Saturday, January 4, 2014

Project $3 Million - December Results

This portfolio belongs to a 28 year old person. I manage it for him.

MONTHLY HIGHLIGHTS:

The portfolio ended at an all-time high on December 31 at $111,161.93.

A quarterly dividend income record was established in the fourth quarter at $924.88.

An annual income record was established with $3,365.47 paid in dividends during 2013.
------------------------------------------------------------------------------------------------

PRIMARY OBJECTIVE:

Income Replacement! ... The objective is to start earning an income stream now to replace the income that will be earned throughout the working years. The goal is to achieve $10,000 per month income in retirement, and not have to sell any assets to do so.

The objective also includes having the income stream continue to grow at a rate above inflation. ... (Keep in mind, this portfolio was designed under today's dollar. As time moves on, we understand adjustments will need to be made as inflation rises. More funds will be contributed as pay raises allow. Other adjustments will be made as necessary.)

A portfolio of $3 Million with a yield of 4% will accomplish the $10,000 per month in income. Hence the title of this portfolio. ... Project $3 Million.
---------------------------------------------------------------------------------------------

MISSION STATEMENT:

To earn an income stream that is reliable, predictable and increasing.
-----------------------------------------------------------------------------------------------

STRATEGY:

To focus on the safety of the dividend, then to focus on the growth of the dividend, and then to focus on the total return. The formula to be used to put this strategy into effect is what I call, "The Success Formula That Never Fails."

High Quality + High Current Yield + High Growth of Yield = High Total Return
-----------------------------------------------------------------------------------------

TACTICS:

To contribute $500 per month to the portfolio, look to earn 8.25% annually, compounded over 40 years (to age 65). The beginning portfolio value at the time of establishing these goals was $42,204.42.

The link below shows the compounding effect and where the portfolio needs to be at the end of each of those 40 years to achieve the $3 Million.

http://www.planningtips.com/cgi-bin/savings.pl?amt=42205.00&dep=500&cmp=annually&int=8.25&yrs=40&Calculate.x=50&Calculate.y=12

All dividends are currently being reinvested back into the companies paying the dividend. Monthly cash contributions will be used to add new positions, or create new ones.
------------------------------------------------------------------------------------

STATUS:

To stay on schedule for the $3 Million, in the time allotted, according to the link above, the balance at the end of year 2013 needed to be $86,959.44. ... Project $3 Million is ahead of schedule.

The portfolio value at the end of December (year end) is $111,161.93. ... This is an all-time portfolio high. ... This amount of money already exceeds what the portfolio is supposed to show at the end of 2014.

The portfolio is just 3.8% shy of being two years ahead of schedule.
-----------------------------------------------------------------------------------------

DIVIDEND HISTORY:

December Dividend History:

2009 ... $207.43
2010 ... $179.20
2011 ... $260.87
2012 ... $247.33
2013 ... $277.82

Year End Dividend History:

2009 ... $684.38
2010 ... $1,693.33
2011 ... $2,404.02
2012 ... $2,808.46 ... up 16.8%
2013 ... $3,365.47 ... up 19.8%
===========================================================

DECEMBER DIVIDENDS RECEIVED:

Taxable Account (Dividends Reinvested)

Southern Company - SO ..... $35.88 ... bot 0.871 shares
Chevron - CVX .................. $31.37 ... bot 0.256 shares
Johnson & Johnson - JNJ .... $29.27 ... bot 0.313 shares
McDonald's - MCD ............ $29.10 ... bot 0.313 shares
Lockheed-Martin - LMT ..... $63.16 ... bot 0.43 shares
Frontier Comm. - FTR ........ $2.20 ...... bot 0.47 shares
Coca-Cola - KO ................ $31.16 .... bot 0.8 shares
===========================================================

PORTFOLIO HOLDINGS: ($4,000 equals a full position)

