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BruceCM

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  • You're Retiring: Where Is Your Income Going to Come From? [View article]
    David
    Sorry, but I haven't read all the responses to your original article, so I aplogize if I'm repeating what someone else may have already said.

    I've been a pure income (or RIP as you say) retiree for 12 years. I have found that there is little or NOTHING out in the investment community to support this kind of approach, I've had to self learn about everything I now know, which I'll distill down as follows:

    1. The investment advisory community does not support this approach, as there is no way for them to make money at it. This isn't a fault, just a consequence of human nature. For example, a portfolio of, say, 40 income stocks will pay NOTHING in fees or expenses, directly or indirectly during a given year. That's zilch...nada....$0. What middleman would recommend that?

    2. Income diversification is vital or this approach won't work. This means holding multiple classes of dividend (or, more accurately, distribution) paying industries, to include:
    - REITS
    - Drugs
    - Tobacco
    - Utilities
    - Energy
    - manufacturing
    - other Consumer non-cyclicals

    It also includes preferred stocks of the above, even though preferreds have no dividend growth, most are not tax favored 'qualifying dividends' and redemptions come at exactly the wrong time of very low interest rates.

    3. Hold no more than 4% of investments in any one security and no more than 20% in any income class.

    4. NEVER chase yield. High current yields are that way for a reason, and if you, the investor, don't know why the yield is so high, you'll most likely eventually learn why..that hard way.

    5. Income ETFs may do some of the security selection for you, but usually with trade-offs and their own added expenses (usually running 8 to 16% of income)

    6. Open End Mutual funds don't work as income securities. The incentives to the fund manager are opposed to an income investor's.

    7. Closed End Mutual funds are a great way to lose money

    8. Brokerages, wire houses, insurers and professional portfolio managers will vomit all over this investing approach to retirement income. They hate it. They despise it. They consider it tantamount to idiocy, lunacy and crackpotism. But I'm not investing to satisfy their expectations....I'm investing for reliable income. And so far, this approach for me has done just that.

    BruceM
    Mar 8 05:32 PM | 19 Likes Like |Link to Comment
  • Why Most Dividend Investors Never Succeed [View article]
    Wanna
    This is the classic mistake of income investing. Happens all the time.

    The core reason for this is we cannot let go of the capital appreciation part of total return.....its been inculcated within our investment neurons too deeply for too long.

    But also think of the illogic. If my dividend paying stock has appreciated 400% in price and I sell it to 'harvest the gain', in doing so I've given up the dividend it was paying me. Ok....so now I go back out into the marketplace and find a stock that will replace my now lost income. But wait....all those equivalent stocks have also gone up in price. In fact, the only way I can improve my former income stream is to buy a stock whose income is at greater risk of being cut or a stock whose dividend is greater but does not grow as fast as the one I sold. Add some capital gains taxes and transaction costs into the mix and what I was sure was the right thing to do (harvesting gains) wound up reducing my household income.....or.....kept it much the same but at a higher income risk.

    True income investing requires thinking this stuff all the way through and being prepared to let go of some long held beliefs and investment practices.

    BruceM
    Dec 26 03:26 PM | 14 Likes Like |Link to Comment
  • High Dividend Stocks Generally Facing Massive Liquidation and Collapse [View article]
    James
    You really need to take the time to try to understand the investment objective of pure income investing. Here, retirees invest for the reliable distributions, quarter after quarter, year after year, over their full retirement. Price movements, price valuations, variance and standard deviation, market Beta, P/E growth rates...all of these metrics are simply back-ground noise and although interesting, are irrelevant. Its the distribution made from the free operational cash flow (not earnings) the company generates...and the market forces that will affect this....that matter.

    What makes income investing such a difficult concept is its utter simplicity.

    BruceM
    Aug 22 11:54 AM | 14 Likes Like |Link to Comment
  • My Superyield Retirement Strategy [View article]
    Having been a pure income investor since 2000, I've learned the hard way that there is a price to be paid for 'yield reaching'. These lessons come to me in the form of names like AHR, ALD, ACAS and TMA.

    Following these bruises, I've readjusted my income portfolio into about 10 unrelated industries, with no one securites providing more than 3% of overall income, and utilizing common stock, preferred stock and a small holding of bonds within each industry. Overall portfolio yield is about 4.6%.

