Some even finer points In addition to David's points on REIT distributions....capital gains distributions may be long term, short term (very unusual) or unrecaptured sec. 1250. This latter tax character is an important metric, as it tends to reflect how much of the REITs appreciated assets it is liquidating, as Sect 1250 capital gains represents the amount of past depreciation that was taken on sold properties. REITs showing a spike in 1250 distributions suggests it is selling assets to pay distributions...an alert that things may not be ok with the REIT. In addition, like an MLP, REITs may return capital as part of their distribution...which is not necessarily a bad thing, providing the Return of Capital distribution doesn't exceed their non-cash expenses...typically 10 to 20% of the distribution. ROC that is exceeds this and grows suggests problems with the REIT.
And although I do indeed appreciate your thorough discussion of these (and other) REITs, I'm sorry but I have to disagree completely with the idea of buying units of anything that is not listed and traded on a large stock exchange. The ability of shareholders to sell any investment they hold, at any time, for any reason, is vital to the financial health of the economy. Liquidity matters. Unlisted REITs offer little or no liquidity, and unitholders must exist under the rubric of 'trust us...we know what's good for you', which invariably leads to self dealing on the part of the unlisted REIT management. Yes, broad coverage by such as Morningstar and the recent SEC rulling requiring the unlisted REIT periodically report MARKET value of units to unitholders, will help 'motivate' the unlisted managers...but why even go there. Many great REITs are there to choose from with full liquidity.
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
David But this is the definition of 'insurance'. Your homeowner's insurance works the same way...the insurer collects premiums, pools risk, determines loss risk (to them), pays these losses and keeps what is not paid out. For such property/casualty/health insurance, we generally don't concern ourselves with what the insurers invest our premiums in...we concentrate on the quantity and quality of coverage (mutual insuraers can be a small variation to this).
Life annuities are a form of insurance, by offering a hedge on longevity risk. Your 'premium' for this risk is surrendering any 'unused' portion of your initial lump sum should you die prematurely. The insurer pools the assets and when the insured's dies prematurely, uses these 'unused' surrenders to pay future life annuity benefits for those who have survived past life expectancy. Now, if in excess of future loss, the insurer COULD use this excess to increase life annuity payments, and hence could be considered another 'Market', but knowing insurers as I've come to know them, I would doubt it :-)
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
Richjoy Good points applicable to an investment manager. . As a self-manager, I don't see my role as convincing anyone to do anything. I'm not doing this for a fee and I'm not looking for clients. The value of these forums is education and a free-flow of ideas, and my comments are directed that way. The very LAST thing I want to do is to try to convince a retiree to invest for income....that's something he/she must figure out for themselves. And IF they elect to go in that direction, they MUST, in my opinion, teach themselves to ignore stock price movement just as they would ignore stock and bond price movements of the investments of the insurance company they bought their life annuity from.
Forget The Insurance Company, Build Your Own Annuity [View article]
"Annuity Credits", along with the "mortality expense" paid by deferred annuity holders, and most likely part of the long term investment returns of the insurance company's assets....all combine to pay the premiums for the 'pooled mortality credits'. Longevity risk is a risk like any other household risk that we usually manage by transferring this risk to an insurer and paying them a premium. In short, we accept a known small loss (the premium) in exchange for avoiding an unknownl large loss...in this case, outliving our assets. Insurers do not provide this benefit for free.
And this is pretty easy to do yourself. As the OP suggests, simply buy long term bonds and hold them to maturity. It doesn't get much easier than that. No, you won't have your principal returned to you as you hold the bond....as a life annuity would do....but then, you don't lose any 'unused' principal if you die prior to your life expectancy, you have the full value of the investment in your estate when you die and you can liquidate early if need be....none of which can you do with a life annuity.
But heck...if a life annuity from an insurer floats your retirement income boat...then perhaps thats where you should be :-)
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
Robert's point is central to understanding and employing an "Income Only" approach to retirement income investing.....the ability to ignore...and I genuinely mean IGNORE...stock price movements, and instead, pay attention to the company's ability to generate the free cash flow that is necessary to sustain, and hopefully grow, their quarterly dividend payments. Standard CAPM and 'efficient frontier' metrics of measuring a stock's volatility and "RISK" simply have no meaning and serve only to complicate and obfuscate the real underlying company metrics that an income investor must pay attention to. If a retiree cannot let go of the old paradigm, then they should not be wading in the waters of pure income investing.
