“For last year's words belong to last year's language
And next year's words await another voice.
And to make an end is to make a beginning."
Little Gidding, by T.S. Eliot
Situation: After your career of gainful employment ends, you’ll need to make a new beginning. New beginnings are comparatively rare over the course of our lives, and frequently the changes made amount to nothing more than defenses thrown up to improve our situational control. Retirement is an excellent opportunity to examine such habits, as some may no longer have utility. But beware. People who have looked at personality adjustments in retirement suggest that whatever little monster lives inside us won't remain so little after we retire and dial back those defenses. Academic studies, however, reveal no universal trends. There’s just a complex tableau of effects. That said, we all know that our working life frequently required us to whittle ourselves into a machine of a person. That’s what we’ve been doing. And now we’re going to un-whittle, whether we want to or not. Prepare for that day by investing in yourself. Drop the job-related defenses without losing sight of the need we all have for routine and purpose. Build new routines that have a new purpose.
Mission: Retirement, like marriage, purports to be about quality-of-life. Both are influenced by two important factors: our health and our ability to pay. Opportunity becomes a function of maintaining our body and our balance sheet.
Step #1 is to craft a retirement identity, now that your Facebook Page isn’t being monitored by your employer. Each of us needs to understand that there will be a new twist to the way we answer key questions: “Deep down, who am I? How do I get a life?” There will be moments of grieving over the loss of friends, particularly the loss of your best friend (yourself). Elisabeth Kubler-Ross has taught us that grieving happens in identifiable stages: denial, anger, bargaining, depression, and acceptance. These steps “can occur in any order.” From my decades employed as a doctor (neurosurgeon), I think that 95% of us will exhibit Kubler-Ross symptoms during retirement. Often, the trigger is not the loss of livelihood but the loss of personhood, which was gained through the roles and missions of our job. But psychotherapists say that explanation is too simplistic. They suggest instead that the vacuity of our interpersonal relationships away from work brings on a sense of loss that can no longer be covered up by work.
Step #2 is to take care of our bodies. This is a two-part problem because the things we do to damage our health often function to allay our feelings of stress: smoking, drinking, and continuing to eat after our appetite has been satisfied. And, stress is a contributing cause of most illnesses. Almost all of us have found ways to de-stress as often as necessary. (Prohibition failed for a reason.) Psychologists say the healthy way to do this is to take frequent 3 or 4 day vacations instead of the annual multi-week expedition. Of course, psychologists who say this are “arguing against interest” because part of their business comes from people overwhelmed by relationships that blew up during Christmas and annual vacations.
Step #3 is to fund your retirement. The trick here is not to gamble. Gambling mainly comes in two forms. Borrowing money is most common way people gamble. So don’t borrow money for anything other than a mortgage on your principal residence. The other form is to make risky investments. What is risk? Taking a risk is to bet on an uncertain outcome. In finance, “risk-on” means to have confidence in a future stream of earnings growth (for a stock) or the full repayment of principal on time (for a bond). “Risk-off” means confidence has evaporated; the investor will usually want to close out her position, perhaps at a loss. We caution you to make bond-like investments that are highly rated by S&P. With a highly-rated bond, the borrower almost always returns the original investment to the lender on time. With a highly-rated stock, bond-like features, such as good and growing dividends or a low debt/equity ratio, will often prevent the stock’s price from falling in a recession. Start your career as a stock-picker with the list of Dividend Achievers. For those of us who don’t have time to make a hobby of stock-picking, the way to avoid gambling is to invest in either a bond-heavy mutual fund like Vanguard Wellesley Income Fund (VWINX), or a stock-heavy index fund like Vanguard Balanced Index Fund (VBINX).
