Situation: This is Blog #3 of a 3-blog series on S&P 500 Index stocks that have outperformed that Index for 16 yrs, i.e., up more and down less (see Week 255 and Week 256). For each blog, the companies we analyze are S&P Dividend Achievers and have high S&P ratings on their stocks and bonds. This week we cover companies in “defensive” S&P industries that have revenues sufficient for inclusion in the recently published 2016 Barron’s 500 List.
Mission: We select Dividend Achievers in defensive industries (Consumer Staples, HealthCare, Utilities, and Communication Services) that have outperformed the S&P 500 Index for the past 16 yrs. By “outperformed” we mean their stocks were up more and down less: 16-yr total returns/yr were greater and losses in the last market correction (April through September of 2011) were less. In addition, all companies must have an S&P bond rating of BBB+ or higher and an S&P stock rating of B+/M or higher. Net Present Values are calculated; NPV data points are presented in U-Y of the Table. [A full explanation of inputs for NPV calculations is given in the Appendix of last week’s blog (Week 256).]
Execution: see Table.
Bottom Line: Five companies are outstanding. MO, COST, HRL, NEE and CVS have NPVs that are above the group average, as well as improving 3-yr trends in cash-flow based Return on Invested Capital (ROIC) and sales (which determine a company’s Barron’s 500 rank), and an ROIC that exceeds the company’s weighted average cost of capital (WACC).
Risk Ranking: 6 (Treasuries = 1 and gold = 10)
Full Disclosure: I dollar-average into JNJ, NEE and PG, and own shares of ABT, HRL, CVS, KO and PEP.
NOTE: Metrics highlighted in red in the Table indicate underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX, at Line 26 in the Table). Metrics highlighted in green at Columns Q and R in the Table indicate improving performance trends for fundamental business parameters. Metrics highlighted in purple at Columns Z and AA in the Table indicate a company in current difficulty, ROIC being lower than WACC. Aside from NPV calculations for May 12, 2016, metrics are current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label vanguard. Show all posts
Showing posts with label vanguard. Show all posts
Sunday, June 5
Sunday, May 22
Week 255 - “Buy and Hold” Mid Cap Dividend Achievers
Situation: Over long periods, Mid-Capitalization companies tend to outperform Large Capitalization companies. Mid Caps often have a more focused business plan and use less credit. Overshadowing these advantages, both the weighted average cost of capital (WACC) and the risk of bankruptcy are higher for Mid Caps. In addition, there are fewer product lines to offset poor performance, thus making these companies more difficult to analyze. Our favorite tool for following fundamental performance metrics, the Barron’s 500 List, doesn’t help us analyze Mid Caps because those don’t have sufficient revenue for inclusion. But the larger and more stable Mid Caps are easy to identify, since they’re S&P 500 companies that have been excluded from the Barron’s 500 List (a list that includes both Canadian and US companies). Mid Caps traditionally have a market capitalization of $2-10 Billion, whereas, the smaller S&P 500 companies that we reference have a market capitalization of $3-20 Billion. So, we’re stretching the Mid Cap definition.
Mission: Help investors decide which of these smaller S&P 500 companies are “Buy-and-Hold” candidates. We’ll exclude companies that haven’t outperformed the Vanguard 500 Index Fund (VFINX) over the past 16 yrs, haven’t increased their dividend annually for 10+ yrs to become Dividend Achievers, and/or haven’t obtained an S&P bond rating of at least BBB+ and an S&P stock rating of at least B+/M.
Execution: We’ll calculate the Net Present Value (NPV) of buying stock and holding it for 10 yrs. The tricky part of that calculation is picking the discount rate. We’ll use 9.0% because that is the sum of the CAGR for the S&P 400 Mid Cap Index at 7.6%/yr (see Column N at Line 22 in the Table), and the S&P 400 Mid Cap Index ETF dividend yield at 1.4% (MDY at Line 18 in the Table). The 16-yr dividend growth rate (Column H in the Table) and the 16-yr CAGR for price appreciation (Column N in the Table) are used to complete the NPV calculation on each stock. Transaction costs are 2.5% upon buying the stock and 2.5% upon selling the stock. Dividends are not re-invested.
The discount rate is supposed to be a “hurdle” rate for an investment under consideration. In other words, there needs to be a comparable investment “opportunity” with a readily determined growth rate that we’re trying to beat. That rate is then discounted or subtracted from the rate of growth of the investment under consideration. If we did beat it, the NPV is a positive number.