Interestingly, when one buys a life annuity, at that point they will employ at least part of the principals of income investing....the new annuity holder will typically ignore wide market fluctuations, even though the insurance company is paying close attention. But a failure of the insurer could result in a loss of the life annuity, or at least a reduction of its payments, just as would happen if the individual income investor lost income due to a stock's dividend cut or dividend elimination. But I guess, if you don't have to see it, you tend to ignore it :-)
Dividend Growth Portfolio Semi-Annual Review: Pretty Boring Stuff... The Dividends Just Keep Increasing (Yawn) [View article]
David Good to see your selected holdings, and good to see somebody else who does this besides me :-)
I too track dividend growth stocks to find those whose dividend rate of growth has declined as a potential danger sign and cause for 'firing' it out of the income portolio.
Another point you didn't mention is to actually track each stocks current yield. A sharply dropping CY suggests there is a 'run' on the stock, with its price being bid up, for whatever reason. For an income investor, this presents a 'yield arbitrage' opportunity. I've done this with PSA and OGE in the past couple of years. Of course, the income investor needs to keep their eyes on replacement income stock. to ensure no added risk to the income is being taken in making the switch.
Its very refreshing to read the posts of someone who truly 'gets' income investing....please keep your articles coming!!!
Oh, and one other point you didn't raise...the cost of maintaining your income portfolio. If you hold this mix of income stocks for 2011, selling nothing and buying nothing, your gross expense, direct and indirect, for generating this income will be ZERO.
Forget The Insurance Company, Build Your Own Annuity [View article]
Bob Long term maturity bonds (that don't mature for, say, 30 years) will provide life income to a 70 or 80 year old. For a younger retiree, they may have to reinvest the bond redemption amount if they are alive when it is redeemed or called.
The principal risk with using bonds as annuity surrogates is default risk. I remember in 2008 the story of the retired couple who had placed virtually all of their retirement income into GM Bonds, which were rated AAA when they bought them. Who would have thought GM would file for bankruptcy? The primary defense against this risk is diversity amongst many bonds.
But other than a steady fixed income, self-made annuities using corporate or governement bonds have nothing in common with insurance issued life annuities. Self made bond-annuities have modest liquidity (they can be sold if some unforseen event occurs requiring cash, although there may be a penalty in the form of a discount on the bond's price at sale), flexibility (bond redemptions may be reinvested for a higher yield in later years) and there is a residual value in the estate of the retiree that can be passed to heirs. Now, insurance issued life annuities can have many permutations to them, including some annual inflation adjustement, a 'death benefit', a 'guaranteed' payment period (called a 'period certain'), a survivorship provision, etc, etc. But any of these add-ons will drop the monthly benefit to pay for the add-on...some of them, lifke an inflation adjustement, will drop the payment substantially. You do not have to 'pay' for these features which will come with a bond-annuity, except for inflation adjustment....which is taken care of if the retiree uses stock dividends instead of or in addition to, bond interest to fund their life annuity...but that's another story.
Forget The Insurance Company, Build Your Own Annuity [View article]
"First, an annuity does not guarantee you income for life"...
Sure it does...an insurer will 'guarantee' their life income payment just as PG 'guarantees' me their common stock dividend or KIM 'guarantees' me the quarterly dividend payment on the series G preferred stock I hold. All of these 'guarantees' have one thing in common...they will be paid as long as the company can pay them. When they reach the point at which they either cannot or will not make the payments anymore, then the 'guarantee' becomes meaningless.
There are 'guarantees' that are backed by the government, such as FDIC for insured bank deposits below certain dollar deposit maximums based on account ownership or the PBGC that 'guarantees' most (but not all) private pension accrued benefits by employees. There are private company 'guarantees' backed by private insurance, such as the NCUA that backs credit union deposits for its memebers up to certain dollar maximums, SIPC for brokerage accounts should the brokerage go bankrupt and state regulated (but not state funded) 'guaranty' funds to cover certain losses when an insurer goes insolvent.
The insurance industry, IMHO, wants to associate their 'guarantee' with the above government or private insurance backed 'guarantee'. Now, the state overseen private 'guaranty' funds do indeed back some insurance product distributions, but these are typically limited to fixed payout products, dollar maximums may be less than government backed 'guarantees', there can often be long periods of interrupted payments while the insolvent insurer's assets are being sorted out and the resumed benefit may be less generous than what it was. So, for insurance products, I think you're safe if you just assume the 'guarantee' is nothing more than a marketing term, much like 'protection' and 'safety', two other marketing terms the insurance industry just loves to use.