In this week’s Table (Columns N-P), we introduce a third way to avoid gambling on stocks: avoid those that don’t exhibit reversion to the mean. In other words, confine your selections to stocks that are priced close to their 30-yr trendline. To demonstrate, we’ve picked 10 Dividend Achievers at the BMW Method 30-yr website, using Coca-Cola (KO) as the limit for risk of loss (Column P in the Table) and extent of leverage (Columns AC and AD in the Table), and the S&P 500 Index (^GSPC) as the limit for loss during the correction of 2011 (Column D in the Table). Companies with a Return on Invested Capital (ROIC) that is less than the Weighted Average Cost of Capital (WACC) are excluded (Columns AA-AB), as are companies with a negative book value, which makes it impossible to calculate the Graham Number (Column U).
Execution: How might one craft a retirement identity? Start by coming up with a plan for preventing or minimizing Kubler-Ross symptoms. Or better yet, how about just facing them? The plan has to separately address distinct parts of your being, i.e., mental health, physical health, renewal through travel and recreation, and substitution. Why substitution? Because you’ll need to substitute for your work persona through the gradual and planned development of your natural personality, untethered to the habits necessitated by your working life. While it is impossible to detach entirely from ingrained habits, we all know that many of our co-workers (40% of all workers in one large study) report to work simply to make money and have health insurance. They were not there to either sustain or nourish their personality. Karl Marx was right about “alienation.” If you spent your working years as one of those unfortunates, retirement is a chance to recover, dial back your stress level and grow a little. But if you identified strongly with your workplace persona, you’ll need to remain somewhat tethered, perhaps by becoming “historian” of your trade association.
How might one improve health? Given that many of our poor health habits exist because of work-related stress, experiment with dialing back unhealthy habits.
How might one plus-up retirement savings without gambling? We all know you can’t retire while you have debts. If that’s you, make sure you can migrate to a part-time job soon after retiring from your full-time job. Once your debts have been paid off, do the math and see if you can maintain your lifestyle by using income from Social Security, pensions & annuities, and your retirement portfolio. If there’s still not enough, you’ll have to continue with part-time work or dial back your lifestyle. But behavior is hard to change, so you’ll be tempted instead to borrow money, gamble, or borrow money to gamble. Don’t. There are no short-cuts. It’s too late in the game for you to invest in anything with an uncertain payoff. The only investments that can help you now are to be found at treasurydirect. You’ll have to keep working, dial back your lifestyle, or sponge off friends and relatives. If you are disabled, apply to the appropriate government agency for assistance.
Administration:
Mental Health: Here you’ll need to reach out. Start by paying closer attention to your network of friends and relatives. Technology also helps by providing vicarious relationships through your laptop: Facebook, movies, and feature presentations viewable with 360 degree “virtual reality” headsets. And remember, New York museums and Broadway plays are popular with tourists for a reason. Find a way to avail yourself of live theater or a museum visit at least once a year.
Physical Health: The trick here is 30 minutes of exercise a day (e.g. brisk walking), and eating a balanced diet that includes green vegetables, fruit, nuts and coffee (or some other antioxidant). If you live alone, there’s a good chance you’re not getting enough protein and Vitamin D. So, take a supplement like “Ensure Enlive” (Abbott Laboratories) each day. Finally, the need for extra sleep is easily forgotten. It may be hard to understand the importance of sleeping each night until rested, but “you’ll know it when you see it”.
Travel and Recreation: “Get a life!” That’s what we say to boring people who appear to have no excitement in their lives. But many senior citizens lack the wherewithal to travel, or even take up a renewing pastime. Fortunately, the internet makes it easy to find affinity groups and charitable organizations that will help you avoid becoming a “shut-in.”
Substitution: learn routines for a new purpose in life, one that suits you. Here you’ll need a little professional help from someone who knows how to select and evaluate a psychological test that addresses someone like you. You’d best do this at least 3 yrs before you retire, since you may need to reacquire lost skills or encourage new skills.
