Firecalc slays a strawman, deceives many

[unclemick]

Latin -John - latin to put on the dryer sheet flag - ? under the motto? - or down in a corner.

Then - of course - we need a list of ER Holidays appropriate to fly the flag - Bernstein, Bogle day, Real Estate week, index weekend, etc., etc., and perhaps dividend/Norwegian widow day. Throw in Monte Python and his quest for the one great holy grail stock.

 

[John Galt]

audentes fortuna juvat ?

John Galt

 

[amt]

75% balanced index, 10% REIT Index, and when me, Monte Python, and the Nowegian widow make it big with last 15% in dividend hobby stocks - I may write a book or give tv interviews.

What's the Norwegian widow

 

[unclemick]

Lost in the mists of time -
superceded by auto deposit.

Depending on whose telling the story - the little old lady on Finn Hill Road, waiting by her mailbox for her stock dividend checks. Finn Hill Road is south of Tuwilla and north and west of the Muckleshoot Indian Resevation. There are many other versions. Ours was Mrs Wright(aka Andersen) - Rt 9 - Old Pacific Hwy. (old 99).

 

[hankjoy]

Cutthroat: "Another thought on this just occurred to me.  
It seems to me that the way FIRECalc works, is that you'd actually be a buyer of cheap equiities at these times.  
As an Example. If you had a 50/50 portfoilo of Stocks/TIPS and the market hit the 1929 crash, wouldn't FIRECalc be buying these cheap stocks and you would be living off of the TIPS to maintain the 50/50 split of the portfoilo?"
Yes, if you were using asset allocation of 50% utility stocks/50% TIPS and rebalancing periodically then you would be buying utilities or other high yielders when they were low and selling to rebalance when they were high which would be better than a mix of S&P 500 and TIPS. However this would still in the long run give you a lower income than straight growing high yielders or what I call SBI stocks.

 

[hankjoy]

Cutthroat and TH:
"Another question I had on this.  
Do you think that a portfoilo of only high dividend yielding stocks would give enough proper diversification? " and
"The whole strategy has several holes in it, however.  
For starters, most high yield stocks that are REALLY high yield are paying that level of dividend for a reason.
The idea that you can buy and hold a really high dividend stock ignores the fact that many of these heavy payers go out of business and take your principal with it.
Even if they stay in play, a lot of these guys may decide that they cant afford to pay the high dividends anymore and lower them.  At that point, try to unload the stock without taking a loss."
Your questions and comments lead me to believe you are reading over and not noticing the comment about the paradigm shift in thinking regarding worrying about portfolio value because:
You--- are--- not--- going--- to--- sell!
Therefore:
1. Volatility does not matter and is not equal to risk.
2. As long as the company continues to pay and grow it's dividend at least at the rate of inflation (whatever it is where you live) a 50% or more drop in price does not matter.
3. Since your safe withdrawal rate is dividends alone without ever selling shares there is no risk of ever depleting your portfolio, it can't happen.
4. Diversification to smooth out volatility is not necessary (but it is necessary for protecting against business risk).

TH you are setting up a strawman here, argueing about the risks of stocks that I am not advocating anyone buy. The ones you talk about are risky.
When you screen for high yield stocks you will find several catagories:
1. Stocks in financial difficulty whose price is significantly down making them appear to have a high yield but that are very likely to cut or eliminate the dividend shortly. e.g. IBM just before drastically cutting it's dividend was sporting a +9% yield but everybody was talking about their financial difficulty and the likelyhood of an impending cut in the dividend. These are the ones TH warns about.
2. Stocks that are financially strong with a safe dividend that are going through a bad year or quarter or that are temporarily unpopular with the market. e.g. ALD a stock that has paid dividends every quarter without fail for over 40 years.It takes some homework to discern between catagories 1 and 2. (Due diligence or DD are required here)
3. Stocks that are returning capital and will be depleted down to nothing over time. Make sure you know when approximately the trust expires or proven reserves run out and consider the risk very carefully here. (DD required here)
4. Stocks that are slow to medium growth rate that have a history of regularly raising the dividend and paying a high yield for a long time. The momentum and high growth rate crowd usually ignore these stocks so the low demand keeps the price low and therefore the yield high.

