Via SeekingAlpha.com

The market has an odd combination of pessimism and positivity priced into it over the last week. Ironically, not much has really changed other than Jay Powell reiterating the Federal Reserve’s commitment to using as much firepower as necessary to stabilize the markets and what seems like regular announcements regarding the development of a vaccine for COVID-19.

Suddenly, we have states like California switching their stance on statewide restrictions for closing large segments of the economy now announcing that “53 of 58 California counties are all of a sudden eligible to get their economies back up and running.”

Society loves to adopt what I’ve come to term as the pendulum swing (especially when it comes to controversial subjects where the truth is likely somewhere in the middle). The pendulum swing refers to the extremes on either side as it swings back-and-forth and the sentiment that comes with having extremes on either side of the center (which is exactly where the pendulum would rest if there is no positive or negative news driving the pendulum from one extreme to the other). In the case of COVID-19, it’s all about how states are reacting and whether or not they are taking a whole state approach (I.E. if things are bad in one county the rest of the state must act like things are just as bad in every other county) versus opening up everything (I.E. we know some counties are facing more challenges than others).

Somewhere in the middle lies a surgical approach (I.E. we have counties with more restrictions because they are having problems but other counties should not be subject to the same type of shutdown when they are not exhibiting the same problem). Events the cause the pendulum swing to be more dramatic cause larger shifts in the market even when the truth is really somewhere in between (again, the surgical approach is the most reasonable/common sense approach we can take). I honestly pray that we can continue pushing society towards a surgical solution that is rooted in the scientific evidence that we do have and common sense. Until then, I can’t help but feel somewhat skeptical about the state of the market because of its radical shift towards overwhelming optimism. This doesn’t mean I am not enjoying the gains seen at the end of the day on May 18 but it does mean I don’t expect them to last indefinitely.

Dividend Cuts

Vermilion Energy (VET) cut its dividend from $.115/month (Canadian) to $.02/month. Subsequently, VET then cut the dividend altogether citing uncertain market conditions. As I have stated in previous articles, VET was our speculative play given the massive decrease in price. I still don’t expect to see the dividend back anytime soon and at this point, I would rather see the company deleveraging or repurchasing shares (when appropriate).

Chart
Data by YCharts

We would normally choose to sell-off shares but VET has an opportunity to make a strong recovery as oil prices recover now that the world has decided that COVID-19 lockdowns for longer aren’t something we are interested in doing. VET is still extremely speculative but those who are willing to take the risk have the potential for seeing a strong reward. With that said, if the dividend is reinstated and the stock price jumps we are likely to sell the position versus continue to hold the position for the long run if the dividend is not reinstated and their balance sheet gets brought back in order.

Client Background

I want to emphasize that this is an actual portfolio with actual shares being traded. This article focuses on Jane, who is now approximately one year away from retirement and has requested my help in managing her own portfolio instead of paying a financial advisor. It is important to understand that I am not a financial advisor and merely provide guidance for her account based on a friendship that goes back several years. In this article, I will refer to Jane as “my client” and I do this for simplicity’s sake, but I do not charge her for what I do. The only thing Jane offers in return is allowing me to write anonymously about her financial journey with the hope that I can potentially help others who are wanting to achieve the same thing.

Jane is still working and has aspirations of retiring in the next year which is part of the reason why I write this series separately from her husband John (who is currently retired). Because Jane is not currently retired, I have focused her portfolio on slightly more aggressive investments than her husband and plan to transition to a slightly more conservative mix over the next year. From a day-to-day finance perspective, readers should be aware that Jane and her husband currently have no debt or mandatory monthly obligations other than what is expected (such as property taxes, water, etc.)

Jane and her husband have adopted my philosophy of focusing on cash flow from investments instead of drawing out large sums of money by selling shares of currently held investments. To briefly summarize this, Jane and her husband are on board with the idea of building a portfolio of stocks that will provide a steady stream of growing dividend income that will supplement their income during retirement.

