Situation: If you’re a stock picker, you’ll need Buy-and-Hold stocks that are suitable for retirement but you’ll also need to know how to “buy low.” The job of an investor, according to Joel Greenblatt (CEO of Gotham Capital), “is to figure out what a business is worth and pay a lot less”. Those two words (buy low) separate investors from savers.
The objective way to “buy low” is to listen to Warren Buffett and dollar-cost average a fixed amount each month into shares of large, well managed, and long-established companies with clean Balance Sheets. You do this by using an online Dividend Re-Investment Plan (DRIP). When the price of that stock falls during a Bear Market, you’ll automatically BUY LOW and acquire more shares per month than usual.
The subjective way to “buy low” is to resort to labor-intensive Fundamental Analysis, which uses a bespoke set of metrics to repeatedly examine stocks in each sub-industry and decide which are bargain-priced. My requirements for a company to be “A-rated” and join my Watch List of “large and well-managed companies with clean Balance Sheets” can be seen in the Tables for each month’s blog. For example, a large company is one in the S&P 100 Index. A well-managed company is one picked by the Managing Editor of The Wall Street Journal for inclusion in the 65-stock Dow Jones Composite Index. A clean Balance Sheet is one earning an S&P Bond Rating of A- (or better), with positive Book Value for the most recent quarter (mrq). I also require that Tangible Book Value (TBV) be a positive number but a negative TBV is acceptable if the company is mainly capitalized by Common Stock and its Total Debt is no greater than 2.5X EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the Trailing Twelve Months (TTM). The companies I analyze are listed in both the iShares Russell Top 200 Value ETF (IWX) and the Vanguard High Dividend Yield Index ETF (VYM). I interpret “long-established” to mean a 20+ year history of being traded on a public stock exchange.
Mission: Using our Standard Spreadsheet, analyze A-rated stocks that are in both the 65-stock Dow Jones Composite Average and the S&P 100 Index.
Execution: see Table. Columns AP and AQ give annual costs and the vendor URL for each dividend reinvestment plan (DRIP).
Administration: The idea behind owning “value” stocks is to lose less during Bear Markets. The idea behind owning “growth” stocks is to earn more during Bull Markets. Column AO shows how much the price of each stock changed in 2008. Column D shows how much the price of each stock changed in 2018 (when the S&P 500 Index lost 19.9% in the 4th quarter). These 14 stocks lost 5% less than the S&P 500 ETF (SPY) in 2018, and 17.3% less in 2008. An additional benefit of owning shares in these “value” companies that pay above-market dividends is that 7 are also listed in the iShares Russell Top 200 Growth ETF (IWY): MRK, KO, PG, JNJ, CAT, MMM, IBM. You can have “the best of both worlds” by owning those.
Bottom Line: The secret of stock picking is to have a short Watch List because you’ll need to practice due diligence: follow the evolution of each company’s “story” and the effectiveness of its managers. This takes time and money: online subscriptions to The Wall Street Journal, Barron’s, Bloomberg Businessweek, and The New York Times don’t come cheap. Neither do online DRIPs: For example, the average expense ratio in the first year of using a DRIP to buy into these 14 companies is 1.56% (see Column AP in the Table: $18.76/$1200 = 1.56%). And, you’ll get a bigger bill from your accountant if you decide to sell a DRIP, besides spending more time yourself to get the paperwork ready. For example, you’ll have to list the “cost basis” for each of the 16 purchases you made each year (12 monthly purchases plus 4 purchases to reinvest quarterly dividends) of each stock so your accountant can calculate capital gains.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into PFE, NEE, INTC, KO, PG, WMT, JPM, JNJ, CAT and IBM, and also own shares of MRK, DUK, SO and MMM.
NOTE: Aside from dollar-cost averaging, there is second objective way to buy low: make “one-off” purchases of any of these 14 stocks that appear on the “Dogs of the Dow” list, which is updated every New Year’s Day. For example, the 10 dogs on this year’s list include: International Business Machines (IBM), Pfizer (PFE), 3M (MMM), and Coca-Cola (KO).
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Showing posts with label DRIP. Show all posts
Showing posts with label DRIP. Show all posts
Sunday, June 28
Sunday, July 28
Month 97 - Members of "The 2 and 8 Club" in the Russell 1000 Index - July 2019
Situation: The idea here is to “beat the market” by making selective purchases of individual stocks. This is a delusion, given that the odds are less than 1 in 20 that a professional trader will (over any 10-year period) beat VOO--the ticker for the lowest cost S&P 500 Index Fund, which has an Expense Ratio of 0.03%. VOO is marketed by Vanguard.
Since you have to actively trade stocks to even come close to beating VOO, trading costs will relentlessly keep you from beating the market. Those costs include brokerage fees, commissions, research time & expense, and capital gains taxes. So, this month’s blog is about an interesting game, like tennis or marriage: When you lose, you’re a fool if you take it personally.
Mission: Run our Standard Spreadsheet for high-quality stocks in the Russell 1000 Index that have a good and growing dividend. High quality means an S&P bond rating of A- or better. A good dividend is one that gets the stock into the Vanguard High Dividend Yield Index Fund (VYM). A growing dividend is one that has been 8.0%/yr (or better) over the past 5 years.
Execution: see Table.
Bottom Line: You’re toast. It isn’t going to happen. But you’ll come close to beating the market if you avoid making abstract considerations and instead follow concrete markers, such as avoiding stocks with a dividend yield plus dividend growth rate of less than 10%. And, find a way to quickly decide whether a stock is overpriced. For example, you can ask your broker if Morningstar rates the stock as being “overvalued”. Or, you can calculate the Graham Number on your smartphone. The Graham Number is what the stock’s price would be at 15 times Earnings Per Share for the trailing 12 months (TTM), multiplied Book Value for the most recent quarter (mrq). This is a power function (15 times 1.5 equals 22.5). So, you have to multiply those numbers (for the stock in question) by 22.5 before taking the square root, which is the stock’s rational price. If the stock is selling for more than 2.5 times the Graham Number, it is overpriced (see the numbers highlighted in purple at Column AB of the Table). In other words, many investors want to own the stock but relatively few owners want to sell it. You should wait for this fever to break before buying shares.
Risk Rating: 6 (where a 10-year US Treasury Note = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into NEE, JPM, CAT and IBM, and also own shares of CSCO, AMGN, TRV, CMI, MMM and BLK.
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Since you have to actively trade stocks to even come close to beating VOO, trading costs will relentlessly keep you from beating the market. Those costs include brokerage fees, commissions, research time & expense, and capital gains taxes. So, this month’s blog is about an interesting game, like tennis or marriage: When you lose, you’re a fool if you take it personally.
Mission: Run our Standard Spreadsheet for high-quality stocks in the Russell 1000 Index that have a good and growing dividend. High quality means an S&P bond rating of A- or better. A good dividend is one that gets the stock into the Vanguard High Dividend Yield Index Fund (VYM). A growing dividend is one that has been 8.0%/yr (or better) over the past 5 years.
Execution: see Table.
Bottom Line: You’re toast. It isn’t going to happen. But you’ll come close to beating the market if you avoid making abstract considerations and instead follow concrete markers, such as avoiding stocks with a dividend yield plus dividend growth rate of less than 10%. And, find a way to quickly decide whether a stock is overpriced. For example, you can ask your broker if Morningstar rates the stock as being “overvalued”. Or, you can calculate the Graham Number on your smartphone. The Graham Number is what the stock’s price would be at 15 times Earnings Per Share for the trailing 12 months (TTM), multiplied Book Value for the most recent quarter (mrq). This is a power function (15 times 1.5 equals 22.5). So, you have to multiply those numbers (for the stock in question) by 22.5 before taking the square root, which is the stock’s rational price. If the stock is selling for more than 2.5 times the Graham Number, it is overpriced (see the numbers highlighted in purple at Column AB of the Table). In other words, many investors want to own the stock but relatively few owners want to sell it. You should wait for this fever to break before buying shares.
Risk Rating: 6 (where a 10-year US Treasury Note = 1, S&P 500 Index = 5, and gold = 10)
Full Disclosure: I dollar-average into NEE, JPM, CAT and IBM, and also own shares of CSCO, AMGN, TRV, CMI, MMM and BLK.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, November 25
Week 386 - Retirement Savings Plan For The Self-Employed
Situation: Let’s follow the Kiss Rule (Keep It Simple, Stupid). There are many jobs that don’t offer a workplace retirement plan. For example, if you’re a long-haul truck driver and own your Class 8 tractor, i.e., you’re an “Owner/Operator”, you make over $100,000 per year but have high expenses. As an S corporation, you don’t pay taxes on the 15% of gross income that you try to set aside for retirement.
