KBWY and dividend alternatives

[voidstar]

I came across KBWY about a year ago.

PowerShares KBW Premium Yield Equity

Every question needs context, as no single investment choice can be recommended without more detailed context.

I guess to summarize, I'm 40, spouse and I are both maxing RothIRA and 401K already. House, cars, etc. paid off, so we're accumulating a mix of growth and dividend stocks with the extra income we have now (roughly $1000/mo, leaving enough extra for fun stuff like movies and a bit of travel).


As mentioned, I came across KBWY awhile back. ER 0.35% and at ~$30/share it's offering roughly $.17/share per month. Today, it's DIV/YIELD is 9.63 (it's been high 7 to low 9 for as long as I've known about it). Fidelity lists this, today: Distribution Yield (TTM) 7.06% (where I assume "Distribution" means post-expenses?)


There are other choices, like REET, IYR, SCHH. Or why not a pure utility stock or a bond? Well, however TTM is being computed in the catalog, those options are lower -- like 2-5%.

I'm familiar with Fundrise, and I have funds also accumulating there -- with the plan to keep it there about 10 years, then use it for whatever our daughter need as she gets to her college age (in addition to her 529). FWIW, personally my Fundrise has been doing fine -- maybe not outstanding, but it always has growth (beyond my own contributions) every time I login and check it.


I'm not at all handy, so the idea of buying and renting homes doesn't appeal to me. But I have relatives and co-workers who do this -- they've all described that it doesn't work with just 1-2 homes, you need about 3-4+ homes; so you have to commit to reaching that plateau. But there are the maintenance tickets, and the mixed bag of quality renters, that they have to deal with. It's not my cup of tea.


Meanwhile, what's wrong with KBWY ? In my situation, it feels like "it works". But I don't fully understand some of the issues I've read about it -- yes, it's a fund-of-funds. Yes, some of those funds I think have ER >2.5%. But at the end of the day (or rather, "end of the month" as it were), I'm getting ~17 cents per ~$31 invested.


I'm up to about 500 shares accumulated. And so regardless of whatever the growth stocks have done that month, it cool that I get 60-80$ to buy more shares of something. Effectively I get to see in real time what's been going on in our IRA and 401K's for 15+ years. But obviously this is in a taxable account, so there is that -- but again, this is absolutely extra, where I'm happy to net anything above 2%. And not all our extra is in this pot, there is a spread of growth stocks like TSLA, DBX, W, CDXS, HEXO.


KBWY is relative new (under 5 years). I think it's Morningstar and other ratings are low because of that. It's had some relatively "bad" months (8-12 cents instead of 17-22). Yes, it got knocked down (briefly) Nov/Dec 2018 like nearly everything else.

So that's my question - is KBWY like a candy addiction? Am I misunderstanding the negatives of compound ER or tax consequences?

If SCHH can maintain its 45 cents per quarter at ER 0.07, how is that "better" than KBWY's 17 cents per month at ER 0.35 (given also that, today, at $31 I can accumulate a lot more KBWY than SCHH at $44)?


The main risk obviously is the Real Estate market exposure - but the way I see it, even if there was a catastrophe and that market fell 50% - I'm still getting dividends. Even if that drops to just 3-4% net instead of 7-8%, that's still better than my goal of >2% (but maybe I'm naïve in thinking there is a linear relationship between the drop in a given market and its corresponding dividends?). Any such drop is probably a 6 month wait. That possibility aside, that's what I'm paying KBWY for: to rotate/balance things around to avoid that kind of extreme catastrophe, so I don't have to micromanage ~40 funds myself.



Thoughts? I'm just suspicious of myself when I get to thinking a certain choice is a "no brainer" -- why leave $15k even in a 2% savings account, when you have the KBWY option? ( yea, it could drop from $30 to $24 suddenly -- so you just have to ride that out and hope you don't have some other financial emergency while waiting, forcing you to sell on a relative-to-your-average low; is that the gist of the risk? )



THANK YOU FOR READING!

