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The Retiree's Dividend Portfolio - Jane's May Update: Women And The Challenge Of Retirement

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Includes: ABBV, ADM, BAC, BNS, BP, BTI, CM, CMI, CTL, DLR, EAFAX, EMRAF, ENB, ETN, EWBC, GILD, GIS, GLOP.PC, HON, IBM, 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 $1,149.58 in dividend income for May 2019 vs. $839.22 of dividends in May of 2018.

We have begun to cautiously buy shares that look undervalued including BAC and NTAP.

A total of four companies paid increased dividends during the month of May.

Fewer women save for retirement compared with men, and even when they do, they are not contributing enough to build a well-funded retirement nest egg.

There are a number of challenges women face regarding retirement and we examine how Jane's portfolio stands up to these challenges.

Considering the Taxable account saw its highest month of dividend income ever, it can be a little depressing to see such a mediocre month of dividends in Jane's retirement accounts. To be fair, Jane's assets heavily favor companies that paid their dividends in April or June and therefore make the months of February, May, August, and November the weakest months of the year. Fortunately, Jane and her husband John have plenty of diversified income streams that they do not need to live on a month-to-month basis like many Americans.

I wanted to start this article by discussing the reality of retirement, and even more specifically, how it can impact women. The purpose of writing this introduction is to discuss the ugly truth of retirement, most specifically, how it can have a disproportionate impact on women due to the fact that they, on average, live longer than men do.

Let's start by acknowledging that the average American does not save anywhere close to the amount of money needed to retire on. According to a study by Ramsey Solutions in 2016, 58% of Americans are actively saving for the future and only 1 out of 10 Americans are saving 15% or more of their income.

Where these numbers get extra scary is when we break it down by gender because women were more than twice as likely to have zero dollars saved as men were. Here are a few statistics from the same study by Ramsey Solutions that demonstrate how severe the disparity is between men and women:

  • "More than three-quarters of men are currently saving for retirement compared to 60% of women."
  • What amplifies the severity of the first bullet point is the fact that 37% of women are currently saving between 1-9% of their income while 36% of men are saving 10% or more.

Another thing that gets overlooked is how even a married woman can be at risk for loss of income depending on the pension plan chosen by her spouse. Retirees often view the pension system as a guaranteed source of income that cannot fail, but even if we exclude the potential for pensions filing for bankruptcy, spouses could potentially lose that income stream in the event that their spouse dies. It boils down to two options:

  • Single Life Benefit - Monthly payments based on a retiree's expected lifetime (meaning that they stop when the individual dies).
  • Joint and Survivor Benefit - Monthly payments based on your lifetime but includes a rider that states what percentage of your benefit will continue to be received by your spouse.

The primary issue I have seen from retirees I have worked with when I was a loan officer is that they would choose the Single Life Benefit at retirement because it typically offers more monthly income than if they were to choose a Joint and Survivor Benefit. Even in the case of the Joint and Survivor Benefit, retirees should have a clear understanding that the amount of income their surviving spouse will receive is will end up being a percent of what the retiree was receiving before they passed away.

For all of these reasons, I have come to despise pension plans because I don't see this as security at all. When we consider the amount of money contributed to these funds, it makes me cringe.

  1. Public employees in California paid an average of 12% into their own retirement while California teachers contribute 8%.
  2. Money paid-in is anything but guaranteed and if the retiree dies soon enough they may end up receiving a fraction of what was originally contributed.
  3. If the pensioner dies before they are able to retire, the spouse may have the option of receiving a lump sum or a bridge pension that will pay benefits to the surviving spouse (usually until the now deceased pensioner would have turned 65 years-old).

So what if investors took the time to educate themselves and put the same type of funding towards their own retirement? Let's consider Jane's situation.

Jane has never had an employer-sponsored 401(k) or pension but she has always tried to contribute the maximum amount to a Traditional IRA or Roth IRA almost every year.

