Investing For Retirement Strategy

[TommyOIB]

It has been my intent to continue to accumulate dividend paying stocks for my retirement. As these stocks have gotten more expensive more research is required to not overpay for a stock. To reduce the amount of time and work involved I thought about buying mutual funds using Schwab's screener and asset allocation model. I screened for funds that don't have a transaction cost and are no-load. Further, I screened for a return of >10% for 1,3,5,10, yrs, Morningstar Overall of 3 Stars of greater, average or above historical return and average or below historical risk. My results will give me 2-Large Value, 2-Large Growth, and 1-Large Blend Funds for 35% of portfolio, 9-Small Cap Funds (all 4 or 5 stars) for 10% of portfolio, 3-Foreign Large Cap Funds (all 5 stars) for 15% of portfolio, and 1-Tax Free Bond Fund (includes my home state) for 35% of portfolio.
Please share your thoughts on this approach to retirement investments. Thanks!
TommyOIB

 

[LOL!]

This screening process seems to be so 1980s. Folks nowadays simply try to own index funds that cover everything. And going for just dividends is kind of passé, too.

Bogleheads • View topic - misguided interest in div strategies

 

[racy]

This screening process seems to be so 1980s. Folks nowadays simply try to own index funds that cover everything. And going for just dividends is kind of passé, too.

Money magazine (I know, I know..financial porn) comes to the same conclusion in their Jan/Feb 2014 issue in an article titled "Looking For The Top Funds". The mag use to recommend 70 funds in 17 categories (Lg Growth, Sm Cap, Foreign, etc). Many were redundant, many were actively managed and some managed funds with good records (lots of M* stars!) were now under-performing.

They've changed their approach. They write, "indexing has won the argument". They've dropped duplications, pruned out actively managed funds, and reorganized the categories. They pared down to 50 funds and have 3 categories: Building Block Funds, One Decision Funds and Custom Funds ("based upon how elaborate you want your portfolio to be").

Interesting, I thought.

 

[SteveL]

This is way too much work. Take a peek at the following from Scott Burns:

AssetBuilder - A Sloth

 

[Vincenzo Corleone]

I don't understand why dividend growth investing is looked down on, or considered "passé". My mother managed to follow the strategy until she retired and now lives comfortably just from the dividends (and my family was not wealthy by any stretch of the imagination). And her dividend payers raise their dividends annually at the rate of inflation or more. Target, for example, has raised dividends by 18.60% per year over the past decade. Another example is McDonalds - their dividend payment has increased by 28.40% per year over the past decade. That's a heck of a lot more than any raise that I received from my job. If you reinvest those dividends while you're still in the accumulation phase, you might be able to amass enough so that you can live off the divis.

Of course, researching individual stocks takes time and work - in both looking for new companies to invest in, and in watching over the companies that you have already invested in. But I enjoy doing it.

I have been tracking stocks on various "dividend growers" lists - like the Dividend Kinds, Dividend Aristocrats, Dividend Champions, etc. Indeed, many have been bid up to the point where it wouldn't make much sense investing in them now. It's a strategy that requires patience. I'm on the fence regarding following this strategy using mutual funds as you have no control over buying something that contains stocks that are overvalued, nor do you have control over the initial yield at which you buy them.

Full disclosure: long TGT, MCD

 

[jimnjana]

I don't understand why dividend growth investing is looked down on, or considered "passé".

I'm with you. Warren Buffet is basically a Dividend Growth Investor. I think the key is still buying quality at a discount. I think DGI investing makes sense for a core of ones portfolio, still believe in diversifying among asset classes and investment styles.

 

[brewer12345]

It has been my intent to continue to accumulate dividend paying stocks for my retirement. As these stocks have gotten more expensive more research is required to not overpay for a stock. To reduce the amount of time and work involved I thought about buying mutual funds using Schwab's screener and asset allocation model. I screened for funds that don't have a transaction cost and are no-load. Further, I screened for a return of >10% for 1,3,5,10, yrs, Morningstar Overall of 3 Stars of greater, average or above historical return and average or below historical risk. My results will give me 2-Large Value, 2-Large Growth, and 1-Large Blend Funds for 35% of portfolio, 9-Small Cap Funds (all 4 or 5 stars) for 10% of portfolio, 3-Foreign Large Cap Funds (all 5 stars) for 15% of portfolio, and 1-Tax Free Bond Fund (includes my home state) for 35% of portfolio.
Please share your thoughts on this approach to retirement investments. Thanks!
TommyOIB

I think your screening methodology will give you a collection of tax inefficient funds which charge generous management fees and whose managers have either recently gotten lucky (won't be repeated) or took a flier of something (gambled with fund shareholders money) and won.

 

[Midpack]

I think your screening methodology will give you a collection of tax inefficient funds which charge generous management fees and whose managers have either recently gotten lucky (won't be repeated) or took a flier of something (gambled with fund shareholders money) and won.

