Each week I update my portfolios and post them on this blog.  Every investor struggles to find the right way for them to save for retirement.  This week is no different, I have posted the updates to all my portfolios.  In this post, I expand on the investing options available for people who are trying to decide how to invest their hard earned savings.

• Actively managed portfolios
• Mutual Funds
• ETF's
• Do it yourself disciplined investing

Active Investing:

I am not a fan of active investing because I have seen the effects of investors trying to time the market.   I cannot tell you how many will sell at the lows and buy at the highs.  These people are always worried about missing the next run up just to cave when the market gets hammered like in 2009.   They see another investor make a ton of money on some high flying stock and want to get in on the action.  Active management is analyzed by experts all the time and rarely does it beat the performance of the S&P 500.

Investopedia provides a very good review of active versus passive investing in this article:  http://www.investopedia.com/articles/mutualfund/05/activepassive.asp

Mutual Funds:

I am also not a fan of mutual funds. Look some mutual funds have done pretty well but they have a lot of cost built in.  Up front fees, ongoing 12 B-1 fees, and redemption fees eat into results.  These funds may be actively managed and some are leveraged.  Some funds are funds of funds which just multiply the costs.

Investors who want to invest in a specific area like small cap. stock,  gold, or South America, or some other very specific sector, mutual funds may be the best alternative.  But I write for income investors; investors who want to retire with income that grows and mutual funds are not the best vehicles.

ETF's:

Ben Stein and John Bogle speak about the superior performance of ETF's over active management or mutual funds.  I agree with them.  Three ETF's that I like are SPY, SDY, and VIG.   Other funds exist that are similar but few come with the extra low costs of these three ETF's.

SPY is a proxy for the entire S&P 500.  The stocks in that ETF pay dividends and those are passed on to you the investor.  SPY's yield as calculated by the SEC (Security and Exchange  Commission) is 2.01%.  Fees on this ETF are .10%.

When the market goes up this ETF will go up with it as it is so diversified.  However, when the overall market goes down, this ETF will follow suit.

Periodically, the S&P 500 shuffles the stocks in the index.  When this happens the SPY has to buy and sell stocks to stay in simile with the S&P 500.  The selling may generate capital gains and each year those gains are passed onto the ETF holder.

The charts below come from Market Watch



SDY is a subset of the S&P 500 and is designed to include stocks that pay a higher than average dividend.  About 100 stocks are in this ETF.   SDY's yield is 2.58% and their expense ratio is .35%.  Picking the 100 stocks is less passive than the SPY which is why the cost is a bit higher and so is the yield.  Like SPY when the 100 stocks are changed, any capital gain is passed onto the investor.  In 2016 SDY paid $.313485 in capital gains and in 2015 those distributed gains were $2.609.

The charts below come from Market Watch



VIG is an ETF run by Vanguard funds and this ETF concentrates not just on stocks that pay dividends but on stocks that pay dividends that grow. VIG's dividend yield is 2.14%. VIG's expenses are very low at .09%.  In 2014 VIG paid $1.585 in dividends and in 2016 it paid $1.826.   This represents a dividend growth over two years of 15.2% or 7.5% per year.  Every retired investor would like that kind of income growth.

The Charts below come from Market Watch

Do it Yourself Dividend Investing: 

 

I have always been a do it yourself investor.  First of all when I started investing, ETF's were not available and mutual funds (full disclosure I did own some of these) were even more expensive than they are now.

Over my many years of investing my own money and that of my clients, I learned a disciplined approach to picking stocks and then sticking with those stocks can yield better returns at lower costs than any of the above approaches.

My portfolios are listed below.  I compare them with the results of SDY and VIG.  Each time I bought a stock, I tracked what would have happened had I invested the same amount of money in SDY or VIG.  So when I invested say $10,000 on a given stock on a given day I recorded the number of shares of SDY and VIG that same $10,000 would buy and then I tracked all three to see how we did.

2014 is the only portfolio that lags SDY.  All the other portfolios of stocks deliver more dividends, more dividend growth and better capital gains.   Expenses:  once the initial commission is paid, expenses are $0.  You can't be much more efficient than that.

The table below presents all my Dividend portfolios.