How do you invest it? If you follow the KISS Rule, you’re best off putting all of it in Vanguard’s Wellesley Income Fund. That fund has an expense ratio of 0.22% and is half stocks and half bonds. The ~70 stocks are selected from the FTSE High Dividend Yield Index (i.e., the ~400 companies in the Russell 1000 Index that reliably pay an above-market dividend). You’ll recognize that Index as the same source we use to pick stocks for “The 2 and 8 Club”.
Mission: Run our Standard Spreadsheet using the 10 stocks that reliably pay good and growing dividends and are less likely to fall as much as the Dow Jones Industrial Average in a Bear Market. Compare that portfolio to the Vanguard Wellesley Income Fund (VWINX), the Vanguard High Dividend Yield Index ETF (VYM), and the SPDR S&P 500 Index ETF (SPY).
Execution: see Table.
Bottom Line: If you’re self-employed (e.g. do seasonal work), you need a flexible retirement plan with low transaction costs. Safety is the main goal. Take no risks! If you want to pick your own stocks, all right. You can keep costs for that low by dollar-averaging but then your bonds have to be very low risk, i.e., US Savings Bonds.
Risk Rating: 4
Full Disclosure: I dollar-average into NEE, KO, T, JNJ and DIA, and also own shares of HRL.
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How do you invest it? If you follow the KISS Rule, you’re best off putting all of it in Vanguard’s Wellesley Income Fund. That fund has an expense ratio of 0.22% and is half stocks and half bonds. The ~70 stocks are selected from the FTSE High Dividend Yield Index (i.e., the ~400 companies in the Russell 1000 Index that reliably pay an above-market dividend). You’ll recognize that Index as the same source we use to pick stocks for “The 2 and 8 Club”.
Mission: Run our Standard Spreadsheet using the 10 stocks that reliably pay good and growing dividends and are less likely to fall as much as the Dow Jones Industrial Average in a Bear Market. Compare that portfolio to the Vanguard Wellesley Income Fund (VWINX), the Vanguard High Dividend Yield Index ETF (VYM), and the SPDR S&P 500 Index ETF (SPY).
Execution: see Table.
Bottom Line: If you’re self-employed (e.g. do seasonal work), you need a flexible retirement plan with low transaction costs. Safety is the main goal. Take no risks! If you want to pick your own stocks, all right. You can keep costs for that low by dollar-averaging but then your bonds have to be very low risk, i.e., US Savings Bonds.
Risk Rating: 4
Full Disclosure: I dollar-average into NEE, KO, T, JNJ and DIA, and also own shares of HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, August 26
Week 373 - 10 Dividend Achievers In Defensive Industries That Are Suitable For Long-term Dollar-cost Averaging
Situation: Which asset class do you favor? Stocks, bonds, real estate or commodities? On a risk-adjusted basis, none of those are likely to grow your savings faster than inflation over the near term. You might want to hold off making “risk-on” investments, unless you're a speculator, because markets are likely to fluctuate more than usual. If you think a “risk-off” approach is best, then you need to pick “defensive” stocks for monthly (or quarterly) investment of a fixed dollar amount (dollar-cost averaging). To minimize transaction costs, you’ll want to invest automatically in each stock through an online Dividend Re-Investment Plan (DRIP).
Now you will be positioned to ride-out a Bear Market, knowing that you’re accumulating an unusually large amount of shares in those companies as their stocks fall in price. And, those prices won’t fall far enough to scare you because that group of stocks has an above-market dividend yield. So, you’ll stick with the program instead of selling out in a moment of panic.
Mission: Run our Standard Spreadsheet for high-quality stocks issued by companies in defensive industries, i.e., utilities, consumer staples, healthcare, and communication services.
Execution: see Table.
Administration: Companies that don’t have at least an A- S&P rating on their bonds and at least a B+/M rating on their stock are excluded, as are those that don’t have at least a 16-yr trading record suitable for quantitative analysis by using the BMW Method. Companies that aren’t large enough to be on the Barron’s 500 List are also excluded.
Bottom Line: We find that 10 companies meet our requirements. Companies in the Consumer Staples industry dominate the list: Hormel Foods (HRL), Costco Wholesale (COST), PepsiCo (PDP), Coca-Cola (KO), Procter & Gamble (PG), Walmart (WMT), and Archer Daniels Midland (ADM). As a group, these 10 companies have above-market dividend yields and dividend growth (see Columns G & H in the Table). Risk is below-market, as expressed by 5-Yr Beta and predicted loss in a Bear Market (see Columns I & M).
Risk Rating: 4 for the group as a whole (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into NEE, KO, JNJ, PG and WMT, and also own shares of HRL and COST.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Now you will be positioned to ride-out a Bear Market, knowing that you’re accumulating an unusually large amount of shares in those companies as their stocks fall in price. And, those prices won’t fall far enough to scare you because that group of stocks has an above-market dividend yield. So, you’ll stick with the program instead of selling out in a moment of panic.
Mission: Run our Standard Spreadsheet for high-quality stocks issued by companies in defensive industries, i.e., utilities, consumer staples, healthcare, and communication services.
Execution: see Table.
Administration: Companies that don’t have at least an A- S&P rating on their bonds and at least a B+/M rating on their stock are excluded, as are those that don’t have at least a 16-yr trading record suitable for quantitative analysis by using the BMW Method. Companies that aren’t large enough to be on the Barron’s 500 List are also excluded.
Bottom Line: We find that 10 companies meet our requirements. Companies in the Consumer Staples industry dominate the list: Hormel Foods (HRL), Costco Wholesale (COST), PepsiCo (PDP), Coca-Cola (KO), Procter & Gamble (PG), Walmart (WMT), and Archer Daniels Midland (ADM). As a group, these 10 companies have above-market dividend yields and dividend growth (see Columns G & H in the Table). Risk is below-market, as expressed by 5-Yr Beta and predicted loss in a Bear Market (see Columns I & M).
Risk Rating: 4 for the group as a whole (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into NEE, KO, JNJ, PG and WMT, and also own shares of HRL and COST.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Sunday, August 5
Week 370 - Ways To Win At Stock-picking #1: Dollar-cost Average Into 10 Of The 30 DJIA Companies
Situation: You’re troubled by the dominance of the S&P 500 Index. After all, it is a derivative and you wonder whether it is really the safest and most effective way to build retirement savings. Your biggest concern is that it is a capitalization-weighted index, which is a design that favors momentum investing: Mid-Cap companies that garner investor enthusiasm become included in the S&P 500 Index because their stock is appreciating; Mid-Cap companies that have managed to be included in the S&P 500 Index investors are in danger of being excluded because investors have lost their enthusiasm and the stock’s price is falling. Many investors buy/sell shares in a company’s stock because of that trend in sentiment. Fundamental sources of value (revenue, earnings, and cash flow) often have little to do with their enthusiasm, or the fact that it has evaporated. Articles in the business press may carry greater weight, and those articles may be influenced by analyses introduced by short sellers, who are betting on a fall in price, or hedge fund traders with long positions, who are betting on a rise in price. In other words, most retail investors are paying attention to market sentiment when buying or selling shares, not due diligence that comes from a careful study of a company’s prospects and Balance Sheet.
Your second biggest concern is likely to be that few S&P 500 companies have a good credit rating backing their debts. In other words, they’re paying too high a rate of interest on the bonds they’ve issued, or the bank loans they’ve taken out. The company’s Net Tangible Book Value is therefore likely to be drifting deeper into negative territory because of interest expenses, part of which are no longer tax deductible due to changes in U.S. tax law.
Both of these problems fall by the wayside if you invest in the 30 companies that make up the Dow Jones Industrial Average, either separately or together in the price-weighted Dow Jones Industrial Average Index (DIA at Line 18 in the Table). Investing in the “Dow” may be a little smarter for retirement savers than investing in the S&P 500 Index (SPY at Line 16 in the Table) for two reasons: 1) DIA has a dividend yield that is ~10% greater; 2) DIA pays dividends monthly, whereas, SPY pays dividends quarterly. A higher dividend yield means that your original investment is returned to you more quickly, which translates as a higher net present value, if other factors (e.g. dividend growth and long-term price appreciation) are not materially different.
Mission: Use our Standard Spreadsheet to illustrate how I dollar-cost average into stocks issued by 10 DJIA companies.
Execution: see Table.
