Situation: You’re bombarded with advice about how to save for retirement. But unless you’re already rich, the details are simple. Dollar-cost average 60% of your contribution into a stock index fund and 40% into a short or intermediate-term bond index fund. If you know you’ll never be in “the upper middle class”, opt for the short-term bond index fund. But maybe you have a workplace retirement plan, which makes saving for retirement a little more complicated. Either way, you’ll want to contribute the maximum amount each year to your IRA, which is currently $5500/yr until you reach age 50; then it’s $6500/yr.
Here’s our KISS (Keep It Simple, Stupid) suggestion: Make your IRA payments with Vanguard Group by using a Simple IRA (Vanguard terminology) composed only of the Vanguard High Dividend Yield Index ETF or VYM. Then, contribute 2/3rds of that amount into Inflation-protected US Savings Bonds. These are called ISBs and work just like an IRA. No tax is due from ISBs until you spend the money but there’s a penalty for spending the money early (you’ll lose one interest payment if you cash out before 5 years). The annual contribution limit is $10,000/yr. A convenient proxy for ISBs, with similar total returns, is the Vanguard Short-Term Bond Index ETF or BSV.
Mission: Create a Table showing a 60% allocation to VYM and 40% allocation to BSV. Include appropriate benchmarks, to allow the reader to create her own variation on that theme.
Execution: see Table.
Bottom Line: However you juggle the numbers, it looks like you’ll make ~7%/yr overall through your IRA + ISB retirement plan, with no taxes due until you spend the money. In other words, each year’s contribution will double in value every 10 years. The beauty of this plan is that transaction costs are almost zero, and the chance that it will give you headaches is almost zero.
Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Inflation-protected Savings Bonds and the Dow Jones Industrial Average ETF (DIA).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label treasury bonds. Show all posts
Showing posts with label treasury bonds. Show all posts
Sunday, September 16
Sunday, May 20
Week 359 - Gold Can Be Useful To Own When Markets Are In Turmoil
Situation: On April 2, 2018, a new downtrend began for the US stock market according to Dow Theory. This officially ends the Bull Market that began on March 9, 2009. Gold now becomes one of the go-to destinations for traders, along with other “safe haven” investments like Japanese Yen, Swiss Francs, US dollars, and US Treasury Bonds. When traders stop moving new money into stocks and instead resort to a safe haven, they often move some into SPDR Gold Shares (GLD at Line 15 in the Table).
Why has the US stock market embarked on a primary downtrend? Because the risk of a Trade War has increased. But it’s a perfect storm because the Federal Open Market Committee (FOMC) of the US Treasury has also put the US stock and bond markets at risk by steadily increasing short-term interest rates. Normally when the economy falters, bonds are a good alternative to stocks. The exception happens when the FOMC raises short-term interest rates to ward off inflation: Long-term rates also rise, giving their new investors an asset that is falling in value.
An option to buying gold bullion (GLD) is to buy stock in mining companies. Gold miners are emerging from difficult times, given that the 2014-2016 commodities crash caught them competing on the basis of growth in production, which they had funded with ever-increasing debt. Now they are paying down that debt and instead competing on the basis of free cash flow, in order to reward investors (i.e., buy back stock and increase dividends).
Mission: Run our Standard Spreadsheet to analyze gold-linked investments, as well as short-term bonds. Include manufacturers of mining equipment, and other enablers like railroads and banks.
Execution: see Table.
Administration: Some advisors suggest that gold should represent 3-5% of your retirement savings. However, gold has marked price volatility but remains at approximately the same price it had 30 years ago. If you plan to hold it long-term, you’d best think of it as one of your Rainy Day Fund holdings (see Week 291).
What actions are reasonable to take when Dow Theory declares that stocks are entering a new downtrend? Gold is one of the 5 places to consider routing new money instead of stocks, the others being US dollars, Japanese Yen, Swiss Francs, and US Treasury Bonds. We’ve shown that US Treasury Bonds are not a suitable choice in a rising interest rate environment. For US investors, that leaves gold and US dollars as safe haven investments. The most inflation-resistant way to invest in US dollars is to dollar-average into 2-Yr US Treasury Notes or Inflation-protected US Savings Bonds at no cost through the government website. But for traders who are willing to pay transaction costs, the 1-3 Year Treasury Note ETF (SHY at Line 15 in the Table) is more convenient.
How best to invest in gold? Let’s start with the old lesson about how to profit from gold mining, learned during the California gold rush of 1949: Gold miners don’t make much money but their enablers do. Those are the bankers who loan them money, and the owners of companies that provide them with equipment, consumables and transportation. Go to any open-pit gold mine and the first thing you’ll notice is the massive yellow-painted trucks carrying ore. Those are made by Caterpillar (CAT at Line 6 in the Table).
Now look at the top of the Table. The second company listed is Union Pacific (UNP). This highlights the fact that ores recovered at any mine have to be transported to smelters. The fourth company, Royal Gold (RGLD), is a Financial Services company. This highlights the fact that bankers can profit greatly from loaning money to gold miners, provided they do it in an unusual way, which is issuing loans that don’t have to be repaid in dollars but instead can be repaid by the grant of either a royalty or a specified fraction (“stream”) of gold produced over the lifetime of the mine. Royal Gold (GLD) prefers royalty contracts. The other two Financial Services companies that service gold miners prefer streaming contracts: Franco-Nevada (FNV) and Wheaton Precious Metals (WPM).
Bottom Line: SPDR Gold Shares (GLD) will be in demand until Dow Theory declares that the downtrend in US stocks has been reversed. 2-Yr US Treasury Notes (SHY) will be in demand until the FOMC stops raising short-term interest rates.
Risk Rating: 10 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, UNP and 2-Yr US Treasury Notes, and also own shares of WPM.
"The 2 and 8 Club" (CR) 20187 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Why has the US stock market embarked on a primary downtrend? Because the risk of a Trade War has increased. But it’s a perfect storm because the Federal Open Market Committee (FOMC) of the US Treasury has also put the US stock and bond markets at risk by steadily increasing short-term interest rates. Normally when the economy falters, bonds are a good alternative to stocks. The exception happens when the FOMC raises short-term interest rates to ward off inflation: Long-term rates also rise, giving their new investors an asset that is falling in value.
An option to buying gold bullion (GLD) is to buy stock in mining companies. Gold miners are emerging from difficult times, given that the 2014-2016 commodities crash caught them competing on the basis of growth in production, which they had funded with ever-increasing debt. Now they are paying down that debt and instead competing on the basis of free cash flow, in order to reward investors (i.e., buy back stock and increase dividends).
Mission: Run our Standard Spreadsheet to analyze gold-linked investments, as well as short-term bonds. Include manufacturers of mining equipment, and other enablers like railroads and banks.
Execution: see Table.
Administration: Some advisors suggest that gold should represent 3-5% of your retirement savings. However, gold has marked price volatility but remains at approximately the same price it had 30 years ago. If you plan to hold it long-term, you’d best think of it as one of your Rainy Day Fund holdings (see Week 291).
What actions are reasonable to take when Dow Theory declares that stocks are entering a new downtrend? Gold is one of the 5 places to consider routing new money instead of stocks, the others being US dollars, Japanese Yen, Swiss Francs, and US Treasury Bonds. We’ve shown that US Treasury Bonds are not a suitable choice in a rising interest rate environment. For US investors, that leaves gold and US dollars as safe haven investments. The most inflation-resistant way to invest in US dollars is to dollar-average into 2-Yr US Treasury Notes or Inflation-protected US Savings Bonds at no cost through the government website. But for traders who are willing to pay transaction costs, the 1-3 Year Treasury Note ETF (SHY at Line 15 in the Table) is more convenient.
