The Retirees' Dividend Portfolio - John And Jane's July Taxable Account Update: Looking To The VIX Index

by: Matthew Utesch

The taxable account generated $1,030.43 of dividends in July of 2019 compared with $640.87 of dividends in July of 2018.

Fixed income provided an additional $199.59 of income during the month of July.

We added to a few select positions in July and I am anticipating some interesting deals during the month of August.

A total of four companies in the taxable portfolio paid increased dividends during the month of July.

I will discuss a few of the stocks that are on my radar during this period of turbulence.

August is starting off on a pretty rough note even after the market received its expected rate cut from the Federal Reserve. With this, there have been suggestions that the S&P 500 could be headed south as major support somewhere lies somewhere between 2600 and 2800.

This means that I expect to see some interesting value propositions across a number of sectors. It has been a while since I looked at the VIX index (there isn't much need to look at it when the markets are acting normally) and I offer an explanation of the VIX index in my article The VIX To Rule Them All - And The 3 Value Stocks We Added In The Volatility. The key item to remember about the VIX index is that it serves as an "investor fear gauge" by tracking the calls and puts of the S&P 500.

Chart Data by YCharts

What is most helpful about the VIX index is that a dramatic rise almost always correlates to a steep drop in the values of the greater market. Decreases in the VIX end up resulting in prosperous periods of time where the market steadily rises. Let's consider the following two images for evidence of what I'm referring to.

Chart Data by YCharts
Chart Data by YCharts

As I mentioned before, the more intense the spike in the VIX index is the more pronounced the fall in the Dow Jones industrial average and S&P 500 is likely to be. The most recent spike is the largest we have seen YTD-2019 but is nowhere near the levels that we saw at the end of 2018 (at least not yet).

During times like these, it is important to be patient, however, I have already created my watchlist of stocks that I am interested in adding to the position of (some of which we have already taken small nibbles at). Currently, there are five high-quality stocks that are already in John Jane's portfolio which I find to be good candidates for adding to the existing position.

1. Cummins (CMI) - Target Price: $132/share

I like to nibble at positions and I expect I will do this with CMI as it continues to trend down. CMI broke the $150/share support range which tells me that the stock might not see major support until the $130/share range. It is likely we will add to the position at around $140/share (roughly 10 shares at first) and go from there.

2. Dover (DOV) - Target Price: $90/share (we will add more at around $80-$85/share).

We already took the liberty of adding to DOV with 10 shares purchased at $90.90/share. $90/share is a support level that was broken by the end of the day and so we expect that we will be able to add more in the low-to-mid $80/share range. Remember, DOV recently updated its FY-2019 guidance to the upper end of its expected range.

3. Emerson Electric (EMR) - Target Price: $60/share (we will add more at around $55/share and again at around $50/share).

EMR is another position that we already added to for a total of 25 shares at $60.03/share. Although the five-year dividend growth rate is only 3.22% we still like EMR's conservative nature and 61 years of consistent dividend increases.

4. Energy Transfer (ET) - Target Price: $13/share.

ET is one of the larger MLP holdings for John and Jane's Taxable portfolio and currently carries an average cost basis of $15.22 on 600 shares. There are several good articles out that explain why ET is worth investing in and I believe that Peter Frorer explains it best in his article Energy Transfer To Drive Debt Leverage Dramatically Lower While Distributable Cash Flow Soars.

5. United Technologies (UTX) - Target Price: $115/share.

We have continued to add to UTX on any weakness in the position currently carries a cost basis of approximately $117/share. There should be less volatility regarding the merger with Raytheon (RTN) with news that Pershing Square Capital's Bill Ackman liquidated its position in UTX rather than fighting its takeover of Raytheon.

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, whereas 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'.

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

Fixed Income - 2019-7

Source: Consistent Dividend Investor, LLC.

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.

Dividend And Distribution Increases

July included a total of four 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.

  • Cardinal Health (CAH)
  • Realty Income (O)
  • Washington Trust Bancorp (WASH)
  • WP Carey (WPC)

Cardinal Health - Drug distributors McKesson (MCK), AmerisourceBergen (ABC), and CAH have all struggled over the last few years amid eroding margins and uncertainty. More recently, a Bloomberg report came out that suggested the three companies proposed paying a combined total of $10 billion "to settle all claims related to their respective roles in the opioid epidemic." When compared to the competition, CAH has seen significant share price erosion over the last five years. A Q3-2019 EPS beat was nice but the uncertainty around margins resulted in a small 1% increase in the dividend.

Chart Data by YCharts

The dividend was increased from $.4763/share per quarter to $.4811/share per quarter. This represents an increase of 1.0% and a new full-year payout of $1.92/share compared with the previous $1.90/share. This results in a current yield of 4.48% based on a share price of $42.92.

