Dividend Account results – 1st qtr 2020

I’ve been tracking my dividend/income account for some time, to see how I could create an income stream out of my investments, rather than just depending on growth stocks and selling them off as I move through retirement and use my  bucket system. The old traditional way was to use dividend paying stocks and bonds to live on (reinvesting some of them to keep up with inflation).

This worked for many years, until the dot.com bust and the “great recession,” when the US Fed dropped interest rates to try and keep the economy out of recession and to fend off deflation – A terrible economic situation, where prices tomorrow will be cheaper than today. When you get a continuous time period of deflation (see America’s great depression of the 1930s) its hard to get the economic engine going again. Folks wait to purchase, because it will be cheaper tomorrow.

Well, due to low interest rates, US stock dividends and bond dividends have been small pickings, and the result is difficulty for folks who want to follow traditional ways of investing their retirement money and drawing down. As I noted at the beginning of the year, my attempts haven’t been that good.

In the early part of the year, I chose to ditch my bonds in the account (which made up 50% of it) and go to a 50/50 split of dividend stocks and REITs. Yes, I know, great timing! So how has it gone for the first quarter? Not bad from a dividend standpoint, but sucky from a stock value standpoint.

Dividend Account
stockDetailsInvestment valueAnnual YieldDividend
CSCOCisco Systems$5,870.253.58%$52.50
XOMExxon Mobil$3,971.008.76%$87.00
HRHealthcare Realty$12,570.004.77%$150.00
IBMInternational Business Machines$5,400.006.00%$81.00
ORealty Income Corp (REIT)$9,086.005.10%$115.75
SVCServices PPTYS TR$2,604.0024.88%$162.00
MMM3M Company$4,035.302.91%$29.40
UMHUMH Properties$10,802.007.33%$198.00
 Bonds  $132.95

So I cashed in $1,414 in dividends in 1st qtr 2020 versus only getting $1,192 in 1st quarter 2019 – an 18.6% increase in income (not too shabby). However, 1st qtr 2019 investments were worth $132,151, so that was painful. However, if the objective was to get and live off the income, I could let the investments sit there and move back up. I’m not sure if these companies will cut their dividends in the new year, we’ll have to see.

So the experiment continues.  Right now, I still think investing in index funds and going for growth is the better way to go, and that is where the lions share of my investments are.

Othalafehu dividend performance for 1st qtr

Mr. 39 Months

Timing the Market – is now the time to go “All In?”

Like most experienced FIRE investors, I don’t see the recent market “correction” as a disaster – I see it as a buying opportunity! The stock market is the only place where people go into despair when things go on sale. Very odd.

I wrote about the potential for a market correction back at the beginning of the year. At that time, the market timing signals laid out by Ben Stein were heavily weighted towards “do not buy additional stocks.” Note that this didn’t say to sell stocks, only that purchasing additional ones at the inflated prices of Jan 2020 was unwise. In this case, it appears the market timing had some validity.

So now that the market has fallen 30%+, I’m interested in potentially changing my current investment allocation, and purchasing more stock now that it has fallen, and reduce my new investments in bonds. Again, the idea is not to sell your current investments, but to guide you on what to purchase going forward. So what do the tea leaves of market timing say?

If you remember there were four categories of the timing:

  1. Price (Current price of S&P500 vs 15 year trend): For March 17th the S&P500 was at 2,529 vs. a 15-year average of 2,030. The signal is that stocks are still too high, so NO  to new stock investments
  2. P/E Ratio (Current S&P 500 P/E ratio vs 15-year trend): For March 17th, the assumed P&E was 19.03 vs. a 15-year average of 23.4. Since the current P/E is lower, this signal says Yes to new stock purchases
  3. Dividend yield of S&P500 vs 15-year average: For Feb 2019, the dividend yield was 1.97% vs. a 15-year average of 2.05%, so this signal says No to new stock investments
  4. Earnings of S&P500 vs. AAA corporate bond (stock earnings “yield” vs. yield of AAA bonds): For March 17th, the P/E ratio is 19.03, or the equivalent of a 5.25% yield (1/19.03) vs. a current AAA bond yield of 2.94% – thus the stocks are providing a better earnings yield than AAA corporate bonds. This signal says Yes to new stock purchases.