 

[MichaelB]

I moved the thread to the stock picking forum, where it will get better focus.

 

[voidstar]

Thanks, I really wasn't sure!


I think my basic question is: if the TTM stays consistently something like 7-9%, then why do I care if the ER (expense ratio) is 0.01% or 9.99% ?


EDIT: and with that in mind, relative to other lower ER options (like a bond index? or maybe just a dividend stock like MXIM, CY, MCD - with effectively 0% ER aside from your own time), how does KBWY look? (with a general goal of beating 2%, or inflation -- or a typical savings account)

 

[MichaelB]

Thanks, I really wasn't sure!


I think my basic question is: if the TTM stays consistently something like 7-9%, then why do I care if the ER (expense ratio) is 0.01% or 9.99% ?

Others will respond. My immediate thought is - the risk is higher, and I'm not getting compensated for taking it.

 

[target2019]

What is your overall allocation to this ETF?
What is the total return of your investment?

 

[voidstar]

Fair questions. I watched KBWY for a few months, then only started accumulated since Dec 2018, so not a full year yet. I'm using Robinhood (RH), where I can buy a few shares at a time without commission. If the funds aren't fully transferred from bank account to RH yet, then sometimes they issue orders on margin -- and sometimes I'm using Limits orders. The exact fill dates are in the App, but for now I don't have a nice CSV to slice just that pick out.

It looks like the Dividend is issues around the 20th of the month, then delivered around the 28-31st.

My dividends so far have only been ~$95 total, and are consistent with the reported dividend history: Dec (.174), Jan (.171), Feb (.165), Mar (.161).


I keep a cash reserve and also the KBWY as an extra reserve, both within RH (then a separate cash reserve in my bank). If a regular stock looks to be a good value, I can use the RH cash reserve and jump in -- or if the KBWY price is above my average, I can slice some of that off also (and if it's after the 20th, that months dividend has already been captured).

The best approximation I can offer is this, just using some back of a napkin arithmetic based on my RH statements:

dividend $33.09 feb (200 shares 2/20/2019 div .165)
est these shares at $30.38, 200*30.38 = 6076
33.09*12 = ~$397.08 annual, 397/6076 = 6.5%

dividend $54.87 mar (340 shares 3/19 div .161)
est. these shares at $30.67, 340*30.67 = 10427.8
54.87*12 = ~658.44 annual, 658/10427 = 6.3%

These two month are a bit of a down trend from their 22 cent dividend, but historically it looks like around 17 cents is not unusual.

I certainly don't think 6% is bad -- certainly better then any CD or bank account that I know of. But it's not 8-9%. My rough 6.4% average is within a reasonable error bounds of the Fidelity reported TTM of 7.06%.

As far as overall allocation -- since I'm still kind of experimenting here, I'd say this KBWY specifically is like 1.5% of our overall taxed and taxed deferred accounts, if that's what you meant. So far, it's just been extra play money, under the "don't invest more than you can afford to lose" mantra.


That said: if one did plunk down say $800k... 800,000/$31 share = 25806 shares. 25806*.17 cent dividend = $4387 month -- right now. Taxed, of course, but starts to be pretty livable. What savings account or bond is going to do this? But there has to be a catch I am missing, or a more attractive alternative (is a spread of MCD, APPL, AMGN, XLNX -- outstanding dividend stocks -- that alternative, they have that much growth to offer?)

Note: KBWY isn't residential - it seems to be more public storage, solar storage, data center, medical centers, etc (but low/mid cap). A lot would have to go wrong to ruin all that -- as in earthquakes, extreme vandalism, extremely poor management, another black plague? But THAT said, the early adopters (say before 2018) that got in at $37 might not be as enthusiastic.... So similarly, if the price dropped to $20 and the dividends shrank to .9 average -- that guy sure would wish he had his $800k back, I'd bet -- but even then, 3% still beats 2% !