How best to invest in gold? Let’s start with the old lesson about how to profit from gold mining, learned during the California gold rush of 1949: Gold miners don’t make much money but their enablers do. Those are the bankers who loan them money, and the owners of companies that provide them with equipment, consumables and transportation. Go to any open-pit gold mine and the first thing you’ll notice is the massive yellow-painted trucks carrying ore. Those are made by Caterpillar (CAT at Line 6 in the Table).
Now look at the top of the Table. The second company listed is Union Pacific (UNP). This highlights the fact that ores recovered at any mine have to be transported to smelters. The fourth company, Royal Gold (RGLD), is a Financial Services company. This highlights the fact that bankers can profit greatly from loaning money to gold miners, provided they do it in an unusual way, which is issuing loans that don’t have to be repaid in dollars but instead can be repaid by the grant of either a royalty or a specified fraction (“stream”) of gold produced over the lifetime of the mine. Royal Gold (GLD) prefers royalty contracts. The other two Financial Services companies that service gold miners prefer streaming contracts: Franco-Nevada (FNV) and Wheaton Precious Metals (WPM).
Bottom Line: SPDR Gold Shares (GLD) will be in demand until Dow Theory declares that the downtrend in US stocks has been reversed. 2-Yr US Treasury Notes (SHY) will be in demand until the FOMC stops raising short-term interest rates.
Risk Rating: 10 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into CAT, UNP and 2-Yr US Treasury Notes, and also own shares of WPM.
"The 2 and 8 Club" (CR) 20187 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 28
Week 343 - Raise Cash For The Crash
Situation: By now, you know that many are predicting that we are in the late stages of a bull market. Euphoria is the last stage, and in the present climate, one would expect that euphoria will begin happening as the new tax bill takes effect. Two or 3 years later, the stock market will over-correct to the downside and recession will likely soon follow. Now would be a good time for small investors to begin to protect themselves. One way to do that would be to “bulk up” on cash equivalents and Treasuries. The money you still have in equities will need to move in the direction of high-yielding Dividend Achiever type stocks.
Why should we start making these changes now? Because the yield curve is flattening (see Appendix below), which is the best indicator that Financial Services professionals have to predict a market crash.
Mission: Draw up a portfolio of stocks and bonds that will carry you through a market crash relatively unscathed.
Execution: see Table.
Administration: There are 4 ways to raise cash for a crash.
1) Have a Rainy Day Fund that covers 6 months of expenses and is inflation-protected. All of us resist maintaining this “Dead Money Account.” Why? Because it keeps taking money away from spending as our income increases. The trick is to make it painless by a) eliminating transaction costs, tax payments, and inflation risk, and b) paying into the Account automatically. Sounds great, but how? By going to the US Treasury website and directing that a transfer of $25+/mo be made from your checking account into an Inflation-Protected Savings Bond (ISB). Follow a First In/First Out (FIFO) policy when cashing-out your Rainy Day Fund, since you’ll lose an interest payment if you cash-out sooner than 5 years. Taxes are only due after you’ve drawn down the Account.
2) Increase your Cash-Equivalents Allocation: dollar-average into 2-Yr Treasury Notes. Normally, this allocation is whatever cash cushion you like to maintain in your Savings, Checking, and Brokerage Accounts. But now isn’t a normal time. You need to plus-up those cash holdings and build a “backstop.” Why? Because there’s a material risk that your household will soon be living on less income (that is, a reduction upwards of 5%/yr). The easiest way to build a temporary backstop is to go back into www.treasurydirect.com and invest $1000 every 2 months in a 2-Yr Treasury Note. After 2 years, you’re done. You’ve allocated $12,000 that will start paying $1000 into your Checking Account every 2 months. Meantime, you can track the value of this investment through the ticker SHY (iShares 1-3 Year Treasury Bond ETF -- see Line 20 in the Table),
3) Reduce your Equity Allocation but retain Dividend Achievers with above-market yields. This week’s Table has suggestions that may assist you. Those stocks were chosen largely on the basis of a) high ratings from S&P, b) above-market yields, c) the likelihood of payouts continuing to increase in a recession, d) P/E ratios at or below market, and e) predicted losses in a bear market (see Column M in the Table) that are less than or equal to those predicted for the S&P 500 Index (at Line 20). When the crash hits, you will be tempted to sell these (your most crash-resistant stocks) because you’re afraid they’ll fall further. Don’t. Instead of reinvesting dividends, just have the dividend checks sent to your mailbox. If you aren’t a stock picker, simply invest in VYM (Vanguard High Dividend Yield ETF at Line 17 in Table) and XLU (SPDR Utilities Select Sector ETF at Line 14).
4) Increase your Fixed-Income Allocation: dollar-average into 20+ Yr Treasury Bonds. In a Bear Market, you may need to raise cash by selling assets. You might want to sell assets that have temporarily spiked upward in value because stocks are crashing. Only one asset that will predictably do that for you: 20+ Year Treasury Bonds, which are already being bought up and flattening the yield curve (see Appendix below). These are the Treasuries you’ll be buying, and later turning around to sell. So, you’ll need to have a brokerage account that is fee-based (that is, you’re charged ~1% of Net Asset Value/yr in return for transaction costs being waived). Then dollar-average into TLT (iShares 20+ Year Treasury Bond ETF at Line 15 in the Table). Sell those when you think the stock market has bottomed, and spend the proceeds on stocks in that Fire Sale.
Bottom Line: To avoid sleepless nights and migraine headaches, pull in your horns now. Stop gambling (but restart after the market collapses). Build up your Rainy Day Fund, and invest in cash equivalents, high-yielding high-quality stocks, and long-term Treasuries. When the crash hits, people will tell you to stop buying stocks altogether. Why do they say that? Because nobody can say for sure how long the market will keep going down. But Walmart (WMT) and McDonald’s (MCD) will be booming, even while layoffs in the Industrial Sector continue to make headlines. The End of the World isn’t happening. Get over it. Read the Wall Street Journal. When the Bear looks to be getting tired, call your stock broker and buy.
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into NEE and TGT, and also own shares of PEP, PFE, HRL, and MO. I am executing on the 4 suggestions above for raising cash.
APPENDIX: The yield curve is Flattening. What does that jargon term mean? Savvy investors are moving money out of growth stocks and into Long-Term Treasuries, even while the Federal Reserve is raising Short-Term interest rates. It doesn’t make sense. Long-Term rates would typically move up in tandem with Short-Term rates, provided the economy is truly gaining strength.
You can follow that increase in Long-Term Treasury Bond prices (which move in the opposite direction of interest rates) by going to Yahoo Finance and entering TLT (for iShares 20+ Yr Treasury Bond ETF). Click on “chart” and select the 2 Year chart. Then on “indicator” and choose a 200-day moving average. That will show the steady upward movement in the price of those bonds—because buyers outnumber sellers. That results in a steady downward movement in the rate of interest being earned by new buyers, which flattens the yield curve.
There are several explanations why Long-Term interest rates might fall even as Short-Term rates are rising: “the likeliest...is the simplest: markets are losing confidence in the Fed’s ability to raise [Short-Term] rates without inflation sagging.” You might want to learn more about the falling yield curve, so read on.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Why should we start making these changes now? Because the yield curve is flattening (see Appendix below), which is the best indicator that Financial Services professionals have to predict a market crash.