Bottom Line: We have found 8 Mid Cap Dividend Achievers in the S&P 500 Index. All 8 have positive Net Present Values (see Column W in the Table). NPV is important because it represents the profit you can expect (before subtracting inflation and taxes) over and above the rate at which your money would likely have grown were you to make the comparable “reference” investment. For these 8 stocks, we chose as our reference investment the Vanguard 400 MidCap Index ETF (MDY), currently growing at 9.0%/yr (the discount rate).
We have identified an interesting slice of the stock market, one where the reward/risk ratio is skewed in the direction of reward.
Risk Rating = 6 (where 1 = Treasuries and 10 = gold).
Full Disclosure: I own shares of MKC.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red reflect underperformance vs. VBINX, the Vanguard Balanced Index Fund.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Help investors decide which of these smaller S&P 500 companies are “Buy-and-Hold” candidates. We’ll exclude companies that haven’t outperformed the Vanguard 500 Index Fund (VFINX) over the past 16 yrs, haven’t increased their dividend annually for 10+ yrs to become Dividend Achievers, and/or haven’t obtained an S&P bond rating of at least BBB+ and an S&P stock rating of at least B+/M.
Execution: We’ll calculate the Net Present Value (NPV) of buying stock and holding it for 10 yrs. The tricky part of that calculation is picking the discount rate. We’ll use 9.0% because that is the sum of the CAGR for the S&P 400 Mid Cap Index at 7.6%/yr (see Column N at Line 22 in the Table), and the S&P 400 Mid Cap Index ETF dividend yield at 1.4% (MDY at Line 18 in the Table). The 16-yr dividend growth rate (Column H in the Table) and the 16-yr CAGR for price appreciation (Column N in the Table) are used to complete the NPV calculation on each stock. Transaction costs are 2.5% upon buying the stock and 2.5% upon selling the stock. Dividends are not re-invested.
The discount rate is supposed to be a “hurdle” rate for an investment under consideration. In other words, there needs to be a comparable investment “opportunity” with a readily determined growth rate that we’re trying to beat. That rate is then discounted or subtracted from the rate of growth of the investment under consideration. If we did beat it, the NPV is a positive number.
Bottom Line: We have found 8 Mid Cap Dividend Achievers in the S&P 500 Index. All 8 have positive Net Present Values (see Column W in the Table). NPV is important because it represents the profit you can expect (before subtracting inflation and taxes) over and above the rate at which your money would likely have grown were you to make the comparable “reference” investment. For these 8 stocks, we chose as our reference investment the Vanguard 400 MidCap Index ETF (MDY), currently growing at 9.0%/yr (the discount rate).
We have identified an interesting slice of the stock market, one where the reward/risk ratio is skewed in the direction of reward.
Risk Rating = 6 (where 1 = Treasuries and 10 = gold).
Full Disclosure: I own shares of MKC.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red reflect underperformance vs. VBINX, the Vanguard Balanced Index Fund.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 17
Week 250 - A Monthly Retirement Savings Plan With Automatic Online Additions
Situation: If you’re self-employed or work at a company that doesn’t sponsor a 401(k) or 403(b) retirement plan, you need to create your own. The “secret sauce” is payday deductions. Economists often say that the parts of your income you never see are the parts you stop thinking about. Pay stubs list those automatic withdrawals for taxes, social security, health insurance, and a tax-deferred retirement plan but you no longer care: You’re receiving “full benefits” which is why you took the job in the first place.
If you’re one of the 50% of US workers who doesn’t have a workplace retirement plan, you need to go to start an IRA funded with payday deductions. This can be done by visiting a bank, brokerage, credit union or by going online to a low-cost mutual fund site like Vanguard Group. You can also set up monthly automatic withdrawals from your checking account to invest in Dividend Re-Investment Plans (DRIPs). Your accountant will report to the IRS that those constitute your IRA. That works best if you backup those stock investments with bonds by using one of the US Treasury’s zero-cost IRA-like plans (Savings Bonds and MyRA), which have no transaction costs. At their website, you’ll see an option for automatic monthly withdrawals from your checking account.
Mission: Set up a spreadsheet that illustrates an automatic online retirement savings plan with monthly additions for each item.
