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

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Matthew Utesch
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Summary

  • The Taxable Account generated $1,171.77 of dividends in July of 2022 compared with $1,222.15 of dividends in July of 2021.
  • The Taxable Account had a balance of $531K as of July 31, 2022, vs. $507.8K on July 31, 2021. The annualized cost basis yield is 5.57%.
  • Three companies in the Taxable portfolio paid increased dividends or a special dividend during the month of July.
  • The Taxable Account had a cash balance of $25.9K as of July 31, 2022, vs. $32.8K as of July 31, 2021.
  • The Taxable Account had an unrealized gain/loss of $111.3K as of July 31, 2022, vs. $100.4K as of July 31, 2021.

Oil spilling from red barrel onto floor

mevans/E+ via Getty Images

EAFAX Shows The Direction We Are Going

It's been quite some time since I discussed Eaton Vance Floating-Rate Advantage Fund (EAFAX) since I don't cover dividend changes due to the wild swings in the distribution.

The purpose of investing in EAFAX has always been as a dividend play that recently paid $70/month at the beginning of 2022 and has substantially increased since then. Since March, we have seen the funds for distribution generated by this fund increase dramatically which matches rising interest rates.

EAFAX invests funds in floating rate funds and floating rate debt securities and includes debt that would be considered higher risk since there are holdings that do not qualify as investment grade (these are often referred to as "junk"). These loans are most commonly secured by collateral.

The distribution after the initial phase of COVID cratered which was likely due to a consensus that rates would be lower-for-longer because of the economic disaster created by lockdown policies and the shutdown of international trade, etc. This resulted in a shortage of goods at the same time nonessential workers were out of work and unable to afford basic living expenses.

Chart
Data by YCharts

John and Jane have a considerable amount of exposure to EAFAX as they hold shares in their Taxable, Traditional, and Roth IRAs (combined between all of John and Jane's accounts EAFAX is cumulatively the largest individual holding).

With the distribution income up 30% since the beginning of the year and no clear end in sight for the interest rate increases by the Federal Reserve as they attempt to tame inflation. EAFAX's distribution will continue to benefit from rising rates for the foreseeable future and based on the current entry point it is a reasonable time to establish a position with the cost per share at an attractive level.

Background

For those who are interested in John and Jane's full background, please click the following link here for the last time I published their full story. The details below are updated for 2022.

  • 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 now only collects Social Security income as his regular source of income.
  • Jane officially retired at the beginning of 2021, and she is collecting Social Security as her only regular source of income.
  • John and Jane have decided to start taking draws from the Taxable Account and John's Traditional IRA to the tune of $1,000/month each. These draws are currently covered in full by the dividends generated in each account.
  • John and Jane have other investments outside of what I manage. These investments primarily consist of minimal risk bonds and low-yield certificates.
  • John and Jane have no debt and no monthly payments other than basic recurring bills such as water, power, property taxes, etc.

The reason why I started helping John and Jane with their retirement accounts is that I was infuriated by the fees they were being charged 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. My primary goal was to give John and Jane as much certainty in their retirement as I possibly can because this has been a constant point of stress over the last decade.

Dividend Increases

Three companies paid increased dividends/distributions or a special dividend during the month of July in the Taxable Account.

  • Realty Income (O)
  • Schlumberger (SLB)
  • W. P. Carey (WPC)

Realty Income

The monthly dividend company delivered a stronger-than-expected Q2-2022 earnings which allow them to raise the full-year guidance of normalized FFO per share to $3.92-$4.05 (up from $3.88-$4.05). Realty Income reported occupancy rates finishing up the quarter at 98.9% which reflects the highest occupancy in over 10 years. Management also boosted FY-2022 acquisitions to reach $6 billion up from its prior guidance of $5 billion.

Realty Income is fully priced at the current moment although its pullback to the mid-$60 price range would represent a potential buying opportunity for investors who are looking for quality stocks to hold that produce a strong dividend yield (over 4%).

Realty Income - FastGraphs

Realty Income - FastGraphs (FastGraphs)

The dividend was increased from $.2470/share per month to $.2475/share per quarter. This represents an increase of .2% and a new full-year payout of $2.97/share compared with the previous $2.964/share. This results in a current yield of 3.95% based on the current share price of $74.13.

Schlumberger

SLB reported in late July a strong Q2-2022 earnings beat that also included raising full-year guidance. Net income per share increased from $.36/share in Q1-2022 to $.67/share in Q2-2022. This large jump in net income was supported by revenue growth in its Well Construction (27% Y/Y), Production Systems (13% Y/Y), Reservoir Performance (19% Y/Y), and Digital & Integration (17% Y/Y). North America was the primary driver for revenue growth coming in at 42% Y/Y compared International revenue growth of 15% Y/Y.

SLB is currently at an interesting valuation and I believe there is potential for strong upside if they can maintain strong revenue growth that will boost EPS. We are looking at strong double-digit revenue increases which will support strong dividend increases similar to the one that we saw in the month of July. For those who do not have exposure to SLB I would contend that now represents a strong entry point to buy the stock at a reasonable price and benefit from the sizable dividend increases we expect to see over the next two years.