Symbol ... Shares ... Mkt Value ... Gain/Loss ... Company

ADP ..... 39.285 ... $3,174.19 ... up 79.94% ... *Automatic Data Processing
CL ....... 50.736 ... $3,308.49 ... up 62.07% ... *Colgate-Palmolive
CVX .... 31.626 ... $3,950.40 ... up 37.50% ... *Chevron Corp
DE ....... 12.00 ..... $1,095.96 ... up 10.22% ... Deere & Company (new position)
DEO .... 30.253 ... $4,006.10 ... up 88.50% ... *Diagio, plc
EPD ..... 63.918 ... $4,237.76 ... up 68.83% ... **Enterprise Products Partners
FTR ..... 21.984 ... $102.23 ...... (Received in spinoff from VZ ... Frontier Comm.)
GIS ...... 79.016 ... $3,943.69 ... up 37.47% ... *General Mills
JNJ ...... 44.66 ..... $4,090.41 ... up 45.71% .... *Johnson & Johnson
KMB ... 37.178 ... $3,883.61 ... up 36.92% .... *Kimberly-Clark
KMP ... 37.811 ... $3,049.84 ... up 9.93% ...... **Kinder Morgan Partners
KO .... 112.068 ... $4,629.53 ... up 69.82% .... *Coca-Cola
KRFT .. 88.339 ... $4,762.36 ... up 17.84% .... *Kraft Foods
LMT  ... 47.922 ... $7,124.08 ... up 75.74% .... *Lockheed-Martin
MCD ... 36.23 ..... $3,515.40 ... up 24.14% .... *McDonald's
MMP ... 83.655 ... $5,292.85 .. UP 125.67% .. **Magellan Midstream Partners
MO ... 108.465 ... $4,163.97 .... up 78.11% .... *Altria Group (held in two accounts)
PEP ..... 33.943 ... $2,815.23 ... up 33.05% ..... *Pepsico
PM ...... 44.925 ... $3,914.32 ... up 13.49% ..... *Philip Morris
SO ...... 71.573 ... $2,942.37 ... up 4.02% ........ *Southern Company
SYY .. 115.463 ... $4,168.21 ... up 20.17% ...... *Sysco Corp
Cash .................... $74.12
-------------------------------------------------------------------------------------------
Account Value .... $78,245.12

*Increased the dividend in 2013
**Multiple dividend increases in 2013
================================================================

ROTH IRA: (Dividends Reinvested)

December Dividends:

Realty Income - O ............ $15.25 ... bot 0.391 shares
Dominion Resources - D ... $40.43 ... bot 0.628 shares
----------------------------------------------------------------------------------------------

PORTFOLIO HOLDINGS: ($4,000 equals a full position)

Symbol ... Shares ... Mkt Value ... Gain/Loss ... Company

D ......... 72.507 ... $4,690.48 ... up 36.52% ... *Dominion Resources
HCN ... 44.21 ..... $2,368.33 .. <dn 4.12%> .. *Healthcare REIT
KMI .... 70.866 ... $2,551.18 .. <dn 2.05%> .. **Kinder Morgan, Inc
MO ..... 72.819 ... $2,795.41 ... up 7.71% ...... *Altria Group (held in two accounts)
O ......... 84.261 ... $3,145.46 ... up 2.70% ..... **Realty Income
PG ....... 35.449 ... $2,885.90 ... up 28.22% .... *Procter & Gamble
VZ ...... 120.26 .... $5,909.58 ... up 29.47% .... *Verizon
Cash .................... $513.48
------------------------------------------------------------------------------------
Account Value: .... $24,859.93

========================================================

THRIFT SAVINGS PLAN (TSP) - Federal Version of the 401K

There isn't any matching funds in this account. Therefore, only 5% of income is being contributed. Index Funds and Life Cycle Funds are the only options to choose from.