So we are 50/50 on the potential for new stock purchases. It appears the signal is saying that stocks still may be overpriced, even after a 30%+ sell off.

So what to do? I was originally thinking of changing my new investment allocations and going for a 100% stock purchases for new 401K and brokerage account purchases. Now that I’ve run the numbers, I think I’ll stick with my current allocation, and just go with that.

Also, if you remember, I changed my income account from a 25% stock, 25% REIT and 50% bond allocation to a 50% stock/50% REIT allocation – just in time to get hit with this massive sell off. This decision was a completely emotional decision, not based on a lot of analysis. So I’m not very confident in my ability to make decisions without firm analysis and numbers – my emotions seem to be 100% off.

So I’ll keep my current investment allocations (30% bonds, 17.5% REITs, 52.5% stocks in S&P500, small cap and foreign). I believe the market will recover one we get this Corona/Wuhan Flu out of our system.

Retirement Manifesto: Benefits of a Bear Market

Hopefully you are all weathering the storm alright!

Mr. 39 Months

Changes to Income Account due to four years of lessons

AS you know, I have been using my father’s inherited stretch IRA to experiment with creating an income generating account. It is similar to what folks used back in the day for their retirement – using stock and bond dividends to create a stream of income, and one with lower taxes (due to the lower taxes charged on dividend income).

I have been following the results of the account since I started it in late 2015, and after four years, here are some of the results.

Asset % of Portfolio Annual Growth Annual Dividends Total Annual Returns
Income Stocks 25% 10.4% 4.4% 14.8%
REITs 25% 13.0% 5.1% 18.1%
Bonds 50% 3.3% 2.1% 5.4%

As you can see, the Stocks and REITs have paid a significant amount out over the last four years, even with the dip in 2018. Even their dividends have beaten the yield of the bond funds. A lot of this is due to the low interest rates currently being paid on the market, and unfortunately, I do not see much relief on the horizon for this. Even if rates did start going up, it would penalize existing bonds, due to their lower bond rates (i.e. why buy a 2% bond from 2019, when I can get a 3%+ bond in 2021?)

After a lot of soul-searching over the holiday season, I have decided to walk away from bonds in my investment portfolio for income. I know a lot of you will be saying “about time!” in this regard, but I felt I wanted to experiment and learn from this. I believe four years of getting sub-standard income returns is enough here.

Therefore, I have gone back to my broker and re-adjusted the plan.

  • Going with a 50/50 split between stocks and REITs
  • Going to keep my iShares (PFF), even though their growth has not been as good as other income stocks. That is because their dividend is very high (it has averaged a 7.2% yield year-over-year, and a 7.5% growth, so it’s about the same as my 14.8% average for stocks)
  • Going to try the “dogs of the Dow” strategy, where every year you start with the ten stocks in the Dow 30 who have the highest yields. This should be because their stock price is down in comparison to the dividends they pay. The idea is that, over the year, they should bounce back to the average yield of the Dow, which means the stocks will go up, while the dividend stays the same (or goes higher)
  • The “Dogs of the Dow” strategy calls for you to review at the end of the year, sell the stocks that are no longer in the top 10 for yield, and buy the new ones.

Based on this, my stock purchases will be equal dollar amounts:

Stock Current Price  Est. Dividend Yield
Dow  $    47.18  $       2.80 5.93%
ExxonMobil  $    64.74  $       3.60 5.56%
IBM  $  138.62  $       6.63 4.78%
Chevron  $  110.39  $       5.00 4.53%
Verizon Communications  $    59.91  $       2.49 4.15%
Pfizer  $    40.16  $       1.52 3.78%
Walgreens Boots Alliance  $    52.23  $       1.87 3.57%
3M  $  175.63  $       6.06 3.45%
Cisco Systems  $    47.47  $       1.52 3.20%
Caterpillar  $  135.73  $       4.27 3.15%

I will report on how this is going over the year.