Chart
Data by YCharts

The dividend was increased from $.125/share per quarter to $.175/share per quarter. This represents an increase of 40% and a new full-year payout of $.70/share compared with the previous $.50/share. This results in a current yield of 2.0% based on the current share price of $34.92.

W. P. Carey

WPC's Q2-2022 was nearly identical to what was seen in Realty Income's guidance beat with a race of $.04/share on the low end of the guidance moving FY-2022 FFO to $5.22-$5.30/share. WPC is also benefiting from an occupancy rate of 99.1% in Q2 and is a substantial increase over the occupancy rate of 98.5% in Q1-2022.

We recently sold a portion of John and Jane's WPC positions using limit orders of $85/share. We have maintained their lowest cost shares which are $70/share or less. At present, WPC has reached overvalued territory and purchasing at these levels is highly likely to result in poor returns over the next few years. As you can see in the graph below, the dividend yield is pushing the lowest point it is seen prior to the outbreak of COVID. Before this, a dividend low of 5.40% was commonly seen from 2014 through the end of 2018. I would suggest waiting for an entry point less than $80/share ($78.50 to be exact) which would generate a dividend yield of approximately 5.40%.

Chart
Data by YCharts

The dividend was increased from $1.057/share per quarter to $1.059/share per quarter. This represents an increase of .2% and a new full-year payout of $.4.236/share compared with the previous $4.228/share. This results in a current yield of 4.87% based on the current share price of $87.06.

Positions

The Taxable Account currently consists of 44 unique positions at market close on August 9th, 2022. There were a total of three purchases that took place during the month of July.

2022 - July Taxable Transaction History

2022 - July Taxable Transaction History (Charles Schwab)

I will discuss these trades more in-depth in my article that discusses these trades. The link below is my purchases/trades article from July 30, 2022.

The Retirees Dividend Portfolio - Recent Purchases And Limit Trades

July Income Tracker - 2021 Vs. 2022

The Taxable Account is still running in the red for the year and this is the direct result of some massive special dividends paid by Old Republic International (ORI) in 2021. The Taxable Account is currently estimated to generate an average of $1,612.16/month of dividend income in 2022. This is slightly lower than the average monthly income of $1,704.23 generated in 2021 (running at about -5.4% behind 2021 performance).

A new item for readers to consider is the impact of draws on the Taxable Account which started in January in the amount of $1,000/month. The good news is that the portfolio generates more monthly income from dividends and distributions than John and Jane are looking to withdraw. The challenge for me is that I am used to running an account that is typically flush with excess cash that would allow greater ability to reinvest funds. Therefore, I will need to be more considerate of cash balances available at a given time. This also underscores the importance of the Cash Balance table in the images below that tracks the amount of cash on hand.

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. (also referred to as CDI as the source below).

2022 - July - Taxable Dividend Breakdown

2022 - July - Taxable Dividend Breakdown (CDI)

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 going back to January of 2018.

2022 - July - Taxable Monthly Dividend Graph

2022 - July - Taxable Monthly Dividend Graph (CDI)

2022 - July - Taxable Monthly Dividend Line Graph

2022 - July - Taxable Monthly Dividend Line Graph (CDI)

The table below represents all income generated in 2021 and collected/expected dividends in 2022.

2022 - July - Taxable Annual Estimate

2022 - July - Taxable Annual Estimate (CDI)

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

2022 - July - Taxable Dividend History

2022 - July - Taxable Dividend History (CDI)

The Taxable Account balances below are from July 31, 2022, and all previous months are taken from the end-of-month statement provided by Charles Schwab.

2022 - July - Taxable Month End Balance

2022 - July - Taxable Month End Balance (CDI)

The next image is the only new table being added to the report for 2022. As mentioned previously, this is the first year that John and Jane will begin taking withdrawals from their Taxable Account (and also from John's Traditional IRA). For this reason, I want to keep a record of these withdrawals because they will also have an impact on the account balance in the cash balance table (after this image).

2022 - July - Taxable Withdrawals

2022 - July - Taxable Withdrawals (CDI)

The next image indicates how much cash John and Jane had in their Taxable Account at the end of the month as indicated on their Charles Schwab statements.

2022 - July - Taxable Cash Balance

2022 - July - Taxable Cash Balance (CDI)

There were large changes in cash at the end of 2019 and then again in 2020 (this was from the purchase of a physical asset and the sale of another) which explains why the balance fluctuated so much during this time. A lot of cash was deployed in March and April of 2020 as the pandemic caused share prices to plummet. John and Jane no longer qualify to make contributions to their Traditional or Roth IRAs, so there will also not be any funds taken from the Taxable Account to cover these contributions (which is what they typically did in the past).

The next image provides a history of the unrealized gain/loss at the end of each month going back to the beginning in January of 2018.