Fund - Tracking Index ....... Shares ..... Value ..... Percentage of Portfolio

C Fund (S&P 500) ....... 105.4986 ... $2,518.80 ... 31.26%
S Fund (Small Cap) ....... 91.3291 .... $3,075.11 ... 38.17%
I Fund (International) ..... 96.3436 .... $2,462.97 ... 30.57%
---------------------------------------------------------------------------------------
Account Value: ................................ $8,056.88

Contribution Allocations:

C Fund ... 20%
S Fund ... 35%
I Fund ... 45%
===========================================================

SOLD POSITIONS - REALIZED GAINS/LOSSES:

Company ... Date ... Gain/Loss ... Reason/Result

BMY ... 11/09 ... $1,001.21 - up 25.85% - Froze dividend, bot VZ and JNJ

KMR ... 02/11 ... $504.94 - up 27.09% - Replaced in taxable account with KMP
O ........ 03/11 .... $639.63 - up 34.55% - sold @35.42 bot back @34.43 don't recall why
ZTR .... 04/11 .... <$55.58> - dn <10.09%> - Cut losses, bot SYY
VZ ...... 05/11 ... $618.16 - up 30.15% - Moved to Roth and added to existing position
CLX ... 06/11 ... $25.25 - up 1.57% - Concerned with debt, replaced with KMB
VFC ... 10/11 ... $897.99 - up 53.07% - Yield dropped below 2%, bot PEP

O ....... 01/12 ... $79.73 - up 3.01% - Moved to Roth
UHT .. 01/12 ... $233.60 - up 10.32% - Wanted to spread tenant risk, bot HCN
FTR ... 03/12 .. <$1,095.08> - dn <49.90%> - Dividend cut, cash to Roth, bot COP
ABT ... 11/12 .. $872.46 - up 31.38% - Company split, took profits, bot KRFT
BP ..... 12/12 ... <$554.03> - dn <17.23%> - Took loss, cash to Roth, bot COP
NUE .. 12/12 .. $164.61 - up 7.33% - Slow dividend growth, cash to Roth, added to COP

COP ... 04/13 ... <$2.46> - dn <0.10%> - Froze dividend, bot MO
------------------------------------------------------------------------------
Total Cash Gains ... $3,330.43




























































































19 comments:

  1. Impressive, and thanks for letting it be seen and for keeping it up

    ReplyDelete
  2. All the names on the list appear to be household names. I have nothing against investors that believe that putting money into high quality stocks is a good idea. But some companies that are not household names can also be excellent companies.

    ReplyDelete
    Replies
    1. You're right Jim, and I appreciate the comment. We'll be getting to that as we go along. There's only so much you can do with $500 per month and we wanted the foundation in place first.

      Now that the foundation is in place, we can start on constructing the walls.

      This portfolio, over the years, will be adding other positions.

      Delete
    2. By the way, I forgot to ask, do you have any recommendations? We're looking to add something later this month and I'm researching now. ... Thanks in advance.

      Delete
    3. Jim, I have been mentoring someone who asked me about starting out with dividend growth investing and wanted to know about the importance of "core" positions. This is just one response between this person and me, and applies to this portfolio to date. I thought this might be a good time to share it here.

      It may take a couple of message here to complete because I'm not allowed enough characters.

      Delete
    4. Knowing that one of the keys to long-term success of our income stream is determined by owning high quality companies, who are in a position to provide that long-term success, the next step is building the foundation of your portfolio, the “core” positions if you will.

      Once we are in the distribution phase, our portfolio is what will carry us through. If we’re counting on that income, we can’t sell off positions due to fear of market conditions, or we’ll be forcing ourselves to take a pay cut. Nobody really knows what’s going to happen next. Some things can be predicted, most things can’t. Since nobody really knows what’s going to happen, your plan must allow for the fact that the markets will experience some unexpected downturns every now and then.

      As a Marine, we were taught to always be aggressive, always be on the attack, always be moving forward. There are times when you had to stop and regroup. When forward progress was stalled, we put out a perimeter. That perimeter was our first line of defense against attack. How well we were protected was defined by the skills and alertness of the perimeter team.