Mission: Draw up a portfolio of stocks and bonds that will carry you through a market crash relatively unscathed.
Execution: see Table.
Administration: There are 4 ways to raise cash for a crash.
1) Have a Rainy Day Fund that covers 6 months of expenses and is inflation-protected. All of us resist maintaining this “Dead Money Account.” Why? Because it keeps taking money away from spending as our income increases. The trick is to make it painless by a) eliminating transaction costs, tax payments, and inflation risk, and b) paying into the Account automatically. Sounds great, but how? By going to the US Treasury website and directing that a transfer of $25+/mo be made from your checking account into an Inflation-Protected Savings Bond (ISB). Follow a First In/First Out (FIFO) policy when cashing-out your Rainy Day Fund, since you’ll lose an interest payment if you cash-out sooner than 5 years. Taxes are only due after you’ve drawn down the Account.
2) Increase your Cash-Equivalents Allocation: dollar-average into 2-Yr Treasury Notes. Normally, this allocation is whatever cash cushion you like to maintain in your Savings, Checking, and Brokerage Accounts. But now isn’t a normal time. You need to plus-up those cash holdings and build a “backstop.” Why? Because there’s a material risk that your household will soon be living on less income (that is, a reduction upwards of 5%/yr). The easiest way to build a temporary backstop is to go back into www.treasurydirect.com and invest $1000 every 2 months in a 2-Yr Treasury Note. After 2 years, you’re done. You’ve allocated $12,000 that will start paying $1000 into your Checking Account every 2 months. Meantime, you can track the value of this investment through the ticker SHY (iShares 1-3 Year Treasury Bond ETF -- see Line 20 in the Table),
3) Reduce your Equity Allocation but retain Dividend Achievers with above-market yields. This week’s Table has suggestions that may assist you. Those stocks were chosen largely on the basis of a) high ratings from S&P, b) above-market yields, c) the likelihood of payouts continuing to increase in a recession, d) P/E ratios at or below market, and e) predicted losses in a bear market (see Column M in the Table) that are less than or equal to those predicted for the S&P 500 Index (at Line 20). When the crash hits, you will be tempted to sell these (your most crash-resistant stocks) because you’re afraid they’ll fall further. Don’t. Instead of reinvesting dividends, just have the dividend checks sent to your mailbox. If you aren’t a stock picker, simply invest in VYM (Vanguard High Dividend Yield ETF at Line 17 in Table) and XLU (SPDR Utilities Select Sector ETF at Line 14).
4) Increase your Fixed-Income Allocation: dollar-average into 20+ Yr Treasury Bonds. In a Bear Market, you may need to raise cash by selling assets. You might want to sell assets that have temporarily spiked upward in value because stocks are crashing. Only one asset that will predictably do that for you: 20+ Year Treasury Bonds, which are already being bought up and flattening the yield curve (see Appendix below). These are the Treasuries you’ll be buying, and later turning around to sell. So, you’ll need to have a brokerage account that is fee-based (that is, you’re charged ~1% of Net Asset Value/yr in return for transaction costs being waived). Then dollar-average into TLT (iShares 20+ Year Treasury Bond ETF at Line 15 in the Table). Sell those when you think the stock market has bottomed, and spend the proceeds on stocks in that Fire Sale.
Bottom Line: To avoid sleepless nights and migraine headaches, pull in your horns now. Stop gambling (but restart after the market collapses). Build up your Rainy Day Fund, and invest in cash equivalents, high-yielding high-quality stocks, and long-term Treasuries. When the crash hits, people will tell you to stop buying stocks altogether. Why do they say that? Because nobody can say for sure how long the market will keep going down. But Walmart (WMT) and McDonald’s (MCD) will be booming, even while layoffs in the Industrial Sector continue to make headlines. The End of the World isn’t happening. Get over it. Read the Wall Street Journal. When the Bear looks to be getting tired, call your stock broker and buy.
Risk Rating: 4 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into NEE and TGT, and also own shares of PEP, PFE, HRL, and MO. I am executing on the 4 suggestions above for raising cash.
APPENDIX: The yield curve is Flattening. What does that jargon term mean? Savvy investors are moving money out of growth stocks and into Long-Term Treasuries, even while the Federal Reserve is raising Short-Term interest rates. It doesn’t make sense. Long-Term rates would typically move up in tandem with Short-Term rates, provided the economy is truly gaining strength.
You can follow that increase in Long-Term Treasury Bond prices (which move in the opposite direction of interest rates) by going to Yahoo Finance and entering TLT (for iShares 20+ Yr Treasury Bond ETF). Click on “chart” and select the 2 Year chart. Then on “indicator” and choose a 200-day moving average. That will show the steady upward movement in the price of those bonds—because buyers outnumber sellers. That results in a steady downward movement in the rate of interest being earned by new buyers, which flattens the yield curve.
There are several explanations why Long-Term interest rates might fall even as Short-Term rates are rising: “the likeliest...is the simplest: markets are losing confidence in the Fed’s ability to raise [Short-Term] rates without inflation sagging.” You might want to learn more about the falling yield curve, so read on.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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, October 1
Week 326 - Investing for Income
Situation: Bonds or stocks? Which will give you a larger monthly check without disrupting your sleep? For stocks, the standard would be SPDR Dow Jones Industrial Average ETF (DIA), yielding 2.2%. For bonds, the standard would be iShares 20+ Year Treasury Bond ETF (TLT), yielding 2.5%. So far, so good. But what if you want more income than those “plain vanilla” options provide? For example, a bond index fund that wouldn’t be hit for a big loss if inflation were to spike upward? Then you would want to be an investment-grade intermediate-term index fund like the Vanguard Interm-Term Bond Fund (BIV). If you’re a stock-picker and want more yield, you’ll need to start with a close look at the 400+ stocks in the Russell 1000 Index that yield more than a market average 2%. There’s an exchange-traded index fund (ETF) that holds positions in all such stocks: The Vanguard High Dividend Yield ETF (VYM). Our Table for this week pulls out 8 Dividend Achievers that we think do the job. But remember, you’d have to hold positions in all 8 to minimize selection bias. Then, you’d have an investment that yields ~2.7% and is likely to grow those dividends ~9%/yr.
Mission: Find A-rated Dividend Achievers with a higher yield than DIA, a clean Balance Sheet, and less volatility over the past 20 years than the S&P 500 Index.
Execution: We find 8 companies in the Russell 1000 Index that meet those criteria, except for minor Balance Sheet issues (see Table).
Bottom Line: Low-risk investments that yield more than 3% have almost disappeared. We find only two: WEC Energy Group (WEC) and Procter & Gamble (PG). Of course, there are some companies and government agencies that issue bonds paying a higher interest rate, but you’d have to invest $25,000 in each to avoid paying high up-front transaction costs. And, you’d need to have positions in several such bonds to minimize selection bias.
Risk Rating: 3 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: For equities, I dollar-average into NEE, PG and JNJ, and also own shares of TRV, WMT and MMM. For bonds, I own shares of BIV.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Find A-rated Dividend Achievers with a higher yield than DIA, a clean Balance Sheet, and less volatility over the past 20 years than the S&P 500 Index.
Execution: We find 8 companies in the Russell 1000 Index that meet those criteria, except for minor Balance Sheet issues (see Table).
