The Retirees' Dividend Portfolio - John And Jane's May Taxable Account Update: Monthly Income Record

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Includes: AAPL, ABR, ADM, APD, APLE, BP, BPL, CAH, CLX, CMI, DOV, EAFAX, EMR, EPD, EPR, ET, GIS, HP, HRL, IRM, JCI, LEG, LTC, MIC, MO, MSB, NRZ, O, ORI, PH, PSXP, R, SCHO, SCHP, SCHR, SCHW, SKT, SLB, SO, SPG, SWVXX, T, TLP, TLT, TXN, UTX, VMMXX, VZ, WASH, WLKP, WPC, XOM
by: Matthew Utesch
Summary

The Taxable account generated $1,657.60 of dividends in May of 2019 compared with $1,567.49 of dividends in May of 2018.

Fixed Income holdings added an additional $292.82 of income (in addition to the dividend income of $1,657.60).

We sold BPL at $41.80/share after a buyout offer from IFM Investors. I made the mistake of selling too quick which resulted in the loss of $168.75 for May's distribution.

Six companies in the Taxable Portfolio paid increased dividends during the month of May.

We chose to replace BPL with EPD because it is one of the premier pipeline MLP's in operation with 58 consecutive quarters of distribution growth and 1.5x distribution coverage.

One of the most humbling things I have learned to do in my short 30 years of life is to openly admit when I make a mistake. My reason for doing this is that I believe the fastest way to build trust is by telling the truth even when the outcome doesn't necessarily have a major impact on the person/audience I am speaking to. The obligation to point out my own mistakes is elevated by the fact that my articles are read by investors whose knowledge level varies from amateur to expert.

So what is the mistake I made exactly? It was a simple as selling out of the Buckeye Partners (BPL) position before the dividend ex-date which impacted my clients' May income stream. Some might scoff at this but I believe it is important to call this mistake out because that is the only way to make sure that a "silly" mistake doesn't turn into a big one.

The good news is that John and Jane have their highest-earning month of income since I began helping them with their finances. It also looks like there won't be any higher buyout offers which meant that selling when I did made it possible for John and Jane to capitalize on selling at the share price of $41.80/share which is a premium of $1.16/share over its current price of $40.64/share. With a holding of 225 shares, it reduced the realized loss by $261 (The position was sold at a loss of -$837.63).

The bad news is that if I had given more than two seconds of thought before trading BPL the total monthly income would have risen from $1,657.60 to $1826.35. Ironically, the additional income of $168.75 would have likely come at the expense of the additional $261 (or at least a portion of) gain received from selling when we did.

Realistically, we also need to consider that the buyout price by IFM is $41.50/share which means that if we had held to the point of receiving the dividend we would have been forced to continue holding the shares if we were to maximize the value of each share (after the ex-dividend date).

So what did I learn from all of this? I think my lesson can be summarized in three basic concepts:

  1. Making quick decisions based on instinct is a bad idea. I consider myself to be a very rational person, however, I am still subject to the same impulsive reactions as every other human being. I saw the price of $41.80/share (which was above the offering of $41.50/share) and jumped on the offer because I believed it was as sweet as it was going to get.
  2. Dumb luck was a major factor in preventing this scenario from being worse than it was. It would be ridiculous to expect that my impulsive reaction would have reduced the realized gain/loss by $261 which exceeds the distribution amount of $168.75. Even when we make a mistake there is always the chance that dumb luck comes into play and it's something that we can never truly take into account. Although we expected the stock price to drop after the ex-dividend date, I didn't expect shares to be trading over IFM's price of $41.50.
  3. Take the time to analyze your mistakes. It's important to remember that we are all human and that mistakes will happen from time-to-time. Taking the time to remind yourself of what making a mistake feels like is a humbling experience that should make you better equipped to show empathy towards others when they experience the same thing. Honestly, we need more people to lead by being this type of example instead of taking the "respond like a jerk" approach. Everyone knows there is a huge difference between constructive criticism and criticism and we need to remember that one is useful while the other is likely to build disdain that isn't productive.

Simply put, not every mistake has to result in a significant monetary loss or negative consequences, after all, in this scenario, John and Jane ultimately benefited to the tune of $92.25 (the amount of gain in stock price less the dividend) but that is entirely due to luck and I take no credit for that. Personally, we are happy to see the BPL position sold at such a strong premium because we were beginning to contemplate the sale of the position after a complete loss of faith in management. By selling the position now we were able to reduce the expected loss associated with the BPL position and redirect funds to one of the better known (and run) MLP's available.

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. The two images below are a good example of what I am talking about.

Source: Bankrate.com

Source: Bankrate.com

Losing out on $100 of interest over 6 months in exchange for having more flexibility is something that I have no problem with. Even if short-term rates were to drop I am still more comfortable with the difference in interest earned over this time frame given the current economic conditions.

