A modest gain in Q2
The 13.66% Q1 gain after the December lows was followed by a more modest 2.72% Q2 gain, for a year-to-date increase of 16.38%. My spreadsheet records the portfolio's ongoing progress, with one cell calculating the gain since 12/31/15. On June 28, 2019, my eye was drawn to that cell's round number: a 52.00% gain in 3.5 years.
The portfolio's yield at the end of the quarter was 4.24%, down from 4.52% at the end of Q1. The lower yield is due in part to an increase in the cash position during the quarter from 3.28% to 6.31% and an intentional shift toward greater relative quality and safety, while giving up some yield.
Additions to the portfolio
Apple (AAPL), with an AA+ S&P credit rating, was added in May at $178.10. I had closed an earlier position in AAPL in October 2018 at $220.48.
Archer-Daniels-Midland (ADM), with an S&P credit rating of A, is back in the portfolio after an extended absence with two purchases in May at $39.97 and $38.11.
Merck (MRK), with an S&P credit rating of AA, is also back in the portfolio with an April purchase at $74.46.
I decided to add some preferred shares to the portfolio as a way to gain exposure to some quality real estate investment trusts and utilities with low-yielding common shares. I have limited my universe to preferred issues with a $25 par value (callable at that price) that are selling below par. In mid-June, I added four preferred issues:
Arch Capital Group 5.45% Series F (ACGLO) was added at $24.62. I hadn't planned on adding a financial, but Standard & Poor's gave the company an unusually favorable report and a credit rating of A-, with the preferred issue rated BBB. It's callable beginning on 8/17/22.
Federal Realty 5.00% Series C (FRT.PC) was added at $24.90. It is cumulative and callable beginning on 9/29/22. FRT has an S&P credit rating of A-, with the preferred series rated BBB. At some point, I would like to own some common shares of FRT, but the common hasn't yielded over 4.0% since 2010.
National Retail Properties 5.20% Series F (NNN.PF) was added at $24.92. It is cumulative and callable beginning on 10/11/21. NNN has an S&P credit rating of BBB+, with the preferred series rated BBB-. I've owned shares of NNN in the past, and I'm very comfortable with the company.
PS Business Parks 5.20% Series Y (PSB.PY) was added at $24.85. It is non-cumulative and callable beginning on 12/7/22. PSB has an S&P credit rating of A-, with the preferred series rated BBB. PSB was a spinoff by Public Storage (PSA) and is still partly owned by PSA. PSB continues the PSA tradition of funding growth primarily through preferred shares. Currently, PSB has no debt.
A 2019 goal is to strengthen the portfolio's credit quality. The three new common stock positions (AAPL, ADM and MRK) were part of this plan. Two events converged around year-end 2018 that helped shape this goal. The first was the big market drop in late December and early January. The second was the beginning of IRA distributions in January.
When the dust settled from these two events, I realized that after many years of working to increase the portfolio's dividend income, I had reached my income goal with enough cushion to allow for annual increases. So, I gave up some yield for higher credit ratings.
Companies still on my watch list include Microsoft (MSFT), Walmart (WMT), Automatic Data Processing (ADP), Colgate-Palmolive (CL), Coca-Cola (KO), Genuine Parts (GPC), Target (TGT), Realty Income (O), WEC Energy (WEC), Camden Property Trust (CPT), Prologis (PLD) and Boston Properties (BXP).
Positions closed in Q2
Brookfield Property REIT (BPR) was closed in April at $21.00. I bought BPR in late 2018 when it was too cheap to ignore. The cost basis was $17.14. BPR credit isn't rated by S&P, but a related entity, Brookfield Property Partners (BPY), is rated BBB. Brookfield already was well-represented in the portfolio, and I prefer Simon Property Group (SPG) and Federal Realty (FRT) in the mall and shopping center sub-sectors.