Bottom Line: Half of us will need to continue working in our sunset years. During the run-up to retirement, we’ll have to learn a new career/vocation/hobby, one that is less stressful and time-consuming. Those of us who don’t fear outliving our retirement assets will have a similar task, but will also have the luxury of free associating a plan for new routines that match a new purpose in life. Both groups soon realize they’ll have to pay a lot more attention to physical health than anticipated. That will lead to paying closer attention to mental health, which creates a positive feedback loop that stabilizes physical health. For example, we continue to eat after our appetite has been satisfied mainly because it decreases stress. By learning more about the sources of stress in our lives, and taking remedial action, we’ll find that losing weight is not so difficult. So, the key part of our makeover is to de-stress, which is most easily accomplished through frequent 3-4 day periods of Travel and Recreation. Academic studies also suggest that to de-stress we’ll need to nurture more friendships.
Risk Rating: 5 (US Treasuries = 1; gold = 10)
Full Disclosure: I dollar-average into NKE, JNJ, and T, and also own shares of ROST and KO.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. NPV inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for price over the past 50 days (corrected for transaction costs of 2.5%), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is Price CAGR for the past 30 years, and Price Return in the 10th year is corrected for transaction costs of 2.5%. The calculation template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 31
Sunday, July 24
Week 264 - High-quality Food and Agriculture Companies in the 2016 Barron's 500 List
Situation: The performance of food-related stocks is linked to the commodity supercycle, which has just completed a successful test of its 1998 low. Now would be a good time for you to prepare for the next commodity supercycle. You can buy mining and energy stocks while prices are low, but we’d rather have you think about buying food & agriculture stocks. Why? Because mining and energy stocks carry higher risk, whereas, food is both a daily requirement and in a growth market. This is because the number of people in East Asia alone who can afford to be adequately nourished has been increasing by almost 20 million persons a year for the past 20 yrs. The price of food also faces upward pressure, and is more likely to outstrip general inflation than to continue tracking it. Why? Because agriculture is the greatest consumer of water, and the steady expansion of drought-stricken areas is reducing the inventory of arable land that is able to support agriculture without irrigation.
Mission: Provide an update of food and agriculture companies listed on the New York and Toronto stock exchanges, by referencing the 2016 Barron’s 500 List of the largest companies by revenue. That list ranks companies by fundamental metrics (cash flow from operations, revenue) for the past 3 yrs. We highlight (using green) the companies that have improved their rank (see Table). We also exclude any that do not have an S&P bond rating of at least BBB+ and an S&P stock rating of at least B+/M. Companies with a BBB bond rating are also included if they carry an S&P stock rating of at least A-/M.
Execution: see Table.
Bottom Line: In the aggregate, these 12 companies are good investments. And, they’re safe enough to be long-term holdings in a retirement portfolio. The problem is that you’ll only choose to invest in two or three. To help you pick those, we’ve calculated Net Present Value (NPV) in Column AA of the Table. Ranked by NPV, and also considering safety metrics like Dividend Achiever status, General Mills (GIS), Hormel Foods (HRL) and Deere (DE) look like good bets.
Risk Rating: 6 (where US Treasuries = 1 and gold = 10).
Full Disclosure: I own shares of GIS, HRL, KO, PEP, ADM, and DE.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. NPV inputs are described and justified in the Appendix to Week 256. A shorthand way to estimate that a stock will have an investable NPV is highlighted in yellow at Column Q in the Table, i.e., 16-Yr CAGR (Column N) + Dividend Yield (Column G) needs to be 11.4% or higher.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Provide an update of food and agriculture companies listed on the New York and Toronto stock exchanges, by referencing the 2016 Barron’s 500 List of the largest companies by revenue. That list ranks companies by fundamental metrics (cash flow from operations, revenue) for the past 3 yrs. We highlight (using green) the companies that have improved their rank (see Table). We also exclude any that do not have an S&P bond rating of at least BBB+ and an S&P stock rating of at least B+/M. Companies with a BBB bond rating are also included if they carry an S&P stock rating of at least A-/M.
Execution: see Table.