Other options that have been discussed in the comment section include:

  • Vanguard Money Market Fund (VMMXX) - 2.40% 7-Day Yield
  • Charles Schwab Money Market Fund (SWVXX) - 2.24% 7-Day Yield
  • iShares 20+ Year Treasury Bond ETF (TLT) - 2.77% 30-Day Yield
  • Schwab Intermediate U.S. Treasury ETF (SCHR) - 2.33% 30-Day Yield
  • Schwab Short-Term U.S. Treasury ETF (SCHO) - 2.32% 30-Day Yield
  • Schwab U.S. TIPS ETF (SCHP) - 5.37% 30-Day Yield (Distorted because there were no distributions made from January 2019 until May 2019). TTM Yield is 2.27%.

All of these funds have their advantages and disadvantages, however, VMMXXX (which Schwab doesn't support) and SWVXX represent the most stable investments in terms of share price and distribution. SCHO is also relatively stable in price because it consists of 1 to 3-year bonds.

One of the big benefits that I've not discussed when it comes to certificates through Charles Schwab (SCHW) is that every certificate of deposit I have seen (or purchased) is FDIC insured. Although the money market funds are almost the same exact risk, they are not FDIC backed and could in extreme circumstances lose value while CD's are protected.

At this point, I do have concerns about just how much bonds ETF's like TLT have run up in value and I am reluctant to initiate a position because it is starting to look like there is significantly more potential for downside than there is for upside. Until we begin to see some stability in the bond market we will likely continue using short-term 1-3 month certificates of deposit.

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

Fixed Income - May 2019

Source: Consistent Dividend Investor, LLC.

The current value of John and Jane's Taxable account is $447.5k and the total amount of cash and/or conservative investments (like certificates of deposit) represent a total of $147k of the Taxable account or roughly 33% of the Taxable account. This is currently down from 36% because we have deployed some of these funds to purchase shares in stocks that look extremely attractive.

The following colors were used to represent the following details:

  • Green: Dividend received confirmed (an actual dollar amount).
  • Yellow: Dividend expected to be received but not yet confirmed.
  • 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 $292.82 in the month of May for a total of $1,201.26 of income YTD-2019. Looking at this figure on a YTD basis we can say that the fixed income portfolio has added an average of approximately $240.25 of monthly income in 2019.

Dividend And Distribution Increases

May included a total of six companies that paid increased dividends during the month. Some of these positions also benefited from the purchase of additional shares which also boosted the distribution and dividend income received.

  • Apple (AAPL)
  • Arbor Realty (ABR)
  • Mesabi Trust (MSB)
  • Phillips 66 Partners (PSXP)
  • Tanger Factory Outlets (SKT)
  • Westlake Chemical Partners (WLKP)

Apple - The most recent increase of 5.5% is approximately half of the five-year growth rate of 10.84% that we've been accustomed to seeing from Apple. Additionally, we have seen significantly more volatility in the share price which likely comes from revised iPhone sales ahead of next year's 5G model and US trade tensions with China. Similar to many analysts, I see much of the upside in services. Personally, we agree with the 10-year FastGraphs chart that suggests AAPL's current share price is of $185.22 indicates that the stock is fairly valued.

AAPL FastGraphs Dividend Increase The dividend was increased from $.73/share per quarter to $.77/share per quarter. This represents an increase of 5.5% and a new full-year payout of $3.08/share compared with the previous $2.88/share. This results in a current yield of 1.66% based on a share price of $185.22.

Arbor Realty - ABR still represents one of the riskiest holdings in John and Jane's Taxable account and although the stock has recently seen its price drop from a high of $13.94 in early May, it still carries a more than 51% gain at a cost basis of $8.23/share. With interest rates dropping we may have a ways to go before seeing the stock bottom (lower interest rates mean more loans refinancing from higher to lower rates). As long as the real estate market remains hot we will continue to hold ABR in the portfolio. The P/FFO ratio indicates that the stock is trading at 10.2x Funds From Operations and should continue to expand as interest rates increase.

ABR FastGraphs Dividend Increase The dividend was increased from $.27/share per quarter to $.28/share per quarter. This represents an increase of 3.7% and a new full-year payout of $1.12/share compared with the previous $1.08/share. This results in a current yield of 8.53% based on a share price of $12.43.

Mesabi Trust - MSB pays a variable dividend that is dependent on the volume of iron ore extracted from the Peter Mitchell Mine located near Babbitt, Minnesota. For this reason, I like to compare MSB on a year-over-year basis (Q2-2019 vs Q2-2018) instead of a quarter-over-quarter basis. The stock has been producing above-average dividends compared with most of the last decade as there has been a big increase in the demand for the type of iron ore that comes from the Peter Mitchell Mine.