    Of course, being retired, I treat this income as my pension. I have absolutely zero interest in the fun-n-games of outperforming or getting the highest yield I can on each invested dollar. Reliability and sustainability is everything.

    Now, I must confess, when I first got started, I too chased very high yield...and some of them paid off handsomly, such as MO, JCP and the preferreds from REITs like LTC. to name a few, all at double-digit yields when I bought them. What I now realize looking back, is that many of these were on the verge of collapse, and had economic conditions been less favorable to them, their dividend would have been cut, likely to zero and the stock pushed to the basement. I was not smart...I was lucky.

    To each their own...but I spend my investment time these days reviewing the stocks/bonds I hold to see if there are threats to their distributions (primarily dividends) that I can detect early enough to remove the stock and replace it with another.

    Just my experience.

    BruceM
    Aug 7 01:20 PM | 13 Likes Like |Link to Comment
  • Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
    Larry
    Don't know if you recall, we've had this discussion before. But as a recap...

    As a fellow bogelhead, I hold nothing but respect for the evidence-based approach you (and others like Rick Ferri) have towards passive investing and limiting portfolio expenses. To the extent it is humanly possible, you employ the most scientific approach to long term total return. You, sir, are a hero in the eyes of most who truly understand the concept of total return in an unpredictable investment universe.

    But this has somehow blinded you to another paradigm. Investing for income (cash flows) is a paradigm that works for those requiring reliable and consistent income. Like most who criticize this approach, you tend to dismiss it as 'yield chasing', which to me is analogous to referrring to the use of growth stock ETFs as 'hot stock chasing'. It is a gross oversimplification. Now, to the extend you shout "WARNING" to yield starved retirees who wander blind-folded into the relm of high-dividend securities, knowing little of investment risk and lured only by high yield....to this I absolutely agree. But like a balanced passive portfolio, carefully allocated and deliberately rebalanced on a regular basis, a portfolio of income producing securities, carefully chosen and carefully monitored, can provide for household income just as reliably. I know....I've been doing this for the past 12 years.

    Remember, it is not the process that ultimately matters to the retired client...it is the outcome that matters.

    BruceM
    Dec 25 02:18 PM | 10 Likes Like |Link to Comment
  • Dave Van Knapp Positions For 2013: Tuning Out Market 'Noise' With Dividend Growth Investing [View article]
    Like Dave, I don't use options for income. I studied it and considered it several years ago, but concluded that the income risk isn't worth the possible supplemental income. Assuming I'm using income producing stocks to cover the calls I sell, or to sell and with added cash to pay the puts 'put' to me...it only takes a couple of sharp stock price movements to consume much of the income generated using this strategy. Stated another way, the bet on price movement is a zero-sum game. The only money in the 'pot' is what the buyer deposits. There is no organic growth. No corporate capital reserves. So what an options trader is betting is that he will be right most of the time, and he is collectively smarter than the buyers on the other side of the option trade. Now, maybe he is, maybe he isn't. But frankly, the excitement from that kind of betting just doesn't interest me.

    Dividends paid to me from companies committed to them...that interests me.

    BruceM
    Dec 28 09:17 PM | 9 Likes Like |Link to Comment
  • Are Dividends Truly Beneficial To Shareholders? [View article]
    "Are dividends truly beneficial to shareholders?"

    Well, I pay my bills with them. Without them, I wouldn't be able to pay all of my bills. I think that qualifys as 'beneficial'.

    What do you think?

    BruceM
    Nov 29 02:50 PM | 9 Likes Like |Link to Comment
  • Don't Seek Dividends For Their Own Sake [View article]
    For a retiree who electively invests for income reliability from the dividends (actually 'distributions') his/her investments produce, its not all about the dividend...its ONLY about the dividend.

    You make the mistake so many who speak on this topic make. You criticise investing for income and then use the principals of Modern Portfolio Theory to support your argument. In your example, how much of the S&Ps past X year's total return has been due to dividend reinvestment is interesting, but for an income investor, is irrelevant.

    "Will my shares of XYZ company continue to pay its $a.bc/quarter dividend? Does the company show the fundamentals necessary to be able to grow this amount over the quarter's ahead? Is management committed to growing the dividend?" These are the important questions.

