Unplanned Early Retirement, Conclusion And Report Card

Includes: DSUM, EFV, FEZ, PGX, RWX
by: Kevin Arledge


Targeted index funds, with low expense ratios, can be a good choice for investing a sum too small to diversify properly with individual stocks.

Preferred stocks provide high current income with a risk profile similar to bonds.

Foreign stocks can help grow your wealth if you can get them at a good price. Typical foreign blue chip stocks pay higher dividends than American blue chips.

Compounding through dividend reinvestment combined with dividend growth leads to accelerating current income.

It really is possible for your retirement income to be higher than your working income. Start investing early and have a plan.

At last, this is the final article in my series showing you what I am doing to cope with an unexpected job loss after middle age, but before retirement age. The first installment, titled Part 1, was introductory. In Part 2, I began to explore my strategy in asset allocation and I covered the Business Development Companies I chose for my portfolio. In Parts 3, 4, and 5 I explored my Real Estate Investment Trust choices, banks and energy companies, and utility companies. In Part 6 and 7, I looked at the largest of my categories which I call "USA Industrials." Today, I will discuss preferred stocks and foreign stocks, and then I will wrap this all up and grade my portfolio on performance to date. Some may disagree with my logic, some may complain that I have the advantage of age and a head start, but everyone can rest assured that I will honestly tell you exactly what I am doing with my own money.


If this is the first time you are reading one of my articles, I suggest you go back and read "Unplanned Early Retirement, Part 1" to get the background on my situation. You might also want to read Parts 2 through 7 depending on which types of investments interest you.

My 401k to IRA Rollover action plan consisted of asset allocations and specific dollar targets for each security within each asset class. I was looking for positions that either had dividend growth with a yield at least 3% or 4%, or in the absence of dividend growth, I wanted yields in the 5% to 6% range or higher. I allowed myself some flexibility on these rules for the sake of diversification. I avoided positions that might generate foreign taxes or otherwise would make no sense in a tax deferred account. My final asset allocation plan, as executed in January and February 2014, was as shown in the following table:

Today, I first want to discuss preferred stocks and foreign companies. I can work through these very quickly because there are only a few ticker symbols to discuss. If you have been reading my articles and the comment chains at the bottom of each, you already know that I generally prefer buying individual stocks rather than mutual funds or exchange traded funds, but for these two final categories I decided to use ETFs. There are a couple of reasons for this.

First, I did not want to dedicate a huge percentage of my portfolio to preferred stocks, so rather than try to figure out which one or two companies would be the best choice in the universe, I decided to go with one single fund. The fund I chose is PowerShares Preferred (NYSEARCA:PGX). The current dividend yield is 6.11%, which is pretty good, plus PGX pays out monthly which enhances the compounding as long as I continue reinvesting my dividends. The dividend does fluctuate a little, and I do not expect dividend growth, but I got in at a good price, so my yield on cost is over 6.5%. I expect the growth in yield on original cost to accelerate as my monthly compounding starts working for me. The annual expense ratio for PGX is 0.5% which is relatively low for this type of fund. The top 10 positions in this fund, which account for more than 23% of the holdings, are mostly banks and finance companies with Public Storage being the only exception. If this concentration in the banking industry makes you uncomfortable, maybe PGX is not for you, but I think the dividend yield and the monthly compounding make it worth the risk. I put 3.51% of my rollover IRA in PGX and that position is up 7.2% including dividends in a little less than 5 months.

When it comes to foreign stocks, I again chose to use ETFs. Again, I did not want to put a huge percentage of my IRA in foreign companies, so rather than choose individual companies I decided to pick a few good funds. In addition, I wanted to use American ETFs to avoid the issue of paying taxes out of a tax deferred account. In the course of writing these articles I have learned that this tax problem would not be an issue with many stocks; nevertheless, my strategy in my IRA for now is to use ETFs.

The first foreign stock ETF chosen for my IRA is SPDR EURO STOXX 50 (NYSEARCA:FEZ) which is an index fund from State Street Global Advisors. Index funds, because they are not "actively" managed, tend to have lower expense ratios; FEZ has an expense ratio of 0.29%. This is a fund that invests in large, value oriented European blue chip stocks like Total SA (NYSE:TOT), Sanofi (NYSE:SNY), Bayer (OTCPK:BAYRY), Banco Santander (OTCPK:BCDRF), Siemens (OTCPK:SIEGY), and BASF (OTCQX:BASFY). The current yield on this fund is only 3%, but I expect some capital growth here eventually as the global economy recovers. Incidentally, as with many foreign stocks, this is a case where you should calculate the annual yield yourself. FEZ pays out quarterly, but the payments are not equal. There are very small payments in March and September, a larger one in December, and a very large one in June. I have found that some websites list a yield lower than the actual yield while others exaggerate it greatly. I put 2.32% of my rollover IRA in FEZ and that position is up 11.6% in a little less than 5 months. When the large June dividend comes in on July 2 it will add another 2.1%.

The second foreign fund I chose is SPDR Dow Jones International Real Estate (NYSEARCA:RWX). This is also an index fund and is set up to track the performance of the Dow Jones Global ex-U.S. Select Real Estate Securities Index. The current yield is not bad at 4.4%. The expense ratio is a little higher than I like at 0.59%, but not too bad. This is a play on foreign real estate, and I believe real estate is an important part of any investment portfolio. (If you want to know more about my thoughts on real estate, please go back and read Part 3 of this series for my discussion of Real Estate Investment Trusts.) I also believe that I bought this position at a good price and I can therefore expect capital growth. I put 2.31% of my IRA in RWX and that position is up 11.5% in a little less than 5 months.

