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Doug Meeks
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Doug Meeks is a Registered Investment Advisor in Plano, Texas. He is the Principal Advisor for Pier LLC, an investment management company. The focus at Pier is to build and manage income-producing portfolios for our clients. We provide individual service to those who are inclined to see their... More
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  • A Dividend Growth Portfolio Is Not Replaced By VIG

    While saving for retirement under ERISA or the Employee Retirement Income Security Act of 1974, many investors have been compelled to have their retirement savings invested in Mutual Funds, this has built an industry around funds and an army of financial professionals that work with funds. In truth, this has probably helped more people than it ever hurt. I have heard some sad stories of what happens to many people in the markets.

    Today a demographic shift is underway and more people are retiring than ever before. These people need goals other than higher prices from the stock market, they need an income goal. A few savers have sufficient capital to allow conservative and flexible plans, but most are wanting the best sustainable idea they can get.

    Investors approaching the market with this idea do not have a theory, they have a budget and the hope of a long life.

    Leading to this theoretical discussion…...

    Retiree: I need a paycheck, but I want to stay ahead of inflation.

    Financial Advisor: We can sell 4% of your holdings and get your paycheck, we can bump it up each year for inflation. You probably won't run out of money.

    ……Retiree goes home unhappy, reads an article like this one by David Van Knapp, and returns the next day.

    Retiree: Why would I sell my assets for 4% if Realty Income (NYSE:O) is paying a 4.5% yield every year and increasing it every year.

    Financial Advisor: You would not want to own just one stock. Even with Realty Income looking healthy and having a long record of increasing dividends, it's still not a good idea to have just one stock.

    Retiree: I can find all kinds of good companies that will give me a blended 4% yield, look here. Why would I sell assets for 4%?

    Financial Advisor: You can not find enough companies to be price efficient and thus have low enough risk.

    Retiree: Really? I thought we were talking about income, not price. How many companies do I need?

    Financial Advisor: You need some bonds and an ETF or Mutual Fund, and I have one right here for you! The Vanguard Dividend Appreciation ETF trading under the symbol VIG.

    ........Retiree leaves unhappy.

    I do love Vanguard funds, they have proven to me that they are focused on their investors by keeping the fees low and delivering great products like VIG. That is much more than I can say about many Financial Advisors and fund companies that offer fee laden products, but I digress. I have the Supreme Court looking into that for me, no need to get into it here.

    Since VIG is built around the NASDAQ Dividend Achievers it is a great Fund to contrast with the needs of a retired person moving beyond theory to budgeting. With a budget you have an unrelenting set of expenses and hopefully some grace built in to handle the unknown. This unrelenting set of expenses needs an unrelenting income stream to take care of it.

    Does VIG match up with a budget? Let's look at it. VIG is currently made up of 163 companies that have increased dividends for at least 10 years. That means consistent repeatability and profitability, branding and good company management.

    Is Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) consistent like the companies it holds and consistent like a personal budget? - NO

    (click to enlarge)

    VIG has a variable payout often reducing its distribution (9 times since 2008). Income is slightly random but it is increasing. A dividend growth strategy is often an attempt to stabilize the income stream.

    Does VIG provide enough income? - NO

    (click to enlarge)

    The above graphs shows that at no time has VIG delivered more than 3.19% yield, and the majority of years have been below 2.4%. We are starting with the hope of a 4% payout from retirement, this has not been available from VIG.

    Does VIG offer more safety than just owning stocks? - NO

    Charts from BuyUpside.com.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Please note the correlation of the top three holdings in the Fund, Walmart (NYSE:WMT), Johnson and Johnson (NYSE:JNJ) and Pepsi (NYSE:PEP) to the Fund. All three are above a correlation of 0.93. The price change since 2008 of these three equities (the top three holdings in VIG) are about the same as VIG when blended.

    I will say that holding three stocks is not safer than owning the fund, but the largest components that make up the fund are very strongly correlated to the fund itself, this leads to a replacement idea for the fund by using the direct equity holdings, a good number would be 20 holdings, properly diversified with the same filters. The top 10 holdings are 35% of the fund and the top 20 holdings are about 54% of the fund.

    For our sample time frame VIG had a larger move down in 08/09 than the top three holdings. See below from Yahoo Finance.

    (click to enlarge)

    Conclusion

    Mutual Funds and Exchange Traded Funds, like VIG, lean toward a price only strategy. In the case of VIG, it's a really good price-only strategy having out performed the SP500 for a long time. However, this fund is not an income managed vehicle, pure equity Mutual Funds and ETF's do not provide income focus at the level desired by many dividend growth investors. Even being built on one of the most stable income paying group of stocks in the market, the fund is just not able to put income ahead of price, and VIG does not compensate for that by being safer than it's components in terms of price.

