Stocks have been my hobby for 34 years. I hope I still enjoy my hobby 30+ years from now, just as Jack Dorshaw still enjoys flying airplanes on weekends at age 96.
That's Plan "A." However, it's prudent to provide a Plan "B" for when I'm "grounded" at some point. In a March 30 article, I raised the question:
"What if I become incapacitated or otherwise unable or unwilling to manage a portfolio of individual stocks?"
I believe now is the right time to begin adding some ETFs to my Retirement Income Portfolio of individual stocks.
ETF exposure could help accomplish two goals:
- Achieve more diversification; and
- Provide the groundwork for my survivors to eventually assume management of the portfolio.
In the March 30 article, I briefly profiled five exchange traded equity funds:
- Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD)
- Vanguard High Dividend Yield Index ETF (NYSEARCA:VYM)
- Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)
- Vanguard REIT ETF (NYSEARCA:VNQ)
- Vanguard Utilities ETF (NYSEARCA:VPU).
That article's comment thread provided some excellent ideas for ETFs to study. I promised a follow-up, and here it is.
I've added two equity funds to my ETF universe:
- iShares Core High Dividend ETF (NYSEARCA:HDV)
- WisdomTree Emerging Markets High Dividend Fund (NYSEARCA:DEM).
Also, I've added two bond ETFs for further study:
One result of the March 30 article has been constructive dialogue with the next generation in my family and an increased interest in being prepared for portfolio management when needed.
I plan to integrate ETFs into my Retirement Income Portfolio in three phases.
Phase One: Add three or four ETFs for:
- increased international exposure,
- for sector diversification, and
- to lay the initial building blocks for possibly shifting the portfolio's focus to ETFs and/or mutual funds.
I began this phase with an 11.4% cash position in the portfolio. The first phase would use about half of the cash position to introduce equity ETFs to the portfolio. This would bring the cash position down to the 5%-6% range.
From time to time, readers suggest that I should invest in non-U.S. corporations. In the past, I've owned shares of two Canadian companies: Bank of Nova Scotia (NYSE:BNS) and BCE, Inc.(NYSE:BCE). I've also owned shares of European companies Vodafone (NASDAQ:VOD) and Shell (NYSE:RDS.B). Otherwise, I've depended on investments in multi-national corporations to provide global exposure.
This seems to be a logical time to expand those horizons for three reasons:
- The selection of corporations domiciled outside the US is not part of my skill set;
- Diversification is easily accomplished with one or more ETFs;
- International equities have underperformed U.S. equities, and while internationals have seen gains in recent weeks, there may still be relatively good opportunities.
I was ready to make an initial purchase of the Vanguard FTSE Canadian High Dividend Yield ETF (VDY). That ETF would be a great way to invest in a basket of Canadian equities, tilted heavily toward the large Canadian banks - which I believe are among the best in the world. Unfortunately, VDY is not available to US investors, so I dropped it from my universe. I've looked at some alternatives but I haven't found one I like as much. I welcome your suggestions.
Vanguard FTSE Emerging Markets ETF
My first choice for an ex-United States fund is VWO. I profiled VWO in the previous article. Morningstar gives it 3 stars. Annual expenses are .15%. The April 15 closing price was $35.11. The 52-week range has been $27.98-$45.08. The current 12-month yield is 3.04%.
over time will build exposure to small-capitalization stocks and China A-shares. ... The fund will sell large-cap and mid-cap stocks on a monthly basis while proportionally adding exposure in China A-shares and small-cap ex China A-shares based on each security's weight in the index. At the end of the transition period, the fund will begin tracking the FTSE Emerging Markets All Cap China A Inclusion Index. Given this recent change ... VWO may not be an appropriate investment for all investors looking for emerging market exposure.
Last September, a ColoradoWealthManagementFund article described VWO's strengths but also expressed a preference that the fund was less exposed to China.
As of April 15, I have not yet made an initial investment in VWO, but I may do so in the near future.
