Seeking Alpha

Building A Retirement Portfolio

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Includes: CZNC, DIA, F, FCOM, FDIS, FENY, FHLC, FIDU, FMAT, FNCL, FREL, FSTA, FUTY, GGB, KMI, KO, LUV, MET, O, ONEQ, PEAK, SPY, T, VTI, X
by: Cody Perez
Cody Perez
Growth, value
Summary

I'm building a retirement portfolio that will generate cash flows through dividends.

I have 24-29 years left to perfect my income portfolio.

Here are my financial goals and investment methodology for coming up with the most efficient income portfolio.

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This is a continuation of a series of blog posts built around building a retirement portfolio that can generate passive income through dividends. The previous post, "Growing And Tracking A Young Dividend Portfolio Part 10," described the purchases I made since part 9 of the series, my updated portfolio at the time, the dividends I received during October 2019, and the plans I had for my portfolio (sector diversification/core building). In this article, I will continue as usual by going through the plans I have to build my retirement portfolio, my portfolio after purchases/sales (including DRiP shares), my investment methodology, my long-term investment goals, and lastly the dividends I received for the year - including November 2019.

Plans

Now that my portfolio is complete, I will be spreading my money between the investments and making sure the portfolio is well balanced. For one, I look to continually decrease the percentage that my top three holdings make up. It's never a good thing to have extremely concentrated positions.

The most important rule to follow when building a strong retirement portfolio is having a strong core. This may mean sacrificing yield for volatility. This doesn't mean every holding should be extremely conservative with a low yield, only a handful that can provide support for the entirety of your portfolio. For instance, great core holdings in my opinion would be market tracking ETFs like SPDR S&P 500 Trust ETF (SPY), SPDR Dow Jones Industrial Average ETF (DIA), Fidelity Commonwealth Trust - Fidelity Nasdaq Composite Index Tracking Stock (ONEQ), and Vanguard Total Stock Market ETF (VTI) to name a few. Although they bring low yields to the table, they will provide lower volatility and follow the gains of the broad market. This will at least give a foundation for the rest of your portfolio to build on.

To have a balanced mix, the core should make up roughly 10-25% and individual stocks and ETFs the rest of the portfolio. Potentially, bonds could be a small part of the core position. This is the way I plan on having my portfolio setup (without bonds). The way I currently have my portfolio setup, I have 10 dividend paying sector ETFs which act as my core followed by 10 individual dividend paying stocks. My core consists of 12.14% of my overall portfolio. I look to have each stock be roughly 7.5% of the portfolio and each core holding be roughly 2.5%. Once I manage to balance out my portfolio along these lines, I will look to add more stocks and those same market trackers I previously suggested. The final goal for me is having a retirement portfolio of roughly 30-35 dividend paying holdings.

Financial Goals and Investment Methodology

When deciding how to balance your portfolio, the main deciding factor is time. How much time are you looking at before you'll want to access the dividends from your portfolio? To answer this, look at your target retirement age. Whether you want to retire at the age of 45, 65, or anywhere in between, this will help determine which stocks are best for you and what kind of risk you can tolerate. For instance, if you're planning on retiring early near 45, then dividend aristocrats might not be the best and most efficient choices to help you get there. Slightly riskier yields might be more favorable in the short term (with good fundamentals of course). On the other hand, if you plan on retiring near 65, then having some dividend aristocrats will pay off in the long run because you'll have plenty of time for them to grow their dividend and over time your yield on cost will skyrocket.

For me, I'm looking at having roughly another 24-29 years before I'll need to access my dividends. So, I can be more lenient with slightly higher yields and riskier investments (with good fundamentals of course) while also holding on to some dividend aristocrats. With this in mind, I decided to limit my core to 25%. Eventually, I will change this to 30-40% once I retire since I'll want my portfolio to have even less volatility and safer yields.

Another thing to keep in mind is inflation. In my opinion, it's safe to always assume a 3% increase per year even though realistically it'll be closer to 2-2.5% This means the minimum dividend yield your portfolio has to return is 3.01% to beat inflation. So, this, along with time in the market, will help you narrow down which stocks are best for you and what kind of risk you can tolerate when building your own retirement portfolio.

Currently, my portfolio is generating roughly 3.91% in dividends. I'd like my yield to be a little higher closer to 4.5%, but it's a safe dividend yield, especially considering I own several dividend aristocrats and known dividend growth stocks. I can expect my yield to naturally increase year over year.

To be as transparent as possible, I'll go into some detail with my own financial position and what I am currently doing. This will give you some background on myself and where my goals came from. I am a 21-year-old undergraduate student studying fourth-year chemistry with an emphasis in biochemistry. I have a part-time job ($16 an hour/week) at a casino working on the pool deck. I set up as part of my direct deposit to deposit 30% of my checks into my investment account where I purchase securities based off of my own research. The rest of my paychecks go toward paying a monthly car bill along with groceries for my dorm.