Bottom Line: Low-risk investments that yield more than 3% have almost disappeared. We find only two: WEC Energy Group (WEC) and Procter & Gamble (PG). Of course, there are some companies and government agencies that issue bonds paying a higher interest rate, but you’d have to invest $25,000 in each to avoid paying high up-front transaction costs. And, you’d need to have positions in several such bonds to minimize selection bias.
Risk Rating: 3 (where 10-Yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: For equities, I dollar-average into NEE, PG and JNJ, and also own shares of TRV, WMT and MMM. For bonds, I own shares of BIV.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 10
Week 323 - “Toto, I’ve A Feeling We’re Not In Kansas Any More.”
Situation: A storm has hit international relations. It’s not as though we haven’t been warned. In his 2014 book, “World Order,” Henry Kissinger mentions dark trends could undermine the principles of international governance, which were established by (and adhered to since) the Peace of Westphalia ended the Thirty Years War in 1648. Those principles are 1) the inviolability of national sovereignty, and 2) the self-determination of peoples free from religious intolerance. But Russia has recently annexed Crimea, and Great Britain’s vote to leave the European Union reflects growing religious intolerance. Here in America, we have echoed Brexit by electing Donald J. Trump to be our President.
Investors abhor uncertainty and wonder whether they’ll continue to prosper in the absence of International Order. The issue is one of governance. Picture a tent with many people of various nationalities inside, debating ideas about how best to get along together. This metaphor worked for hundreds of years, even though a camel would occasionally stick its nose under a tent. Now countries and economic unions are having to grapple with anarchists seeking Jihad.
What does it all mean? Investors need a mental picture, one where cause and effect assume a pattern that allows us to anticipate how events on the world stage are likely to play out. Artists often arrive at formulations before events unfold. The disruption of Victorian Order that culminated in World War One is one example. The writings of Franz Kafka and paintings of Picasso spring to mind as heralds of Modernism. Similarly, Existentialists like Albert Camus and Jean Paul Sartre anticipated the Second World War and gave us The Theatre of the Absurd. The effect reached music with the 12-tone scale, choreography with ballets no longer anchored in stories, paintings lacking both content and message, and the “deconstruction” of classical poetry.
The art world has evolved beyond Modernism to become Post-Modern, but more recently that has been replaced by Contemporary Art, which anticipates the crumbling of World Order we’re now seeing. Formerly, art was about feelings, music, and imagery; reasoned discourse was left out. In Contemporary Art, the intellect is finally engaged but still without reasoned discourse. The tent ropes have come loose. We are left to manage without Cliff’s Notes, religious precepts, party politics, or judicial constraint; mood-altering drugs are used to let light in as often as to keep it out. A piece of Contemporary Art (if we are open to it at all) might lead any one of us to see, hear, read, imagine, or think along a unique trajectory, then use that as a basis for free association.
There are no guideposts, and the unhinging has been accelerated by the ready availability of computing power and networking via one’s cell phone. The artist typically has no interest in channeling the viewer or listener’s thoughts, feelings, or mental images. Why presume, given that each of us is unique? A poet might apply the words levitation, unmooring, kaleidoscopic, or ricochet to characterize the mental effects that the artist ignites in some people. If people join together, it might become participatory theater. Think of stadium performances by iconic figures like The Grateful Dead, Janis Joplin, or even Donald J. Trump. The traditional format used by the music industry is also “going down the tubes.” Few artists make an “album” any longer with a recording studio contract. It’s all small entrepreneurs selling a single song via the internet, using social media as advertising.
Prepare your portfolio. Think about limiting key retirement investments to US Treasury bonds and well-capitalized A-rated stocks that have a Durable Competitive Advantage (see Table). VYM is the Benchmark Index for Russell 1000 companies that pay at least a market dividend. “Durable Competitive Advantage” (see Column O in the Table) is a term that Warren Buffett coined to denote a 7% (or higher) rate of growth in a company’s Tangible Book Value (TBV) over the past 10 yrs, provided that TBV is down no more than 3 years (see Week 158 and Week 241).
Administration: The sky is not falling. Civilization won’t end, and neither will Westphalian Principles of Governance. Be patient but don’t take risks. Some good is bound to come from abandoning “received wisdom” or “group think.” Why? Because “received wisdom” gives rise to dogma, and dogma prevents innovation. Don’t worry about nuclear war. Sure, it could happen. Maybe there’s even a “material” risk (odds higher than one in twenty). That would amount to an existential crisis for many survivors. We’d all become more focussed on survival, so behavior would become more collegial.
Bottom Line: Uncertainty is on the move. So, this is not a good time to speculate in financial assets. Hard assets like farmland are another matter (see next week’s blog).
Risk Rating: 6 (where 10-Yr T-Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MSFT and NEE, and own shares of NKE, TJX, ACN, JPM, and TRV.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Investors abhor uncertainty and wonder whether they’ll continue to prosper in the absence of International Order. The issue is one of governance. Picture a tent with many people of various nationalities inside, debating ideas about how best to get along together. This metaphor worked for hundreds of years, even though a camel would occasionally stick its nose under a tent. Now countries and economic unions are having to grapple with anarchists seeking Jihad.
What does it all mean? Investors need a mental picture, one where cause and effect assume a pattern that allows us to anticipate how events on the world stage are likely to play out. Artists often arrive at formulations before events unfold. The disruption of Victorian Order that culminated in World War One is one example. The writings of Franz Kafka and paintings of Picasso spring to mind as heralds of Modernism. Similarly, Existentialists like Albert Camus and Jean Paul Sartre anticipated the Second World War and gave us The Theatre of the Absurd. The effect reached music with the 12-tone scale, choreography with ballets no longer anchored in stories, paintings lacking both content and message, and the “deconstruction” of classical poetry.
The art world has evolved beyond Modernism to become Post-Modern, but more recently that has been replaced by Contemporary Art, which anticipates the crumbling of World Order we’re now seeing. Formerly, art was about feelings, music, and imagery; reasoned discourse was left out. In Contemporary Art, the intellect is finally engaged but still without reasoned discourse. The tent ropes have come loose. We are left to manage without Cliff’s Notes, religious precepts, party politics, or judicial constraint; mood-altering drugs are used to let light in as often as to keep it out. A piece of Contemporary Art (if we are open to it at all) might lead any one of us to see, hear, read, imagine, or think along a unique trajectory, then use that as a basis for free association.
There are no guideposts, and the unhinging has been accelerated by the ready availability of computing power and networking via one’s cell phone. The artist typically has no interest in channeling the viewer or listener’s thoughts, feelings, or mental images. Why presume, given that each of us is unique? A poet might apply the words levitation, unmooring, kaleidoscopic, or ricochet to characterize the mental effects that the artist ignites in some people. If people join together, it might become participatory theater. Think of stadium performances by iconic figures like The Grateful Dead, Janis Joplin, or even Donald J. Trump. The traditional format used by the music industry is also “going down the tubes.” Few artists make an “album” any longer with a recording studio contract. It’s all small entrepreneurs selling a single song via the internet, using social media as advertising.
Prepare your portfolio. Think about limiting key retirement investments to US Treasury bonds and well-capitalized A-rated stocks that have a Durable Competitive Advantage (see Table). VYM is the Benchmark Index for Russell 1000 companies that pay at least a market dividend. “Durable Competitive Advantage” (see Column O in the Table) is a term that Warren Buffett coined to denote a 7% (or higher) rate of growth in a company’s Tangible Book Value (TBV) over the past 10 yrs, provided that TBV is down no more than 3 years (see Week 158 and Week 241).