Because of Jane’s age, we are not overly concerned with the impact of required minimum distributions (RMD) from her Traditional IRA. RMDs are important for retirees to pay attention to since the penalties for not withdrawing the mandatory amount is 50% tax on the difference between the RMD and what was actually withdrawn.

The goal for Jane’s retirement accounts is that she will be able to rely on dividends for the majority of her near-term Traditional IRA distributions and all of her Roth IRA distributions. By doing this, we are making sure that Jane won’t need to sell shares from her Traditional IRA until it is absolutely necessary to meet the RMD (and will only need to sell from her Roth IRA if she should choose to want to do this). Living on dividends vs. selling shares is the key difference between living on the cash flow generated by her investments and needing to sell shares as a means of “funding her retirement.”

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Here are some important characteristics to keep in mind about the Retirement Portfolio:

  1. Capital appreciation is the least important characteristic of this portfolio. This doesn’t mean we don’t care about it (because all investors do to some degree), but it does mean that we are less concerned about the day-to-day fluctuations of stock prices. Since the goal is to never sell (although I make occasional changes by eliminating or adding positions), a focus on capital appreciation doesn’t mean a lot when it comes to the game plan.
  2. I am not concerned with owning stocks that have a qualified/non-qualified dividend because both of these accounts are tax-sheltered (Traditional IRA and Roth IRA).
  3. I do trade stocks in the retirement portfolio on a more regular basis because the gains are sheltered from taxes. The number of trades that take place on any given month depends on market volatility and whether or not a stock has reached the price target that I have set for it. I adjust these targets regularly and will be incorporating more information as to how I set these price targets over the next few months.

For those who are looking to understand John and Jane’s portfolio I have included the link for the April Taxable account below:

The Retirees’ Dividend Portfolio: John and Jane’s April Taxable Account Update

Dividend And Distribution Increases

The following companies from the Traditional IRA and Roth IRA paid an increased dividend during the month of April. This includes:

  • Canadian Imperial Bank (CM)
  • PPL Corporation (PPL)
  • Realty Income (O)
  • Toronto-Dominion Bank (TD)
  • WP Carey (WPC)

I already covered Realty Income and WP Carey in the Taxable Account article so I will forgo update/write up section but will include a summary of the dividend increase for both of these stocks.

Canadian Imperial Bank – CM made its semi-annual dividend increase like usual but this increase was much more conservative than the last year of increases (1.4% vs 2.9%). Some might be disappointed with this, however, I am always more concerned with financial stability during times like these. Although there are a number of reasons we could critique CM (overpriced Canadian housing market and COVID-19 related mortgage deferral requests) we need to remember that Canadian banks have typically been more conservative in their lending practices as a result of the difference in the Canadian banking system vs the United States. This is part of the reason why CM has been able to maintain or increase its dividend since 1968. The last time CM was available at a P/E ratio this low was during the financial crisis in 2008.

Canadian Imperial Bank Of Commerce - FastGraphs The dividend was increased from $1.44 CAD/share per quarter to $1.46 CAD/share per quarter. This represents an increase of 1.4% and a new full-year payout of $5.84/ CAD share compared with the previous $5.76/ CAD share. This results in a current yield of 7.09% based on a share price of $82.30 CAD ($58.91/share USD).

PPL Corporation – PPL is not regarded as one of the best utilities when it comes to dividend growth but it is worth noting that it is one of the higher-yielding utilities and one of the few companies that recently reaffirmed FY-2020 EPS guidance. PPL has managed to increase its dividend every year for the last 20 years with a 10-year growth rate of 2.57%. Although the dividend growth might not be there, DGI’s should consider that the recent drop in share price represents a more compelling value on the basis of an increased yield as a result of the drop in price. The increased yield being offered by PPL would require investors to wait for nearly 9 years of growth at the 10-year growth rate of 2.5% (this is assuming we use the four-year average yield as the starting point). PPL shares have not been this attractive since the financial crisis in 2008.

