A portfolio yielding nearly 4% annually

I have some friends with about $340,000 to invest in a self-directed portfolio as they prepare for retirement in a few more years. I have tried to create demo portfolio tackling their problem. I put the money in eleven dividend paying Canadian stocks, three ETFs (VIU, VFV and ZPAY) and I left the remainder, a very small amount, in cash.

 

 

At the first of each month I will post the month end balance. I am hoping to realize almost a full four percent of cash income annually. Stay tuned and we will see how I have done.

Oh, you may have noticed a dearth of bonds in this demo portfolio. At this time, I do not want to hold many bonds. I believe bonds are going to lose value in the coming months. This Bank of Montreal ETF, based on U.S. equities usrs options to increase its yield while, in theory, minimizing volatility and managing to deliver about 6.5% annually. As I need a high dividend-paying investment in order to even get close to my 4% annual income goal. I am betting the yield on ZPAY will be greater than its market loss. Time will tell.

To see the portfolio report larger, hold down your ctrl-key and tap the +key on the left side of the numeric row of keys near the top of the keyboard.

• Sat., May 29 -- $340,000 -- Opening Balance -- Cash is $143.40 -- This will grow with dividends.
• Mon., June 21 -- $346,152 -- Cash at $16.72 -- This will grow with dividends.
  

It is a little early for the present results to have much meaning but after three weeks my newest portfolio is showing promise. I have already done a little tweeking. I have cut my holdings of both BNS and IGM and put the money realized from these sales into ZPAY.

It's time to examine corrections and bear markets

The markets are down today and many are crying that the sky is falling. The end is nigh. Poppycock!

Let's take a close look at where we are today and when we enter correction territory and, if things worsen, a bear market.

The TSX is down 250 today. The DJIA is down 520. The S&P 500 is down 60 and the NASDAQ is down 185. And I assure you, this is not a time to panic. It is not even time to make a blanket buy recommendation. Many stocks will still be trading near historical highs.

My Million Dollar Retirement Portfolio DEMO is at $1,183,000 at this moment. It recently touched $1,206,000. There is $61,350 in cash. At what point is my DEMO portfolio entering correction territory? Remember a correction is when equities retreat from 10-20% from the high of the past year.

 

• Portfolio High Point: $1,206,000
• Total Equity Value was: $1,206,000 - $61,350 = $1,144,650
• Correction Boundary for Equities = $1,144,650 - 10% = $1,030,185
• Correction Boundary for Total Portfolio = $1,091,535

• Portfolio High Point: $1,206,000
• Total Equity Value was: $1,206,000 - $61,350 = $1,144,650
• Bear Market Boundary for Equities = $1,144,650 - 20% = $915,720
• Bear Mkt Boundary Total Portfolio = $1,091,535 = $977,070

A truly bad bear market would be something like 40%. Bears can be worse but 40% would be a big one. So what does a big bear look like? Do the math: $750,000 is close. And what does one do at such a moment? Buy. This could be a once in a lifetime sale of equities. Keep in mind, the deepest bear markets rise phoenix like very quickly. A three year recovering would be a very long recovery period. A little over a year would be a good guess. 

The lesson? Don't panic.

Oh, when do I start buying? A drop of 17% in the equity value of any individual stock makes me think "Buy." 

I don't go all in, though. Put no more than a third to a half of your cash into the market. Keep a good chunk for future buying if the market continues to deteriorate. If the bear gets truly fierce, you want to have kept some powder dry as they say.

A look under the hood of the Morningstar Cdn. Index List

 No need to write anything for this post. Morningstar has done the writing and done it very well. Have you ever wondered how Morningstar determines what stocks it includes in its set of sturdy dividend payers. Please read and discovered the answer:

Sturdy Canadian Dividend Stocks

Annuities

I don't like annuities. And I'm wrong. I'm not alone in passing on annuities. We may all be wrong. As we age we lose some of our mental capabilities. Lose enough and you become a senior mark easily snookered by smooth talking relatives or swindlers. An annuity purchased between age 75 and 80 may make a lot of sense as insurance against being ripped off. 

I'd say more but why bother? I found a great site: 7 Best Annuity Calculators in Canada. If this site just talked about annuity calculators it would be a good site to visit. But it also examines some common questions raised by those thinking of buying an annuity.

• Is an annuity your best option?
• How large an annuity do you need?
• What's the best online annuity calculator for Canadians?
• When should one buy an annuity?
• How does one purchase an annuity?

