The Retirees' Dividend Portfolio - John And Jane's October Taxable Account Update: Budgeting In Retirement (2024)

Over the last month, we have let the Taxable account ride because there are some new developments in John and Jane's lives that require them to have access to the cash portion which has been used in the past to purchase short-term certificates of deposit. This will result in the $137k disappear from its cash base (Typically $100k has been in short-term certificates while $37k was held as cash).

The good news is that we have run the Taxable account in a way where we knew that these funds would be utilized for some other purpose (we just didn't know when). While this has put a damper on upcoming stock purchases, it will have very little impact on the actual monthly cash flow because it won't be necessary to sell any stocks in the Taxable portfolio in order to come up with the $137k needed.

This leads me to the main point of my introduction which is that I cannot understate how important it is that an investor has a well thought out game plan for how they will achieve short-term and long-term goals. Even if you have a financial advisor there are important questions that need to be revisited on a regular basis because what good is planning if you don't plan for your own personal life circ*mstances.

Taking care of bills on a day-to-day basis and paying general bills are things that we must all get used to, however, preparing for unexpected expenses is something that the average American has proven to be extremely poor at doing which is no wonder why credit cards seem to get so easily abused since they are often the last resort for the majority of people. The following stats were found in an article titled A growing percentage of Americans have no emergency savings whatsoever posted on bankrate.com:

28% of US adults have no emergency savings.
25% of US adults have a rainy day fund but there isn't enough money in it to cover at least three months of living expenses.
Less than 20% of Americans have more than 6 months of expenses in emergency savings.

It's pretty funny that these statistics would make me think of the line that Benjamin Franklin wrote Jean-Baptiste Leroy in 1789 which says:

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

Well, when it comes to the topic of budgeting and expenses my take is slightly different than Benjamin Franklin in that nothing is certain with the exception that something will go wrong because crap (I typically use the other four-letter word) happens. When you begin to plan your budget around this concept it becomes much easier to handle some of the more dramatic situations we are faced with.

For example, my fiance and I have had over $1300 of various vet expenses but we were able to easily cover these expenses through a savings account that is devoted entirely to our furry friends. Needless to say, my stress level is significantly lower because I don't have to try and figure out where we will get these funds from.

John and Jane situation is quite different in that the need for utilizing these funds had nothing to do with an emergency and everything to do with making a purchase that they believe will improve the quality of their retirement. After all, what's the point of saving for your retirement if you aren't going to try and maximize the quality of it?

Client Background

John and Jane are two real people who asked me to help manage their retirement portfolios. It is important to understand that I am not a financial advisor and merely provide guidance for my clients' accounts based on a friendship that goes back several years. I call them my clients for simplicity's sake, but I do not charge them for what I do. The only request I made to them was that they allow me to anonymously write about them so that I can potentially help others who are wanting to achieve the same thing.

John retired in January of 2018 and is collecting social security along with other benefits while Jane is still working with aspirations of retiring in the next two years. John and Jane have done an excellent job heading into retirement because they currently have no debt or mandatory monthly obligations other than what is expected (such as property taxes, water, etc.)

John and Jane 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. In a nutshell, what John and Jane want is a portfolio of stocks, bonds, and other investments that will provide a steady stream of growing and consistent dividend income that will supplement their income during retirement. At some point, it will be necessary for John and Jane to sell shares from their Traditional IRA, whereas the goal of the Taxable and Roth IRA is that they will never need to sell any shares (unless they want to) because the income generated will prevent them from needing to sell shares as a means of "funding their retirement."

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

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.
In the past year, I have typically focused on stocks that paid a qualified dividend because they qualify for the lower long-term capital gains tax rate vs. ordinary dividends which are taxed as ordinary income. This has become less important now that 2018 was John's first year of retirement. Changes in the tax brackets also support this approach because the ranges have been expanded and include basically all of their income in the 22% bracket. (Qualified dividends are subject to a 15% tax so the difference has become less-important).

Fixed Income

I have chosen to separate the fixed income figures from the rest of the portfolio in order to avoid confusion which allows those reading to gain a better understanding of how John and Jane's Taxable Portfolio is generating interest and dividend income.

Certificates of deposit (CDs) are the primary recipient of these funds because we are looking for zero volatility and FDIC insured product. I have received feedback on investing directly into treasuries but haven't had the time to discuss this with my clients'. There are some potential uses for these funds in 2020 so the short-term nature of the CD suits John and Jane's current needs perfectly.

Dividend And Distribution Increases

September included a total of three companies that paid increased dividends/distributions or a special dividend during the month.