Bottom Line: In the aggregate, these 12 companies are good investments. And, they’re safe enough to be long-term holdings in a retirement portfolio. The problem is that you’ll only choose to invest in two or three. To help you pick those, we’ve calculated Net Present Value (NPV) in Column AA of the Table. Ranked by NPV, and also considering safety metrics like Dividend Achiever status, General Mills (GIS), Hormel Foods (HRL) and Deere (DE) look like good bets.
Risk Rating: 6 (where US Treasuries = 1 and gold = 10).
Full Disclosure: I own shares of GIS, HRL, KO, PEP, ADM, and DE.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 18 in the Table. NPV inputs are described and justified in the Appendix to Week 256. A shorthand way to estimate that a stock will have an investable NPV is highlighted in yellow at Column Q in the Table, i.e., 16-Yr CAGR (Column N) + Dividend Yield (Column G) needs to be 11.4% or higher.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 17
Week 263 - “Bond-like” Stocks That Fly Under The Radar
Situation: The stock market is overpriced, which is the obvious outcome of “quantitative easing” and ultra-low interest rates. US Treasury bonds and notes carry an interest rate that is close to the projected inflation rate over their holding period. Stocks, in spite of their added risk, are the only path to portfolio growth. For that reason, the business news increasingly talks up “bond-like” stocks.
Mission: In last week’s blog, we set up criteria for defining “bond-like” stocks, starting with the requirement that they be Dividend Achievers, i.e., the dividend has been increased annually for at least the past 10 yrs. Now we’ll use those same criteria to highlight “below the radar” stocks, e.g. those issued by companies that don’t have sufficient revenue to be included in the 2016 Barron’s 500 List.
Execution: We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M or S&P assigns a denominator of “H” to the rating (indicating high risk of loss);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: This metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table.
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found a dozen Dividend Achievers that appear attractive for long-term investment, even though most reside in the S&P 400 MidCap Index. Not surprisingly, 7 of the 12 are utility stocks. But the strongest stock of the group is Tanger Factory Outlet Centers (SKT), a real estate investment trust.
Risk Rating: 5 (where US Treasuries = 1 and gold = 10)
Full Disclosure: I own shares of Lincoln Electric (LECO).
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 25 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: In last week’s blog, we set up criteria for defining “bond-like” stocks, starting with the requirement that they be Dividend Achievers, i.e., the dividend has been increased annually for at least the past 10 yrs. Now we’ll use those same criteria to highlight “below the radar” stocks, e.g. those issued by companies that don’t have sufficient revenue to be included in the 2016 Barron’s 500 List.
Execution: We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M or S&P assigns a denominator of “H” to the rating (indicating high risk of loss);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: This metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table.
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found a dozen Dividend Achievers that appear attractive for long-term investment, even though most reside in the S&P 400 MidCap Index. Not surprisingly, 7 of the 12 are utility stocks. But the strongest stock of the group is Tanger Factory Outlet Centers (SKT), a real estate investment trust.
Risk Rating: 5 (where US Treasuries = 1 and gold = 10)
Full Disclosure: I own shares of Lincoln Electric (LECO).
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 25 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 10
Week 262 - The Master List for 2016
Situation: You’d like not to outlive your retirement savings. And you probably want to find a path toward that goal that doesn’t involve gambling. For that reason, non-gamblers who work on Wall Street have traditionally invested in bonds because bond pricing is stable unless the borrower faces bankruptcy. Even then, the creditor gets back most of the money owed, after the court liquidates and distributes the borrower’s assets. High quality bonds also come with fairy dust. They go up in price during recessions. Stock pricing depends on the perceived value of future cash flows discounted to the present. High quality stocks mostly go down in price during recessions because cash flows depend on demand for the company’s goods and services.
Bonds now pay only enough interest to cover inflation. You have little choice but to invest in “bond-like” stocks that don’t fall much in value during recessions, and maybe even go up. Examples include Wal-Mart and McDonald’s, both of which went up during the Lehman Panic. We’ve constructed the 2016 Master List around that idea. It starts of course with companies that pay a good and growing dividend, the ones S&P calls Dividend Achievers because they’ve raised their dividend annually for at least the past 10 yrs. Those companies have a captive audience of some sort, people who will keep shelling out cash for a product or service, even during recessions.
