Situation: Young couples are often advised to make payments each month on 1) a home mortgage, and 2) a “whole life” insurance policy. Homes are not good investments, and neither are “whole life” policies. They’re a form of compelled savings. If we later find ourselves unprepared for retirement, we may be guided to recoup those savings by “taking out” a reverse mortgage or “borrowing against” a whole life policy. The government joins the party by compelling us to save during our working years (under the Federal Insurance Contributions Act of 1935), and then guides us to recoup our “Social Security” savings in retirement.
Mission: Look at the costs and benefits of reverse mortgages. NOTE: To obtain more detailed information, I suggest reading this article that appeared in USA Today on October 28.
Execution: “On the plus side, reverse mortgages are considered loan advances to you, not income you earned. Thus, the payments you receive are not taxable. Moreover, they usually don't affect your Social Security or Medicare benefits.” Emotional benefits play a role, given that 1) you get to keep living in your home without paying rent, and 2) your children get to inherit a house that retains considerable equity. And, reverse mortgages make a great Rainy Day Fund.
On the negative side, there is “opportunity cost”: You are giving up the opportunity to invest a large sum of your own money, if you sell the house and rent a place more suited to your needs. Transaction costs on the sale are the same as those for taking out a reverse mortgage (6%), which leaves 94% for you to invest. We provide an example (see Table) of how you might set up an online investment in bonds and stocks that pays out at least 2%/yr (after transaction costs) and grows those payments at least 2%/yr.
Administration: The investment example has an asset allocation of 50% bonds/50% stocks. The bonds are “zero risk/zero cost” 10-Yr Treasury Notes accessed through the government website; that site also offers inflation-protected Treasury Notes. You can invest in KO, JNJ and WMT online but have to use a different website to invest in PG. Each pays a good and growing dividend, and had Total Returns/yr during the Housing Crisis that were better than those for our key benchmark, the Vanguard Balanced Index Fund (VBINX; see Column D in the Table).
It is best to make these investments over time, starting with 40% of your proceeds then adding $100/mo to each of the 4 stocks and $1200/qtr to T-Notes. So, 60% of the proceeds from selling your house would initially go to an FDIC-insured savings account paying little interest. Part of that 60% will never be invested because it serves as your Rainy Day Fund. Nonetheless, you’ll be in a position to withdraw $9600/yr for electronic transfers to bond and stock accounts. Annual transaction costs come to ~$72/yr (see Column N in the Table).
Bottom Line: Reverse mortgages can be a good idea, if you’ve paid off your home mortgage and have almost no source of retirement income outside of Social Security. But inflation will always be with us, so it might be better to sell your house and move to a place that is not designed for raising children. Then, you can invest the proceeds from selling your house in a manner that costs you little and provides an opportunity to protect yourself from inflation.
Risk Rating: 4 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into PG and JNJ, as well as inflation-protected Savings Bonds (which are an IRA-like version of 10-Yr Treasury Notes). I also own shares of KO and WMT.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 25
Sunday, December 18
Week 285 - 2017 Master List
Situation: You want to make money from investments, and you know that the best way to do that is not to lose money. Stocks pose the risks of volatility and selection bias, so you need to pick stocks that represent all 10 S&P industries while taking care to focus on large companies with competitive advantages, i.e., strong brands and clean balance sheets. Those advantages will help to insure your portfolio against market outages.
Mission: Develop a spreadsheet of A-rated S&P 100 companies with clean balance sheets that are both Global 500 Best Brands and S&P Dividend Achievers. Exclude companies with less than 25 yrs of trading data. Some companies in the Table have more than one top brand (see Appendix A).
Execution: see Table. There is one caveat: Union Pacific (UNP) will not qualify for S&P Dividend Achiever status until February, 2017.
Administration: We think a Balance Sheet isn’t “clean” if long-term debt represents more than a third of total assets, dividend payments in the two most recent quarters could not be met from Free Cash Flow, or Tangible Book Value is a negative number (see Columns N-P in the Table).
