That dividend raise song just keeps on playing with Leggett & Platt (LEG) raising their dividend 4.76% and Packaging Corp of America (PKG) with a 25% raise.
Retail was the dagger in the heart of the markets this week . Here are my trades for the week:
Best Buy (BBY) – increased position – Retail dropped like a lead balloon. Grabbed 2 shares @ $74.19 and a 4.74% yield.
Bar Harbor Bankshares (BHB) – increased position – Adding a little more to my small local bank position. Grabbed 2 shares @ $25.16 and a 4.13% yield.
Packaging Corp of America (PKG) – increased position – Recent raise puts this back over the 3% mark. Grabbed 1 shares @ $148.96 and a 3.36% yield.
Amplify CWP Enhanced Dividend Income (DIVO) – new position – Used the proceeds from last weeks ETF sales to start this new position. Grabbed 305 shares @ 34.67 and a 5.08% yield and 459 shares @ 34.23 with a 5.14% yield.
Global X S&P 500 Covered Call (XYLD) – new position – Used the proceeds from my PSEC sales to start this new position. Grabbed 168 shares @ 44.18 and a 10.88% yield.
While perusing finance articles I came across one from MarketWatch called “Why don’t retirees like annuities?“. The article touched on the most common issues that annuities are not flexible, can be complicated to understand and laden with excessive fees. Without a doubt these are serious concerns for investors but the article did not address an additional concern I have with the total actual payouts.
Annuity salespeople are extremely pushy. Besides sidestepping any disclosure about commissions and fees they also dodge the question of how much money will actually be paid out over a lifetime. Instead they redirect you to a % that your money will return and how great it is because you can’t get a guaranteed income at that rate anywhere. But who exactly is it great for? You, the Salesperson, or the Insurance Company?
To answer this question lets look at an example where I have $100,000 I would like to invest into an immediate annuity. I head to my local annuity store and they provide me the following table:
Depending on which age I chose the annuity, my $100K investment will pay out a guaranteed rate of 5% to 6% for rest of my life. Sounds pretty good but the key words here are “for the rest of my life” and exactly how long is that?
I’m going to be generous and use pre-covid U.S. Life expectancies of 76.61 for males and 81.65 for females. We can also look at the region with the longest life expectancy (Hong Kong) with 82.38 for males and 88.17 for females. We can now compare these to the highest payouts for each annuity age bracket.
Life Expectancy Age
Immediate Annuity at 60
Immediate Annuity at 65
Immediate Annuity at 70
Table: Anticipated Lifetime Annuity Payouts for a $100K Immediate Annuity
In most scenarios you do not even get back your base investment. Assuming you are extremely lucky and get to age 88 the largest payout is ~$141K and that amount is over 28 years which equates to a growth rate of just 1.25% per year on the initial $100K investment.
Unless there is a medical breakthrough that allows us to live well beyond the age of 100 it appears the only person that benefits from this deal is the insurance company and it shouldn’t come as a surprise. First they are a business an need to make profit, second they employ actuaries that analyze your life expectancy risk and adjust your payouts to that risk.
Recently the House of Representatives passed the Secure 2.0 act which will allow annuity offerings in 401(k) plans. One of the bill sponsors, Richard Neal, D-Mass., spoke on the House Floor on March 29, 2022 stating the act “…is protecting Americans and their retirement accounts.” Of course the question is protecting us from whom? Not the insurance companies that’s for sure. As a note, I am not railing against the good U.S. Representative Richard Neal, for the most part I thought the act introduced some welcome changes to the 401K system (like auto-enrollment). However you can see insurance lobbying influence with the annuity aspect.
One might argue that annuities benefit those who have little financial knowledge or financial self-control. This is a pretty good argument as many of us know quite a few financially irresponsible or illiterate people but there are other alternatives. The mutual fund industry has what is referred to as managed payout funds that solves the issue of figuring out how to do drawdown and sends you a monthly check but still allows you access to your investment.