 

[target2019]

I don't use Robinhead, so can't provide much help to you. You have your own personal approach to investing, and if you're satisfied with the numbers, enjoy.
REIT investing can be a nice supplement to a simple index portfolio. I use vgslx which is a diversified slice of REITs.
The crash of REIT NAV can be quite spectacular.

 

[pb4uski]

IMO, if you're 40 and want to retire early... I assume that is why you are here... you will better off with a broad based stock fund like VTSAX than a REIT.... higher risk but also higher return.

$10,000 invested at KBWY's inception in Jan 2011 would be $19,424 at Mar 31, 2019 with dividends reinvested... $10,000 invested in VTSAX in Jan 2011 would be $26,204 at Mar 31, 2019 with dividends reinvested. $26,204 beats $19,424.

I retired at 56 investing in stocks.... I doubt that I could have retired that early investing in REITs.

Then, when you are 5-10 years from retiring you can start to transition from 100% stock to add in some bonds for stability.

https://www.portfoliovisualizer.com...cation1_1=100&symbol2=VTSAX&allocation2_2=100

 

[voidstar]

Interesting, RH is only showing KBWY history back to late Nov 2016. Hadn't noticed that.

The bulk of our retirements accounts are VIGAX, ITOT, VINIX, QQQ; we're absolutely a believer in those broad based funds. It looks like ITOT is effectively the ETF version of VTSAX.


RH doesn't work with mutual funds (just ETFs, stocks, and Crypto).


So yes, in this situation of still having to work towards retirement - the retirement itself is well enough on-track. This is a situation of "left over" income that can either sit in a Savings Account, or you can make it work.

Clearly you still want a reserve (the 3 months salary standard if an unexpected job issue comes up, or some kind of financial catastrophe that insurance can't cover - right, they call those vacations! haha ).

It's not like parking $10,000 to let it grow for 5+ years -- although we ARE doing that, with Fundrise and a combination of growth stocks. But for this particular dollars, we don't even want them locked 6-18 months like a CD; to me, access within the timeframe of 1 month is comfortible. And don't want the overhead of a brokerage commission fee.

Given that context, backtesting isn't as useful (IMO) because even if I had $10K laying around then -- I'd still be buying over time intermixed between other expenses. So the results would be quite dependent on when orders were actually filled.


So let me look at a few cases given $10,000, here are the resulting dividend payout (Right Now):

CASE 1: Savings Account
A 2% savings account should be something like $16 month earned ($200 for the year divided by 12).

CASE 2: VTSAX .04 ER
dividend every 3 months ~30 cents
~$.10 per share @ $71.53 w/ 139 shares: $13.9
(FYI, ITOT works out to about the same at $13)

CASE 3: VGSLX .12 ER
every 3 months 117 cents
~$.39 per share @ 123.09 w/ 81 shares: $31.59

CASE 4: KBWY .35 ER
monthly 17 cents
~$.17 per share @ 30 w/ 333 shares: $56.61


Of course Uncle Sam takes a cut of this - so that, plus your time, is effectively your own ER. As an Average Joe, I'm not going beat the market. So the risk is that at the end of that month, if you can convert those shares back to $10,000 if you need to (for whatever expense: replacing an air conditioning, paying property tax, fixing a car, exotic family trip, etc). In that regards, REET (for example) seems "safer" since it hovers more consistently around $26 (less volatile).

So yes, this seems to work for me -- better than a savings account, remains liquid, reasonable risk. And if there is no urgent expense on the horizon, I can use the dividend to buy a growth stock. But if there is an "urgent expense", I can choose to either shave off from the successful growth stocks, or shave from the dividend fountain, whichever seems more appropriate to the situation (could also just use the cash reserve also).

 

[pb4uski]

You are too focused on dividends.... your real return needs to include share appreciation... together with dividends is total return.

 

[target2019]

CASE 1: Savings Account
A 2% savings account should be something like $16 month earned ($200 for the year divided by 12).