Administration: It has been necessary to use 3 separate Dividend Re-Investment Plans (DRIPs) to dollar-cost average into the 10 DJIA stocks I’ve chosen (see Column AE in the Table). Those DRIPs automatically extract $100 each month for each of the 10 stocks; transaction costs average $18.68/yr (see Column AD), which includes automatic reinvestment of dividends. The expense ratio is 1.56% for each year’s investments, but expenses relative to Net Asset Value fall to less than 0.01% after 10-20 years.
Bottom Line: This week’s blog compares my long-standing pick of 10 Dow stocks (for an automatic monthly investment of $100 each using an online DRIP) to investing $1500/qtr in the entire 30-stock index (DIA) using a regional broker-dealer, which is something I’ve just started doing to facilitate comparison going forward. (You’ll see each year’s total returns in future blogs published the first week of July.)
Risk Rating: 6 (where U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: If one of the 10 stocks I’ve chosen is dropped from the Dow Jones Industrial Average (DJIA), I’ll sell those shares and use those dollars to start a DRIP with shares issued by another DJIA company.
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Your second biggest concern is likely to be that few S&P 500 companies have a good credit rating backing their debts. In other words, they’re paying too high a rate of interest on the bonds they’ve issued, or the bank loans they’ve taken out. The company’s Net Tangible Book Value is therefore likely to be drifting deeper into negative territory because of interest expenses, part of which are no longer tax deductible due to changes in U.S. tax law.
Both of these problems fall by the wayside if you invest in the 30 companies that make up the Dow Jones Industrial Average, either separately or together in the price-weighted Dow Jones Industrial Average Index (DIA at Line 18 in the Table). Investing in the “Dow” may be a little smarter for retirement savers than investing in the S&P 500 Index (SPY at Line 16 in the Table) for two reasons: 1) DIA has a dividend yield that is ~10% greater; 2) DIA pays dividends monthly, whereas, SPY pays dividends quarterly. A higher dividend yield means that your original investment is returned to you more quickly, which translates as a higher net present value, if other factors (e.g. dividend growth and long-term price appreciation) are not materially different.
Mission: Use our Standard Spreadsheet to illustrate how I dollar-cost average into stocks issued by 10 DJIA companies.
Execution: see Table.
Administration: It has been necessary to use 3 separate Dividend Re-Investment Plans (DRIPs) to dollar-cost average into the 10 DJIA stocks I’ve chosen (see Column AE in the Table). Those DRIPs automatically extract $100 each month for each of the 10 stocks; transaction costs average $18.68/yr (see Column AD), which includes automatic reinvestment of dividends. The expense ratio is 1.56% for each year’s investments, but expenses relative to Net Asset Value fall to less than 0.01% after 10-20 years.
Bottom Line: This week’s blog compares my long-standing pick of 10 Dow stocks (for an automatic monthly investment of $100 each using an online DRIP) to investing $1500/qtr in the entire 30-stock index (DIA) using a regional broker-dealer, which is something I’ve just started doing to facilitate comparison going forward. (You’ll see each year’s total returns in future blogs published the first week of July.)
Risk Rating: 6 (where U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: If one of the 10 stocks I’ve chosen is dropped from the Dow Jones Industrial Average (DJIA), I’ll sell those shares and use those dollars to start a DRIP with shares issued by another DJIA company.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, July 8
Week 366 - A Capitalization-weighted Watch List for Russell 1000 Companies
Situation: Every stock-picker needs to confine her attention to a manageable list of companies, called a “Watch List.” Here at ITR, the focus is on investing for retirement. So, our interest is in companies that have a higher dividend yield than the S&P 500 Index. Why? Because your original investment will be returned to you faster, which automatically gives your portfolio a higher “net present value” than a portfolio composed of companies that pay either no dividend or a small dividend. Once you’ve retired, you’ll switch from reinvesting dividends to spending dividends.
Mission: Assemble a Watch List composed of companies that are “Blue Chips” (see Week 361), companies that are in “The 2 and 8 Club” (see Week 344), and companies that are in the Extended Version of “The 2 and 8 Club” (see Week 362).
Execution: see Table.
Bottom Line: If you’re saving for retirement and would like to pick some individual stocks to supplement your index funds, here is an effective and reasonably safe Watch List. However, the mutual funds that pick individual stocks haven’t done very well compared to benchmark index funds. So, your chances of doing well as a stock-picker also aren’t good. But index funds like the SPDR S&P 500 (SPY) expose you to significant downside risk. There is one conservatively managed mutual fund that we think is an excellent retirement investment, the Vanguard Wellesley Income Fund, which is mostly composed of bonds. Your risk of loss from owning VWINX is less than half that from owning SPY; the 10-Yr Total Return is 7.0%/yr vs. 9.0%/yr for SPY.
Risk Rating for our Watch List: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into MSFT, JPM, XOM, WMT, PG, KO, IBM, CAT and NEE, and also own shares of GOOGL, CSCO, MCD, MMM, TRV, CMI and ADM.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Mission: Assemble a Watch List composed of companies that are “Blue Chips” (see Week 361), companies that are in “The 2 and 8 Club” (see Week 344), and companies that are in the Extended Version of “The 2 and 8 Club” (see Week 362).
Execution: see Table.
Bottom Line: If you’re saving for retirement and would like to pick some individual stocks to supplement your index funds, here is an effective and reasonably safe Watch List. However, the mutual funds that pick individual stocks haven’t done very well compared to benchmark index funds. So, your chances of doing well as a stock-picker also aren’t good. But index funds like the SPDR S&P 500 (SPY) expose you to significant downside risk. There is one conservatively managed mutual fund that we think is an excellent retirement investment, the Vanguard Wellesley Income Fund, which is mostly composed of bonds. Your risk of loss from owning VWINX is less than half that from owning SPY; the 10-Yr Total Return is 7.0%/yr vs. 9.0%/yr for SPY.
Risk Rating for our Watch List: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).
Full Disclosure: I dollar-average into MSFT, JPM, XOM, WMT, PG, KO, IBM, CAT and NEE, and also own shares of GOOGL, CSCO, MCD, MMM, TRV, CMI and ADM.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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Sunday, December 10
Week 336 - Version 3.0 of The Growing Perpetuity Index Reflects “The 2 and 8 Club”
Situation: We started this blog six years ago with the idea to create a Growing Perpetuity Index as a way to save for retirement, by selecting from a workable “watch list” of high-quality stocks (see Week 21). We chose to base the index on companies in the 65-stock Dow Jones Composite Average (^DJA), and ended up selecting 12 from the 14 that had earned S&P’s designation of Dividend Achiever, i.e., companies that had raised their dividend annually for the previous 10 years or longer:
Exxon Mobil
Wal-Mart Stores
Procter & Gamble
Johnson & Johnson
IBM
Chevron
Coca-Cola
McDonald’s
United Technologies
3M
Norfolk Southern
NextEra Energy
Our thought was that investors could select stocks from this index to safely dollar-cost average automatic online contributions into their Dividend Reinvestment Plan (DRIP). That would allow relatively safe and efficient growth in their retirement assets. Version 2.0 (see Week 224) added back the two companies that had been left out, Caterpillar (CAT) and Southern Company (SO), plus two newly qualified companies: Microsoft (MSFT) and CSX (CSX).
Now we’ll apply a lesson learned from running Net Present Value (NPV) calculations, namely that Discounted Cash Flows from good and growing dividends are more likely to predict rewards to the investor than Capital Gains from a history of price appreciation. Accordingly, Version 3.0 re-casts the index to include only those ^DJA companies that are in “The 2 and 8 Club” (see Week 329) of high-quality companies with a dividend yield of at least 2% and a dividend growth rate of at least 8% for the past 5 years. The result is a 13 company Watch List, not all of which are Dividend Achievers. Only 7 are holdovers from Growing Perpetuity Index, v2.0:
NextEra Energy
3M
Exxon Mobil
Coca-Cola
IBM
Microsoft
Caterpillar
Mission: Apply our standard spreadsheet (see Table) to the 13 companies in the 65-company Dow Jones Composite Index that are in “The 2 and 8 Club.”
Execution: see Table.