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
A couple of points to keep in mind when considering a life annuity (or one of a hundred variations to a simple life annuity) from an insurer::
1. The insurance company invests the lump sum given them by you in exchange for the life income, in the same stock market you and I do. Certainly at a different scale...but the same marketplance
2. The insurer has no more idea what the markets will do than anyone else...so they asset allocate, just like everybody else
3. Insurers have expenses...lots of expenses, when you consider the commission to those selling their products, portfolio management, multiple levels of employees, overhead and a profit margin to make this all worthwhile to shareholders.
4. Insurance companies do not print money.
Now, in fairness, what insurers offer in life annuities is the administration necessary to provide sufficient investment liquidity to keep the monthly payments coming...this is their principal selling point, and I'd guess is the primary reason retirees are attracted to them....its a paycheck substitute, however expensive it is. Self management of investments will require the retiree not only to pick and choose the right investment allocation, but to time sale of securities to sustain cash flow.
For me, without a question, the best options is to spend the time to learn how to pick income producing securities (income ETFs for those who want to keep this research time to a minimum), monitor them to ensure the dividend/interest payments will be forthcoming, collect them, sweep them to the checking account...and enjoy retirement!!
4 High-Yield Diversified REITs With Strong Protection Against Dividend Cuts [View article]
Dividend Screen In evaluating REITs, you should probably not use P/E ratios, as GAAP earnings take into account non-cash expenses, such as depreciation, which for most REITs is a very large expense relative to revenue, hence P/E ratios will be heavily skewed, suggesting an overbought (high market price) position.
You should probably be using the industry standard measure of Funds From Operations (FFO).
Dividend Yield Vs. Dividend Growth: Are You Better Off With Eli Lilly Or Procter & Gamble? [View article]
Doug For those of us who invest for income, this question of lower yield/high dividend growth rate...vs....high yield/low dividend growth, has been discussed before. I've run crossover points for many stocks, both common and preferred. My findings are that high yield wins. Of course, as you point out, this will depend on one's age, life expectancy and future dividend growth rates.
One point in your calcs. For income investors, like me, I use nominal dollars, not compounded dollars, as income investors we don't invest dividends...we live on them. We spend them as we get them.
LordXot ran a series of graphs using high yield preferred stocks, and from these it is clear that for most retirees, high yield will provide more income over the long run then even the strongest growth C-Corps, such as PG or KMB or PM.
5 Crown Jewel REITs Paying 'Great Repeatable' Dividends Over 5% [View article]
And although I do indeed appreciate your thorough discussion of these (and other) REITs, I'm sorry but I have to disagree completely with the idea of buying units of anything that is not listed and traded on a large stock exchange. The ability of shareholders to sell any investment they hold, at any time, for any reason, is vital to the financial health of the economy. Liquidity matters. Unlisted REITs offer little or no liquidity, and unitholders must exist under the rubric of 'trust us...we know what's good for you', which invariably leads to self dealing on the part of the unlisted REIT management. Yes, broad coverage by such as Morningstar and the recent SEC rulling requiring the unlisted REIT periodically report MARKET value of units to unitholders, will help 'motivate' the unlisted managers...but why even go there. Many great REITs are there to choose from with full liquidity.
In any event, thanks for your ongoing series!
BruceM
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
But this is the definition of 'insurance'. Your homeowner's insurance works the same way...the insurer collects premiums, pools risk, determines loss risk (to them), pays these losses and keeps what is not paid out. For such property/casualty/health insurance, we generally don't concern ourselves with what the insurers invest our premiums in...we concentrate on the quantity and quality of coverage (mutual insuraers can be a small variation to this).
Life annuities are a form of insurance, by offering a hedge on longevity risk. Your 'premium' for this risk is surrendering any 'unused' portion of your initial lump sum should you die prematurely. The insurer pools the assets and when the insured's dies prematurely, uses these 'unused' surrenders to pay future life annuity benefits for those who have survived past life expectancy. Now, if in excess of future loss, the insurer COULD use this excess to increase life annuity payments, and hence could be considered another 'Market', but knowing insurers as I've come to know them, I would doubt it :-)
BruceM
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
Good points applicable to an investment manager.
.
