large stable dividend stocks vs diversified funds

[getoutearly]

I have my portfolio allocated to lots of different funds.* Some managed, some indexes.* Was talking to an older, thoughful, coworker who said he used to do that, but switched several years ago to individual stocks.*

Only a handfull or 2 at most.* Mostly large, stable, dividend generating stocks with a couple others thrown in as the opportunity arises (XOM, GE, F (recovery play), Pfizer, Bank of America, Whole Earth, a health care company, etc. and some laddered CD's ).*

The dividends provide some gauranteed growth and since the companies are large stable outfits, less chance of loss of principal.* Less "diworsification".

Sounds kind of interesting, and got me to rethinking my approach (not sure if that is a good thing or not).*His is almost a buy and hold approach.* *Anyone else taken this approach?* Tried both approaches and have comments on them?* *

Too many options out there...

[LOL!]

For a time I used large stable stocks and also sold covered calls on them. The premiums for the calls was nothing special since the underlying stocks were not so volatile.* In the end, my portfolio looked like the top 10 of the S&P500 and I wasn't making any real money over the averages.

So the approach your friend uses reads essentially like investing in the S&P500 to me.* It can look sexier because it's "individual stocks" and one can be fooled that one is doing better because you remember the XOM's (up 20% in last 12 months) but forget about the GE's (up only 3%) and F (down 14%).* If you averaged your stocks they would probably be up 9% or so which is the same as SPY because that's what SPY is made of anyways.

Anyways, I found it was better for me to get away from this kind of investing and asset allocate to international and small caps.* That said, my two best investments for 2006 are a couple of long-time holdings of mine: ING and MO both of which pay nice dividends (not a recommendation at current price levels).

[getoutearly]

He also meantioned that he doesn't buy international. All US. But, with the large companies, and the global economy, may be kind of a moot point?

I kind of wonder if almost all stocks, worldwide, aren't pretty well correlated?

[Nords]

That reminds me of the book "Eight Steps to Seven Figures".* (I wonder how that text survived the bear market.)* It also sounds like a lot of work to duplicate the S&P500, especially when you can buy the fund with less than a 0.10% ER.* But he's a stockpicker!

Originally Posted by getoutearly

He also meantioned that he doesn't buy international.* All US.* But, with the large companies, and the global economy, may be kind of a moot point?

Perhaps.* It depends on whether those foreign earnings are coming back to the U.S. or staying overseas.* He's also missing out on the gains that international investing affords when the dollar is dropping.

Originally Posted by getoutearly

I kind of wonder if almost all stocks, worldwide, aren't pretty well correlated?

More than before.* However there are still pockets of divergence ("non-convergence"?) among smaller-cap stocks and emerging markets.

(Edited for /quote typo.)

[2B]

I know an even better way. Buy the next Microsoft or Cisco.

Buying big, dividend paying stocks works well when big, dividend paying stocks are in favor. Having only a few stocks also exposes you to "disasters" in a single stock. Having GM or Ford (former big, dividend paying stocks) doesn't look real good right now. Owning them has to be classified as speculation.

By diversifying into various low cost index funds, you will beat 70% of all mutual funds and money managers. You will always have this weeks star shoved at you by the media but it's very rare to see the same person very often.

[unclemick]

Hmmm

Let's see - in 30 yrs - have yet to truly trounce my balanced index(diversified value before that) - but it's male, hormonal and a lot of fun.

82% Target Retirement(Roth included), 3% cash and - 15% individual dividend stocks.

heh heh heh heh

[wabmester]

Originally Posted by Cute & Fuzzy 2B

Buying big, dividend paying stocks works well when big, dividend paying stocks are in favor.

I'm pretty impressed with the globally branded consumer staples. * Take a look at MO, PEP, MCD, etc to see how they've outperformed the S&P 500 for over 30 years.

You can find funds that focus in this sector. * Take a look at XLP, for an example of a passive index (although I don't like their high exposure to retailers.)