Bottom Line: The value of picking from among the highest-quality stocks in the Dow Jones Composite Index is not just that it’s the smallest and oldest index, but also that it is continuously vetted by the managing editor of The Wall Street Journal. Companies that don’t stand muster are replaced by companies that do. By adding the several requirements for inclusion in “The 2 and 8 Club” (e.g. S&P bond ratings cannot be lower than A-), you have a good chance of selecting half a dozen stocks that will beat the S&P 500 Index over a 10-Yr Holding Period (see Column Y in the Table). You’ll also be taking on more risk (see Columns D, I, and M in the Table), which you’ll ameliorate by trading new entrants to “The 2 and 8 Club” for those that are leaving.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MSFT, XOM, NEE, KO, JPM and IBM, and also own shares of TRV, PFE, MMM, and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Exxon Mobil
Wal-Mart Stores
Procter & Gamble
Johnson & Johnson
IBM
Chevron
Coca-Cola
McDonald’s
United Technologies
3M
Norfolk Southern
NextEra Energy
Our thought was that investors could select stocks from this index to safely dollar-cost average automatic online contributions into their Dividend Reinvestment Plan (DRIP). That would allow relatively safe and efficient growth in their retirement assets. Version 2.0 (see Week 224) added back the two companies that had been left out, Caterpillar (CAT) and Southern Company (SO), plus two newly qualified companies: Microsoft (MSFT) and CSX (CSX).
Now we’ll apply a lesson learned from running Net Present Value (NPV) calculations, namely that Discounted Cash Flows from good and growing dividends are more likely to predict rewards to the investor than Capital Gains from a history of price appreciation. Accordingly, Version 3.0 re-casts the index to include only those ^DJA companies that are in “The 2 and 8 Club” (see Week 329) of high-quality companies with a dividend yield of at least 2% and a dividend growth rate of at least 8% for the past 5 years. The result is a 13 company Watch List, not all of which are Dividend Achievers. Only 7 are holdovers from Growing Perpetuity Index, v2.0:
NextEra Energy
3M
Exxon Mobil
Coca-Cola
IBM
Microsoft
Caterpillar
Mission: Apply our standard spreadsheet (see Table) to the 13 companies in the 65-company Dow Jones Composite Index that are in “The 2 and 8 Club.”
Execution: see Table.
Bottom Line: The value of picking from among the highest-quality stocks in the Dow Jones Composite Index is not just that it’s the smallest and oldest index, but also that it is continuously vetted by the managing editor of The Wall Street Journal. Companies that don’t stand muster are replaced by companies that do. By adding the several requirements for inclusion in “The 2 and 8 Club” (e.g. S&P bond ratings cannot be lower than A-), you have a good chance of selecting half a dozen stocks that will beat the S&P 500 Index over a 10-Yr Holding Period (see Column Y in the Table). You’ll also be taking on more risk (see Columns D, I, and M in the Table), which you’ll ameliorate by trading new entrants to “The 2 and 8 Club” for those that are leaving.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MSFT, XOM, NEE, KO, JPM and IBM, and also own shares of TRV, PFE, MMM, and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Sunday, December 3
Week 335 - Invest in “The 2 and 8 Club” Without Gambling
Situation: You’d like to invest in stocks without leaving money on the table. The alternative is to invest in the S&P 500 Index, which is a derivative subject to the kind of Program Trading that caused the “Black Monday” crash on October 19, 1987. Even after 3 decades of refining New York Stock Exchange technology to apply lessons learned from that crash, its recurrence remains a distinct possibility.
You can invest in stocks without getting swept up in full fury of the next crash by using a few precautions: 1) Avoid stocks that have a statistical likelihood of losing more money than the S&P 500 Index per the BMW Method, i.e., avoid stocks highlighted in red at Column M in our Tables. 2) Use dollar-cost averaging to invest through a Dividend Re-Investment Plan (DRIP) in stocks that aren’t highlighted in red, and continue automatically investing in those each month throughout the next crash. 3) Avoid non-mortgage debt and have at least 25% of your assets in Savings Bonds, 2-10 Year US Treasury Notes, cash and cash equivalents.
Mission: Looking at the 30 stocks in “The 2 and 8 Club” (see Week 329), set up a spreadsheet of those that do not have red highlights in Column M.
Execution: There are 12 such stocks (see Table).
Administration: Note that Costco Wholesale (COST) is not listed in the FTSE High Dividend Yield Index upon which “The 2 and 8 Club” is based. While dividend growth rate is 13.0%/yr, its dividend yield is only 1.3%, which is much lower than the ~2%/yr required for inclusion in the FTSE High Dividend Yield Index. This overlooks the fact that Costco Wholesale issues special dividends of $5 or more every other year! So, I’ve chosen to make COST an honorary member of “The 2 and 8 Club.”
Bottom Line: You do have a chance of beating the S&P 500 Index without gambling, by investing in high quality growth stocks that are unlikely to lose as much as that index in the next market crash. But we find only 12 such stocks, which means you’d need to invest in all 12 to avoid selection bias.
Risk Rating is 5, where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10.
Full Disclosure: I dollar-cost average into IBM, KO, XOM and NEE, and also own shares of MO and TRV.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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You can invest in stocks without getting swept up in full fury of the next crash by using a few precautions: 1) Avoid stocks that have a statistical likelihood of losing more money than the S&P 500 Index per the BMW Method, i.e., avoid stocks highlighted in red at Column M in our Tables. 2) Use dollar-cost averaging to invest through a Dividend Re-Investment Plan (DRIP) in stocks that aren’t highlighted in red, and continue automatically investing in those each month throughout the next crash. 3) Avoid non-mortgage debt and have at least 25% of your assets in Savings Bonds, 2-10 Year US Treasury Notes, cash and cash equivalents.
Mission: Looking at the 30 stocks in “The 2 and 8 Club” (see Week 329), set up a spreadsheet of those that do not have red highlights in Column M.
Execution: There are 12 such stocks (see Table).
Administration: Note that Costco Wholesale (COST) is not listed in the FTSE High Dividend Yield Index upon which “The 2 and 8 Club” is based. While dividend growth rate is 13.0%/yr, its dividend yield is only 1.3%, which is much lower than the ~2%/yr required for inclusion in the FTSE High Dividend Yield Index. This overlooks the fact that Costco Wholesale issues special dividends of $5 or more every other year! So, I’ve chosen to make COST an honorary member of “The 2 and 8 Club.”
Bottom Line: You do have a chance of beating the S&P 500 Index without gambling, by investing in high quality growth stocks that are unlikely to lose as much as that index in the next market crash. But we find only 12 such stocks, which means you’d need to invest in all 12 to avoid selection bias.
Risk Rating is 5, where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold = 10.
Full Disclosure: I dollar-cost average into IBM, KO, XOM and NEE, and also own shares of MO and TRV.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Sunday, November 19
Week 333 - $175/wk For An IRA That Uses DRIPs Backed By Savings Bonds
Situation: If you don’t have a workplace retirement plan, then you most likely have concerns that you won’t have enough savings to support retirement. You should be able to replace at least 85% of your final year’s salary by withdrawing 4%/yr from your retirement savings, which amount is increased in subsequent years to allow for inflation. But the median Social Security payout only replaces 46% of median household income. If you don’t have a workplace retirement plan, you’ll have to set savings goals, eliminate non-mortgage debt, and start cutting costs long before retiring. For example, move to an apartment after your children finish high school.
Most of us don’t think about allocating money to Savings Bonds and an IRA until we’re 50. So, let’s be realistic. How much could you augment your retirement income by contributing the maximum $6500/yr starting at age 50 to an IRA consisting of Dividend ReInvestment Plans (DRIPs) for stocks, and backing that up by contributing $2600/yr to tax-deferred Inflation-protected Savings Bonds (ISBs). You’d be saving $175/wk ($9100/yr), which is 15% of median household income for 2016 ($59,039). This plan is approximately one part Treasury Bonds and 2 parts stocks. Over the past 20 years, the lowest-cost S&P 500 Index fund has returned 7.0%/yr. The lowest-cost intermediate-term investment-grade bond index fund (composed mainly of the same 7-10 year US Treasury Bonds used for ISBs) has returned 5.4%/yr. Overall return for the 2:1 private retirement plan would have been 6.5%/yr, but 2.1%/yr of that would have been lost to inflation.
Starting at age 50, IRA contributions of $6500/yr to stocks in a DRIP IRA, and ISB contributions of $2600/yr, would have built up a private retirement account worth $314,101 by the time you retire at age 67. Spending 4% of that in your first year of retirement would add $1047/mo to the $2260/mo provided by Social Security, if you and your spouse have a the 2016 median household income of $59,039. A complicated formula will determine your exact benefit, so start learning the basics.
Mission: Develop our standard spreadsheet for 6 DRIPs using stocks issued by companies in the FTSE High Dividend Yield Index, specifically those that grow dividends 8% or more per year. In other words, pick stocks from the Extended Version of “The 2 and 8 Club” (see Week 327 and Week 329).
Execution: (see Table).
