Seeking Alpha

The Retiree's Dividend Portfolio - Jane's July Update: What Does Volatility Look Like In Your Portfolio?

by: Matthew Utesch

Jane's retirement accounts generated a total of $1,988.24 in dividend income for July 2019 vs. $1,610.61 of dividends in July of 2018.

A total of four companies paid or increased special dividends during the month of July.

The introduction of this article focuses on volatility and how Jane's portfolio value compares with her husband John's.

We have continued to deploy cash when it makes sense to add to existing positions that are too attractive to pass up.

Every morning I wake up and look at my phone to see what kind of SeekingAlpha alerts have flooded my main screen. After attempting to grasp what chaos has made the headlines, I turn on my computer to see what the market is and where the portfolio of my clients' John and Jane stand.

With the major sell-off that took place during August, I am reminded why I added the positions I did to Jane's account and it was because Jane and I agreed that additional risk in her portfolio was acceptable while focusing on the addition of less risky stocks in John's portfolio. After looking at the total value of their portfolios side-by-side, I am confident that I have their accounts set up correctly because John (who is currently retired) has seen significantly less volatility in his account value when compared with the account value of his wife Jane.

Here are a few key details about the image below:

  • Jane's Account Value - Includes the Taxable Account and both Retirement (Traditional and Roth IRAs).
  • John's Account Value - Includes the Taxable Account and both Retirement (Traditional and Roth IRAs).
  • Approximately half of each account value column comes from the shared Taxable Account ($447k as of market close on 8/29/2019).

August Account Comparison

Source: Charles Schwab

I think it is extremely important to consider just how significant these numbers are since the change in value (calculated by subtracting Jane's account value from John's) is coming exclusively from the retirement accounts. By isolating change associated with the retirement accounts we can say that volatility in Jane's account is significantly higher than John's.

It is also true that a resolution to the trade war and other negative economic indicators would likely have a greater impact on Jane's account in terms of recovering value.

For those who are interested in better understanding the Taxable Account the July article can be found at the following link:

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

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, if the current in Jane's Traditional IRA was $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 July. This includes:

  • Main Street Capital (MAIN)
  • NetApp (NTAP)
  • Realty Income (O)
  • WP Carey (WPC)

I already wrote about Realty Income and WP Carey in the Taxable account article The Retirees' Dividend Portfolio - John And Jane's July Taxable Account Update: Looking To The VIX Index. The summary of the dividend increase for O and WPC is included below.

Main Street Capital - July was the first month of the new dividend increase program as they continue to reduce the special dividend and incorporate it as part of the monthly dividend. MAIN's share price continues to push new highs as investors search out higher-yielding assets that can replace the income that other investments (which are traditionally safer) can't provide at this point in time. For those interested in better understanding why MAIN is constantly being traded at such a high premium, I recommend reading an article by Brad Thomas titled Main Street Capital: A High-Yield Monthly Paying Blue Chip You Can Trust. The following graph shows how MAIN has seen strong returns relative to two peers: Ares Capital (ARCC) and Prospect Capital (PSEC).

Chart Data by YCharts

The dividend was increased from $.20/share per month to $.205/share per month. This represents an increase of 2.5% and a new full-year payout of $2.46/share compared with the previous $2.40/share. This results in a current yield of 5.63% based on a share price of $43.73.

NetApp - Tech companies are something I tend to stay away from unless they have a certain size/scope that gives them a competitive advantage. NetApp's recent relationship with Alphabet (GOOG) looks promising but there are still a number of analysts who are bearish when it comes to NTAP short-term outlook. The recent dividend increase is well-supported by earnings and the recent drop in price creates an attractive entry point.

NTAP - FastGraphs The dividend was increased from $.40/share per quarter to $.48/share per quarter. This represents an increase of 20% and a new full-year payout of $1.92/share compared with the previous $1.60/share. This results in a current yield of 4.01% based on a share price of $47.90.

Realty Income - The 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 3.68% based on a share price of $73.93.

WP Carey - 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 4.62% based on a share price of $89.19.

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 some 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 July.

  • Digital Realty (DLR) - Purchased 10 Shares @ $116.38/share.
  • Digital Realty (DLR) - Purchased 15 Shares @ $116.21/share.
  • Williams Companies (WMB) - Purchased 50 Shares @ $25.53/share.

We sold the following positions in the Traditional IRA during the month of July.

  • Royal Bank of Canada (RY) - Sold 25 Shares @ $80.74/share.
  • General Mills (GIS) - Sold 25 Shares @ $54.34/share.
  • Laurentian Bank (OTCPK:LRCDF) - Sold 25 Shares @ $34.83/share.
  • IBM Corp (IBM) - Sold 15 Shares @ $148.27/share.
  • LogMein (LOGM) - Sold 50 Shares @ $81.53/share.

Traditional IRA - July Realized Gains Source: Charles Schwab

Roth IRA - The following stocks were added in the Roth IRA during the month of July.

  • British Petroleum (BP) - Purchased 50 Shares @ $39.71/share.

We did not sell any positions in the Roth IRA during the month of July.

July Income Tracker - 2018 Vs. 2019

The income generated during the month of July 2019 was solidly higher than the income generated in July 2018 for each of the retirement accounts. As I mentioned in my June article, I consider this year-over-year change to be reasonable considering that most of Jane's retirement funds were invested by this time last year (months prior to this saw large differences because positions were added after dividend ex-dates).

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 - 2018 vs 2019

Source: Consistent Dividend Investor, LLC

Roth IRA - 2018 vs 2019 - July

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 - July Income Graph

Source: Consistent Dividend Investor, LLC

Roth IRA - July Income Graph

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.

Retirement Account - July Projection Update 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)

Retirement Account Month End 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 August 29th.

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

Traditional IRA - July Gain-Loss

Source: Consistent Dividend Investor, LLC

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

Roth IRA - July Gain-Loss

Source: Consistent Dividend Investor, LLC

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

  • Traditional IRA - Current gain/loss of -$11,199.50 vs $-1,612.93 when the June retirement article was written.
  • Roth IRA - Current gain/loss of -$12,260.09 vs -$5,538.00 when the June retirement article was written.


Remember why you built your portfolio the way you did because it can help ease your nerves when the market has a sell-off as it did during the month of August. With that said, it is even more important to remember that the portfolio was designed to provide consistently growing dividend income and the tumultuous share price often stands out because it is where all of the risk is concentrated.

I continue to practice an investing method that is based on capital recycling (when certain price targets are met) with an exclusive focus on dividend-paying stocks. The positions that were sold in the Traditional IRA are a great example of how this works considering every position sold is now available again at a lower price than what was sold for. By selling these positions when we did we were able to accumulate reserve capital which was used to purchase shares in existing positions which were much more attractively valued during the month of August.

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 (ABBV), Archer Daniels Midland (ADM), 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 (ENB), Eaton Corporation (NYSE:ETN), Emera Inc. (OTCPK:EMRAF), East West Bancorp (EWBC), General Mills (NYSE:GIS), Gilead Sciences (GILD), Gaslog Partners Preferred C (GLOP.PC), Honeywell (HON), International Business Machines (IBM), Illinois Tool Works (ITW), Iron Mountain (NYSE:IRM), Johnson Controls (NYSE:JCI), KeyCorp (KEY), Laurentian Bank of Canada (OTCPK:LRCDF), LyondellBasell (LYB), LogMein (LOGM), Main Street Capital (MAIN), 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, 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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.