competition that typically trades between 100-120% of NAV. Right now MAIN is trading just above the 5-year P/E ratio average of 14.9x.

MAIN FastGraphs MAIN's dividend was increased from $.20/share per month to $.205/share per month. This represents an increase of 2.5% and a new full-year payout of $2.46/share compared with the previous $2.40/share. This results in a current yield of 6.1% based on a share price of $40.36.

Realty Income - 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 3.92% based on a share price of $69.27.

PPL Corporation - PPL's primary issue is that it comes with significant exposure to the UK, fortunately, management has been proactive when it comes to foreign currency hedging seems to have alleviated this issue. PPL is a classic example of a stock that isn't very sexy but provides a consistent dividend that is higher than most utilities out there. Based on the current price of $29.79 shares are currently trading at a P/E ratio of 12.4x while it's historical 10-year P/E ratio has averaged 12.6x.

PPL - FastGraphs The dividend was increased from $.41/share per quarter to $.4125/share per quarter. This represents an increase of .6% and a new full-year payout of $1.65/share compared with the previous $1.64/share. This results in a current yield of 5.54% based on a share price of $29.79.

Toronto-Dominion Bank - The last Canadian bank on my list is TD and represents the Canadian bank that has the strongest potential over the course of the next year. TD has grown EPS rather quickly over the last three years, meanwhile, the P/E ratio has continued to fall (along with most other Canadian banks), which means that it could be a true value play.

TD FastGraphs The dividend was increased from $.67 CAD/share per quarter to $.74 CAD/share per quarter. This represents an increase of 10.4% and a new full-year payout of $2.96/ CAD share compared with the previous $2.68/ CAD share. This results in a current yield of 3.78% based on a share price of $55.25.

WP Carey - 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 5.09% based on a share price of $80.73.

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 April.

  • Eaton Corp (ETN) - Purchased 20 Shares @ $83.10/share.
  • 3M (MMM) - Purchased 15 shares @ $180.82/share.
  • Digital Realty Trust (DLR) - Purchased 25 shares @ $114.77/share.
  • Logmein (LOGM) - Purchased 15 shares @ $79.86/share.
  • EastWest Bancorp (EWBC) - Purchased 25 shares @ $49.76/share.
  • KeyCorp Bank (KEY) - Purchased 100 shares @ $16.67/share.
  • Logmein (LOGM) - Purchased 25 shares @ $77.52/share.
  • British American Tobacco (BTI) - purchased 25 shares @ 40.71/share

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

  • Apple, Inc. (AAPL) - Sold 20 shares @ $203.83/share.
  • 3M (NYSE:MMM) - Sold 20 shares @ $217.21/share.
  • Logmein (LOGM) - Sold 25 shares @ $83.97/share.

Traditional Gains Source: Charles Schwab - Traditional IRA

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

  • Bank of America (BAC) - Purchased 50 shares @ $29.09/share.
  • US Bancorp Preferred Series H (USB.PH) - Purchased 50 shares @$19.28/share.

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

  • Bank of America (BAC) - Sold 50 shares @ $30.17/share.
  • Intel Corp - (INTC) - Sold 75 shares @ $56.35/share.

Roth Gains As you can see the sale of BAC and INTC happened at the best time possible and I have recently added back to these positions again in the month of May now that their stocks are both reasonably discounted.

April 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

Source: Consistent Dividend Investor, LLC.

Roth IRA Source: Consistent Dividend Investor, LLC.

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

Traditional IRA Graph Source: Consistent Dividend Investor, LLC.

Roth IRA 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 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)

Month End Balance

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 worsened month-over-month when we compare the current market value to what it was at the end of March.

  • Traditional IRA - Current gain/loss of -$5,545.70 vs $556.74 when the March retirement article was written.
  • Roth IRA - Current gain/loss of -$7,060.70 vs -$4,057.15 when the March retirement article was written.

Conclusion

Market turbulence has increased and we have taken the opportunity to add shares/rebuild positions in companies like 3M (MMM) over the last few days. Cash reserves have been drawn down in Jane's account while cash reserves in John's account (my next article) have increased because we have sold partial positions in some REITs, which have benefitted from the tariff battle with China. We have begun to see discounts in stocks that look attractive and we plan to add to these positions with the modest cash reserves Jane has established.

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), KeyBank (KEY), 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.