PPL Corporation - FastGraphs The dividend was increased from $.4125/share per quarter to $.4150/share per quarter. This represents an increase of .06% and a new full-year payout of $1.66/share compared with the previous $1.65/share. This results in a current yield of 6.47% based on a share price of $25.65.

Realty IncomeThe dividend was increased from $.2325/share per month to $.233/share per month. This represents an increase of .2% and a new full-year payout of $2.796/share compared with the previous $2.79/share. This results in a current yield of 5.36% based on a share price of $52.15.

Toronto Dominion Bank – It was refreshing to see a release by the CEO of TD when he made it clear that they do not expect to make any changes to the current dividend due to the impact from COVID-19. Prior to the pandemonium that is currently taking place, TD made a rather large 6.8% increase to its quarterly dividend. This increase was just slightly below the 10-year average dividend growth rate of 7.67%. The current P/E ratio comes in at 9.6x but has a 10-year historical P/E ratio average of 12.2x. The last time TD was available at a P/E ratio of less than 10x was during the financial crisis in 2008.

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Toronto Dominion Bank - FastGraphs The dividend was increased from $.74 CAD/share per quarter to $.79 CAD/share per quarter. This represents an increase of 6.8% and a new full-year payout of $3.16/ CAD share compared with the previous $2.96/ CAD share. This results in a current yield of 5.69% based on a share price of $55.52 CAD ($39.69/share USD).

WP CareyThe dividend was increased from $1.038/share per quarter to $1.040/share per quarter. This represents an increase of .2% and a new full-year payout of $4.16/share compared with the previous $4.152/share. This results in a current yield of 6.83% based on a share price of $60.89.

Retirement Account Positions

There are currently 21 different positions in Jane’s Roth IRA and 32 different positions in Jane’s Traditional IRA. While this may seem like a lot, it is important to remember that some of these stocks cross over in both accounts and are also held in the Taxable portfolio.

Traditional IRA – The following stocks were added to the Traditional IRA during the month of April.

  • KeyCorp (KEY) – 100 Shares @ $12.11/share.
  • EPR Preferred Series E (EPR.PE) – 100 Shares @ $24.88/share.
  • Archer-Daniels-Midland (ADM) – 10 Shares @ $37.18/share.
  • Broadcom Preferred Series A (AVGOP) – 5 Shares @ $1,010/share.
  • AVGOP – 1 Share @ $980.92/share.

The following shares in the Traditional IRA were sold during the month of April.

  • Illinois Tool Works (ITW) – 50 Shares @ $135.22/share.

Traditional IRA - April Realized Gain-LossSource: Charles Schwab

We closed out of the ITW position (reluctantly) but felt it was best to build an additional cash position while investing in more preferred shares (both EPR.PE and AVGOP represent compelling values with 8-9% dividend yields). Both preferred series are interesting plays because there is a convertible option included in the shares which gives us the opportunity to capitalize on gains in the future while collecting dividends now.

Roth IRA – The following stocks were added to the Roth IRA during the month of April.

  • Annaly Capital Preferred Series D (NLY.PD) – 100 Shares @ $16.28/share.
  • Store Capital (STOR) – 25 Shares @ $15.25/share.
  • NLY.PD – 100 Shares @ $18.80/share.
  • Lexington Realty Preferred Series C (LXP.PC) – 100 Shares @ $47.56/share.

The following shares in the Roth IRA were sold during the month of April.

  • Gilead (GILD) – 35 Shares @ $73.49/share.

Roth IRA - April Realized Gain-LossSource: Charles Schwab

We picked the right time to get into some preferred shares at great discounts and have seen 30%+ unrealized gains on NLY.PD since the shares were purchased. As I’ve mentioned in previous articles, the position in GILD was sold due to too much speculation regarding Remdesivir and the true impact of COVID-19. It is too difficult to say how much value investors have been assigning to GILD’s stock but the share price is currently less than it was when we sold it but had reached a 52-week-high of $85.97 which is absurd given the rest of GILD’s portfolio of drugs. This is part of the reason why we are still looking to start a holding in BlackRock Health Sciences Trust (BME) because it is easier to let smarter minds determine which health/pharmaceutical-related companies to invest in.

