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I am an individual investor, and have never been employed in the securities business. My professional background is in the finance area. I have managed my own investments for over 30 years. For most of that time, my focus was on portfolio building using individual stocks. About 5 years ago, I... More
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  • On The Matter Of Replacing Bonds With Dividend-Paying Stocks. Crazy Like A Fox?

    Today's article is going to come from a very interesting place for ETF Monkey.

    Readers who have followed my work will by now be familiar with its main focus, namely using ETFs to build low-cost, extremely diversified portfolios. An example of this is the ETF Monkey Vanguard Core Portfolio; based on just three ETFs yet offering well-balanced exposure to both domestic and foreign stocks as well as bonds. In that article, I advocated establishing target weightings and sticking to these. I wish to reiterate that, for many investors, I would recommend sticking to that game plan.

    In the main, I run my own portfolio that way. I use a few more than three ETFs, but I am very conscious of maintaining and rebalancing to target weights. For perspective, as of this morning, 81.11% of my total portfolio is in ETFs.

    However, I occasionally make an exception and maintain modest positions in individual stocks for specific reasons. This article will talk about such a reason and, in the process, hopefully offer those who may be a little more adventurous something to think about.

    As of this writing, two such positions are AT&T Inc. (NYSE:T) and Verizon Communications (NYSE:VZ), each of which holds a weighting of roughly 2.5% in my portfolio. I have actually held both stocks for a over a year but recently added to each position to bring it up to the weighting I mention.

    Let's now turn to the reason I did so.

    Bonds vs. Dividend-Paying Stocks in the Current Environment

    One of the core holdings is my portfolio is the Vanguard Total Bond Market ETF (NYSEARCA:BND). For more about this ETF, feel free to check out this article. To reiterate, this ETF is still a core holding for me, nothing has changed about that. However, the specific set of market circumstances in which we find ourselves today started me thinking along the lines of what I will share next.

    Here are a couple of salient data points around BND. Feel free to check out my data from the fact sheet if you wish.

    1. On the 'Overview' tab, we can see that the current SEC Yield is 2.20%.
    2. On the 'Portfolio & Management' tab, we find that the duration of the ETF is 5.7 years.

    In the article I link above, I explain the concept of duration as it applies to a bond ETF. I will summarize ever so briefly here. The theory is that, should interest rates rise 1%, the value of BND should decrease somewhere in the neighborhood of 5.7%. Given the fact that interest rates are expected to rise at some point, though exactly when is certainly unclear, this becomes a matter of some concern.

    In contrast, at today's prices, both AT&T and Verizon are paying dividends in excess of 5%, close to 6% in the case of AT&T. Over the past year, both have declined further than the S&P 500 in price. Further, as I write this article, we are hovering just above the official correction level on the S&P 500 and the NASDAQ and are in correction territory on the Dow. In other words, at least some of the air has been let out of what was an overpriced market.

    That led me to ponder a couple of interesting questions: 1). In my opinion, what is the level of risk that AT&T and Verizon could drop an additional 5.7% in price, as BND should do if rates were to rise 1%? 2.) How does that risk measure up with a current dividend in excess of 5% as opposed to the 2.2% I am receiving from BND?

    As far as the prospects for AT&T and Verizon going forward, I would recommend readers search those ticker symbols right here on Seeking Alpha and read some of the recent, high quality articles that have been written on these companies.

    The bottom line? I recently used some cash that my weighting targets would have dictated go to bonds to increase my weighting in AT&T and Verizon instead.

    Now, before you say it, I know I am taking additional risk in the fact that both of these are telecommunications companies. But, that's my prerogative.

    However, if the basic idea appeals to you, here are a couple of potential variations you might consider.

    Idea #1: A Triumvirate of Individual Stocks

    For our first variation on the theme, I started to think about picking three securities that met the following criteria:

    1. They must offer a solid history of dividend performance.
    2. They must have underperformed the market.
    3. They must be from three different sectors, for diversification.

    Below, I present three stocks that meet those criteria: Johnson & Johnson (NYSE:JNJ), AT&T Inc. , and Wal-Mart Stores, Inc. (NYSE:WMT).

    Let's start by looking at their performance over the past year, compared to the S&P 500.

    ^GSPC Chart

    ^GSPC data by YCharts

    Clearly, for one reason or another, all three have underperformed the S&P 500 over that time frame. Of course, anything can happen. However, this would appear to minimize the risk of the group, taken together, experiencing a further decline of more than 5.7% in price.

    They come from three different sectors, yet all fulfilling basic needs. There is nothing esoteric about any of them.

    As far as dividends, as of their respective closing prices on 9/24/15, AT&T is paying a dividend of 5.85%, Johnson and Johnson 3.24% and Wal-Mart 3.07%. If you were to purchase equal dollar amounts of all three, you would end up with roughly a 4% dividend.

    Lastly, both Johnson and Johnson and Wal-Mart meet the current criteria for inclusion in the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and all three meet the criteria for inclusion in the Vanguard High Dividend Yield Fund (NYSEARCA:VYM).

    Idea #2: A Top-Quality ETF to Accomplish the Same Goal

    For our second variation, we will actually use the second of the ETFs mentioned at the conclusion of the last section, the Vanguard High Dividend Yield Fund.

    Similar to the three stocks featured, this ETF has also underperformed the S&P 500 over the past year, as shown here.