WisdomTree Emerging Markets High Dividend Fund
As I studied this segment of the ETF market, I became interested in WisdomTree's DEM. My plan - as of now - is to add shares of VWO and DEM to the portfolio.
Several years ago, I looked at DEM, but never made a purchase. As part of my renewed interest in ETFs, DEM has reappeared on the horizon. Morningstar describes DEM as passively managed and not market-cap weighted. Companies are selected based on dividend yield. WisdomTree weights the holdings by dividends paid. This results in a high-yielding portfolio that tilts toward large-cap value stocks.
DEM seeks to track the price and yield performance, before fees and expenses, of the WisdomTree Emerging Markets High Dividend Index. Under normal circumstances, at least 95% of the fund's total assets (exclusive of collateral held from securities lending) are invested "in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities."
Morningstar gives DEM a 2-star rating. The April 15 closing price was $35.59. The 52-week price range has been $27.15-$48.56. The annual expenses are .63%, which are considerably higher than VWO's annual expenses. The 12-month yield is 4.70%. DEM holds 291 stocks and 29 "other holdings." The annual turnover is 39%. The top ten holdings represent 26% of the portfolio's assets:
- CNOOC Ltd (NYSE:CEO)
- Gazprom PJSC ADR (OTCQX:GZPFY)
- PJSC Lukoil GDR (OTCPK:LUKOY)
- MMC Norilsk Nickel JSC ADR (OTCPK:NILSY)
- China Construction Bank Corp H (OTCPK:CICHY)
- Chungwe Telecom Co Ltd
- Industrial and Commercial Bank of China Ltd H (OTCPK:IDCBF)
- MTN Group Ltd (OTCPK:MTNOY)
- Vale SA (NYSE:VALE)
- MediaTek Inc. (OTCPK:IMKI)
The per share price of DEM is in proximity to the per share price of VWO. I'm considering making a small initial purchase of an equal number of shares so I can compare their performance.
If you are interested in DEM, you may want to take a look at a new WisdomTree ETF that tracks the WisdomTree Emerging Markets Dividend Index (as opposed to the High Dividend Index for DEM). It's the WisdomTree Emerging Markets Dividend Fund (BATS:DVEM).
DVEM has an indicated expense of .32% (prospectus). Under normal circumstances, at least 80% of the fund's total assets (exclusive of collateral held from securities lending) will be invested in component securities of the index and investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities. The index is a dividend weighted index that consists of emerging market dividend-paying common stocks.
Over a year ago, in March 2015, Vulcan Investments encouraged SA readers to consider DEM as a way into emerging markets.
In November 2015, ColoradoWealthManagementFund said DEM is worth a closer look.
I have not yet made an initial purchase of DEM but I may do so in the near future.
Sector Diversification: Increasing REIT exposure through the Vanguard REIT ETF
I'm a long time fan of real estate investment trusts. However, due to generally high REIT valuations (and resulting lower yields) earlier in 2016, my REIT exposure became the smallest in my memory. At present, I own common shares of just two REITs: W.P. Carey (NYSE:WPC) and Hannon Armstrong (NYSE:HASI). On March 7, I initiated a position in PSA.PRB, a preferred stock issued by Public Storage (NYSE:PSA).
As I mentioned in the March 30 article, I like VNQ's portfolio. Its largest positions are high credit quality REITs such as Simon Property Group (NYSE:SPG), PSA, Equity Residential (NYSE:EQR), and AvalonBay Communities (NYSE:AVB).
On April 13, I initiated a position in VNQ at $83.11. VNQ closed on April 15 at $83.38. The 52-week range has been $70.89 to $83.94, so it is near its 52-week high price. Morningstar gives VNQ 3 stars. The 12-month yield is 4.21%. Annual expenses of .12%.
In my previous article, I cited Income Surfer's recommendation that VNQ provides good diversification at a very low cost.