Altria (MO)
Realty Income (O)
WP Carey (WPC)

Altria - Income investors currently have a major love/hate relationship with Altria given the high level of uncertainty that has clouded what is typically an extremely predictable business. After all, Altria's reported $4.5 billion dollar write-down on its investment in Juul Labs is more than enough to make investors begin to question their position in Altria. With that aside, I am beginning to view Altria's situation with optimism since the bottom appears to be in and Altria's short and long-term outlook improving. As shown in the FastGraphs chart below, investors who believe the worst is over for Altria will find the current entry point one of the most attractive we have seen in over 10 years.

The dividend was increased from $.80/share per quarter to $.84/share per quarter. This represents an increase of 5% and a new full-year payout of $3.36/share compared with the previous $3.20/share. This results in a current yield of 7.24% based on a share price of $46.41.

Realty Income - There isn't much to say about Realty Income that I haven't said before other than the stock recently pushed to a new 52-week-high of $82.17/share which I believe is extremely overvalued. After touching this point the stock has dropped abruptly to a one-month low of $76.32/share. We have no plans to purchase additional shares until we see the share price drop below $65/share which would result in a dividend yield of roughly 4.2%. Realty Income's consistency and history deserve credit but at a current P/FFO of 23.4x, the current premium is too much for my taste.

The dividend was increased from $.2265/share per month to $.227/share per month. This represents an increase of .2% and a new full-year payout of $2.724/share compared with the previous $2.718/share. This results in a current yield of 3.57% based on a share price of $76.32.

WP Carey - WPC and Realty Income have a lot in common right now and it has little to do with their portfolio of properties but a lot to do with the inflated share price that has reached the point of ridiculous. WPC's stock price has steadily dropped over the last week after they announced that the top end of its 2019 FFO would be reduced from $5.05/share down to $5.01/share. Despite this temporary setback, WPC looks like it will be able to meet most analysts' expectations. As of market close on 11/8, WPC's stock price reached a 3 month low of $84.46.

The dividend was increased from $1.034/share per quarter to $1.036/share per quarter. This represents an increase of .2% and a new full-year payout of $4.144/share compared with the previous $4.136/share. This results in a current yield of 4.89% based on a share price of $84.46.

Positions

The Taxable account currently consists of 43 unique positions as of November 12, 2019. There was a fair amount of activity on the Taxable account this month as we reduced exposure to certain stocks and eliminated the entire position for Macquarie Infrastructure (MIC). We took advantage of zero trading commissions to add a few more shares in McDonald's (MCD). We also used the opportunity to purchase more shares of Archer Daniels Midland (ADM), Exxon (XOM), Washington Trust (WASH), and Ryder (R).

We purchased shares for the following stocks during the month of October:

MCD - Purchased 3 Shares @ $200.45/share.
MCD - Purchased 2 Shares @ $203.10/share.
WASH - Purchased 25 Shares @ $48.18/share.
XOM - Purchased 15 Shares @ $68.24/share.
ADM - Purchased 25 Shares @ $40.41/share.
R - Purchased 10 Shares @ 47.42/share.

**I would like to point out that I accidentally purchased 10 shares of Toronto-Dominion (TD) in the Taxable account when it was intended to go in Jane's Traditional IRA. After realizing my mistake the shares were liquidated for a -$.12 loss. These transactions will not be included in the list above/below.

We sold shares for the following stocks during the month of October:

MIC - Sold 50 Shares @ $39.62/share.
MIC - Sold 50 Shares @ $40.24/share.
Southern Company (SO) - Sold 50 Shares @ $61.58/share.

Source: Charles Schwab

I had been looking into selling MIC for a while now because I want to limit John and Jane's exposure to a small handful of high-yield stocks and MIC has been at the top of the list to eliminate. With that being said, I wanted to wait until I could make sure that the loss could be offset by a gain. In this case, the gain came from the sale of SO which represented John and Jane's initial position in the stock and lowered the cost-basis of what I believe is an incredibly overvalued utility. John and Jane's realized gains on the Taxable account still sit at a small loss for FY-2019.

Source: Charles Schwab

October Income Tracker - 2018 Vs 2019

Income for the month of October by a significant amount year-over-year with the primary reason for the increase coming from a cash infusion of $200k from the sale of real estate assets. This cash infusion allowed me to increase already existing positions and add two additional positions which included Schlumberger (SLB) and Leggett & Platt (LEG).

Images will explicitly state if they take into consideration the income generated by the Fixed Income holdings.

Dividend Income - 2018 vs 2019 Breakdown