The third fund I picked is iShares MSCI EAFE Value (BATS:EFV). This is an index fund that seeks to track the investment results of the MSCI EAFE Value Index. This index includes stocks from Australia and Asia as well as Europe, basically most of the world economy outside the USA. In the top 10 holdings, making up about 20% of the portfolio, are a diversified group of banks, oil companies, drug companies, and manufacturers including big names such as HSBC (NYSE:HSBC), BP (NYSE:BP), Shell (NYSE:RDS.A) (NYSE:RDS.B), GlaxoSmithKline (NYSE:GSK), BASF, Siemens, and Novartis (NYSE:NVS). The current yield is 3.01%. Dividends are paid only twice per year with the mid-year payment being somewhat larger than the end-of-year payment. The expense ratio is 0.40%. I wanted some exposure to the rest of the world outside the USA and Europe and this fund gives me a little of that. I put 2.13% of my IRA in EFV and in a little less than 5 months that investment is up 11.4%. That is all capital appreciation since it has not yet paid a dividend. Not bad. My first dividend is due in July.

The final investment in my portfolio is PowerShares Chinese Yuan Dim Sum Bond (NYSEARCA:DSUM). This position violates a lot of my principles, but even a conservative American-oriented dividend growth investor can take a risk now and then. This is my most offbeat investment. First of all, I love real Chinese food like Dim Sum, but I also have a couple of serious reasons for picking this ETF. Having traveled in China many times I have seen both the good and the bad. I know there are risks, both economic and political, but I also know there are opportunities. I know for example that the reason China is the world's manufacturer now has much less to do with cheap labor and much more to do with economies of scale and immense capital investments. DSUM invests in bonds that are issued outside of China, generally in Hong Kong, but denominated in Chinese yuan (RMB). It is an index fund that invests most of its assets in the components of the Citi Custom Dim Sum Bond Index which is a mix of government and corporate bonds.

I am looking for a couple of things from this investment in DSUM. First of all, it gives me a bond holding in the second largest economy in the world. Say what you want, but I expect China to continue to grow. Secondly, I expect that one day China will be forced to completely sever the now forced relationship between the value of the dollar and the value of the yuan. Just recently, they have let that relationship bend a little. I expect when the yuan is no longer pegged to the dollar, the dollar is likely to fall relative to the yuan, because I feel that China is keeping the value of their currency artificially low. When and if this happens, my yuan denominated bonds will be worth more dollars. So this investment is a speculative play on the international currency market as well as the economies of China and related countries. The current yield is a little better than 3.3% with an expense ratio of 0.45%. The dividend is paid monthly, so compounding is accelerated. I put 2.00% of my IRA in DSUM and in a little less than 5 months that investment is worth 2.9% less than when I started even with the dividends reinvested. Maybe I should have stuck with my principles after all.

So, if you have read this entire series of articles you have now seen my entire IRA investment strategy. It has been a little less than 5 months since I transferred my 401k into a rollover IRA, and it is time to do a report card. How is my strategy working? Remember, I would like to grow my current income, and in doing so I expect I will also grow my total portfolio, especially during the near term when I am still able to do my automatic dividend reinvestment.

From the time I transferred my 401k until today, the sum total of the account including reinvested dividends is up 9.12%. For comparison the DOW is up 8% and the S&P500 is up 10.1%, so I am right in the middle. Not bad for capital preservation and growth. My current income, however, is much better than either the DOW or the S&P500. As of today, my current yield is about 4.6%, but my yield on the cost of my original investment is already at about 5%. I expect this number to continue to grow quickly due to my continued dollar cost averaging on reinvested dividends and the fact that most of my stock choices have a history of growing their dividends every year. Compounding plus real dividend growth equals accelerating income.

Still, as I have mentioned before I am not operating under the delusion that I can replace my comfortable preretirement salary with investment income in such a short time. If I decided at the end of this year to exercise my right to take Substantially Equal Payments (SEP) out of my IRA, it would only replace about 20% of my salary. Income from my other investments would chip in another 15%, and taking my pension early would give me another 25%. At that rate I would have about 60% of my preretirement income, and since we have no debt that is not a bad income level. But drawing the income out of my investments would mean that my dividend reinvestment would have to stop, so my income growth would slow down greatly. I want to put those decisions off as long as possible.

Getting 100% of my preretirement salary would be much better. When I turn 62 and can take early Social Security, I would be right at 100% of my previous salary. Actually, if I can let my investment income grow all during the time I am waiting for Social Security, I would be doing much better than 100%. Retiring with more income than I had working? That would be great, but I will not turn 62 for 7 more years, hence my dilemma.

Decisions, decisions. Do I take a SEP? How long can I delay tapping my income investments and pension? Do I take a job? What kind of job? These are all decisions my wife and I will have to work on over the next few months. Meantime, I am thankful for all the blessings I have.

I hope you have learned something in this catalog of my new phase in life. Thanks for reading, and as always, let me know what you think.

Now for my standard disclaimer:

Please note that there is no way to do an exhaustive essay on any one of these companies when I am trying to cover several of them in one article. In my own research, I considered a lot more aspects than I can cover here. If this article generates some interest, please study carefully and do your own due diligence before investing your hard-earned money.

Disclosure: The author is long DSUM, EFV, FEZ, PGX, RWX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article I am not a certified financial expert of any kind. This essay serves as a journal of my own investing experience.