Main Street Capital (MAIN) was closed in April at $38.71. The cost basis was $36.88. MAIN has an S&P credit rating of BBB. This is the best business development company, and I sold it primarily because of my concern about our macro situation and the inherent uncertainties about BDCs in a deep recession. I like MAIN, but I sold it as part of my overall de-risking.
Manulife Financial Corporation (MFC) was closed in April at $18.46. The cost basis was $16.23. MFC has an S&P credit rating of A. This is a solid Canadian company with exposure to the U.S. via its John Hancock insurance segment and to Asia. It was clearly undervalued when I bought shares, watched it get cheaper (adding more shares), and then saw a strong recovery. I realized MFC may have more moving parts than I can effectively monitor, so I decided to take a decent profit and redeploy the funds.
Ventas (VTR) was closed in June at $66.87. The cost basis was $55.43. VTR has a BBB+ credit rating. I like the company. I thought it was moving toward a credit rating upgrade by diversifying away from senior housing toward more triple-net, research and medical office facilities. Recent actions (including the Canadian investment) seem to double down on Shopify (SHOP). I'm often wrong and sometimes too cautious. The market doesn't share my concerns, because VTR has continued to move up. However, at this point in the market cycle, I'm more comfortable with one of the REIT preferred issues.
In a January update about Ventas, S&P said, in part:
"As Ventas has grown its portfolio (usually through large acquisitions), the company has also increased its investment in senior housing operating portfolio "SHOP" assets, which are more management- and capital-intensive than its triple-net-leased investments. Thus, the company has become modestly more vulnerable to macroeconomic trends (such as rising labor costs and supply/demand imbalances), which could lead to heightened cash flow volatility."
These are solid companies. I'm not suggesting you should share my way of thinking about these sales, but to help you see my thought process at age 68, I invite you to compare the closed positions with the three new common stock positions, the four new preferred stock positions and with my small watchlist universe (above).
Portfolio as of June 28, 2019
Here's a breakdown of the portfolio sectors:
Real Estate is 11.98% of the portfolio's value and 16.57% of income: Simon Property Group, Federal Realty Pfd, Tanger Factory Outlet Centers (SKT), W.P. Carey (WPC), Apple Hospitality REIT (APLE), National Retail Properties Pfd and PS Business Parks Pfd.
International Funds comprise 1.10% of the portfolio and 2.87% of income: India Fund (IFN).
The portfolio's 34 common and 4 preferred equities are listed in the table below, followed by 4 closed-end funds. Price is the 6/28/19 closing price. %Port is each holding's percentage of the portfolio's market value as of 6/28/19. Div is the annual dividend per share (or distribution per unit). Yld is the dividend yield per share as of the close on 6/28/19. %Inc is the percentage of the portfolio's income contributed by each holding. Buy is the price at which I would consider adding more shares. I've set an alert with Custom Stock Alerts for these targets. S&P is the Standard & Poor's credit rating, where available. CCC is the number of consecutive years of dividend/distribution increases, per Justin Law and the DRiP Investing Resource Center. SSD is the Dividend Safety number assigned to each holding (where available) by Simply Safe Dividends.
I'm not advocating the purchase or sale of any security. These quarterly updates form a journal of my effort to design and maintain a retirement income portfolio with a relatively safe stream of growing dividends. I seek companies with histories of rising dividends, strong financials and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence. If you'd like to receive notices of future article posts, hit the "Follow" button.
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Disclosure: I am/we are long JNJ, AAPL, PFE, MRK, PG, MMM, BLK, CSCO, RY, TD, RDS.B, PEP, ITW, TXN, CMI, UPS, BNS, ADM, IBM, OXY, SPG, PPL, QCOM, ETN, ABBV, ENB, EPD, BIP, BEP, BCE, T, SKT, WPC, APLE, ACGLO, FRT.PC, NNN.PF, PSB.PY, ADX, IFN, RMT, RVT. 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: The article is for informational purposes only (not a solicitation to buy or sell stocks). I am not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.