Category: Income investing

OK, I’m out!

That’s it – I’m moving out of my bond funds!

As many of you know, I changed by allocation at the beginning of the 2020 to reduce my bond portion from 30% to 20% of my portfolio. My reasoning was that the US Fed was keeping rates for borrowing low, so the yield I could expect from fixed assets would be low.

Of course, my timing sucked (as usual) and within 2 months of purchasing more stocks, the market tanked and the bonds became more valuable. Still, I held my course and even rebalanced In July, selling bonds and purchasing underpriced stocks – even though the market wasn’t going anywhere. That is why I have been very happy with the Nov/Dec. recovery

The US Federal Bank continues to keep rates low. The yield on the 10-year treasury is running at 0.947%! Thus, if you loan the fed $100, at the end of the year, you will have made $0.95. In ten years, you will get back $109.89. How can anyone make money in this?

So, with the S&P 500 paying a 1.6% dividend, and my Income account paying 4.19% dividends for the year, my thought is that I am going to take those bond funds in my 401K/IRAs, and convert them to mutual funds that focus on Dividend growth. For 2020, my bond funds returned about 2.2% growth and 3.0% in dividends – total of 5.2%

For my IRA/401K/Mutual Funds, I’m looking at three funds:

  • Wife’s IRAs (Trowprice): PRDGX (Dividend growth) – 13.93% 1 year / 14.49% 5 year
  • My IRAs (Vanguard): VDADX (Dividend Appreciation Index) – 15.46% 1 year/ 14.92% 5 year
  • My 401K/Deferred: VIMAX (Mid-Cap, my company does not offer a dividend growth fund, and I’m already invested in S&P500, small cap and international here) – 18.24% 1 year/ 13.28% 5 year

The plan here would be to use my rebalancing step, which I normally do in early January, to shift out of bonds and move into these new dividend growth stock funds. I’ll try and do that later this week.

Of course, knowing how well I time things, I’d expect a major market correction/crash shortly after I do this – so you’ve been warned.

So what changes are you guys making at the start of the year?

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Millennial Revolution

Mr. 39 Months

Do you use Robinhood?

Robinhood is a “Commission-free trading platform” which is fairly user friendly, especially with phone applications. Since its inception, it has been surrounded by a lot of controversy. The idea of commission free trading brings up the question “how are they making money?” Their level of service has been spotty (at best) and at key moments, the site has shut down or not let people make trades which may have cost them significant money. They’ve had a lot of legal issues as well, further confusing the issue.

The solution to many of these issues is a simple one. As laid out by the Motley Fool, the solution is to use the application to invest, not the try and time the market (i.e. don’t use it to day trade). Robinhood plays up its ease of trading, but its performance in quick trades has been poor. However, its ability to make stock trading easier to start is laudable.

I was thinking about this after reading an article by evidence investor about “Why most robinhood traders get lousy returns.” The article pretty much lays out that people are using it to day trade, not invest for the long-haul, and are thus using having their emotions drive their investing decisions. It’s a good article and worth a read.

I personally don’t use Robinhood. Most of my investments are in mutual funds/ETFs. I gave up stock picking (I sucked at it) and chose just to stick with those. I’ve heard it said that it really doesn’t matter that much getting the optimum return – its getting started with regular investing and sticking with it. In that sense, if Robinhood gets you to do that, it can be a worthwhile option.

Hope your holidays are going well!

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Mr. 39 Months

Dividend Account results – 3rd Qtr 2020

Sorry I didn’t post over the weekend. Went backpacking up in New Hampshire, where it dropped down to 32 degrees with a 15 mph wind blowing. Made the hike a little more “exciting” than I wanted.

As noted back in April, I altered my Dividend/Income account to reduce the bond allocation to 0, and increased the dividend stocks and REITS to a 50/50 split. The idea was to increase my dividend yield, as bonds had been performing poorly for the 3+ years that I had been using them. With Interest rates the way they appear to be, I don’t see bonds performing that well in the near future.

The first quarter was somewhat successful (an 18.7% increase in dividend $) but a real bust as far as value (I dropped almost 30% in value) due to the market volatility. Yield was up to 6.13%, but this was primarily due to a drop in the underlying value of the investments. For the second quarter, the investments recovered somewhat, and my yield dropped won to 4.67%. The actual $ amount of dividends for 2020 vs. 2019 was just about even.

For the third quarter, the value of the underlying investments has gone up about 2% (still not where they were at the beginning of the year) and the dividend payments are only 3% higher than the same period last year. A slight improvement.

stockDetailsInvestment valueYieldDividend
CATCaterpillar$7,457.502.76%$51.50
CVXChevron$3,600.007.17%$64.50
CSCOCisco Systems$5,908.503.66%$54.00
DOWDow$4,705.005.95%$70.00
XOMExxon Mobil$3,433.0010.14%$87.00
HRHealthcare Realty$15,060.003.98%$150.00
IBMInternational Business Machines$6,084.005.36%$81.50
PFFiShares$12,029.005.39%$162.04
PFEPfizer$5,505.004.14%$57.00
ORealty Income Corp (REIT)$12,150.004.61%$140.10
SVCServices PPTYS TR$4,770.000.50%$6.00
MMM3M Company$6,407.003.67%$58.80
UMHUMH Properties$14,894.005.32%$198.00
VZVerizon$5,949.004.14%$61.50
WBAWalgreens$3,592.005.21%$46.75
$111,544.004.62%$1,288.69

Again, if I was using the account to live off the dividends, I could “let it ride” and let the investments build back up, while spending the dividends. I believe the “jury is still out” on whether the shift to stocks & REITS was a good decision or not. With the current US Fed and its interest rates, I don’t think Bonds will be a good return any time soon – unless you are willing to go into some very risky bonds. If I had additional capital, I might invest more here, as I think these dividend stocks are undervalued.

