Investing - Schwab US Dividend Equity ETF

Investing - Schwab US Dividend Equity ETF

I am trying to organize a bunch of stray thoughts into a coherent presentation here. I hope this makes sense.

Since well before I retired in 2016 I was concerned about what to do with my retirement portfolio. I had enough money to retire but how could I protect it in case of a stock market crash. I took a pretty standard and conservative path - primarily 60/40 stock/bond mutual funds.

As retirement moved along, I knew there was a problem with this. Interest rates had been falling for many years, giving bond funds a nice boost. But rates were approaching 0. And it was obvious that something would happen eventually to restart inflation and force interest rates to rise. Not only would the stocks crash but bond values would drop as interest on new bonds went up.

Not knowing what else to do, I stuck with my strategy.

Covid came and set off a chain of events that crashed the stock market and induced inflation. The Fed pushed up interest rates and bond funds dropped. But bond funds dropped far more than predictions based on their average duration. Eventually stocks rose and my portfolio was not a complete disaster. But looking back, if everything was in an S&P 500 fund (not considered a particularly safe place for money in retirement), I would have done much better.

So back to the big question. Where should I put my retirement money so that I get regular income, the income rises with inflation, and economic events don't crush my strategy?

The graph below shows total return, NOT adjusted for inflation, since 2019, VOO (S&P 500 index ETF), SCHD (dividend index ETF), VBIAX (60/40 index fund), AGG (aggregate bond index ETF).  

Https://stockcharts.com/h-perf/ui?symbol=voo+schd+vbiax+agg 

if you want to play with the data. My graph can be replicated with Range - Select Start/End and Start YYYY-MM-DD - 2019-01-01.

 

Bonds (AGG in the graph) -

Bonds take two hits on inflation. The principal and interest lose buying power by the inflation rate. And the Fed raises interest rates to try to reduce the inflation, so new bonds issue with a higher rate, which devalues current bonds.

In the graph, bonds are dead flat over this period due to rising interest rates. And that assumes no withdrawals.

In better times, the interest rate is little better than the inflation rate. And the principal does not grow so there is no adjustment for inflation.

CDs -

CDs act just like bonds, at a lower interest rate in return for FDIC insurance (up to $250,000 per owner, per bank).

These will likely lose to inflation. If you distribute them properly you can get FDIC insurance on all of your assets. But will the FDIC survive an economic collapse? Well, it better or you can expect collapse of the banking system and our society.

60/40 or 40/60 Funds (VBIAX in the graph) -

In the graph, stocks crash and bonds don't grow. The bond portion contributed nothing to the total return.

Bonds do reduce the volatility of the investment. But in the graph example, after three years, the pure stock asset is so far ahead of the 60/40 fund that it covers any typical stock market crash.

Annuities -

These have big management fees, you lose control of your assets, you have nothing to leave to heirs. And in a severe economic collapse, the managing company may fail and the insurance may fail.

I looked up a typical distribution for an immediate annuity. 7% - about twice the distribution of SCHD. But it never increases. With inflation at 4%, a 7% distribution becomes, effectively, 5.1% in the eleventh year. For SCHD, at a growth rate of 10% minus 4% inflation, a 3.5% distribution becomes, effectively, 5.5% at eleven years. After that SCHD keeps going up and the annuity keeps going down. It is easy to manipulate the results by adjusting the inflation and growth rate.

Dividend Stocks (SCHD in the graph) -

So how about dividend stocks? ETFs for minimal effort, but some people prefer to choose individual stocks.

SCHD ETF seeks to match the S&P Dow Jones US Dividend 100 index, which screens for quality stock dividends (stocks only - no REITs). The expense ratio is .06% - that's $600 on a $1000,000 investment. (A typical expense ratio for a mutual fund might be .75%. That's $7,500 on a $1000,000 investment.) Historically, this is the best of the dividend ETFs.

SCHD pays about 3.5% in qualified dividends. That's income for you, taxed at the long term capital gains rate (after a short period of ownership). The payout ratio (dividends divided by earnings) is about 50% (as best I can find). That's 3.5% for the corporations to reinvest in growth, which helped the total return come close to the S&P 500. The dividend growth rate has been about 15% so the dividends grow faster than inflation. That's history, not prediction.

So this looks like a nice place to invest, especially for a tax unadvantaged account for people that need to get income from their investment. But is it safe?

It is certainly more volatile that CDs, bonds, and annuities. But it is somewhat less volatile than stocks in general because the dividends support the stock price. In the event of major economic problems, the money is (hopefully) in productive businesses. If money making businesses fail en mass, the whole economic system will collapse.

Compare the total return of SCHD versus AGG (aggregate bond ETF), starting 1,2,.. years ago, and then look forward. In every such period, after five years, SCHD is far ahead of AGG. Short term volatility can hurt, but long term, you are way ahead with SCHD. Furthermore, the dividends keep coming even when the stock price is down. That's history, not prediction.

