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KSAccountant
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I am following the example of several other Seeking Alpha contributors who publish their stock portfolio. I do so to give greater insight into some of the comments I write. For better understanding, I separate my portfolio into three categories: 1. Taxable, 2. Roth IRA, and 3. SIMPLE IRA. My... More
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  • Dividend Growth Stock VS Index - ten year estimate (OH CRAP scenario)
    With all the conversations about index investing versus individual stocks, I decided to run two different scenarios. The first scenario I posted previously, this scenario covers an “oh crap” situation whereby XOM is forced to completely eliminate its dividend. I used the same facts as the previous post but will restate them here.
     
    I selected Vanguard Total Stock Market Index (MUTF:VTSMX) and ExxonMobil (NYSE:XOM). I chose XOM because it is the largest holding of VTSMX. So here are the basic facts:
     
    VTSMX
    Expense Ratio: 0.18%
    Average Yield over last 5 years: 1.91%
    Price used for calculation: 29.18
    Average Div. Growth Rate over last 5 years: 0% (sporadic)
     
    XOM
    Expense Ratio: 0%
    Average Yield over last 5 years: 2.43%
    Average Div. Growth Rate over last 5 years: 5%
     
    I used 5 years before retirement and 5 years after retirement for a total of 10 years. I also used the stated fact that both investors need $125 a year. Also, since VTSMX is an index fund, I gave it a 5% bonus in down market years in comparison to XOM and a 5% penalty in up market years in comparison to XOM simply because it is an average.
     
    Investor A – puts $5,000 into VTSMX and reinvests dividends for 5 years and then stops reinvestment after that point.
    Investor B – puts $5,000 into XOM and reinvests dividends for 5 years and then stops reinvestment after that point.
     
    With those facts in mind, I randomly chose up and down market amounts (I could back test but as all prospectuses say “past results are not predictive of future results”.)
     
    Here are the results (I will show only account balances to save on space):
    Year 1
    Investor A – VTSMX 0%, Return Account balance – $5079.35
    Investor B – XOM 5% Return, Account balance – $5292.44
     
    Year 2
    Investor A – VTSMX 5%, Return Account balance – $5460.97
    Investor B – XOM 10% Return, Account balance – $5949.99
     
    Year 3
    Investor A – VTSMX -25%, Return Account balance – $4177.42
    Investor B – XOM -30% Return, Account balance – $4302.68
     
    Year 4
    Investor A – VTSMX 20%, Return Account balance – $5109.98
    Investor B – XOM 25% Return, Account balance – $5527.69
     
    Year 5
    Investor A – VTSMX 3%, Return Account balance – $5360.34
    Investor B – XOM 8% Return, Account balance – $6131.08
     
    Starting in years after this all dividends are taken in cash and shares are sold to get the $125 needed
     
    Year 6
    Investor A – VTSMX 5%, Return Account balance – $5598.54
    Investor B – XOM 10% Return, Account balance – $6743.97
     
    In Year 7 XOM is forced to cut its dividend and the stock drops 40% as a result. VTSMX is also effected since XOM is its largest holding but only by 1% over normal market returns. Investor B would be required to sell 2 shares a year of XOM to get the required $125. Now the scenario continues.
     
    Year 7
    Investor A – VTSMX -15%, Return Account balance – $4733.41
    Investor B – XOM -20% Return, Account balance – $3889.49
     
    Year 8
    Investor A – VTSMX 30%, Return Account balance – $6120.48
    Investor B – XOM 35% Return, Account balance – $3919.22
     
    Year 9
    Investor A – VTSMX 3%, Return Account balance – $6270.15
    Investor B – XOM -2% Return, Account balance – $3867.11
     
    Year 10
    Investor A – VTSMX 3%, Return Account balance – $5986.76
    Investor B – XOM -2% Return, Account balance – $3931.09
     
    Investor A had to start selling shares immediately in Year 6 to meet the $125 yearly demand.
    Investor B never sold any shares because the dividend growth covered the $125 yearly demand.
     