Administration: The sky is not falling. Civilization won’t end, and neither will Westphalian Principles of Governance. Be patient but don’t take risks. Some good is bound to come from abandoning “received wisdom” or “group think.” Why? Because “received wisdom” gives rise to dogma, and dogma prevents innovation. Don’t worry about nuclear war. Sure, it could happen. Maybe there’s even a “material” risk (odds higher than one in twenty). That would amount to an existential crisis for many survivors. We’d all become more focussed on survival, so behavior would become more collegial.
Bottom Line: Uncertainty is on the move. So, this is not a good time to speculate in financial assets. Hard assets like farmland are another matter (see next week’s blog).
Risk Rating: 6 (where 10-Yr T-Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MSFT and NEE, and own shares of NKE, TJX, ACN, JPM, and TRV.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 6
Week 318 - Growing Perpetuity Index: A-Rated Dow Jones Composite Companies With Tangible Book Value that pay a “Good and Growing” Dividend
Situation: You need a way to save for retirement that is safe and effective. We agree with Warren Buffett’s approach which is to use a low-cost S&P 500 Index fund combined with a low-cost short-intermediate term US Treasury fund. If you’re wealthy, make the stock:bond mix 90:10. If not, move toward a 50:50 mix.
If you’re a stock-picker but fully employed outside the financial services industry, find a formula that won’t require a lot of your time for oversight and maintenance. The S&P 500 Index has too many stocks, so stick to analyzing the Dow Jones Composite Index. Those stocks have been picked by the Managing Editor of the Wall Street Journal. Start with the 20 companies in that 65-stock index that pay at least a “market dividend” and are Dividend Achievers, i.e., have raised their dividend annually for at least the past 10 years. We call that shortened version The Growing Perpetuity Index (see Week 261). It also excludes companies with less than a BBB+ S&P Bond Rating or B+/M S&P Stock Rating. But companies with with ratings lower than A- tend to develop problems, as do companies with negative net Tangible Book Value. (The SEC requires that the sale of newly-issued shares on a US stock exchange not dilute a company’s net Tangible Book Value below zero.)
Mission: Revise “The Growing Perpetuity Index” to exclude companies with negative Tangible Book Value, as well as companies with an S&P Bond Rating less than A- or an S&P Stock Rating less than A-/M.
Execution: We’re down to 9 companies (see Table).
Administration: Our Benchmark for companies that pay a “good and growing” dividend is the Vanguard High Dividend Yield ETF (VYM at Line 14 in the Table). That fund represents a subset of the Russell 1000 Index of the largest publicly-traded US companies which pay at least as high a dividend yield as the average for the full set. As it happens, all of the companies in the subset that have A ratings from S&P on their bonds and stocks are Dividend Achievers.
In next week’s blog, we highlight the 11 companies in VYM that aren’t in the Dow Jones Composite Index. Then you’ll need to track only 20 companies on your adventure into stock-picking! But be aware: 30% of those 20 companies are boring utilities, meaning that clear-eyed stock-picking isn’t glamorous at all. It’s just making money by not losing money, which is Warren Buffett’s #1 Rule.
Bottom Line: Stock-picking becomes a problem for non-gamblers at the Go/No-Go point, i.e., after 5 years of trying, you need to think about giving up if you can’t beat the total return/yr for an S&P 500 Index fund (SPY or VFINX) by at least 2%/yr. This is because you need to cover your greater transaction costs and capital gains taxes that are being expensed out. We’re suggesting that you start with 9 “blue chip” stocks that have a reasonable likelihood of letting you stay in the game after a 5 year probation period. Of course, you’d be opening yourself up to selection bias because there is a greater risk of loss vs. investing in all 500 stocks. Academic studies have shown that you’d need to own shares in at least 50 companies to largely overcome that risk.
Risk Rating: 6 (10-Yr Treasury Note = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into NEE, MSFT, JNJ, KO, and UNP. I also own shares of MMM, TRV, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If you’re a stock-picker but fully employed outside the financial services industry, find a formula that won’t require a lot of your time for oversight and maintenance. The S&P 500 Index has too many stocks, so stick to analyzing the Dow Jones Composite Index. Those stocks have been picked by the Managing Editor of the Wall Street Journal. Start with the 20 companies in that 65-stock index that pay at least a “market dividend” and are Dividend Achievers, i.e., have raised their dividend annually for at least the past 10 years. We call that shortened version The Growing Perpetuity Index (see Week 261). It also excludes companies with less than a BBB+ S&P Bond Rating or B+/M S&P Stock Rating. But companies with with ratings lower than A- tend to develop problems, as do companies with negative net Tangible Book Value. (The SEC requires that the sale of newly-issued shares on a US stock exchange not dilute a company’s net Tangible Book Value below zero.)
Mission: Revise “The Growing Perpetuity Index” to exclude companies with negative Tangible Book Value, as well as companies with an S&P Bond Rating less than A- or an S&P Stock Rating less than A-/M.
Execution: We’re down to 9 companies (see Table).
Administration: Our Benchmark for companies that pay a “good and growing” dividend is the Vanguard High Dividend Yield ETF (VYM at Line 14 in the Table). That fund represents a subset of the Russell 1000 Index of the largest publicly-traded US companies which pay at least as high a dividend yield as the average for the full set. As it happens, all of the companies in the subset that have A ratings from S&P on their bonds and stocks are Dividend Achievers.
In next week’s blog, we highlight the 11 companies in VYM that aren’t in the Dow Jones Composite Index. Then you’ll need to track only 20 companies on your adventure into stock-picking! But be aware: 30% of those 20 companies are boring utilities, meaning that clear-eyed stock-picking isn’t glamorous at all. It’s just making money by not losing money, which is Warren Buffett’s #1 Rule.
Bottom Line: Stock-picking becomes a problem for non-gamblers at the Go/No-Go point, i.e., after 5 years of trying, you need to think about giving up if you can’t beat the total return/yr for an S&P 500 Index fund (SPY or VFINX) by at least 2%/yr. This is because you need to cover your greater transaction costs and capital gains taxes that are being expensed out. We’re suggesting that you start with 9 “blue chip” stocks that have a reasonable likelihood of letting you stay in the game after a 5 year probation period. Of course, you’d be opening yourself up to selection bias because there is a greater risk of loss vs. investing in all 500 stocks. Academic studies have shown that you’d need to own shares in at least 50 companies to largely overcome that risk.
Risk Rating: 6 (10-Yr Treasury Note = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into NEE, MSFT, JNJ, KO, and UNP. I also own shares of MMM, TRV, and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 18
Week 311 - A-rated S&P 100 “Defensive” Companies With Tangible Book Value
Situation: We know for certain that this is a period of great anxiety in credit markets. Trillions of dollars in loans have been made by banks in Southern Europe and East Asia that are now worth less than a third of their face value. Many of these loans were made by private banks, but governments are ultimately “on the hook” for the debt. With non-performing debts on their books, banks have less ability to make worthwhile loans to support economic growth, education and upgrades of infrastructure. A credit crunch is going to happen, unless these bad debts are boxed up, tied with a ribbon, and sold to the highest bidder. Remember: the credit crunch of 2008-09 quickly cut worldwide GDP growth per capita in half, from 2%/yr to 1%/yr. And it didn’t start to recover until this year.