The problem with managed payout funds is they were introduced during the worst time of the financial crisis (circa 2008) and it was for a market (baby boomers) who had yet to begin retiring. As such they have not really gained traction over the years and are not offered in 401K plans. My biggest issue with these is they are modeled on old outdated portfolio allocations of bonds with some equities all based on their other mutual fund offerings. There are so many more income sources they could employ (REITS, utilities, dividend growth, or covered calls to name a few). If the mutual fund industry adjusted their portfolio mix to include some higher yielding or dividend growth components it might be the best solution today. But alas there is little to nothing out there that fits this bill so I will continue to manage my own assets to generate income as annuities are a benefit to only the insurance company.
After 35 years of clocking in and out of work and religiously saving at least 10% annually in my 401K every year, my countdown to financial independence is in sight. Each month is a step closer and let’s look at how this past month is getting me there.
For the month of March I made $3,828.61; a decrease of -3.34% versus this time last year. The main culprit for the decrease was my BGS payment sliding out into early May versus April of last year.
In April I received 7 dividend raises from ARTNA, BHB, DFS, IBM, JNJ, PG and SO. A solid month for raises that should add an additional $131 to my annual income going forward.
On the home I haven’t had much time as for some reason work has become stressful and I’ve been mentally fatigued lately. Unfortunately, it has spilled into early May but hopefully things will lighten up soon.
Being just 5 years out from reaching Financial Independence (FI) I have started to fine tune everything as the acquisition phase of my investing journey is coming to an end. Losing the safety net of my steady weekly earned paycheck means I have to do more to avoid investing mistakes or unplanned events.
Recently I posted my my first fine tuning with target emergency funds I plan on having during FI as well as eliminating a rainy-day fund and instead amortizing replacement costs and adding that to my monthly budget. A quick summary of that is as follows:
The Market Crash Emergency Fund – equal to 9 months of expenses
The Healthcare Emergency Fund – equal to 3 months of nursing home care
Additional $583 added to my monthly expenses – amortization of replacement costs for home, transportation, and appliances.
The final piece of fine tuning my plan revolves around achieving my income goal of passive income equal to 115% of my annual expenses while mitigating the risk of inflation, which for this exercise I will use the long term inflation average (since 1913) of 3.24%.
Jumping straight to the final solution, I determined the best mix to maximize income and reduce risk would be an allocation of 70% Dividend Growth Equities, 20% Real Estate (REITs), 5% Business Development Companies (BDCs) and 5% in Leveraged ETFs.
Fidelity Cash Management
The Fidelity Cash Management Account is one item I have not spoken about in the past. To consolidate my financial sources, I have chosen to use Fidelity as a replacement for my bank checking account as most of my investments are already with Fidelity and this just simplifies things.
The other aspect of the cash management account is the reference to 6 months of expenses. No this is not another emergency fund. The intent of this balance is to smooth out my dividend income into a steady monthly cash flow amount. As many investors are aware, dividend income is not the same month to month so again this is another simplification step.
Finally, achieving this is quite simple actually as 6 months before I hit my FI target I simply turn off all my DRIP and reinvestment activities and allow the dividends to pool.
Growth Rates & Inflation
Starting with my Dividend Growth bucket, my annual growth rate fluctuates between 4% to 5%. This came down quite a bit as I leaned heavily into buying utility stocks in 2020 when they were on sale. While this provided stability it came at a price of muting my growth rate.
The REIT bucket can vary wildly. Some years my REITs saw a 6% rise while other years its was less than 1%. For this analysis I will stay conservative assuming an annual growth rate of 1% on the low end to 2% on the upper end.
Regarding the BDCs bucket, this is an ebb & flow with dividend raises. Some years are 0% while others I have seen 5%. For this analysis I will stay conservative assuming an annual growth rate of 0%.