April Income Tracker – 2019 Vs. 2020

The following images are intended to provide readers with a better understanding of what Jane’s Traditional and Roth IRA accounts look like. Jane’s Gain/Loss numbers are based on prices from May 25th at the market close.

SNLH = Stocks No Longer Held – Dividends in this row represent dividends collected on stocks that are no longer held in that portfolio. We still count the dividend income even though it is non-recurring.

On the lists provided below, it is important to know that not all stocks on that list were owned at that point in time (2019 tables represent what holdings were still held at the end of 2019). All of the stocks you see were acquired over the course of a year.

Traditional IRA - April year-over-year dividend income comparison

Source: Consistent Dividend Investor, LLC

Roth IRA - April year-over-year dividend income comparison Source: Consistent Dividend Investor, LLC

Here is a graphical illustration of the dividends received on a monthly basis for the Traditional and Roth IRAs.

Traditional IRA - 2020 April dividend income Source: Consistent Dividend Investor, LLC

Roth IRA - 2020 April dividend income graph

Source: Consistent Dividend Investor, LLC

Based on the current knowledge I have regarding dividend payments and share count, the following tables are a basic prediction of the income we expect the Traditional IRA and Roth IRA to generate in FY-2020 compared with the actual results from 2019.

April 2020 - retirement account dividend income

Source: Consistent Dividend Investor, LLC

Below is an expanded table that shows the full dividend history since inception for both the Traditional IRA and Roth IRA.

April 2020 - three year retirement account income overview

Source: Consistent Dividend Investor, LLC

I have included line graphs that better represent the trends associated with Jane’s monthly dividend income generated by her retirement accounts. As year three begins, we should continue to see a more stable pattern that comes from the deposit of regular dividend income. The images below represent the Traditional IRA and Roth IRA, respectively.

Traditional IRA - April 2020 three year dividend income graph Source: Consistent Dividend Investor, LLC

Roth IRA - April 2020 three year dividend income overview Source: Consistent Dividend Investor, LLC

Here is a table to show how the account balances stack up year-over-year (I previously used a graph but believe the table is more informative).

Retirement Accounts - April 2020 account balances

Source: Consistent Dividend Investor, LLC

Lastly, on the topic of transparency, I like to show readers the actual gain/loss associated with each position in the portfolio because it is important to consider that in order to become a proper dividend investor, it is necessary to learn how to live with volatility. The market value and cost basis below is accurate as of the market close on May 25th.

Here is the Unrealized Gain/Loss associated with Jane’s Traditional IRA.

Traditional IRA - April 2020 gain-loss

Source: Consistent Dividend Investor, LLC

Here is the Unrealized Gain/Loss associated with Jane’s Roth IRA.

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Roth IRA - April 2020 gain-loss

Source: Consistent Dividend Investor, LLC

As mentioned in the Taxable Account article for April I have decided to continue including the following graph that was suggested by one of my readers who thought that this particular graph would demonstrate some of the interesting trends that we see each month while comparing them on a year-over-year basis. The main issue with the graph as it currently stands is that this is only the third year of collecting this data which makes the graph more choppy than it should be. I believe that the graph will continue to become more valuable as we enter into years four and five.

Traditional IRA - April 2020 monthly year-over-year income comparison Source: Consistent Dividend Investor, LLC.

Roth IRA - April 2020 year-over-year monthly income comparison Source: Consistent Dividend Investor, LLC.