Mr. 39 Months

Correction Coming? Timing the Market in 2020

I have written several times about the potential of timing the market, using a variety of methods. My favorite approach would be the one Ben Stein and Phil DeMuth came up with after the dot.Com blowup in 2000. I even went back and charted how I would have done if I had followed their advice since I had graduated (back in 1986 – yep, I’m an old man).

For a lot of folks, the giant returns of 2019 were a godsend after having suffered a downturn in 2018. It helped plump back up everyone’s retirement accounts and personal savings, and better place them for retiring early. Yet now there is that nagging fear that we’ll have a correction, and we will lose all those wonderful gains that we had. This also raises the specter of “sequence of return risk,” where you retire right as the market tanks (or stays flat for a decade+). So what is a person to do?

I looked at my “market timing” stats for 2019 and 2020 and here is what they said:

  1. Price (Current price of S&P500 vs 15 year trend): Jan 2019: No to stocks, Jan 2020: No to stocks
  2. P/E Ratio (Current S&P 500 P/E ratio vs 15-year trend): Jan 2019: Yes to stocks, Jan 2020: No to stocks
  3. Dividend yield of S&P500 vs 15-year average: Jan 2019: Yes to stocks, Jan 2020: No to stocks
  4. Earnings of S&P500 vs. AAA corporate bond (stock earnings “yield” vs. yield of AAA bonds): Jan 2019: Yes to stocks, Jan 2020: Yes to stocks

So in Jan 2019, 3 of the 4 indicators said to purchase stocks, while in Jan 2020, 3 of the 4 are saying invest in bonds. Looks to me like stocks aren’t set up to do great in 2020.

Now remember, these timing stats did not say to sell your stocks/bonds, they just say that for that period, you just concentrate your new purchases on the appropriate category.

As I’ve stated before, I’m a firm believer in the “buy and hold” strategy, keeping with your market allocation, and rebalancing regularly (for me every 6 months) in order to keep your allocation within your guidelines. While some folks may have enjoyed higher returns over a set period of time, this method has met my objectives and allowed me to grow my net worth significantly.

So will there be a correction in 2020? In almost every election year, the market has done OK (with the exception of 2008, when it melted down spectacularly). However, I’ve been growing my net worth at an average of 6.1% per year for the last 14 years – and based on that I would need my investments to lose 9.5% in 2020 in order to maintain that 6.1% growth rate. Take of that, what you will.

My thought is that 2020 will be a “net 0” year, with limited gains in the market. Stocks are overpriced if you look at the metrics above, so it will take them some time for the profits to catch up with the price. My intention is to “stick with the plan” of investing regularly, keeping my allocation, and rebalancing.

What are you plans for 2020?

Mr. 39 Months

Dividend/Income Account Update

I wrote in July about the performance of my dividend/income account, the one that I have setup in my father’s stretch IRA. The concept was to see what I could do with an income-oriented account (dividends, etc.). Could we get the growth and income necessary to meet our retirement goals, and how did it do in comparison to the Vanguard account I had with the simple allocation?

The base allocation for the income account was 25% dividend paying stocks, 25% REITs (paying good dividends) and 50% Bonds. This was all based on the information in the book “Yes, you can be an income investor” by Ben Stein.

For the year, the account returned a healthy 3.51% dividend return, and growth of around 9.7%. Not too shabby! However, this is in comparison to my Vanguard IRA account, which had a 2.86% dividend, and a 16.51% growth rate. Obviously, the Vanguard account, with its higher weighting of stocks (52.5% stocks, 17.5% REITs, 30% bonds) did better in 2019.

One of the things I noticed, however, was that the income account didn’t drop as precipitously as the Vanguard account in the bear market of 2018. How have the two different accounts done over the last three years?

The Vanguard numbers are a little “screwy” as I have had to add back in the $90K of Roth-IRA conversions that I did in 2018 and 2019, and the Stretch IRA I have to take about $5K out each year for tax purposes. I’ve adjusted the totals and percentages to reflect this.

