The Retiree's Dividend Portfolio - John's June Update: Why We Dropped Boeing

|
Includes: APLE, ARESF, BA, BBT, BML.PL, BP, BRX, CDUAF, CLDT, CONE, CVS, CVX, D, DHR, DLR.PJ, DUK, EAFAX, EMR, EPR, EPR.PG, EV, GD, HTA, INTC, IRM, JPM, KIM.PL, KMI, KRG, LEA, LTC, LVS, MAIN, MMM, MO, O, OMI, OXY, OZK, PACW, PEP, PH, PK, PNRRY, PONAX, PPG, RF, SCE.PD, STAG, SWPPX, T, TD, TROW, TXN, UMPQ, UTF, VER, VLO, VLY, VTR, WBA, WELL, WPC, WRK
by: Matthew Utesch
Summary

John's retirement accounts generated a total of $1,889.94 in dividend income for June 2019 vs. $1,328.94 in dividends in June of 2018.

In June, PepsiCo paid out its recent dividend increase while MAIN provided a special dividend.

We sold Boeing (in the month of July) because we do not like the political tension surrounding the stock, and at this point, we see BA in trouble through year-end.

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

John's IRAs have a combined cash balance over $33,000 and we are patiently waiting to purchase additional shares of existing positions at more attractive price points.

That's right, we chose to sell Boeing (BA) out of John's Traditional IRA. Given the circumstances surrounding the grounding of the 737 MAX, I wrote about the decision to do this in the article, Why I Dumped Boeing - Even Though I Believe It Will Fly Again.

As many of you are probably thinking, I received mixed feedback in the comment section of that article. I estimate that 60% of people understood my criticism of Boeing while the other 40% couldn't fathom how I could hold such a blasphemous opinion. Well, a simple search regarding the 737 MAX just after midnight on July 25 produced a number of headline articles that provided further proof as to why we sold our position in Boeing. The New York Times suggested Boeing may stop 737 MAX production if the return of the jetliner is delayed any longer than necessary. Now, this confirms my uneasiness about Boeing because halting production on a plane with years of backlogged orders isn't a decision to be taken lightly. I think we can all agree that Boeing shutting down production (or even slowing production for that matter) is something that most investors would have never considered possible.

I think my position against Boeing is entirely reasonable because I am actually bullish when it comes to Boeing's long-term outlook, but their short-term outlook tells me that its current share price cannot be justified since management has been unable to convey the plan going forward with any semblance of certainty. The other big issue is that these problems aren't just issues associated with the production; in fact, the real at-hand for Boeing has more to do with the issue shifting into the political arena with testimony being given by the families of victims at the House aviation subcommittee hearing.

Regardless of how you feel about Boeing, it is situations like these where it is absolutely critical to understand that emotions and feelings often trump actual operating results. The combination of anger and emotions along with poor quarterly results is a recipe that I am not interested in swallowing.

Even worse, we now need to consider the potential impact on Boeing's suppliers if they choose to halt production of the 737 MAX. Some notable names include:

  • Parker-Hannifin (PH)
  • PPG Industries (PPG)
  • Emerson Electric (EMR)
  • Danaher Corp. (DHR)
  • Lear Corp. (LEA)
  • 3M (MMM)

These names don't even begin to touch the total number of companies that are on the supplier list which is why investors may want to consider exercising caution when it comes to these companies (depending on the amount of revenue and gross margins that come as a direct result of the Boeing relationship).

Needless to say, I have no issue with steering clear of Boeing until management can convey a more positive outlook regarding the return of the 737 MAX.

June Dividend Article Links

The following two links are for Jane's retirement account article and the taxable account article.

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 received increased dividends from two companies during the month of June. PepsiCo (PEP) paid out its annual increase in the month of June while Main Street Capital (NYSE:MAIN) continued its trend of raising its monthly dividend while shelling out a diminishing special dividend.

Since I covered MAIN's special dividend in Jane's June article update, The Retiree's Dividend Portfolio - Jane's June Update: The Stock Market Climbs While Jane's Cost Basis Drops, I will only mention the change in its dividend metrics.

PepsiCo - The last time I wrote on Pepsi was back on January 14, 2019, in my article PepsiCo: Changing My Entry Price For 2019 where I suggested that shares looked attractive at $108/share and that we would pull the trigger and load up if shares dropped into the $103 range. Unfortunately, Pepsi's stock price basically took off from there and moved into the $130/share range by mid-May and has a 52-week-high price of $135.24/share. The only disappointment I have is that the dividend increase paid in the month of June was much more modest than the 5 to 7% I was projecting. Regardless, I am optimistic that growth opportunities at Pepsi remain plentiful as they recently acquired South Africa's Pioneer Food Group (OTC:PNRRY) for $1.7 billion and I expect that this won't be the last deal of its kind. Pepsi is currently trading at a P/E ratio of 23.54x which is well above its 10-year P/E ratio average of 19.84x and suggest that the stock appears to be overvalued. I believe that there will be opportunities to buy on a dip, but I am moving my buy price up from $108/share to $120/share which would result in a yield of 3.18%.

Pepsi - FastGraphs

The dividend was increased from $.9275/share per quarter to $.955/share per quarter. This represents an increase of 3% and a new full-year payout of $3.82/share compared with the previous $3.71/share. This results in a current yield of 2.91% based on a share price of $131.22.

Retirement Account Positions

There are currently 26 different positions in John's Roth IRA and 31 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.