Conclusion:  

 

Investors today are quite fortunate to have multiple investing options available.  Instead of trying to get cute with target date funds, or funds of funds you have two very good options.   Learn how to use a specific approach to selecting stocks to build your portfolio and stick to it through thick and thin or use a combination of SPY, SDY, and VIG to create your retirement portfolio, then watch it grow.  Reinvest the dividends and capital gains while you still work then turn them on as income when you retire.

M* MoneyMadam

 Disclosure:  Long SPY, SDY and VIG as well as the stocks listed in my portfolios

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ETF versus Semi - Active Managed Income Portfolios

The purpose of this post is to present a simple comparison of two income investing strategies.  One strategy is totally passive and employs two well respected ETF’s.    The other strategy uses individual stock picking.  I call that strategy a “semi-active managed” strategy.  Every stock selected in the semi-active strategy is held no matter what.  All spin offs and splits are included in the portfolio.  In that way, it is semi-actively managed as a long only portfolio with no trades.

Accumulate over five years

Beginning in November, 2010 and continuing for the next 12 months, I added one stock per week to the “semi-active” portfolio.  I used my standard four criteria of dividend yield 3% or greater, EPS (earnings per share) greater than dividend paid out, history of dividend increases and D/E (debt to equity ratio) of 1 or less or equal to industry standard.  This is called the 2011 model portfolio. 

Simultaneously, I created two parallel portfolios using SDY and VIG two ETF’s with similar goals to my portfolio.  I added the number of shares of these two ETF’s equal to the amount invested in a given stock.

For instance, the very first stock I picked was Microchip Technology, MCHP.  This stock was added on November 12, 2010 at a basis of $33.55.  The post was published on November 14, 2011.    http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html

Simultaneously, I started the SDY and VIG portfolios.  I needed a bench mark against which to compare my portfolio and I chose SDY an ETF that concentrates on dividend income and VIG which concentrates on dividend increases.   SDY on November 12, 2010 closed at $51.37.  I added 65.437878 shares of SDY equal to the $3,355 invested into MCHP.   VIG closed at $50.60 and I added 66.304 shares also equal to the $3,355 invested into MCHP.

I continued these multiple channels of investing over five years.  The total basis is $710,000 in all three portfolios M* (my stock picks), SDY and VIG.

Capital Gain Results

The table below shows the result of holding these three portfolios as of midday (1:32PM Eastern time) on September 20, 2016.

You can see that all portfolios performed quite well.  Picking stocks did beat both SDY and VIG by between 8 and 10 percent.   Actual dollar difference is between $58,000 and $72,000 over the five years.

Will having an average of $65,000 more in your portfolio make a difference in five years?  Only you can determine that.  However, I find solace and comfort in all three approaches.   I have often encouraged people who do not have the time to invest by themselves and do know how to direct an investment adviser or cannot find one they trust, to use these two ETF’s and now I feel good about the results.

Readers have to consider that these five years have been very good to equity investors as well as bond investors.  It was hard to lose money over these five years.

As one of my former clients recently told me “I don’t expect to beat the market, I just want to at least keep up.”  All three portfolios “kept up.”

Dividend Increases

As I am an income investor first and foremost, I like capital gains but I really like income increases.   Trust me, your expenses will double every 20 years so if you expect to retire at 60 and live to be 100, your expenses will double twice.   Let’s see how these two approaches did on income increases.

Comparing dividend increases is a complicated task.  You don’t buy everything at the closing price on 12/31 of a given year and then look at how that holding performed using 12/31 values of the next year.  This is how the experts track mutual funds etc.   You buy every week or every month sometimes you wait 90 days for the first dividend.  I tried to simplify the process as you can see in the table below.

The table above shows that VIG is the winner on dividend increases.  SDY is the loser and M* came in second.   To be fair to SDY, I used only dividend payments in this analysis.  Keep in mind that SDY also delivered some healthy capital gain distributions in 2014 and 2015.   My 2011 portfolio suffers because several stocks were bought out and that cash sits in the portfolio (no transactions allowed in order to report good data) not creating any income or capital gain.

Conclusion:

For me, I prefer using my four criteria (which I adjust and update each year) to pick income stocks for the majority of my income investing portfolio.  However, in certain accounts that have limited investment options like my Health Savings Account, I use SDY and VIG in equal amounts for my investments.

M* MoneyMadam

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