      In investing, as you organize, plan, or simply regroup against the forces of the market, it’s your core positions that you will send out to defend your perimeter. These are the companies that you will have faith and confidence in holding during serious market corrections. After all, they are providing you with your paycheck in retirement.

      Delete
    5. In 1999, The Single Best Investment by Lowell Miller was published. If you haven’t read it, I recommend it. He has an updated book out. He suggests that your core positions represent more than 50% of your portfolio. I believe the number should be closer to 70% or 80% in retirement. He suggested that out of that number, core positions should represent at least 25-30 positions. So that should give you a guideline on how to weight your positions.

      In 1999, Miller suggested that your core positions should be focused on MLP’s, REIT’s and utility companies. He thought consumer companies should be included but at the time, their valuations were way to high. Anyway, those four sectors should constitute most of your core positions.

      His advice was given prior to the Lost Decade of 2000. The top three sectors coming out of the Lost Decade? ... MLP’s, REIT’s and utility companies. Now that’s what I call prescient.

      What constitutes a core position? In my opinion, and the way I have our portfolio’s established, is that I want companies that offer a product or service that we must, or will use regardless of economic conditions. Since I must rely on my core positions to sustain my retirement needs, I must be sure that the companies I own will outlast me. 50 years from now, people will still need power to keep the lights on and and heat and cool their homes. People will still have to eat, still take care of their personal hygiene, and take care of their medical needs. These behaviors will never go out of style and I want to own companies that provide those basic needs.

      What made MLP’s, REIT’s and utilities so valuable as core positions?

      They all have guaranteed revenues coming in regardless of economic conditions. MLP’s and REIT’s have long-term contracts in place and can count on most of those revenues regardless of what’s going on with the economy. Utility and phone companies have guaranteed revenues that they can count on month after month after month. People can’t change utility companies. If they want electricity, they have to pay the bill. Our utility provider has so many payments coming in monthly, that the post office issued them their own zip code.

      As long as those companies are well managed, which is where looking for those with the highest financial strength ratings come into play, then the company has to earn a profit. They earn a profit, I earn my retirement check.

      People didn’t stop grocery shopping during the Great Recession. They aren’t going to stop in our lifetimes either.

      Knowing that people must, or will use the products or services provided in these sectors, and the fact that I’m selecting the more financially strong of those, it is that knowledge that allows me to stay put and do nothing during market corrections other than collecting my dividends.

      In General Douglas McArthur’s final speech to the Army Corps of cadets at West Point, he told them that he was ending his Army career and in heading off into retirement, his final thoughts would be of the Corps, and the Corps and the Corps.

      We too have our Core to rally around.

      Delete
  3. hi, chowder:
    do you mind telling us what the approx. percentage you allot to MLPs, REIT, Utilities in your portfolio, since most of us are in your age group and aren't that young any more?
    would also appreciate other categories that compromise your whole portfolio.
    thanks

    ReplyDelete
  4. MLP's ... 12.1%
    REIT's ... 9.9%
    Utilities ...22.5%

    I include telecoms under the utility umbrella.

    ReplyDelete
  5. Hey Chowder,

    How do you feel about 3M for a portfolio like this? S&P A+ Quality, 56 year history of dividend increases (although only 4% the past 5 years) and a huge recent increase (35%). Do you think that it fits the bill of stocks like DE that you've added recently? Thanks!

    John

    ReplyDelete
    Replies
    1. John, I think MMM is a good pick for a portfolio like this. It's on our watch-list. I'm simply waiting for a better valuation.

      Delete
  6. I've always thought it would be so simple just to buy BRKB, and sit back and relax. Any thoughts on how this ranks within your parameters of qualifying a company?

    ReplyDelete
  7. I should have added, even without dividends, over the past 5 years their share price rise has been 86.68%, and when averaged out over that 5 years, it works out, at this moment, to 17.3% per year. And when thinking about the share price drop currently, it might be an opportune time to take a look. Just thinking out loud and wondering if there aren't any companies out there that might be a good choice even without a stated dividend payment?