Execution: If your net worth (excluding home & mortgage) is less than $1 Million, you needn’t bother with picking stocks and bonds. Just go to the Vanguard Group website and pick the Vanguard Wellesley Income Fund (VWINX at Line 25 in the Table), which is 45% stocks and 55% bonds. Make that your IRA and set up monthly withdrawals from your checking account. If you’re self-employed as an “S Corporation”, the IRS provides special tax-deferred retirement options geared to your situation.
If you choose to pick your own dividend-paying stocks and back those with Treasuries, read on:
I. Bonds
You’ll need to start by assigning 25% to 75% of your savings to US Treasury issues, with the percentage depending on your view of the economic climate. The only automatic monthly withdrawal plan offered by the US Treasury are for Savings Bonds and MyRA. Inflation-adjusted Savings Bonds (“I Bonds”) are your best choice if you might want to cash in some for emergencies. The total return on Savings Bonds is approximately the same as for 10-yr Treasury Notes that have been renewed every 10 yrs, once you consider the tax benefit from owning Savings Bonds. The biannual interest paid on Savings Bonds is accrued and cannot be taxed until after you cash the bonds, whereas, tax is due every year on the the biannual interest you receive from Treasury Notes.
II. Stocks
The remaining 25% to 75% of your retirement savings plan needs to reflect growth in the economy. There are 10 S&P industries in the economy and you’ll probably gain the most benefit if you pick a stock for each. No one can predict which industry will take the lead in a future growth spurt, and each of the 10 has taken the lead at some point in the past. To set up automatic online investments each month, you’ll need to pick stocks that pay a dividend. The two largest online DRIP vendors are Computershare and Shareowneronline.
Administration: This week’s Table is a spreadsheet for stocks I have picked (one for each S&P industry), combined with a 50% commitment to 10-yr Treasury Notes that serve as proxies for Savings Bonds. In the Table, we assume that $100/mo is invested in each stock online and $1000/mo is invested in Savings Bonds online. The total investment is $24,000/yr and the transaction costs come to $164/yr (see Column Z in the Table). The Expense Ratio (164/24000) is 0.68% for the first year. If the economy keeps growing, that $164/yr will become an increasingly smaller fraction of the asset value.
Bottom Line: Polls have shown that “planning for retirement” is the biggest financial worry Americans have after “out of control spending.” Partly this is because 50% of Americans work where there is no retirement plan. The secret to success from stashing away ~15% of your gross income in a 401(k) or 403(b) plan is that you never see the money unless you look at the paystub. If you want success from setting up a retirement plan without those 401(k) or 403(b) tools, you need to mimic them. Have the money disappear automatically from your paycheck or checking account. Sending that money to a “conservative allotment, low-cost balanced mutual fund” like The Vanguard Balanced Index Fund (VBINX in the Table) is a good way to begin solving the problem with an IRA. If you are self-employed as an S Corporation, you can set aside the entire 15% or more of your income in a tax-advantaged retirement plan. You can also pick dividend-paying stocks for your IRA, plus Inflation-protected Savings Bonds and MyRAs that are tax-advantaged like an IRA.
Risk Rating: 4
Full Disclosure: I use the plan summarized in the Table.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. The Vanguard Wellesley Income Fund or VWINX. Total Returns in Column C date to 9/1/2000, a peak in the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If you’re one of the 50% of US workers who doesn’t have a workplace retirement plan, you need to go to start an IRA funded with payday deductions. This can be done by visiting a bank, brokerage, credit union or by going online to a low-cost mutual fund site like Vanguard Group. You can also set up monthly automatic withdrawals from your checking account to invest in Dividend Re-Investment Plans (DRIPs). Your accountant will report to the IRS that those constitute your IRA. That works best if you backup those stock investments with bonds by using one of the US Treasury’s zero-cost IRA-like plans (Savings Bonds and MyRA), which have no transaction costs. At their website, you’ll see an option for automatic monthly withdrawals from your checking account.
Mission: Set up a spreadsheet that illustrates an automatic online retirement savings plan with monthly additions for each item.
Execution: If your net worth (excluding home & mortgage) is less than $1 Million, you needn’t bother with picking stocks and bonds. Just go to the Vanguard Group website and pick the Vanguard Wellesley Income Fund (VWINX at Line 25 in the Table), which is 45% stocks and 55% bonds. Make that your IRA and set up monthly withdrawals from your checking account. If you’re self-employed as an “S Corporation”, the IRS provides special tax-deferred retirement options geared to your situation.