Administration: To augment your Social Security income by using a private retirement account, you’ll need to build an IRA for stocks that is backed by Inflation-protected Savings Bonds (ISBs). Make sure your accountant declares to the Internal Revenue Service that 6 DRIPs above represent your IRA, noting that annual contributions to those will not exceed $6500/yr unless the US Treasury raises the contribution limit.
We have used high-quality stocks instead of index funds in our example above, given that index funds are now thought to carry the same risks as other derivatives.
Bottom Line: It is practically impossible for you to fund your retirement without contributing at least 15%/yr to a workplace retirement plan for 25+ years. The private retirement plan outlined above envisions contributing the maximum amount allowed for an IRA, supplemented by Savings Bonds, to channel 15% of your income into tax-deferred savings for the 17 years after you turn 50, which is when you can start making the largest annual contributions to your IRA. But if you’d started that plan 17 years ago (when you were 50), you’d now receive ~$1050/mo in your first year of retirement, which is less than half your Social Security check.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into all 6 stocks, as well as ISBs.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Most of us don’t think about allocating money to Savings Bonds and an IRA until we’re 50. So, let’s be realistic. How much could you augment your retirement income by contributing the maximum $6500/yr starting at age 50 to an IRA consisting of Dividend ReInvestment Plans (DRIPs) for stocks, and backing that up by contributing $2600/yr to tax-deferred Inflation-protected Savings Bonds (ISBs). You’d be saving $175/wk ($9100/yr), which is 15% of median household income for 2016 ($59,039). This plan is approximately one part Treasury Bonds and 2 parts stocks. Over the past 20 years, the lowest-cost S&P 500 Index fund has returned 7.0%/yr. The lowest-cost intermediate-term investment-grade bond index fund (composed mainly of the same 7-10 year US Treasury Bonds used for ISBs) has returned 5.4%/yr. Overall return for the 2:1 private retirement plan would have been 6.5%/yr, but 2.1%/yr of that would have been lost to inflation.
Starting at age 50, IRA contributions of $6500/yr to stocks in a DRIP IRA, and ISB contributions of $2600/yr, would have built up a private retirement account worth $314,101 by the time you retire at age 67. Spending 4% of that in your first year of retirement would add $1047/mo to the $2260/mo provided by Social Security, if you and your spouse have a the 2016 median household income of $59,039. A complicated formula will determine your exact benefit, so start learning the basics.
Mission: Develop our standard spreadsheet for 6 DRIPs using stocks issued by companies in the FTSE High Dividend Yield Index, specifically those that grow dividends 8% or more per year. In other words, pick stocks from the Extended Version of “The 2 and 8 Club” (see Week 327 and Week 329).
Execution: (see Table).
Administration: To augment your Social Security income by using a private retirement account, you’ll need to build an IRA for stocks that is backed by Inflation-protected Savings Bonds (ISBs). Make sure your accountant declares to the Internal Revenue Service that 6 DRIPs above represent your IRA, noting that annual contributions to those will not exceed $6500/yr unless the US Treasury raises the contribution limit.
We have used high-quality stocks instead of index funds in our example above, given that index funds are now thought to carry the same risks as other derivatives.
Bottom Line: It is practically impossible for you to fund your retirement without contributing at least 15%/yr to a workplace retirement plan for 25+ years. The private retirement plan outlined above envisions contributing the maximum amount allowed for an IRA, supplemented by Savings Bonds, to channel 15% of your income into tax-deferred savings for the 17 years after you turn 50, which is when you can start making the largest annual contributions to your IRA. But if you’d started that plan 17 years ago (when you were 50), you’d now receive ~$1050/mo in your first year of retirement, which is less than half your Social Security check.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into all 6 stocks, as well as ISBs.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Sunday, October 29
Week 330 - $150/wk For An Online Retirement Fund
Situation: You’ve heard a lot about saving for retirement, and you’ve probably heard that Social Security plus your workplace retirement plan probably won’t get you to a comfortable retirement any more. Why? Because people only reduce their spending by 15% after they retire, which means you will need a private savings plan to make up for the lost income. This savings plan can take the form of an IRA, payments into a low-cost annuity, proceeds from the sale of your home (if you move to smaller quarters), or perhaps even gold you’ve hidden away, and other choices. But when retirement is more than 5 years in the future, stocks remain your best bet.
We recommend that you minimize costs by using a stock index fund backed by a bond index fund. The Vanguard Balanced Index Fund (VBINX) provides both in one package, allocated 60% to stocks and 40% to bonds. It is rebalanced daily, so you won’t get burned if a stock market bubble bursts. (Most of those stock gains would already have been converted to bonds as part of daily rebalancing, and bonds typically increase in value when stocks crash.) Or, you can choose a low-cost managed fund that uses an excess of bonds to balance both the inherent risk of stocks and the difficulty managers have of knowing when to move away from stocks and into bonds. The Vanguard Wellesley Income Fund (VWINX) has the best record. It is bond-heavy and therefore has less volatility than VBINX but performs about as well.
The third low-cost option is to study the markets yourself and invest in stocks online through a Dividend ReInvestment Plan (DRIP) at computershare, and in bonds at treasurydirect. This third option allows you to pick only the most stable stocks and bonds.
Mission: Detail one example of a personal online retirement fund (mine). I dollar-cost average $100/mo automatically (online) into 5 stocks: NextEra Energy (NEE), Coca-Cola (KO), JP Morgan Chase (JPM), Microsoft (MSFT), and IBM (IBM), then dollar-cost average $150/mo into ISBs--inflation-protected Savings Bonds (treasurydirect).
Execution: In the Table, note that the iShares 7-10 Year Treasury Bond ETF (IEF) reflects returns from the main asset that the US Treasury uses to back its ISB accounts. Also note that we use red highlights to denote metrics that underperform our benchmark, i.e., the SPDR S&P 500 ETF (SPY). Metrics highlighted in purple indicate issues that accountants will raise with that company’s CFO.
Administration: ISBs are a tax-deferred investment much like an IRA. Contributions from your checking account can be set up for automatic monthly deposits at treasurydirect. You can have your accountant designate the money that you spend to buy stocks online through a DRIP as an IRA. Compare this week’s blog to an earlier blog with the same title (see Week 120).
Bottom Line: Dividend Reinvestment Plans (DRIPs) take time to set up, but are on “automatic pilot” the rest of the time. Savings Bonds are even easier to manage (treasurydirect). So, the key difficulty is deciding exactly which stocks you’d like to own for an extended period.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
We recommend that you minimize costs by using a stock index fund backed by a bond index fund. The Vanguard Balanced Index Fund (VBINX) provides both in one package, allocated 60% to stocks and 40% to bonds. It is rebalanced daily, so you won’t get burned if a stock market bubble bursts. (Most of those stock gains would already have been converted to bonds as part of daily rebalancing, and bonds typically increase in value when stocks crash.) Or, you can choose a low-cost managed fund that uses an excess of bonds to balance both the inherent risk of stocks and the difficulty managers have of knowing when to move away from stocks and into bonds. The Vanguard Wellesley Income Fund (VWINX) has the best record. It is bond-heavy and therefore has less volatility than VBINX but performs about as well.
The third low-cost option is to study the markets yourself and invest in stocks online through a Dividend ReInvestment Plan (DRIP) at computershare, and in bonds at treasurydirect. This third option allows you to pick only the most stable stocks and bonds.
Mission: Detail one example of a personal online retirement fund (mine). I dollar-cost average $100/mo automatically (online) into 5 stocks: NextEra Energy (NEE), Coca-Cola (KO), JP Morgan Chase (JPM), Microsoft (MSFT), and IBM (IBM), then dollar-cost average $150/mo into ISBs--inflation-protected Savings Bonds (treasurydirect).
Execution: In the Table, note that the iShares 7-10 Year Treasury Bond ETF (IEF) reflects returns from the main asset that the US Treasury uses to back its ISB accounts. Also note that we use red highlights to denote metrics that underperform our benchmark, i.e., the SPDR S&P 500 ETF (SPY). Metrics highlighted in purple indicate issues that accountants will raise with that company’s CFO.
Administration: ISBs are a tax-deferred investment much like an IRA. Contributions from your checking account can be set up for automatic monthly deposits at treasurydirect. You can have your accountant designate the money that you spend to buy stocks online through a DRIP as an IRA. Compare this week’s blog to an earlier blog with the same title (see Week 120).