So when looking at safety, I will take an investment that has a good record of beating inflation over a non-volatile investment that has little chance of keeping up with inflation. And I like the idea of owning productive businesses rather than debt.

So most of my portfolio is now in dividend stock ETFs, and most of that is SCHD. Does this sound risky? Maybe. But looking back over my past investments, risky would have paid off nicely.

If stocks totally collapse, I have Social Security to keep me going. But if stocks totally collapse, I doubt that Social Security will be far behind.

For dividend stock ETFs look at SCHD, SPYD, VYM, DGRO, VIG, and there are many more.

BEWARE (2024-07-15) - 

ETFs such as SCHD, and those listed above, that own dividend paying stocks and distribute only those dividends, will not lose stock shares (although the value of the shares may drop). This is critical to my analysis of risk and keeping up with inflation.

Some dividend ETFs pay out more than the dividends of the stocks that are in the ETF. This can be done by selling shares or using derivatives - either way you risk losing shares. This can be useful for increasing your income, but it risks principal and growth of principal. For long term, passive income that keeps up with inflation, I would stay away from these.

Cheers and Sighs

Cheers and Sighs

Sigh -

I was at a dance, in a hurry, and needed to get a phone number from someone so that I could text them. They texted me their VCard contact and I imported it. But when I tried to start a text, it wasn't there. Checking in my contact app, there it was, but sorted by first name. The last name was part of the first name instead of a separate value. Fixed, back to text - not there. I verified that it was in my contact list. Restarted my text app, hoping it would import the changed contact list. No. Gave up. The next day I investigated again. Ah - the phone was listed as a home phone, not mobile. So the text app ignored it. Sigh. I can't trust my phone when I'm in a panic. I hope I remember how to dial 911 when the time comes.

Yay -

The new Toyota Prius is a huge step forward. It's a 2023 model, 5th generation, I saw one on the road for the first time a few days ago. By far Toyota's prettiest car. No monster grill. Six inches of ground clearance. 0-60 mph in under 8 seconds. 52 mpg. 10.6 gallons gas tank - with the typical 2 gallon reserve, that's over 400 miles - good enough. Nice - except I really like my Crosstrek's 8.7 inch ground clearance.

Yay -

The Kroger near me has been stocking Dip t-shirts. Nice cotton and unusual, nice colors. About twice the price of t-shirts that I used to get at Walmart. But no-one was selling good t-shirts any more - undersized, polyester blends, boring colors (black, navy blue, red, white), until I found Dip.

Sigh -

What is the fascination with shark attacks? Any shark attack in the world is on NBC, CBS, ABC, and NPR evening news. A few people get mangled or killed every year. That's maybe .0000002% of the world's human population.

Sigh -

My favorite pants - L.L.Bean's Lakewashed, 5 pocket, cotton pants. Cut like jeans, with front pockets that don't promote pick-pocketing, and half the weight of jeans. Great for dancing. GONE.

Yay, Sigh -

I received a new pair of glasses from Zenni Optical today - $50 total with frame, bifocal, anti-reflective coating. Nice, inexpensive. But - The temple pieces are flex titanium. And unfortunately, one side has a lot more curve than the other. How do you change the curve on flex titanium? I can bend it 90 degrees and it unbends to it's original shape.

Fortunately, this is the third "identical" pair that I have purchased. I replaced the pieces with the pieces from my first pair - just a year of use with no noticeable wear. But this seems to be a fundamental problem with flex titanium. You can't accidentally bend your frame, but you also can't bend it intentionally.

My Web Pages and Android Apps

My Web Pages and Android Apps

Web Pages

I have posted many web pages that might be of interest. They are all linked to my home page. I thought descriptions might be useful.

Cary Ravitz - Home Page -  www.ravitz.us

Contra Dance Links - www.cdl.ravitz.us - My links into the world of contra dance. With links for dancers, callers, choreographers, musicians, sound techs.

Contra Dances by Cary Ravitz - www.dance.ravitz.us - All of my dance stuff - contra dances, contra tunes, waltz tunes, robot dancers, notes on choreography, calling, and dancing.

Ravitz Chess - www.chess.ravitz.us - My stacking/nesting chess piece design. STL files for printing on 3D resin printers.

Ravitz Software - www.rs.ravitz.us - My software, including Android apps, Windows text editor, and old printer graphics software.

Ravitz Violin Shoulder Rest - www.vsr.ravitz.us - My violin shoulder rest. A significant departure from other shoulder rests. I'm am not selling these any longer - too much work.

Contra Dances by Mike Boerschig - www.mike.ravitz.us - Mike's contra dances, including the classic Happy as a Cold Pig in Warm Mud.

