The Retirees' Dividend Portfolio - John And Jane's June Taxable Account Update: The Danger Of Making Assumptions

by: Matthew Utesch

The Taxable account generated $936.06 of dividends in June of 2019 compared with $676.96 of dividends in June of 2018.

Fixed Income holdings did not generate any income during the month of June.

We did not sell any positions but we added to several based on several positions that were close to their 52-week-low.

Three companies in the Taxable Portfolio paid increased dividends during the month of June.

The main topic of the article is how assumptions impact the investing process and why I intend to be more careful about the assumptions I convey in my writing(s) going forward.


Assumptions can be a useful tool when trying to examine the impact of a hypothetical scenario, especially when investing. For instance, it would be necessary to use assumptions when forecasting expected dividend income. When I perform a task like this, I like to establish a range that I can reasonably expect will occur.

  • Worst-case scenario
  • Baseline scenario
  • Above-average scenario

The point of making different assumptions is to build a range that we expect our true scenario will fit into. I consider these type of assumptions to be useful because its primary goal is to help the investor set reasonable expectations about what is likely going to happen.

At the same time, assumptions can be dangerous when we rely on them to explain complicated situations that are often the result of a multitude of factors. In many cases, assumptions are used as a form of confirmation bias that provides the kind of blind support we need to justify our position/stance.

Consider the old saying of "taking someone at their word" which means that we assume the person's words mean exactly what they are and that there is no ulterior motive or underlying meaning behind them. If someone tells you they need a ride to the airport it would be most appropriate to assume that they mean what they say because they are saying what they mean (and that means a ride to the airport does not mean anything else). Making assumptions like this is something that the human mind considers reasonable and is a time-saving tool that reduces the amount of unnecessary time needed to think about a subject.

Over the past year, I have made the mistake of using assumptions to help support my reasons why the stock market is overvalued. This leads me to the point of the introduction which is that I have been guilty of oversimplifying the stock market and the various forces that pull its levers on a regular basis.

"The Stock Market Is Overvalued"

This is the phrase I have been most guilty of saying for the better part of the last year because it is a simple way to communicate what seems like weekly record highs. The same phrase also helps make sense of some stocks which are trading well-above their historical P/E ratios and 52-week-high prices. What makes the phrase above dangerous (in my opinion) is that it is technically true when you apply it to the market as a whole.

Let's consider the S&P 500 and the Dow Jones Industrial Average since the time I was born back in 1989 where we see that both indexes are now at a record-high as they grew in value by more than 3x since the financial crisis in 2009.

Chart Data by YCharts

Both of these charts demonstrate that the market as a whole has boomed over the last 10 years and the biggest companies (which these indexes are comprised of) have seen a meteoric rise in their share price (whether or not it is justified is debatable).

What the above graph doesn't show you is that there are individual companies which are trading at attractive prices compared with their historical norms. On an even more broad level, there are entire industries that have been hammered over the last twelve months. A few examples include:

Oil & Gas Equipment & Services

Oil Field and Services Aluminum Companies

Aluminum Industry Regional BanksRegional Banks

The point of this exercise is that if we accept blanket statements that the market is fully-valued that we will likely forget to look for areas where the value really exists. Value

My goal going forward is to be more specific when describing where the market is fully-valued and where it is undervalued (in my opinion). Currently, I will likely describe where the market is undervalued (industries/sectors) because there is only a handful of them. I believe that specifying which industries/sectors fit this criterion will aid in the discovery of undervalued stocks that will benefit my clients' (and hopefully my readers') portfolios.

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. I have received feedback on investing directly into treasuries but haven't had the time to discuss this with my clients'. Some of the other funds I have tracked/watch include the following:

  • Vanguard Money Market Fund (VMMXX) - 2.30% 7-Day Yield
  • Charles Schwab Money Market Fund (SWVXX) - 2.17% 7-Day Yield
  • iShares 20+ Year Treasury Bond ETF (TLT) - 2.37% 30-Day Yield
  • Schwab Intermediate U.S. Treasury ETF (SCHR) - 2.33% 30-Day Yield
  • Schwab Short-Term U.S. Treasury ETF (SCHO) - 2.12% 30-Day Yield
  • Schwab U.S. TIPS ETF (SCHP) - 6.52% 30-Day Yield (Distorted because there were no distributions made from January 2019 until May 2019). TTM Yield is 2.06%.

Of the funds listed above, the long-term focused treasuries/bonds have taken the largest hit as the financial community largely expects the Fed to cut interest rates by .25%. This has resulted in the flattening of the yield curve (especially when it comes to CDs).

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

June - Fixed Income

Source: Consistent Dividend Investor, LLC.

The current value of John and Jane's Taxable account is $458.5k and the total amount of cash and/or conservative investments (like certificates of deposit) represent a total of $142k of the Taxable account or roughly 31% of the Taxable account. This is currently down from 33% because we have deployed some of these funds to purchase shares in stocks that look extremely attractive and because the Taxable account has increased in value by over $10k since the May article.