What’s the best way for you to drill down on this subject? I suggest that you read Peter Coy’s article, which appeared in Bloomberg Business Week last October. His analysis responds to the International Monetary Fund’s 2016 Global Financial Stability Report that was hot off the press. Here are bullet points from that report: “medium-term risks continue to build”, meaning 1) growing political instability; 2) persistent weakness of financial institutions in China and Southern Europe; 3) excessive corporate debt in emerging markets. In China, combined public and private debt almost doubled over the past 10 years, and is now 210% of GDP (worldwide it’s 225% of GDP).
Mission: What’s the best way to tailor your retirement portfolio in response to these global risks? Become defensive. That doesn’t just mean having a Rainy Day Fund that is well-stocked with interest-earning cash-equivalents (Savings Bonds, Treasury Bills, and 2-Yr Treasury Notes). It means overweighting high quality “defensive stocks” in your equity portfolio. What is the Gold Standard? Companies in the S&P 100 Index that are in the 4 S&P Defensive Industries:
Consumer Staples;
Healthcare;
Utilities; and
Communication Services.
Large companies have multiple product lines, and membership in the S&P 100 Index requires a healthy options market for the company’s stock, to facilitate price discovery. You have to drill deeper in your analysis, to be sure the company’s S&P credit rating is A- or better, and its stock rating is A-/M or better. Statistical information has to be available from the 16-Yr series of the BMW Method and the 2017 Barron’s 500 List. Check financial statements for signs of high debt: long-term bonds that represent more than a third of total assets, operating cash flow that covers less than 40% of current liabilities, or an inability to meet dividend payments out of free cash flow (FCF). Exclude companies with negative Tangible Book Value.
Execution: By using the above criteria, we uncover 7 companies out of the 32 “defensive” companies in the S&P 100 Index (see Table).
Bottom Line: Defensive companies are less interesting than growth companies or companies involved in the production of raw commodities. But high-quality defensive companies, such as Johnson & Johnson (JNJ) and NextEra Energy (NEE), consistently grow earnings faster than GDP and are quick to correct any earnings shortfall. All an investor need do is learn to read financial statements, and regularly examine websites for data on companies of interest.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion).
Full Disclosure: I dollar-average into Coca-Cola (KO), NextEra Energy (NEE), and Johnson & Johnson (JNJ). I also own shares in Costco Wholesale (COST) and Wal-Mart Stores (WMT).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 15 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K. Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 20 in the Table. The ETF for that index is MDY at Line 14. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
What’s the best way for you to drill down on this subject? I suggest that you read Peter Coy’s article, which appeared in Bloomberg Business Week last October. His analysis responds to the International Monetary Fund’s 2016 Global Financial Stability Report that was hot off the press. Here are bullet points from that report: “medium-term risks continue to build”, meaning 1) growing political instability; 2) persistent weakness of financial institutions in China and Southern Europe; 3) excessive corporate debt in emerging markets. In China, combined public and private debt almost doubled over the past 10 years, and is now 210% of GDP (worldwide it’s 225% of GDP).
Mission: What’s the best way to tailor your retirement portfolio in response to these global risks? Become defensive. That doesn’t just mean having a Rainy Day Fund that is well-stocked with interest-earning cash-equivalents (Savings Bonds, Treasury Bills, and 2-Yr Treasury Notes). It means overweighting high quality “defensive stocks” in your equity portfolio. What is the Gold Standard? Companies in the S&P 100 Index that are in the 4 S&P Defensive Industries:
Consumer Staples;
Healthcare;
Utilities; and
Communication Services.
Large companies have multiple product lines, and membership in the S&P 100 Index requires a healthy options market for the company’s stock, to facilitate price discovery. You have to drill deeper in your analysis, to be sure the company’s S&P credit rating is A- or better, and its stock rating is A-/M or better. Statistical information has to be available from the 16-Yr series of the BMW Method and the 2017 Barron’s 500 List. Check financial statements for signs of high debt: long-term bonds that represent more than a third of total assets, operating cash flow that covers less than 40% of current liabilities, or an inability to meet dividend payments out of free cash flow (FCF). Exclude companies with negative Tangible Book Value.
Execution: By using the above criteria, we uncover 7 companies out of the 32 “defensive” companies in the S&P 100 Index (see Table).
Bottom Line: Defensive companies are less interesting than growth companies or companies involved in the production of raw commodities. But high-quality defensive companies, such as Johnson & Johnson (JNJ) and NextEra Energy (NEE), consistently grow earnings faster than GDP and are quick to correct any earnings shortfall. All an investor need do is learn to read financial statements, and regularly examine websites for data on companies of interest.
Risk Rating: 4 (where 1 = 10-Yr Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion).
Full Disclosure: I dollar-average into Coca-Cola (KO), NextEra Energy (NEE), and Johnson & Johnson (JNJ). I also own shares in Costco Wholesale (COST) and Wal-Mart Stores (WMT).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 15 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K. Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 20 in the Table. The ETF for that index is MDY at Line 14. For bonds, Discount Rate = Interest Rate.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 30
Week 278 - Living From One Month To The Next On Social Security
Situation: 60℅ of Americans over age 65 are “overwhelmingly” dependent on Social Security and 20% are totally dependent (“Animal Spirits”, George A. Akerlof and Robert J. Shiller, Princeton University Press, Princeton and Oxford, 2009, p. 124). To maintain Social Security in its current form, with cost of living adjustments (COLA), would consume ~2℅ of the country's taxable income going forward. The average monthly benefit (July 2016) for a retired worker is $1350. Contrast this with the US “poverty threshold” of $1200/mo.
Mission: Outline constraints on the 20% who are totally dependent on Social Security and the 40% who have some savings but remain overwhelmingly dependent on Social Security. Create a spreadsheet of the types of assets held by the latter group.
Execution: To live independently on $1350/mo, an individual or couple would have to start retirement debt-free and remain so. If they are living rent and mortgage free in their home, they will not be able to afford the expenses (maintenance, property tax, utilities) unless they take in a renter. A car would also not be affordable due to expenses (insurance, tires, maintenance, registration). The discipline of sticking to a budget rules out the use of credit cards; a debit card and checking account are a better plan. They would need to use accrual accounting. That is, assign all $1350 of income each month to budgeted expense, including a savings account for non-recurring capital expenditures on new clothes, vacations, income taxes and medical/dental expenses.
The 40% who find themselves overwhelmingly dependent on Social Security probably had no intention of ever owning stocks or stock mutual funds, preferring instead to use FDIC-insured savings accounts, Savings Bonds, whole life insurance, 1/10th ounce gold coins and a money market fund (or short-term bond fund) obtained from a broker. They are savers rather than investors and don’t want to place their savings at risk. They’d like to avoid losing money to inflation, and may be aware that the only zero-risk/zero-cost investments are 10-Yr Inflation-protected Treasury Notes and IRA-like Inflation-protected Savings Bonds obtained online.
This cohort doesn’t want to gamble, which means they don’t want to invest in asset classes that always seem to fall in value during a recession. That restraint rules out stocks, corporate bonds, and REITs but not the equity in their own home. They may strive to own a home, but until the Housing Crisis they weren’t fully aware of the risk. Now they know that only Treasury Notes and gold can be counted on to rise in value during a financial crisis.
Administration: see Table.
Bottom Line: Live small, stay out of debt, close any credit card accounts and keep track of every penny in an accrual accounting ledger.
Risk Rating: 3 (where Treasury Notes = 1 and gold = 10).
Full Disclosure: I dollar-average into Savings Bonds and hold Treasury Notes at www.treasurydirect.gov. I hold an intermediate-term US Treasury Bond Fund in a retirement account.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Outline constraints on the 20% who are totally dependent on Social Security and the 40% who have some savings but remain overwhelmingly dependent on Social Security. Create a spreadsheet of the types of assets held by the latter group.
