Several years ago, while fielding questions at an AAII (American Association of Individual Investors) meeting in Northeast NJ, a comparison was made between a professionally directed "Market Cycle Investment Management" (MCIM) portfolio and any of several "High Dividend Select" equity ETFs.
• My response was: what's better for retirement readiness, 8% in-your-pocket income or 3%? Today's' response would be 7.85% or 1.85%... and, of course, there is not one molecule of similarity between MCIM portfolios and either ETFs or Mutual Funds.
I just took a (closer-than-I-normally-would-bother-to) "google" at four of the "best" high dividend ETFs and a, similarly described, group of high dividend Mutual Funds. The ETFs are "marked-to" an index such as the "Dividend Achievers Select Index", and are comprised of mostly large capitalization US companies with a history of regular dividend increases.
The Mutual Fund managers are tasked with maintaining a high dividend investment vehicle, and are expected to trade as market conditions warrant; the ETF owns every security in its underlying index, all of the time, regardless of market conditions.
According to their own published numbers:
• The four "2018's best" high dividend ETFs have an average dividend yield (i.e., in your checkbook spending money) of... pause to catch your breath, 1.75%. Check out: DGRW, DGRO, RDVY, and VIG.
• Equally income unspectacular, the "best" Mutual Funds, even after slightly higher management fees, produce a whopping 2.0%. Take a look at these: LBSAX, FDGFX, VHDYX, and FSDIX.
Now really, how could anyone hope to live on this level of income production with less than a five or so million dollar portfolio. It just can't be done without selling securities, and unless the ETFs and funds go up in market value every month, dipping into principal just has to happen on a regular basis. What if there is a prolonged market down turn?
The funds described may be best in a "total return" sense, but not from the income they produce, and I've yet to determine how either total return, or market value for that matter, can be used to pay your bills.... without selling the securities.
Much as I love high quality dividend producing equities (Investment Grade Value Stocks are all dividend payers), they are just not the answer for retirement income "readiness". There is a better, income focused, alternative to these equity income production "dogs"; and with significantly less financial risk.
• Note that "financial" risk (the chance that the issuing company will default on its payments) is much different from "market" risk (the chance that market value may move below the purchase price).
For an apples-to-apples comparison, I selected four equity focused Closed End Funds (CEFs) from a much larger universe that I have been watching fairly closely since the 1980s. They (BME, USA, RVT, and CSQ) have an average yield of 7.85%, and a payment history stretching back an average 23 years. There are dozens of others that produce more income than any of the ETFs or Mutual Funds mentioned in the "best of class" google results.
Although I am a firm believer in investing only in dividend paying equities, high dividend stocks are still "growth purpose" investments and they just can't be expected to generate the kind of income that can be relied upon from their "income purpose" cousins. But equity based CEFs come very close.
• When you combine these equity income monsters with similarly managed income purpose CEFs, you have a portfolio that can bring you to "retirement income readiness"... and this is about two thirds the content of a managed MCIM portfolio.
When it comes to income production, bonds, preferred stocks, notes, loans, mortgages, income real estate, etc. are naturally safer and higher yielding than stocks... as intended by the investment gods, if not by the "Wizards of Wall Street". They've been telling you for nearly ten years now that yields around two or three percent are the best they have to offer.
They're lying through their teeth.
Here's an example, as reported in a recent Forbes Magazine article by Michael Foster entitled "14 Funds that Crush Vanguard and Yield up to 11.9%"
The article compares both yield and total return, pointing out pretty clearly that total return is meaningless when the competition is generating 5 or 6 times more annual income. Foster compares seven Vanguard mutual funds with 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 yields and one-year returns, none of the Vanguard funds win. Despite their popularity, despite the passive-indexing craze and despite the feel-good story many want to believe is true—Vanguard is a laggard."
Hello! Time to get your retirement readiness income program into high gear and stop worrying about total returns and market value changes. Time to put your portfolio into a position where you can make this statement, unequivocally, 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 am in a perfect position to take advantage of all market and interest rate movements of any magnitude, at any time... without ever invading principal except for unforeseen emergencies."
*Note: no mention of any security in this article should be considered a recommendation of any kind, for any specific action: buy, sell