For comparison, I did the math for if you had invested $1000K in 2016, what would that be at the end of 2019. As of Jan 1, 2020, the Stretch IRA would have $1,232, while the Vanguard account would have $1,321 – the Vanguard account’s return was better. It wasn’t like that at the end of 2018, due to the stock drop.

My intention is to continue to keep the money in my father’s stretch IRA oriented on income, as a learning tool. Should be interesting.

Good post at Retire by 40 on his dividend portfolio

Mr. 39 Months

Previous Updates:

Update on my income account

As many of you know, I’ve used my father’s inherited IRA to experiment with an income producing method of investing similar to the “old school” way that folks invested their money after retirement. This was laid out in Ben Stein’s book “Yes, you can become a successful income investor.” The idea was to create a method to generate enough income from the portfolio to live off of, without touching the principal (thereby letting it grow).

I detailed in a later post that, for the last 2-1/2 years, the stretch IRA was beating my vanguard allocation. I did note that this took into account the terrible 2018 year, which beat the Vanguard account down more than the income account. Over time, all my reading shows that the Vanguard account would do better – but be more volatile.

For the last three months, the account has not increase that much in value, but it has continued to throw off dividends. Investment value grew $2,194 for the six months (while the market was pretty stagnant), 1.7% (or 6.7% annual growth) while also throwing off $1,256.94 in dividends – the equivalent of 3.75% annual yield.

stock Details 1-Jul 1-Oct Yield Dividend
CVX Chevron $6,222.00 $5,614.50 4.24% $59.50
CSCO Cisco Systems $8,209.50 $6,984.00 3.01% $52.50
HR Healthcare Realty $7,830.00 $8,312.00 3.61% $75.00
PFF iShares $16,766.75 $16,912.35 5.24% $221.49
O Realty Income Corp (REIT) $6,897.00 $7,673.00 3.54% $67.95
SVC Hospitality Properties Trust $7,500.00 $7,498.50 8.64% $162.00
UMH UMH Properties $7,446.00 $8,622.00 5.01% $108.00
VZ Verizon $5,713.00 $5,891.00 4.09% $60.25
VBTLX Vanguard Total Bond Market Index $32,621.94 $33,248.71 2.69% $223.25
VBILX Vanguard Int-term Bond Index $32,787.96 $33,432.51 2.72% $227.00
$131,994.15 $134,188.57 3.75% $1,256.94

Not too shabby! Basically, its close to hitting the 4% withdrawal figure, while still growing sufficiently to keep up with inflation. What is interesting is that, while the stocks declined a lot (look at Chevron & Cisco) the other items (REITs,  bonds) helped to cushion the blow.

I’ll continue to monitor and see how this goes.

Mr. 39 Months

Timing the Market – Update for Aug 2019

Back two years ago, I reviewed Ben Stein’s & Phil DeMuth’s book “Yes You can time the Market” in which they discussed ways  to time the market over the long term, using various signals signs to determine the long term (15 year trend) of the market. They definitely did not believe in short-term timing, but they did present a good case for how to look at the current state and make long-term determinations.

I followed up with several other posts in which I looked at short-term timing, and at what Stein/DeMuth’s strategy would have resulted if I had followed it since graduating college in 1986 (answer, I would have been 5% – 10% richer over a 30 year period, including the dot.com crash).

I thought I’d provide a slight update to folks in case they were interested.

If you remember, Stein/DeMuth had four key measurements to determine the long-term direction of the market:

  1. Price vs 15-year average
  2. Price-to-earnings ratio vs. 15-year average
  3. Dividend yield vs. 15-year average
  4. Bond yeld vs Dividend yield

For Jan 1, 2018, the numbers showed:

  • Price (adjusted for inflation) of $2,883 vs 15 year avg of $1,789 – don’t buy stock
  • P/E ratio: 24.97 vs 15-year average of 23.2 – don’t buy stock
  • Dividend Yield: 1.83% vs. 15-year average of 1.99% – don’t buy stock
  • Earnings Yield (inverse of P/E) vs. AAA bond yield: 4.0% vs 3.5% – buy stock

So three out of the four metrics said don’t buy. The S&P 500 for 2018 was down -6.2% (source CNBC). A lot of folks paid money for stocks that were overpriced at the beginning of 2018.

