The Retiree's Dividend Portfolio - Jane's June Update: The Stock Market Climbs While Jane's Cost Basis Drops

by: Matthew Utesch

Jane's retirement accounts generated a total of $1,561.04 in dividend income for June 2019 vs. $1,405.95 of dividends in June of 2018.

We sold some shares of DLR at the top and bought some ABBV at the bottom.

A total of three companies paid or increased special dividends during the month of June.

The topic of today's article is how disciplined buying and selling of strong dividend-paying stocks can lower the cost basis of your portfolio.

Using this method has allowed Jane's cost basis to keep dropping even as the stock market continues to climb.

Before you decide to leave a comment calling me a market-timer, I would love it if you would simply hear me out. I know this is a controversial subject for dividend growth investors (DGIs), but I believe it is important to regularly review a portfolio and sell the highest cost shares of select positions. This is not a process that happens over days or weeks but rather months or years as my examples later in the article will show you. I never run my retirees' portfolios as "all-in" because it is foolish to never leave oneself with dry-powder (especially when they've accumulated a large investment portfolio similar to John and Jane's). Recycling capital and maintaining cash-on-hand is critical for investors who want to make sure they are maintaining an efficient investment portfolio.

First, I want to emphasize that every stock we add to Jane's retirement portfolio is a stock that I consider to be worthy of a long-term hold based on the fact that I believe each and every stock in her portfolio will continue to pay consistent dividends and also regularly increase those dividends. The more difficult part for any investor is trying to determine when shares are selling at a compelling value where the potential upside exceeds the potential downside.

Jane, who has been intimately involved in running a business's books during her career, understands that cash flows are absolutely critical to running a successful business. Building on this concept, I have helped Jane understand that investing in dividend-paying stocks, bonds, and other cash-producing investments are just as important for her personal finances going into retirement. The cash flow from these type of investments is the key to creating a stable retirement plan that does not depend on withdrawing the principle of investments as a main source of income.

Now, I would be crazy to say that she doesn't care about the principal balance of her accounts (because everyone obviously does to a certain degree), but we want to reduce the emphasis placed on the growth of principal. The goal of taking these steps is to eliminate the destruction of wealth that comes from needing to sell investments just to be able to meet the basic needs of retirement. In a sense, my strategy is to reduce the risk associated with market exposure which complements the strategy of a DGI.

Below are examples of three transactions where I executed this strategy.

Royal Bank of Canada (RY)

RY - Cost Basis Trades Source: Charles Schwab

The new blended cost of the position is now $76.69/share on the 50 remaining shares compared with $77.87/share on the previously held 75 shares. With the cash waiting in preparation, we have one of two scenarios that will play out.

  • If shares go up, then we reap the benefit of the lower cost basis, but we reduce the upper end of how much capital gains can be made (because we sold the 25 shares and now only have 50). My target sale price for the remaining higher cost basis is about $84/share currently.
  • If shares go down, then we are provided with another opportunity to purchase shares at a lower cost than our actual cost basis. This means we will be able to collect dividends while waiting for the share price to move back up again. Based on current factors, my buy price where I would add another 25 shares is under $75/share.

East West Bancorp (EWBC)

EWBC is a good example of a position that has not fully played out yet.

EWBC - Cost Basis Trades Source: Charles Schwab

The new blended cost of the position is now $48.48/share on 225 shares but would have been $48.65 on 250 shares if I hadn't sold.

  • When we sold shares of EWBC at $52.13/share, we elected the shares in question to be our highest cost basis shares that cost $51.70/share.
  • If (and I believe when) EWBC shares move into the $52/share range, we plan on selling an additional 25-75 shares of our highest cost basis.

International Business Machines (IBM)

IBM is a good example of a position that recently played out.

IBM - Cost Basis Trades

Source: Charles Schwab

The new blended cost of the position is now $135.79/share on 65 shares but would have been $138.07 on 80 shares prior to the sale.

The key to all of these examples is that the trades may take months or even years to play out which is something I am perfectly comfortable with because all of these stocks are continuously churning out dividends to pay Jane while she waits.

Now, I am sure that some of you will think I cherry-picked these examples, but I have done this same process with a number of positions in the tax-deferred portfolio, including Archer-Daniels-Midland (ADM), Bank of America (BAC) Digital Realty (DLR), Cummins (CMI), Enbridge (ENB), Illinois Tool Works (ITW), and 3M (MMM).

I want to be clear, the primary risk associated with this method is that you will be reducing the overall upside potential of any single position (since I am suggesting selling shares before they can hit their highest possible market value). At the same time, the primary benefit comes from reducing the amount of downside potential (because the sale of shares reduces the cost basis and lowers the number of shares outstanding).

Personally, I find it ironic that some will still see this process as market-timing even though the primary risk associated with this method is reducing upside potential which is the exact definition of market timing because investors can plan to sell shares at the top (but rarely do) and often fail to buy shares at the bottom because they experience fear or lack the funds to do so. I am sure that some will still claim that I am trying to time the market, but I personally think the method shown is more anti-timing than anything.

June Articles and Previous Article Links

Below are the links to the Taxable Account - June Article and Jane's Retirement Article for May.

