The Retirees' Dividend Portfolio: John And Jane's May Taxable Account Update

Summary

• The Taxable account generated $1,721.59 of dividends in May of 2020 compared with $1,667.25 of dividends in May of 2019.
• A total of one stock/funds in the Taxable portfolio paid increased dividends or paid a special dividend during the month of May.
• A total of one stock/funds in the Taxable portfolio suspended or reduced dividends during the month of May.
• The market is making its comeback but how much steam behind it is another question.
• We used the opportunity to start a position in HON for the Taxable account and as of early June have been able to trim some of the high-cost portions of several positions.

Honeywell (HON) is the newest addition to the Taxable Account and has morphed into a dividend powerhouse. Since 2008, it currently pays a dividend rate that is more than 3x the amount paid in 2008 and it has managed to do this without compromising the payout ratio. This has been achieved by focusing on high-margin products (aerospace being a major focus) which can be clearly seen when we look at how gross profit has nearly doubled since 2008 even as revenue stays the same (or even contracted in most recent years).

Data by YCharts

This has driven earnings per share and executive management has largely increased the dividend to keep pace with earnings growth. HON has been growing its dividend at 11.3% CAGR over the last 10 years.

Data by YCharts

Jane currently holds shares of HON in her Traditional IRA and we have been adding to it as share prices continue to drop. Given the current circumstances, we felt like it was a good opportunity to build a starter position that we can potentially add to as we see the market recover and we are able to sell some of our high-cost portions of other positions.

Background

For those who are interested in John and Jane's full background please click the following link here for the last time I publish their full story. Here are the key details about John and Jane that readers should understand.

• This is a real portfolio with actual shares being traded.
• I am not a financial advisor and merely provide guidance based on a relationship that goes back several years.
• John retired in January 2018 and is only collecting Social Security income at this point in time.
• Jane is working part-time and will continue to do so for the remainder of 2020. Whether or not she continues to work will depend on whether or not her employer requests that she stays on in 2021.
• John and Jane have no debt and no monthly payments other than water, power, property taxes, etc.

I started helping John and Jane with this because I was infuriated by the fees and gimmicky trades made by their previous financial advisor. I do not charge John and Jane for anything that I do and all I have asked of them is that they allow me to write about their portfolio anonymously in order to help spread knowledge and to make me a better investor in the process.

Generating a stable and growing dividend income is the primary focus of this portfolio and capital appreciation is the least important characteristic.

Dividend And Distribution Decreases

A total of one company decreased their dividends/distributions during the month of May in the Taxable account and includes the following companies:

• New Residential (NRZ)

New Residential - NRZ is an interesting case of a company that grew rapidly and was capable of paying a high dividend yield by owning high-yield financial assets and boosting the yield through its use of additional leverage. Anyone who is still invested in shares of NRZ should fully accept that the yield provided in the past is extremely unlikely to return in the future. NRZ's shift was massive, selling $27.9 billion of assets as of April 30, 2020, which reduce the size of its investment portfolio to $12.7 billion. By doing this, NRZ was able to drop its total amount of leverage to 1.5x from 3.5x.

NRZ has been a component of John and Jane's portfolio going back to July of 2017, and it has been a pretty phenomenal stock (with regard to yield) as it has generated more than $1,000 in dividends during this time. Although it is still a higher-risk income vehicle we took advantage of its record-low prices over the last few months by adding 225 shares at an average cost of $5.94/share. By doubling the position at these rock bottom prices we were able to drop the breakeven point to $11.11/share.

Data by YCharts

The dividend was decreased from $.50/share per quarter to $.05/share per quarter. This represents a decrease of -90% and a new full-year payout of $.20/share compared with the previous $2.00/share. This results in a current yield of 2.37% based on a share price of $8.44.

Dividend And Distribution Increases

A total of one company paid increased dividends/distributions or a special dividend during the month of May in the Taxable account and includes the following companies:

• Apple (AAPL)

Apple - Investors have been loving the recovery on AAPL's share price as it is currently riding a momentum wave from App Store revenue. Morgan Stanley recently lifted its price target as it estimates App Store revenue to be 35% higher for the quarter year-over-year. AAPL has been doing an excellent job growing revenue among its services segment. Given the current circumstances, I believe that AAPL chose to be more conservative with its dividend raise of 6.5% was well below the five-year growth rate of 10.49% CAGR.

