The Retiree's Dividend Portfolio - John's May Update: When It Becomes Hard To Find A Good Deal

by: Matthew Utesch

John's retirement accounts generated a total of $1,115.93 in dividend income for May 2019 vs. $908.43 of dividends in May of 2018.

Only Kinder Morgan paid an increased dividend during the month of May.

John's more conservative investments has helped the account perform better than the overall market due to a heavy concentration in utilities and REITs.

Preferred shares have seen a significant uptick in their volume now that the Fed has signaled their desire for a more moderate policy towards interest rates.

John's Roth IRA has a cash balance over $18,000 and I have included some of the most interesting/appealing plays below.

In last month's article regarding John's retirement accounts, The Retiree's Dividend Portfolio - John's April Update: Focus On The Blended Yield, I mentioned that I was extremely interested in Valero Energy (VLO) and Parker Hannifin (PH) as two potential candidates worth increasing John's exposure to. The VLO position was increased to a total of 150 shares but we ultimately chose to not add any shares of PH.

With a new month upon us and a stock market that has rallied (at least in some regards) I wanted to review my watchlist to see what other candidates might be worth adding to John's portfolio. VLO and PH are still attractive but they have bumped off of 52-week-lows.

Chart Data by YCharts

With decently-sized holdings already concentrated in these two stocks, I wanted to see if there was anything else out there that might be worth considering for John's retirement portfolio. My primary goal is to identify beaten-down stocks that have defensive characteristics in a poor economic environment.

  1. Conagra (CAG)
  2. Alliance Data Systems (ADS)
  3. Eaton Vance (EV)

Over the last three years, only EV's stock price has moved higher than where it initially began.

Chart Data by YCharts

All three stocks are also currently trading well under their TTM historical P/E ratios.

Chart Data by YCharts

Upon further research, ADS is the least safe option of the group even though it appears to have significantly more upside if management can convey that its earnings will remain strong especially in the face of increasing credit card charge-off and delinquency rates. Although charge-offs declined slightly in May (compared with April) the delinquency rate increased while Synchrony (SYF) and Capital One Financial (COF) saw a steady decline in overall delinquencies. Simply put, ADS is trading at a P/E ratio of 7.9 because it has a high-risk credit card portfolio.

Credit card delinquency and charge-off Source: Seeking Alpha - May Credit Card Charge-Off/Delinquency Rates

This leaves CAG and EV as the two companies that are of particular interest. CAG's appeal comes from its position in the food industry Part of the issue with CAG's P/E ratio is that it appears to be overstated. If we use the TTM earnings of $2.24/share we arrive at a P/E ratio of 12.9x. The forward P/E ratio for 2019 is just over 14x based on mean estimated earnings of $2.06/share from 15 analysts. One recent article on CAG cites a Trailing P/E ratio of 21x according to Yahoo! Finance which I find inaccurate based on the numbers I cited above from data sources like Charles Schwab, Seeking Alpha, and FastGraphs.

CAG - FastGraphs Unfortunately, its CAG isn't the screaming deal it appears to be at first glance which has more to do with the fact that its share price exceeded the average 10-year P/E ratio of 12.8x for most of 2015, 2016, 2017 and 2018. Currently, CAG is trading at what I would consider being fair value.

This leaves EV as the one stock that I might potentially consider adding to John's retirement portfolio. FastGraphs shows that the stock was recently trading at a P/E ratio of 10.9x which is the lowest P/E ratio of the last 10 years and well under the 10-year average of 16.2x.

Eaton Vance - FastGraphs Other reasons why I find EV attractive:

  • 37 years of consecutive dividend increases.
  • Current payout ratio of 43.4%.
  • A five-year dividend growth rate of 15.6%.

The only issue I have with my research on EV is that it is expecting to see decelerating EPS growth which means that the dividend growth rate will likely be less than its five-year average of 15.6%. While the potential for this slow down in earnings is real, I expect that EV will continue to prosper. While I will be considering EV as a stock to add to John's portfolio I don't expect to be adding it any time soon because everything is looking increasingly expensive given the recent market rally.

What do you all see out there in terms of deals? Is there anything that is missing from the portfolio that I should be considering?

May Articles

For those of you who were interested in why some of my articles have been delayed, I have some before and after pictures of my house. I typically spend 3-4 hours every day after work and at least 8-12 hours on the weekend. I estimate that I have completed approximately 25% of the work necessary to finish installing new siding and roofing my home before summer is over. The first picture is what I started with (I tore out the old brick planter boxes and built new ones shown in the photo below).

Home Improvement - Before

Home Improvement - Front

Home Improvement - East Side Of House

Home Improvement - Dump Run

In short, I want to thank everyone who has subscribed and continues to read/comment on my articles even though they haven't always been consistently published at the same times each month. After I finished the outside of my house I will of renovated every last aspect of my property, at which time, I plan to be much more active on SeekingAlpha.

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 $264k John would be required to take approximately $9,600 if he was at the age where he needs to begin satisfying 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 five companies that paid an increased dividend during the month of May. Kinder Morgan (KMI) was the only company in John's portfolio that paid an increased dividend during the month of May.

