Saving for retirement

[ChiefGator]

I'd advise against using dividend stocks for fixed income. Dividend stocks are fine, but ultimately they will perform like stocks. Bonds tend to have weak correlation to stocks and can even have negative correlation in severe economic downturns.

High dividend yield funds lost more than 50% of their value in 2008 downturn.

VHDYX Vanguard High Dividend Yield Index Inv Fund VHDYX Quote Price News

Lower yield Dividend growth funds fared somewhat better, maybe lost 35%

VDIGX Vanguard Dividend Growth Inv Fund VDIGX Quote Price News

A simple 60/40 stocks/bond fund dropped maybe 30%

VBINX Vanguard Balanced Index Inv Fund VBINX Quote Price News

I don't do funds, and I get 4% or more tax free on my dividend paying stocks, not to mention they are mostly worth way more than I paid for them. Today dividend payers are somewhat over priced, but without federal income taxes they are a good deal. Now you can't be rich and get the deal, so it changes if you earn a lot.

 

[78]

I'd advise against using dividend stocks for fixed income. Dividend stocks are fine, but ultimately they will perform like stocks. Bonds tend to have weak correlation to stocks and can even have negative correlation in severe economic downturns.

High dividend yield funds lost more than 50% of their value in 2008 downturn.

VHDYX Vanguard High Dividend Yield Index Inv Fund VHDYX Quote Price News

Lower yield Dividend growth funds fared somewhat better, maybe lost 35%

VDIGX Vanguard Dividend Growth Inv Fund VDIGX Quote Price News

A simple 60/40 stocks/bond fund dropped maybe 30%

VBINX Vanguard Balanced Index Inv Fund VBINX Quote Price News

You failed to take into consideration his time horizon. If it's long he can afford to ride out the ups and downs and he'll fight inflation at the same tume.

You also placed undue emphasis on the 2008 financial crisis, which not so surprisingly hit financial stocks the hardest. They comprise the highest concentration of the Vanguard fund addressed here. Are you assuming the next downturn will be like the last? I wouldn't.

 

[ChiefGator]

You failed to take into consideration his time horizon. If it's long he can afford to ride out the ups and downs and he'll fight inflation at the same tume.

You also placed undue emphasis on the 2008 financial crisis, which not so surprisingly hit financial stocks the hardest. They comprise the highest concentration of the Vanguard fund addressed here. Are you assuming the next downturn will be like the last? I wouldn't.

Not to mention being lucky I bought many of them at the lows, not that everyone would do that.

My problem with funds is that they must rebalance, which might mean selling something good in the long term and buying something bad.

This works for me, not recommended for anybody else. My advisor always tells me I am way too concentrated in utilities, until I point out my unrealized gain and decent return on my investment. Like we have been saying investing strategy should be quite individualized, if you don't want to learn simple is the way to go.

 

[Politigator]

You failed to take into consideration his time horizon. If it's long he can afford to ride out the ups and downs and he'll fight inflation at the same tume.

You also placed undue emphasis on the 2008 financial crisis, which not so surprisingly hit financial stocks the hardest. They comprise the highest concentration of the Vanguard fund addressed here. Are you assuming the next downturn will be like the last? I wouldn't.

You read a lot into my post that I didn't say.

Just saying, dividend stocks aren't fixed income. There's nothing wrong with dividend stocks, but they behave more like stocks. Most people prefer to have some diversification with fixed income for their stocks, unless they are very young (I think chief is either retired or near retirement)

Now he is talking about utility stocks, and I suspect the are more like fixed income than just about any equity category.

I imagine utility stocks are mostly reasonably safe, but I'd never put most of my money in any particular category.

 

[Gator By Marriage]

Not to mention being lucky I bought many of them at the lows, not that everyone would do that.

My problem with funds is that they must rebalance, which might mean selling something good in the long term and buying something bad.

This works for me, not recommended for anybody else. My advisor always tells me I am way too concentrated in utilities, until I point out my unrealized gain and decent return on my investment. Like we have been saying investing strategy should be quite individualized, if you don't want to learn simple is the way to go.