Bottom Line: There really is no need to take a risk with stocks. You already know volatility is “just around the corner” and that you shouldn’t “concentrate your bets”. All you need to do is follow metrics that have a solid track record for identifying companies that have executed their Business Plan in a safe and effective manner. We have selected 12 S&P 100 companies by using what we consider to be the most impactful metrics (see Table). We like S&P 100 companies because a) they are large enough to have multiple product lines (i.e., internal lines of support that insure against company-wide losses during a recession), and b) are required to have actively traded put and call options on the Chicago Board Options Exchange (i.e., the CBOE facilitates efficient price discovery 24/7/365).
Risk Rating: 5 (where 10-yr Treasury Notes = 1 and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, and MSFT. I also own shares of CAT, MMM, WMT and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr trendline (“least squares”) CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 20.
Appendix A: Companies in the Table that have more than one top brand (2016/2015 rank #):
Microsoft: Microsoft (5/4), Xbox (200/196), LinkedIn (334/476).
Wal-Mart Stores: Wal-Mart (8/7), Sam’s Club (101/78).
Johnson & Johnson: Johnson’s (79/60), Neutrogena (250/143).
Procter & Gamble: Gillette (185/138), Pampers (214/225), Pantene (296/264), Tide (493/NR).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Develop a spreadsheet of A-rated S&P 100 companies with clean balance sheets that are both Global 500 Best Brands and S&P Dividend Achievers. Exclude companies with less than 25 yrs of trading data. Some companies in the Table have more than one top brand (see Appendix A).
Execution: see Table. There is one caveat: Union Pacific (UNP) will not qualify for S&P Dividend Achiever status until February, 2017.
Administration: We think a Balance Sheet isn’t “clean” if long-term debt represents more than a third of total assets, dividend payments in the two most recent quarters could not be met from Free Cash Flow, or Tangible Book Value is a negative number (see Columns N-P in the Table).
Bottom Line: There really is no need to take a risk with stocks. You already know volatility is “just around the corner” and that you shouldn’t “concentrate your bets”. All you need to do is follow metrics that have a solid track record for identifying companies that have executed their Business Plan in a safe and effective manner. We have selected 12 S&P 100 companies by using what we consider to be the most impactful metrics (see Table). We like S&P 100 companies because a) they are large enough to have multiple product lines (i.e., internal lines of support that insure against company-wide losses during a recession), and b) are required to have actively traded put and call options on the Chicago Board Options Exchange (i.e., the CBOE facilitates efficient price discovery 24/7/365).
Risk Rating: 5 (where 10-yr Treasury Notes = 1 and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, and MSFT. I also own shares of CAT, MMM, WMT and EMR.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr trendline (“least squares”) CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 20.
Appendix A: Companies in the Table that have more than one top brand (2016/2015 rank #):
Microsoft: Microsoft (5/4), Xbox (200/196), LinkedIn (334/476).
Wal-Mart Stores: Wal-Mart (8/7), Sam’s Club (101/78).
Johnson & Johnson: Johnson’s (79/60), Neutrogena (250/143).
Procter & Gamble: Gillette (185/138), Pampers (214/225), Pantene (296/264), Tide (493/NR).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 11
Week 284 - Barron’s 500 List: Food and Agriculture Companies
Situation: There is some evidence that a new Commodity Supercycle is starting. For example, the Dow Jones Commodity Index recently recalled its 1998 low and is now rising. Corn and soybean prices have stabilized well above their 1999 low. We recently took a close look at all of the larger companies supporting Agriculture Production (see Week 279) and concluded that fundamental metrics are on the upswing, in spite of a February 2016 Bear Market in commodity-related stocks. Now 9 months have passed and we need to again look closely at the data while adding Agriculture Processing companies to our analysis.
If, after closer study, you’d still like to buy stock in one of these companies, you need to understand that you’d be making a “risk-on” trade with multiple opportunities for loss. For example, the February 2016 Bear Market apparently arose because “...investors’ appetite for riskier securities nose-dived early in 2016 [due to] concerns about an economic slowdown in China and the U.S., falling commodities prices, and the uncertain direction of interest rates were roiling global markets.”
