The Retirees Taxable Dividend Portfolio - The Rise Of Air Products and Chemicals

seekingalpha06-15

The Taxable Account has exceeded expectations, with four months providing double-digit income growth in 2024, and averaging 8.25% over the first five months of 2024.We look at actual examples of how ...

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This is up from last months estimate of 2.9%.   Funtay/iStock via Getty Images May marks the second month in a row in which the Taxable Account has generated double-digit income growth compared to the same month in 2023. In fact, four of the five months in 2024 have seen double-digit income growth and when all five months are average together it results in a 8.25% annualized growth YTD. This performance so far exceeds my realistic expectations of 3.8% income growth for FY-2024 (when compared with FY-2023). The Taxable Account tends to be a very stable portfolio in the sense that there isn't a lot of trading being done, especially when it comes to selling shares because this creates taxable events since this is not a tax-deferred account like a Traditional or Roth IRA. With that said, this doesn't mean there isn't any trading but that we engage in a strategy that focuses on adding shares of companies when they are attractively priced and then reducing our exposure to high cost shares as we see the stock price moving higher again. In the previous The Retirees Taxable Dividend Portfolio - April 2024 Income Update we noted that we were interested in taking advantage of compelling stock price of Air Products and Chemicals (APD). APD recently saw its share price tumble after its last earnings report resulting in a buying opportunity that allowed us to build up the position at prices that have been quite elusive over the last few years. Data by YCharts Now compare the purchases that were made in early 2023 through the most recent sale at the end of June 2024.   APD - 2024-6 Trade History (Charles Schwab) What this demonstrates is that over a roughly 15 month period we were able to continue adding shares of APD in small tranches with the ultimate goal of ending with a stronger position (lower cost means a higher effective yield associated with the invested funds). Consider the following example:  APD @ $270/share = 2.62% Dividend Yield APD @ $220/share = 3.22% Dividend Yield  While this might not seem like a significant difference, the proof is in the math. A true buy-and-hold strategy would require APD to grow its dividend at 10%/year (which is its current 10-year dividend growth rate sits at 10.1%) for the next two years for the effective yield on the shares purchased at $270/share to have nearly the same effective yield as the shares purchased at $220/share today. At the same level of growth, the shares carrying a 3.22% dividend yield today would have been effective yield of 3.90% assuming a 10%/year growth rate over the next two years. The following realized gain-loss table reiterates this strategy.   2024-5 - Realized Gain Loss (Charles Schwab) Of the five sales made in 2024, four of them have been at a minimal loss with one trade resulting in a substantial gain. The difference in these transactions is that the ones that resulted in a minimal loss are all substantial components of the Taxable Portfolio while RPM International (RPM) was eliminated due to concerns that the stock was overvalued. In this situation John and Jane made the decision to close the position while the other trades are all examples where John and Jane saw the value in paring back the size of their holdings to reduce how much exposure they have to high cost-basis shares. Although the bus has already passed for APD, there are a couple of interesting plays that might be worth considering when it comes to building a lower cost-basis position. The following companies represent the most interesting plays in the Taxable Account with regard to being at an entry point that makes sense to accumulate more:  McCormick (MKC) Helmerich & Payne (HP)  Data by YCharts With MKC we have a number of reasons to suggest that a share price between $65-$70 is a reasonable entry point. Using the historical valuation and the historical dividend yield we can see that the stock is currently offering an effective yield that has not been available at any point over the last ten years. While growth has been slowed we are still talking about a company that has the ability to offer mid-to-high single digit dividend growth.   MKC - 10 Year Dividend Yield (Seeking Alpha) HP on the other hand, has demonstrated a fairly compelling floor at $35/share over the last year and has adopted the practice of paying a special dividend regularly. One of the reasons why $35 looks compelling is that we have had a number of very high-cost shares that were accumulated prior to the negative impact from COVID. Selling John and Jane's high cost shares to offset the gains from the sale of other companies in the Taxable portfolio represents a way for us to improve the cost basis of the position while also reducing the consequences for John and Jane's Taxable income. Let's take a look at some of the changes in the portfolio during the month of May. May Dividend Increases During the month of May, a total of three companies increased their dividend payout or provided a special dividend. Apple (AAPL) - Increased the dividend by 4.2% Energy Transfer (ET) - Increased the dividend by .8% Helmerich & Payne (HP) - Paid a special dividend of $.17/share May Trades There were a total of two trades that took place during the month of May and both were used to add to already existing positions.   