If you choose to pick your own dividend-paying stocks and back those with Treasuries, read on:
I. Bonds
You’ll need to start by assigning 25% to 75% of your savings to US Treasury issues, with the percentage depending on your view of the economic climate. The only automatic monthly withdrawal plan offered by the US Treasury are for Savings Bonds and MyRA. Inflation-adjusted Savings Bonds (“I Bonds”) are your best choice if you might want to cash in some for emergencies. The total return on Savings Bonds is approximately the same as for 10-yr Treasury Notes that have been renewed every 10 yrs, once you consider the tax benefit from owning Savings Bonds. The biannual interest paid on Savings Bonds is accrued and cannot be taxed until after you cash the bonds, whereas, tax is due every year on the the biannual interest you receive from Treasury Notes.
II. Stocks
The remaining 25% to 75% of your retirement savings plan needs to reflect growth in the economy. There are 10 S&P industries in the economy and you’ll probably gain the most benefit if you pick a stock for each. No one can predict which industry will take the lead in a future growth spurt, and each of the 10 has taken the lead at some point in the past. To set up automatic online investments each month, you’ll need to pick stocks that pay a dividend. The two largest online DRIP vendors are Computershare and Shareowneronline.
Administration: This week’s Table is a spreadsheet for stocks I have picked (one for each S&P industry), combined with a 50% commitment to 10-yr Treasury Notes that serve as proxies for Savings Bonds. In the Table, we assume that $100/mo is invested in each stock online and $1000/mo is invested in Savings Bonds online. The total investment is $24,000/yr and the transaction costs come to $164/yr (see Column Z in the Table). The Expense Ratio (164/24000) is 0.68% for the first year. If the economy keeps growing, that $164/yr will become an increasingly smaller fraction of the asset value.
Bottom Line: Polls have shown that “planning for retirement” is the biggest financial worry Americans have after “out of control spending.” Partly this is because 50% of Americans work where there is no retirement plan. The secret to success from stashing away ~15% of your gross income in a 401(k) or 403(b) plan is that you never see the money unless you look at the paystub. If you want success from setting up a retirement plan without those 401(k) or 403(b) tools, you need to mimic them. Have the money disappear automatically from your paycheck or checking account. Sending that money to a “conservative allotment, low-cost balanced mutual fund” like The Vanguard Balanced Index Fund (VBINX in the Table) is a good way to begin solving the problem with an IRA. If you are self-employed as an S Corporation, you can set aside the entire 15% or more of your income in a tax-advantaged retirement plan. You can also pick dividend-paying stocks for your IRA, plus Inflation-protected Savings Bonds and MyRAs that are tax-advantaged like an IRA.
Risk Rating: 4
Full Disclosure: I use the plan summarized in the Table.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. The Vanguard Wellesley Income Fund or VWINX. Total Returns in Column C date to 9/1/2000, a peak in the S&P 500 Index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 26
Week 173 - Why Vanguard?
Situation: Warren Buffett, in his Annual Report to Berkshire Hathaway investors this spring, included a “letter” to his relatives. It recommended that they structure investments in their “trusts” as follows: 90% in the Vanguard index fund dedicated to the S&P 500 Index (VFINX) or the index fund dedicated to the total US stock market (VTSMX), and 10% in the Vanguard managed fund dedicated to short-term US Treasury Notes (VFISX). His main concern was to minimize their investment costs while tracking stock market returns.
Our readers aren’t as rich as his relatives. So, we suggest that you back your stock investments 1:1 with US Treasury Notes & Bonds, other AAA-rated bonds, Savings Bonds, or the Vanguard Intermediate-term Treasury Fund (VFITX). In other words, the most prudent long-term investment balances large-capitalization US stocks with risk-free AAA bonds. And by “long-term”, we mean that you intend to hold your investment for at least 20 yrs in anticipation of using it for retirement purposes. Our benchmark for “Risk-On” investors is the Vanguard Balanced Index Fund (VBINX), which is composed 60% of a capitalization-weighted index of the total US stock market and 40% of an investment-grade US bond index (mainly US Treasuries). For “Risk-Off” investors, our benchmark is Vanguard’s Wellesley Income Fund (VWINX), which is 60% bonds and 40% stocks. “Risk-Off” investors are those who have moved closer to drawing on retirement income and have less investment time available to recover from market fluctuations.