Yes some work is required but less than you think and remember you are looking for stocks to hold for your grandchildren's retirement as well as your own because you plan to never sell. Once you have selected and setup your SBI stock portfolio monitoring your portfolio should take no more than 1-2 hours a quarter.

Even when you think you are buying catagories 2,3,4 above you will find that some have become, or really were, catagory 1's. That is where diversification comes in. The NAIC (National Association of Investors Corporation) says if you buy 10 stocks doing your due diligence you will average 2 that will disappoint you, 6 that will do about what you expected and 2 that will take off above expectations compensating you for the 2 that disapointed you. This has actually been my personal experience.
I believe that starting with ten and building to 20-25 will provide adequate diversification if you do due dililgence. Warren Buffet says that if each investor were limited to only ten investments in their entire lives we would make much more careful investments. I agree emphatically.
What do you think? Hank Joy

 

[BigMoneyJim]

I think there are a lot of investors out there smarter than me, and I'm not going to begin to try and outsmart them. If you're one of the smart ones then good luck!

Besides redirecting the DD effort into my skillset (computer maintenance) will likely lead to higher returns on sweat equity, anyway.

 

[Cut-Throat]

2. As long as the company continues to pay and grow it's dividend at least at the rate of inflation (whatever it is where you live)

Here is what I think Hankjoy - This is a HUGE if.

 

[cute fuzzy bunny]

Ditto. A lot of big 'ifs'.

Besides the elephant sized #2, in #3 you say your portfolio cannot be depleted. Well, it can in fact be depleted by companies going OOB or their stock prices dropping. In fact, a good pile of 10% dividend paying companies could take half your portfolio with them when they either disappear or their stock price drops in half and they subsequently cut their dividend 50%.

Hankjoy, the dividend rates you originally mentioned in your earlier thread were well above the threshold for what I'd consider a 'safe' bet.

Whether you plan to sell or not is irrelevant if the company disappears or cuts the dividend.

I'd find it hard to believe you'd find a solid company at a reasonable price that pays over 7-8% dividends, that has a <10-20% chance of flaming out or cutting its dividend.

If it was reasonably easy (or hard as hell but doable), where are the successful funds and investors built around this philosophy?

I'm not saying owning a couple of heavy payers that look good on paper isnt a good idea. I've owned a handful of fat dividend payers for a period of time, usually less than a year, when pickings were slim and the overall market wasnt doing well.

I'm saying building a portfolio around this strategy and depending on it long term is extremely risky.

 

[Bob_Smith]

Hankjoy, is this really much different than just buying a managed equity-income mutual fund? It sounds good in theory, but there is a strong bias among many of us against stock-picking, as BigMoneyJim describes. Can you point to any funds that have followed this approach for an extended period of time?

 

[amt]

Lost in the mists of time -
superceded by auto deposit.

Depending on whose telling the story - the little old lady on Finn Hill Road, waiting by her mailbox for her stock dividend checks. Finn Hill Road is south of Tuwilla and north and west of the Muckleshoot Indian Resevation. There are many other versions. Ours was Mrs Wright(aka Andersen) - Rt 9 - Old Pacific Hwy. (old 99).

Interesting. Can you elaborate or point to a link? thanx,

 

[unclemick]

A link - are you kidding - when I said mists of time - this was back in the days when Fortran students had to punch stupid cards, submit them thru a clerk and come back a day or two later to see if the program ran (early 60's).The Seattle paper??

I suppose someday this computer thing will catch on - but in the meantime I'll pick my dividend stocks from a book - every one or two years.  

Back then - people were still whining that 'risky stocks' paid less dividends than safe bonds - ever since 1958 or so.

 

[hocus]

I'd find it hard to believe you'd find a solid company at a reasonable price that pays over 7-8% dividends, that has a <10-20% chance of flaming out or cutting its dividend.

I agree with this comment. Still, I think that Hankjoy is putting forward an idea worth exploring. If you buy an index today, you pay an extremely high price for each dollar of earnings obtained. It doesn't strike me as so unlikely that you could get a better long-term return for your investment dollar by seeking out stocks that pay relatively high divdends (but not so high as 8 percent) and that have a track record indicating long-term stability.