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.

No Income was generated from the Fixed Income holdings in the month of June primarily because the due date associated with the North American Savings was due on July 8th (this will be discussed in July's article).

Dividend And Distribution Increases

June included a total of three 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. The following list of companies only includes those which paid an increased dividend via a raise.

  • Parker-Hannifin Corporation (PH)
  • Southern Company (SO)
  • Exxon Mobil (XOM)

Parker-Hannifin - The increase of 15.8% is a welcome increase from one of the most impressive dividend-paying stocks out there (especially considering that the five-year growth rate comes in at 10.56%). With 62 years of consistent dividend increases, PH has continually dished up results that make a true Dividend Growth Investors' mouth water. I will note that recent downgrades by Wells Fargo (WFC) and J.P. Morgan (JPM) might be able to help move PH's share price back into a very attractive range of $150-$160/share. PH's share price has become increasingly attractive over the last two years with a current P/E ratio of 14.5x versus a 10-year average of 15.86x.

Parker-Hannifin - FastGraphs The dividend was increased from $.76/share per quarter to $.88/share per quarter. This represents an increase of 15.8% and a new full-year payout of $3.52/share compared with the previous $3.04/share. This results in a current yield of 2.08% based on a share price of $169.07.

Southern Company - The most recent increase of 3.3% is in line with the company's five-year average of 3.41%. While the dividend increases are typically modest, the real growth story can be seen in the capital gains generated over the course of the last year. The increase in value has pushed the P/E ratio to 18.23x which is just short of its 18.56x 10-year high seen on June 30th, 2016. Shares of SO appear to be fully valued at this point and I do not plan on adding to this position until we see a pullback below the 10-year average P/E ratio of 16.3x (approximately $50/share).

Southern Company - July FastGraphs The dividend was increased from $.60/share per quarter to $.62/share per quarter. This represents an increase of 3.3% and a new full-year payout of $2.48/share compared with the previous $2.40/share. This results in a current yield of 4.45% based on a share price of $55.67.

Exxon Mobil - XOM has been a little lackluster lately but the same can be said for the other major oil companies including Chevron (CVX) and British Petroleum (BP). With that said, XOM has made substantial moves to increase their cash-flow which should pay off over the next few years. At this point, XOM remains a hold but I do not plan on adding to the position until the company begins to meaningfully deleverage as oil oversupply presents a real risk to the long-term safety of the dividend. Management appears to be optimistic about XOM's current situation as the dividend increase of 6.1% was 50 basis points higher than the five-year dividend growth average of 5.60%.

Chart Data by YCharts

The dividend was increased from $.82/share per quarter to $.87/share per quarter. This represents an increase of 6.1% and a new full-year payout of $3.48/share compared with the previous $3.20/share. This results in a current yield of 4.48% based on a share price of $77.08.


The Taxable account currently consists of 44 unique positions as of July 15, 2019. We made a number of small purchases in the month of June that increased the number of shares for existing holdings for the following positions.

  • New Residential (NRZ) - Purchased 50 Shares @ $15.83/share.
  • United Technologies (UTX) - Purchased 15 Shares @ $124.58/share.
  • Schlumberger (SLB) - Purchased 25 Shares @ $35.99/share.
  • Energy Transfer LP (ET) - Purchased 100 Shares @ $14.31/share.
  • Ryder System (R) - Purchased 25 Shares @ $52.47/share.

June Income Tracker - 2018 Vs 2019

June 2019 saw income increase by 27.6% 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.

2019 vs 2018 - June Comparison

Source: Consistent Dividend Investor, LLC.

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

Monthly Dividend Update - June

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.

June - Annual Estimate Update I have also included 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 - June Account Balance

Source: Consistent Dividend Investor, LLC.

To wrap up June'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.

2019 Taxable Gain-Loss

All figures in the images above were accurate as of market close on 7/9/2019.


To end this article I found an interesting quote about assumptions that truly captures the absurdity associated with making assumptions when we don't have enough details.

"As the old saying goes, "There's more than one way to skin a cat." The problem is that too often we assume that we've got the right cat, and then we assume that the only solution is to skin it. And once everything mercifully comes to a close, assuming that we've made a terrible mess of things is the only assumption that's not an assumption."

― Craig D. Lounsbrough

How many times have we seen a scenario like the one described above take place? It is important that reserve the use of assumptions for times when we have enough data that the assumption itself is simply being used to fill in a blank. In other words, assumptions are useless if we don't have a good baseline to start with.

Since the fixed-income holdings produced no income in the month of June, John and Jane's Taxable Portfolio generated a total income of $936.06 for the month. Based on the data we have collected and estimates for the remaining six months of 2019, the Taxable Account is estimated to be generating an average of $1,128.25/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), Mitcham Industries Preferred Series A (MINDP), 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. 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.