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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 8887  
Subject: Dividend ETF or Income Investor Date: 1/20/2011 11:01 AM
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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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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6602 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/20/2011 11:32 AM
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Sounds about right.

The one slight advantage the stock picker has over the ETF is our active management. The ETF is dumb it buys and sells as folks buy and sell into it. It is built to achieve average. I don't subscribe to the service but I can easily assume that if I bought the 20 "best" of their current 50 holds and buy nows I would return very near the average of the index/etf.

If one takes the slower road and picks up dividend stocks on sale and slowly builds one's port we can buy higher yields for less money which provides us greater downside protection and higher income. When we get to distribution points dividend reinvesting may not be our best friend, it may be better to have that income distributed and leave as much of our capital in place as possible.

One could "bank" their dividend money in the ETF and as the better picks come along sell SDY for the higher returning individual stock. In the early stages the port will perform like SDY over time it would be possible to outperform.

jack

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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: 6603 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/20/2011 12:43 PM
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Jack,

I agree with you. Waiting for a prescreened stock to drop to a good buy price ought to improve returns. Also taking dividends in cash or selling shares of the ETF to either buy bargain dividend stocks and/or raise required minimum distributions makes sense. A combination of selected dividend stocks and SDY ETF could be the ticket. Thanks

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Author: TMFBigFrog Big red star, 1000 posts Old School Fool Home Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6604 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/20/2011 9:31 PM
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codger41,

I've long been of the opinion that the stock selections in many of the Motley Fool newsletters are about the third most important piece in the services' value chains. And I'm actually under contract by one of them and have said the same thing to the newsletter's members.

The way I see it, the most important thing an investment newsletter can share with its members is a solid investment philosophy that has the legitimate potential to succeed over time. That's critically important because the market moves as the market moves and will move against all of us from time to time. Even Warren Buffett, arguably the greatest living investor in the world, fell behind the S&P 500 for a five year stretch ( http://www.fool.com/investing/value/2007/11/19/even-warren-b... ).

With a strong handle on a solid investment philosophy you as an investor can make the right decisions for yourself and your portfolio even during those times when the market moves against you. Without a strong grasp on a solid investing philosophy, what keeps you from panic selling near a low point, buying in near a high point so as to 'not miss out', or simply "waiting on the sidelines" while missing out on decent returns?

In my opinion, the second most important thing that a Fool newsletter offers its members is a community of like-minded investors all working together to improve their investment returns. There's nothing quite like having a couple thousand of your closest friends 'check your work' to help you sharpen your own investing saw, improve your own critical thinking skills, and see both positive and negative aspects of a potential investment that you may have missed on your own. Heaven knows I've greatly benefitted from the reasoning of others, both paid Fools and subscribers, and I only hope I've been able to pay forward the favor.

Then, in third place from my perspective, come the stock selections themselves. I view them as putting into practice the investment philosophy and community-centric analysis to help people intelligently invest the hard earned money they're putting aside for their futures. Is that valuable and important? You bet. Is that the most important part? Well, without the first benefit (the philosophy), just the selections themselves can be dangerous to an investor's net worth, even when they ultimately prove to be successful over the long run. And in those periods of time when the market moves against a selection, being an active part of the community to discuss what's happening can help people steer their own thinking to make decisions for the right reasons -- whether the ultimate decision be to sell, hold, or buy more.

Can you invest without the Fool or its newsletters? Certainly. Can you be successful at it? Yup. It really is a question of whether the total value that a newsletter brings to you is more than its cost. Part of it is the stock selections. Part of it is the philosophy. And part of it is the community. Only you can answer whether that's worth the price of admission.

-Chuck
Inside Value Home Fool

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6609 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/20/2011 11:23 PM
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Hey C41

You said: 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.

What I would recommend is rather than selling a block of SDY ... instead do a transfer of an appropriate number of shares to cover your RMD to a taxable Schwab brokerage account. That way you still will own your SDY shares and meet your RMD requirements. Maybe commission free too !

Best Regards,

Rich

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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: 6612 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/21/2011 10:14 AM
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Chuck

Amen. I appreciate you sharing your philosophy with me. I am going to save your response so that I can read it when the storms rage and I need reassurance that I am on the right course.

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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: 6614 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/21/2011 12:52 PM
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Hey Rich,

I see that you have your thinking cap on this morning. I do have IRA, ROTH, and personal accounts at Schwab, and a stock transfer as a required minimum distribution would work fine. Couple of things to consider: do I want dividend paying stocks in my personal account, and also how Uncle Sam gets his share of the distribution from the IRA. Of course a sale of enough ETF shares to pay taxes is simple enough.

I appreciate the input.

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Author: JCMcCarter Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6627 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/23/2011 8:25 PM
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Codger,

Did you put your cost of II membership into your analysis? I didn't see it. I don't belong to II but imagine that its annual cost is large enough to be taken into consideration. I know that the cost of my membership in the Fool's MDP exceedes my annual trading costs. Just something to consider.

I also think that Chuck's post was on target regarding the benefit of Foolish memberships. But to totally ignore costs, especially on a moderate sized portfolio would be foolish.

James

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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: 6628 of 8887
Subject: Re: Dividend ETF or Income Investor Date: 1/24/2011 11:20 AM
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James,

The cost of MF II is about $114/yr. I would probably subscribe to the service in any event because I get access to so much information and the opportunity to express myself (whether this is a benefit to the site is questionable)

Thanks for reminding me.

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