Kinder Morgan - It can be difficult to build a strong reputation primarily because a good reputation is typically destroyed at a faster pace than it can be built. KMI is a great example of a company that investors' couldn't get enough of until it came to the point where oil prices started crashing in the same investors couldn't get rid of the shares fast enough. KMI has demonstrated consistency including a recent upgrade from Fitch to BBB from BBB- including an outlook of Stable going forward. The recent increase from $.20/share per quarter to $.25/share per quarter indicates that KMI is on the right path to generate increased earnings and rewarding shareholders in the process.

Chart Data by YCharts

The dividend was increased from $.20/share per quarter to $.25/share per quarter. This represents an increase of 25% and a new full-year payout of $1.00/share compared with the previous $.80/share. This results in a current yield of 4.80% based on a share price of $20.80.

Retirement Account Positions

There are currently 23 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 May.

  • Valero Energy (VLO) - 40 Shares @ $70.29/share.
  • Valero Energy (VLO) - 20 Shares @ $75.88/share.
  • Occidental Petroleum (OXY) - 20 Shares @ $54.09/share.
  • Intel (INTC) - 50 Shares @ $45.38/share.
  • Valero Energy (VLO) - 10 Shares @ $82.20/share.
  • Valero Energy (VLO) - 15 Shares @ $83.55/share.

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

  • Pattern Energy (PEGI) - 100 Shares @ $20.87/share.
  • CyrusOne (CONE) - 50 Shares @ $60.00/share.

Traditional IRA - May realized gains Source: Charles Schwab

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

  • Las Vegas Sands (LVS) - 25 Shares @ $59.01/share.
  • Las Vegas Sands (LVS) - 25 Shares @ $58.45/share.

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

  • Ventas (VTR) - 50 Shares @ $64.50/share.
  • Welltower (WELL) - 50 Shares @ $79.65/share.

Roth IRA - May realized gains Source: Charles Schwab

Shares of CONE, VTR, and WELL were all sold to help lock in gains as all three of these positions represent a sizable amount of John's retirement portfolio. VTR shares were also sold because it reduces the cost basis for the remaining position back down to the $57/share range. When it comes to these three companies we will be adding to the portfolio on any price weakness.

We sold the position in PEGI because it is a high-risk position that I haven't had time to adequately cover. This position was never intended to be a long-term hold and so the decision to sell was an easy one because the goal is to improve the overall quality of the positions in John's retirement portfolio. It definitely wasn't the best time to sell (the stock currently trades for $22.99/share as of June 19) but I feel more comfortable removing it from the portfolio.

May Income Tracker - 2018 Vs. 2019

Income during the month of February, May, August, and November have always been on the light side and although total income between the Traditional and Roth IRAs was up year-over-year it was still disappointing to see a drop in May income from $503.76 in 2018 to $432.03 in 2019. To be fair, May of 2018 was one of the highest months of non-recurring dividends received (primarily because we sold out of six positions that collected dividends during the month of May for a grand total of $165.25 of additional dividend income). If we remove these earnings from 2018, the income generated in the month of May would've only been $338.51. It should also be noted that we have been retaining a large cash reserve in the Roth IRA which currently sits at just under $18.4k.

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.

Traditional IRA - May Dividends

Source: Consistent Dividend Investor, LLC

Roth IRA - May Dividends 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 Dividends

Source: Consistent Dividend Investor, LLC

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

Roth IRA - May Dividends

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 - Traditional and Roth IRAs

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. All numbers below are accurate as of market close on June 19th, 2019.

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.

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 Balances - Traditional and Roth IRAs

Source: Consistent Dividend Investor, LLC

Balances have recovered since the end of May when the market saw a strong selloff due to trade tensions and concerns over a slowing economy.


Remember, in the investment world boring is often the best recipe for success (especially when someone is already retired) because what John and all other retirees are honestly looking for is a little bit of stability so they can enjoy their retirement. John's account continues to be business as usual although some stocks have seen their price closing in on their 52-week-highs and we are more than happy to take some of the gains and set them aside. Even more importantly, I use this kind of opportunity to reduce the cost basis of positions so that we can add to the same position later at a lower price.

My favorite example of this recently took place with 3M (MMM) in his wife Jane's retirement account. After selling shares at $214/share that were purchased between $195/share and $205/share we were able to drop the cost basis on the remaining 50 shares to around $188/share. As 3M continued to fall, we made small but regular purchases of the stock ranging from $183/share all the way down to $162/share. The new cost basis on 100 shares of 3M now stands at close to $182/share.

Some of the stocks that are being considered for the same method as 3M include:

Based on the current forecast/model, I believe that John will be averaging just under $1,628/month from these two retirement accounts for an annual dividend income of around $19,536. Because I do not always have the time (or the patience) to update expected dividends, I would suggest that the annual income from these two accounts will exceed $20,000/year.

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), Intel (INTC), Iron Mountain (IRM), JPMorgan Chase (JPM), Kimco Preferred Series L (KIM.PL), Kinder Morgan (KMI), Kite Realty Group (KRG), Las Vegas Sands (LVS), 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), 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, WRK. 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. It should also be noted that Umpqua is now my previous employer as I recently took a job with a local credit union. I am still personally long UMPQ stock and will not take questions about Umpqua for the next several months.

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.