Execution: To live independently on $1350/mo, an individual or couple would have to start retirement debt-free and remain so. If they are living rent and mortgage free in their home, they will not be able to afford the expenses (maintenance, property tax, utilities) unless they take in a renter. A car would also not be affordable due to expenses (insurance, tires, maintenance, registration). The discipline of sticking to a budget rules out the use of credit cards; a debit card and checking account are a better plan. They would need to use accrual accounting. That is, assign all $1350 of income each month to budgeted expense, including a savings account for non-recurring capital expenditures on new clothes, vacations, income taxes and medical/dental expenses.
The 40% who find themselves overwhelmingly dependent on Social Security probably had no intention of ever owning stocks or stock mutual funds, preferring instead to use FDIC-insured savings accounts, Savings Bonds, whole life insurance, 1/10th ounce gold coins and a money market fund (or short-term bond fund) obtained from a broker. They are savers rather than investors and don’t want to place their savings at risk. They’d like to avoid losing money to inflation, and may be aware that the only zero-risk/zero-cost investments are 10-Yr Inflation-protected Treasury Notes and IRA-like Inflation-protected Savings Bonds obtained online.
This cohort doesn’t want to gamble, which means they don’t want to invest in asset classes that always seem to fall in value during a recession. That restraint rules out stocks, corporate bonds, and REITs but not the equity in their own home. They may strive to own a home, but until the Housing Crisis they weren’t fully aware of the risk. Now they know that only Treasury Notes and gold can be counted on to rise in value during a financial crisis.
Administration: see Table.
Bottom Line: Live small, stay out of debt, close any credit card accounts and keep track of every penny in an accrual accounting ledger.
Risk Rating: 3 (where Treasury Notes = 1 and gold = 10).
Full Disclosure: I dollar-average into Savings Bonds and hold Treasury Notes at www.treasurydirect.gov. I hold an intermediate-term US Treasury Bond Fund in a retirement account.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, August 28
Week 269 - “Buy and Hold” Barron’s 500 Defensive Companies
Situation: You will become a “risk-off” investor the day you retire. The most you’ll be able to draw from your retirement savings is 4%/yr, preferably 3.5%. That amount has to be re-calculated each year by adding enough to compensate for inflation. You’ll also need to match revenues with expenses, with the goal of spending 1/12th of that yearly income each month. Inflation won’t be your main problem, as long as 50% of your retirement savings are in the stock market, where prices inflate at about the same rate as your food and utility bills. In normal economic times, the interest paid on bonds you own will also track inflation. For example, the yield on 10-yr Treasuries has stayed at 2.3%/yr ahead of inflation since 2000, and over the past 140 yrs. Your problem will be living on a fixed income with an inflexible budget. Money to buy new clothes or take a vacation will have to come from a savings account that you’ve set up for non-recurring capital expenditures, an account that you contribute to every month.
To increase your spending power, three options are relatively common: 1) rent out part of your house and raise the rent faster than inflation raises your expenses; 2) find a part-time job where your after-tax income is likely to grow faster than inflation; and/or 3) benefit from “risk-off” stocks that you bought before retiring, stocks that you never plan to sell (because they pay a good and growing dividend). Let’s dig deeper on Option 3, living off dividend income.
Mission: Provide fundamental information about each company that pays “risk-off” dividends likely to grow faster than inflation.
Execution: I know what you’re thinking: this is alchemy. And you’re right. In a world that arbitrages every financial asset every day, there is no such thing as free money after accounting for inflation and transaction costs. So, let’s start with how finance professionals do it. They invest in AAA sovereign bonds. These days, they have to pay for that privilege. In other words, the safest bonds (German Bunds) pay negative interest. You’re not going to do that, so you’ll have to take a little bit of risk.
What is a “risk-off” dividend-growing stock? The risk that a dividend won’t increase continuously relates to the health of that company’s Balance Sheet. You’ve heard the phrase: “Bullet-proof Balance Sheet.” That means the company keeps cash (and cash-equivalents like US Treasury Bills) in a bank vault or with the US Treasury, and also has non-strategic assets that traders know can be sold for a good price, even during a recession. In recent blogs, we’ve talked about companies that have a “clean Balance Sheet” and have boiled that term down to tracking 4 ratios:
1. Total Debt:Equity is under 100% (or under 200% if the company is a regulated public utility). That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is the most important marker of a company’s “general financial condition." That ratio needs to be under 30% (35% if a regulated public utility). Long-term debt has to either be renewed at maturity or returned to the lender. In a financial crisis, the rate of interest that bankers charge for a renewal (“rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling assets or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies mainly in the perceived value of their brand, which accountants call “goodwill” when the company is sold for more than its book value. But remember that property, plant and equipment are carried at historic cost when calculating book value. So, goodwill is more than just the perceived value of the brand. It’s the buyer’s perception of current value for property, plant, and equipment. TBV may be negative for a short period after a company restructures, e.g. by selling non-strategic assets to pay down LT debt as Procter & Gamble (at Line 7 in the Table) did recently. If the other 3 ratios indicate a clean Balance Sheet, the TBV will likely continue to be raised on schedule.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow (i.e., “cash from operations” minus capital expenditures).
Administration: Most companies with A-rated stocks pay good and growing dividends. S&P calls those with a 10+ yr record of annual dividend boosts Dividend Achievers. Another quick way to find relatively safe stocks is to take a close look at those issued by companies in “defensive” industries (Consumer Staples, HealthCare, Utilities, and Communications Services). Why? Because they sell essential goods and services. Unfortunately, that extra bulwark against bankruptcy leads many of those companies away from maintaining a clean Balance Sheet and toward a reliance on borrowed money. And banks will comply. Even during the Lehman Panic, Johnson & Johnson (with its AAA credit rating) had no difficulty borrowing money at attractive interest rates. We also use another safety factor when looking for “risk-off” companies, which is to confine our search to Barron’s 500 companies. Why? Because those companies have large revenue streams, capturing revenue from multiple product lines. One or two of those lines will continue to grow during a recession, reducing the impact from lines that loose sales.
We find 7 Dividend Achievers in defensive industries that are sufficiently “risk-off” to be suitable for inclusion in a “buy and hold” retirement savings plan (see Table).
Bottom Line: It’s a nice idea, to find “safe companies” that pay a good and growing dividend. A retiree who paid $50,000 for stock in such companies over a 10 yr period prior to retirement will not be confined to living on a fixed income. By the time she retires, those stocks will be yielding 4-5% of their initial cost, and that $2000+/yr of income can be expected to grow 9+%/yr going forward. Ten yrs into retirement, she’ll be receiving dividend checks totaling ~$5000/yr. We’ve turned up 7 Dividend Achievers that are good bets for accomplishing that feat. In the aggregate, they’ve increased their dividend 12%/yr over the past 16 yrs (see Column H in the Table). None have a statistical risk of price loss in a Bear Market that exceeds the 31% loss projected for the S&P 500 Index, and their average projected loss is only 25% (see Column M in the Table).
