Monday, December 5, 2011

Picking an ETF

Finding good dividend producing investments is difficult. In the present economic climate, it can keep one awake at night with worry. Still, I'm retired. I need money to live. I must invest. I have no choice. If I don't, I will have to spend my principal and that is clearly a road to financial ruin.

I demand a minimum four percent dividend. That's the magic number for me: four percent. The general rule is one can remove four percent a year from a retirement portfolio and not bleed the portfolio dry. Of course, if you are doing quite well and surpassing the four percent watershed by a good amount, spend more. For the past three years I've been lucky, I've done very nicely, and I've withdrawn far more than four percent annually.

One ETF I watched for sometime was REM (ishares TS FTSE NAREIT MTG Plus Capped Index FD). I bought 200 shares on a recent dip.

Note the "Low Risk" rating at bottom left.

What attracted me originally was the high yield. Today it is delivering 11.16%. Very nice. High yield attracts but it also warns. High dividends often come with high risk. When I began looking into REM I found that it appeared to have relatively low risk, at least according to Morningstar.

Next, I examined the top ten investments that make up the REM package.

These holdings are generally all holds. Not appealing but not frightening.

I check every one of the top ten investments. As I write this a chap on BNN is talking about NLY. He told a caller that NLY had a great dividend and the dividend was, in this person's opinion, "sustainable."

In the above report, NLY is rated a buy. Note the falling and levelling trend indicator.

At this point, I am getting a feel for the investment. When I did this originally, REM was a blazing buy in my estimation. When I got a chance, I bought 200 shares on a dip. Before writing this today, I did another run through my pre-purchase procedure. REM is more hold today than buy and for me the word hold holds no attraction. Hold says concern. I would not be too fast to buy more REM today. As an owner, and one who is slightly up on his purchase, I'm holding and I'm happy.

I also like to take a quick look at some of the Risk & Reward measurements, such as beta, standard deviation, sharpe ratio. I take these with the proverbial grain of salt but I do consider them before buying.

Note the above numbers and then click the above links to get a full understanding.

Lastly, one must remember that this investment also contains a big measure of currency risk. I've owned Canadian funds that hedged the currency risk and I've owned U.S. investments outright. I've decided to accept the risk and get on with my investing. I have a U.S. investment component to my allocation and that component comes with some currency risk. Maybe I should learn about hedging currency risk. I'm still learning.

But, while I'm learning the approximately $300 I earn from owning REM will help keep a roof over my head and food on the table. Am I worried about owning REM? A little. But, I worry a lot less when I'm dry, warm and not hungry.

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