The Leveraged ETF bucket is a fairly new aspect to my portfolio and something I have been researching. Leveraged funds such as QYLD and JEPI have become quite popular as of late in the investing world due to their high yield and monthly payouts. Some seek the high yields while others look at total return, however, my take on them is slightly different. One factor I have noticed amongst these funds is their monthly payout varies immensely depending on the option activity so it is understandable. For my portfolio I prefer more consistency and predictability, as such I have narrowed my list down to just three funds that currently have the least variability in their monthly payouts:
NUSI (Nationwide Risk Managed Income Fund) – The average monthly payout for NUSI is $0.17 per share. Its payout variation ranges from -10% to +10.59%. Of all the funds I reviewed NUSI by far had the most consistent month to month payout. The only downside to NUSI is in a slow declining market it increases the costs of theirs puts & calls strategy and I do have some concerns if they can stay consistent with their payouts.
XYLD (Global X S&P 500 Covered Call ETF) – The average monthly payout for XYLD is $0.40 per share. Its payout variation ranges from -16.75% to +25.25%. XYLD surprised me being the runner-up to NUSI when it comes to a low variable payout, I thought its sister fund XRMI which uses a collar strategy to limit risk would have performed better but that varied from -23.5% to +26.5%.
DIVO (Amplify CWP Enhanced Dividend Income ETF) – The average monthly payout for DIVO is $0.14 per share. Its payout variation ranges from -22.14% to +12.14% however the instances of negative months are dramatically lower than other funds. Of all the funds DIVO has the smallest dividend at just 4.82% however (this is the best part) it has annual dividend growth! Excluding a single long term capital gain event in 2019, DIVO has increased their dividend over the last 3 years at an average rate 6.28% and makes DIVO my favorite out of the three.
Because of DIVOs growth rate, my Leveraged ETF bucket will have a projected annual growth rate of 2% that I will use for both the low and high end.
Combining all the growth grates and adjusting for weighting, my overall portfolio will see growth on the low end of 3.45% and 4.4% on the upper end. Using the long term average annual inflation rate of 3.24% my portfolio will achieve a positive real growth rate.
Low End CAGR
Upper End CAGR
LT Inflation Rate
As you can see in the table above, a 0.21% real CAGR does not leave much left on the table but it is positive none the less. Considering the amount of money I will be investing over the next 5 years, this was the best combination I could use that would allow me to achieve FI. If I reduce the allocation to dividend growth stocks I would, in the short term, exceed my income need but after inflation is factored in I would have a negative CAGR and longer term that benefit would quickly erode.
Now my entire FI plan for next 5 years has been laid out, my only task left is working towards the final solutions. Of course no one is perfect, I have tried to account for as many scenarios as possible that could occur during my FI years but I may have missed something and I am always open to any input or a glaring omission I might have missed.
New inflation numbers came out this week and it was all the talk in financial circles with a whopping 8.5% rise. Thankfully I received some dividend raises to offset inflation; Procter & Gamble (PG) issued 5% raise while Artesian Resources (ARTNA) issued a 2.02% raise.
Here are my trades for the week:
Independent Bank Corp (IBCP)– increased position – Share price is less than what I paid last October. Grabbed 10 shares @ $21.36 and a 4.12% yield and 10 shares @ $21.19 with a 4.15% yield.
Oil-Dri Corp. of America (ODC) – increased position – ODC has been slow to react to inflation and their share price is suffering. Grabbed 7 shares @ $26.90 and a 4.01% yield.
Not a lot of excitement (positive or negative) for the week. The Fed released some new commentary about more rate increases but nothing that caused the stock market to panic as most investors are expecting additional rate hikes.
Only weakness was in transports and not sure why. If I had to guess maybe there is some worry of the economy slowing down (i.e. recession talk). Other than that it was a pretty quiet week so here are my trades for the week:
Snap-On Inc. (SNA) – increased position – It dips and I buy. Grabbed 1 share @ $204.37 and a 2.78% yield.
Best Buy Co. Inc. (BBY) – increased position – Love it when a stock I like is just floating near their lows as I can slowly build up a position. Grabbed 2 shares @ $90.39 and a 3.87% yield.