+1. Investing by rear view mirror. If it was that easy, we'd all be well off...

I'd encourage the OP to seek backtesting on screens or any other recommendation sources (magazines, etc.) and seeing how they actually fared. There have been after the fact studies that suggest screens are a guarantee for under performance due to simple sector/style rotation and reversion to mean, the opposite of value investing.

What's the standard disclaimer, 'past performance is not a guarantee of future results.'

 

[Ready]

I've never understood the fascination with dividends. All they do is generate income that we have to pay taxes on and lower the share prices by the amount of the dividend. The best stocks you can own are ones that pay no dividends but just do well, and allow you to sell them an incur long term capital gains so that you are only paying taxes when you sell the stocks, rather than ever year when you receive the dividends.

And the other issue with the research being done by the OP is they are looking backwards to see which funds have performed well. Reversion to the mean comes in to play here. Simply stated, if a fund did better than average over the past decade, it is likely to underperform its peers in the future, so that in the long term it just returns to the mean. Staying in index funds is the only way to win, because you get the mean, but you pay much lower fees in doing so.

 

[LOL!]

I don't understand why dividend growth investing is looked down on, or considered "passé".

As the link demonstrates, your mother did fine, but she could've done better.

When someone tells me they invested in 2013 and made 30% in stocks as if they were a genius stock picker, I have to chuckle because the index funds made even more.

 

[Animorph]

It has been my intent to continue to accumulate dividend paying stocks for my retirement. As these stocks have gotten more expensive more research is required to not overpay for a stock. To reduce the amount of time and work involved I thought about buying mutual funds using Schwab's screener and asset allocation model. I screened for funds that don't have a transaction cost and are no-load. Further, I screened for a return of >10% for 1,3,5,10, yrs, Morningstar Overall of 3 Stars of greater, average or above historical return and average or below historical risk. My results will give me 2-Large Value, 2-Large Growth, and 1-Large Blend Funds for 35% of portfolio, 9-Small Cap Funds (all 4 or 5 stars) for 10% of portfolio, 3-Foreign Large Cap Funds (all 5 stars) for 15% of portfolio, and 1-Tax Free Bond Fund (includes my home state) for 35% of portfolio.
Please share your thoughts on this approach to retirement investments. Thanks!
TommyOIB

Look at the gold, silver, bronze ratings, not the stars. The metal ratings are forward looking, as much as they can be. Looking for 10% over 1 year is just going to pick up funds in categories that did well last year. That's still just noise. Over 10 years is decent, but did the fund have the same manager all 10 years? If so, is the manager now so old that another 10 years is questionable? Even over 10 years, there will be entire categories of funds that did not do well, but will in the future.

You can't go wrong with popular index choices for your funds. But you probably need to think some more about your selection strategy if you want to try something else.

 

[jebmke]

For me, the ER for a TSM index fund is cheap diversification. Also I'm lazy.

 

[ikubak]

I've never understood the fascination with dividends. All they do is generate income that we have to pay taxes on and lower the share prices by the amount of the dividend.

For 2013, married filing jointly, taxable income of 17,850 - 72,500 puts you in the 15% tax bracket. Qualified dividends for those in the 15% tax bracket are taxed at 0%. Those figures may change, but I can see how an early retired couple could benefit from dividend income.

If you are cursed with high income, 72,500-450,000, your qualified dividends are taxed at 15%

 

[TommyOIB]

I think your screening methodology will give you a collection of tax inefficient funds which charge generous management fees and whose managers have either recently gotten lucky (won't be repeated) or took a flier of something (gambled with fund shareholders money) and won.

The screen produced 18 different funds that met the following criteria.
return of >10% for 1, 3, 5, 10 yrs,
Morningstar Overall of 3 Stars of greater,
average or above historical return and
average or below historical risk

Don't see a lot of luck or gambling with these results.

 

[brewer12345]

The screen produced 18 different funds that met the following criteria.
return of >10% for 1, 3, 5, 10 yrs,
Morningstar Overall of 3 Stars of greater,
average or above historical return and
average or below historical risk

Don't see a lot of luck or gambling with these results.

Hey, mazeltov! Much luck to you. We each plot our own course and live by our choices. I think you would be a lot better off with index funds, but you and I must each make our own decisions.

 

[pb4uski]

It should be easy to compare the 10 year growth of $10,000 of each of these 18 funds that meet your screening tests to some similar low-cost index funds and see if there really is magic to be had. Just be careful to compare apples-to-apples to the extent possible.

 

[photoguy]

The screen produced 18 different funds that met the following criteria.
return of >10% for 1, 3, 5, 10 yrs,

The most counter-intuitive thing about investing is that, unlike pretty much everything else in life, past performance does not predict future returns.