Mission: Capture data on all Food and Agriculture companies in the 2016 Barron’s 500 List that have S&P stock ratings of B+/M or higher. Include columns that note whether the 200d moving average of a stock’s price is moving higher, and whether the 50d moving average has risen above the 200d average to lead it higher. Also include 2 columns that compare the 2016 brand rank to the 2015 brand rank among the top 500 global brands, and 3 columns to assess whether the company has a clean Balance Sheet.
Execution: see Table.
Bottom Lines: Food and Agriculture companies have been struggling over the past 4 years, along with other commodity-related companies. Hundreds of billions of dollars were invested in expansion projects, which became monuments to futility as the buildout of China’s infrastructure suddenly sputtered. The world now has the capacity to produce, process, transport, and market more oil, natural gas, coal, gold, steel, aluminum and protein-rich foods than it needs. That means the prices that food processors are asked to pay for corn and soybeans have fallen, but the good news is that those prices are now coming off historic lows relative to inflation.
Multi-decade commodity cycles have been with us forever and a new one appears to be starting, now that a number of production companies have gone bankrupt and all of those remaining have drastically curtailed their expansion plans. “Dr. Copper” is the generally accepted as the main barometer for expansion vs. contraction in commodity production. Freeport-McMoRan (FCX) is the largest company that mainly produces copper (see Line 24 in the Table). Caterpillar (CAT) is another widely-accepted barometer (see Line 10 in the Table). With regard to stock prices, the 200 day moving averages for both companies bottomed in the early summer and have been rising steadily since the late summer (see Columns AE-AF in the Table).
Risk Rating: 8 (where a 10-yr US Treasury Note = 1, and gold bullion = 10).
Full Disclosure: I dollar-average into MON, and also own shares of CAT, HRL, KO, and ADM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 27 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 33 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
If, after closer study, you’d still like to buy stock in one of these companies, you need to understand that you’d be making a “risk-on” trade with multiple opportunities for loss. For example, the February 2016 Bear Market apparently arose because “...investors’ appetite for riskier securities nose-dived early in 2016 [due to] concerns about an economic slowdown in China and the U.S., falling commodities prices, and the uncertain direction of interest rates were roiling global markets.”
Mission: Capture data on all Food and Agriculture companies in the 2016 Barron’s 500 List that have S&P stock ratings of B+/M or higher. Include columns that note whether the 200d moving average of a stock’s price is moving higher, and whether the 50d moving average has risen above the 200d average to lead it higher. Also include 2 columns that compare the 2016 brand rank to the 2015 brand rank among the top 500 global brands, and 3 columns to assess whether the company has a clean Balance Sheet.
Execution: see Table.
Bottom Lines: Food and Agriculture companies have been struggling over the past 4 years, along with other commodity-related companies. Hundreds of billions of dollars were invested in expansion projects, which became monuments to futility as the buildout of China’s infrastructure suddenly sputtered. The world now has the capacity to produce, process, transport, and market more oil, natural gas, coal, gold, steel, aluminum and protein-rich foods than it needs. That means the prices that food processors are asked to pay for corn and soybeans have fallen, but the good news is that those prices are now coming off historic lows relative to inflation.
Multi-decade commodity cycles have been with us forever and a new one appears to be starting, now that a number of production companies have gone bankrupt and all of those remaining have drastically curtailed their expansion plans. “Dr. Copper” is the generally accepted as the main barometer for expansion vs. contraction in commodity production. Freeport-McMoRan (FCX) is the largest company that mainly produces copper (see Line 24 in the Table). Caterpillar (CAT) is another widely-accepted barometer (see Line 10 in the Table). With regard to stock prices, the 200 day moving averages for both companies bottomed in the early summer and have been rising steadily since the late summer (see Columns AE-AF in the Table).
Risk Rating: 8 (where a 10-yr US Treasury Note = 1, and gold bullion = 10).
Full Disclosure: I dollar-average into MON, and also own shares of CAT, HRL, KO, and ADM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 27 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 33 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 4
Week 283 - Investing for Retirement Income
Situation: Investing for Capital Appreciation is mainly about reward, whereas, investing for Income is mainly about risk aversion. Upon retirement, you should try to forget about Capital Gains, i.e., selling growth stocks after a 10-yr Holding Period using a target discount rate of 9% (see Week 281). That’s what you do in your working years. In retirement, your discount rate is the average payout rate for interest and dividends from your bonds and stocks. Instead of using the S&P 400 MidCap Index as your benchmark, you’re now using the Vanguard Total Bond Market Index Fund (VBMFX), paying 2.3%/yr, and the Dow Jones Industrial Average (DIA), paying 2.5%/yr.
