"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

I reckon messing around with MC simulations does help bring
out the many caveats that attach to the typically too
enthusiastically embraced 10% average historical return of
stocks.

- quote -

Much credit to a certain eccentric Millionaire-Next-Door
relative pounding these notions into me (with examples from
his own investing history, typically) and input from the
group, among other sources, over the last few years. Though
surely many of the more retired wealthy live off dividends,
keep up with inflation, and sleep just fine, no bonds/CDs
for these folks, thank you very much.

- quote -

Yessir, that is my opinion. But also I am so far embracing
Jim's suggestion to have around seven years of cash (or
steadily dissolving laddered CDs, say) to cover down periods
of the economy; possible dividend cuts; and my admittedly
delusional euphemism of "self-indemnification" for health
care costs. (Face it, on this matter, I'm screwed. The only
relief to be found is that I think we're all screwed!)
Though truth is dividend cuts would have to be pretty darn
severe--and so denote some kind of massive meltdown of the
economy--for me to be hurting. And yup, having that cash in,
say, the S&P 500 in the last few years would have grown into
a nice pile of dough by today. That kind of hindsight is
blindness, though, to the bigger picture.

I'm outta here now, before the mods pull out the hook and
throw me off stage. :-)

Elle wrote:
- quote -

While I agree with B on this point, it also seems that there is indeed a
low correlation between dividend changes and price changes (for the S&P,
using Shiller's data - note that I did not try to account for any time
lag in the correlation).

- quote -

This is a really interesting approach. When you play around with Monte
Carlo simulations (and I know you have!), you quickly realize that bad
years up front in retirement are much worse that bad years later on
because you're drawing down. This seems like an interesting way to
mitigate this risk. It seems like this would lessen (but probably not
elinminate) your need for bonds/cash to cushion early market meltdowns.

-Will

beliavsky[at]aol.com wrote:

- quote -

and (4) investor speculation (i.e. irrational behavior, unless you count
that in 3).

- quote -

I don't think anyone said or implied that there is no connection between
prices and dividends.

- quote -

I think this is Elle's point?

-Will

<beliavsky[at]aol.com> wrote
- quote -

This seems like a rather forced attempt to correlate
dividend changes with stock price changes From my
(admittedly anecdotal but nonetheless pretty extensive)
study, dividend changes do not particularly affect stock
prices, except for a short-term burp when a drastic cut is
made. See CAG, SLE, PSD, TCR (now CLP), for example. All had
drastic cuts in the last five years. The price of all
recovered within two years. For stocks where increases are
steady, e.g. General Electric's, stock prices can be all
over the map. I have a bunch of other companies showing the
same.

Dividends derive from earnings, and earnings certainly
affect stock prices, of course.

- quote -

Dividends respond much more rationally to fundamentals, too.
So in fact I can ignore periods of irrationality by stock
investors that cause share prices to change ridiculously /in
the short term/, and find solace in my steadily increasing
dividends instead. I agree with Will.

Seeming critics of this approach might note the recent
popularity of mutual funds and ETFs explicitly focused on
"dividend achievement." Vanguard in the last year interested
one or a few; same for PowerShares; same for Wisdom Tree
(Jeremy Siegel, senior advisor). I am in fact watching some
of these ETFs, but for now, I am quite pleased with my
individual picks. Of course I hope I could say the same, by
virtue of the steadiness of the dividends, were the market
not so generous of late.

"TB" <borekfm[at]pacbell.net> wrote
- quote -

I do not know what parts of "the time period is too short to
ascertain with precision my success in meeting my long-term
goals" and "my goals are not simply principal appreciation"
you do not understand. Fact one: If I were only interested
in principal appreciation, I would not have chosen the
stocks I did. Fact two: If I had chosen REIT mutual funds
and other funds, I would have had to draw down on principal,
and possibly when the market was down. It did not go down,
but that's only using hindsight, Tad. This early, I do not
want to touch principal. See my post to Will for more,
though obviously this has become repetitive.

I really thought you might have something to say about long
term principal appreciation of electric utilities vs. REITs,
either confirming the trend I think I see or not, and
explaining why. See Joetaxpayer's "best guess" on this, for
example.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

Yessir, you nailed it. I sure did not want to set up a
portfolio where the dividend yield would be lower such that
I would have to regularly withdraw from principal /at this
point/. This would have been the case had I chosen mutual
fund categories similar to my various stock categories.

It's too early in my "retirement," and too risky for the
long run in my estimation, to draw down right now.

