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The 4% Portfolio is designed to provide a smarter way for retirees to follow the 4% rule without having to sell a portion of their stock portfolio each year. Our portfolio is based around financially sound corporations spread across multiple industries who reward investors through regular... More
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  • PIMCO Total Return Mutual Fund Analysis

    PIMCO Total Return (PTTAX) is the world's largest bond fund with nearly $250 billion in total assets. The fund is managed by Bill Gross, one of the most highly regarded bond investors in the world. PTTAX has performed well vs its peers and delivered solid returns for investors looking for income. When looking at its performance, once can easily see why it is such a popular income mutual fund. But lets take a look at what the sales brochure for PTTAX won't highlight for you.

    Based on our assumptions here, let's take a look at the fees, turnover and holdings of PIMCO's Total Return A bond fund.


    PTTAX not only has an annual expense ratio near 1.0%, but it also has the dreaded front-end load sales fee. If your investment adviser is recommending PTTAX, one of their motivations may be because they get a piece of that front-end load sales fee. The front-end load fee is a staggered fee with different expense rates depending on how much you are investing. Based on our example $500,000 investment, below is the initial fee that will be paid when you invest in PTTAX.

    Due to this front-end load fee, your initial investment of $500,000 is immediately reduced by $14,250 giving you a beginning investment of $485,750.

    Based on our historical expense ratio data for PTTAX, lets take a look at how much is generated in fees over a 5 year time frame.

    (click to enlarge)

    Turnover & Holdings

    As of 3/31/2013, PTTAX had an average annual turnover rate of 380%. This is a very high rate and shows management is constantly replacing its holdings.

    As of of 3/31/2013, PTTAX had the following Portfolio allocation.

    • Cash: 9.33
    • Stocks: 0.00
    • Bonds: 69.51
    • Other: 1.47

    Of this Portfolio composition, the largest holdings of PTTAX outside of cash are:

    • US Treasury Note 1.625% (Treasury bill)
    • Fannie Mae Single Family TBA 3% 2043-04-01 (Mortgage-backed security)


    PTTAX has had success generating income for investors and outperforming its peers. But anyone considering an investment in PTTAX should be aware of the fees they will pay, the high amount of activity management needs to generate these returns, and what underlying investments their money is going to.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: The 4% Portfolio Retirement Service has made no recommendations on PTTAX.

    Nov 07 11:52 AM | Link | Comment!
  • McDonald's Dividend Safety Analysis

    McDonald's Corp. (NYSE:MCD) is the largest fast-food restaurant company in the world, with nearly 34,500 restaurants in 119 countries. McDonald's success was built on an idea of consistency. Consistency in food preparation, quality, and value. This consistency has been the model for other restaurant franchises for many years now. It has also led to a consistency of reliable and increasing dividend payments for the company's shareholders.

    Utilizing our Dividend Safety scoring system, let's take a look at just how secure McDonald's current dividend payment is.

    MCD Dividend Safety Analysis

    The only real concern that shows up is McDonald's most recent free cash flow payout ratio of 75%. This is considerably higher than its five year average payout ratio of 60%. The increasing payout ratio is likely why investors received a 5% dividend increase this year versus the double digit increases they enjoyed in previous years. McDonald's cash position is also less than we like to see when compared to its annual dividend obligation, but it appears that management prefers the lower level of cash on hand as the current amount is typical when compared to historical levels.

    McDonald's has a strong dividend history and solid financials. Its impressive how they have managed to keep their profit margin levels near 20% while focusing on fierce competition within the value (or "dollar") menu business area. A decrease in its free cash flow payout ratio and higher dividend increases in the future will likely depend on the company's growth in the international markets as well as achieving organic growth among its existing domestic restaurants.

    The stock is currently yielding 3.4%, well over 200% more than today's highest yielding "safe" money market and CDs. For those searching for a safe income source, McDonald's is an easy choice.

    Disclosure: I am long MCD.

    Additional disclosure: The 4% Portfolio Retirement Service has made no recommendations on MCD.

    Nov 01 1:53 PM | Link | Comment!
  • Inflation Insurance For Your Retirement

    "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." -Ronald Reagan

    When approaching retirement the main question a retiree will try to answer is "How much money do I need to cover my annual expenses". While this is certainly a question that has to be answered, there is another one that must be considered as well - "What will my annual expenses be in 10, 20, or 30 years?"

    The term "fixed income" is used far too often when discussing retirement investing and planning. Fixed income suggests you should be able to decide today how much income you are going to need each year of retirement. But because of inflation we know that our expenses are not going to be fixed, so we should not plan for our income to be either. If you plan to withdraw the same amount from your retirement account annually then you will be losing purchasing power each year due to inflation. And many people underestimate the effect inflation has on their retirement plans. While we have seen wide swings of the inflation rate with highs above 10% in the late 70's and early 80's, the general rule of thumb is to plan for an annual rate of 3%. So how does that 3% affect your spending power over time?