    ReplyDelete
    Replies
    1. Rich, I have thought about owning BRK.B but passed on the idea.

      The very first thing every investor should strongly consider is their Primary Objective. What is it you want your portfolio to achieve? Each person can have different goals, and there's nothing wrong with that, but whatever goals you do establish, the positions you purchase should support the overall objective.

      In the Primary Objective established for this portfolio, the first two words are Income Replacement!

      With this in mind, every position purchased must support the objective, and that means every position must pay a dividend. BRK doesn't qualify for purchase.

      Based on the objective established for this portfolio, an asset is only as valuable as the amount of income it throws off, and BRK doesn't throw off any income.

      Think of it in terms of real estate. This portfolio's objective is income, thus the properties being purchased must produce rents every month. If the objective is to draw rental income on a monthly basis, I wouldn't purchase raw land. BRK is raw land. Buy it today and hope that sometime in the future I can sell it at a profit. Once sold, it no longer has value to me. Rental units always have value because the objective is to hold on to them as long as the rental income continues to come in and it covers the expenses.

      I can see expanding the portfolio objective at some point. Perhaps once the monthly dividend income equals the amount of income being drawn from current employment. I can see adding a company like BRK at that point.

      Keep in mind, this doesn't make it wrong for others to own BRK, their objectives may include such a purchase, but this portfolio is looking to replace current income requirements with dividend income first.

      Delete
  8. This comment has been removed by a blog administrator.

    ReplyDelete
  9. Hi Chowder, at some point I hope you adjust your link to the planningtips.com calculator to reflect the fact that much more than $500 per month is being added. At least $625 per month has been added to Project $3 Million since the end of 2009. The extra $125 is an approximation of the additional "5% of salary" contribution to your son's TSP. You have noted this extra 5% of his pay time and again but never included it in the schedule. Your (highly accomplished!) son was about an E-5 (petty officer 2/C) at the end of 2009, making about $30,000 per year, right? Five percent of this each month is $125. It's grown since 2009, of course.

    If you had invested this $625+ monthly in SPY starting with $42,205.42 on Dec. 31, 2009, you would be much more ahead of schedule, with $119,400 in shares of SPY on Dec. 31, 2013. See the monthly calculator for SPY at http://www.buyupside.com/calculators/dollarcostaveinclude.php?symbol=spy&amountinitial=42205.42&amount=625&interval=1&start_month=11&start_year=2009&end_month=11&end_year=2013&submit=Calculate+Results

    It's not that I think you should change anything. But this reality may be food for thought for the interested reader wondering if moving in and out of DG stocks, and not reinvesting dividends automatically, all per your "strategy," is for them. I expect the gap between your total and just investing in SPY to become much larger over the years, due to the compounding of your losses as you move in-and-out of positions that you are attempting to value. I write with respect and "just saying."

    ReplyDelete
    Replies
    1. Elle, you bring up some good points. I appreciate it.

      I don't know how much goes into his TSP, but for the sake of discussion, I'll accept your numbers.

      I know this will sound crazy but I'm not interested in what the results might have been if invested in SPY. SPY isn't going to continue having the double digit returns it has had over the last couple of years. SPY took a 30% gain last year to gain any traction ahead of what I am trying to accomplish.

      I don't expect to outperform SPY during some years. It's not even a consideration on my part. This is a long-term portfolio where dividends are being reinvested. I think it's a good thing that this portfolio lagged the market last year. It allows for us to acquire more shares, due to lower prices, than we would have been able to acquire if share prices were higher. Since he has 4 decades of compounding ahead of him, I think lagging the SPY now will be a blessing over the long term.

      I don't understand the moving in and out comment. Only one sale has been made in 15 months. Some of the moves in prior years was in positioning the accounts and that's over with. I had a change of heart in 2013.