However, this could create a new problem given that half your retirement savings are in bonds and half are in stocks. This implies that you will have 2.4% of your savings available to spend each year, unless you’re willing to sell some stocks or bonds. Try those sales for a few years, and see if you start having nightmares about outliving your money.
Financial advisors (and you should have one) address that concern by recommending clients initially follow The 4% Rule for annual spending, adjusted for inflation. That rule was created decades ago by Bill Bengen, an aerospace engineer who had access to a really powerful computer that could run partial differential equations with 3 variables. People live longer now, and assets pay less. So, Bill Bengen is having second thoughts. Maybe a withdrawal rate of 3%/yr is more prudent for today’s retirees. But the message is clear. Whenever a retiree’s assets pay less than 4%/yr, she’ll have to sell stocks (to capture Capital Gains) or risk outliving her money.
Mission: Set up a spreadsheet of A-rated Dividend Achievers that a) pay at least 2.5%/yr, and b) have a statistically lower risk of loss than the S&P 500 Index (see Column M in the Table). Eliminate companies that have long-term bonds that account for more than 1/3rd of total assets. Eliminate companies with insufficient revenue to be on the Barron’s 500 List published 4/30/16, as well as companies with insufficient Free Cash Flow to fund dividends paid in the first half of 2016. Also exclude companies if their Weighted Average Cost of Capital (WACC) exceeds their Return on Invested Capital (ROIC).
Execution: Only 8 companies meet our requirements (see Table).
Bottom Line: As a group, these companies pay ~3.0%/yr and have dividend growth of almost 10%/yr. Except for Wal-Mart Stores (WMT), they offer a positive NPV (see Column X in the Table) and will likely have good Capital Gains over the next 10 yrs should you have need of more income.
Risk Rating: 4 (where 1 = 10-yr US Treasury Notes, and 10 = gold bullion).
Full Disclosure: I dollar-average into JNJ, PG, and NEE, and also own shares of WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 23 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
However, this could create a new problem given that half your retirement savings are in bonds and half are in stocks. This implies that you will have 2.4% of your savings available to spend each year, unless you’re willing to sell some stocks or bonds. Try those sales for a few years, and see if you start having nightmares about outliving your money.
Financial advisors (and you should have one) address that concern by recommending clients initially follow The 4% Rule for annual spending, adjusted for inflation. That rule was created decades ago by Bill Bengen, an aerospace engineer who had access to a really powerful computer that could run partial differential equations with 3 variables. People live longer now, and assets pay less. So, Bill Bengen is having second thoughts. Maybe a withdrawal rate of 3%/yr is more prudent for today’s retirees. But the message is clear. Whenever a retiree’s assets pay less than 4%/yr, she’ll have to sell stocks (to capture Capital Gains) or risk outliving her money.
Mission: Set up a spreadsheet of A-rated Dividend Achievers that a) pay at least 2.5%/yr, and b) have a statistically lower risk of loss than the S&P 500 Index (see Column M in the Table). Eliminate companies that have long-term bonds that account for more than 1/3rd of total assets. Eliminate companies with insufficient revenue to be on the Barron’s 500 List published 4/30/16, as well as companies with insufficient Free Cash Flow to fund dividends paid in the first half of 2016. Also exclude companies if their Weighted Average Cost of Capital (WACC) exceeds their Return on Invested Capital (ROIC).
Execution: Only 8 companies meet our requirements (see Table).
Bottom Line: As a group, these companies pay ~3.0%/yr and have dividend growth of almost 10%/yr. Except for Wal-Mart Stores (WMT), they offer a positive NPV (see Column X in the Table) and will likely have good Capital Gains over the next 10 yrs should you have need of more income.
Risk Rating: 4 (where 1 = 10-yr US Treasury Notes, and 10 = gold bullion).
Full Disclosure: I dollar-average into JNJ, PG, and NEE, and also own shares of WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 23 in the Table.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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