If it was reasonably easy (or hard as hell but doable), where are the successful funds and investors built around this philosophy?

This argument I do not buy. Every great investing idea was at one time an idea known to only a few. Ideas become popular by being tested and working. Once it becomes proven out, however, an investing idea often becomes less effective. It may be that Hankjoy's idea will be all the rage five years from now, but that it will no longer be a profitable idea because the popularity of the idea will have driven the prices of high-dividend stocks too high.

I'm saying building a portfolio around this strategy and depending on it long term is extremely risky.

All investing ideas have some risk attached to them. To my way of thinking, the greatest risk is the hidden risk. Buying an index seems to me to be the most risky approach in today's world. When you buy an index, you are locking in the overall market's return for yourself. At today's prices, the overall market's long-term return does not look to be too appealing. Stock picking makes a lot more sense in this environment than it did when an attractive long-term return could be locked in by indexing.

 

[unclemick]

Heh, heh, heh - back in good old Norwegian widow days - the stock certicates were in the bank safety deposit box - Ma Bell(of course), the local utility, the local bank, and maybe an oil stock - all traditional dividend payers. The dividend checks came in the mail and nobody checked stock prices - they were irrelavant. three or four good stocks at most. Mrs Wright paid the big bucks when I mowed her lawn and never gave me - wait till payday crap.

Of course being modern, I have 40 DRIPs, SBC, Verizon, Con ED, Excelon, Dominion, JP Morgan, Bank of America, Exxon, Chevron, and a bunch more like New Plan Reality, United Dominion REITs. BUT - tel, ute., bank, oil - hmmmm - sounds vaguely familar.

 

[Gonzo]

I have found a fund Gabelli Utlities AAA "GABUX" that has a 10.77% yield but also a 2.00% expense ratio. Any comments on this fund and how it may be used in ER. If this yield would continue it appears it could provide a SWR of plus 4%.

 

[unclemick]

Mario sent me a blurb the other day - that yield is too high for a utilities fund - until I figure out how he's doing it - I'd be cautious. Morningstar gives them 5 stars - that's often the kiss of death - especially for a Boglehead like me.

I bought his closed end convert in 93 - yielding 12-16% in prior years - it subsequently underperformed for the next ten - still got it - 15.75% yield on original $ plus reinvested div.s - ok for income - but my balanced index beat it for the last ten yrs - NOW going forward??

 

[Nords]

Two words, Gonzo.

Leverage & derivatives.

 

[dory36]

Heh - I've pretty much given up on picking, even with funds.

When The Motley Fool was saying to look ONLY at index funds, they deviated for a while , and recommended the IPS Millenium Fund, at http://www.fool.com/news/foth/2000/foth000224.htm.

I bought when that article appeared. The next 3 years performance? Minus 23%, minus 42%, and minus 28%.

It will take a LONG time for that one to return to the mean!

 

[jimnjana]

I have found a fund Gabelli Utlities AAA "GABUX" that has a 10.77% yield but also a 2.00% expense ratio. Any comments on this fund and how it may be used in ER. If this yield would continue it appears it could provide a SWR of plus 4%.

Old thread, but I was looking at GABUX and after doing some DD, decided to take some gains I had in a little E&P company and put it here. After about 6 years from quoted post, GABUX is still outperforming its benchmark utility index, even when considering that most of the distribution it pays is a Return of Capital, the fund NAV hangs tough. Yes its down, but not by nearly the $4 or so it has paid in distros. I was really looking for a Junk Bond Fund, but with interest rates likely heading North, I decided to look elsewhere. I intend to reinvest distro and am holding it in my Roth.

Wonder if this is the oldest reply to a previously posted message?

 

[Sarah in SC]

Wow, that is an OLD thread. Good for you to find it in your research, JimnJana!

 

[HFWR]

Some classic ho-suck in this thread, though thankfully not of the extreme verbose variety. Wab, Bob Smith, Dory, CT, TH (before the bunny), even intercst. Ah, the good ol' days...

 

[tuixiu]

Sheesh these type of threads always confuse the hell out of me until I finally figure out to look at the dates of the posts.