    What about the Pro Shares S&P500 Dividend Aristocrats Fund trading under the symbol NOBL?

    NOBL is an ETF that holds the Dividend Aristocrats, a group of S&P500 stocks that have increased dividends for 25 straight years. That is a much longer dividend growth filter than the 10 years in VIG. The result is that NOBL is reduced from the 163 companies held in VIG to about the 53 companies in the Aristocrats Index, many of these companies are very recognizable names.

    NOBL has been in action since October 2013, so the history is very short but despite holding only the most stable dividend paying companies they have a variable payout.

    From ProShares web site:

    In terms of many personal budgets income variability is the same as price variability, it is the income stability of dividend growth investing that creates an appeal. An investor can take on market risk to grow and have a fairly reliable, steady, growing income.

    Make a plan, and get to work.

    Mar 05 2:05 PM | Link | 4 Comments
  • Avoid High Fees From Your Financial Advisor

    In this simple article I am going to cover one way you can help your investments perform better. Avoiding high fees.

    Your Financial Advisor is a good place to start looking for high fees.

    If you have hired a Registered Investment Advisor, often called "Financial Advisor" or RIA, then this individual should have your best interest in mind. This means being as transparent as possible with ALL fees and using good judgment when fees are needed.

    Unfortunately I want to go over a few fees that I have seen far too often that have little or no merit. If you see any of these fees, please ask your Advisor about them and be sure to ask.... "Why?"

    Four types of fees.

    1. Up Front Fees.

    2. High Fee Investments, 12b-1 and deferred charges.

    3. Advisor Fees.

    4. Activity Fees or Churn.

    1. Never pay "Up Front"

    Money removed up front is never invested. Money lost to this type of fee can not participate in failure or success. This can be a diverse group of fees but all are 100% losses to you.

    Never pay up front to open an account. Brokerages, like Scottrade and others, do not charge to open accounts and neither should your Advisor. In fact, if you ask, most brokerages will give you incentives to move your account into their care. They will even reimburse transfer fees in many cases and award free trades.

    Some Advisory firms, even 'fee only' firms, charge their base fee up-front. RIA's do have rules about this and it can not exceed a certain amount or time frame, unless it has detailed disclosure. These fees create a feeling of commitment in the client. Leaving an Advisor with this fee often requires a confrontation to recover the fees. RIA's are required to return these fees to clients on a pro rata basis at the end of services provided.

    Advisor's fees should be charged a reasonable time after services are provided.

    More Up-Front Fees

    Advisors often use mutual funds with more up-front fees. Here is an example from Franklin Templeton.

    (click to enlarge)

    Yes, these can be as high as 5.75% as shown above. This has the same effect as the base fee from an Advisor but is often much higher and is IN ADDITION to the other fees. Remember this means if you make a $100 per month contribution to your advisor and something like this is in your account then you get $94.25 invested in the fund (and still get to pay the other fund fees and advisor fees).

    A simple review of your account will tell you right away if these funds are being used. A part of these fees are often returned to the Advisory firm as compensation for choosing the fund, these funds are very tempting to the Advisor in terms of the Advisor getting paid.

    I find these fees the most offensive because better decisions can easily be made for the client.

    2. High Fee funds, with 12b-1 fees and sales charges

    There is a case heading to the Supreme Court right now that addresses this issue..... "Did your Advisor choose the best priced fund for you?" Link to case here. Lower cost funds should be chosen for you if they are available, funds should at least be competitive.

    If you could chose between three S&P500 funds then there is little doubt you would choose the lowest cost fund. Yes, I'm assuming equal reputation and safety of the assets.

    It's very simple to look into this, note the expense ratio's below:

    0.05% - Vanguard S&P500 Admiral (MUTF:VFIAX)

    0.25% - USAA S&P500 Fund (MUTF:USSPX)

    0.56% - Blackrock S&P500 (MDSRX)

    I would question the use of funds with an expense ratio above the Vanguard Funds. These three companies are doing a good job with fees. Nothing wrong with Blackrock or USAA, but if your Advisor is using them, he needs to justify the additional expense and you should ask him for that answer.

    Even worse is that some funds are disguised S&P 500 Funds, like the Franklin Templeton Growth Fund which states clearly in the prospectus that it is benchmarked to the SP500. Link here. This means that you could have an S&P500 Fund with a sales charge of 5.75%. Do you? Please check on that. Ask your Advisor why he didn't pick the Vanguard S&P500 fund for your account.

    Many mutual funds allow for Advisor compensation to come from 'Wrap-fee' programs where the firm selecting the fund is compensated from the fund and thus from the client. These fees can be deferred sales charges and the annually charged 12b-1 fee.

    In the example fund page above I circled the 12b-1 fee. This is a reoccurring charge and is often, but not always, shared by the brokerage and the Advisor. Investments are available with the same goals, risk and most of the same holdings as these high fee funds.

