This is a guest contribution by A.W. ‘Chip’ Stites of The Laughing Retirement
Way Back Machine Question: It is late December of 1999. For Christmas, I am offering you a choice of investments. Your present is $1,000, but you must invest in either the XLU ETF (Utilities Select Sector SPDR) or QQQ ETF (Invesco ETF of the 100 largest companies listed. NASDAQ Exchange). In both cases, you must reinvest the dividends! Which do you want?
You will receive your gift on January 1, 2000, and you get to take all your money out on January 1, 2020. Your investment has two decades to make money for you!
Which ETF would you choose? I will answer the question of your return, and other things, at the end of the article.
One of my favorite fables was written 2500 plus years ago by Aesop -the Greek storyteller- and is no less accurate today than it was 2500 years ago when it was first told. The fable of the Tortoise and the Hare.
Today, the Hare is represented by the disruptors, those fancy names whose companies are changing our lives faster than we learn their names. Electric Vehicles, driverless cars, bitcoin, altcoins, blockchain, biotech, FAANG, Tesla, and 5G, to name a few. Their names are bantered about on the morning, mid-day, and nightly news. They become household names. Their stocks are purchased to such an extent that even their owners and founders have occasion to say that they are not worth the price we are paying. But no matter–we continue to purchase them anyway.
But, the tortoise, the slow, cumbersome, dull tortoise, won the race – Right? Well, at least to Aesop, he did.
What if Aesop was right and the slow, steady, and tedious contestants do win the race?
I have always wanted to buy companies that paid me for the risk I was taking. While any “future” is unknown, when a company pays me to own them, they must believe in themselves just as much as I do! Right?
Dividends are a peculiar beast in the age of “growth and disruptors.” We are most likely toward the end of one of the longest, strongest bull markets in history. The idea of a company taking its profits and not using them to grow, to discover newer, faster, better products, just does not make sense today to most investors. At least not if you read WSJ or listen to the “talking heads of stock” on T.V.
But let us take a second look.
Think about this. Why wouldn’t you want to own a company that thought so much of themselves and their future, they would give away, payout some of their earnings – their profits? Why wouldn’t you want to own a company that believed you – their investors, their owners – were important enough to share in their earnings?
Why wouldn’t you want to own a company so powerful that as it grew, it increased what it paid its owners (you) year, after year, for decades?
Why wouldn’t you want to own a company whose structure, balance sheet, debt (in some cases), expected future profits, and whose “name” is recognizable and consistent in a marketplace that continually changes?
Is there anything here not to like?
Can we say that generally, a stock paying a dividend is safer than a stock trying to grow its share value? Naturally, I think we are reasonably safe, over the broad view of all stocks, to make that generality and be correct.
What happens, for instance, if we have a growth stock grows its price from $100 a share, over five years like this: year 1 (+40%), -year 2 (-30%), year 3 (+15%), year 4 (-5%) and in year five (+10%)?
Would you rather have that or a consumer staple everybody knows worth $100 a share and pays (reinvested) a plodding 3.5% over the same period, and the stock price never moves a penny?
Indeed, the risk of the growth stock is higher. The volatility is greater, and I would hazard a bet that the growth stock makes lots of headlines and gets lots of followers on Twitter and Instagram.
I would hazard another bet that our consumer staple has its owners (stockholders) shaking their heads, asking what is wrong, and calling for the CEO’s head. Such is life in the C-Suite.
But wait! It is Aesop’s Fables all over again. After five years, the growth stock with a value starting at $100 a share is now worth $117.77, and the plodding consumer staple, with a lot less risk, who fired its CEO is worth $118.77. Someone needs to hire that CEO. Give me the turtle!
Mutual Fund, ETF, or Stock?
I spent almost forty years in the financial services industry, and we were taught first to sell mutual funds. After all, you were purchasing diversification (a form of safety in and of itself), a professional manager whose job it was to grow your money, and you could do it all at a nominal price and a minimal investment of $25 or $50 a month.
Stocks were too risky, too unknown. It took a professional, with years of study, groomed by a more senior professional to evaluate which stock was most likely to be worth more in the future. It was a great mystery and (they said) overly complicated, way too hard for the layman to consider.