Mission: Identify Dividend Achievers likely to hold their value during recessions.
Execution: You’ll know them by how little their total return to investors fell during the most recent “bear market” in an important asset class. That would be the middle two quarters of 2011, when the S&P 400 MidCap Index ETF (MDY) fell 21%. We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M (or S&P assigns a denominator of “H” to the rating, denoting high risk of loss to the investor);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: this metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table;
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found 24 Dividend Achievers in the 2016 Barron’s 500 List that defy gravity. All 24 have outgrown the Vanguard S&P 500 Index Fund (VFINX) over the past 16 yrs AND dropped no more in Finance Value during the 2011 bear market than did MDY, the S&P 400 MidCap Index ETF (see Column E in the Table). More importantly, the first 10 companies in the Table beat out 10-Yr Treasury Notes in Finance Value. Thirteen of the 24 improved their cash flow and sales numbers in 2015 compared to 2014 (highlighted in green in Columns R & S of the Table). All 24 continue to more than repay their cost of capital (see Columns AB and AC in the Table). The discounted cash flow (NPV) over the next 10 yrs, projected from 16-yr dividend and price appreciation rates by using a 9%/yr discount rate, shows that all 24 are likely to beat out Berkshire Hathaway (BRK-A), MDY, Microsoft (MSFT), and VFINX (see Columns W-AA in the Table).
Risk Rating: 4 (where 1 = Treasury Notes and 10 = gold).
Full Disclosure: I dollar-average into JNJ and NEE, and own shares of GIS, KO and MCD.
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 37 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Bonds now pay only enough interest to cover inflation. You have little choice but to invest in “bond-like” stocks that don’t fall much in value during recessions, and maybe even go up. Examples include Wal-Mart and McDonald’s, both of which went up during the Lehman Panic. We’ve constructed the 2016 Master List around that idea. It starts of course with companies that pay a good and growing dividend, the ones S&P calls Dividend Achievers because they’ve raised their dividend annually for at least the past 10 yrs. Those companies have a captive audience of some sort, people who will keep shelling out cash for a product or service, even during recessions.
Mission: Identify Dividend Achievers likely to hold their value during recessions.
Execution: You’ll know them by how little their total return to investors fell during the most recent “bear market” in an important asset class. That would be the middle two quarters of 2011, when the S&P 400 MidCap Index ETF (MDY) fell 21%. We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:
1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M (or S&P assigns a denominator of “H” to the rating, denoting high risk of loss to the investor);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: this metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table;
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).
Bottom Line: We’ve found 24 Dividend Achievers in the 2016 Barron’s 500 List that defy gravity. All 24 have outgrown the Vanguard S&P 500 Index Fund (VFINX) over the past 16 yrs AND dropped no more in Finance Value during the 2011 bear market than did MDY, the S&P 400 MidCap Index ETF (see Column E in the Table). More importantly, the first 10 companies in the Table beat out 10-Yr Treasury Notes in Finance Value. Thirteen of the 24 improved their cash flow and sales numbers in 2015 compared to 2014 (highlighted in green in Columns R & S of the Table). All 24 continue to more than repay their cost of capital (see Columns AB and AC in the Table). The discounted cash flow (NPV) over the next 10 yrs, projected from 16-yr dividend and price appreciation rates by using a 9%/yr discount rate, shows that all 24 are likely to beat out Berkshire Hathaway (BRK-A), MDY, Microsoft (MSFT), and VFINX (see Columns W-AA in the Table).
Risk Rating: 4 (where 1 = Treasury Notes and 10 = gold).
Full Disclosure: I dollar-average into JNJ and NEE, and own shares of GIS, KO and MCD.
Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 37 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 3
Week 261 - Growing Perpetuity Index v2.1
Situation: Our blog started 5 years ago with the idea that saving for retirement could be more efficient if savers were to “dollar-average” $50-200 online each month into stocks. The purchases would be spread out over several companies in different sectors of the market, i.e., companies that pay a good and growing dividend. The saver’s accountants would declare to the IRS that those savings constitute an IRA. This week’s blog revisits our initial strategy, examines its performance, and looks for ways to enhance the way we measure performance.
By using the 65-stock Dow Jones Composite Average or ^DJA, we picked an initial 12 stocks and called those the Growing Perpetuity Index (see Week 4). ^DJA is not only a shorter list than the S&P 500 Index (^GSPC) but also outperforms ^GSPC over the long term (compare Lines 32 and 33 at Column C in the Table). Our strategy was to exclude stocks that don’t pay at least a market dividend (currently 2.0%/yr), and those issued by companies that don’t have S&P ratings of at least BBB+ for their bonds and B+/M for their common stock. Most importantly, the companies needed to have a record of increasing their dividend annually for 10 or more years. S&P calls those companies Dividend Achievers.
Mission: List all companies that currently qualify for inclusion in the Growing Perpetuity Index (see Table), and highlight important metrics for the investor to consider. Five years ago, we found 14 companies and eliminated two to reach our goal of having only a dozen. At Week 224 there were 16 qualifiers; we gave up the idea having a dozen favorites and called the 16-stock portfolio Growing Perpetuity Index v2.0. Now, 19 companies meet our criteria, and we’ve added one (Union Pacific) that will soon be designated a Dividend Achiever. You get to choose from the 20 stocks in Growing Perpetuity Index v2.1.
Execution: Highlighting “important metrics for the investor to consider” has become “the tail that wags the dog.” For example, we’ve come around to the idea that Net Present Value (NPV) needs to be calculated for every stock appearing in our tables. Explaining that math trick can start with pretending that you bought one of the stocks having a $0.00 transaction cost online, e.g. 50 shares of Exxon Mobil (XOM) at $100/Sh. If you’re looking for that $5000.00 investment to have a 9%/yr rate of price appreciation over a 10 year holding period, you’ll sell those 50 shares for $11835.00 ($236.72/Sh). The calculated Present Value of Expected Cash Flows on that price return works out to be $5000, meaning Net Present Value will be $0.00 because you spent $5000 of Present Value to buy it.
You get the point: The discount rate (9%/yr) is like the inflation rate but instead reduces your return because of the Time Value of Money. For example, the impact of that 9%/yr “discount” on each dollar of dividends paid out 10 yrs from now is to leave you with a NPV of 39 cents. The dividend growth you expect is also 9%/yr, which (if realized) would also generate an NPV of $0.00. (A detailed explanation of the inputs to the NPV calculation can be found at Week 256).
The amount of the dividend is important in the NPV calculation. Why? Because large dividend cash flows may be paid out in the early years, when the discount rate has less impact. XOM pays a high 3.3% dividend, which turns out to give it a positive NPV even though other factors work against its having a positive NPV. Those factors are 1) the NPV calculation includes transaction costs of 2.5% at both the front and back end, 2) the dividend growth rate is only 8.0%/yr, and 3) the price appreciation rate is only 7.9%/yr (see Columns G, H, M and Y at Line 16 in the Table). After buying XOM, almost 20% of its purchase price is returned to you as dividends within 5 yrs.
Administration: Market returns have but two sources: asset allocation and security selection. We recommend bond-like stocks for retirement planning, backed 2:1 with 10-yr US Treasury Notes that are purchased online to avoid transaction costs. Diversification to gain exposure to foreign markets or small-mid capitalization companies is not necessary because the average company in the Table gains 40% of revenues outside the US and several of the companies (JNJ, MSFT, IBM, PG, KO, XOM, UTX, MMM) buy up small companies almost every year.
That leaves “security selection” as the key source of returns. This is the hard part, since you aren’t going to buy all 20 stocks. But it’s really a 2-part problem, given that transaction costs may outweigh selection bias as a source of poor returns for the average investor. So, let’s look at those costs as a fraction of the asset’s purchase price, the so-called expense ratio. For automatic purchases of $100/mo online, the average expense ratio for the 20 stocks we highlight this week is 1.4% (see Column AB in the Table). Note: 8 of those 20 stocks carry zero or minimal transaction costs.