Sector Diversification: Possibly increasing Utility exposure through the Vanguard Utilities ETF
As with REITs, I am somewhat underweight utilities. As REITs and utilities escalated in value in the past year, I moved some money to technology industrials and health care, which saw some stocks at times sporting a higher yield than many REITs and utilities. As with REITs, over time, I would like to add some more utility exposure, through a utility ETF such as VPU. Also, I'm considering adding shares of Duke Energy (NYSE:DUK).
I profiled VPU in the March 30 article. VPU closed on April 15 at $106.26. The 52-week range has been $87.84 to $108.14. Morningstar gives VPU 4 stars. The 12-month yield is 3.08%. Annual expenses are .10%.
The most recent SA article about VPU was in November 2015, by ColoradoWealthManagementFund. It discusses the pros and cons of buying individual stocks versus ETFs.
I have not yet made an initial purchase of VPU. I do not anticipate making an initial purchase in the immediate future. As long as the price remains elevated, I may defer this to "Phase Two," described below.
A "skeleton" ETF framework: Beginning with the Schwab US Dividend Equity ETF
When I wrote the March 30 article, I was leaning toward making an initial purchase of SCHD and perhaps VYM. As I worked on this, I added a third diversified blue chip dividend ETF to consider: the iShares Core High Dividend ETF.
At some point, hopefully when prices moderate a bit, I will make an initial purchase of one or more of the ETFs that focus on blue chip dividend-paying stocks. Currently, my top choice remains SCHD.
I profiled the SCHD in my March 30 article. The April 15 closing price was $40.35. The 52-week price range has been $31.75 to $40.48. The current 12-month yield is 2.93%. Annual expenses are very low at .07%. Morningstar gives SCHD 5 stars.
SCHD was brought to my attention by David Van Knapp's April, 2015 article. David has indicated that he will provide a one-year review of this investment. Other SA articles about SCHD include one by Derek Getz on October 5, 2015, and one by Mario Rodriguez on April 4, 2016.
ColoradoWealthManagementFund has written ten SA articles about SCHD in the past 12 months, the latest on November 25, 2015.
The other two diversified blue chip dividend ETFs in my universe are the Vanguard High Dividend Yield Index ETF and the iShares Core High Dividend ETF.
Vanguard High Dividend Yield Index ETF
I profiled VYM in the March 30 article. Morningstar gives this fund 5 stars. Annual expenses are .09%. On an annual expense basis, SCHD and VYM are excellent choices, and both are 5-star funds. VYM closed on April 15 at $69.57. The 52-week price range has been $31.75 to $40.48. The current 12-month yield is 2.93%. Annual expenses are very low at .07%.
VYM was featured in two April articles, one by ColoradoWealthManagementFund, which said VYM becomes more attractive as the yield curve flattens, and one by McPiro, citing the Fed's reluctance to raise rates as a boon to dividend paying funds.
I have not yet made an initial investment in VYM, but I may do so in the near future.
iShares Core High Dividend ETF
BlackRock's iShares Core High Dividend ETF is given 5 stars by Morningstar. The closing price on April 15 was $78.87. The 52-week range has been $40.01 to $79.03. The current 12-month yield is 3.64%. Annual expenses are .12%. The 52-week price range for these three large cap, diversified blue chip dividend ETFs reveals the uptrend of today's strong market.
HDV seeks to track an index of relatively high dividend paying US equities. Investors should be aware that 20.11% of the fund is in the energy sector, followed by 18.71% in consumer staples, 16.00% in health care and 13.16% in information technology. The P/E ratio (as of March 31) was 19.03. The portfolio currently has 73 stock holdings. The annual turnover is 63%.
