Retiree's Dividend Portfolio - Jane's April 2024 Income Update - Closing Position In EWBC (2024)

The purpose of this series is to review the real investment portfolios of my retirees John and Jane to gain perspective on how their portfolio is performing (month-to-month) while also discussing the process behind why we are making certain changes to their portfolio. I started this series to give readers an opportunity to better understand how John and Jane's portfolios are evolving over time and I include historical results that show where the portfolio has been while also incorporating a dive into investments we are looking to add/trim/eliminate from the portfolio. It is important to note that the investments of interest to add/trim/eliminate can apply to all three of the portfolios that fall under this series.

This article specifically focuses on the results of Jane's Traditional and Roth IRAs for the month of April. In this article I take a deeper look at the reasons behind why we closed out of East West Bancorp (EWBC).

April was an all-around excellent month for Jane's Traditional and Roth IRAs with both accounts having grown the income year-over-year. The Traditional IRA saw the income produced increase by 13.45% compared to April 2023 and the Roth IRA saw a more modest increase of 7.68% over the same time period. Even with this gains, our extremely conservative income estimates show that the Traditional IRA is still projected to have negative income growth year-over-year, however, the gap is closing significantly with the new estimates coming in at -14.1% in the Traditional IRA compared to -16.3% estimated in the month of March. The Roth IRA on the other hand is in the positive and also continues to grow with April's estimated annual growth of 3.9% growth compared to the 2.4% that was estimated in March.

I have mentioned in previous articles that the main reason for the disparity between the Traditional and Roth IRA is that the Traditional IRA is more heavily invested in CD's and Charles Schwab Money Market (SWVXX) and we do not include these numbers in our conservative estimates because they fluctuate and can be difficult to properly track when CD's renew, etc. I will provide a table later in the article that shows a more realistic estimate of what we expect to see for income growth in 2024.

Closing Out Jane's Position In East West Bancorp

I want to start by saying that I personally believe EWBC is an excellent financial institution and I can totally understand why an investor would continue to hold shares even though we chose to close this position.

EWBC has never been a core position for Jane's Traditional IRA which means that we have never treated as a long-term hold or as a substantial component of her portfolio relative to the size of other positions. When I say that an investment is a "core" position this typically means that even when we trade around the position (for example, reducing our high cost shares) it means that we typically never drop below a certain number of shares. A great example of a core position that we have traded regularly is American Tower (AMT) and it is extremely unlikely that we would suddenly close out this position unless a significant/unforeseen event takes place.

Because EWBC isn't a core position it increases the potential that we would eliminate or reduce the position when the potential for upside is extremely limited and the dividend yield associated with the stock was sitting close to about 2.75% at the time of sale.

There were two major incidents that resulted in EWBC's dividend yield pushing well-above a 3% dividend yield:

1. COVID/Pandemic
2. The fall of Silicone Valley Bank (SIVB)

In both of these circ*mstances we were able to exploit the overreaction in the market to purchase shares at a much lower than normal price and then subsequently selling shares for some fairly substantial gains.

We will still closely watch EWBC because it is a stock that we would gladly add back at the right levels but at this point that is unlikely to happen without another special event that causes a ripple effect though the financial markets, especially one that casts doubts on the performance of the commercial real estate market.

Lastly, shortly after closing this position, we were able to use some of the proceeds to establish a position in Healthpeak Properties (DOC) based on the potential for capital appreciation and the current dividend yield that is more than double what was offered by EWBC.

April Dividend Increases

April saw a total of two companies increase their dividend payout or provided a special dividend.

• Essex (ESS) - Increased dividend by 6.1%.
• Blue Owl Capital (OBDC) - Increased dividend payout by 5.7%.

Traditional IRA - April Trades

We had only two purchases and one sale during the month of April. The big movement came from the establishment of 50 shares in DOC and the elimination of their position in EWBC.

Roth IRA - April Trades

We had a handful of purchases along with one sale during the month of April in the Roth IRA. April presented an excellent opportunity for us to increase our holdings in AMT at a much lower cost basis and to also trim the size of Bank of America (BAC) due to ongoing concerns with the financial sector as mentioned in the article John's March 2024 Income Update: Reducing Bank Exposure. Jane still maintains 175 shares of BAC and there are is no intent of cutting shares further at today's prices.

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 -14.1% (previously -16.3%) in the Traditional IRA and up 3.9% (previously 2.4%) 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 capitalize on the additional income from CD's and Money Markets (which is something the Traditional IRA is extremely dependent on).

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 Jane'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, CD's, 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 income growth of 1.4% in the Traditional IRA (previously 1.2%) and 14.2% in the Roth IRA (previously 14.0%) FY-2024. Part of the reason why the Roth IRA appears to be growing at a much faster pace is partly due to the fact that a significant portion of the Traditional IRA's income comes from fixed income sources like certificates of deposit and SWVXX. Rates interested

Conclusion

The market has been chugging along until today (5/23) when 10/11 S&P sectors ended in the red. I think it would be a mistake to assume that interest rates will soon move lower from here and I have maintained that position for quite some time. This increases the importance of responsible capital rotation and right now the emphasis is on short-term fixed income instruments. I am predicting with the concerns on the housing and automotive side that these kinds of investments are a very important safe haven that will benefit investors (particularly retirees like John and Jane) over the next 3-24 months.

We are seeing significantly more houses (inventory) coming to market while at the same time seeing delinquency among the riskiest real estate loans (FHA) increase. Combine with this a rapidly increasing credit card debt load and delinquency levels followed by a significant uptick in repossessions and dealerships that still have brand-new 2022 vehicles on the lot even though 2025's are starting to be delivered. In my opinion, investments that focus on mortgage production, credit cards, and vehicle sales should be treated with extreme caution.

As for the stocks in the portfolio that we like we have rotated capital into consumer goods and affiliated companies with recent adds or interesting plays in the following companies:

• Lamb Weston (LW) - Recently established position
• Americold Realty (COLD) - Recently established position (this company provides refrigerated warehousing for companies like LW)
• Unilever (UL) - Existing long-term position - The announcement to spin-off Magnum and Ben & Jerry's ice cream into a standalone company and deliver total savings of $800 million euros was very well received

These examples as a whole have beaten the S&P 500 over the last month even though they have lagged the index over a 12 month time frame.

Even though we are heavily favoring certificates of deposit and Charles Schwab Money Market (SWVXX) this underscores the importance and benefit of capital rotation to industries that offer a compelling upside and in this case these are all companies that provide goods that are impacted by inflation but whose core products are items that consumers don't want to be without regardless of how the economy is doing.

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

John and Jane are long all holdings mentioned in this article.

Matthew Utesch