When buying stocks through a discount broker, the expense ratio is typically 2.5%. Index funds purchased through the Vanguard Group have expense ratios of 0.25% or less, which is the main reason Warren Buffett recommends that his friends and relatives buy the Vanguard 500 Index Fund (VFINX at Line 28 in the Table) instead of trying to pick stocks.
Selection bias is an important problem for investors holding fewer than 40 stocks. We try to help you by emphasizing the importance of diversification, e.g. having stocks in all 10 of the S&P industries (see Week 236). Mostly, you need to emphasize quality when picking stocks (see our rationale above for making this week’s selections). Then see how to get the most value from the stocks you like by running NPV calculations before you buy (c.f. Columns U through Y in the Table). Also, pay attention to the Graham Number in Column T and compare it to the Stock Price in Column U. The Graham Number is what the price of the stock would be at 15X earnings and 1.5X book value.
Bottom Line: We have refreshed our Growing Perpetuity Index. Now it is v2.1 and composed of 20 companies which, in the aggregate, handily outperform our benchmarks. We find that only 3 companies have a lower “finance value” than VFINX using our method of calculating performance: 16-yr total return minus the loss incurred in the 2011 market correction (see Column 5 of the Table). Those companies are 3M (MMM), CSX Railroad, and Caterpillar (CAT). In terms of NPV, all 20 companies outperformed the benchmarks (see Column Y in the Table). Those benchmarks include VFINX, Berkshire Hathaway (BRK-A), and the SPDR MidCap 400 ETF (MDY).
Risk Rating is 6, where Treasuries = 1 and gold = 10.
Full Disclosure: I dollar-average into XOM, JNJ, MSFT, NEE, PG, and UNP. I also own shares of MCD, MMM, IBM, KO, and WMT.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance vs. VBINX (Vanguard Balanced Index Fund at Line 26 in the Table), which is our key benchmark.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
By using the 65-stock Dow Jones Composite Average or ^DJA, we picked an initial 12 stocks and called those the Growing Perpetuity Index (see Week 4). ^DJA is not only a shorter list than the S&P 500 Index (^GSPC) but also outperforms ^GSPC over the long term (compare Lines 32 and 33 at Column C in the Table). Our strategy was to exclude stocks that don’t pay at least a market dividend (currently 2.0%/yr), and those issued by companies that don’t have S&P ratings of at least BBB+ for their bonds and B+/M for their common stock. Most importantly, the companies needed to have a record of increasing their dividend annually for 10 or more years. S&P calls those companies Dividend Achievers.
Mission: List all companies that currently qualify for inclusion in the Growing Perpetuity Index (see Table), and highlight important metrics for the investor to consider. Five years ago, we found 14 companies and eliminated two to reach our goal of having only a dozen. At Week 224 there were 16 qualifiers; we gave up the idea having a dozen favorites and called the 16-stock portfolio Growing Perpetuity Index v2.0. Now, 19 companies meet our criteria, and we’ve added one (Union Pacific) that will soon be designated a Dividend Achiever. You get to choose from the 20 stocks in Growing Perpetuity Index v2.1.
Execution: Highlighting “important metrics for the investor to consider” has become “the tail that wags the dog.” For example, we’ve come around to the idea that Net Present Value (NPV) needs to be calculated for every stock appearing in our tables. Explaining that math trick can start with pretending that you bought one of the stocks having a $0.00 transaction cost online, e.g. 50 shares of Exxon Mobil (XOM) at $100/Sh. If you’re looking for that $5000.00 investment to have a 9%/yr rate of price appreciation over a 10 year holding period, you’ll sell those 50 shares for $11835.00 ($236.72/Sh). The calculated Present Value of Expected Cash Flows on that price return works out to be $5000, meaning Net Present Value will be $0.00 because you spent $5000 of Present Value to buy it.