Risk Rating: 4 (where Treasuries
= 1 and gold = 10)
Full Disclosure: I dollar-average monthly (www.computershare.com) into NEE, PG and JNJ, and also own shares in WMT and HRL.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 14 in the Table. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is 16-Yr CAGR. Price Growth Rate is the mean or trendline 16-Yr Price CAGR (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
To increase your spending power, three options are relatively common: 1) rent out part of your house and raise the rent faster than inflation raises your expenses; 2) find a part-time job where your after-tax income is likely to grow faster than inflation; and/or 3) benefit from “risk-off” stocks that you bought before retiring, stocks that you never plan to sell (because they pay a good and growing dividend). Let’s dig deeper on Option 3, living off dividend income.
Mission: Provide fundamental information about each company that pays “risk-off” dividends likely to grow faster than inflation.
Execution: I know what you’re thinking: this is alchemy. And you’re right. In a world that arbitrages every financial asset every day, there is no such thing as free money after accounting for inflation and transaction costs. So, let’s start with how finance professionals do it. They invest in AAA sovereign bonds. These days, they have to pay for that privilege. In other words, the safest bonds (German Bunds) pay negative interest. You’re not going to do that, so you’ll have to take a little bit of risk.
What is a “risk-off” dividend-growing stock? The risk that a dividend won’t increase continuously relates to the health of that company’s Balance Sheet. You’ve heard the phrase: “Bullet-proof Balance Sheet.” That means the company keeps cash (and cash-equivalents like US Treasury Bills) in a bank vault or with the US Treasury, and also has non-strategic assets that traders know can be sold for a good price, even during a recession. In recent blogs, we’ve talked about companies that have a “clean Balance Sheet” and have boiled that term down to tracking 4 ratios:
1. Total Debt:Equity is under 100% (or under 200% if the company is a regulated public utility). That means senior managers will still “call the shots” in a crisis, not the bankers.
2. Long-Term Debt:Total Assets is the most important marker of a company’s “general financial condition." That ratio needs to be under 30% (35% if a regulated public utility). Long-term debt has to either be renewed at maturity or returned to the lender. In a financial crisis, the rate of interest that bankers charge for a renewal (“rollover”) will likely be higher than for the original loan. In the Lehman Panic, many companies found that rollovers were unavailable at any rate of interest. To avoid declaring bankruptcy, those companies had to either repay maturing loans by selling assets or find a “White Knight,” such as another company willing to assume that obligation as part of an acquisition.
3. TBV:Px is a positive number. You want the stock’s price to include Tangible Book Value. Most S&P 500 companies don’t have TBV. Their book value lies mainly in the perceived value of their brand, which accountants call “goodwill” when the company is sold for more than its book value. But remember that property, plant and equipment are carried at historic cost when calculating book value. So, goodwill is more than just the perceived value of the brand. It’s the buyer’s perception of current value for property, plant, and equipment. TBV may be negative for a short period after a company restructures, e.g. by selling non-strategic assets to pay down LT debt as Procter & Gamble (at Line 7 in the Table) did recently. If the other 3 ratios indicate a clean Balance Sheet, the TBV will likely continue to be raised on schedule.
4. Div:FCF is a positive number. Going into a Bear Market, you don’t want to own stock in companies that make a habit of borrowing money to pay their dividend. Always be suspicious of companies that don’t pay their dividend out of Free Cash Flow (i.e., “cash from operations” minus capital expenditures).
Administration: Most companies with A-rated stocks pay good and growing dividends. S&P calls those with a 10+ yr record of annual dividend boosts Dividend Achievers. Another quick way to find relatively safe stocks is to take a close look at those issued by companies in “defensive” industries (Consumer Staples, HealthCare, Utilities, and Communications Services). Why? Because they sell essential goods and services. Unfortunately, that extra bulwark against bankruptcy leads many of those companies away from maintaining a clean Balance Sheet and toward a reliance on borrowed money. And banks will comply. Even during the Lehman Panic, Johnson & Johnson (with its AAA credit rating) had no difficulty borrowing money at attractive interest rates. We also use another safety factor when looking for “risk-off” companies, which is to confine our search to Barron’s 500 companies. Why? Because those companies have large revenue streams, capturing revenue from multiple product lines. One or two of those lines will continue to grow during a recession, reducing the impact from lines that loose sales.
We find 7 Dividend Achievers in defensive industries that are sufficiently “risk-off” to be suitable for inclusion in a “buy and hold” retirement savings plan (see Table).
Bottom Line: It’s a nice idea, to find “safe companies” that pay a good and growing dividend. A retiree who paid $50,000 for stock in such companies over a 10 yr period prior to retirement will not be confined to living on a fixed income. By the time she retires, those stocks will be yielding 4-5% of their initial cost, and that $2000+/yr of income can be expected to grow 9+%/yr going forward. Ten yrs into retirement, she’ll be receiving dividend checks totaling ~$5000/yr. We’ve turned up 7 Dividend Achievers that are good bets for accomplishing that feat. In the aggregate, they’ve increased their dividend 12%/yr over the past 16 yrs (see Column H in the Table). None have a statistical risk of price loss in a Bear Market that exceeds the 31% loss projected for the S&P 500 Index, and their average projected loss is only 25% (see Column M in the Table).
Risk Rating: 4 (where Treasuries
= 1 and gold = 10)
Full Disclosure: I dollar-average monthly (www.computershare.com) into NEE, PG and JNJ, and also own shares in WMT and HRL.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 14 in the Table. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is 16-Yr CAGR. Price Growth Rate is the mean or trendline 16-Yr Price CAGR (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The NPV template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 17
Week 263 - “Bond-like” Stocks That Fly Under The Radar
Situation: The stock market is overpriced, which is the obvious outcome of “quantitative easing” and ultra-low interest rates. US Treasury bonds and notes carry an interest rate that is close to the projected inflation rate over their holding period. Stocks, in spite of their added risk, are the only path to portfolio growth. For that reason, the business news increasingly talks up “bond-like” stocks.
Mission: In last week’s blog, we set up criteria for defining “bond-like” stocks, starting with the requirement that they be Dividend Achievers, i.e., the dividend has been increased annually for at least the past 10 yrs. Now we’ll use those same criteria to highlight “below the radar” stocks, e.g. those issued by companies that don’t have sufficient revenue to be included in the 2016 Barron’s 500 List.
Execution: We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M or S&P assigns a denominator of “H” to the rating (indicating high risk of loss);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: This metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table.
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found a dozen Dividend Achievers that appear attractive for long-term investment, even though most reside in the S&P 400 MidCap Index. Not surprisingly, 7 of the 12 are utility stocks. But the strongest stock of the group is Tanger Factory Outlet Centers (SKT), a real estate investment trust.
Risk Rating: 5 (where US Treasuries = 1 and gold = 10)
Full Disclosure: I own shares of Lincoln Electric (LECO).
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 25 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: In last week’s blog, we set up criteria for defining “bond-like” stocks, starting with the requirement that they be Dividend Achievers, i.e., the dividend has been increased annually for at least the past 10 yrs. Now we’ll use those same criteria to highlight “below the radar” stocks, e.g. those issued by companies that don’t have sufficient revenue to be included in the 2016 Barron’s 500 List.
Execution: We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M or S&P assigns a denominator of “H” to the rating (indicating high risk of loss);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: This metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table.
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found a dozen Dividend Achievers that appear attractive for long-term investment, even though most reside in the S&P 400 MidCap Index. Not surprisingly, 7 of the 12 are utility stocks. But the strongest stock of the group is Tanger Factory Outlet Centers (SKT), a real estate investment trust.
Risk Rating: 5 (where US Treasuries = 1 and gold = 10)
Full Disclosure: I own shares of Lincoln Electric (LECO).
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 25 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
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.
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