CASE 2: VTSAX .04 ER
dividend every 3 months ~30 cents
~$.10 per share @ $71.53 w/ 139 shares: $13.9
(FYI, ITOT works out to about the same at $13)

CASE 3: VGSLX .12 ER
every 3 months 117 cents
~$.39 per share @ 123.09 w/ 81 shares: $31.59

CASE 4: KBWY .35 ER
monthly 17 cents
~$.17 per share @ 30 w/ 333 shares: $56.61

What is the Total Return for these 4 cases, say, for 1, 3, 5 years?

Your KBWY strategy is working for you, but what about the shrinking dividend?

If you research KBWY at Morningstar, Fidelity, etc., and look at the low ratings, you'll be able to better understand that you've found an investment that works now, but will decline by a large percentage, since it is small cap value REITs only. Since the ETF did not exist before 2011, you can look at the benchmark to gauge how much you're 10K investment will decline in the next recession.

 

[voidstar]

Sure, appreciation is a factor. But let's try this: Rounding the numbers to keep things simple, I view this as two scenarios...


SCENARIO A:

(tax-deferred)
$1,000,000 invested across indexed funds, adding $46k/year (appreciation + dividend 100% reinvested).

(taxed)
$100,000 savings, adding $12k year ($1000/mo), this being spread across:
-----------------------------------
a) $30,000 in Savings Account, instant access as needed.
b) $50,000 in combination of growth funds (Fundrise aggressive growth and ~20 growth stocks).
c) $20,000 in KBWY. Dividend focus to pump (b) or use as an extra cash reserve.



SCENARIO B:

(tax-deferred)
$1,000,000 invested across indexed funds, adding $46k/year (appreciation + dividend 100% reinvested).

(taxed)
$100,000 savings, adding $12k year ($1000/mo), this being spread across:
-----------------------------------
a) $50,000 in Savings Account, instant access as needed.
b) $50,000 in ITOT (blend)


(implied that this is all above regular Checking, which that would be used for the monthly bills)


My problem with back testing these is:

(1) Since ~2008, essentially nobody would have failed in the market. IMO, assessing from 2011 to now is a bit biased. On top of that, the no commission advantage of RH is rather unprecedented, with only a couple years of history behind it. The 100+ year history of the market speaks for itself, but impartial back testing from multiple decades gets a little challenging.

(2) Aside from just having cash on hand for emergencies/maintenance (ie balances on the ready to handle those), there are also big expenses being saved up for - home remodeling, landscaping/fencing, vacations, etc. as desired along the life journey. So it's not just Buy and Forget (10k of this or that), that's significant chunks taken out aperiodically, then re-filled back also unpredictably (i.e. we'll allocate into {a} {b} or {c} depending in moods, disposition, or perceives market conditions). Casual back testing can't really account for these interrupts (sporadic sell-off and buy-in).

(3) As an example, I could move $10k out of KBWY and into a particular stock pick that I think happens to be a good discount. Or, conversely, when Wayfair jumped from $120 to $160, I took profits to add more into KBWY for awhile.


I'd say I'm using something like KBWY as like a buffer between a Savings Account and Stock Picks.



Yes, at 40, I've read the responsible thing to do is to start migrating into bonds. And I started to, like 5%, but then reconsidered since it's still a tad early (ok, and I'm a stock addict). But maybe I'm trying to wrestle with (eventually) living off dividends from bonds vs real estate. Probably end up with both.


And sure, the contemporary appearance of over just a couple months can't drive the whole decision. But KBWY grew from 10 cent to 22 cent over its time, it has had a bit of a pull back recently to the 17 cent (consistent with that market as a whole). Eitherway, I think it's accurate to say that it has consistently been better than a typical Savings Account. (but sure, can't the same be said of essentially anything with a TTM >2%, regardless of its ER?)