    If there were some rule that companies who have built to some level of fundamental strength MUST distribute cash flow in excess of this target in the form of dividends, then I'd agree with your approach. But, with the exception of REITs, there is no such rule. Companies with growing fundamentals generating excess cash flow may elect to retain those earnings for any reason they wish....which may be good for the company and may be good for long term growth prospects of the company in expanding product lines, cash buy-outs, entering new markets, etc. But none of this pays my utility bills, my health insurance premiums or put gas in my car....only dividends can do that.

    BruceM
    Oct 10 12:15 PM | 9 Likes Like |Link to Comment
  • Can Dividend Growth Investing Be Reconciled With Modern Portfolio Theory? [View article]
    Robert
    "I haven’t checked, but it would be interesting to see how DGI would have fared over the period 1990-2012 compared to the total return on long treasuries."

    To a retiree seeking long term reliable income from his investments, who employs a DGI strategy, total returns on Treasuries (or anything else) may be academically interesting, but is irrelevant to their investment objective. Retirees cannot pay their bills with total returns...they actually must have the income (cash) in their checking accounts.

    As to the performace of my own DG portfolio from 1990 to 2012....
    without adding to my original investment capital, here is how it performed....(note: I actually began income investing in earnest in 1998, so I've had to extrapolate backwards to 1990, but I've used actual dividend numbers)

    Income generated in 1990: $21,120
    Income generated in 2011: $65,012
    Total nominal income collected (some estimating here): $863,054

    Over the same period, a 22 year Treasury (were there such a thing) issued in January of 1990 had a coupon of about 8%.Soooo

    Income generated in 1990: $40,228
    Income generated in 2011: $40,228
    Total nominal income collected: $885,029

    Pretty close.

    Except now that the Treasuries have matured, the investor must take his original capital amount (a bit over $500K) and go out into the marketplace and attempt to reinvest to continue his income. With today's 20 year Treasury bonds at about 2.7%, this would provide an income replacement of about $13,500! At a 4% income portfolio yield his income replacement would be about $20,114.

    Of course, there are other practical factors to consider, such as life expectancy and need for capital at end of life (for whatever reason). But clearly, when comparing performance of an income portfolio of DG securities to fixed income bonds (like Treasuries), one must take into account reinvestment risk.

    BruceM
    Sep 20 02:14 PM | 9 Likes Like |Link to Comment
  • My Take On Kinder Morgan [View article]
    Like REITs, MLP metrics involving net earnings, will look odd.
    The principal reason for this is the (relatively) large non-cash depreciation and ammortization expenses these business entities carry. So metrics such as P/E and Payout Ratios will look off-the-charts. A much better measure of MLP performance is free cash flow.

    BruceM
    Apr 14 11:11 AM | 9 Likes Like |Link to Comment
  • Managing Your MLP Holdings [View article]
    "We can't emphasize enough the importance of adhering to our buy targets and taking some profits off the table when a big winner throws off the balance of your portfolio."

    Do you have any concept how irrelevant this statement is to an income investor...and this is an income forum.

    Income investors, primarily retirees, live off the distributions we receive from our investments. We do NOT live off capital appreciation, as one would who invests for total return. So if I follow your advice and 'take profits', after I've paid transaction costs and income & Capital Gains taxes, where will I revinvest those dollars to maintain my monthly income? If you're going to write to income investors, you need to understand this.

    Now, having said that, I do appreciate your discussion of hydraulic fracturing and its use in generating the extracts that will keep the pipelines full. Very helpful.

    BruceM
    Mar 1 08:35 PM | 9 Likes Like |Link to Comment
  • Dividends: A Case of Behavioral Heuristics? [View article]
    But what would you call Gigerenzer if his Heuristic were Algorithmic?

    "But don’t we just love that dividend?".

    Well, its not so much a case of loving it, its a case of requiring it.

    "I have yet to find anyone, however, who will answer affirmatively the question, Would Warren be richer, if Berkshire (BRK.A) had paid out 30% of its earnings in dividends for the past 45 years?"

    Yes, that may be. But my investment object, I think, is a bit different. I'm not trying to get richer...I'm trying to generate reliable and growing dividends over my retirement years. I suspect Mr. Buffet is not concerned about such things.

    "If you haven’t overturned a long-held view in the past year you haven’t been thinking.”