Bottom Line: Dividend Reinvestment Plans (DRIPs) take time to set up, but are on “automatic pilot” the rest of the time. Savings Bonds are even easier to manage (treasurydirect). So, the key difficulty is deciding exactly which stocks you’d like to own for an extended period.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 17
Week 250 - A Monthly Retirement Savings Plan With Automatic Online Additions
Situation: If you’re self-employed or work at a company that doesn’t sponsor a 401(k) or 403(b) retirement plan, you need to create your own. The “secret sauce” is payday deductions. Economists often say that the parts of your income you never see are the parts you stop thinking about. Pay stubs list those automatic withdrawals for taxes, social security, health insurance, and a tax-deferred retirement plan but you no longer care: You’re receiving “full benefits” which is why you took the job in the first place.
If you’re one of the 50% of US workers who doesn’t have a workplace retirement plan, you need to go to start an IRA funded with payday deductions. This can be done by visiting a bank, brokerage, credit union or by going online to a low-cost mutual fund site like Vanguard Group. You can also set up monthly automatic withdrawals from your checking account to invest in Dividend Re-Investment Plans (DRIPs). Your accountant will report to the IRS that those constitute your IRA. That works best if you backup those stock investments with bonds by using one of the US Treasury’s zero-cost IRA-like plans (Savings Bonds and MyRA), which have no transaction costs. At their website, you’ll see an option for automatic monthly withdrawals from your checking account.
Mission: Set up a spreadsheet that illustrates an automatic online retirement savings plan with monthly additions for each item.
Execution: If your net worth (excluding home & mortgage) is less than $1 Million, you needn’t bother with picking stocks and bonds. Just go to the Vanguard Group website and pick the Vanguard Wellesley Income Fund (VWINX at Line 25 in the Table), which is 45% stocks and 55% bonds. Make that your IRA and set up monthly withdrawals from your checking account. If you’re self-employed as an “S Corporation”, the IRS provides special tax-deferred retirement options geared to your situation.
If you choose to pick your own dividend-paying stocks and back those with Treasuries, read on:
I. Bonds
You’ll need to start by assigning 25% to 75% of your savings to US Treasury issues, with the percentage depending on your view of the economic climate. The only automatic monthly withdrawal plan offered by the US Treasury are for Savings Bonds and MyRA. Inflation-adjusted Savings Bonds (“I Bonds”) are your best choice if you might want to cash in some for emergencies. The total return on Savings Bonds is approximately the same as for 10-yr Treasury Notes that have been renewed every 10 yrs, once you consider the tax benefit from owning Savings Bonds. The biannual interest paid on Savings Bonds is accrued and cannot be taxed until after you cash the bonds, whereas, tax is due every year on the the biannual interest you receive from Treasury Notes.
II. Stocks
The remaining 25% to 75% of your retirement savings plan needs to reflect growth in the economy. There are 10 S&P industries in the economy and you’ll probably gain the most benefit if you pick a stock for each. No one can predict which industry will take the lead in a future growth spurt, and each of the 10 has taken the lead at some point in the past. To set up automatic online investments each month, you’ll need to pick stocks that pay a dividend. The two largest online DRIP vendors are Computershare and Shareowneronline.
Administration: This week’s Table is a spreadsheet for stocks I have picked (one for each S&P industry), combined with a 50% commitment to 10-yr Treasury Notes that serve as proxies for Savings Bonds. In the Table, we assume that $100/mo is invested in each stock online and $1000/mo is invested in Savings Bonds online. The total investment is $24,000/yr and the transaction costs come to $164/yr (see Column Z in the Table). The Expense Ratio (164/24000) is 0.68% for the first year. If the economy keeps growing, that $164/yr will become an increasingly smaller fraction of the asset value.
Bottom Line: Polls have shown that “planning for retirement” is the biggest financial worry Americans have after “out of control spending.” Partly this is because 50% of Americans work where there is no retirement plan. The secret to success from stashing away ~15% of your gross income in a 401(k) or 403(b) plan is that you never see the money unless you look at the paystub. If you want success from setting up a retirement plan without those 401(k) or 403(b) tools, you need to mimic them. Have the money disappear automatically from your paycheck or checking account. Sending that money to a “conservative allotment, low-cost balanced mutual fund” like The Vanguard Balanced Index Fund (VBINX in the Table) is a good way to begin solving the problem with an IRA. If you are self-employed as an S Corporation, you can set aside the entire 15% or more of your income in a tax-advantaged retirement plan. You can also pick dividend-paying stocks for your IRA, plus Inflation-protected Savings Bonds and MyRAs that are tax-advantaged like an IRA.
Risk Rating: 4
Full Disclosure: I use the plan summarized in the Table.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. The Vanguard Wellesley Income Fund or VWINX. Total Returns in Column C date to 9/1/2000, a peak in the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If you’re one of the 50% of US workers who doesn’t have a workplace retirement plan, you need to go to start an IRA funded with payday deductions. This can be done by visiting a bank, brokerage, credit union or by going online to a low-cost mutual fund site like Vanguard Group. You can also set up monthly automatic withdrawals from your checking account to invest in Dividend Re-Investment Plans (DRIPs). Your accountant will report to the IRS that those constitute your IRA. That works best if you backup those stock investments with bonds by using one of the US Treasury’s zero-cost IRA-like plans (Savings Bonds and MyRA), which have no transaction costs. At their website, you’ll see an option for automatic monthly withdrawals from your checking account.
Mission: Set up a spreadsheet that illustrates an automatic online retirement savings plan with monthly additions for each item.
Execution: If your net worth (excluding home & mortgage) is less than $1 Million, you needn’t bother with picking stocks and bonds. Just go to the Vanguard Group website and pick the Vanguard Wellesley Income Fund (VWINX at Line 25 in the Table), which is 45% stocks and 55% bonds. Make that your IRA and set up monthly withdrawals from your checking account. If you’re self-employed as an “S Corporation”, the IRS provides special tax-deferred retirement options geared to your situation.
If you choose to pick your own dividend-paying stocks and back those with Treasuries, read on:
I. Bonds
You’ll need to start by assigning 25% to 75% of your savings to US Treasury issues, with the percentage depending on your view of the economic climate. The only automatic monthly withdrawal plan offered by the US Treasury are for Savings Bonds and MyRA. Inflation-adjusted Savings Bonds (“I Bonds”) are your best choice if you might want to cash in some for emergencies. The total return on Savings Bonds is approximately the same as for 10-yr Treasury Notes that have been renewed every 10 yrs, once you consider the tax benefit from owning Savings Bonds. The biannual interest paid on Savings Bonds is accrued and cannot be taxed until after you cash the bonds, whereas, tax is due every year on the the biannual interest you receive from Treasury Notes.
II. Stocks
The remaining 25% to 75% of your retirement savings plan needs to reflect growth in the economy. There are 10 S&P industries in the economy and you’ll probably gain the most benefit if you pick a stock for each. No one can predict which industry will take the lead in a future growth spurt, and each of the 10 has taken the lead at some point in the past. To set up automatic online investments each month, you’ll need to pick stocks that pay a dividend. The two largest online DRIP vendors are Computershare and Shareowneronline.
Administration: This week’s Table is a spreadsheet for stocks I have picked (one for each S&P industry), combined with a 50% commitment to 10-yr Treasury Notes that serve as proxies for Savings Bonds. In the Table, we assume that $100/mo is invested in each stock online and $1000/mo is invested in Savings Bonds online. The total investment is $24,000/yr and the transaction costs come to $164/yr (see Column Z in the Table). The Expense Ratio (164/24000) is 0.68% for the first year. If the economy keeps growing, that $164/yr will become an increasingly smaller fraction of the asset value.
Bottom Line: Polls have shown that “planning for retirement” is the biggest financial worry Americans have after “out of control spending.” Partly this is because 50% of Americans work where there is no retirement plan. The secret to success from stashing away ~15% of your gross income in a 401(k) or 403(b) plan is that you never see the money unless you look at the paystub. If you want success from setting up a retirement plan without those 401(k) or 403(b) tools, you need to mimic them. Have the money disappear automatically from your paycheck or checking account. Sending that money to a “conservative allotment, low-cost balanced mutual fund” like The Vanguard Balanced Index Fund (VBINX in the Table) is a good way to begin solving the problem with an IRA. If you are self-employed as an S Corporation, you can set aside the entire 15% or more of your income in a tax-advantaged retirement plan. You can also pick dividend-paying stocks for your IRA, plus Inflation-protected Savings Bonds and MyRAs that are tax-advantaged like an IRA.