Since the last article, some key changes that have taken place include the elimination of two positions from the Traditional IRA and the addition of three new positions in the Roth IRA (the changes below will have some redundancy with my normal lists, but I wanted to include these to help explain some of the major changes in the retirement portfolio).

  • Sold the remaining 50 shares of Intel (INTC) from the Traditional IRA and I do not plan to initiate a new position anytime soon. The semiconductor space has become too challenging for me to continue tracking. At this point, the only remaining holding in the sector is Texas Instruments (TXN) in the Taxable account (which we plan to continue holding indefinitely).
  • As I mentioned at the beginning of the article, we eliminated the position in Boeing (a total of 35 shares) due to the increased uncertainty surrounding the 737 MAX. Until management can provide the clarity needed, we will not consider initiating a position unless shares drop below $300/share.
  • Added 35 shares of Eaton Vance (EV) at the end of June.
  • Added 100 shares of VEREIT (VER) at the beginning of July prior to writing my analysis, VEREIT: Even After The Run-Up, The 6% Yield Is Still Attractive on July 10th.
  • Added 100 shares of Cohen and Steers Infrastructure Fund (UTF) and will be publishing an article on this in the near future.

Traditional IRA - The following stock was added to the Traditional IRA during the month of June.

  • Canadian Utilities (OTCPK:CDUAF) - 50 Shares @ $28.72/share. (Increases the original position to 150 shares).

The following stock was sold from the Traditional IRA during the month of June.

  • Intel - 50 Shares @ $47.64/share.

Traditional IRA - Realized June Gains Source: Charles Schwab

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

  • Eaton Vance - 35 Shares @ $43.01/share.
  • Brixmor Property Group (BRX) - 50 Shares @ $18.53/share. (Increases the original position to 250 shares).

There were no sales of any positions in the Roth IRA during the month of June.

June Income Tracker - 2018 Vs. 2019

Income for the month of June was still strong even though we have a combined total of more than $32k now sitting as cash reserves between the Traditional and Roth IRAs. As usual, we are patiently waiting in a market where there aren't a lot of stocks that are attractively priced.

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 - June Dividends

Source: Consistent Dividend Investor, LLC

Roth IRA - June 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 - Dividend Graph

Source: Consistent Dividend Investor, LLC

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

Roth IRA - June 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.

IRA - Retirement Dividend projections

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 - June gain-loss

Source: Consistent Dividend Investor, LLC

Here is the Gain/Loss associated with John's Roth IRA:

Roth IRA gain-loss June

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.

IRA month end balances

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.

Conclusion

For the average investor, an ETF or a passive index fund would likely be the most practical way to reduce exposure and also limit the amount of time/due diligence an investor must do to properly maintain a diversified portfolio.

The primary reason that John does not have an ETF or passive index fund-based portfolio is that this would not provide the type of income he needs during his retirement. Let's consider one of the better performing passive index funds from Charles Schwab - S&P 500 Index Fund (SWPPX).

At the end of 2018, the fund made its largest annual distribution that I could find by returning both dividend and capital gains to shareholders totaling $1.02/share and had an average share price of $37.98/share. Based on these figures, the yield represented a 2.7% distribution yield at the end of 2018 (which was elevated due to a market selloff). Investors looking to add SWPPX would be saddened to find that the current yield has dropped as the market recovered from the selloff that occurred and now stands at 2.18% based on 2018's distribution. Meanwhile, John's portfolio is currently generating the following dividend income (yield on cost).

  • John's Traditional IRA generates a yield on cost of 4.76%.
  • John's Roth IRA generates a yield on cost of 4.65%.

The problem becomes even more clear when we consider what this means in real dollar terms (for the sake of simplicity, let's assume a one million dollar retirement portfolio).

  • SWPPX Portfolio - If the yield was still 2.7%, an investor with $1 million would expect approximately $27,000/year of distributions (based on 2018's distribution amount of $1.02/share).
  • Blended Traditional IRA and Roth IRA - approximately $47,000/year of dividends and distributions (based on the estimated current yield).

The point is, yes, it is more work for me to help manage John's portfolio the way I do compared to building a portfolio of ETFs and passive index funds. The reality is, this is what is needed to provide income security for when times aren't good because we are reaching the point where it's hard to say how many people actually remember the pain inflicted in from the financial crisis in 2008. At the end of the day, investors managing their own investments in a similar manner as John need to consider the benefit and whether or not it is worth the time needed.

In John's Traditional and Roth IRAs, he is currently long the following mentioned in this article: Apple Hospitality REIT (APLE), Artis Real Estate Trust (OTCPK:ARESF), BB&T (BBT), Bank of America Preferred Series L (BML.PL), BP (BP), Brixmor Property Group (BRX), Canadian Utilities, 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, 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), 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, Altria (MO), Realty Income (O), Owens & Minor (OMI), Occidental Petroleum Corp. (OXY), Bank OZK (OZK), PacWest Bancorp (PACW), PepsiCo, Park Hotels & Resorts (PK), PIMCO Income Fund Class A (PONAX), Regions Financial (RF), South California Edison Preferred Series D (SCE.PD), STAG Industrial (STAG), AT&T (T), Toronto-Dominion Bank (TD), T. Rowe Price (TROW), Cohen and Steers Infrastructure Fund, Valero (VLO), VEREIT, Valley National Bancorp (VLY), Umpqua Holdings (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.