When calculating your 1:1 stock:bond balance, remember to include the present value of your Social Security account, which would be $164,000 if you were to qualify today for a beginning payout of $2000/mo and were to receive monthly payouts for the next 11 yrs, assuming a discount rate of 5.6%. That discount rate is the sum of the “risk-free” rate (2.6% interest on a 10-yr Treasury Note) and “risk” (i.e., inflation, as reflected in a 3.0%/yr estimated annual cost-of-living adjustment). Total payments would amount to almost $305,000 over 11 yrs, with a monthly payment of $2636 in the 11th yr.
We need to draw attention now to the costs that are associated with investment accounts. How important are those costs? Well, the standard rule of thumb for business accountants is to note any cost as being “material” if it represents more than 5% of revenues or earnings. Upon noting said cost, the accountant will delve deeper to determine whether it is justified. Using that guideline, let’s look at the past 100 yrs of returns from owning 10-yr Treasury Notes and reinvesting interest payments vs. owning shares of the S&P 500 Index and re-investing dividend payments. Over that 100 yr period of time, the key facts are:
1) Inflation averaged 3.22%/yr;
2) Total returns on 10-yr Treasury Notes averaged 5.05%/yr (1.83% after inflation);
3) Total returns on the S&P 500 Index averaged 10.16%/yr (6.94% after inflation);
4) Total after inflation returns for our recommended 50:50 allocation averaged 4.39%/yr;
5) Therefore, transaction costs (expenses) become material when the expense ratio reaches 0.22%/yr, which would bring the after inflation total return down to 4.17%/yr;
6) The relevant Vanguard funds are VFITX (intermediate-term Treasuries) with an expense ratio of 0.20%/yr, and VFINX (S&P 500 Index) with an expense ratio of 0.17%. Both of those expense ratios are less than 0.22%/yr, so transaction costs are immaterial.
Vanguard index funds were invented by John Bogle to provide retail investors with market-tracking investments that have immaterial transaction costs. (The only remaining costs are taxes and inflation.) The issue that concerns Mr. Bogle is that the average retail investor has an expense ratio of 2.2%/yr, which is 10 times too much! That is the reason why Warren Buffett thinks so many investors are being disappointed. Half of their after-inflation returns are being eaten up by costs, 90% of which can be eliminated by sticking to Vanguard index funds.
Treasury Notes don't provide interest payouts that grow faster than inflation, but Vanguard's S&P 500 index fund (VFINX) has grown its dividend payout 4.7%/yr since 1980, which is 1.5%/yr faster than inflation over that 34-yr period. However, those payouts bounce around a lot because ~150 companies don’t pay a dividend. Only about 150 increase their dividend annually.
Now you have the explanation why the purpose of this blog is to interest you in buying stock monthly (online) in selected companies that have increased their payout for at least 10 yrs at a rate 3-4 times faster than inflation. Some of those companies charge no transaction costs for automatic monthly investments (see Week 162). Examples include NextEra Energy (NEE), Abbott Laboratories (ABT), and ExxonMobil (XOM) for shares purchased through computershare.
Bottom Line: Here at ITR, we stress two things: minimizing transaction costs and maximizing retirement income. For this week’s Table, we’ve used our “Risk-On” benchmark (VBINX) supplemented with Vanguard’s intermediate-term Treasury fund (VFITX) to construct a 50:50 stock:bond fund, i.e., 75% VBINX and 25% VFITX. By having 25% invested in a Treasury bond fund, you’ll have an investment that goes up in value during a recession, and also provide a way to pay for unforeseen emergencies that often crop up during a recession. Alternatively, you can invest in the Vanguard Wellesley Income Fund, or a 50:50 mix of the Vanguard 500 Index Fund (VFINX) and the Vanguard Intermediate-term Treasury Fund (VFITX). All 3 of these options are worry-free and track the markets in a manner that gives you protection from a crash in the stock market. Plus, you don’t have to fiddle with picking stocks and the added complexity they bring to paying taxes.
Risk Rating: 4.
Full Disclosure: I invest monthly in inflation-protected Savings Bonds at and in NEE and ABT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Our readers aren’t as rich as his relatives. So, we suggest that you back your stock investments 1:1 with US Treasury Notes & Bonds, other AAA-rated bonds, Savings Bonds, or the Vanguard Intermediate-term Treasury Fund (VFITX). In other words, the most prudent long-term investment balances large-capitalization US stocks with risk-free AAA bonds. And by “long-term”, we mean that you intend to hold your investment for at least 20 yrs in anticipation of using it for retirement purposes. Our benchmark for “Risk-On” investors is the Vanguard Balanced Index Fund (VBINX), which is composed 60% of a capitalization-weighted index of the total US stock market and 40% of an investment-grade US bond index (mainly US Treasuries). For “Risk-Off” investors, our benchmark is Vanguard’s Wellesley Income Fund (VWINX), which is 60% bonds and 40% stocks. “Risk-Off” investors are those who have moved closer to drawing on retirement income and have less investment time available to recover from market fluctuations.