Let’s see how the 4th quarter goes.

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Mr. 39 Months

Dividend Account results – 2nd qtr 2020

As noted back in April, I altered my Dividend/Income account to reduce the bond allocation to 0, and increased the dividend stocks and REITS to a 50/50 split. The idea was to increase my dividend yield, as bonds had been performing poorly for the 3+ years that I had been using them.

The first quarter was somewhat successful (an 18.7% increase in dividend $) but a real bust as far as value (I dropped almost 30% in value) due to the market volatility. If I had kept the bonds, I wouldn’t have dropped as much. As usual, my short-term timing is poor.

For the second quarter, I had to shift my account from my bank (USAA) to Vanguard, because USAA was spinning off their investments to Schwab, and I didn’t want to have my investments in multiple companies (I currently use Vanguard, and Mrs. 39 Months uses TRowePrice). I may have missed a few dividend payments on this, so the numbers are a little suspect. For the 2nd qtr 2020:

stockDetailsInvestment valueYieldDividend
CATCaterpillar$6,325.003.26%$51.50
CVXChevron$4,461.505.78%$64.50
CSCOCisco Systems$6,996.003.09%$54.00
DOWDow$4,076.006.87%$70.00
XOMExxon Mobil$4,472.007.78%$87.00
HRHealthcare Realty$14,645.004.10%$150.00
IBMInternational Business Machines$6,038.505.40%$81.50
PFFiShares$11,431.205.91%$168.97
PFEPfizer$4,905.004.65%$57.00
ORealty Income Corp (REIT)$11,900.004.70%$139.80
SVCServices PPTYS TR$4,254.000.56%$6.00
MMM3M Company$6,239.602.83%$44.10
UMHUMH Properties$14,223.005.57%$198.00
VZVerizon$5,513.004.46%$61.50
WBAWalgreens$4,239.004.32%$45.75
 Bonds   
$109,718.804.67%$1,279.62

For 2nd qtr 2019, I received 1,280.21 in dividends on $131,994 of investments – so 2nd quarter appears to be a “wash.” I’ve managed to gain back about 12% of the value back from the 30% that I lost, but still have a ways to go to build it back up.

Again, if I was using the account to live off the dividends, I could “let it ride” and let the investments build back up, while spending the dividends. I believe the “jury is still out” on whether the shift to stocks & REITS was a good decision or not. With the current US Fed and its interest rates, I don’t think Bonds will be a good return any time soon – unless you are willing to go into some very risky bonds.

Let’s see how 3rd and 4th quarter goes.

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Mr. 39 Months

Have you changed your asset allocation?

I tend to re-balance every six months (In July and January). Re-balancing – make it regular and timely. Its helped save me some money (I didn’t suffer as much in Feb/Mar as others, as I took a share of my stock increases for 2019 and purchased bonds with them). So now its July and time to re-balance again.

Now, my standard allocation is:

  • 30% Index Bond funds
  • 17.5% S&P 500 Index
  • 17.5% Small cap Index
  • 17.5% International stocks index
  • 17.5% REITs index

I have found in the first six months of 2020 that my bonds were up to around 33% of my investments, while my REITS were down around 15%, and the stocks were lower as well. Usually, I’d just rebalance everything to the numbers above, and be “on my way.”

However, the Chinese Covid virus and the market volatility had me thinking. The “Fed” (US Federal Reserve Board) in an attempt to keep the market afloat, has dramatically dropped interest rates, and begun buying debt again. The result is that, as before, savers got punished and folks looking to increase their debt could find easy money. It thus made bonds less attractive, as any new debt issued is going to be at lower interest rates for the foreseeable future.

What is someone to do as they close in on retirement? Typically you pull money away from the volatile market and embrace safer investment alternatives – but you can’t do that with rates this low. I’ve tried experimenting with an income account for years, and I just can’t make it work with dividends. So I am stuck, like so many others, in shifting my allocation to more stocks.

In early July, I returned to the allocation that we had for most of the last 20 years:

  • 20% Index bond funds
  • 20% S&P 500 Index
  • 20% Small Cap Index
  • 20% International stocks index
  • 20% REITS index

Based on my previous horrible timing, I’m assuming we’ll have a stock collapse in the next 3 months, so be ready.

Have you made any changes to your investment allocations recently, based on current events?

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Mr. 39 Months

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
CATCaterpillar$5,695.000.00%$0.00
CVXChevron$3,762.256.86%$64.50
CSCOCisco Systems$5,870.253.58%$52.50
DOWDow$2,800.4010.00%$70.00
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
PFFiShares$9,807.604.36%$106.95
PFEPfizer$5,004.004.56%$57.00
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
VZVerizon$5,457.004.51%$61.50
WBAWalgreens$5,457.003.35%$45.75
 Bonds  $132.95
$92,321.806.13%$1,414.30

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

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