So what did Jan 2019 look like?

  • Price (adjusted for inflation) of $2,654 vs 15 year avg of $1,862 – don’t buy stock
  • P/E ratio: 19.6 vs 15-year average of 23.0 – Buy Stock
  • Dividend Yield: 2.14% vs. 15-year average of 2.03% – Buy Stock
  • Earnings Yield (inverse of P/E) vs. AAA bond yield: 5.1% vs 3.98% – Buy Stock

So three out of the four metrics say “buy stocks” – and the market is up 15.23% year-to-date

Does this prove that Ben Stein and Phil DeMuth’s market timing strategy is still valid. It appears to be still going well.

Anybody out there with an interesting market timing strategy?

Mr. 39 months

Status update of my income account investments vs. regular investments

Some folks have been asking how my income account has been doing overall, especially in comparison to the market. If you remember, I wrote about setting this up back in May of 2017. Using the concepts outlined in Ben Stein’s book “Yes you can be a successful income investor”, I created an account specifically designed to throw off dividends, in an attempt to see if one could create a retirement with this sort of setup. The hope was that the account would throw off sufficient income, and still grow to match inflation.

So how has it done for the last several years? Because it’s an inherited IRA, I have to take money out of it every year, based on my age at the time my father passed away. I will factor that in. I’ll compare the performance to my overall investments in one of my IRAs (which contains a mix of 52.5% stocks, 17.5% REITs, and 30% bonds).

Year Strech IRA Dec Strech IRA Yield Strech IRA Growth % Vanguard Dec Vanguard Yield Vanguard Growth % US inflation rate
2016 $129,811 3.42% 0.00% $262,985 2.20% 0.00% 2.10%
2017 $139,119 3.37% 3.80% $298,748 2.42% 11.18% 2.10%
2018 $136,583 3.62% -5.44% $234,647 3.22% -24.68% 1.90%
2019 $146,994 3.75% 3.87% $273,917 2.33% 14.41% TBD

Overall, the stretch IRA’s allocation of 25% dividend stocks, 25% REITs and 50% bonds have thrown off an average of 3.58% dividends annually, and has grown from Dec 2016 to July 2019 at a rate of 2.50% (pretty much keeping up with the US’s low inflation rate).

The Vanguard account has had a dividend yield of around 2.66% (not too shabby), but due to the bad 2017, it has grown at a negative -3.81% for the same time period. However, its growth over the last ten years has probably put the dividend account to shame. If you look at the spreadsheet above, the Vanguard account beat the stuffing out of the Dividend account in 2017 (and appears to be doing it in 2019)

The question comes down to are you willing to have some “low points” like 2018, to get the higher growth periods, or do you want more stability, where it doesn’t crash as much (compare 2018’s -5.44% drop in the dividend account versus the -24.68% in the Vanguard account!). I’d like to think that you could get by with the dividend account once you hit FI and want to follow the 4% rule, but like most folks, I’m very concerned about inflation. The Weimar republic is a brutal lesson, and the US continues to spend way more than it takes in.

For folks who want to know, here is a quick rundown of my dividend account:

Chevron Corp CVX  $               124.44 50.0
Cisco CSCO  $                  54.73 150.0
Healthcare Realty Trust HR  $                  31.32 250.0
Hospitality Properties Trust HPT  $                  25.00 300.0
Ishares Preferred PFF  $                  36.85 455.0
Realty Income Corp O  $                  68.97 100.0
UMH Properties Inc UMH  $                  12.41 600.0
Verizon VZ  $                  57.13 100.0
Vanguard Total Bond Index VBTLX  $                  10.93 2984.6
Vanguard Int-term Bond index VBILX  $                  11.70 2802.4

Hopefully, this is useful to folks. I’ll continue to monitor in the years ahead and provide regular updates.