I once had the brilliant idea of funding private high school for my kids (well, partially anyway) with dividends from a Gabelli Utilities Mutual Fund. It was a great idea - for a while. For several years the fund was selling for $9-10 a share but was paying a monthly dividend of $0.07/share. Not bad, right? So, with my goal in mind, I was re-investing the dividends into new shares. Even when the share price fell into the $6-7 range, the dividend remained the same. In hindsight, of course, I should have realized that it was not sustainable. Annnnnnnnd it wasn't. Ultimately they did a reverse two for one split and the dividend was no longer very special - though they do currently pay over 6%. Although it was not really painful - it was really more irritating than anything else; after all it was really just a dividend cut packaged as something else - and I was not too over concentrated in this fund, I still should have been more balanced. At least I learned a good lesson!
Whether you are too concentrated in utilities is of course a personal decision, and owning a bunch of individual stocks instead of a fund may (should?) keep you more protected - and in the case of utilities, most of them aren't going anywhere. As one gets later in life, owning a bunch of dividend paying stocks/funds/ETFs has always seemed to me like a sound strategy to me. (Others, I am sure will have a different opinion, this is GCMB after all!)

For anyone interested, here's a good story about it:
Gabelli Utilities Fund And The Stealth 50% Dividend Cut: Bad Mojo At A Decent Fund? - Gabelli Utilities Fund (MUTF:GABUX) | Seeking Alpha

 

[78]

You read a lot into my post that I didn't say.

Just saying, dividend stocks aren't fixed income. There's nothing wrong with dividend stocks, but they behave more like stocks. Most people prefer to have some diversification with fixed income for their stocks, unless they are very young (I think chief is either retired or near retirement)

Now he is talking about utility stocks, and I suspect the are more like fixed income than just about any equity category.

I imagine utility stocks are mostly reasonably safe, but I'd never put most of my money in any particular category.

I know all about negative and positive asset correlation. I was driving at the broad brush stroke you seemed to be painting re high dividend stocks by using the 2008 financial crisis as the measuring stick.

We may never again in our lifetime face a crisis of that magnitude, not just in quantitative terms but qualitative as well. Financial stocks, which generate some of the highest income streams, were at the epicenter of the meltdown. And after 40 years of monetary easing, the bond market is all but tapped out. Bond alts are all the rage these days.

 

[ChiefGator]

You read a lot into my post that I didn't say.

Just saying, dividend stocks aren't fixed income. There's nothing wrong with dividend stocks, but they behave more like stocks. Most people prefer to have some diversification with fixed income for their stocks, unless they are very young (I think chief is either retired or near retirement)

Now he is talking about utility stocks, and I suspect the are more like fixed income than just about any equity category.

I imagine utility stocks are mostly reasonably safe, but I'd never put most of my money in any particular category.

As we know I am not anything like you. And as I said my strategy is not for others, I have some inside type information on management and operations of utilities. For example that foolish utility in California is not on my list of acceptable companies, their management is idiotic.

 

[Politigator]

I know all about negative and positive asset correlation. I was driving at the broad brush stroke you seemed to be painting re high dividend stocks by using the 2008 financial crisis as the measuring stick.

We may never again in our lifetime face a crisis of that magnitude, not just in quantitative terms but qualitative as well. Financial stocks, which generate some of the highest income streams, were at the epicenter of the meltdown. And after 40 years of monetary easing, the bond market is all but tapped out. Bond alts are all the rage these days.

The 2008 was just an example of what can go wrong and how dividend stocks varied dramatically from high quality fixed income. It was not meant to be a prediction.

I do have vanguard dividend growth, which has much lower dividend yield but a long history of dividend growth resulting in a portfolio of generally high quality companies and tends to be less volatile than the market in general. But I wouldn't call these a bond substitute either.

 

[78]

The 2008 was just an example of what can go wrong and how dividend stocks varied dramatically from high quality fixed income. It was not meant to be a prediction.

I do have vanguard dividend growth, which has much lower dividend yield but a long history of dividend growth resulting in a portfolio of generally high quality companies and tends to be less volatile than the market in general. But I wouldn't call these a bond substitute either.

By bond alts I meant funds that seek non-correlation while investing outside the fixed-income arena, often through derivatives.

Managed futures
Merger arbitrage
Currency plays
Covered calls
Convertible arbitrage
Unconstrained bond

The goal is to lower risk through non-correlation while seeking alternatives that can potentially hedge against inflation.