When calculating your 1:1 stock:bond balance, remember to include the present value of your Social Security account, which would be $164,000 if you were to qualify today for a beginning payout of $2000/mo and were to receive monthly payouts for the next 11 yrs, assuming a discount rate of 5.6%. That discount rate is the sum of the “risk-free” rate (2.6% interest on a 10-yr Treasury Note) and “risk” (i.e., inflation, as reflected in a 3.0%/yr estimated annual cost-of-living adjustment). Total payments would amount to almost $305,000 over 11 yrs, with a monthly payment of $2636 in the 11th yr.
We need to draw attention now to the costs that are associated with investment accounts. How important are those costs? Well, the standard rule of thumb for business accountants is to note any cost as being “material” if it represents more than 5% of revenues or earnings. Upon noting said cost, the accountant will delve deeper to determine whether it is justified. Using that guideline, let’s look at the past 100 yrs of returns from owning 10-yr Treasury Notes and reinvesting interest payments vs. owning shares of the S&P 500 Index and re-investing dividend payments. Over that 100 yr period of time, the key facts are:
1) Inflation averaged 3.22%/yr;
2) Total returns on 10-yr Treasury Notes averaged 5.05%/yr (1.83% after inflation);
3) Total returns on the S&P 500 Index averaged 10.16%/yr (6.94% after inflation);
4) Total after inflation returns for our recommended 50:50 allocation averaged 4.39%/yr;
5) Therefore, transaction costs (expenses) become material when the expense ratio reaches 0.22%/yr, which would bring the after inflation total return down to 4.17%/yr;
6) The relevant Vanguard funds are VFITX (intermediate-term Treasuries) with an expense ratio of 0.20%/yr, and VFINX (S&P 500 Index) with an expense ratio of 0.17%. Both of those expense ratios are less than 0.22%/yr, so transaction costs are immaterial.
Vanguard index funds were invented by John Bogle to provide retail investors with market-tracking investments that have immaterial transaction costs. (The only remaining costs are taxes and inflation.) The issue that concerns Mr. Bogle is that the average retail investor has an expense ratio of 2.2%/yr, which is 10 times too much! That is the reason why Warren Buffett thinks so many investors are being disappointed. Half of their after-inflation returns are being eaten up by costs, 90% of which can be eliminated by sticking to Vanguard index funds.
Treasury Notes don't provide interest payouts that grow faster than inflation, but Vanguard's S&P 500 index fund (VFINX) has grown its dividend payout 4.7%/yr since 1980, which is 1.5%/yr faster than inflation over that 34-yr period. However, those payouts bounce around a lot because ~150 companies don’t pay a dividend. Only about 150 increase their dividend annually.
Now you have the explanation why the purpose of this blog is to interest you in buying stock monthly (online) in selected companies that have increased their payout for at least 10 yrs at a rate 3-4 times faster than inflation. Some of those companies charge no transaction costs for automatic monthly investments (see Week 162). Examples include NextEra Energy (NEE), Abbott Laboratories (ABT), and ExxonMobil (XOM) for shares purchased through computershare.
Bottom Line: Here at ITR, we stress two things: minimizing transaction costs and maximizing retirement income. For this week’s Table, we’ve used our “Risk-On” benchmark (VBINX) supplemented with Vanguard’s intermediate-term Treasury fund (VFITX) to construct a 50:50 stock:bond fund, i.e., 75% VBINX and 25% VFITX. By having 25% invested in a Treasury bond fund, you’ll have an investment that goes up in value during a recession, and also provide a way to pay for unforeseen emergencies that often crop up during a recession. Alternatively, you can invest in the Vanguard Wellesley Income Fund, or a 50:50 mix of the Vanguard 500 Index Fund (VFINX) and the Vanguard Intermediate-term Treasury Fund (VFITX). All 3 of these options are worry-free and track the markets in a manner that gives you protection from a crash in the stock market. Plus, you don’t have to fiddle with picking stocks and the added complexity they bring to paying taxes.
Risk Rating: 4.
Full Disclosure: I invest monthly in inflation-protected Savings Bonds at and in NEE and ABT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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