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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8587  
Subject: Dividend ETF or Income Investor Date: 1/20/2011 11:01 AM
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Recommendations: 2
Let me begin by saying that I have never been one to conceal his stupidity or ineptitude. I am rather new to dividend investing and I have been amazed by the sage information and advice found in Motley Fool Income Investor.

I know that James Early and gang do a great job of researching and stock picking, but I am having trouble quantifying the results. For instance, the II web site provides us the information that II has a cuumulative return of 8.8% and that beats the S&P by 7%. Now I see that II has been in the stock picking business since 2003, so the average annual return must be somewhere between 1% and 2%. Also my information is that SPY, the S&P 500 ETF, returned a cumulative 2.2% over the last 5 years. So if II returned 7% more than the S&P, it might have returned 9.2% over the last five years. That checks out...II has an 8.8% total return, very close to 9.2%.

II has recommended 230 transactions, 90 sold stocks each with a buy and a sell commission (180 total) and 50 current positions. I currently pay Schwab about $9 per trade which means that $2,070 would have gone out in commissions. On a 100K portfolio trading commissions would be 2.07% (on a 50K portfolio, 4.14%). Of course if one is paying full commissions, say $25 per trade, trading commissions could total $5750. This is 5.75 % of a $100 K portfolio and 11.5% of a $50K portfolio. II returns after commissions would be small or nonexistent if full service brokers were used and all II recommendations followed. In the case of an investor paying $9 per trade like me, and assuming a $100K portfolio, trading costs would have reduced II returns by 2%, leaving a 6.8 total return over II's life.

Dividend stock ETFs are new, with only a couple with 5 year records. The best record of the lot belongs to SDY, the S&P 1500 dividend ETF which buys the Dividend Aristocrats. It has cumulative returns of 2.3% for 3 years and 3.3% for 5 years. For some investors the SDY etf may be the best choice. I have to start taking required minimum distributions next year, and it would be easier to a sell a block of SDY to raise funds for a distribution as opposed to figuring how to raise money from an II portfolio.

I am aware that II does not recommend that one go out immediately and acquire the 50 active stocks. II recommends buying "buy now" stocks first, then "buy" rated stocks later. But a portfolio of one or more "buy now" stocks, even if combined with a few "buy" rated stocks,
lacks diversity and carries more risk than the dividend etf.

Finally, having annoyed many of you, let me say that I have created a dividend stock portfolio with about 50% of my assets, that portfolio containing mostly II recommendations. And, since I started using II in July, 2010, I have done well (mainly to the luck of getting in as dividend stocks began rising). II is a valuable service and is worth the money. Watch the commissions. And some investors may prefer an etf because the onerous obligation of stock selection is removed from their shoulders. Others enjoy the challenge. My personal belief is that SDY and II will track close together since they contain many of the same stocks and have similiar philosphies.
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