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A review

I created this model portfolio for retirees because even though there are already a lot of articles written about stocks and portfolios for retirement, I find most of them disappointing. As a retired person, I see several problems that are common among these articles. I detailed these in my last article that introduced this portfolio. Below is a summary of them.

  • It is not always clear if the proposed portfolio is for a retired person or if it is meant to be a retirement portfolio for a person still in accumulation phase. In many cases, these portfolios should be different.
  • Many articles reach for yield, potentially risking income and principle.
  • Many of these articles propose allocations to REIT’s and MLP’s. By definition, these are highly leveraged and therefore risky business models.
  • Some if not most of these articles are written by someone who is not retired. In my view, it is difficult, if not impossible to have the same perspective as retired person.

A new real money portfolio

I suffered a dividend cut with my Dominion (D) shares in early July. I managed to sell the shares early in the morning after the announcement, so I did not lose capital. I am taking the funds from the sale of these shares and putting them into this portfolio. I have $15,000 to invest in this portfolio. Each position will start at about $750. This will make a decent-sized portfolio of 20 stocks. Due to the sale of D shares, investing in this portfolio does not increase my overall equity exposure.

The methodology

For retirees using a dividend growth strategy and living off the dividends from the investments there are a few critical factors. The probability of a dividend cut should be reduced as much as possible. In this methodology, there are two criteria used to reduce the odds of a cut. First, a dividend streak of 20 years is required for inclusion. This helps to ensure the company’s business model is sound and can withstand economic downturns. It will also generally mean that company’s management is committed to the dividend. The second criteria is a payout ratio of less than 65% for initial inclusion in the portfolio. This will allow the dividend to be maintained if there is a dip in earnings.

Another important factor is yield. While it is not desirable to reach for yield, a certain minimum is necessary. I set this at 1.9% which was the yield of the S&P 500 when the portfolio was started.

It is also wise to not overpay for the stocks. We use a criteria of PE of 17 or less. Originally, we said the PE of the S&P 500 or less; however, Ycharts says that is now around 30 so we are going to stay with 17. We will of course look at each company and take into account if it normally trades at a lower PE. For instance, if a company has a current PE of 15 but normally trades at PE 12, we probably would not add it to the portfolio.

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These criteria will generally exclude REITs and MLPs. That is OK because this portfolio avoids these high-risk industries.

To find such investments, the screens are as follows:

  • Start with all dividend champions, contenders, and challengers
  • Eliminate all those with a dividend streak of less than 20 years.
  • Eliminate all those with a yield of less than 1.9% or current yield of S&P500.
  • Eliminate all those with a payout ratio of greater than 65%.
  • Eliminate all those with a P/E of greater than 17, or the current P/E of the S&P 500.
  • Eliminate all those with a market capitalization of less than $1 Billion.

At the end of September, the portfolio contained the stocks in the following table.

Company

Ticker

Purchase Price

Shares

Div

Yield at Purchase

Cost

Tot Div

AFLAC Inc.

AFL

$35.30

21

$1.12

3.2%

$741.30

$23.52

Albemarle Corp.

ALB

$82.79

9

$1.54

1.9%

$745.11

$13.86

Archer Daniels Midland

ADM

$42.66

18

$1.44

3.4%

$767.88

$25.92

AT&T Inc.

T

$29.81

25

$2.08

7.0%

$745.25

$52.00

Eaton Vance Corp.

EV

$37.22

20

$1.50

4.0%

$744.32

$30.00

General Dynamics

GD

$147.29

5

$4.40

3.0%

$736.45

$22.00

International Business Machines

IBM

$124.46

6

$6.52

5.2%

$746.76

$39.12

J.M. Smucker Co.

SJM

$111.89

7

$3.60

3.2%

$783.23

$25.20

McGrath Rentcorp

MGRC

$59.26

13

$1.68

2.8%

$770.38

$21.84

MDU Resources

MDU

$21.13

35

$0.83

3.9%

$739.55

$29.05

New Jersey Resources

NJR

$31.36

24

$1.25

4.0%

$752.64

$30.00

Raytheon Technologies

RTX

$57.53

13

$1.90

3.3%

$747.89

$24.70

T. Rowe Price Group

TROW

$136.59

5

$3.60

2.6%

$682.93

$18.00

UGI Corp

UGI

$34.10

22

$1.32

3.9%

$750.20

$29.04

Walgreens Boots Alliance Inc.

WBA

$40.61

18

$1.87

4.6%

$730.98

$33.66

The portfolio had the following statistics upon purchase.

Statistic

Average

Yield

3.7%

Payout Ratio

47.7%

Dividend Growth Streak

32

P/E

13.2

Until I fill out the portfolio, I will screen the CCC list each month to see if there are any new companies that meet the screen criteria.

The October list was screened with the following results and the following companies passed the screens.

Name

Symbol

Sector

General Dynamics

GD

Industrials

T. Rowe Price Group

TROW

Financials

AFLAC Inc.

AFL

Financials

Archer Daniels Midland

ADM

Consumer Staples

J.M. Smucker Co.

SJM

Consumer Staples

Franklin Resources

BEN

Financials

UGI Corp.

UGI

Utilities

Prosperity Bancshares

PB

Financials

MDU Resources

MDU

Utilities

People’s United Financial

PBCT

Financials

Eaton Vance Corp.

