My Retirement Income Portfolio Quarterly Review - Part Two

Includes: ABT, AGNC, MCD, UN, WMT, XLU
by: Bob Wells

I'm a new Dividend Growth investor and I have been conducting the first quarterly review of my income stream portfolio. I encourage you to read Part One of this process if you haven't already. The link to this article is available here. This review is a required part of my portfolio business plan in support of my actual retirement income portfolio available here.

The Dividend Growth Portfolio I have developed is one of many sources of monthly income required for our retirement income. It represents roughly 30% of our total income. The remaining 70% comes from several fixed income sources including Social Security and traditional pensions. Each of our fixed income sources are adjusted for inflation.

I have elected to limit my investments to a portfolio of 50 equal weighted Dividend stocks the majority of which are Dividend Champions, Challengers and Contenders. I have elected not to invest in Government Bonds, Bond Funds, Mutual Funds, ETFs and Preferred Stocks. By so doing I fully respect the rights of others who may disagree with this approach. I have also elected not to exercise buy or sell options.

Before continuing my quarterly review I want to thank all of you who offered suggestions and comments during part one of this review. Your suggestions will help add additional clarity to my decision making moving forward.

I heard from both experienced Dividend Growth investors and many who appeared new to the basic concepts surrounding this investment approach. I encourage those just beginning to explore this concept to check out my next article where I will review just some of the fundamentals necessary to gain a full understanding of how a Dividend Growth Investment approach can help provide a safe and growing monthly stream of income that can help support your retirement as ours has for us.

I also encourage you to take the time to fully explore the comment sections in support of this article and its companion articles. In the past year I have learned that the issues explored through comment sections have enriched my understanding of self-directed investing in retirement. Those who wade through the 400 plus comments in the article found here.

I have later written of how much they learned and even how much fun they had in the process. Well it's time to get back to my quarterly review focusing first on:

Portfolio Construction:

My plan calls for seeking well-roundedness in the portfolio, diversifying across sectors, industries, geographies. It calls for establishing a range of yields and dividend growth rates.

I currently am represented in all 10 major sectors, though I am seriously underweighted in tech, industrials and materials. My reasoning is simple, yield and beta. These three sectors are among the highest in terms of beta and the lowest in terms of yield. Most fail to meet my 3% yield criteria required for inclusion. I am overweight in the consumer staple sector due to safety, low beta and higher yield.

I currently own 50 stocks with an equal amount invested in each stock as the norm. I currently yield just under 5% and my current lowest yielder is Wal-mart WMT - yielding just 2.1%.

Guidelines require that no more than 5% of the portfolio's value be invested in a single stock. I have my largest position in MC Donald's (NYSE:MCD). That position represents just under 4% of my portfolio.

My plan requires that I make opportunistic switches between stocks if such a more will serve to improve the portfolio. There have been no changes to the core portfolio accept to do some profit taking for the purpose of increasing yield.

My plan calls for a focus on stable monthly dividend income and not share prices. The aim is to remain 90% or more invested. Generating a steady and growing income stream from dividends remains job one.

Dividend reinvestment:

The goal of my portfolio is to generate income solely from dividends and the growth of those dividends.

As such dividends are only reinvested when they are more than the 5% required for income.

When reinvesting dividends, it is my aim to improve the portfolio in one or more of the following dimensions: yield, dividend growth, or diversification.

Selling Guidelines:

Business Plan guidelines require that each quarter I Investigate and consider selling any stock for these reasons:

  • It cuts, freezes, or suspends its dividend.

American Capital Agency Corp. (NASDAQ:AGNC) cut its dividend and as such was sold.

  • It becomes seriously overvalued. Profit taking and re-investment will likely be the first step.

After a full review using Fast Graphs none were found to have become seriously overvalued at this time.

During Part One of my review I stated my intent to examine my holding currently yielding less than 3%. I asked for suggestions on each of these holdings moving forward.

After reviewing all the comments and suggestions received, I decided to trim my position in Abbott Laboratories (NYSE:ABT) by taking profits of $1500 to be redeployed in a higher yielding position.

For now I plan to stay with my current position in WMT despite the yield of just 2.1%. I have found that Wal-Mart (NYSE:WMT) has been one of my strongest performers on days when stocks are down. As I accept increased volatility through the next quarter I have decided to stand pat on my position.

Finally I decided to sell Unilever (NYSE:UN) since it appears to be my lowest yielding over valued stock. I plan to redeploy the funds into a higher yielding undervalued stock this earning season.

  • A holding underperforms stocks in its sector in total returns (price + dividends) for two years running.

Since my portfolio is less than one year old, this evaluation was not conducted.

  • A holding incurs a loss in excess of 10% and such a percent represents a loss significantly greater than similar stocks in that sector or industry.

None of my holdings incurred a loss in excess of 10%.

Portfolio Performance:

Finally, I look at just how to best measure the overall performance of my portfolio.

Using standards like the S&P 500 appeared inappropriate due in large part to beta and yield. In addition the S&P is highly weighted in banks and tech and these are sectors which I significantly under weight.

Instead I am seeking to use the performance of appropriate sector etfs such as XLU as gauge. For example: How was the average performance of my portfolio utilities vs. the performance of the XLU for that quarter. Serious under performance will be closely examined to see if an exchange for other DG equities within that sector has the potential to further strengthen income stream and capital preservation. It appears my individual stocks have underperformed the XLU. I will be further reviewing their progress to determine if further action is required.

I hope to hear this time from each of on your suggestions for evaluating capital gain performance in a Dividend Growth Portfolio.

Disclosure: I am long ABT, WMT, MCD. 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.