[Trace]

I use the core and explore strategy.* 401K and Roth IRA investments in Index Funds (core).* *Set up a taxable account where dividend paying stocks are purchased (explore).* * I mainly focus on companies with strong financials, solid brand and a 10 year history of dividend increases.* The taxable portfolio consists of 20 stocks (to increase diversification).* You can also take steps to reduce cost by using a discount broker.*

[mathjak107]

i stopped buying individual stocks for anything except speculating years ago.....the odds of picking just the right stock in just the right industry at just the right time in just the right market is to difficult for me.....and even as i get all the above correct you still dont know what the competitors are doing and how the market will perceive this company...lets not talk about even an earnings report that disapoints and your beaten down 20% in a day.,,oh yeah and did i mention selling at just the right time too?....yep well diversified funds are my choice for my serious investment money...unless you got enough dough to buy many individual stocks and i mean many then the threat of market risk to those few you own is way to large ....for speculating individuals are fine but i wouldnt use them for my serious investment money anymore

[mathjak107]

another issue with individual stocks i have is the way markets have changed over the last few years...in the old days when commissions were higher for brokerage services an investor who had a large holding they wanted to sell without dragging the stock down drastically did the following:

they went to their broker or investment banker and told them to sell a large stake..they in turn called their best clients and offered it to them with a slight discount and basically liquidated the position without barely a ripple..brokerages earned big commissions for "POSITIONING" as it was called..today positioning no longer exists...at 6 bucks a trade they cant and wont do it and so individual stock volatility is huge today...its smoothed over greatly in funds with the many many issues they own so its not as big a factor.

[astromeria]

I sold off most of my individual stocks over the last couple of years (oy, the taxes!) and have only XOM (Exxon), TOT (Total, the European oil co), ARKAY (a plastics company spun off from TOT), AVB (Avalon Bay, upscale-apartment REIT), and BAC (Bank of AMerica). I keep telling myself I'll sell off BAC, but can't seem to pull the trigger. And it's even in my husband's Roth, so no taxes to worry about. But it's so hard to say farewell to that beautiful dividend! I'm thinking of swapping all of these out in favor of JKF, a large value ETF with yield of 2.38%. Decisions, decisions...

[2B]

Originally Posted by astromeria

I sold off most of my individual stocks over the last couple of years (oy, the taxes!) and have only XOM (Exxon), TOT (Total, the European oil co), ARKAY (a plastics company spun off from TOT), AVB (Avalon Bay, upscale-apartment REIT), and BAC (Bank of AMerica). I keep telling myself I'll sell off BAC, but can't seem to pull the trigger. And it's even in my husband's Roth, so no taxes to worry about. But it's so hard to say farewell to that beautiful dividend! I'm thinking of swapping all of these out in favor of JKF, a large value ETF with yield of 2.38%. Decisions, decisions...

My only individual stock is BAC. It's the result of buying a small, regional bank over 20 years ago. It was bought out and bought out and, eventually, bought out by BAC. I have 95% gains in my position! BAC funded two of my kid's college expenses (shares transferred to them and sold at their tax rate) and I still have a very small amount left. I sold everything else off years ago and put everything in some type of fund.

I used to kid myself that I could out gain the "coach potato fund." I ran my numbers over about 10 years and I fell about 1% short. I was also "working" way too much to get my sub-index return. On the plus side I'd periodically get a real rush when one of my stocks doubled in 3 months but I had to "forget" about the ones that just sat there and looked at me.

[mathjak107]

as an investor for almost 20 years now i can tell you all my dabbling in individual stocks never gave me the level of returns my diverse funds mix does....yeah the winners moved alot but the loosers did too ...most of the time i barely beat a money market overall in individual stocks

[grumpy]

I guess I am out of step with almost everyone on this thread. I began buying individual dividend paying stocks through DRIP plans in 1995. I then moved all of them to Buy & Hold Securities, where for $15 per month I got unlimited trades. I bought small amounts when ever there was a price dip. I could also rotate among the companies with almost zero trading costs as different industries came into and out of favor. I have accumulated over $200K worth of shares in 20 companies across 9 industries. These shares give me over $8000 per year in lightly taxed dividends and there has been some nice appreciation over the years since I bought when prices were down. My best returns have been on Altria (Phillip Morris) which I bought at $19 in early 2000 when the litigation landscape was ugly and the dividend was over 10%. It closed on Friday at a few cents under $84. Not all of my purchases worked out quite that well, of course. Still, I have learned alot about the markets by following these companies closely. Also note that the bulk of my portfolio is invested in diversified mutual funds. These dividend paying stocks are less than 25% of my total investments.