Risk Rating: 4
Full Disclosure: I use the plan summarized in the Table.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. The Vanguard Wellesley Income Fund or VWINX. Total Returns in Column C date to 9/1/2000, a peak in the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 7
Week 205 - Barron’s 500 Dividend Achievers with Improving Fundamentals
Situation: We recommend Vanguard Group mutual funds for retirement investing. Specifically, their S&P 500 index fund (VFINX) hedged 50:50 with their investment-grade intermediate-term bond index fund (VBIIX). That investment has paid ~7.7%/yr over the past 20 yrs (5.4%/yr after correcting for inflation of 2.3%/yr). Similar index funds are among the options available in almost any 401(k) plan. Why are Index funds better than “managed” funds? Because they can’t zig when the economy zags. However, Vanguard Group also markets managed funds that have performed well. One such fund that we like is Vanguard Wellesley Income Fund (VWINX) which is 55% bonds, 45% stocks, and handily beat a group of above-average hedge funds during the Lehman Panic. It has returned 8.4%/yr over the past 20 yrs. The benchmark we like to use is the Vanguard Balanced Index Fund (VBINX) which is 60% stocks, 40% bonds, and has returned ~8.2%/yr over the past 20 yrs. There’s just one problem: After you retire, these 3 choices for your retirement years don’t produce a lot of income from dividends and interest. You’ll be lucky if those quarterly payments keep up with inflation. In other words, you’ll have to sell shares periodically to maintain your spending power. That is bound to make you wonder whether or not you’ll outlive your nest egg.
Mission: Come up with a list of companies that have improving fundamentals and a 10+ yr history of increasing their dividend annually (companies that S&P labels Dividend Achievers, see Week 168). We’re looking for well-run companies that have grown their dividend more than twice as fast as inflation over the past 20 yrs, meaning 5%/yr or better.
Execution: To find companies with improving fundamentals, we depend on the Barron’s 500 List, published each year in May. In a now-standard fashion, the 2015 list gives a letter grade to the 500 largest companies in the US and Canada by using 3 equally-weighted metrics:
1) median 3-yr return on investment (ROIC),
2) the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.”
To find companies that have grown their dividend annually for at least the past 10 yrs, we refer to the holdings of PFM, which is an Exchange-Traded Fund that invests in every company on Standard & Poor’s list of Dividend Achievers.
To construct this week’s Table, we combine the two lists. Any company with a 2015 Barron’s 500 rank that is higher than its 2014 Barron’s 500 rank we consider to have “improving fundamentals.” If such a company is also a Dividend Achiever, it will appear in our Table, with certain notable exceptions. A company is excluded if its S&P bond rating is lower than BBB+ or its S&P stock rating is lower than B+/M. A company that has a 20-yr dividend growth rate less than 5%/yr is excluded. Companies with fewer than 20 yrs of being listed on either the New York or Toronto stock exchange are excluded.
Additional data is provided in Columns K and L of the Table referencing the BMW Method (see Week 199), where Standard Deviations of trendline price appreciation over the past 20 yrs are listed, as well as the extent of loss that would be incurred if prices fell by 2 Standard Deviations.
Bottom Line: We’ve found 20 Dividend Achievers that have exhibited improving fundamentals over the past 3 yrs (see Table), as assessed by three metrics used to assemble the 2015 Barron’s 500 List. Their average dividend growth rate over the past 20 yrs beats inflation by ~10%/yr (see Column H in the Table). The top 9 companies in the Table outperformed our key benchmark, the Vanguard Balanced Index Fund (VBINX). VBINX is a version of the S&P 500 Index that is hedged 40% with investment-grade bonds. There is an online Dividend Reinvestment Plan (DRIP) or Direct Purchase Plan (DPP) available for all 9 of those stocks (see Column O of the Table), available either through computershare or Wells Fargo.
Risk Rating: 4
Full Disclosure: I dollar-average into NKE and NEE, and also own shares of ITW, PEP, BDX, and INTC.
NOTE: metrics are brought current for the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark VBINX at Line 29 in the Table.
Mission: Come up with a list of companies that have improving fundamentals and a 10+ yr history of increasing their dividend annually (companies that S&P labels Dividend Achievers, see Week 168). We’re looking for well-run companies that have grown their dividend more than twice as fast as inflation over the past 20 yrs, meaning 5%/yr or better.
Execution: To find companies with improving fundamentals, we depend on the Barron’s 500 List, published each year in May. In a now-standard fashion, the 2015 list gives a letter grade to the 500 largest companies in the US and Canada by using 3 equally-weighted metrics:
1) median 3-yr return on investment (ROIC),
2) the most recent year’s ROIC relative to the 3-yr median, and
3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.”
To find companies that have grown their dividend annually for at least the past 10 yrs, we refer to the holdings of PFM, which is an Exchange-Traded Fund that invests in every company on Standard & Poor’s list of Dividend Achievers.
To construct this week’s Table, we combine the two lists. Any company with a 2015 Barron’s 500 rank that is higher than its 2014 Barron’s 500 rank we consider to have “improving fundamentals.” If such a company is also a Dividend Achiever, it will appear in our Table, with certain notable exceptions. A company is excluded if its S&P bond rating is lower than BBB+ or its S&P stock rating is lower than B+/M. A company that has a 20-yr dividend growth rate less than 5%/yr is excluded. Companies with fewer than 20 yrs of being listed on either the New York or Toronto stock exchange are excluded.
Additional data is provided in Columns K and L of the Table referencing the BMW Method (see Week 199), where Standard Deviations of trendline price appreciation over the past 20 yrs are listed, as well as the extent of loss that would be incurred if prices fell by 2 Standard Deviations.
Bottom Line: We’ve found 20 Dividend Achievers that have exhibited improving fundamentals over the past 3 yrs (see Table), as assessed by three metrics used to assemble the 2015 Barron’s 500 List. Their average dividend growth rate over the past 20 yrs beats inflation by ~10%/yr (see Column H in the Table). The top 9 companies in the Table outperformed our key benchmark, the Vanguard Balanced Index Fund (VBINX). VBINX is a version of the S&P 500 Index that is hedged 40% with investment-grade bonds. There is an online Dividend Reinvestment Plan (DRIP) or Direct Purchase Plan (DPP) available for all 9 of those stocks (see Column O of the Table), available either through computershare or Wells Fargo.
Risk Rating: 4
Full Disclosure: I dollar-average into NKE and NEE, and also own shares of ITW, PEP, BDX, and INTC.
NOTE: metrics are brought current for the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark VBINX at Line 29 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 17
Week 202 - Dividend Achievers with Growing Brand Recognition
Situation: Brand recognition is the secret sauce of a company's competitive advantage. It doesn't show up in core earnings or tangible book value, but does contribute powerfully to the markup in price (above market) that an acquiring company must offer before it can hope to succeed in a completing a merger or acquisition. The acquiring company books the markup (what it paid for the brand) as "goodwill" and recognizes it as an intangible asset.
Several organizations attempt to assign a dollar value to brands, and issue annual rankings. Brand Finance is one such organization, and just came out with its 2015 rankings for the “Global 500”. Their #1 Brand for both 2014 and 2015 is Apple, a brand they currently value at $128 Billion. We have looked through their list, finding that 20 Dividend Achievers improved their rank in 2015 vs. 2014 (see Columns K-M in the Table). You’ll remember that "Dividend Achievers" is what S&P calls companies that have increased their dividend annually for at least the past 10yrs. Some of the companies listed in the Table have more than one ranked brand, in which case we’ve presented metrics for the brand that improved the most.
The Table also contains data from the BMW Method website for the past 16yrs (see Columns P-R). By scanning across the spreadsheet, you’ll see that Wal-Mart Stores (WMT), Nike (NKE) and PepsiCo (PEP) look like good choices for investment. We suggest that you dollar-cost average your investments and do it online. Direct Stock Purchase Plans that incorporate a Dividend ReInvestment Plan (DRIP) are available for each of those stocks.
Bottom Line: It is difficult to measure brand recognition but much depends on it. For example, a stock’s price will often change 5-10% over a short period of time because of a change in how its brand is being perceived (i.e., Monsanto). That is why Peter Lynch encouraged people to “invest in what you know” and liked to talk about the stock tips he’d gleaned from listening to comments his wife Carolyn made after shopping. Peter Lynch ran Magellan Fund at Fidelity Investments from 1977 to 1990, achieving a Total Return of 29.2%/yr. I only became successful at investing after reading his book “One Up on Wall Street” in 1990.
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, NKE, and MSFT, and also own shares of QCOM, KO, XOM, PEP, and PG.