You get the point: The discount rate (9%/yr) is like the inflation rate but instead reduces your return because of the Time Value of Money. For example, the impact of that 9%/yr “discount” on each dollar of dividends paid out 10 yrs from now is to leave you with a NPV of 39 cents. The dividend growth you expect is also 9%/yr, which (if realized) would also generate an NPV of $0.00. (A detailed explanation of the inputs to the NPV calculation can be found at Week 256).
The amount of the dividend is important in the NPV calculation. Why? Because large dividend cash flows may be paid out in the early years, when the discount rate has less impact. XOM pays a high 3.3% dividend, which turns out to give it a positive NPV even though other factors work against its having a positive NPV. Those factors are 1) the NPV calculation includes transaction costs of 2.5% at both the front and back end, 2) the dividend growth rate is only 8.0%/yr, and 3) the price appreciation rate is only 7.9%/yr (see Columns G, H, M and Y at Line 16 in the Table). After buying XOM, almost 20% of its purchase price is returned to you as dividends within 5 yrs.
Administration: Market returns have but two sources: asset allocation and security selection. We recommend bond-like stocks for retirement planning, backed 2:1 with 10-yr US Treasury Notes that are purchased online to avoid transaction costs. Diversification to gain exposure to foreign markets or small-mid capitalization companies is not necessary because the average company in the Table gains 40% of revenues outside the US and several of the companies (JNJ, MSFT, IBM, PG, KO, XOM, UTX, MMM) buy up small companies almost every year.
That leaves “security selection” as the key source of returns. This is the hard part, since you aren’t going to buy all 20 stocks. But it’s really a 2-part problem, given that transaction costs may outweigh selection bias as a source of poor returns for the average investor. So, let’s look at those costs as a fraction of the asset’s purchase price, the so-called expense ratio. For automatic purchases of $100/mo online, the average expense ratio for the 20 stocks we highlight this week is 1.4% (see Column AB in the Table). Note: 8 of those 20 stocks carry zero or minimal transaction costs.
When buying stocks through a discount broker, the expense ratio is typically 2.5%. Index funds purchased through the Vanguard Group have expense ratios of 0.25% or less, which is the main reason Warren Buffett recommends that his friends and relatives buy the Vanguard 500 Index Fund (VFINX at Line 28 in the Table) instead of trying to pick stocks.
Selection bias is an important problem for investors holding fewer than 40 stocks. We try to help you by emphasizing the importance of diversification, e.g. having stocks in all 10 of the S&P industries (see Week 236). Mostly, you need to emphasize quality when picking stocks (see our rationale above for making this week’s selections). Then see how to get the most value from the stocks you like by running NPV calculations before you buy (c.f. Columns U through Y in the Table). Also, pay attention to the Graham Number in Column T and compare it to the Stock Price in Column U. The Graham Number is what the price of the stock would be at 15X earnings and 1.5X book value.
Bottom Line: We have refreshed our Growing Perpetuity Index. Now it is v2.1 and composed of 20 companies which, in the aggregate, handily outperform our benchmarks. We find that only 3 companies have a lower “finance value” than VFINX using our method of calculating performance: 16-yr total return minus the loss incurred in the 2011 market correction (see Column 5 of the Table). Those companies are 3M (MMM), CSX Railroad, and Caterpillar (CAT). In terms of NPV, all 20 companies outperformed the benchmarks (see Column Y in the Table). Those benchmarks include VFINX, Berkshire Hathaway (BRK-A), and the SPDR MidCap 400 ETF (MDY).
Risk Rating is 6, where Treasuries = 1 and gold = 10.
Full Disclosure: I dollar-average into XOM, JNJ, MSFT, NEE, PG, and UNP. I also own shares of MCD, MMM, IBM, KO, and WMT.
NOTE: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance vs. VBINX (Vanguard Balanced Index Fund at Line 26 in the Table), which is our key benchmark.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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