Grumpy

[mathjak107]

the question of course is not which ones did well but what was the overall long term return of the batch........ my buddy used to buy individual stocks and i used to ask him how he is doing...great he used to say....untll one day we compared him to some averages and now the "great turned out to be not so great...he would have done far better just buying index funds

[CyclingInvestor]

I have always used individual stocks instead of mutual funds. I just do not
sleep well at night with others choosing my investments. I use a universe
of around 35 top quality stocks (management integrity and ability, balance
sheet, long and consistent track record, low business volitility), and own the
ones that are IMO the best values at the time. I own between 5-20 stocks
at any time. I have used this approach since 1993, with annual expenses
of about 0.1% (used to be higher). All activity is tracked in EXCEL to make
tax time easier, although most of the $$ is in an IRA. This approach led me
to be very heavily invested in REITs 1998-2006, although they have finally
gone high enough (and other blue-chips low enough) that I am more spread
out now.

Short term fluctuations have never bothered me. I got into REITs a year
too early, and watched them drift down while the market was exploding
in 1999, but was confident that I was holding the more valuable properties.
I would never have been able to contemplete retirement in the next year
or so without the higher returns that individual stocks have provided.

[Ed_The_Gypsy]

Our patron saint John Greaney struck his number by investing in individual pharamaceutical stocks when their prices weakened under the Clinton administration, captializing on an opportunity. He does not recommend that for others, interestingly enough.

He does note, however, that stocks help outside of tax-sheltered programs have advantages. Dividends and capital gains are taxed at special low rates, unlike distributions from IRAs (except Roths), which are taxed at higher income rates. In addition, the feds do not force required minimum distributions on them and one can sell losers for a tax break. He has also pointed out that a mutual fund company's management bite--even Vanguard's--can exceed brokerage fees on large pots.

Bernstein points out that for those making their own 'mutual fund' with a mix of stocks, the old 20-stock rule for equalling the volatility of the total market isn't good anymore. His point being, you may as well buy the whole market in an index fund.

I do not have a good track record with individual stocks, so I go with mostly index funds now. Note that my pot is rather small compared to many here, so I can't make too many mistakes anymore.

Ed

[kcowan]

We tried the expert Portfolio Manager to select individual stocks, and some mutual funds too for our tax-sheltered fund. We dropped the Manager in 2001 and now have a basket of individual stocks, blue chips and growth including small caps, and bonds (and money market right now as we have done profit-taking over the last year and are waiting for buying opportunities).

It has worked for us. We are up 5.5% YTD June 30th. Our annual average ROI since retiring is 7% and that is after the regular withdrawals for living expenses. Because we use 3 brokerages plus a discount brokerage, I also use Excel to consolidate the monthly results. Three brokers? Yes, one each for large cap, small caps, one mutual funds. We are buy and hold types so the full-service fees are not too serious.

We are early in our early retirement (4 years) and being hands on has made me more confident that we can make it. After we accumulate enough to purchase a winter home in Puerta Vallarta, we will probably adopt a more passive approach with a basket of index funds.

[haha]

Originally Posted by mathjak107

another issue with individual stocks i have is the way markets have changed over the last few years...in the old days when commissions were higher for brokerage services an investor who had a large holding they wanted to sell without dragging the stock down drastically did the following:

they went to their broker or investment banker and told them to sell a large stake..they in turn called their best clients and offered it to them with a slight discount and basically liquidated the position without barely a ripple..brokerages earned big commissions for "POSITIONING" as it was called..today positioning no longer exists...at 6 bucks a trade they cant and wont do it and so individual stock volatility is huge today...its smoothed over greatly in funds with the many many issues they own so its not as big a factor.

This is an interesting, albeit counterfactual story.

Ha