As of March 31, the top holdings comprised 58.91% of the portfolio:
- Exxon Mobil (NYSE:XOM) 9.47%
- Verizon Communications (NYSE:VZ) 7.32%
- Johnson & Johnson (NYSE:JNJ) 6.45%
- Chevron (NYSE:CVX) 6.38%
- Pfizer (NYSE:PFE) 5.57%
- Procter & Gamble (NYSE:PG) 5.37%
- Wells Fargo (NYSE:WFC) 5.29%
- Philip Morris (NYSE:PM) 4.98%
- Coca-Cola (NYSE:KO) 4.10%
- Merck (NYSE:MRK) 3.98%.
On January 28, 2016, ETF Monkey wrote an article about HDV's outperformance during the month. In October 2015, ColoradoWealthManagementFund highlighted HDV's solid yield and low expense ratio. A September 2015 article by Accendo Markets cited HDV's outperformance of the S&P.
I have not yet made an initial purchase of HDV, but I may in the near future.
Phase Two: Use potential "new money" to put some flesh on the ETF skeleton
Portfolio management includes making important decisions about "the seasons of life." After retiring from full-time work at age 59, I continued to work part time in a job that made contributions to a retirement plan. So, for the past six years, I have built some additional retirement savings that will eventually roll over to my IRA.
When I reached age 62, I decided that if my health continued to be good I would defer applying for Social Security benefits at least until my "full retirement age" of 66. That season, or window of opportunity, will occur at the end of this calendar year. If I continue to work, the Social Security income will be a new monthly income stream in 2017 that could fund this new ETF adventure. If I retire from the job that has provided contributions to a retirement plan, I can roll those funds to my IRA. In either case, there is potentially some "new money" for adding ETFs to the portfolio.
Phase Two will focus on making initial purchases of some of the ETFs described in this article, which could eventually replicate the present portfolio.
Phase Three: Introduce bonds to the portfolio through ETFs
Finally, I will add perhaps two bond ETFs to the portfolio. Currently, I have no bond exposure. I am fortunate to have a pension, which I consider fixed income. When I begin to receive Social Security benefits, I will consider it fixed income. As part of the discussion following the March 30 article, I realized that I need to consider adding fixed income. This is because my son (the primary beneficiary of the portfolio), due to a physical disability, may not achieve the 40 quarters of earned income necessary to receive Social Security benefits. It would be prudent for him to have some fixed income exposure.
Early in my investing life, I owned several convertible bonds, including one that was converted into shares of Royce Value Trust (NYSE:RVT) and one that was called by Norton Company (which was later acquired by the Saint-Gobain Corporation). Other than that, bonds have not been part of my universe.
I can now foresee a time when some bond exposure would be helpful, and one or more bond funds would be an easy way to accomplish this.
So, I have added two bond funds to my ETF universe. I have no immediate plans to purchase these, but currently my choices are:
Vanguard Long-Term Bond ETF
BLV tracks the Barclays US Long Government/Credit Float Adjusted Index. This index is composed of US Treasuries, investment-grade corporate bonds, and investment-grade international bonds. Morningstar says the inclusion of investment-grade corporates increases the yield above government-only funds without taking on any significant credit risk. The fund is 37.7% in US government and agency bonds, 11.9% in foreign bonds and the remainder (50.4%) is in investment-grade corporate debt.
Morningstar gives BLV 3 stars. The closing price on April 15 was $93.84. The 52-week range has been $86.30 to $96.99. The 12-month yield is 3.83%. Annual expenses are .10%. The fund holds 2,015 bonds.
In the past five years, there has been just one SA article about BLV, and it was by ColoradoWealthManagementFund in October 2015. The title says it all, "This is One Heck of a Great Bond ETF."
Vanguard Long-Term Corporate Bond ETF
Morningstar gives VCLT 5 stars. The closing price on April 15 was $90.06. The 52-week range has been $82.90 to $90.34. The 12-month yield is 4.48%. Annual expenses are .10%. The fund holds 1,668 bonds.
The Vanguard website indicates that the fund invests primarily in investment-grade corporate bonds and that the Fund tracks the performance of the Barclays U.S. 10+ Year Corporate Bond Index.
