Income Investing Fantasyland: High-dividend ETFs and Equity Mutual Funds

Several years ago, while answering questions at an AAII (American Association of Individual Investors) meeting in Northeast New Jersey, a comparison was made between a professional-led “Market Cycle Investment Management” (MCIM) portfolio. and any of the various stocks of the “High Dividend Select” ETF.

• My answer was: Which is better for retirement readiness, 8% of out-of-pocket income or 3%? Today’s answer would be 7.85% or 1.85%… and of course there is no molecule of similarity between MCIM portfolios and ETFs or mutual funds.

I just took a “Google” (closer than I normally would) on four of the “best” high dividend ETFs and a group, similarly described, of high dividend mutual funds. ETFs are “marked with” an index such as the “Dividend Achievers Select Index” and are comprised mostly of large-cap US companies with a history of regular dividend increases.

Mutual fund managers are tasked with maintaining a high dividend investment vehicle and are expected to operate as market conditions require; The ETF owns all the securities of its underlying index, all the time, regardless of market conditions.

According to their own published numbers:

• The four “best of 2018” high dividend ETFs have an average dividend yield (that is, on your checkbook to spend money) of … pause to catch your breath, 1.75%. See: DGRW, DGRO, RDVY and VIG.

• Equally unspectacular income, the “best” Mutual Funds, even after slightly higher management fees, yield a whopping 2.0%. Take a look at these: LBSAX, FDGFX, VHDYX, and FSDIX.

Now, really, how could anyone expect to live at this level of income production with a portfolio of less than five million dollars? It simply cannot be done without selling securities, and unless ETFs and funds increase in market value each month, investing in equity has to happen on a regular basis. What if there is a prolonged market crash?

The funds described may be better in a “total return” sense, but not based on the income they produce, and I have yet to determine how the total return or market value can be used to pay your bills. .without selling the securities.

As much as I love high-quality, dividend-producing stocks (investment-grade value stocks are all dividend payers), they’re just not the answer for retirement income “readiness”. There is a better, income-focused alternative to these stock-income producing “dogs”; and with a significantly lower financial risk.

• Note that “financial” risk (the possibility that the issuing company will default on its payments) is very different from “market” risk (the possibility that the market value will move below the purchase price). .

For an apples-to-apples comparison, I selected four equity-focused fixed-equity funds from a much larger universe that I have been watching quite closely since the 1980s. They (BME, US, RVT and CSQ ) have an average yield of 7.85% and a payment history dating back an average of 23 years. There are dozens of others that produce more income than any of the ETFs or mutual funds mentioned in Google’s “best-in-class” results.

Although I’m a firm believer in investing only in dividend-paying stocks, high-dividend stocks are still “growth purpose” investments and simply cannot be expected to generate the kind of income that can be relied upon from their cousins ​​with “income purpose”. But share-based CEFs come very close.

• When you combine these capital income monsters with CEF for similarly managed income purposes, you have a portfolio that can get you into “retirement income readiness” … and this is about two-thirds the content of a portfolio of Managed MCIM.

When it comes to income production, bonds, preferred stocks, notes, loans, mortgages, real estate income, etc. they are naturally safer and higher yielding than stocks … as the investment gods, if not the “Wizards of Wall Street” would have it. They have been telling you for almost ten years that returns of around two to three percent are the best they have to offer.

They are lying through their teeth.

Here’s an example, as reported in a recent Forbes Magazine Michael Foster article titled “14 Funds That Crush Vanguard and Yield Up to 11.9%”

The article compares both performance and total return, noting quite clearly that total return is meaningless when your competition generates 5 or 6 times more annual revenue. Foster compares seven Vanguard mutual funds to 14 closed funds … and the underdog win in every category: Total Stock Market, Small Cap, Mid Cap, Large Cap, Dividend Appreciation, US Growth, and Value of USA His conclusion:

• “When it comes to one-year performance and profitability, none of Vanguard funds win. Despite its popularity, despite the craziness of passive indexing, and despite the good story many want to believe to be true, Vanguard is a laggard. “

Hello! It’s time to kick-start your retirement preparation income program and stop worrying about total returns and changes in market value. It’s time to put your portfolio in a position where you can make this statement, unequivocally, without hesitation, and with full confidence:

“Stock market volatility and rising interest rates are not likely to negatively impact my retirement income – in fact, I am perfectly positioned to take advantage of all market and interest rate movements. of any magnitude, at any time … without ever invading the main one except in case of unforeseen emergencies. “

Still not there? Try this.

* Note: no mention of value in this article should be considered a recommendation of any kind, for any specific action: buy, sell or hold.