The dividend was increased from $.77/share per quarter to $.82/share per quarter. This represents an increase of 6.5% and a new full-year payout of $3.28/share compared with the previous $3.08/share. This results in a current yield of .99% based on a share price of $331.50.

Historically speaking, May is a month where a handful of Master Limited Partnerships (MLP) typically make their quarterly dividend increases. Given the circumstances, I believe that it was prudent for these companies to maintain the same distribution that they made during the month of February. The companies I am specifically referring to are:

• Enterprise Production Partners (EPD)
• Phillips 66 Partners (PSXP)
• Westlake Chemical Partners (WLKP)

Positions

The Taxable account currently consists of 47 unique positions as of the market close on June 5, 2020. Stock market volatility has decreased significantly and reduced the number of attractive buying opportunities that were available through the end of May. During the first week of June, we began selling some of the high-cost positions in John and Jane's Taxable Account in order to begin rebuilding the cash horde John and Jane had in the account prior to COVID-19.

Shares purchased in the Taxable Account are listed below:

• Old Republic International (ORI) - 100 Shares @ $14.52/share.
• Washington Trust (WASH) - 25 Shares @ $29.24/share.
• Honeywell (HON) - 5 Shares @ $136.53/share.

There were no shares sold from the Taxable Account during the month of May.

May Income Tracker - 2019 Vs. 2020

Income for the month of May was up modestly year-over-year but some of this benefit comes from how much money from John and Jane's Taxable Account has been put to work relative to the amount of cash being held in May 2019.

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 that comes from stocks no longer held in the portfolio even though it is non-recurring. All images below come from Consistent Dividend Investor, LLC.

Here is a graphical illustration of the dividends received on a monthly basis. I have begun updating the chart to also reflect the dividends earned in 2018, 2019, and 2020.

I am experimenting with new charts that give a different perspective on the dividend income received. I expect that these charts will provide more value as the dividend updates for 2020 start to take shape. Let me know if you have any suggestions in the comments about potential graphs and/or tables that you believe would add more value.

As mentioned in my previous Taxable Account update for the month of April, I expect that the trend for dividend income will more closely resemble the trajectory seen in 2019. There are a couple of reasons why I expect this to occur, including:

• Dividend cuts and suspensions from COVID-19.
• Cash-on-hand has been significantly reduced as we made quite a few purchases over the last three months.
• As stock prices recover, he will begin trimming the high-cost portion of certain positions while retaining the low-cost shares acquired during the downturn.

As a general rule, we do not typically sell out of positions in the Taxable account and therefore it is unlikely that we will see a dividend decrease as a result of selling a position. With that said, readers should expect more stock sales to occur as the market rallies.

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 2020 compared with the actual results from 2019. This table will continue to be updated as the year goes on with the actual amount of dividends earned in a specific month which will also include any dividend raises that have not been announced (yet) and will also reflect the income generated by additional purchases.

Below gives an extended look back at the dividend income generated from when I first began writing these articles.

Like many investors out there, John and Jane's Taxable portfolio saw its account balance drop significantly over the last several months but the end of May marks the second month of improvement and balance has improved even more dramatically in the first week of June when it closed with a balance of $403.4K as of June 5, 2020.

In an effort to be transparent about John and Jane's Taxable account I like to include an unrealized Gain/Loss summary. The numbers used are based on the closing prices from June 5th, 2020.

The unrealized gain-loss has improved significantly since the last figures were updated from May 7, 2020 market close. As demonstrated by the image above, more of the holdings in the portfolio are sitting on unrealized capital gains and the unrealized capital losses have dropped from $-68,073.83 to only being short -$3,361.68.

Lastly, I wanted to include the Monthly Year-Over-Year Income Comparison to show how the Taxable Account is trending. I believe this graph will become even more important in year number four since this will give us enough data points to really see how income is increasing by month year-over-year.

