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The Retiree's Dividend Portfolio - Jane's August Update: Price Targets

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Includes: ABBV, ADM, BAC, BNS, BP, BTI, CM, CMI, CTL, DLR, EAFAX, EMRAF, ENB, ETN, EWBC, GILD, GIS, GLOP.PC, HON, IBM, IRM, ITW, JCI, KEY, LOGM, LRCDF, LYB, MAIN, MMM, MO, MSB, NTAP, O, OXLCM, PFBC, PH, PM, POL, PPL, RMD, RY, SCHF, SNX, TD, USB.PH, VET, VZ, WASH, WMB, WPC
by: Matthew Utesch
Summary

Jane's retirement accounts generated a total of $1,048.58 in dividend income for August 2019 vs. $689.45 of dividends in August of 2018.

A total of 1 company paid or increased special dividends during the month of August.

A number of purchases were made during the month of August as many stocks were pushed to a 52-week-low, which depleted the cash reserves.

No sales were made during this time although the month of September has gotten off to a busy start with a handful of sales now that the market is rallying.

We are now focused on building cash reserves now that there are few stocks available at attractive valuations.

When the market as a whole enters a rally like this, it can be difficult to take a deep breath and begin trimming certain positions as the thrill of rapidly increasing portfolio balances offers a temporary high. If you follow a strategy that is similar to mine then you know that I remain cautiously optimistic about the current rally but I am more focused on scanning the portfolio to find positions that need to be trimmed back because the window of opportunity is seldom open for long. Specifically, I am looking to take advantage of paring back positions where shares were purchased at a price that is well above the cost basis of the other shares which means that selling them for a small gain or even a loss puts Jane in a better position by lowering her overall cost basis while replenishing the cash we need when the market takes its next tumble.

Here are a few of the companies that we are interested in or have already pared back.

Eaton (ETN) - It hasn't been since the same time last year that ETN's share price pushed above the $87/share mark, which represents a yield of 3.25% based on an annual dividend of $2.84/share. Over the last five years, ETN has failed to push above the $90/share mark, and we have sold shares in the past when the price moves above $87/share. We use this current opportunity to sell 20 shares at $87.88/share and liquidated 20 shares that were purchased at $83.10/share and drops the overall cost basis of the remaining 80 shares to $78.16/share.

Chart Data by YCharts

FastGraphs shows that ETN looks fully valued based on a 10-year P/E ratio average of 14.34x earnings compared with a current P/E ratio of 15.29x at $87.47.

ETN - FastGraphs

Parker Hannifin (PH) - PH is actually held within the Taxable account, but we used the recent run-up to sell our initial position of 10 shares, which was established at a cost basis of $184.15/share. By selling the same 10 shares at $184.32/share we were able to lock in a small loss of $8.27/share and lowers the overall cost basis of the remaining 45 shares drops to $164.27/share. Previously I had stated I would love to see PH drop into the low $150/share range, at which point we will become acquirers of the stock once again.

FastGraphs indicates that PH is currently trading near its 10 year P/E ratio average of 15.9x compared with its current P/E ratio of 15.4x.

PH - FastGraphs

Washington Trust (WASH) - WASH remains one of my favorite banks because of its dividend growth trajectory and its relative price stability when compared with other financial institutions. With that being said, there have been a number of purchases made in 2019, which has doubled the size of the position in the Taxable account. Shares recently moved above the $50/share mark after recently hitting a 52-week-low of $45.21/share.We currently have a price target of around $52.50/share or a P/E ratio of 13.5x, at which point we will sell 50 shares that were acquired at the highest cost basis of $50.29/share.

The other reason for selling shares of WASH at these levels is that EPS is expected to contract in 2019 compared with 2018. EPS in 2020 is expected to remain stagnant with little to no growth. WASH is still one of my favorite banks in John and Jane's portfolio, but that does not mean that we are willing to ignore/overlook an opportunity to reduce exposure.

