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The Retiree's Dividend Portfolio - John's July Update: Capital Recycling And The Impact On Income

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Includes: APLE, ARESF, BA, BBT, BML.PL, BP, BRX, CDUAF, CLDT, CONE, CVS, CVX, D, DLR.PJ, DUK, EAFAX, EPR, EPR.PG, EV, FRT, GD, HTA, IRM, JPM, KIM.PL, KMI, KMI.PA, KRG, LTC, LVS, LXP, MAIN, MO, O, OMI, ORCL, OXY, OZK, PACW, PEGI, PK, PONAX, RF, SCE.PD, STAG, T, TD, TROW, UMPQ, UTF, VER, VLO, VLY, VTR, WBA, WELL, WPC, WRK
by: Matthew Utesch
Summary

John's retirement accounts generated a total of $1,912.99 in dividend income for July 2019 vs. $2,208.27 in dividends in July of 2018.

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

Income is down in both the Traditional and Roth IRA year-over-year, and I will show you how this happened.

$199.88 of dividend income in July 2018 came from shares that were sold before the end of the year.

We sold LXP in 2019 because of the massive dividend reduction and eliminated PEGI. These accounted for $130.95 of income difference.

As a dividend growth investor, nothing could be worse than seeing a reduction of monthly income when comparing to the same month from the prior year. Between the Traditional and Roth IRAs, the total amount of income for July 2019 was reduced by $295.28 when compared with July 2018.

In the worst-case scenario, this could indicate that a company (or multiple companies) in the portfolio reduced their dividend which would then make you question whether or not that company (or companies) should continue to be held in your portfolio. When it comes to John's portfolio, there is a much more reasonable explanation to help explain why there was such a large discrepancy during the month of July (when comparing 2018 and 2019).

There is only one company that shows a reduced dividend payout that is the direct result of an actual dividend cut. Owens & Minor (OMI) was paying $.26/share per quarter before it cut its dividend twice, first in January-2019 and then again in March-2019, resulting in a current payout of $.025/share per quarter. At this point, OMI represents less than .20% of John's traditional IRA and continues to be held because another good quarter has the potential to make the risk worthwhile. Overall, OMI's reduced dividend is responsible for a total of -$25.75 of dividend income for the month of July.

After consulting my income chart, it looks like there are a few culprits that really had a large impact on July income year-over-year.

  • Kite Realty (KRG) - KRG paid dividends in January, April, July, and October of 2018, but its payouts for 2019 include January, March, June, and September. This resulted in the loss of $95.25 of income during the month of July (but added to the outperformance of income during the month of June).
  • Lexington Realty (LXP) - We sold the LXP position because of the dividend cut which dropped the yield from 7% down to 4.3%. These funds were redeployed into other dividend-paying stocks. The sale of LXP stock resulted in the loss of $88.75 (July 2018 income), but would have been reduced to $71.75 after the dividend cut.
  • Pattern Energy (PEGI) - PEGI has performed well, but we felt that it was time to eliminate the position because I didn't have time to keep current with what was considered to be a non-essential holding. The elimination of this position represented a total income difference of $42.20.
  • Shares No Longer Held (SNLH) - In my charts (shown later in the article) there was a considerable amount of income that came from positions which are no longer held in the portfolio (these positions were sold prior to the end of 2018 whereas LXP and PEGI were sold in 2019). Stocks eliminated from the portfolio include Federal Realty (FRT), Kinder Morgan Preferred Series A (KMI.PA), Oracle (ORCL), and LTC Properties (LTC). The income generated by these positions resulted in a difference of $199.88 between 2018 and 2019.

In total, the discrepancies mentioned above resulted in a difference of $409.08, which exceeds the difference in July 2019 income when compared with July 2018. This means that we can conclude that the portfolio has continued to generate increasing amounts of income when we take the same assets into consideration.

July Dividend Article Links

The following two links are for Jane's (John's wife) retirement account article and their joint Taxable account article.

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

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

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.

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).
  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 that said, investors should understand that recent changes in the tax code have reduced the taxable consequences between qualified and ordinary dividends.
  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. Trades are not executed in an attempt to lock in "quick profits" and readers should also understand that John and Jane do not compensate me for anything I do.

Dividend And Distribution Increases

The following stocks in John's portfolio paid an increased dividend during the month of July.

  • Main Street Capital (MAIN)
  • Realty Income (O)
  • Bank OZK (OZK)
  • W.P. Carey (WPC)

MAIN, O, and WPC have all been discussed in the previous July articles (links included in a previous section) so I will not provide more analysis on these stocks but I will include a summary of their dividend increase.