  • As of May 31st, her total balance in the retirement accounts was just under $410,000 which generated an average monthly income of $1,510/month.
  • Jane is likely to take Social Security early, which will result in a reduced benefit of around $1,500/month.
  • The Taxable account generates an average monthly income of $1,120.
  • In total, Jane will have access to roughly $4,130/month of recurring income (which excludes her husband's retirement assets/income).

The bullet points below include her husband John's assets:

  • If her husband passes away before her, Jane will receive his social security benefit of $2,200/month instead of the estimated $1,500/month.
  • John's retirement assets in his Traditional and Roth IRA are currently valued at $434,500 and generate a monthly average income of $1,625/mo.
  • This means that Jane would be generating an additional $2,325/month of income in the event that John were to pass away, which would bring her total monthly income stream up to an average before-tax income of $6,455/month.

In summary, Jane is doing significantly better than the average woman based on the metrics discussed above. I think it is extremely important to understand that Boomer-Aged women are more likely to be impacted by inadequate retirement savings because many of them held more traditional roles (like raising a family) or did not have the education necessary to work a job with strong retirement benefits.

I found this exercise to be especially helpful as a way to understand that it's not enough to have retirement assets/income but to have the right mix that accounts for as many of the unseen circumstances that can have a serious impact on one's retirement.

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. RMDs 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 game plan.
  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 May. This includes:

  • East West Bancorp (EWBC)
  • Laurentian Bank of Canada (OTCPK:LRCDF)
  • Mesabi Trust (MSB)
  • Royal Bank of Canada (RY)

**I will not provide a market update for MSB because I already addressed this in my Taxable Account article The Retirees' Dividend Portfolio - John And Jane's May Taxable Account Update: Monthly Income Record. I will still provide a basic synopsis of the dividend increase.

East West Bancorp: I recently wrote an article on EWBC titled East West Bancorp: A Steady Fed Funds Rate Is A Recipe For Continued Net Interest Margin Improvement where I explained that the net interest margin (NIM) has continued to expand even though most banks have seen a decline in this metric. With the Fed maintaining or even cutting the rate suggest that EWBC should be able to continue growing its NIM which means continued growth of net interest income. We recently added to Jane's holdings as I believe the fears regarding China and the economic slowdown will have little impact on EWBC's bottom line. Over the last 10 years, EWBC has shown an average P/E ratio of 14.9x but is currently trading at a P/E ratio of 8.9x. Based on the information available in FastGraphs the P/E ratio has only been lower during the financial crisis. Personally, I see a fair value of $60/share to be extremely reasonable (approximately 12x P/E Ratio) which goes along with the average target price of $60.75 according to the 13 analysts ratings:

  • Buy - 8
  • Outperform - 3
  • Hold - 2

EWBC - FastGraphs The dividend was increased from $.23/share per quarter to $.275/share per quarter. This represents an increase of 19.6% and a new full-year payout of $1.10/share compared with the previous $.92/share. This results in a current yield of 2.51% based on a share price of $43.76.

Laurentian Bank of Canada: The approval of the agreement with its unionized workers in Q2-2019 is expected to reduce uncertainty and benefit earnings going forward. LRCDF is also making large investments in its digital platform and reducing its headcount that is expected to bring millions of dollars in savings annually starting sometime in the next 12 months. These recent developments all suggest a positive trajectory for LRCDF and the market seems to agree. With a cost basis just under $30/share, we plan to continue holding LRCDF and potentially adding on any dips under $30.

Chart Data by YCharts

The dividend was increased from $.65 CAD/share per quarter to $.66 CAD/share per quarter. This represents an increase of 1.5% and a new full-year payout of $2.64/ CAD share compared with the previous $2.60/ CAD share. This results in a current yield of 5.89% based on a share price of $33.67.

Mesabi Trust: We measure the dividend increase with the previous year and quarter. 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 $29.53 and a TTM dividend history of $3.44/share, we arrive at a current yield of 11.65%.