2024-5 - Taxable Account Trades (Charles Schwab) This is the first time that we have added to Nordson (NDSN) in over a year and these shares are at the highest price point relative to the rest of the shares. NDSN is a very high quality company and the recent pullback from the 52-week-high was substantial enough to warrant adding a few more shares. As for Hormel (HRL) this add may have been a bit premature especially because further review suggests that we are more likely to see downside in the near-term. I think the article Hormel: You Are Two-Thirds Of The Way There from Trapping Value provides a compelling analysis, especially when you consider they have operating margins well-below its competitors but a PE ratio valuation that is well-above its competitors. HRL in the range of $25-$28 would be a much more compelling price point where we would consider adding more. 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 what holdings are generating income.   2024 - May - Taxable Dividend Breakdown (CDI) Here is an updated table of the extremely conservative forecast that suggests income would be down -2.0% in FY-2024, but this model assumes that we see no dividend growth, and we do not capitalize on the additional income from CD's and Money Markets. The estimate at the end of April was -3.7% which means that income produced in May was substantially higher than what we originally forecasted.   2024-5 - Taxable Forecasted Income (CDI) The next image has 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 how the Taxable account income is being derived (equities, fixed income, etc.). I started this table because I wanted to give 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).    2024 - May - Monthly Income Growth Tracker (CDI) The estimated increase for FY-2024 over FY-2023 now stands at 3.8% at the end of May, which is a substantial increase compared to the 2.9% at the end of April. I expect that the funds invested in certificates of deposit and money markets will likely be the primary factor that determines how much more of an increase we can expect to see in the income generated by the Taxable account. Conclusion Going back to the start of the article, we have already executed on the purchase of additional shares of MKC after the stock price dropped below the original cost basis that the bulk of shares were originally purchased at.   MKC - Lot Details (Charles Schwab) Following the theme of our strategy, you can see from the details above that we will now have the ability to choose to reduce exposure to MKC if the stock price begins to move back up by eliminating the highest cost shares that were purchased on June 4th. In this situation we wouldn't consider selling those shares for less than their cost-basis because there would be no benefit due to Wash Sale rules. If MKC shares move lower we will then consider investing more in small tranches thus building a layered position that will benefit us later on as the share price recovers. To drive the point home, I want to refer back to the example provided with APD. The image below represents the new lot details of John and Jane's current position in APD.   APD - Lot Details - June 11th, 2024 (Charles Schwab) It wouldn't surprise me if readers want to make the argument that selling the 15 shares at $270 means that we missed out on the potential upside to the closing stock price of $280.81/share on June 11. My response is that we aren't focused on squeezing out every last dollar that we can from these trades and that at $270/share we felt that there was a stronger value proposition putting these funds into cash and giving us the ability to capitalize on future price mismatches. Simply put, we have a bigger picture in mind and have never dwelled on the fact that we could've maximized the return by holding longer because that same mentality is what leads to missing the opportunity to sell. In a similar sense, we have never let buying shares too soon (such as the June 4th purchase of MKC or the May purchase of HRL) bother us because there will always come a point where we will have an opportunity to dispose of these shares as long as we are investing in well-established high-quality companies. I mention this often, but don't mistake this approach as day-trading because the goal is to build a long-term stable portfolio that generates a level of income that can continue to grow and sustain John and Jane during their retirement. What stocks are you seeing that aren't on my list? I am always looking for new companies that might be missing from our watch list. Please feel free to throw any suggestions in the comments!  John and Jane are long all holdings mentioned in this article.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.0","shortVersion":"4.24.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2443896145"}