But then something financially earth-shattering was created – though few saw it at the time – and they were called ETFs or Exchange Traded Funds. To Mr. Bogle, of the famed Vanguard Group, they were a “fad” and little more. But to me, they provided a door to stocks. Here was a group of stocks put together to mirror an index (and we know that 70% of managers do not outperform their index). We could trade them, put sell stops on them to control losses, and we could see, with consistency, what stocks they held.
On average, the dividend yield of the EFTs seemed higher, at least at first glance, because the expenses of the ETFs were lower. So, wouldn’t the dividends of the individual stocks be higher still with no fees at all? I began to look at individual stocks.
No mystery here. If a company could afford to pay their dividend out of earnings and increasing the dividend for a decade, my (your) dividend was safe enough to justify risking my (your) money on their company?
Then the explosion of the internet, computers, and the age of information was upon us, and the ability to identify, screen, and decide what to buy almost completed the circle for the average investor.
Commission Free Trading
Then Robinhood introduced commission-free trades. The entire investment community was forced to follow suit or lose customers, and the circle was closed. The average investor could now buy as few or as many shares as their pocketbook or account size dictated for free.
Now the average investor had the means, the information, a low cost of entry, and the possibility of a safer, more consistent return.
All we needed was a system, a way to see ourselves clear to owning stocks, investing in the things that pay us the most for our risk, and here we have a choice. Here we can DIY or get help.
Thelaughingretirement.com has that form of help. Maybe all you need is just a nudge in the right direction. SureDividend.com certainly has the information laid out conveniently to allow you to grow a secure retirement or even a more secure growth portfolio.
Why do I say that?
Why would I say a secure Growth Portfolio? We have come to believe that “growth” is a type of investment category or stock. It is! But, it is more than that too. Growth is the increase in value from whatever source your portfolio gets it!
Before I refer you back to Mr. Aesop and the effects of time, let me tell you a story! Over twenty-five years ago, I managed multiple portfolios for a bank trust company.
The best portfolio I didn’t need to manage
One of my portfolios was about $1.7 million in size. There was not a name (stock) I did not recognize. Taxes were kept low with muni-bonds and an almost non-existent need to trade or do anything for that matter. I loved it! I wanted to know how it was created and by whom.
I contacted the owner and found a 37-year-old man who worked as a graphic designer. I invited him to the office, and shortly after that, we went to lunch.
His father had died and left him and his brother each half of his portfolio. ($3.4 million in total after taxes). His father was a conductor on the railroad, a high-school graduate, who his son described as intelligent, curious, and honest. His hobby was stocks.
He bought stocks and bonds that paid dividends or tax-free interest. Consistency was his main criteria. He did not want to work at his hobby too hard, and he purchased a small number of shares consistently over time and always reinvested the dividends. He did this for over 35 years – from the late 1950s or early 1960s on.
His son did not use the money, did not take the dividends or interest, and the portfolio assumed a life of its own: constantly growing without much regard to the markets’ movements. Consistently, slow, at times ponderous growth. Sound familiar?
What we are taught
We are taught, indirectly by advertising, T.V., by our financial advisors that “retirement” costs over $750,000 of savings. Don’t believe that! Please. (I am living proof.) Thelaughingretirement.com has examples.
We are taught by Financial Advisors (FA) that stocks are so complicated that even an F.A. needs a third-party manager to do it, which is costly and often unnecessary.
We are taught that we will, most of us, run out of money before we die, and until you know all the facts, do not believe that either.
We are taught that portfolios need but few changes to transition to retirement beyond adjusting a bit of risk for increased age. That is what I was taught, and until fifteen years ago, I believed that too!
Nothing could be further from the truth. Dividends are paramount to longevity and success in retirement. Losses pre and post-retirement can effectively alter what should be the best time of your life. You need to avoid them in the last five years of your working life and lower your risk from that time on.
- The tortoise won the race; no mystery here.
- A. The QQQ ETF with $1000 invested in 2000 and dividends reinvested returned you $3,958.58. The QQQ ETF today takes more risk than the S&P 500. (Beta 1.04)
- The XLU ETF with $1000 invested in 2000 and dividends reinvested returned you $4,206.72. The XLU ETF takes roughly one third the risk of the S&P 500. (Beta .33)
The above risk information was from Google.com by asking for the ‘beta’ of each ETF. The return information for the ETFs was from LazyPortfolioetf.com.
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