NOTE: Metrics that underperform our key benchmark (VBINX) are highlighted in red; metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Several organizations attempt to assign a dollar value to brands, and issue annual rankings. Brand Finance is one such organization, and just came out with its 2015 rankings for the “Global 500”. Their #1 Brand for both 2014 and 2015 is Apple, a brand they currently value at $128 Billion. We have looked through their list, finding that 20 Dividend Achievers improved their rank in 2015 vs. 2014 (see Columns K-M in the Table). You’ll remember that "Dividend Achievers" is what S&P calls companies that have increased their dividend annually for at least the past 10yrs. Some of the companies listed in the Table have more than one ranked brand, in which case we’ve presented metrics for the brand that improved the most.
The Table also contains data from the BMW Method website for the past 16yrs (see Columns P-R). By scanning across the spreadsheet, you’ll see that Wal-Mart Stores (WMT), Nike (NKE) and PepsiCo (PEP) look like good choices for investment. We suggest that you dollar-cost average your investments and do it online. Direct Stock Purchase Plans that incorporate a Dividend ReInvestment Plan (DRIP) are available for each of those stocks.
Bottom Line: It is difficult to measure brand recognition but much depends on it. For example, a stock’s price will often change 5-10% over a short period of time because of a change in how its brand is being perceived (i.e., Monsanto). That is why Peter Lynch encouraged people to “invest in what you know” and liked to talk about the stock tips he’d gleaned from listening to comments his wife Carolyn made after shopping. Peter Lynch ran Magellan Fund at Fidelity Investments from 1977 to 1990, achieving a Total Return of 29.2%/yr. I only became successful at investing after reading his book “One Up on Wall Street” in 1990.
Risk Rating: 5
Full Disclosure: I dollar-average into WMT, NKE, and MSFT, and also own shares of QCOM, KO, XOM, PEP, and PG.
NOTE: Metrics that underperform our key benchmark (VBINX) are highlighted in red; metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 10
Week 201 - Barron’s 500 Companies with 16 years of Below-market Variance and Above-market Returns
Situation: You should invest in the lowest-cost S&P 500 Index fund (VFINX) unless your stock picks have a history of doing better while taking on less risk. Why? Because stock-picking takes up a lot of your time and costs more money than buying shares in an index fund. For investing in smaller capitalization stocks or foreign stocks, don’t even consider any option other than low-cost index funds. Those are the rules so what are the exceptions? There’s really only one, and that is to pick from large capitalization stocks have a history of granting annual dividend increases that more than compensate for inflation. The trick is to find a low-cost dividend reinvestment plan (DRIP) to dollar-average your monthly purchases. After you retire, have those dividends sent to your mailbox and enjoy the one source of retirement income that grows faster than inflation.
Mission: Identify large-capitalization stocks that have below-market variance and above-market returns while paying a dividend that grows more than twice as fast as inflation.
Execution: In our Week 193 and Week 199 blogs, we have presented a system for assessing price variance at multiple points over 25 yrs. The BMW Method provides monthly updates of 16-yr, 20-yr, 25-yr, 30-yr, 35-yr and 40-yr variance, which are “least squares” calculations based on the logarithm of weekly prices for over 500 stocks (fewer at 30, 35 and 40yr intervals). The graphs give a trendline (CAGR at Column S in the Table) with adjacent lines at one and two Standard Deviations from the trendline. The spread between the base trendline and the -2SD trendline is the percent loss you can expect once every 20 yrs (see Column U in the Table). In constructing the Table, a stock that follows a track one Standard Deviation away from the S&P 500 Index (^GSPC) over recent months is at variance with ^GSPC and has therefore been excluded (see Column T in the Table). To further assess variance exceeding that for the S&P 500 Index, we look at Total Return during the Lehman Panic (see Column D in the Table), and at the 5-yr Beta (see Column I in the Table). S&P ratings are used to exclude companies that issue bonds with a rating lower than BBB+ and stocks with a rating lower than B+/M.
Using this information, we’ve come up with 14 companies, all but one of which is a Dividend Achiever (see Column R in the Table). You’ll remember that "Dividend Achiever" is S&P’s term for a company that increases its dividend annually for at least the past 10 yrs. That one exception on our list is Campbell Soup (CPB), and S&P will soon designate it a Dividend Achiever. Several columns in the Table point to the outperformance of these 14 stocks, as well as documenting less volatility than the S&P 500 Index. What is their key to success? Column L (estimated 5-yr earnings growth/yr) offers the key: 3/4ths of these companies are expected to grow earnings slower than the average company in the S&P 500 Index. By itself, that speaks volumes about why these companies outperform with less risk. Their earnings growth is relentless, with only minor hiccoughs. When earnings balk, a stock’s price will usually fall and it may take years to recover (certainly many months). IBM is a case in point. It recently sold off a couple of slow-growth divisions and re-tasked a couple of others, taking an earnings hit. The stock price fell 20% as soon as these moves were announced, and it has stayed at that level for more than 6 months. Is the company worse off or better off as a result of those structural adjustments? Warren Buffett decided that it is better off and bought more shares of IBM for Berkshire Hathaway.
Bottom Line: Companies that rarely disappoint on earnings enjoy steady growth in their stock price. Mature companies with stable earnings growth can outperform the S&P 500 Index, even with earnings growth that is predictably less than for the average S&P 500 company. We’ve only found 14 companies that have better growth with less risk, but those “diamonds in the rough” are worth close examination as prospective investments for your retirement portfolio.
Risk Rating: 4
Full Disclosure: I dollar-average into WMT, NKE, NEE and JNJ, and also own shares of GIS, PEP and ITW.
NOTE: Metrics in the Table that underperform our key benchmark (VBINX) are highlighted in red. All metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Identify large-capitalization stocks that have below-market variance and above-market returns while paying a dividend that grows more than twice as fast as inflation.
Execution: In our Week 193 and Week 199 blogs, we have presented a system for assessing price variance at multiple points over 25 yrs. The BMW Method provides monthly updates of 16-yr, 20-yr, 25-yr, 30-yr, 35-yr and 40-yr variance, which are “least squares” calculations based on the logarithm of weekly prices for over 500 stocks (fewer at 30, 35 and 40yr intervals). The graphs give a trendline (CAGR at Column S in the Table) with adjacent lines at one and two Standard Deviations from the trendline. The spread between the base trendline and the -2SD trendline is the percent loss you can expect once every 20 yrs (see Column U in the Table). In constructing the Table, a stock that follows a track one Standard Deviation away from the S&P 500 Index (^GSPC) over recent months is at variance with ^GSPC and has therefore been excluded (see Column T in the Table). To further assess variance exceeding that for the S&P 500 Index, we look at Total Return during the Lehman Panic (see Column D in the Table), and at the 5-yr Beta (see Column I in the Table). S&P ratings are used to exclude companies that issue bonds with a rating lower than BBB+ and stocks with a rating lower than B+/M.
Using this information, we’ve come up with 14 companies, all but one of which is a Dividend Achiever (see Column R in the Table). You’ll remember that "Dividend Achiever" is S&P’s term for a company that increases its dividend annually for at least the past 10 yrs. That one exception on our list is Campbell Soup (CPB), and S&P will soon designate it a Dividend Achiever. Several columns in the Table point to the outperformance of these 14 stocks, as well as documenting less volatility than the S&P 500 Index. What is their key to success? Column L (estimated 5-yr earnings growth/yr) offers the key: 3/4ths of these companies are expected to grow earnings slower than the average company in the S&P 500 Index. By itself, that speaks volumes about why these companies outperform with less risk. Their earnings growth is relentless, with only minor hiccoughs. When earnings balk, a stock’s price will usually fall and it may take years to recover (certainly many months). IBM is a case in point. It recently sold off a couple of slow-growth divisions and re-tasked a couple of others, taking an earnings hit. The stock price fell 20% as soon as these moves were announced, and it has stayed at that level for more than 6 months. Is the company worse off or better off as a result of those structural adjustments? Warren Buffett decided that it is better off and bought more shares of IBM for Berkshire Hathaway.
Bottom Line: Companies that rarely disappoint on earnings enjoy steady growth in their stock price. Mature companies with stable earnings growth can outperform the S&P 500 Index, even with earnings growth that is predictably less than for the average S&P 500 company. We’ve only found 14 companies that have better growth with less risk, but those “diamonds in the rough” are worth close examination as prospective investments for your retirement portfolio.
Risk Rating: 4
Full Disclosure: I dollar-average into WMT, NKE, NEE and JNJ, and also own shares of GIS, PEP and ITW.
NOTE: Metrics in the Table that underperform our key benchmark (VBINX) are highlighted in red. All metrics are brought current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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