Realty Income - O continues to fly high at its near $70 valuation and consistently delivers on its regular quarterly dividend increases. FFO for Q2-2019 came in above analyst estimates at $.82/share and O reaffirmed AFFO estimates of $3.28-$3.33/share for FY-2019. We plan to buy more shares on any weakness but we don't expect to see it anytime soon as the market continues to view O favorably.

Realty Income - FastGraphs O's dividend was increased from $.226/share per month to $.2265/share per month. This represents an increase of .2% and a new full-year payout of $2.72/share compared with the previous $2.71/share. This results in a current yield of 3.89% based on a share price of $69.87.

Washington Trust Bancorp - WASH continues to be one of my favorite bank holdings and I recently wrote about it in my article Washington Trust - Recent Dividend Increase Forecasts Management's Optimism Regarding Net Interest Margin. For prospective investors, it is worth considering that WASH has maintained or increased its quarterly dividend payments since 1991 which means that it is one of the less volatile financial stocks that can be held in your portfolio. WASH has a long history going back to 1800 when it was first established and it is also the oldest Community Bank in the United States. There is strong downside resistance at the $47/share level as shown in the 3-year history below.

Chart Data by YCharts

The dividend was increased from $.47/share per quarter to $.51/share per quarter. This represents an increase of 8.5% and a new full-year payout of $2.04/share compared with the previous $1.88/share. This results in a current yield of 4.33% based on a share price of $47.11.

WP Carey - Like Realty Income, WPC continues to fly high and remains one of John and Jane's larger positions (Taxable + IRAs). We have been weighing the benefit of selling shares near the 52-week-high but this is an instance where it would be a challenge to replace the current 4.8% yield with something else. At this point, I consider shares to be a hold at best, and like many of the other authors who have written on WPC, I agree that shares are not attractively priced. FastGraphs confirms this based on a 10-year average P/AFFO of 12.82x vs current P/AFFO of 16.68x.

WPC - FastGraphs The dividend was increased from $1.032/share per quarter to $1.034/share per quarter. This represents an increase of .2% and a new full-year payout of $4.14/share compared with the previous $4.13/share. This results in a current yield of 4.79% based on a share price of $86.00.


The Taxable account currently consists of 44 unique positions as of August 10, 2019. We made a number of small purchases in the month of July that increased the number of shares for existing holdings for the following positions.

  • Washington Trust Bancorp (WASH) - Purchased 50 Shares @ $48.05/share
  • Mitcham Industries Preferred Series A (MINDP) - Purchased 100 Shares @ $24.39/share

We did sell a small portion of one position which is uncommon for the Taxable portfolio. This move was to take advantage of a temporary run-up in share price the loudest remove shares that were bought at a higher cost basis.

  • Schlumberger (SLB) - Sold 25 Shares @ $41.24/share

The image below shows the trade history associated with SLB and I highlighted in red the shares that were sold (I specifically decided to sell the highest cost basis shares).

SLB - Trade History Source: Charles Schwab

July Income Tracker - 2018 Vs 2019

July 2019 saw income increase to $1,030.43 compared with $640.87 in July of 2018. This is a whopping increase of over 61% over 2018 the previous year and was partially due to the additional funds invested throughout the year in addition to the regular dividend increases. It was also around this time that John and Jane added additional capital to the Taxable account (most of this capital continues to be held as cash or in other fixed-income investments).

Images will explicitly state if they take into consideration the income generated by the Fixed Income holdings.

Dividend Income - 2018 vs 2019 Breakdown

Taxable Account - July YoY Dividend Comparison

Source: Consistent Dividend Investor, LLC.

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

Taxable Account - 2019 YTD Monthly Dividends

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. (Future estimates were last updated on August 11, 2019).

Taxable Account - Annual Dividend Estimate For 2019

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.

Taxable Account - YTD Month End Balances

Source: Consistent Dividend Investor, LLC.

To wrap up July'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 showing gain while others sit 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.

Taxable Account - July Gain-Loss Update

All figures in the images above were accurate as of market close on 8/9/2019.


Although a few positions were worth adding to during the most recent market decline, I believe that further volatility is ahead and will wait for further information before I began adding to the positions mentioned in this article. I am comfortable with the current composition of the portfolio and expect that it will perform reasonably well under the current market conditions.

When I compare July's updated dividends received and estimates for FY-2019 with the figures I provided in the June Taxable account update there was more than $700 of additional dividend income that is expected to be received before the end of the year. This ultimately boosted the average monthly income generated by the Taxable account by nearly $60/month. (I will try to be more conscientious about updating this part of the spreadsheet more often going forward).

The total amount of income generated by the Taxable account was $1,230.02 and consisted of the following:

  • Fixed-income - $199.59
  • Dividends - $1030.43

Based on the data we have collected and estimates for the remaining five months of 2019, the Taxable Account is estimated to be generating an average of $1,188.23/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, EMR, T. 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.