    ^GSPC Chart

    ^GSPC data by YCharts

    The fund carries a rock-bottom expense ratio of .10%. As of this writing, it carries an SEC Yield of 3.43%, a little lower than the combined 4% of the three stocks I suggest above but still substantially higher than BND's 2.20%.

    This next picture captures several details around the fund's composition.

    (click to enlarge)

    Summary and Conclusion

    As mentioned in the outset, this article represents a slight departure from my normal work as ETF Monkey. We discussed stocks as opposed to ETFs, at least in part. We also discussed the perhaps more radical idea of at least temporarily substituting dividend-paying stocks for some portion of our traditional bond weighting, given the present environment.

    Whether or not you agree with me, I hope you have found this article stimulating and worth reading. As always, I welcome your comments.

    Happy investing!

    Sep 25 3:43 PM | Link | Comment!
  • Starbucks' Sale Of La Boulange Highlights So Much That Is Wrong With Our Culture

    This is a rant.

    I am ETF Monkey. Not Stock Monkey, ETF Monkey. For the most part, my goal is to write about ETFs. But today I am going to write about a stock. I am going to write about Starbucks (NASDAQ:SBUX). A company I like. A company I am going to try very hard to like after today. But a company that just made it a little harder for me to do so.

    What has made it so difficult for me? This announcement, released two days ago, June 16, 2015. In a masterpiece of "corporate speak," Starbucks announced that they are going to "close all 23 La Boulange retail (bakery cafes) locations, as well as the two manufacturing facilities that serve those locations, by the end of September 2015." In other words, pretty much everything that was actually La Boulange. What do I mean by that?

    La Boulange - A Brief History

    La Boulange was founded in San Francisco in 1999 by Pascal Rigo, a native of Bordeaux, France who later emigrated to the United States. Rigo had earlier started the Panissimo Group, starting with a small bakery on Pine Street in San Francisco. Between 1999 and 2010, the date of the article linked above, La Boulange had expanded to 13 locations--all in the San Francisco Bay Area--and was generating $19 million in sales. By the date of the sale to Starbucks, announced on June 4, 2012, La Boulange had grown to 19 locations.

    All baking was done each night in a central bakery, and the freshly baked bread and pastries were delivered to each retail location prior to their 7 a.m. opening time. Any items left over at the end of the day were donated to local charities, ensuring that everything sold in their stores was fresh.

    Clearly, the combination of La Boulange's ambiance, quality freshly-baked items, as well as their other offerings, captured both the hearts and wallets of local consumers.

    After the Sale

    Reaction from locals to the sale was immediate, and largely negative. Here is just one example, tweeted by a retail analyst in the San Francisco area:

    Rob Wilson @RetailRobWilson

    This just sucks! $SBUX buying my FAVORITE lunch spot. The mom & pop atmosphere will all but disappear at #La Boulange. #SadDayforSF

    But more than that, once the "La Boulange" items started to appear in Starbucks stores, customers quickly noticed that they, uh, weren't exactly the freshly-baked and delivered items that you got in an actual La Boulange. In fact, one blogger went as far as to call them 'The Most Disgusting Breakfast On Earth.'

    The End of the Story?

    Apparently, yesterday's announcement means the end for the retail concept known as La Boulange.

    • For employees, it apparently means that Starbucks will attempt to relocate them to nearby Starbucks locations, if possible.
    • For Pascal Rigo, it apparently means that he will move on to other ventures, including "dedicating more time and resources to his nonprofit ventures . . . ." That sounds, to me, like corporate-speak for "we have a non-compete agreement firmly in place so Pascal doesn't start another competing concept."
    • For consumers, it appears that the unique concept known as La Boulange, with the delicious freshly baked bread and pastries, will simply disappear.

    At the end of the day, then, it would appear Starbucks bought La Boulange for their intellectual property.

    Starbucks has the right, of course, to run their business as they see fit. I don't deny them that.

    I wonder what, though, this says about our culture? Apparently, our lives are so rushed, so fast-paced, that speed is more important than quality? Gone is the appeal of a freshly baked croissant, literally minutes (or at the most a few hours) out of the oven, in favor of something that has been baked far away, forced to survive channels of distribution, and reheated in an attempt to recapture some of the original quality? Essentially, not much different from what you could find in your local supermarket. All in the name of speed, and efficiency.

    And for the local community of San Francisco? Just one more business shut down. One more favorite hangout that no longer exists. One less choice, replaced by incessant homogenization.

    Investment Thesis

    Oh, by the way, buy Starbucks. From a business standpoint, I'm sure this move makes eminent sense.

    From a cultural standpoint, though, I wonder if we have become desensitized to just how much we are missing?

    Tags: SBUX, long-ideas
    Jun 19 3:33 PM | Link | 4 Comments
  • OK, Nokia, Microsoft, And AT&T. Put Up Or Shut Up

    At the Lumia 1020 release event, Stephen Elop promised that the phone would be the beneficiary of a coordinated marketing campaign featuring the combined efforts and budgets of Nokia, Microsoft, and AT&T. He basically promised that nothing would be hidden in a back room, or under the counter, as many have observed at both dedicated stores as well as the cellular kiosks at Costco.

    Even though I am a patient Nokia long, I am watching to see how closely the results match the promise. There is a innovation window here that needs to be exploited. It's time to put up or shut up.

    Disclosure: I am long NOK.

    Tags: NOK, MSFT, T
    Jul 24 2:43 PM | Link | Comment!
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