Income Investing Fantasyland: High-Dividend Stock Mutual Funds and ETFs

Several years ago, while answering questions at an AAII (American Association of Individual Investors) meeting in Northeast NJ, a comparison was made between a professionally run “Market Cycle Investment Management” (MCIM) portfolio and any of various “High Dividend Pick” stocks. ETFs.

• My answer was: Which is better for retirement preparation, 8% of out-of-pocket income or 3%? Today’s answer would be 7.85% or 1.85%…and, of course, there isn’t a molecule of similarity between MCIM portfolios and ETFs or mutual funds.

I’ve just taken a “Google” (closer than I’d normally bother) on four of the “best” high-dividend ETFs and a similarly described group of high-dividend mutual funds. ETFs are “adjusted to” 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 trade as market conditions warrant; the ETF owns all of the securities in its underlying index, all of 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 (ie, in your checkbook to spend money on) of…pause to catch your breath, 1.75%. See: DGRW, DGRO, RDVY and VIG.
• With equally unspectacular returns, 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 or more? You simply can’t do it without selling securities and unless ETFs and funds go up in market value every month, equity investing has to happen on a regular basis. What if there is a prolonged market downturn?

The funds described may be better in a “total return” sense, but not for 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-paying), they’re just not the answer for retirement income “cooking.” There is a better, income-focused alternative to these stock income-producing “dogs”; and with significantly less financial risk.

• Keep in mind that “financial” risk (the chance that the issuing company will default on its payments) is very different from “market” risk (the chance that the market value will move below the price of buys).

For an apples-to-apples comparison, I selected four stock-focused closed-end funds (CEFs) from a much larger universe that I’ve been watching quite closely since the 1980s. They (BME, USA, RVT, and CSQ) outperform average of 7.85% and a payment history going back an average of 23 years. There are dozens of others that produce more income than any of the ETFs or mutual funds listed in Google’s “best-in-class” results.

Although I am a firm believer in investing only in dividend-paying stocks, high-dividend stocks are still “purposeful growth” investments and simply cannot be expected to generate the kind of income their “purposeful” cousins ​​can be trusted. from income”. . But stock-based CEFs come pretty close.

• When you combine these monster capital income with similarly managed income purpose CEFs, you have a portfolio that can get you “retirement income readiness”…and that’s about two-thirds of the content of an MCIM portfolio. managed.

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 intended by the investment gods, if not the “wizards of Wall Street.” They’ve been telling you for almost ten years that returns of around two or three percent are the best they have to offer.

They are lying through their teeth.

Here is an example, as reported in a recent forbes magazine article by Michael Foster titled “14 funds that crush Vanguard and yield up to 11.9%”

The article compares both performance and total return, making it clear that total return is meaningless when your competition is generating 5 or 6 times more annual revenue. Foster Compares Seven Vanguard Mutual Funds To 14 Closed-End Funds… And The Underdogs Win In Every Category: Total Stock Market, Small Cap, Mid Cap, Large Cap, Dividend Appreciation, US Growth, and US Value His conclusion:

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

Hello! It’s time to jump-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 complete confidence:

“Neither stock market volatility nor rising interest rates are likely to have a negative impact on my retirement income; in fact, I am in a perfect position to take advantage of all market and interest rate movements of any magnitude, at any time…never invading the principal except in unforeseen emergencies.”

Are you not there yet? Try this.

*Note: Any mention of any security in this article should not be considered a recommendation of any kind, for any specific action: buy, sell or hold.