John’s July 2024 Retirement Income Update: Yield And Potential Appreciation

I try to write at least one article focused on undervalued dividend opportunities every month, with the 2 Undervalued Industrial Dividend Stocks For August 2024 being the most recent publishing. Undervalued opportunities are getting more difficult to come by, and not every ticker symbol in the articles I write represents an investment opportunity (at least not at that moment). In the most recent article, we established a small position for Jane in Stanley Black & Decker (SWK) but we have yet to pull the trigger on shares of Lincoln Electric (LECO).

After the most recent dip (which can primarily be seen in the S&P 500 and the NASDAQ Composite indexes) it shows that we are potentially going to test new market highs or have set a new market high for the Dow Jones Industrial Average.

I am in the camp that the market is assigning too much optimism to the benefit received when the Federal Reserve makes a September rate. It would almost appear that people believe the economy is going to be “saved” as a result of it, but this is something that will take months if not a year to fully play out. With unemployment rising, car and real estate inventories building, and then an election year to top it all off, I think there is a far greater likelihood of valuations getting worse than there is of them continuing to push higher.

The only caveat that I have to the last sentence above are locating undervalued dividend opportunities, but even the number of situations that actually qualify as “undervalued” are becoming much more challenging to find.

Until recently, we have been able to safely store unused capital in brokered certificates yielding in excess of 5%+ on terms as short as one month. This allowed us to keep the principal safe while keeping funds readily available to make purchases when it made sense. Now that rate drops are coming, these yields have approached 4% (which is still arguably good) as a result.

The opportunity that does exist is for investors to take advantage of the discount that still exists with preferred stock. Some of the preferred stock John holds includes:

• Digital Realty Preferred Series J (DLR.PR.J)
• EPR Properties Preferred Series G (EPR.PR.G)
• Bank OZK Preferred Series A (OZKAP)
• VanEck Preferred Securities ex Financials ETF (PFXF)
• iShares Preferred and Income Securities ETF (PFF) – Includes financial preferred shares

Below are some interesting plays that, I believe, are worth more consideration:

• Albemarle Preferred Series A (ALB.PR.A)
• Chart Industries Preferred Series B (GTLS.PR.B)

What makes these options interesting primarily has to do with the attractiveness of the yield with ALB.PR.A paying an 8.85% yield while GTLS.PR.B pays 7.28%. What makes these options interesting is the risk reward surrounding conversion features that could benefit or hurt shareholders at the time shares are converted to common stock.

For example, ALB.PR.A converts in March 2027 to .3809 of a share of Albemarle (ALB) which means that based on today’s pricing you would purchase a preferred share for $41.09/share which would then be worth 38.09% of the common stock ($85.49) = $32.56. In other words, the preferred stock is currently priced in a way where ALB’s stock price would need to go up to make it worthwhile (AKA, a bet on common shares appreciating). For more information on this, I would encourage reading Albemarle: Tough Road Ahead to get even more insight.

GTLS.PR.B also has a very similar situation exception that the callable/convertible date is 12/2025. The benefit is that the preferred stock price of $46.50 is much more attractively priced with a conversion rate of 42.31% of common shares. At the current common stock price of $112.88/share or $47.76 worth of common shares. This means that you can actually buy discounted shares of GTLS (Chart Industries). At the end of July the stock price was in excess of $160/share, which means that a purchase at current prices would convert into $67.70 of common share value.

Overall, GTLS.PR.B looks to be the most attractive option in my eyes by offering the safety of the dividend with the upside potential of the stock price appreciation at the time of conversion.

July Dividend Increases

John Traditional and Roth IRAs had four positions that paid an increased or special dividend during the month of July.

• AFC Gamma (AFCG) – Issued a special dividend of $.15/share
• Main Street Capital (MAIN) – Increased dividend by 2.1%
• Realty Income (O) – Increased dividend by .2%
• W. P. Carey (WPC) – Increased dividend by .6%

Traditional IRA – July Trades

There were a total of five different trades during the month of July, with three of them being to sell Avista (AVA) shares after we utilized funds in June to add shares at a low-cost basis.

Shares of Columbia Banking System (COLB) were sold to trim back the higher cost shares, and Sunrise Realty (SUNS) was closed out because this is a company spun-off from AFCG.

The remaining transactions were the continued reduction of AVA shares allowed us to solidify the low cost position and return funds back to cash that can be redeployed. The trades below show how we have continued to work the AVA cost basis down over time, which has increased our yield by acquiring lower cost basis shares and eliminating higher-cost basis shares. This is also just as far back as Charles Schwab will go, so it doesn’t include trades that came before September 2020 (and I can confirm that shares were definitely purchased prior to this because the highest cost shares ever held were somewhere close to $42/share).