I do not own any credit cards and do not plan on opening any up. I only use my bank issued debit card. I'm also a big saver and only spend money when I need to. If I do not need to, then it'll get invested. With all this in mind, I look for value in places where most people will not. I'm always looking for opportunities where a stock is undervalued and I can get it for a discount. My thought process is "why pay more for a dividend when I can pay less for the same dividend." This helps me when I'm comparing stocks and their underlying value and dividend strength.

The methodology I have (25% core with no bonds) came from reading and looking at the market over time. In my personal opinion, I do not think bonds can provide the same income stocks and ETFs can. In general, bonds tend to have extremely low yields for the same risk and price as some ETFs and stocks that give higher yields. This fits my financial goals perfectly because I have plenty of time left in the market before I'll need to access my dividends. So, I can take advantage of higher yields and higher risk all while limiting my core.

I chose sector-based ETFs from Fidelity for my core. The main reason I went to Fidelity is because I hold my account under their firm. I had looked each one over along with reading analysts opinions and came to the conclusion they could provide stability and a solid yield, albeit low, to my portfolio. This was exactly what I was looking for in a core position - diversification and a solid stream of income. With these, I have a "set it and forget it" mentality. I will continue to add money to each core position but do not plan on selling in the foreseeable future. The only potential downfall with my portfolio is the fact that I do not have any bonds. This will limit my potential income since most bond funds distribute monthly rather than quarterly like most stocks/ETFs.

The Market as a Whole and Its Effect on Your Portfolio

For dividend investors, short term market fluctuations should not bother you. They happen all the time, so if a holding or two in your portfolio falls 5% or more, it's OK - that just means you can purchase that stock at a 5% or more discount to your average cost, which means juicier yields. Bear markets should be your favorite because some gems can come out of them and give you the opportunity to start new positions in stocks that may have been previously overpriced that now give a hefty yield.

The point of this is that you should look forward to bear markets because you can get away with juicier yields assuming the company has solid fundamentals. For instance, in today's bull market, there are shaky moments coming from the ongoing trade war between the U.S. and China. This has weighed heavily on companies that rely on foreign markets. This has provided some buying opportunities because of the retaliatory tariffs that the U.S. and China have engaged in before.

Portfolio

From here on out, I'll be showing my portfolio as an image of my dividend portfolio Excel sheet. As for my portfolio updates, I purchased 1 share of Fidelity Covington Trust - Fidelity MSCI Industrials Index ETF (FIDU), 1 share of Fidelity Covington Trust - Fidelity MSCI Energy Index ETF (FENY), 1 share of Fidelity Covington Trust - Fidelity MSCI Energy Index ETF (FCOM), 1 share of Fidelity Covington Trust - Fidelity MSCI Financials Index ETF (FNCL), 1 share of Fidelity Covington Trust - Fidelity MSCI Materials Index ETF (FMAT), 2 shares of Realty Income Corporation (O), 1 share of The Coca-Cola Company (KO), 1 share of Southwest Airlines Co. (LUV), and 1 share of Citizens & Northern Corporation (CZNC). I sold 4 shares of Healthpeak Properties, Inc. (PEAK) at $34.7336 for a 31.4% realized gain, and sold 35 shares of Gerdau S.A (GGB) at $3.83 for a 1.06% realized gain.

This is my updated portfolio (including DRiP shares):

Source: Created by author using Microsoft Excel

My top 3 holdings make up 48.88% of my portfolio:

  • F - 17.43%
  • GGB - 17.99%
  • KMI - 13.46%

Income Generated Through Dividends

From here on out, I'll be showing dividends as an image of my dividend tracker Excel sheet. Here you can see all my dividends for the year so far:

Source: Created by author using Microsoft Excel. *Each holding in the portfolio is set up with a DRiP that started in October 2019.

As you can see, I need to work on the months of January, April, July, and October. This will hopefully change as I continue to add more holdings to my portfolio including a couple more monthly dividend paying stocks, like O.

Conclusion

I will continue to diversify my money among the portfolio by adding to the smaller positions, which will decrease the larger positions. I look forward to writing more with regard to the December 2019 updates.

Disclosure: I am/we are long CZNC, F, FCOM, FDIS, FENY, FHLC, FIDU, FMAT, FNCL, FREL, FSTA, FUTY, GGB, KMI, KO, LUV, MET, O, T, X. 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: I/we have no positions in SPY, DIA, ONEQ, and VTI, and no plans to initiate any positions within the next 72 hours.