Chart
Data by YCharts

The dividend was increased from $.45/share (May of 2018) to $.89/share (May of 2019). This represents an increase of 97.8% YoY and I expect that we will see another record-breaking payout in 2019. At a share price of $29.47 and a TTM dividend history of $3.44/share, we arrive at a current yield of 11.78%.

Phillips 66 Partners - PSXP was recently rated as a Buy by Mizuho Securities with a price target of $56/share. This price target is in line with the eight analysts that currently rate the stock as a Buy and whose median price target is $56.25/share. PSXP is one of the newer stocks in John and Jane's Taxable portfolio as it was used to replace Transmontaigne Partners (TLP) after it was acquired by ArcLight Energy @ $41/share. Fortunately, PSXP's shares were on sale when we initiated a position and added to that position on 11/26/2018 and 12/28/20118, respectively.

Chart
Data by YCharts

PSXP's dividend was increased from $.835/share per quarter to $.845/share per quarter. This represents an increase of 1.2% and a new full-year payout of $3.38/share compared with the previous $3.34/share. The quarterly dividend in May 2018 was $.714/share which means that the distribution has grown by 18.3% YoY. This results in a current yield of 6.50% based on a share price of $49.55.

Tanger Factory Outlets - I call SKT "the stock that everyone loves to hate" because (as the nickname suggests) the stock can't catch a break with a short interest of 35% (as of May 15th). It will be interesting to see how this plays out because the real question is whether or not outlet centers can compete in a questionable retail landscape. SKT still generates significant cash flow and a comfortable payout ratio. The stock currently trades at a P/FFO ratio of 6.9x but was as high as 18.1x in mid-2016. Shares have dropped to a point where we are potentially interested in adding to the position given the high reward/moderate risk.

SKT Dividend Increase FastGraphs The dividend was increased from $.35/share per quarter to $.355/share per quarter. This represents an increase of 1.4% and a new full-year payout of $1.42/share compared with the previous $1.40/share. This results in a current yield of 8.65% based on a share price of $16.42.

Westlake Chemical - We purchased an additional 50 shares of WLKP for John and Jane's Taxable portfolio back in March which proved to be excellent timing with the share price jumping from approximately $22/share to nearly $24/share. The most recent increase is the 17th consecutive quarterly increase and WLKP currently comes with distribution coverage of 1.12x.

Chart
Data by YCharts

WLKP's dividend was increased from $.4328/share per quarter to $.4452/share per quarter. This represents an increase of 2.9% and a new full-year payout of $1.78/share compared with the previous $1.73/share. This results in a current yield of 7.45% based on a share price of $23.88.

Positions

The Taxable account currently consists of 43 unique positions as of June 8, 2019. We made a number of small purchases in the month of May that increased the number of shares for existing holdings while also adding Enterprise Production Partners (EPD) as the replacement for Buckeye Partners (BPL). This marks the second position we have sold from the Taxable portfolio YTD-2019.

Realized Gain/Loss YTD-2019 Source: Charles Schwab

We added to quite a few positions during the month of May and because the list is so long (partly due to the fact that transaction sizes were smaller) Here are some of the positions we added to in the month of May:

  • Cummins (CMI) - 10 Shares @ $152.41/share.
  • Hormel Foods (HRL) - 50 Shares @ $38.92/share.
  • Parker-Hannifin (PH) - Multiple purchases in small quantities of 10 shares each purchase. The price per share range between $152.57/share and $174.90/share.

May Income Tracker - 2018 Vs 2019

May 2019 saw income increase by 5.75% 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.

May 2019 Dividend Comparison

Source: Consistent Dividend Investor, LLC.

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

May Dividend Graph 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.

2019 May Dividend Income 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.

2019 May Month End Balance

Source: Consistent Dividend Investor, LLC.

To wrap up May'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.

May Gain-Loss 2019

All figures in the images above were accurate as of market close on 6/6/2019.

Conclusion

My Dad always taught me that it was okay to make mistakes as long as I learned from them (because only stupid people don't learn from their mistakes). Making the same mistake a second time (especially in a short period of time) is a great indicator that an individual hasn't put in the time/effort needed to make a change. I think its also fair to clarify that there is a significant difference between making a mistake and having a difference of opinion. I try to not make mistakes but thankfully my work is read by enough people that these issues are quickly rectified.

As for the Taxable portfolio, John and Jane are thrilled to see a month with such strong dividend income that will give them the freedom they desire to live how they want in retirement.

If we include the fixed income holdings in John and Jane's Taxable Portfolio it results in a total income of $1,950.42 in the month of May. If we exclude the fixed income portion of the income, the Taxable Account is estimated to be generating an average of $1,121.76/month of regular dividend payments (Estimated FY-2019).

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), Cardinal Health (CAH), Clorox (CLX), Cummins (CMI), Dover Corporation (DOV), Eaton Vance Floating-Rate Advantage Fund A (EAFAX), Emerson Electric (EMR), Enterprise Product Partners (EPD), 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.