      There are companies in this portfolio that I've sold in my own. SYY and DEO are a couple of examples. My objective is to stay put on these positions unless a company's credit rating drops below BBB. Going forward, I'm going to accept dividend freezes with the companies in this portfolio where I wouldn't in my own portfolio. As long as these companies remain "high quality," I'll hold on to them.

      I don't expect the gap between our total return and SPY to become larger over the years. The yield is too low and so is the dividend growth. I believe compounding will benefit this portfolio over SPY.

      Most of these companies over the last 20 years outperformed SPY for total return. I expect most of them to do so over the next 20.

      When you say if he had invested $625 in SPY, are you saying he should have his entire portfolio in SPY?

      Delete
  10. Hi Chowder, I am saying in the last four years, your gyrations with the portfolio have not paid off. Going through your sell list with quick assessments of whether there seems to have been prudence in the decision:

    BMY since 11/09 is up much more (by 153%) than SPY (85%), JNJ (69%), or VZ (100%). Points to a very bad decision.

    KMR since 2/11 is up more than KMP, but tax implications for this switch understandably may justify it.

    The gyration with O cost trading fees and I expect some dividends that may or may not have offset the lower price at which you re-bought it.

    ZTR since 4/11 is up 31% vs. SPY (45%) and SYY (up 37%). Good decision, ignoring SPY.

    CLX since 06/11 is up 42% vs. SPY (49%) and KMB (82%). Great decision.

    VFC since 10/11 is up 77%, far outpacing SPY (56%) and PEP (36%). Bad decision.

    UHT since 01/12 is up 19% vs. SPY (48%) and HCN (15%). Bad decision.

    FTR since 03/12 is up 38% vs. SPY (37%) and COP (25%). Bad decision.

    ABT since 11/12 is up 30% vs. SPY (35%) and KRFT (29%). Bad decision, since the move cost trading fees and possibly a dividend.

    BP since 12/12 is up 29% vs. SPY (34%) and COP (21%). Bad decision.

    NUE since 12/12 is up 20% vs. SPY (34%) and to COP (21%). Good decision, to be generous in the evaluation.

    COP since 04/13 is up 15% vs. SPY (19%) bot MO (3%). Bad decision.

    Your and many other SA dividend growth-inclined members' counsel on how to pick stocks is fine. It's the criteria for selling them that I think gets you (and others, including myself) in trouble.

    ReplyDelete
    Replies
    1. Elle, it's always easy to analyze in hindsight. I'm one of the few people who will announce moves before they are made and I'll show what I do in real time.

      I've made a lot of mistakes in the past and I'm sure there are more to come, but here's how I look at it.

      The decision that I make, given the data, given my knowledge and experience, and the urgency to fix the problem, was the right one - even if the outcome was not what I wanted.

      It is impossible to succeed unless you experience failure first. It's through our mistakes that we learn to improve and it's by insuring those same mistakes aren't made again that we head down the road of success.

      Some of the moves I made were good ones and some weren't, but not for the reasons you state (performance numbers as they relate to each other). Not in my mind anyway.

      If I had to do it over again, I would have kept BMY, CLX and VFC. My decision to do so is not because of their performance since I sold them, but because they are still "high quality" companies that I would like to see in this portfolio.

      Instead of replacing CLX with KMB, I would have liked to have kept CLX, even though KMB has performed better, and added KMB.

      I wanted O out of the taxable account. I didn't want that position to grow over the next couple of decades with the dividends being taxed at ordinary rates.

      ZTR was not the type of holding I want to see in this portfolio. I wasn't comfortable about the assets that UHT owns, regardless of how well the share price has done. FTR doesn't have the credit quality I want to see in this portfolio. The more I learned about BP from people in the industry, you won't see this company in this portfolio again, regardless of share price movement.

      I suppose I could have survived keeping ABT and COP, although I don't see me adding these to the portfolio anytime soon.

      There won't be a lot of selling going forward, even if the market corrects 30%.

      Delete