    Consider you are someone who is supporting a $60,000 a year lifestyle in retirement. At an average inflation rate of 3%, in order to have the same buying power in the future that you have today you will need:

    • $80,0000 a year in 10 years
    • $108,000 a year in 20 years
    • $145,000 a year in 30 years

    Flawed Retirement Investment Advice

    Go to most online brokerage websites or talk to a financial planner and you're likely to get very similar advice in regards to retirement investments. They will likely tell you in some form or another that you should be seeking a diversified, income-focused portfolio that combine stock and bond investments that offer a choice of asset allocations designed to suit your age and risk tolerance. What this ultimately means for the investor who is trying to follow the 4% rule is that the portfolio will generate a small percentage of income and then you will need to sell some of your principle to make up the rest. The following year, assuming the portfolio generates a similar amount of income, the investor will have to sell once again as well as an additional amount in order to cover inflation. Assuming the investor's portfolio value is increasing each year, this is a sustainable solution. Of course, what happens when the portfolio decreases in value? The investor still needs to increase the amount they are withdrawing to allow for inflation, but now they are increasing the amount they are selling from a portfolio that is decreasing in value. This is a double-whammy for the investor, and can create a significant problem for future withdrawals if the value continues to go down over a longer period of time. Those who were unfortunate enough to retire the past 10 years and follow this investing standard understand this danger all to well.

    Dividend Growth Stocks Providing Inflation Insurance

    Dividend stocks have gained in popularity the past few years for their ability to provide higher income in a low interest rate economy. But beyond focusing on the current dividend being paid by a stock, one should also take into account the growth history of that dividend. An investor who focuses on choosing companies that not only have a history of paying a dividend, but also a history of increasing their dividend each year will be able to effectively fight the threat that inflation poses on their retirement income. David Van Knapp wrote an article last year that answered the question "Has dividend growth kept up with inflation?". To summarize, he discovered that...

    "There is no question that over very long time frames, dividend growth has handily exceeded inflation. Year-by-year, dividend growth was higher than inflation in 31 of 51 years. The average yearly rate of dividend growth (5.4%) exceeded the average annual inflation rate (4.1%) by 32%. Compounded over 51 years, dividend increases grew an initial amount by a total of 75% more than inflation."

    What's even more impressive is that David's analysis utilized the S&P 500 to illustrate the broad trend. If you were to eliminate dividend paying stocks that did not have a history of increasing their dividend the dividend growth figure would have been even higher. Utilizing the inflation rates published here, we can see how some well-known dividend growth stocks have been increasing investors purchasing power over the past 5 years despite the effects of inflation. Note: Complete 2013 dividend and inflation figures are estimated.

    Coca-Cola (NYSE:KO)
    Dividend Growth11.76%7.89%7.32%6.82%8.51%9.80%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%1.59%
    Increased Purchasing Power7.91%8.23%5.68%3.66%6.44%8.21%
    McDonald's (NYSE:MCD)
    Dividend Growth8.33%26.15%10.24%11.95%13.44%8.71%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%1.59%
    Increased Purchasing Power4.48%26.49%8.60%8.79%11.37%7.12%
    Procter & Gamble (NYSE:PG)
    Dividend Growth13.97%10.97%9.65%9.07%7.49%7.10%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%1.59%
    Increased Purchasing Power10.12%11.31%8.01%5.91%5.42%5.51%
    Omega Healthcare (NYSE:OHI)
    Dividend Growth10.19%0.84%14.17%13.14%9.03%9.47%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%1.59%
    Increased Purchasing Power6.34%1.18%12.53%9.98%6.96%7.88%

    Now let's see how well some of the most common income mutual funds, that are specifically designed to provide investors with retirement income, have performed in regards to inflation protection from 2008 - 2012. Note: Special dividends are not included. All data came from

    PIMCO Total Return Fund (PTTRX) is the largest fixed-income mutual fund that is most used by defined contribution plans. It has a 0.46% annual expense fee that was not included in the calculation.

    Dividend Growth2.31%8.82%-40.54%2.23%-0.42%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%
    Purchasing Power Change-1.54%9.16%-42.18%-0.93%-2.49%

    Fidelity Strategic Income (FSICX) was created to "seek high level of current income". It has a 0.70% annual expense fee that was not included in the calculation.

    Dividend Growth-17.26%4.92%-2.63%14.84%-25.50%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%
    Purchasing Power Change-21.11%5.26%-4.27%11.68%-27.57%

    T. Rowe Price Retirement 2010 (TRRAX) is a target date fund that is specifically developed for investors who retired between 2000 - 2010. It has a 0.61% annual expense fee that was not included in the calculation.

    Dividend Growth-2.50%0.00%-10.26%5.71%2.70%
    (minus) Inflation3.85%-0.34%1.64%3.16%2.07%
    Purchasing Power Change-6.35%0.34%-11.90%2.55%0.63%


    If you're relying on Mutual Funds to generate retirement income or are currently holding your retirement savings in cash or low rate investments you need to consider the effects inflation is having on your future spending power. Stock dividend increases aren't a guarantee, of course. But given a choice between an absolute certainty that your buying power decreases due to inflation over time and a strong chance to keep pace or exceed inflation that's backed up by decades of evidence, investors would be wise to make dividend growth stocks a core holding in their retirement portfolio.

    The 4% Retirement Portfolio service recommends OHI.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 27 12:38 PM | Link | Comment!
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