Dance Trance Reel by David Atcher - www.atcher.ravitz.us - David Atcher's book of tunes for contra dances (print ready PDF). I edited this for David, 2018, and was given permission to post the PDF when he died, 2020.

Darlene Underwood - Home Page - www.darlene.ravitz.us - Darlene's dance caller home page.

Miscellaneous Contra Dances - www.miscdances.ravitz.us - Contra dances with no other good home. Some nice dances, including the classic Cows Are Watching.

Notes on Composing Contras by Al Olson - www.olson.ravitz.us - Al's handwritten notes for a 1988 workshop, a PDF of scanned pages.

Paintings by Ruth Ravitz - www.ruthpaint.ravitz.us - Scans of mostly water color paintings by my mother. Many beautiful pictures.

Kelly Wilhoit's Hand-Me-Downs PDF - www.ravitz.us/hmd.pdf - A memoir by my mother's sisters of growing up in Atlanta, Georgia starting around 1925.

Android Apps

I wrote four Android phone apps a few years ago. They are seldom used by others - I obviously have no concept of what other people like. But I thought it would be useful to describe what makes them different from other apps that have the same primary function. And I added some technical information about fitting the function into Android, because I think it is interesting.

These apps are completely free, have no advertising, and do not sell or give away any data about you (the weather app accesses your current location but keeps only the most recent location). You can find all four in the Google Play Store by searching on "ravitz" (it's handy to have an uncommon name).

RPN/Postfix Calculator

For a long time, I used Free42, an excellent and free Hewlett Packard 42 emulator. It has two problems - low resolution number display and a cluttered keyboard with function that I don't need (primarily programming - it's easier to program a desktop computer or spreadsheet than a calculator).

So my calculator has no programming function. I added cursor left and right for improved number editing, display of the full stack, plus undo, help, last key display, and some button configuration flexibility.

The finished app looks good. Numbers are presented in a high resolution font. The button response isn't as good as it should be, I think largely because I check for a valid number after each keystroke - maybe not a good choice.

Tech paragraph - I wrote the calculator in JavaScript/HTML and used Android's Webview to turn it into an app. Android has a simple way of communicating between the Android Java and Webview JavaScript. You can turn any web page into an Android app pretty easily, or there is an app that does the job with almost no programming.

Clock Widget

I wanted a simple clock widget that displayed the time and day/ And I wanted the time zone displayed. When traveling and on two late nights every year, it is not always obvious what time zone you are in. Why not have the complete time displayed?

In addition, the next alarm time is very useful. I use my phone as an alarm clock. Before going to sleep I would like an easy verification that the alarm is set correctly.

Plus size and color flexibility. I think this is a great clock widget.

Interesting that my clock widget and car sometimes differ on the time zone, notably on the western edge of Kansas. The car changes the time at the border. The clock widget (Android) knows that is not where the time zone changes.

Tech paragraph - This requires setting up a widget that sleeps until awaken by a system message, such as next alarm changed. Then it changes the display and goes back to sleep. Time updates are automatic and trivial to program.

MP3 Player

I don't care to subscribe to a music service. I am happy buying MP3 music files from Amazon or copying music from my CD collection. I was very upset once when flying across the country and my music player quit because it couldn't verify that I had paid for it. I want a self contained music system.

And music players do not handle tracks with different volume levels very well. My player lets you add a volume bump to each track or track list.

And it tells you how much time is left in the current track list, so I know if an album will finish before the evening news starts.

Plus optional bass, upper midrange, treble controls instead of Android's separate graphic equalizer.

I'm very happy with the result. I use it often.

Tech paragraph - The user interface is via Webview. Turning MP3 and other music files into music is a simple system function. Keeping the music going while other software is running or the phone goes to sleep requires using an Android foreground service - not simple.

Weather Widget

It's nice to glance at the phone screen and get an overview of the weather. A lot of weather widgets do this, but they tend to be huge (screen area). And are more concerned with being pretty than being informative. After finding a free weather service, maybe not the best forecasts, and navigating Android's background issues, I put together a reliable widget. I added a one page pop up 36 hour hourly forecast to it because that gives you a lot of useful information. And I added a location and forecast update verification line so you know that you are getting timely and location relevant information (not always the case when you are traveling or have a poor internet signal).

This is much more useful than the typical small weather icon. And much smaller than the typical large weather widget. No pretty pictures - after much work, it became apparent that words were a much more compact way to communicate.

Tech paragraph - This uses the sleeping widget concept, like the clock widget. It is awakened via system message, requests a new location, and goes to sleep. Then it is awakened by a location response, gets a new forecast from an internet weather service, updates the display, and goes back to sleep. Not fun - preparing a Google approved procedure to get user permission to access location services in the background.