Profit, Investing Fantasyland: ETFs and Mutual Funds with High Dividends

Several years ago, when asked at a meeting of the AAII (American Association of Individual Investors) in northeastern New Jersey, a comparison was made between the professionally managed portfolio “Market Cycle Investment Management” (MCIM) portfolio and any of several High Dividend Select stocks. . ETFs.

  • My answer was: which is better for retirement, 8% of income in your pocket or 3%? Today’s answer will 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 (closer than I-usually-worried-to) “Google” to the four “best” ETFs with high dividends and, similarly described, a group of mutual funds with high dividends. ETFs are “marked” by an index such as the “Dividend Allocation Index,” and consist mostly of high-cap U.S. companies with a history of regular dividend increases.

Mutual fund managers are tasked with maintaining an investment mechanism with high dividends and are expected to trade according to market conditions; An ETF holds every security in its underlying index, all the time, regardless of market conditions.

According to their own published issues:

  • The four “best” ETFs with high dividends in 2018 have an average dividend yield (i.e. in your checkbook on spending money) in … pause to translate the spirit, 1.75%. Check: DGRW, DGRO, RDVY and VIG.
  • Just as outrageous profits, the “best” mutual funds, even after slightly higher management fees, produce a whopping 2.0%. Look at them: LBSAX, FDGFX, VHDYX and FSDIX.

In fact, how can one hope to live at this level of income production with a portfolio of less than five million dollars. This is simply impossible to do without selling securities, and if ETFs and funds do not grow in market value each month, the dive into the principal amount should occur on a regular basis. What if the market is taking a long turn?

The funds described may be the best in terms of “total profits,” but not from the profits they produce, and I have not yet determined how you can use either total profit or market value to pay your bills. without the sale of securities.

As much as I love high-quality dividend-producing stocks (all investment grade stocks are dividend payers), they just aren’t the answer to “readiness” to retire. There is a better, profit-oriented, alternative to these “dogs” producing equity income; and with much less financial risk.

  • Note that the “financial” risk (the probability that the issuing company will not make its payments) is significantly different from the “market” risk (the probability that the market value may fall below the purchase price).

To compare apples to apples, I chose four equity-focused closed-end funds (CEFs), from a much larger universe that I’ve been following quite closely since the 1980s. They (BME, US, RVT and CSQ) have an average return of 7.85% and a payment history of an average of 23 years. There are dozens of others that bring in more profits than any of the ETFs or mutual funds mentioned in Google’s “top class” results.

Although I firmly believe in investing only in dividend-paying stocks, high-dividend stocks are still “growth-oriented” investments, and we cannot expect them to generate such income. on which one can rely from one’s cousins ​​for “income purposes.” . But the stock-based CEF is very close.

  • If you combine these monsters of earnings from stocks with the same managed earnings CEF, you have a portfolio that can lead you to “retirement readiness” … and that’s about two-thirds of the content of the MCIM-managed portfolio.

When it comes to generating income, bonds, preferred stock, bills, loans, mortgages, real estate, etc. are naturally safer and more profitable than stocks … as envisioned by the gods of investment, if not the “Wizards of the Wall”. The street. They’ve been telling you for almost a decade that a return of about two to three percent is the best they can offer.

They lie through their teeth.

Here is an example, as reported recently Forbes Magazine an article by Michael Foster entitled “14 funds that break Vanguard and bring in returns of up to 11.9%”

The article compares both profitability and total profitability, quite clearly shows that the total profitability is meaningless if the competition brings 5 ​​or 6 times more annual income. Foster compares seven Vanguard mutual funds to 14 closed-end funds … and outsiders win in every category: common stock market, small capitalization, medium capitalization, large capitalization, dividend growth, U.S. growth, and U.S. value. His conclusion:

  • “When it comes to yields and one-year returns, none Vanguard funds will win. Despite their popularity, despite their fascination with passive indexing and despite their pleasant history, many want to believe in the truth – Vanguard – lagging behind. “

Hello! It’s time to step up your income program before retirement and stop worrying about total income and changes in market value. It’s time to put your portfolio in such a position that you can do it unambiguously, without hesitation and with full confidence:

“Neither stock market volatility nor rising interest rates are likely to have a negative impact on my retirement income; in fact, I’m in an ideal position to take advantage of all the markets and interest rate movements of any magnitude at any time … never breaking into a director except for contingencies. ”

Not yet? Try it.

* Note: No mention of securities in this article should be construed as a recommendation for any specific action: purchase, sale or retention.