    End results:
    Investor A – 19.74% Return
    Investor B – (21.38)% Return
     
    This was not a scientific sketch, just an exercise to compare an index to a dividend growth stock. My post is not meant to be an “end all” of conversation nor an academic study, just posting my thought process for discussion and review (both good and bad).
    Sep 07 3:17 PM | Link | 4 Comments
  • Dividend Growth Stock VS Index - ten year estimate
    With all the conversations about index investing versus individual stocks, I decided to run two different scenarios. I decided to use Vanguard Total Stock Market Index (MUTF:VTSMX) and ExxonMobil (NYSE:XOM). I chose XOM because it is the largest holding of VTSMX. So here are the basic facts:
     
    VTSMX
    Expense Ratio: 0.18%
    Average Yield over last 5 years: 1.91%
    Price used for calculation: 29.18
    Average Div. Growth Rate over last 5 years: 0% (sporadic)
     
    XOM
    Expense Ratio: 0%
    Average Yield over last 5 years: 2.43%
    Average Div. Growth Rate over last 5 years: 5%
     
    I used 5 years before retirement and 5 years after retirement for a total of 10 years. I also used the stated fact that both investors need $125 a year. Also, since VTSMX is an index fund, I gave it a 5% bonus in down market years and a 5% penalty in up market years simply because it is an average.
     
    Investor A – puts $5,000 into VTSMX and reinvests dividends for 5 years and then stops reinvestment after that point.
    Investor B – puts $5,000 into XOM and reinvests dividends for 5 years and then stops reinvestment after that point.
     
    With those facts in mind, I randomly chose up and down market amounts (I could back test but as all prospectuses say “past results are not predictive of future results”.)
     
    Here are the results (I will show only account balances to save on space):
    Year 1
    Investor A – VTSMX 0%, Return Account balance – $5079.35
    Investor B – XOM 5% Return, Account balance – $5292.44
     
    Year 2
    Investor A – VTSMX 5%, Return Account balance – $5460.97
    Investor B – XOM 10% Return, Account balance – $5949.99
     
    Year 3
    Investor A – VTSMX -25%, Return Account balance – $4177.42
    Investor B – XOM -30% Return, Account balance – $4302.68
     
    Year 4
    Investor A – VTSMX 20%, Return Account balance – $5109.98
    Investor B – XOM 25% Return, Account balance – $5527.69
     
    Year 5
    Investor A – VTSMX 3%, Return Account balance – $5360.34
    Investor B – XOM 8% Return, Account balance – $6131.08
     
    Starting in years after this all dividends are taken in cash and shares are sold to get the $125 needed
     
    Year 6
    Investor A – VTSMX 5%, Return Account balance – $5598.54
    Investor B – XOM 10% Return, Account balance – $6743.97
     
    Year 7
    Investor A – VTSMX -15%, Return Account balance – $4733.41
    Investor B – XOM -20% Return, Account balance – $5395.18
     
    Year 8
    Investor A – VTSMX 30%, Return Account balance – $6120.48
    Investor B – XOM 35% Return, Account balance – $7283.49
     
    Year 9
    Investor A – VTSMX 3%, Return Account balance – $6270.15
    Investor B – XOM -2% Return, Account balance – $7137.82
     
    Year 10
    Investor A – VTSMX 3%, Return Account balance – $5986.76
    Investor B – XOM -2% Return, Account balance – $6495.42
     
    Investor A had to start selling shares immediately in Year 6 to meet the $125 yearly demand.
    Investor B never sold any shares because the dividend growth covered the $125 yearly demand.
     
    End results:
    Investor A – 19.74% Return
    Investor B – 29.91% Return
     
    This was not a scientific sketch, just an exercise to compare an index to a dividend growth stock. My post is not meant to be an “end all” of conversation nor an academic study, just posting my thought process for discussion and review (both good and bad).
    Sep 07 3:08 PM | Link | Comment!
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