My Retirement Income Quarterly Portfolio Review

Includes: ABT, KO, UN, WELL, WMT
by: Bob Wells

I'm a Dividend Growth Investor and it's time to put my portfolio through it's first quarterly portfolio review. I am 66 and since February of last year my Dividend Growth portfolio has been providing a monthly stream of income in support of our retirement.

We have elected to use the Dividend Growth investing model to produce needed retirement income in lieu of using the 4% withdraw rule usually advocated by the financial industry. Our goal is to derive income solely from the dividends produced by the portfolio and to preserve rather than draw down capital for income. We expect to manage inflation by the growth of the dividends that make up our income stream. Since February of last year we have successfully implemented this strategy see both a growth in income and a growth in capital. For a closer look at my portfolio click on this link.

I developed a portfolio business plan back in July in support of my portfolio which is available here. My business plan requires that I conduct a complete review of my portfolio and its performance on a quarterly basis.

Let's start the review with a few fundamentals:

  • For the first time since February 2011 I'm fully invested in predominantly Dividend Growth stocks. I have less than 3% in cash.
  • I hold 50 positions roughly equal weight positions yielding just over 5%.
  • All but three of my holdings are in Dividend Growth stocks. I currently hold three positions without growing dividends representing 8% of my portfolio - AGNC,AMTG,MTGE, all MReits. They are held to help boost yield and for their capital gain potential.
  • 44 of the 50 positions are Dividend Champions, Challengers and Contenders.
  • Roughly 35 of these positions have been held for more than one year and were purchased at much lower prices than they command today.
  • It is a risk adverse portfolio with the overall average beta of the stocks in my portfolio registering just above 0.6.
  • The majority of my holdings are also part of a select group of stocks that have proven to be among the safest and steadiest performers during the turbulent period of 2002-2011. The full list of 50 stocks generated from my back testing of this period is available thru this link.

Since first publishing my portfolio business plan back in July I have added an important new metric - The "Chowder" Dividend Growth Rule first presented by Seeking Alpha contributor 'chowder". This rule is used to influence the buy and sell decisions of Dividend Growth investors. Under this rule investors should consider stocks for purchase where the Yield and 5 year Dividend Growth Rate (DGR) when combined exceed 12%. Under this rule investors may wish to sell those stocks where Yield and 5year Dividend Growth Rate total less than 8%. This metric is used to help insure that the income from the stocks in your portfolio is likely to increase because of dividends growing at a rate greater than inflation. The average combined percentage of the stocks in my portfolio is 15.4%. Average yield is 5% which for use represents current income and average 5 year DGR of 10.5% a rate which clearly exceeds inflation.

I applied the "Chowder" Dividend Growth Rule to my portfolio and discovered only one stock with a combined total less than 8%. Health Care Reit (HCN) yields 5.1% but has a five year DGR of just 2.2% for a combined rate of 7.3% under the 8% minimum. It's rate of dividend growth for last year was 3.5% suggesting an upward trend in dividend growth. When the one year rate is applied the total is increased to 8.6%. After analysis I have decided not to sell at this time.

Next I evaluated my portfolio to see if any of my stocks had triggered a loss in excess of 10% and required further review. I'm pleased to report that none of my holdings have suffered a double digit loss. In fact only two have losses in excess of 3%.

The next step in my review was to examine the current value of the stocks in my portfolio at today's prices. Using Fast Graphs for my analysis I found that 16 of my holdings are rated as currently undervalued. In contrast 18 are rated as currently overvalued again when measured against today's prices. All but two of these holdings were purchased between February of 2011 and today at prices for the most part considered fair or undervalued.

Next I looked at the stocks that have yields under 3%. I found I have four: ABT - 2.9%, UN at 2.8%, WMT at 2.1% and KO at 2.7%. All have experienced sizable gains since their purchase resulting in dramatic drops in yield. If these stocks were sold and the income redeployed in solid stocks with solid yield and dividend growth clearly it would result in greater monthly income. I would love to hear from each of you on your suggestions concerning what actions I should take concerning these stocks moving forward.

Finally I considered performance. Since inception in February of last year, I'm up 17.49% vs. 13.51% for the S&P 500 Index. For One year I'm up 15.19% vs. 13.51 for the S&P 500. Year to date I'm up 11.88% vs. 16.44 for the index. Remember this performance is from a portfolio with a beta of .6.

Overall I am happy with the income and capital gain being generated by my risk adverse portfolio. Once again my personal thanks go out to all the great Seeking Alpha contributors and commenters who have provided so much wisdom and support as I moved forward on this journey.

Take care and may your dividends and retirement income grow.

Disclosure: I am long HCN, ABT, KO, WMT, UN. 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.