Dividend and Interest income make up a portion of our investment return. While our ultimate goal is total return, dividends and interest represent returns paid in cash and cover some or all of our expenses on a monthly basis in early retirement. December is our biggest dividend month of the year. In addition to our monthly dividend/interest payers and our quarterly dividends that occur in the third month of each quarter, all of our mutual funds make dividend distributions at year end.
Total Investment Income in December: $9,145.
Dividends and Interest exceeded our $6,000/mo budget by more than 1.5x. Here are some investment highlights for the month/year:
REITs: Entertainment Properties Trust and STAG Industrial paid their monthly dividends totalling $703 in December. I made a significant addition to Entertainment Properties in December when its price dipped to $68/share in December and it is now my single largest individual stock holding.
Entertainment Properties Trust is an example of the challenge it takes to invest in individual income stocks vs. a broad market index fund. This company is a Real Estate Investment Trust that owns recreational properties throughout the US. Its holdings include movie theatres (approximately 45% of its business), along with Ski Resorts, Family Entertainment Centers, Top Golfs, Water Parks, and Education facilities. The company uses 65% equity and 35% debt to fund its purchases and paid out $4.50 in dividends in 2019.
The challenge with this investment is they hold higher risk properties. These are typically properties that are difficult for banks to finance and instead operators use Entertainment Properties Trust to landlord and lease the property to the operator. I personally think the biggest factor driving the stock price down is the trouble AMC Theatre’s stock is having. AMC theatres is one of EPR’s largest tenants and was losing money through 9/30/2019. If they or any other major tenants were to file bankruptcy, it would cause some disruption while leases were renegotiated or a replacement tenant were found.
In exchange for these risks, I’m paid a 6.6% yield instead of 3.87% for the Vanguard REIT index. I don’t believe this risk is new to Entertainment Properties Trust and I’m happy to accept the premium return in exchange for this risk.
Financial Stocks: $1,068 in dividend income in December. Three of my Bank stock holdings paid dividends this quarter, Bank of America, Key Corp, and Bank of Hawaii. Bank of America has been one of my biggest winners of the year, I thought it was severely undervalued at $28 or less and the market has corrected itself. At $35/share I’m pretty neutral on it and will happily sit back and collect my dividend. Bank of Hawaii has been a holding of mine since 2012 and they consistently return 100% of profits to shareholders through a combination of dividends and buybacks.
I was a net buyer of financial stocks from October 2018 through November of 2019. Most of these companies had flat earnings but were able to reduce the share count 8-10% over that period. Now that the sector has seen a 30% increase in stock price, the pace of buybacks will slow. I’m optimistic we’ll see 10%+ dividend increases from most of the Bank stocks in 2020 thanks to all the buybacks over the last fifteen months.
New Holdings in 2019: I purchased Carnival Cruise Lines and Westrock Corporation in 2019 and these two companies paid total dividends of $600 for the quarter. These companies were trading at a discount earlier in the year because of their debt loads and general economic concerns. With the recent reduction in interest rates and time for the companies to prove they can meet earnings and cover their dividends, the prices rebounded and aren’t quite the same bargain they were in the middle of the year. On a side note, if you ever go on cruises, the cruise line companies all give an on-board credit of $100 or $250 depending on the length of cruise if you own 100 shares or more. These stocks are fairly boring and worth owning the minimum number of shares if you go on a cruise every couple years.
Dog of the Year: My worst holding for the year was Cracker Barrel. The total return was slightly negative for the year vs. a near 30% return for the S&P. I wrote a separate post outlining my debate with this stock . In 2019, the company managed to reduce their special dividend payout, triggering a major shareholder to sell a chunk of its holdings, then made a $100mil acquisition with minimal disclosure. I’m a long term holder of this company and there’s a lot of levers they can pull for shareholder value with the right management. I might make a trip to investor day in Nashville in 2020 to watch the fireworks unfold.
Bonds: Substantially all of the bond interest income came from the intermediate and long term treasury bond funds we own (VGIT, VGLT, TLT, and TLH). I was buying/selling these bond funds with mild success when interest rates were more volatile in the middle of the year. Now that the volatility has settled, I will slowly moving these positions into the boring Vanguard Bond Index (BND). I still have a preference towards treasuries over corporate bonds (I don’t think investors are paid enough right now to take credit risk) and BND holds 60%+ treasuries. My completely uneducated prediction is it’ll be a boring year for bonds in 2020 and I’ll happily hold the index and earn 2-3% for the year.
Projected Income and What’s Next for 2020:
I reviewed our year end portfolio and statements to tally up our estimated income for the next twelve months: $53,878. This comes out to almost 75% of our annual budget for the year. We could push this income amount higher by exchanging some of our low yielding treasuries for higher risk bonds or stocks, but I currently prefer the low risk of a portfolio that is 2/3rds equities and 1/3rd bonds. I’m having a tough time finding dividend stocks at a decent value today and its likely my first purchase for 2020 will be the Vanguard Emerging Markets Index ETF (WVO). It yields around 3.2% and the underlying holdings are seeing double digit earnings growth and trade at a price to earnings multiple around 13x.
Be on the lookout for our year end portfolio review, I’ll share more details on our allocation, equity glidepath, withdrawal rate, and tax planning for 2020.
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