Main Street Capital - 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 5.58% based on a share price of $44.11.

Bank OZK - We recently added to OZK as the stock dipped below $25/share for the first time since the beginning of the year. At $25/share OZK is trading at a dirt-cheap valuation with a P/E Ratio of 7.8x. Most stable (but growing) banks are currently trading at a P/E Ratio of 10x or more and this difference in valuation is the direct result of Q3-2018 where OZK saw two write-offs of legacy real estate loans (these loans were originated just before the great recession). Although an element of risk does exist with their real estate portfolio, it should be noted that fears are completely overblown (especially at a time where real estate prices have reached record highs for a completely different reason than what we saw in 2007). At an estimated $3.36/annual earnings for 2019 I believe a reasonably conservative valuation of OZK would be around $33.60/share, suggesting upside of more than 30% at current levels.

OZK - FastGraphs

The dividend was increased from $.23/share per quarter to $.24/share per quarter. This represents an increase of 4.3% and a new full-year payout of $.96/share compared with the previous $.92/share. This results in a current yield of 3.72% based on a share price of $25.80.

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 $73.81.

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 4.59% based on a share price of $89.80.

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.

Traditional IRA - The following stocks were added to the Traditional IRA during the month of July.

  • Healthcare Trust of America (HTA) - 100 Shares @ $27.09/share.
  • STAG Industrial (STAG) - 50 Shares @ $30.30/share.

The following stocks were sold from the Traditional IRA during the month of July.

  • Boeing (BA) - 35 Shares @ $364.85/share.
  • Chevron (CVX) - 25 Shares @ $125.54/share.

Traditional - July Realized Gains Source: Charles Schwab

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

  • VEREIT (VER) - 100 Shares @ $9.15/share.
  • General Dynamics (GD) - 10 Shares @ $186.22/share.
  • Cohen & Steers Infrastructure (UTF) - 100 Shares @ $26.24/share.
  • Dominion Energy (D) - 50 Shares @ $74.21/share.

One stock was sold from the Roth IRA during the month of July.

  • T Rowe Price (TROW) - 25 Shares @ $109.92/share.

Source: Charles Schwab

As usual, you can see that my sales have little to do with locking in "big capital gains" and tend to have much more

July Income Tracker - 2018 Vs. 2019

As mentioned at the beginning of the article, the income for July 2019 was quite a bit less than it was in July 2018. After we took into consideration some of the key changes that negatively impacted John's income, we were able to conclude that most of the change was due to recycling capital and changes in dividend payment dates.

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). Any stocks that were sold prior to the end of the year where a dividend was received would be classified as SNLH.

John Source: Consistent Dividend Investor, LLC

John

Source: Consistent Dividend Investor, LLC

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

Traditional IRA - YTD Dividends July

Source: Consistent Dividend Investor, LLC

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

Roth IRA - Dividend Income - July

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.

YTD Dividends - July Update 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 August 30th, 2019.

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

Traditional IRA - Gain Loss

Source: Consistent Dividend Investor, LLC

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

Roth IRA - July Gain-Loss

Traditional IRA - Gain Loss

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.

John

Source: Consistent Dividend Investor, LLC

During the month of July, the market remained fairly steady which resulted in the highest account balances (Traditional and Roth) that we have seen since we first began tracking this metric.

Conclusion

Although dividend income was down during the month of July, I remain optimistic about the long-term dividend/income growth prospects related to John's retirement accounts. This issue would not have occurred if John's retirement portfolio was run using a more commonly accepted method of "permanently buy-and-hold". With this in mind, I believe that capital recycling has created opportunities to boost his passive income by replacing overvalued dividend stocks with undervalued dividend stocks.

With the results of July added into John's income tracker we can see that the estimated FY-2019 average monthly income generated by dividends is up significantly when compared with 2018 (for both the Traditional and Roth IRAs).

  • Traditional IRA - Estimated FY-2019 monthly income average of $991.27 compared with an average income of $802.48 in 2018.
  • Roth IRA - Estimated 2019 monthly income average of $644.59 compared with an average income of $511.24 in 2018.

Cash reserves have dropped considerably during the month of August as we took advantage of the market sell-off to add to positions that we considered to be attractive.

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 (OTCPK:CDUAF), 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 (EV), 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 (MAIN), 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 & Steers Infrastructure Fund (UTF), Valero (VLO), VEREIT (VER), 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.