WASH - FastGraphs These are just a few of the stocks that we are interested in potentially selling in an effort to reduce the downside when the rally comes to an end and prices become more attractive than they currently are. Many of the high-quality stocks which would be worth investing in are currently trading at or above their 10-year average P/E ratios which indicates that this is the time to whittle away at less attractive parts of a position so that we have the needed firepower to acquire more at more attractive valuations.

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

The Retirees' Dividend Portfolio - John And Jane's August Taxable Account Update: MLP Update

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 August. This includes:

Laurentian Bank of Canada - LRCDF is not one of the "Big 5" banks in Canada, and its market cap is a fraction of the size of Canada's behemoth institutions.

Chart Data by YCharts

What we like about LRCDF is that it is in the middle of a turnaround that includes the following changes/improvements, including reaching an agreement with its unionized workforce (this is reducing its above-average labor costs) and the expansion of digital operations which will reduce headcount and is estimated to net $20 million in annual savings by mid-2020. Shares are currently available at a significant discount relative to its historical value.

Chart Data by YCharts

The dividend was increased from $.65 CAD/share per quarter to $.66 CAD/share per quarter. This represents an increase of 1.5% and a new full-year payout of $2.64 CAD/share compared with the previous $2.60 CAD/share. This results in a current yield of 5.88% based on a share price of $33.78 USD/share.

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 August.

  • Lyondell Basell (LYB) - Purchased 25 Shares @ $77.80/share.
  • EastWest Bancorp (EWBC) - Purchased 25 Shares @ $40.36/share.
  • 3M (MMM) - Purchased 15 Shares @ $158.46/share.
  • Honeywell (HON) - Purchased 10 Shares @ $155.45/share.

Traditional IRA - August Purchases

Source: Charles Schwab

There were no shares sold in the Traditional IRA during the month of August.

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

  • NetApp (NTAP) - Purchased 50 Shares @ $46.23/share.

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

August Income Tracker - 2018 Vs. 2019

The following images are intended to provide readers' with a better understanding of what Jane's Traditional and Roth IRA accounts look like. The images show represent all updated information for the month of August and Gain/Loss numbers are based on prices from September 13th market close.

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 - August

Source: Consistent Dividend Investor, LLC

Roth IRA - August

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 - August

Source: Consistent Dividend Investor, LLC

Roth IRA - August Income

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.

August Retirement Account 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)

Retirement Account - August 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 September 13th.

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

Traditional IRA - August Gain-Loss

Source: Consistent Dividend Investor, LLC

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

Roth IRA - August Gain-Loss

Source: Consistent Dividend Investor, LLC

The Gain/Loss associated with both accounts has improved significantly when compared with the month of July.

  • Traditional IRA - Current gain/loss of $1,618.13 vs -$11,199.50 when the July retirement article was written.
  • Roth IRA - Current gain/loss of -$4,451.39 vs -$12,260.09 when the July retirement article was written.

Conclusion

The rally that has taken place during the month of September has pushed Jane's Retirement account balances to record highs and even though it seems like there is still momentum behind the current market you began to trim certain positions with the primary focus being on eliminating shares with a higher cost basis relative to the rest of the position.

We are able to achieve the following objectives when we follow this strategy:

  1. Replenish our cash reserve so that we can take advantage of shares when they are undervalued.
  2. Increase the yield of the remaining position because we are typically selling higher cost-shares (this becomes particularly beneficial when we use these proceeds to purchase additional shares of undervalued companies).

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 (BAC), Bank of Nova Scotia (BNS), BP (BP), British American Tobacco (BTI), Canadian Imperial Bank of Commerce (CM), Cummins (CMI), CenturyLink (CTL), Digital Realty (DLR), 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), Vermilion Energy (VET), Verizon (NYSE:VZ), Williams Companies (WMB), W.P. Carey (NYSE:WPC).

Disclosure: I am/we are long CTL, MAIN, VET. 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.