Have a great summer!

Mr. 39 Months

The benefits of “Stay the Course”

Checked out the S&P 500 this morning. It’s a typical bellwether on how markets are doing, and many people have their investments tied to it, via an S&P500 Index fund. So it is a good judge of how I’m doing with my investments.

As you remember from numerous postings, I have not really let 2018’s market downturns affect my investing strategy. The idea was always to “stick  to the plan” and continue to invest via dollar cost averaging. This has been shown in numerous studies to be the most effective investment strategy.

Well, in checking the S&P 500, what did I find? In Feb 2018, the S&P 500 was as $2,619.55. One year later, the same index is at 2,728.40. Yup, up 4.15% over the last 12 months. Thus, the S&P500 finally dug itself out of the hole it dropped into early last year. By staying the course (and buying a lot of investments “on the cheap” back in 2018) I was able to recover. This also doesn’t take into account the dividends that my investments paid over this same time.

Other posts are dealing with market declines

Mr. 39 Months

Update on Value Investing Portfolio

I went through my value investing choices in my “fun money” account, and reviewed them for performance. If you remember, this account is around 5% of my total invested assets (the majority of them are in straight index funds, allocated over stocks, bonds & REITs). With this account, I sought to experiment with investing in value stocks, based on the writings of Graham, Buffet and other value stock disciples. I wrote two articles on that back in 2017.

The general tenets of the analysis, I broke down into several categories of analysis for each stock:

  1. Market value greater than $2 Billion (Strength)
  2. Current ratio (current assets/current liabilities) of 2-1 or greater
  3. Positive earnings in each of the last 10 years
  4. Paid dividend at least 20 years, and raised over last 20 years
  5. Increased earnings per share by at least 1/3 over 10 years
  6. P/E of 15 or less
  7. Price-to-book of 2.5 or less
  8. Return on Equity of 15% or more, and growing

Not every stock can have all of these, but they should have the majority (and be trending in the right direction). Most stock analysis tools (like Morningstar) will let you put in these feature and determine those stocks that meet or are close to these values.

In the account, I had three stocks that, when I did the analysis, matched somewhat close to these values: Gilead Science (GILD), CSS Industries (CSS) and Tahoe Resources (TAHO).

In addition, Graham had a value equation (updated by recent value disciples) that helped to determine real value for the stocks. Using that, I was able to determine that all three of these were undervalued, based on current earnings, growth potential, etc. In it, you took the company’s earnings without dividends, multiplied it by 2*a company growth rate (I chose 6%) plus 8.5%, and then multiplied that times 4.4 divided by the corporate bond yield.

When looking at my three value stocks, I had the following results:

  • GILD: 6 out of 8 in the categories. Est value of $101.02/share vs current price of $75.42 (+@$25.60)
  • CSS: 6 out of 8 in the categories. Est value of $22.10/share vs share price of $27.86 (-$5.76)
  • TAHO: 3 out of 8 categories (they fell off a lot this year). Est value of $4.81 vs current price of $4.49 (+$0.32)

Based on this, I chose to sell my CSS and TAHO at the beginning of the year. I also chose to sell the REITs I had in the account (I was originally setting it up like my dividend paying account, and only in 2017 did I chose to do value investing in it). This would give me a significant amount of money that I planned to put into three value stock plays.

I did the analysis of the eight categories and came up with 2 other stocks that interested me:

  • SBS (Companhia de Saneamento Basico do Estado de Sao Paulo SABESP): 5 out of 8 in the categories. Est value of $19.69/share vs. current price of $10.43 (89% upside)
  • BBGI (Beasley Broadcast Group Inc.): 5 out of 8 in the categories. Est. value of $29.01/share vs. price of $12.80 (127% upside)
  • I also chose to double my investment in GILD, as it still had significant upside.

I was struck by the lack of stocks that met many of the categories, due to price. It appears the stock run-up has cut into the potential for getting good value stocks.

So evenly split, I have about $12K in each of these value stocks. I’ll let folks now how they do throughout the year.


Mr. 39 Months