Royal Bank of Canada: RY is about is fairly valued as a big stock can be in this current economic environment. Although the bank missed the average analyst estimate its EPS growth of 6% Y/Y is quite strong given the uncertainty in the financial environment. While many banks have been struggling to gain low-cost deposits RY saw deposit growth of 9% across the business and personal accounts resulting in the addition of $30 billion in deposits over the last 12 months. It is also worth noting that RY typically raises its dividend during the months of May and November. This means that the most recent increase represents approximately half of the total increase for 2019. RY is just a solid performer and we will always consider adding to this position at the right price (right now I would like to see it drop below $70/share before adding shares will be considered).

RY - FastGraphs

The dividend was increased from $.98 CAD/share per quarter to $1.02 CAD/share per quarter. This represents an increase of 4.1% and a new full-year payout of $4.08/ CAD share compared with the previous $3.92/ CAD share. This results in a current yield of 4.0% based on a share price of $77.27.

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 May.

  • EWBC - Purchased 25 Shares @ $42.39/share.
  • EWBC - Purchased 25 Shares @ $47.23/share.
  • EWBC - Purchased 25 Shares @ $46.71/share.
  • 3M (MMM) - Purchased 15 Shares @ $167.12/share.
  • MMM - Purchased 10 Shares @ $175.90/share.
  • MMM - Purchased 10 Shares @ $179.45/share.
  • LogMein (LOGM) - Purchased 35 Shares @ $75.83/share.

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

  • EWBC - Sold 25 Shares @ $52.13/share.

May Traditional Realized Gains Source: Charles Schwab - Traditional IRA

Roth IRA: The following stocks were added in the Roth IRA during the month of May.

  • NetApp (NTAP) - Purchased 50 Shares @ $58.67/share.
  • Bank of America (BAC) - Purchased 50 Shares @ $28.31/share.

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

  • Johnson Controls (JCI) - Sold 50 Shares @ $38.93/share.

May Roth Realized Gains Source: Charles Schwab - Roth IRA

May Income Tracker - 2018 Vs. 2019

It was unfortunate to see the total income generated in the Roth IRA decreased during the month of May when comparing 2018 with 2019. As shown by the tables below, the primary reason for this discrepancy is that there were a number of stocks sold in the Roth IRA that paid dividends during the month of May and accounted for over 40% of the $397.60 of dividends received in the Roth IRA during May 2018. Excluding these one time items, dividend income for the month of May saw a rather large increase in recurring dividend income of $350.67 (May 2019) compared with $233.10 (May 2018).

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.

May - traditional Ira dividends received Source: Consistent Dividend Investor, LLC.

May - Roth IRA dividends received Source: Consistent Dividend Investor, LLC.

Here is a graphical illustration of the dividends received on a monthly basis for the Traditional and Roth IRAs.

Traditional IRA monthly dividends received Source: Consistent Dividend Investor, LLC.

Roth IRA monthly dividends received 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 account dividend 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)

Retirement account balances - May

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. The market value and cost basis below is accurate as of the market close on June 14.

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

Traditional IRA - May Gain-Loss

Source: Consistent Dividend Investor, LLC.

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

Roth IRA - May Gain-Loss

Source: Consistent Dividend Investor, LLC.

The Gain/Loss associated with both accounts worsened slightly month-over-month when we compare the current market value to what it was at the end of April.

  • Traditional IRA - Current gain/loss of $-6,723.67 vs -$5,545.70 when the April retirement article was written.
  • Roth IRA - Current gain/loss of $-8,294.73 vs -$7,060.70 when the April retirement article was written.

Conclusion

The month of May was rather lackluster but the dividend income kept rolling in which is why we firmly believe in the power of dividend growth investing. May presented a number of opportunities to purchase attractively priced stock while selling some high-cost shares of EWBC and JCI that were able to reduce the cost basis of those positions.

With more women entering the workforce, and in many cases, displacing men as the primary income earners in a household, I only expect these statistics to continue improving. The reality is that the lack of retirement savings is something that plagues both men and women as we continue to move away from pension-based retirement programs and into 401(k)s, Traditional IRAs, and Roth IRAs.

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.