    3. Advisors Fees, these should always be "fee only".

    The shift to "fee only" advisory services is a good thing. But how much should this fee be?

    Definition of Fee Only: The only revenue stream for the Advisor is from client Assets Under Management (or AUM for short) and is from a set percentage on an annual basis. No other fees go to the Advisor. Investopedia describes Fee Only Advisors here.

    So an Advisor with a Fee-Only structure would charge like the example below, and NO OTHER FEES are available to the advisor from the client.

    $100,000 in AUM at 0.75% = $750 per year in fees.

    In fairness this AUM model needs to have some scale. The larger the account the lower the percentage should go. Advisor's should have a maximum of 1.0% for the smallest accounts, decisions should be carefully made as to the size of each account allowed to be under management. Accounts in the $500,000 dollar range should be 0.75% (or lower). Balances above that level should move down orderly to a fee around 0.35% for large accounts (or lower!).

    If Mutual Funds are being used then the firm should charge on the low side of these rates. Mutual Funds and even Exchange Traded Funds represent some degree of external management of the account and should be evaluated in selection of an Advisor and in the evaluation of his fees.

    4. Account Activity or Churn

    The reasons and timing of account activity can vary widely and I would never question that. However, when mutual funds are sold it can trigger fees to the account via new sales charges and deferred charges. In these cases strong justification is needed for the changes. You should make note of activity in your account and make sure that substantive changes are made via the activity. This type of activity is called "churn", here is a link to the definition from Investopedia.

    Conclusions

    When I was starting my Advisory Firm I spoke with some advisors that have been doing it a long time. I found that these guys were sales people and do little, if any, management of assets. I found them to be honest and good people, but representing them as Investment Advisors was a big stretch in my mind. It is very important to be encouraged to save and to have goals. Many Advisors are skilled at this and it's needed work. However, too often the fees against client assets are hard to justify even with the addition of great coaching.

    Like any investment you make, invest some time into the practices of your Advisor if you have one. It could boost your performance. I will be happy to do my best to answer specific questions, I will not be able to comment on strategies, investment types, risk level or timing from other Advisors. I will certainly look into the fees, all are welcome to look into mine.

    Your 'all in' fees should be less than 1.25%. The days of higher fees are simply a thing of the past, this is a good thing. Information is free and abundant to those who know how to look. However, the very individuals that need this information most are the ones not able to find or understand it. These individuals are in need of the highest Fiduciary standards, and shame on any who take advantage of them.

    Best regards,

    Doug Meeks, RIA

    Tags: retirement
    Feb 26 3:11 PM | Link | 2 Comments
  • The Markets Are Down Big, Are You Getting Your Returns?

    I know what you are thinking.....

    "Should I sell now?"

    If you are in the market for just price then I'm hurting for you right now. I honestly don't have an answer. You did just watch a big part of those 2013 gains disappear. In fact you are now back to October 18, 2013, like these last 4.5 months never happened.

    If I was an MPT guy I would tell you not to worry that the long term average of the markets is something great like 10% CAGR and just hang in there we are efficient as hell, and you'll be fine.

    I'm happy to tell all of you who are investing for dividend growth (in quality stocks, and not just one or two of them) that things are great. Nothing has changed but the price. I want to further encourage you by taking a look at a return.

    I like to keep things simple. From Investopedia:

    (click to enlarge)

    I would add to this that the capital gains portion of a return is only meaningful when the investment is sold or closed out. A capital gain return does gain some mathematical relevance with large moves and can be further solidified, without selling, by adding some smart option contracts or stop loss orders. However, until the dust settles and you have cash in your hand you do not have a return.

    If you want more return..... well you have to buy another investment and another set of risks. All understand this.

    These kinds of returns are the returns that cause sell-side anxiety.

    Do you sell?

    When capital gains are the major goal or major component of your return then at some point you have to sell to get any return.

    Days like today and the resulting emotions are what cause sell side anxiety and often under performance. Risk against the price component of return is often forgotten about when the markets are moving up and up. Then we have a hard sell off, and we are all reminded that the sweet song of MPT and capital gains are best regarded over long time frames.

    When approaching the market I plan on dividends to be the most measurable and useful return. Dividends are new capital. You own a company that proceeded to get some business done and return you some of the profits. Your return is very real in this case, depending on what you do with it can have other results but because it is a cash payment it's a realized return.

    My returns are doing just fine right now. If you are savvy Dividend Growth Investor then your returns are doing just fine right now as well.

    I'm not a fan of falling prices, but if you are in the market then falling prices should be a part of the plan that you can withstand. The other part should be a growing return of new capital via a dividend.

    Feb 03 9:07 PM | Link | 4 Comments
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