- quote -

I hadn't previously checked the standard deviations of the
Shiller data, but from anecdotal study I am sure you are
right. I chose stocks (REITs, utilities, and other
categories) with long records of dividend achievement
(increases). If history continues, by my calculations not
only will the dividend income stream keep up with inflation,
but its increases will trump by a lot an alternative
dividend income stream from the S&P 500. In sound bite form,
this of course is because the S&P 500 is not all "value
stocks."

Without question, though, if history continues, the tradeoff
will be less growth of principal. But I am not giving up,
say, my GE position, whose principal has only gained about
10% while the S&P 500 has gained about 20%, starting from
the same dates. Not when GE's dividend historically has
increased at about 33% a year over the last ten years, while
the S&P 500's dividend has increased at about 5%.

I still welcome commentary on whether it's true that
electric utilities generally cannot keep up with REITs when
it comes to stock principal appreciation, and why.

Will Trice wrote:
- quote -

Stock prices change because of
(1) new information about future earnings and dividends
(2) rational changes in discount rates
(3) noise

It is not easy to determine the relative importance of these factors,
but the extreme assumption that stock returns convey NO information
about future dividends is a "head-in-the-sand" approach that could lead
someone to overspend. Dividends are set by management and respond much
more slowly to company fundamentals than stock prices do.

Elle wrote:
- quote -

See but by owning REITs you take on the asset-class risks, whether you
perceive them or not...plus company-specific risks (the ones you could
diversify away by owning more REITs). So your approach doesn't honestly
assess the investment selections you've made. If you buy bonds, you
compare your picks to a comparable bond index, stocks to a stock index,
REITs to a REIT index (or index fund). If you did better or worse, you
assess why that was and whether you think your picking will continue to
pay off (or if it hasn't, whether the underperformance is temporary).

Let's say you've held your REITs for 3 years. REITs, as an asset class,
had a 3-year annualized return of about 27% through the end of October
06. That's 27% per year, not total, and it was easy to own the asset
class at low cost through one of several index funds. Did you get at
least the asset-class return?

Why is it relevant here? You asked for comments about selling utilities
to buy more REIT stocks. A logical question is "have you been successful
at picking REITs?" If they put in say 15% annually it may look good, but
that was actually well below average for the asset class overall.

-Tad

Elle wrote:

- quote -

I think I'm starting to understand your strategy here. You're saying
that the volatility of dividend increases is less than that of the price
change of the underlying security, right? And so if you're set up to
live off the dividends, then you can pay less attention to the price of
the underlying securities. A quick check of Shiller's data shows that
this is indeed the case for the S&P 500 (defining volatility as annual
standard deviation). I wonder if it is also true for REIT's and
utilities? Interesting. Or did I miss your point entirely?

-Will

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Tad, a few randomly chosen REITS may indeed be riskier to
principal and dividends than holding a REIT mutual fund. But
I propose that foregoing the potential for, say, greater
principal appreciation in certain REIT mutual funds in favor
of holding hand-picked, strictly older, larger,
non-mortgage-based REITs, most likely with less room for
principal growth, can reduce this risk. It's like you have
it backwards: I should buy strictly CDs (in lieu of REITs)
because CDs are really low risk.

Bear in mind that REITs denote a tiny fraction of my
portfolio. I'd elaborate more, but it's way off the point of
my original query. You're already trying to get me to defend
something unrelated on which I am already settled, and
misreading or considering my investing goals, to boot.

- quote -

Tad, excuse me, but did you not read that I said the above
in my previous post?

- quote -

Any stock-picker with experience would not make a judgement
over such a short timeframe. Or are you saying that if the
S&P 500 dives today, while some obscure single stock pick
holds its ground, then the person holding the obscure single
stock pick has good justification to continue picking
stocks? Seems to me this is highly debatable.

Also, what you are saying is like telling someone who
chooses 80% investment grade bonds at age 78 to validate her
choice against an allocation of 80% stocks. I am not saving
for retirement. I am /in/ retirement.

The question is not simply whether my principal's returns
keep up with a mutual fund's principal's returns. The
question is whether my portolio is meeting my income and
principal requirements, at a perceived risk level. Yup, my
portfolio is.

On MLPs: Interesting asset category, and something to keep
in mind for one's investing arsenal. Some of the problems
with MLPs for my current situation are:

-- They are overwhelmingly young. I'd say something like 90%
of them are under eight years old, from a quick check of the
few dozen listed at
http://www.galttech.com/research/fin...ships-mlps.php .
So I can't get much of a feel for how they do against, say,
the S&P 500, as far as principal growth is concerned. Not
having that history denotes risk, to me.
-- They are not terribly liquid. Their trading volume is
typically a tenth or less of a blue chip stock.
-- Dividends do not necessarily keep up with inflation,
though with some notable exceptions, like TPP.
-- MLPs evidently were vulnerable to scandal in the 1980s.
I'm sure you agree anyone buying individual MLPs today
should study that period and make sure they understand the
problems that existed in the 1980s do not exist today.