    Well, I guess I'll just have to go into the non-thinking column....I still have my long-held view that I require reliable income to live on each year :-)

    BruceM
    Dec 28 10:04 PM | 9 Likes Like |Link to Comment
  • Income Annuities Vs. Dividend Stocks [View article]
    To annuitize (through an insurer) or to build your own life annuity via income stocks....that is the question. These are two different approaches to meet the same objective: reliable income in retirement. Here are the pros and cons.....

    An annuity through an insurer is mostly a return of your capital. At today's very low interest rates, you would have almost the same level of income by putting the cash in a safe deposit box and drawing from it each month the annuity amount. There's not much value here.

    Income for life. If you live beyond your life expectancy, the annuity keeps paying. This is funded by those who die before life expectancy and lose any unused portion of their life annuity (the mortality expense). This is a benefit, but its value is overblown. If you buy a life annuity at age 65, the cost of continuing it past age 87 (life expectancy) today is cheap due to time value of money. Setting aside a smaller amount at age 65 to grow to age 87 and using it at that point to buy an annuity...if needed...would make more sense.

    Access to cash if some unforeseen event occurs requiring it. Can't do this with a life annuity.

    Residual value at death. No-can-do with a single life annuity. Now, the insurance sales force will shout "Death Benefit"...but again, this is time value of money sleight-of-hand. The insurer simply reduces the annuity amount and compounds this to pay a future 'death benefit', which usually is an amount equal to a downwardly adjusted cost of the contract.

    Default of insurer. Most states have a mandated Guaranty fund, paid into by insurers, that will insure at least part of a fixed annuity should the insurer default. Self-made life annuities do not have this feature.

    Life annuities are not inflation adjusted...unless the annuitant gives up part of their monthly annuity that the insurer will then compound to provide possible future annual inflation adjustments. Due to the unknown risk of future inflation, these forms of inflation-adjusted annuities are very expensive. At an average annual inflation rate of 3%, the life annuity will lose half of its purchasing power in 22.8 years. This drops to 17 years if the average annual inflation rate is 4%.

    But the greatest benefit of life annuities is never advertised and rarely spoken of.....protection from bad investing decisions. Presumably, a wise income investor understands that market swings are not important.....the ability of the companies he/she holds to pay their distributions is what is truly important. Unwise newby's to this approach will do things like chase high yield, will tend to buy late into market rallys and sell late into market swoons. A life annuity will not allow the investor to do this. That is, a life annuity protects the unwary and unwise from their own investing misdeeds. For a wise income investor, this is not an issue.

    BruceM
    Nov 6 01:21 PM | 8 Likes Like |Link to Comment
  • The Right Time To Sell Dividend Stocks [View article]
    DGI...who doesn't seem to reply to the responses to his article....says

    "Because of the reasons stated above I would not consider selling even if my position went up 1000%"

    Its sooo good to hear from someone who actually understands the core concept of Income investing.

    I'm holding income stocks that are up in price well over 10X what I paid for them in the 1990s when I began investing for reliable income, such as MO, LTC, KMP, O and the like. Yes, it is tempting to 'take profits', but then how am I going to fill that income hole I created?

    Well, I could buy higher yielding stocks than the low yields these I hold have grown into. But then, I'd be taking more income risk than the stock/REIT I sold. In fact, I could have done this at any point along the way, as the seemingly modest 4% yield I want to buy today to replace that 2.8% income I sold, was yielding 5.6% 4 years ago when my appreciated stock was yielding 4%. In short, the 'yield market' is a pretty efficient place. I'm not saying there aren't periods where the market is yield inefficient...perhaps there is some mispricing....but its not going to last very long. And I wish good luck to those who think they can time it to improve income without increasing income risk (note: preferred stock are an exception to this, as they can truly be mispriced due to their very thin trading volumes).

    IMHO, if one is going to successfully invest for reliable and growing income during retirement years, they are going to have to learn to ignore price appreciation (or depreciation) and pay attention to what is truly important: the company's ability to sustain and grow its dividend.

    BruceM
    Apr 19 01:38 PM | 8 Likes Like |Link to Comment
  • Philip Morris Pulls Back Again [View article]
    "Two weeks ago, I published an article telling investors to sell shares of Philip Morris (PM), and reacquire them on a pullback"

    Thats called market timing.

    No thank you.

    BruceM
    Oct 22 11:20 AM | 8 Likes Like |Link to Comment
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