 

[TommyOIB]

I've never understood the fascination with dividends. All they do is generate income that we have to pay taxes on and lower the share prices by the amount of the dividend. The best stocks you can own are ones that pay no dividends but just do well, and allow you to sell them an incur long term capital gains so that you are only paying taxes when you sell the stocks, rather than ever year when you receive the dividends.

And the other issue with the research being done by the OP is they are looking backwards to see which funds have performed well. Reversion to the mean comes in to play here. Simply stated, if a fund did better than average over the past decade, it is likely to underperform its peers in the future, so that in the long term it just returns to the mean. Staying in index funds is the only way to win, because you get the mean, but you pay much lower fees in doing so.

I'm very surprised to read some of the opinions regarding dividend stocks and index funds. To illustrate to incredible power of a "Dividend Aristocrat" stock, take a look at AT&T, symbol T. You could have bought it in 2011 for $25/share. Today it is $33 per share. Up 32% in just over 2 years. BUT, you'd also be receiving $1.84 per share as a dividend. That's 7.4% on those shares bought at $25. That's steady money coming in or to automatically repurchase more shares. And AT&T has increased their dividend every year since 1985.
As for index funds I don't recall reading that Peter Lynch or Warren Buffett invested in index funds. They may have, I just don't remember reading about it.

 

[zesty]

I'm very surprised to read some of the opinions regarding dividend stocks and index funds. To illustrate to incredible power of a "Dividend Aristocrat" stock, take a look at AT&T, symbol T. You could have bought it in 2011 for $25/share. Today it is $33 per share. Up 32% in just over 2 years. BUT, you'd also be receiving $1.84 per share as a dividend. That's 7.4% on those shares bought at $25. That's steady money coming in or to automatically repurchase more shares. And AT&T has increased their dividend every year since 1985.
As for index funds I don't recall reading that Peter Lynch or Warren Buffett invested in index funds. They may have, I just don't remember reading about it.

Let's take a look at AT&T and VTSMX (Vanguard's total US market mutual fund) since the beginning of 2011:

VTSMX has returned 20% more than T in that timeframe.

 

[brewer12345]

Holy cognitive dissonance, Batman!

 

[pb4uski]

...As for index funds I don't recall reading that Peter Lynch or Warren Buffett invested in index funds. They may have, I just don't remember reading about it.

But the difference is that Buffett and Lynch are pros and have large staffs to evaluate their portfolios and investments in companies. TommyOIB isn't.

Zesty's post proves the value of diversification. The growth of $10,000 of T has lagged behind VTSAX for every period (1m, 3m, ytd, 1, 3, 5 years), sometimes quite significantly, except 10 years where is it ahead by a whopping $30.

However, Vanguard Dividend Growth outperformed Total Stock for the 3 and 10 year periods but was behind over 5 years so if you want a dividend tilt to your equities, a diversified fund that tilts towards dividend payers is the way to go IMO.

But you never answered the question of how these winners of the screening process compared over the last 10 years to a broad-based equity index fund.

 

[Midpack]

You asked and we shared our views & experience, you're welcome to pursue whatever approach you like and we wish you the best (really). But anyone can run stock screens and those tools have been around for decades, could it really be that easy?

 

[REWahoo]

... could it really be that easy?

All you have to do is buy the stocks that go up, not the ones that go down. How hard can that be?

 

[target2019]

I'm very surprised to read some of the opinions regarding dividend stocks and index funds. To illustrate to incredible power of a "Dividend Aristocrat" stock, take a look at AT&T, symbol T. You could have bought it in 2011 for $25/share. Today it is $33 per share. Up 32% in just over 2 years. BUT, you'd also be receiving $1.84 per share as a dividend. That's 7.4% on those shares bought at $25. That's steady money coming in or to automatically repurchase more shares. And AT&T has increased their dividend every year since 1985.
As for index funds I don't recall reading that Peter Lynch or Warren Buffett invested in index funds. They may have, I just don't remember reading about it.

You can find a lot of discussion about dividend strategies at morningstar and seekingalpha.com. Most here are comfortable with indexing...

Personally, I see the benefit of having a portion of portfolio in communication stocks at this time. I know someone who holds VZ, T, and CMSA. The dividends held up well in bad times.

 

[karluk]

VTSMX has returned 20% more than T in that timeframe.

It's sort of amusing that OP tried to make the case for high dividend stocks by advocating one that significantly underperformed the market in recent years. It's a good lesson that beating the market entails more than just picking a winner. You also need to pick a winner that's in the upper echelon of winners. That may be possible, but it requires hard work and probably a liitle luck.

I generally stick to index funds. If I were trying to beat the market, I would probably still use index funds, but I would try tilting towards areas that have tended to outperform for long periods. As I recall, there is published research that value tends to outperform growth, and that small cap tends to outperform large cap. Both of those seem to me to be reasonable bets for someone who is searching for market beating investments.