Even with the optimism that has come from states beginning to reopen I still expect to see some negative trends associated with dividend income over the next few months. As the United States “gets back to business” I expect that these trends will improve based on how consumers choose to react (questions like will they start eating out as much as they had in the past and how significant will the impact from permanently closed businesses be). Additionally, and a resurgence in COVID-19 has the potential to derail the recovery while a definitive drawdown and/or the development of a vaccine is likely to continue pushing markets forward as investors see the amount of certainty improve.

Conclusion

After reviewing the individual stocks that generate Jane’s dividend income for the month of April we can see that the following changes have the greatest impact on her dividend income year-over-year.

  • Johnson Controls (JCI) – We sold out of this position a few months ago because it was a non-core position and we were disappointed that it did not announce even a small dividend increase. Ultimately we took the gains to hold as cash and ended up reinvesting the proceeds in preferred shares.
  • Synnex (SNX) – Did not pay its normal dividend in the month of April and it sounds like the spin-off of Concentrix is likely going to happen on June 1st. We took advantage of SNX’s recent lows and added to the position which is currently sitting on 20% unrealized capital gains which more than compensates for the missed dividend income. There is still plenty of upside to this stock in my opinion.
  • ITW – The sale of Illinois Tool Works resulted in missed dividend income. The bulk of the proceeds from this sale won’t begin generating dividend income until June/July because they weren’t reinvested until April/May.

In short, the drop in dividend income actually had more to do with the sale of shares that had previously paid during the month of April more than did with companies that had to reduce or temporarily suspend their dividend due to COVID-19. Because of this, I am not concerned with this trend especially as we see market confidence continue to improve as noted by the settling of the VIX Index.

Chart
Data by YCharts

New Article Format: Let me know what you think about the new format (what you like or dislike) by commenting, liking, following, etc. I appreciate all forms of criticism and would love to hear what I can do to make the articles more useful for you!

In Jane’s Traditional and Roth IRAs, she is currently long the following mentioned in this article: AbbVie (ABBV), Archer-Daniels-Midland (ADM), Broadcom (AVGO), Broadcom Preferred Series A (AVGOP), Boeing (BA), Bank of America (BAC.PK), Bank of Nova Scotia (BNS), BP (BP), British American Tobacco (BTI), Canadian Imperial Bank of Commerce (CM), Cummins (CMI), CenturyLink (CTL), Digital Realty (DLR.PK), Eaton Vance Floating-Rate Advantage Fund A (MUTF:EAFAX), Enbridge (ENB), EPR Properties Preferred Series E (EPR.PE), Eaton Corporation (NYSE:ETN), Emera Inc. (OTCPK:EMRAF), East West Bancorp (EWBC), General Mills (NYSE:GIS), GasLog Partners Preferred C (GLOP.PC), Honeywell (HON), International Business Machines (IBM), Iron Mountain (IRM), KeyCorp (KEY), Laurentian Bank of Canada (OTCPK:LRCDF), Lexington Realty Preferred Series C (LXP.PC), LyondellBasell (LYB), Main Street Capital (MAIN), 3M (MMM), Mesabi Trust (NYSE:MSB), Altria (NYSE:MO), Annaly Capital Preferred Series D (NLY.PD), NetApp (NTAP), Realty Income (O), Oxford Lane Capital Corp 6.75% Cum Red Pdf Shs Series 2024 (NASDAQ:OXLCM), Preferred Bank (NASDAQ:PFBC), Philip Morris (NYSE:PM), PolyOne Corp. (NYSE:POL), PPL Corporation (NYSE:PPL), Royal Bank of Canada (NYSE:RY), Schwab International Equity ETF (SCHF), Synnex Corp. (NYSE:SNX), STORE Capital (STOR), Sysco (SYY), Toronto-Dominion Bank (NYSE:TD), US Bank Preferred H-Series (USB.PH), Vermilion Energy (VET), Verizon (VZ), Williams Companies (WMB), W.P. Carey (WPC).

Disclosure: I am/we are long abbv, adm, ctl, etn, hon, ibm, main, mmm, vet. 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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.