This Index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years.
The Fund approximates the full index in terms of key risk factors and other characteristics. Under normal circumstances, at least 80% of the Fund's assets will be invested in bonds included in the Index. The Fund maintains a dollar-weighted average maturity consistent with that of the Index, which was 23.8 years as of August 31, 2015.
There have only been two SA feature articles about VCLT ever. In August 2014, Scott Arterburn wrote "VCLT: A Good ETF to Have in Your Portfolio." In August 2015, (you guessed it!) ColoradoWealthManagementFund described VCLT as "a great bond option if you don't mind the duration."
If you didn't know it by now, you're aware that ColoradoWealthManagementFund is one of SA's more prolific writers about all things ETF. In an April 17 article, CWMF writes about 5 Dividend ETFs for 2016: SCHD, VYM, HDV, VIG (Vanguard High Dividend Yield ETF), and DGRO (iShares Core Dividend Growth ETF).
On April 6, I added a few shares of General Electric (NYSE:GE) at $30.68. GE is now 4.4% of the portfolio. On April 13, I trimmed a few shares of Qualcomm (NASDAQ:QCOM) at $51.89. QCOM is now 3.0% of the portfolio. On April 13, I trimmed a few shares of Texas Instruments (NASDAQ:TXN) at $59.11. TXN is now 1.7% of the portfolio. On April 13, I trimmed a few shares of Archer Daniels Midland (NYSE:ADM) at $37.13. ADM is now 2.2% of the portfolio. As mentioned above, on April 13, I initiated a position in VNQ at $83.11. VNQ is now 2.4% of the portfolio.
As of April 15, 2016, the portfolio has 32 holdings, including 26 common stocks, one preferred stock, four master limited partnerships and one ETF.
I'm presenting the portfolio in a different fashion with this update. We continue to see investors move in and out of sectors, with "rolling corrections" often driven by sector sentiment, resulting in sector rotation. I believe this has contributed to the long uptrend in equities that began in 2009. The table reflects the shift that has occurred away from REITs and utilities toward industrials, technology and health care.
Prices are as of April 15, 2016. Div is the annual dividend or distribution. Yld is the yield as of April 15. %Port is the percentage of the portfolio represented by each holding (and sector). %Inc is the percentage of portfolio income represented by each holding (and sector). Basis is the cost basis for each holding. Credit is the S&P credit rating for the company. GPC is not rated by S&P, so the Value Line rating is listed. PSA's company rating is A and all of PSA's preferred issues are rated BBB+ by S&P.
|Int Bus Mach||IBM||151.74||5.20||3.4||4.4||4.6||140.78||AA-|
|Ent Prod Prt||EPD||23.98||1.56||6.5||2.8||5.5||25.66||BBB+|
|Pub Stor Pfd||PSA.B||25.87||1.35||5.2||2.3||3.6||25.24||A/BBB+|
|Vn REIT ETF||VNQ||83.38||3.12||3.7||2.4||2.7||83.11|
|Genuine Prts||GPC||99.37||2.63||2.6||2.9||2.3||45.67||A+ (VL)|
The portfolio yield as of April 15, 2016 was 3.3%. The gain for 2016 through April 15 has been 11.5%.
I welcome your questions and suggestions and I always enjoy our conversations in the comment thread. I encourage you to participate.
It is not my intent to advocate buying or selling any security. I offer this update to share ideas for stocks to study and as part of the journal of my ongoing effort to build a retirement income portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects.
Everyone's situation is different. Please do your own due diligence.
Disclosure: I am/we are long JNJ, MMM, PG, MSFT, MRK, PFE, GE, IBM, CSCO, WMT, CMI, EMR, QCOM, PEP, GPC, PSA.B, EPD, UNP, VNQ, ADM, DOV, CNP, WEC, SO, TXN, T, WPC, HASI, PEGI, EVA, CAFD, NEP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.