That said, I definitely have to respect the appreciation of MCD over the past few years. That's certainly doesn't go unnoticed. But I'm not inclined to bet on a single hail mary going forward. Hence that brings the discussion back to something like ITOT (growth and value blend). [ my only issue with ITOT in particular is, I think it may be possible for something to be over-diversified to a point ]


Still, to me, I think SCENARIO A gives me a little more flexibility for when a large expense comes around (I can pull from things that are above average, and let the things below average continue to grow). However, it would be rare (for us) to have a home expense or even a vacation over $12k within a single year (a kitchen remodeling comes close! or when my wife wanted to replace all carpet with wood, whew!). But when it does, we can use SCENARIO A-a immediately, then re-fill that loss from {b} and {c}. Then repeat the process.

 

[Graust]

Alternatives: bond CEFs?

Are you aware of some of the multi-sector and high yield bond CEFs? So many people are comfortable with the volatility of high yield stocks yet are not comfortable/unfamiliar with bond CEFs. Yes, they are almost as volatile as stocks, but their NAVs are quite a bit more stable. And from what I have read on this thread, you are largely Price/NAV insensitive, as this is extra money set aside, and as long as you are still earning the yield.

I posit some examples such as PDI, PCI, PTY, PFN, PCM (all managed by the bond experts at PIMCO and able to use “all the tools” available to them as portfolio managers) that all yield in the 8-9% range. Look up their performance over last several years...they have beaten or matched many stock indexes over certain/multiple time periods. Also, there are such CEFs as KIO, DSL (from Doubleline, another strong bond house), BGH, and a few others that also yield from 8-10%.

Yes these are definitely more volatile than more vanilla bond ETFs or open-end mutual funds, but their portfolio performance (NAV) should be more stable (barring a recession), and the Fed is done raising rates for a while. Actually, as yield-type investments, they trade more in line with REITs.

Maybe something to peel off some of KBWY and look into some of these CEFs. IF you feel comfortable, and after due diligence is performed. And past performance is no guarantee.....and this in no way should be seen as investment advice...etc etc

 

[voidstar]

Nope, I was not aware. Ok, CEFs: https://www.investopedia.com/terms/c/closed-endinvestment.asp

So then for instance, PCI looks like this to me: Get 17 cents per $23.44 invested for a month.
(that's better than 17 cents/month for ~$31 with KBWY, but for how long?).


Over on Fidelity, PCI listed Distribution Rate is 8.57%, but somewhere in the fine print is a ~4% Net ER (versus KBWY posted at 0.35% ER - however all that works out, my estimates don't show 8-9% from my KBWY, take home is more like 6% -- then tax that, puts me back to maybe 4.5% for my troubles, roughly speaking; I try to be conservative on my estimates, and the tax might not be as high, so a high-5% might be more accurate {post tax}).


As another example, CHI: get 8 cents per $10.39 invested (per month)
Easy linear math, just double it to effectively scale it to PCI = 17 cents per $22.07. Even "better", keeping in mind that these are point cases -- success is more about the long run, I get that.

Curious what made CHI nosedive around July 2015. Corporate bonds had a problem then?


KIO also looks pretty consistent as well (12.5 cent per $15.86 per month, though 3.04% fee).
https://seekingalpha.com/symbol/KIO/dividends/history
https://www.cefconnect.com/fund/KIO


Thanks for the heads up, will continue to monitor. You're right, a complementing mixture might be in order. And yes, this is cash on the side, but didn't want to just sit the full portion in a Savings or CD. Could instead effectively start accumulating bond and dividend income, as growth allocations are pretty well established.

 

[Col. Klink]

Closed end funds trade at discounts and premiums to their NAV. Several of the PIMCO funds trade at a premium to the NAV and some, as of late, have cut their distribution. They are well managed. Several authors on Seeking Alpha have done articles on CEF investing. I follow a gentleman by the name of Douglas Albo who has been very insightful over the years.

There are CEF's out there for every purpose under the sun, equity, bond, junk, preferreds, covered calls, sectors. You really need to define what you are looking for and then find funds accordingly, and then, as well try to get it at a fair price. Use limit orders to buy them IMHO.