As a self-manager, I don't see my role as convincing anyone to do anything. I'm not doing this for a fee and I'm not looking for clients. The value of these forums is education and a free-flow of ideas, and my comments are directed that way. The very LAST thing I want to do is to try to convince a retiree to invest for income....that's something he/she must figure out for themselves. And IF they elect to go in that direction, they MUST, in my opinion, teach themselves to ignore stock price movement just as they would ignore stock and bond price movements of the investments of the insurance company they bought their life annuity from.
BruceM
Forget The Insurance Company, Build Your Own Annuity [View article]
And this is pretty easy to do yourself. As the OP suggests, simply buy long term bonds and hold them to maturity. It doesn't get much easier than that. No, you won't have your principal returned to you as you hold the bond....as a life annuity would do....but then, you don't lose any 'unused' principal if you die prior to your life expectancy, you have the full value of the investment in your estate when you die and you can liquidate early if need be....none of which can you do with a life annuity.
But heck...if a life annuity from an insurer floats your retirement income boat...then perhaps thats where you should be :-)
BruceM
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
Interestingly, when one buys a life annuity, at that point they will employ at least part of the principals of income investing....the new annuity holder will typically ignore wide market fluctuations, even though the insurance company is paying close attention. But a failure of the insurer could result in a loss of the life annuity, or at least a reduction of its payments, just as would happen if the individual income investor lost income due to a stock's dividend cut or dividend elimination. But I guess, if you don't have to see it, you tend to ignore it :-)
BruceM
Dividend Challengers: 14 Increases Expected By The First Week Of January [View article]
At my first reply, my computer locked up and I thought I'd checked and saw that it hadn't posted...hence my second.
But whatever the case, thanks again, and keep them coming!!
BruceM
Dividend Yield Vs. Dividend Growth: Are You Better Off With Eli Lilly Or Procter & Gamble? [View article]
Bought it in late 2000 (November) at about $65/share paying $1.08 dividend.
Today its price is about $69.50, paying a $2.80 dividend.
So starting with my buy point through today (N= 11), the stock price has grown by an annualized .61%
The dividend has grown by an annualized 9%
Next question: can a stock like KMB continue this? No one sees the future, but I would doubt it.
BruceM
Dividend Growth Portfolio Semi-Annual Review: Pretty Boring Stuff... The Dividends Just Keep Increasing (Yawn) [View article]
Good to see your selected holdings, and good to see somebody else who does this besides me :-)
I too track dividend growth stocks to find those whose dividend rate of growth has declined as a potential danger sign and cause for 'firing' it out of the income portolio.
Another point you didn't mention is to actually track each stocks current yield. A sharply dropping CY suggests there is a 'run' on the stock, with its price being bid up, for whatever reason. For an income investor, this presents a 'yield arbitrage' opportunity. I've done this with PSA and OGE in the past couple of years. Of course, the income investor needs to keep their eyes on replacement income stock. to ensure no added risk to the income is being taken in making the switch.
Its very refreshing to read the posts of someone who truly 'gets' income investing....please keep your articles coming!!!
Oh, and one other point you didn't raise...the cost of maintaining your income portfolio. If you hold this mix of income stocks for 2011, selling nothing and buying nothing, your gross expense, direct and indirect, for generating this income will be ZERO.
BruceM
Forget The Insurance Company, Build Your Own Annuity [View article]
Long term maturity bonds (that don't mature for, say, 30 years) will provide life income to a 70 or 80 year old. For a younger retiree, they may have to reinvest the bond redemption amount if they are alive when it is redeemed or called.
The principal risk with using bonds as annuity surrogates is default risk. I remember in 2008 the story of the retired couple who had placed virtually all of their retirement income into GM Bonds, which were rated AAA when they bought them. Who would have thought GM would file for bankruptcy? The primary defense against this risk is diversity amongst many bonds.
But other than a steady fixed income, self-made annuities using corporate or governement bonds have nothing in common with insurance issued life annuities. Self made bond-annuities have modest liquidity (they can be sold if some unforseen event occurs requiring cash, although there may be a penalty in the form of a discount on the bond's price at sale), flexibility (bond redemptions may be reinvested for a higher yield in later years) and there is a residual value in the estate of the retiree that can be passed to heirs. Now, insurance issued life annuities can have many permutations to them, including some annual inflation adjustement, a 'death benefit', a 'guaranteed' payment period (called a 'period certain'), a survivorship provision, etc, etc. But any of these add-ons will drop the monthly benefit to pay for the add-on...some of them, lifke an inflation adjustement, will drop the payment substantially. You do not have to 'pay' for these features which will come with a bond-annuity, except for inflation adjustment....which is taken care of if the retiree uses stock dividends instead of or in addition to, bond interest to fund their life annuity...but that's another story.