The trends associated with the graph above have the potential to vary dramatically over the next several months depending on how many more companies will need to suspend/cut dividends and how quickly companies reinstate dividend payments.

Conclusion

Momentum began to build in May and has skyrocketed during the first week of June. Ironically, the markets appeared to pay no attention to the massive riots that took place in nearly every major American city across the United States. Outside of these riots, the positive news concerning jobs and OPEC+ extended oil production cuts were all reasons for the market to rejoice with many companies in the crude oil sector bouncing off of record lows.

I am personally by no means bullish on this rally which is why were have continued to focus on selling the high-cost portion of certain positions (specifically stocks where we picked up shares at record-low prices) which means that we will be able to rebuild John and Jane's cash horde, while at the same time, maintaining similar dividend income levels. This strategy has been effective during periods of volatility and has primarily been used in John and Jane's Traditional and Roth IRAs over the last two years. The reason for using it on the Taxable Account is that we have deployed approximately $70,000 over the last three months which has allowed us to significantly lower the cost basis of companies in the Taxable Account.

Every few months I like to present readers with a visual of exactly how this strategy works. The example below demonstrates how the strategy played out for Emerson Electric (EMR) over the last several months (image shows trades that took place approximately three years ago or sooner).

Source: Charles Schwab

Here are the reasons why we chose EMR as a long-term buy-and-hold company for the Taxable Account:

• 62 years of consecutive dividend increases
• Diversified engineering and manufacturing company

When we purchased the stock for the portfolio we decided that it would be great to buy-and-hold investment regardless of the fluctuations in the stock price.

Data by YCharts

We used the opportunity to purchase an additional 50 shares @ $47.75/share because EMR has only rarely been available for less than $48/share (which is in large part due to the fact that the stock would be generating a 4% plus yield.

By selling the high-cost portion John and Jane are able to have the best of both worlds (increased yield and replenishing cash reserves). While this limits downside it also limits upside in the sense that we are likely to miss out on additional capital gains. Remember, income is our priority and any capital appreciation happens to be a bonus.

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), Apple REIT (APLE), BP (BP), Cardinal Health (CAH), Clorox (CLX), Cummins (CMI), The Walt Disney Company (DIS), 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), Honeywell (HON), Helmerich & Payne (HP), Hormel (HRL), Iron Mountain (IRM), LTC Properties (LTC), Leggett & Platt (LEG), McDonald's (MCD), 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), VF Corporation (VFC), Verizon (VZ), Washington Trust (WASH), Westlake Chemical (WLKP), W. P. Carey (WPC), and Exxon Mobil (XOM).

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long AAPL, ADM, APLE, EMR, EPR, MCD, T, TXN, VFC.. 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.

This article reflects my own personal views and I am not giving any specific or general advice. All advice that is given is done so without prejudice and it is highly 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.

Comments

[yoctowatts]

WLKP is a K-1 form right? Are stocks like that taxed higher?

[Gary Jakacky]

Much as you, I try not to do TOO much trading in my "basket 1" stocks: dividend income with potential capital appreciation, much like Value Line's group 2 in their weekly section. But if the stocks run up incredibly; or the company's outlook has changed substantially, I might make changes at the margin, often by writing calls so I get income while not being too upset if the shares are pulled away.

[User 40509285]

It was nice to see many of the same names in their portfolios that I hold in my and my wife's. The one big difference is the extreme amount of K-1s in their portfolios vs ours. I want to have as much money in retirement as everyone else, but I also don't want the tax burden either. Just curious how "John" and "Jane" feel about this.

[usiah]

Bought HON myself earlier this year (as a dividend-growth investment).

[steve46]

Your opening comment would be more meaningful if it read dividend income on an investment total dollar amount of $_______. It would help determine if you dividend dollars make sense.

[Matthew Utesch]

@steve46

Not a bad suggestion. I’ll give that a try for Jane’s Retirement account article. I’ll probably have to use a separate bullet point though because SA limits the number of characters per point.

Thanks for reading and mentioning that.