Taxable Account - June

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

Jane's Retirement Article - May

The Retiree's Dividend Portfolio - Jane's May Update: Women And The Challenge Of 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 on board 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/non-qualified 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 June. This includes:

  • International Business Machines
  • LyondellBasell Industries (LYB)
  • Main Street Capital (MAIN)

International Business Machines - Seeking Alpha's Stone Fox Capital wrote an interesting article titled IBM: Hat Tip which provided some interesting insight into IBM's recent Q2-2019 earnings beat. Here are some of the key points in the article that I found to be the most compelling arguments for IBM bulls:

  • Gross margins have been declining for years and it appears that margins are now growing after the downward trend was broken in Q4-2018. Q2-2019 margins were at 47%.
  • IBM trades at roughly 10x FCF targets.
  • On August 2nd, IBM will outline some of the financial impacts expected as a result of the merger with Red Hat (RHT).

I agree with Stone Fox Capital that this event will likely be received negatively by the market and therefore has the potential to allow investors to purchase shares at a discounted price.

IBM - FastGraphs

The dividend was increased from $1.57/share per quarter to $1.62/share per quarter. This represents an increase of 3.2% and a new full-year payout of $6.48/share compared with the previous $6.28/share. This results in a current yield of 4.33% based on a share price of $149.68.

LyondellBasell Industries - LYB is one of the world's largest plastics and specialty chemicals companies which are two industries that have been hammered by a slowdown in automobile production and an ethylene cycle downturn. In Q1-2019, LYB was able to exceed analyst expectations even as revenues dropped 10% year-over-year.

The recent cancellation of the ongoing take over of the Brazilian firm Braskem (BAK) appears to be favorably viewed by the market and most investors. I am optimistic that this means management will focus on strengthening LYB's core businesses. I expect LYB to continue trading sideways for the next 6 to 12 months.

LYB - FastGraphs

The dividend was increased from $1.00/share per quarter to $1.05/share per quarter. This represents an increase of 5% and a new full-year payout of $4.20/share compared with the previous $4.00/share. This results in a current yield of 4.89% based on a share price of $85.92.

Main Street Capital - MAIN is one of those stocks that you can't help but love even if you think it's overpriced (which it is relative to its NAV) and the primary reason why is that management is top-notch and continues to deliver capital appreciation and a generous a handsome monthly dividend payment with special dividends being paid 2x/year (this is being phased out as explained below).

MAIN - FastGraphs

MAIN paid a special dividend of $.25/share which is down from $.275/share special dividend in December 2018. The decrease is due to the fact that management has begun transitioning the special dividend (which has historically been paid 2x/year) into the regular dividend.

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, it 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 June.

  • AbbVie (ABBV) - Purchased 35 Shares @ $67.38/share.

We sold the following stock(s) in the Traditional IRA during the month of June.

  • Digital Realty (DLR) - Sold 25 Shares @ $123.64/share.

Traditional IRA - Realized Gains Source: Charles Schwab - Traditional IRA

Roth IRA: There were no stocks added to or sold in the Roth IRA during the month of June.

June Income Tracker - 2018 Vs. 2019

Dividend income in Jane's Traditional and Roth IRAs was higher in the month of June of 2019 when compared with June of 2018. I consider the June YoY comparison to being reasonable as the portfolio was originally established in early 2018 which meant that the months prior to June did not represent fully-invested retirement accounts.

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.

Traditional IRA - 2019 vs 2018

Source: Consistent Dividend Investor, LLC.

Roth IRA - 2019 vs 2018 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 Source: Consistent Dividend Investor, LLC.

Roth IRA - Monthly 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.

June Retirement Income 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)

June Account Balances

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 July 19th.

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

Traditional IRA - Gain-Loss Source: Consistent Dividend Investor, LLC.

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

Roth IRA - Gain-Loss

Source: Consistent Dividend Investor, LLC.

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

  • Traditional IRA - Current gain/loss of $-1,612.93 vs -$6,723.67 when the May retirement article was written.
  • Roth IRA - Current gain/loss of -$5,538.00 vs $-8,294.73 when the May retirement article was written.


There is nothing wrong with managing a buy-and-hold portfolio where the primary rule is to never sell shares. For me, I believe that this method is inefficient because it assumes that the stocks you picked will continue to be relevant (and hopefully even more relevant) 10, 20, and even 30+ years later. While it is likely that some of the companies you pick will continue to thrive over multiple decades, there will also be the losers whose business model lost importance and was edged out by a competitor who could do things more efficiently by taking advantage of some sort of competitive advantage.

A great example comes from a study performed by McKinsey which suggests that the average life-span of companies listed on the S&P 500 is continuing to fall.

  • Average S&P company life-span of 61 years in 1958.
  • Average S&P company life-span of 18 years in 2016
  • "McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared."

For this reason, I believe that capital recycling is a prudent method enlisted by investors who are willing to take the time to do it. Where capital recycling goes wrong is when investors start to buy and sell stock outside of the originally established parameters. Capital recycling requires initiating sell and buy target prices and typically don't involve selling entire positions unless the fundamentals or story behind the stock has changed.

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, Archer Daniels Midland, Bank of America, Bank of Nova Scotia (BNS), BP (BP), British American Tobacco (BTI), Canadian Imperial Bank of Commerce (CM), Cummins (CMI), CenturyLink (CTL), Digital Realty, Eaton Vance Floating-Rate Advantage Fund A (MUTF:EAFAX), Enbridge, Eaton Corporation (NYSE:ETN), Emera Inc. (OTCPK:EMRAF), East West Bancorp, General Mills (NYSE:GIS), Gilead Sciences (GILD), Gaslog Partners Preferred C (GLOP.PC), Honeywell (HON), International Business Machines, Illinois Tool Works (ITW), Iron Mountain (NYSE:IRM), Johnson Controls (NYSE:JCI), KeyCorp (KEY), Laurentian Bank of Canada (OTCPK:LRCDF), LyondellBasell, LogMein (LOGM), Main Street Capital, 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, 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.