BruceM
Forget The Insurance Company, Build Your Own Annuity [View article]
Sure it does...an insurer will 'guarantee' their life income payment just as PG 'guarantees' me their common stock dividend or KIM 'guarantees' me the quarterly dividend payment on the series G preferred stock I hold. All of these 'guarantees' have one thing in common...they will be paid as long as the company can pay them. When they reach the point at which they either cannot or will not make the payments anymore, then the 'guarantee' becomes meaningless.
There are 'guarantees' that are backed by the government, such as FDIC for insured bank deposits below certain dollar deposit maximums based on account ownership or the PBGC that 'guarantees' most (but not all) private pension accrued benefits by employees. There are private company 'guarantees' backed by private insurance, such as the NCUA that backs credit union deposits for its memebers up to certain dollar maximums, SIPC for brokerage accounts should the brokerage go bankrupt and state regulated (but not state funded) 'guaranty' funds to cover certain losses when an insurer goes insolvent.
The insurance industry, IMHO, wants to associate their 'guarantee' with the above government or private insurance backed 'guarantee'. Now, the state overseen private 'guaranty' funds do indeed back some insurance product distributions, but these are typically limited to fixed payout products, dollar maximums may be less than government backed 'guarantees', there can often be long periods of interrupted payments while the insolvent insurer's assets are being sorted out and the resumed benefit may be less generous than what it was. So, for insurance products, I think you're safe if you just assume the 'guarantee' is nothing more than a marketing term, much like 'protection' and 'safety', two other marketing terms the insurance industry just loves to use.
BruceM
Retirement Income: Annuity Vs. Dividend Portfolio [View article]
1. The insurance company invests the lump sum given them by you in exchange for the life income, in the same stock market you and I do. Certainly at a different scale...but the same marketplance
2. The insurer has no more idea what the markets will do than anyone else...so they asset allocate, just like everybody else
3. Insurers have expenses...lots of expenses, when you consider the commission to those selling their products, portfolio management, multiple levels of employees, overhead and a profit margin to make this all worthwhile to shareholders.
4. Insurance companies do not print money.
Now, in fairness, what insurers offer in life annuities is the administration necessary to provide sufficient investment liquidity to keep the monthly payments coming...this is their principal selling point, and I'd guess is the primary reason retirees are attracted to them....its a paycheck substitute, however expensive it is. Self management of investments will require the retiree not only to pick and choose the right investment allocation, but to time sale of securities to sustain cash flow.
For me, without a question, the best options is to spend the time to learn how to pick income producing securities (income ETFs for those who want to keep this research time to a minimum), monitor them to ensure the dividend/interest payments will be forthcoming, collect them, sweep them to the checking account...and enjoy retirement!!
BruceM
4 High-Yield Diversified REITs With Strong Protection Against Dividend Cuts [View article]
In evaluating REITs, you should probably not use P/E ratios, as GAAP earnings take into account non-cash expenses, such as depreciation, which for most REITs is a very large expense relative to revenue, hence P/E ratios will be heavily skewed, suggesting an overbought (high market price) position.
You should probably be using the industry standard measure of Funds From Operations (FFO).
BruceM
Dividend Yield Vs. Dividend Growth: Are You Better Off With Eli Lilly Or Procter & Gamble? [View article]
For those of us who invest for income, this question of lower yield/high dividend growth rate...vs....high yield/low dividend growth, has been discussed before. I've run crossover points for many stocks, both common and preferred. My findings are that high yield wins. Of course, as you point out, this will depend on one's age, life expectancy and future dividend growth rates.
One point in your calcs. For income investors, like me, I use nominal dollars, not compounded dollars, as income investors we don't invest dividends...we live on them. We spend them as we get them.
LordXot ran a series of graphs using high yield preferred stocks, and from these it is clear that for most retirees, high yield will provide more income over the long run then even the strongest growth C-Corps, such as PG or KMB or PM.
BruceM
Dividend Challengers: 14 Increases Expected By The First Week Of January [View article]
Once again, sincere thanks for your work!
BruceM
Dividend Challengers: 14 Increases Expected By The First Week Of January [View article]
Again, my sincere appreciation for your work!!
BruceM