2022 - July - Taxable Unrealized Gain-Loss

2022 - July - Taxable Unrealized Gain-Loss (CDI)

The main reason for including this is to help readers understand that the key to this strategy is to accept the risk, and I personally find that this table is an excellent representation of the volatility in the account. It is important to remember that tolerance for risk can vary significantly, but John and Jane are okay with additional risk because they are focused on generating income from these stocks.

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 August 8th, 2022. It should also be noted that New Residential (NRZ) has since changed names to Rithm Capital (RITM).

2022 - July - Taxable Gain-Loss Update

2022 - July - Taxable Gain-Loss Update (CDI)

When reading the yield column, it is important to understand that the dividend yield is dependent on whether or not we have received a full year of income (this is the only way to keep it mostly accurate without requiring a lot of manual input or calculation on my part). I have updated these for the start of the year, so all yields reflected in the last column are accurate. I actually prefer this method because it will show the reduced yield of a position added partway through the year (thus reflecting an accurate benefit vs. inflated benefit).

Lastly, I wanted to include the Monthly Year-Over-Year Income Comparison to show how the Taxable Account is trending.

2022 - July - Taxable Monthly Year-Over-Year Comparison

2022 - July - Taxable Monthly Year-Over-Year Comparison (CDI)

Conclusion

We have seen the market flip from substantial losses in June back to record-high balances by the end of July.

Chart
Data by YCharts

We made several purchases in the month of June to take advantage of the drop in prices and continued to make purchases (albeit more selectively) during the month of July. The Nasdaq composite is moving up at a faster pace than the S&P 500 and DJIA, however, this should be expected given how much more quickly the Nasdaq fell in early June.

Dividend income has the potential to eclipse a solid $20k this year without a significant emphasis on special dividends to make this happen. We will likely continue to hoard cash until we see more attractive opportunities arise. So far in 2022, John and Jane have taken $7,000 of dividends ($1,000 per month) and will be on target for a total of $12,000 dividends paid in FY-2022. This means that John and Jane's portfolio would still retain $8,000+ of dividend income.

In John and Jane's Taxable Account, they are currently long the following mentioned in this article: Apple (NASDAQ:AAPL), Arbor Realty (NYSE:ABR), Archer-Daniels-Midland (NYSE:ADM), Air Products and Chemicals (APD), Carrier Global Corporation (NYSE:CARR), Clorox (NYSE:CLX), Cummins (NYSE:CMI), Dover Corporation (NYSE:DOV), Eaton Vance Floating-Rate Advantage Fund A (MUTF:EAFAX), Emerson Electric (EMR), Enterprise Products Partners (NYSE:EPD), EPR Properties (NYSE:EPR), Equinix (NASDAQ:EQIX), Energy Transfer (NYSE:ET), Eaton Vance Tax-Advantaged Dividend Income Fund (NYSE:EVT), General Mills (NYSE:GIS), Honeywell (NASDAQ:HON), Helmerich & Payne (NYSE:HP), Hormel (NYSE:HRL), Iron Mountain (NYSE:IRM), McDonald's (MCD), Altria (NYSE:MO), Nordson (NDSN), Realty Income (O), Old Republic International (ORI), Otis Worldwide Corporation (NYSE:OTIS), Parker-Hannifin (NYSE:PH), Ryder System (NYSE:R), Rio Tinto (RIO), Rithm Capital (RITM), RPM International (RPM), Raytheon Technologies (NYSE:RTX), Schlumberger (NYSE:SLB), Southern Company (NYSE:SO), Simon Property Group (SPG), AT&T (NYSE:T), Texas Instruments (NASDAQ:TXN), V.F. Corporation (VFC), Verizon (NYSE:VZ), Washington Trust (NASDAQ:WASH), Warner Bros. Discovery (WBD), Westlake Chemical (NYSE:WLKP), W. P. Carey (NYSE:WPC), and Exxon Mobil (XOM).

This article was written by

Matthew Utesch profile picture
11.14K Followers
Graduated in 2011 with degrees in Pre-Law and Business Administration from Eastern Washington University. Completed my MBA at Whitworth University in May of 2017. Over the last decade, I have worked exclusively in the finance industry. I have acquired specialized knowledge in multiple areas, most notably, Secondary Marketing, Underwriting (specializing in subprime credit), and am currently building an Indirect Lending Program for Canopy Federal Credit Union.Started my first Roth IRA at the age of 16, but began seriously investing closer to 2011 at the age of 22. My investment strategy is largely focused on generating retirement income from dividend-paying stocks. I do not hold any professional investment licenses, but I spend a significant amount of time educating children, teenagers, and young adults on basic finance. I also specialize in cash-flow analysis for those nearing retirement or who are in retirement.

Disclosure: I/we have a beneficial long position in the shares of AAPL, ADM, APD, EMR, EPR, EQIX, HON, MCD, O, RPM, T, TXN, VFC, WBD either through stock ownership, options, or other derivatives. 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 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.

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