Still, like hybrid stocks (preferreds, ETDS's, etc.), MLPs
are something to keep in mind for when I am much older.

Elle wrote:
- quote -


Elle, I think you have it backwards...as with any individual-security
selection, picking a few REITs based on higher yield, or perceived
superiority of some kind, is the riskier approach. It's less
diversified, by definition, and if you focus on higher-yield REITs you
could end up with a riskier subset (REITs that might cut dividends, or
might not have the FFO to support dividends paid). I'm suggesting that
you validate your picks against the returns of the asset class, just as
any stock-picker would. Vanguard's fund and IYR are both index funds, so
are decent proxies for the US equity REIT asset class (incidentally IYR
is at an all-time high).

It's still a hindsight analysis and of limited value, but not in the way
you suggest...rather, it's of limited value for validating your picks.
Theory says the REITs are all priced for their relative risks and there
shouldn't be any free rides within the asset class. In effect you're the
"manager" and the question is, did active management help things?
Perhaps you'd find that IYR outperformed on a total-return basis.


- quote -

The general answer to that question is always "yes"! Though MLPs do have
that partnership structure, which might partially explain yield
differences. They pass through all income, pay no entity-level tax, and
by nature of the markets they typically are working in (eg gas
distribution through an existing infrastructure), have very limited
prospects for growth.

-Tad

<beliavsky[at]aol.com> wrote
- quote -

I think this tends to disregard the first rule of investing:
If one needs some money from one's portfolio (in whatever
form) in the short run, then one needs to invest it in lower
(short-term, implied) risk assets.

- quote -

The key word is "expected." If expectations are not met,
there is an enormous economic difference. My strategy is
more along the lines of some of the IIRC aptly-labeled
"consumption smoothing" ones mentioned here in the last year
or so: Like many retirees, my dividends and interest cover
my basic annual expenses. When times are good, as they are
now, I either spend more, or I take some of the gains and
invest them with an eye towards more diversity, to increase
gains and reduce risk for the long run.

Elle wrote:
- quote -

Even if one needs to spend some money from a portfolio, the focus
should be on total return and risk, rather than income, especially now
that transaction costs are so low. There is no economic difference
between annually selling 3% of an investment expected to appreciate at
8% a year and spending a 3% dividend on an investment with the same
expected total return and risk.

If one does want a high yield portfolio, the question should not be
electric utilities OR REITS but rather what allocation to give to bonds
and ALL stock sectors with substantial dividends, which would include
industries other than electric utilities, such as banks and energy.

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Tad, this was answered years ago when I began shifting from
funds to individual stocks. The funds you name yielded and
still yield quite a bit less than my stable of REITs. I
could have increased the yield more, but that would demand
taking on more risk via younger, smaller REITs, for one. I
also certainly could have banked on principal appreciation
in the short term, maybe going with funds as you suggest.
But aren't you exhibiting a bit of 20/20 hindsight here?
Isn't that a gambler's game /in the short term/? I
absolutely did not expect the REIT boom to continue.
Instead, as I selected my REITs a few years ago, I reminded
myself that I must be braced for a downturn, both in share
price and dividends. I am not filthy rich assets-wise. I
can't take the risk you seem to be proposing.

Things turned out as planned, insofar as income is
concerned. Plus the appreciation is quite satisfactory. I'd
say "stunning" except IMO anyone who suggests they possess
deep expertise on the horns of a rather bullish market
lately is a silly goose. I certainly regret some of my less
informed non-REIT stock picks, but I am very pleased with
all the REITs I have owned. Of course, AFAIC, it was just
luck that they did /this/ well.

I understand the (popular) strategy you're
proposing--cashing in principal sort of as needed and
otherwise reinvesting using, potentially, discounted stock
prices via DRIPs. But as I suggest above, I am conceited
enough to think my situation is a little unusual. In my
view, I currently cannot diversify, maintain income, and
sleep at night the way someone not in retirement can.

I am not sure "electric utilities" is really as broad as you
suggest. Some stock screeners might conflate, say, an
overwhelmingly mostly energy trading or management services
company with a bona fide company that has electric
generators, a gas distribution pipeline system, etc. But I
for one go digging further so as to obtain only the latter.

I certainly agree about the effects on short term risk of
holding only REITs vs. a mix of REITS and electric
utilities. But it's the longer term in which I am
interested. I think this distinction is important. Hence my
original query.