Roth IRA – July Trades

There were a total of six trades made during the month of July in the Roth IRA, with the primary focus on Carter’s (CRI) and United Parcel Service (UPS). I recently wrote the article entitled 2 Undervalued Dividend Opportunities For June 29th, 2024 where I looked at the potential value proposition offered by both companies.

CRI has recently rebounded and is a great example to see why we try to layer into positions. We were able to purchase shares as the stock price continued to drop and then has recently moved off the lows and moved the position from unrealized losses to unrealized gains.

UPS is an example of layering, where things deteriorated further when earnings were released in July.

Lastly, we sold a small chunk of high-cost Truist Financial (TFC) shares. This proved to be an excellent move (this was established as a limit sell of high-cost shares) as the stock price recently moved lower.

Portfolio Composition

The images below are focused on what is happening now and moving forward.

The first image shows what has happened year-over-year with the portfolio in terms of which holdings are generating income.

Here is an updated table of the extremely conservative forecast that suggests income will be down -.41% (previously down -1.6%) in the Traditional IRA and up .2% (previously down -1.01%) in the Roth IRA for FY-2024. Remember, these numbers look bleak because it assumes that we see no dividend growth, and we do not assume consistent income levels from SWVXX or CDs because we are trying to err on the side of safety.

I have also added a combined monthly income table to give a better perspective on how John’s total retirement income potential is impacted.

The next two images have been updated from my forecasting articles to look at how much the income has grown on a monthly basis and separates out what income is from dividends and what comes from CDs/Money Markets, etc.

This offers more insight/context as to where John’s income is being derived (equities, fixed income, etc.). These are also more realistic numbers of what we expect to see for income growth and also gives us the ability to better track which months have the largest impact.

Here is a basic understanding of what each of the columns/fields mean:

• 2023 – Income results for 2023
• 2024 (Ex CDs) – Estimated income 2024 (yellow) and actual income 2024 (green) but excludes all income earned from money markets, CDs, etc.
• 2024 (W CDs) – Estimated CD & money market income 2024 (yellow) and actual income 2024 (green). Separated because we want to differentiate between dividend income and growth compared to CD’s/money market that are not subject to increases.
• Total Income – Combined total income from dividends, CDs, Money market, etc.
• 3%/5%/7% Increase – These columns serve as a marker so you can see how much income would need to be hit that month to achieve a specific increase. I will likely change these numbers to be more account specific in the future (some accounts are growing more rapidly than others).

From the numbers above, we are expecting to see a realistic income growth of 5.6% in the Traditional IRA (down from 6.7% in last month’s update) and 11% in the Roth IRA (up from 10.7% in last month’s update) for FY-2024.

Ultimately, both the Traditional IRA and Roth IRA look like they could generate year-over-year income increases in excess of 7%.

Lastly, John is currently of the age where he must withdraw funds from his Traditional IRA in order to satisfy is Required Minimum Distribution (RMD). The key with this is that we want to make sure his income generated exceeds his RMD amount for as long as possible. Doing this ensures that John has the cash flow needed in order to avoid having to sell parts of his portfolio in order to generate the income he needs during retirement.

To satisfy John’s 2024 RMD he is required to withdraw $13,274.04, and he has chosen to do this in increments of $1,106.17/month. Using the information from the Traditional Portfolio Income Forecast (Actual) table, we are estimating that John will produce a total of $1,499.88/month of income, which results in a payout ratio of 73.8% (up from 72.9% in June) of John’s income generated.

This worsening of the payout ratio is largely due to the decreasing interest we expect to earn with the looming Fed rate cut and CD/money market yields dropping.

Even with this slight setback, it means that John still has approximately $4,800 of additional income per year that he could use to supplement his income before he would need to begin selling assets to generate the funds needed.

Conclusion

With an expected .25% rate cut from the Fed coming up, we expect to see at least a slight dip in expected income heading into the end of the year because this willing directly impact any new CDs and existing money market funds. This goes back to why continue to follow the methodology of under-promise and over-deliver when it comes to income projections.

With more of John’s portfolio currently in cash, money market, and CDs than at the same point in 2023, this gives John additional exposure to fluctuations.

I apologize yet again for the tardiness of this article. I recently started building a large boulder retaining wall and then caught the stomach bug that knocked me out for a few days. I am planning to use some time off in the next few weeks to get my projects around the house knocked out and also get my articles back on track.

What stocks are you seeing that aren’t in Jane’s Retirement portfolio? Are there any compelling investments I should be looking at? I would love to hear any ideas/suggestions in the comment section.