 

[ChiefGator]

The 2008 was just an example of what can go wrong and how dividend stocks varied dramatically from high quality fixed income. It was not meant to be a prediction.

I do have vanguard dividend growth, which has much lower dividend yield but a long history of dividend growth resulting in a portfolio of generally high quality companies and tends to be less volatile than the market in general. But I wouldn't call these a bond substitute either.

In retirement I don't care what the valuation of the stock might be, as long as my dividends continue. Now of course sometimes the price goes down because the dividend is suspect. Most well run public utilities are not going to have that happen to them because their ROI is protected (somewhat) by law.

So they provide income, mostly no matter what happens.

Bonds can be refunded, and their prices are greatly affected by say the Fed.

 

[Politigator]

By bond alts I meant funds that seek non-correlation while investing outside the fixed-income arena, often through derivatives.

Managed futures
Merger arbitrage
Currency plays
Covered calls
Convertible arbitrage
Unconstrained bond

The goal is to lower risk through non-correlation while seeking alternatives that can potentially hedge against inflation.

The issue I have with all of those is that they are active or speculative strategies, and it is likely that any alpha they may get will be eaten up by fees. I had the Merger Fund for years. They always eeked out a non spectacular but very steady modest return. But then it got to the point their low single digit returns were not materially different than bond yields. So I bailed on it. The 1-2% ish fee they have to overcome is just too much.

In terms of inflation, I do have some TIPS funds and ibonds. Also a couple of commodity funds. I like the commodity funds more in theory than in practice. Typically these funds either invest in futures or are a synthetic derivative instrument made to track a commodities index issued by an investment bank. The futures returns may vary drastically from the index due to contango, and the index instrument typically has high fees and is subject to the solvency of the institution creating the instrument. Add on top of that long term commodity prices are typically pretty low.

Also have a modest share of REITS.

 

[78]

The issue I have with all of those is that they are active or speculative strategies, and it is likely that any alpha they may get will be eaten up by fees. I had the Merger Fund for years. They always eeked out a non spectacular but very steady modest return. But then it got to the point their low single digit returns were not materially different than bond yields. So I bailed on it. The 1-2% ish fee they have to overcome is just too much.

In terms of inflation, I do have some TIPS funds and ibonds. Also a couple of commodity funds. I like the commodity funds more in theory than in practice. Typically these funds either invest in futures or are a synthetic derivative instrument made to track a commodities index issued by an investment bank. The futures returns may vary drastically from the index due to contango, and the index instrument typically has high fees and is subject to the solvency of the institution creating the instrument. Add on top of that long term commodity prices are typically pretty low.

Also have a modest share of REITS.

They're hit and miss. I've learned over time to read the lines between economic data and the montetary cycle and to allocate to low-cost ETFs accordingly. Last year, though, was a tricky transitional year coupled with big market swings. It was better second to third quarters to simply hedge with cash.

 

[ChiefGator]

I have to admit that my strategy somewhat failed. I believed that the US would implement some sort of carbon tax and thus utilities with nuclear power would become more profitable. Instead of that fracking produced a lot of natural gas and it became the generation of choice. They cut their dividends and the price went down. Then over time the price came back so I am even on that investment. I bought some pipeline stock, it lost a lot immediately. Mistakes can and are made.

 

[Politigator]

I have to admit that my strategy somewhat failed. I believed that the US would implement some sort of carbon tax and thus utilities with nuclear power would become more profitable. Instead of that fracking produced a lot of natural gas and it became the generation of choice. They cut their dividends and the price went down. Then over time the price came back so I am even on that investment. I bought some pipeline stock, it lost a lot immediately. Mistakes can and are made.

I have learned to separate my political or macro economic views from my investing, at least for the most part. They do influence what I do but not in a major way. For 20+ years I've thought "bond rates can't go any lower that this" and was obviously wrong. I put some relatively small stakes in energy and commodities when they were down and they haven't come back up. Luckily I've made some other correct calls that offset these, but while I definitely have opinions, I realize my crystal ball is largely non functional so I generally come up with an age appropriate asset allocation, invest in low fee funds and stay the course.

 

[ChiefGator]

I have another radical strategy, I evaluate companies with negative emotional press coverage. If their management is good, their business sound sometimes emotion will drive their stock price down more than reality indicates. Thus you can get some great values, if you can evaluate properly. I have some positives here and some yet to be seen.