Don't master limited partnerships involve more risk to give
that higher yield? If so, they fail my "be able to sleep at
night" criterion. I'll google on the subject, anyway.

Elle wrote:
- quote -

Elle, my two cents. Skip sorry for a long post.

First you said individual securities and if it's been enough time my
first suggestion is to copmare the returns you've gotten vs. buying the
basket. Compare your REITs to say ticker:IYR or Vanguard's REIT fund
purchased the same day. That's the first question...should you have
bothered with individual issues? Sometimes the answer is surprising (in
either direction).

If you're going to buy REITs individually you might consider finding one
that has a DRIP that allows you to reinvest dividends and purchase
shares at a discount. This is an way to increase returns, and it's not
available to a lot of money that is invested in REITs (insitutional
investors like me don't custody through DRIP custodians). You said you
need the income so it may require a mental-accounts adjustment. Say you
have $20k in REITs and desire $1200/yr in income from that piece. You
might have some of that in REIT DRIPs with all those dividends
reinvested, to get that discount, and the balance in a REIT mutual fund
(also reinvested). But the mutual fund is set up for > 6% periodic
redemptions, of whatever sum you need. Eventually you would access the
DRIP REIT through a partial sale, which should be at no cost if it's in
a DRIP. At the end of the day you would have enhanced your yield...all
else equal (which it may not be...you do have the issue of taking on
company-specific risk for each REIT you buy in a DRIP, if the
alternative is buying the asset class via a REIT index fund).

REIT vs. utility...going all REIT changes your risk because those two
sectors are affected by different factors. REITs are near all-time highs
by many measures, whether stock price, low yields, premium to asset
value, etc. With electric utilities you at least have diversification
into a different type of business.

But "utilities" are no longer a homogeneous category of investment and
there are a lot of company specific risks. It used to be largely a
matter of nuke liability vs. no nuke liability. Now I think it's more
complicated. There's deregulation and big variations in what "electric
utility" means. Some conduct trading operations (a la Enron), with the
ancillary risks. Some operate in deregulated markets and handle only
generation (others handle only distribution). Some have overseas
investments or revenue sources. And there has been some merger activity
so there can be that possibility for enhancing returns. It's impossible
to generalize really and your utility may be a steady-freddy or a time bomb!

One quirky category you might look into is master limited partnerships,
in energy-related fields. These are publicly traded on the exchanges
(though thinly). The way these work is that you're paid dividends
periodically that are treated as return of capital, so you don't pay tax
then. Your basis adjusts downwards instead, at least until you run out
of basis. When/if you sell the gains are ordinary income. These aren't
usually appropriate for IRAs because they generate something called
UBTI. Income is reported on a K-1 which adds a little complexity to your
tax return. But they're out there as an income alternative with yields
above the typical REIT. Some are in the very boring business of energy
distribution monopolies, with stable customer bases.

-Tad

- quote -

well, I was just giving food for thought, not a well thought out plan for
you. Look at historical cap rates for the sector(s) a particular REIT is
in, look at current cap rates, and ponder that as part of your planning
process.

"P.Schuman" <pschuman_NO_SPAM_ME[at]interserv.com> wrote
- quote -

P.Schuman, I guess you know CBG is not a REIT. Thus, for my
purposes, my only possible, current interest in it would be
as a "value stock with a record of increasing dividends."
But it has never had a dividend.

WYU, on taxation of (typically much of) REIT dividends as
"non-qualified": Good reminder. It's generally not a concern
for my situation, but every year it is becoming more of one.
Others definitely need to be aware of it.

- quote -

what about the likes of CBG
as a favorable stock in the commercial real estate biz ?

Quick reminder. Your utility dividends is taxed at 5%/15% if you are a
long-term holder of the stock/fund. For REITs, only the post-taxed
corporate dividends portion meet this requirement. The pass-through
real estate income is taxed at your normal income rate.

Elle wrote:
- quote -

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

What you say seems a good start.

Not sure if you are also implying government regulation
tends to take a toll more on electric utilities than REITs.
This is something that occurred to me but I have not
investigated it thorougly.

- quote -

For sure. I think them currently overvalued, and so would
wait until company fundamentals indicated they were
reasonably priced. Which of course could be years. One rolls
the dice a bit with my Graham-based strategy.

Gil, REITs come in so many flavors that I hesitate to
generalize as you did about them. Certain categories of
REITs will be hit hard if and when interest rates rise
again, for one, AFAIC. I have avoided mortgage-based REITs
in particular.

Thanks for the input, Joe and Gil.