EV

Financials

Cullen/Frost Bankers

CFR

Financials

Bank OZK

OZK

Financials

UMB Financial Corp.

UMBF

Financials

Telephone & Data Sys.

TDS

Communication Services

McGrath Rentcorp

MGRC

Industrials

BancFirst Corp. OK

BANF

Financials

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General Dynamics (GD), T. Rowe Price (TROW), Aflac (AFL), Archer Daniels Midland (ADM), J.M. Smucker Co (SJM), UGI Corp. (UGI), MDU Resources (MDU), Eaton Vance (EV), McGrath Rentcorp (MGRC) are all in the portfolio already.

We are also avoiding all banks at this time until full impact of economic shut-downs and near-zero interest rates are known.

We should also avoid over-concentration

There were 3 companies in the Capital Markets industry left on the list when the portfolio was created, Franklin Resources, T. Rowe Price, and Eaton Vance. I decided to limit the concentration here to two of them. To make it simple, I picked the two with the lowest payout ratio. Therefore, BEN was removed from the list.

That leaves Telephone & Data Systems (TDS) remaining from the October list.

As discussed in previous updates, TDS earnings history is very choppy. The orange line essentially tracks earnings and they are very inconsistent. In my view, this is not the kind of earnings performance of stocks that are in a retirement portfolio. TDS was eliminated from the portfolio.

Merger Activity

In early October, Eaton Vance agreed to be acquired by Morgan Stanley (MS). Eaton Vance popped about 50% on the merger news and our position was liquidated for a 60% gain.

Recall that 3 companies (EV, TROW, & BEN) in the Capital Markets industry met the screens of the portfolio. To avoid over concentration, only two were selected for the portfolio based on payout ratio. So, EV and TROW were added. When EV was sold at a profit, it created room in the portfolio for BEN. It was added at $22.52.

This swap was the only change made to the portfolio since the last update as there were no new companies that met the criteria.

Now the portfolio looks like this.

Company

Ticker

Purchase Price

Shares

Div

Yield at Purchase

Cost

Tot Div

AFLAC Inc.

AFL

$35.30

21

$1.12

3.2%

$741.30

$23.52

Albemarle Corp.

ALB

$82.79

9

$1.54

1.9%

$745.11

$13.86

Archer Daniels Midland

ADM

$42.66

18

$1.44

3.4%

$767.88

$25.92

AT&T Inc.

T

$29.81

25

$2.08

7.0%

$745.25

$52.00

Franklin Resources

BEN

$22.52

34

$1.05

4.7%

$765.68

$35.70

General Dynamics

GD

$147.29

5

$4.40

3.0%

$736.45

$22.00

International Business Machines

IBM

$124.46

6

$6.52

5.2%

$746.76

$39.12

J.M. Smucker Co.

SJM

$111.89

7

$3.60

3.2%

$783.23

$25.20

McGrath Rentcorp

MGRC

$59.26

13

$1.68

2.8%

$770.38

$21.84

MDU Resources

MDU

$21.13

35

$0.83

3.9%

$739.55

$29.05

New Jersey Resources

NJR

$31.36

24

$1.25

4.0%

$752.64

$30.00

Raytheon Technologies

RTX

$57.53

13

$1.90

3.3%

$747.89

$24.70

T. Rowe Price Group

TROW

$136.59

5

$3.60

2.6%

$682.93

$18.00

UGI Corp

UGI

$34.10

22

$1.32

3.9%

$750.20

$29.04

Walgreens Boots Alliance Inc.

WBA

$40.61

18

$1.87

4.6%

$730.98

$33.66

3.8%

$11,206.23

$423.61

Some holding statistics based on cost.

Statistic Average
Yield 3.8%
Payout Ratio 47.7%
Dividend Growth Streak 32
P/E 13.2

As of now, there are 15 stocks in the portfolio. There is also about $4700 cash in the account including the profit from the sale of EV. So there are enough funds to increase the amount of stocks in the portfolio to 21 from the originally planned number of 20. However, the profits may be used to add to current holdings if opportunity arrives at attractive valuations. Each month or perhaps more often, I will review the Dividend Champions list in search of the final 5 additions to the portfolio. We will begin periodic performance reviews after the portfolio has a few more months in existence.

Even though I have purchased them, I would not recommend blindly buying the stocks on the list. An investor should do his/her own due diligence. Every person will have different risk tolerances or maybe industries or stocks they don’t feel comfortable holding. However, this list can serve as a good starting point for a retiree to begin due diligence and portfolio selection. Also, the screens can be tweaked or added to for investors that have different tolerances and situation than me.

Some other things to consider when selecting stocks from the list is volatility. If it is difficult emotionally for an investor to handle high price fluctuations, the beta and standard deviation should be reviewed. This screen did not consider any volatility component.

This review did not consider the dividend growth rate, only that it did grow. If an investor wants fast dividend growth, it should be reviewed before making selections.

I hope you enjoyed this article written by a retiree for retirees. You can find my most recent motorhome retirement update here. If you enjoyed this article and wish to receive updates on our latest articles, click “Follow” next to GrayBeard Retirement at the top of this article.

Overlooking the Gulf of Mexico and part of the Florida coastline from Navarro Pier.

Disclosure: I am/we are long ALL STOCKS IN THE PORTFOLIO. 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.



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