There is a very good book on Retirement Income for Life by Frederick Vettese. It has an excellent section looking at annuities. This book changed my mind when it comes to annuities. Depending on our finances when I turn 75, I have my fingers crossed, I may buy an annuity despite having bad mouthed them for years.

Another attempt at a 4% yield portfolio

I created a million dollar portfolio in response to advertising bumph sent to me by Fisher Investments Canada. It was well written; it was well researched; it was accurate. And I thought I could do better. Why? Because over the past decade I have. If you'd like to read more, please click the LINK.

But how many of us have a million dollars in savings when we retired? Not the majority of retirees, I'd wager. So, I have designed a second retirement portfolio but this time it is a much more modest portfolio of only $340,000. I will be following this portfolio in the coming months and we'll see how well it performs.

To create a portfolio I use a spreadsheet. I believe my spreadsheet is self-explanatory. I am posting a screen grab of my spreadsheet which I have named in honour of couple facing retirement.

To track the performance of this portfolio over time, I have created an emulation account using TD WebBroker Portfolio Manager. I have invested in nine Canadian dividend-paying stocks and four ETFs to add diversity to this portfolio. I have not invested in bonds. I don't believe bonds will add balance in the near future but will act as anchors pulling portfolios down. Every January I am going to withdraw 4% in cash to emulate the money withdrawn from real portfolios used to fund retirement. 

(And yes I know that there is one error. VDY cost $9.99 to buy and not $12.22. Oops! I confess that I entered the data, I created the jpg and I'm simply too bushed to fix this inconsequential error. It will have no effect on the success or failure of this portfolio. None.)

May 1st        Portfolio Value       $340,000

May 3rd        Portfolio Value       $341875 (Jumped $1875 after Monday open.)

Keep it simple, cheap and diversified

This was written with a relative who is nearing retirement in mind. They are considering dumping their mutual funds in favour of opening a self-directed portfolio account with TD WebBroker.

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There is a belief that new investors when starting out should steer clear of individual stock purchases. Not true. Some carefully chosen, dividend-paying stocks are an excellent addition to any portfolio with one caveat: the new investor's portfolio must have enough value to make diversification possible. Diversification is the "free lunch" of investing. The less money an investor has the more money that should be directed ETFs.

A small portfolio, $25,000 or less, can be well diversified if one buys just three ETFs: 

• VDY (35%)
  
• VFV (40%)
  
• VIDY (25%)
• the percentage in each ETF is flexible
  

VDY (Vanguard Cdn. High Dividend Yield Idx ETF) contains 48 stocks. The MER is only .21% and the annual yield is 4.16%. The top ten holdings are:

• Royal Bank of Canada (RY)
• Toronto-Dominion Bank (TD)
• Bank of Nova Scotia (BNS)
• Enbridge Inc (ENB)
• Bank of Montreal (BMO)
• TC Energy Corp. (TRP)
• Canadian Imperial Bank of Commerce (CM)
  
• Manulife Financial Corp. (MFC)
• BCE Inc. (BCE)
• Canadian Natural Resources Ltd. (CNQ)

VFV (Vanguard S&P 500 ETF) contains 509 stocks. The MER is only .08% and the annual yield is 1.28%. The top five holdings are:

• Apple Inc. (AAPL)
• Microsoft Corp. (MSFT)
• Amazon.com Inc. (AMZN)
• Facebook Inc. Class A (FB)
• Alphabet Inc. Class A (GOOGL)

VIDY (Vanguard Developed ex North America High Dividend Yield Idx ETF) contains 533 stocks. The MER is only .30% and the annual yield is 3.44%. The top five holdings are:

• Nestle SA(NESN)
• Roche Holding AG(ROG)
• Toyota Motor Corp.(7203)
• Novartis AG(NOVN)
• Unilever plc(ULVR) 
• Personally, I own VIU but I've noticed that between the two, VIDY is often the best performer.

A new investor should always keep in mind that professional investors, financial advisors paid to beat the market, often fail. Why should a newbie think they can do better than the pros? So stick to the basics, keep it simple, cheap and diversified. For a few individual, high yielding Canadian stocks consult the Morningstar Canada Income Pick List for suggestions like the following:

• Enbridge yielding 7.3%
• BCE yielding 6.17%
• Emera yielding 4.56%
• IGM Financial yielding 5.87%.
  

Following the above advice, a new investor with a small portfolio ($75,000) could realize an annual income of $3190 or 4.25%. (10% of the portfolio in each of the four stocks and remainder divided among the three ETFs.) If the investor has more funds available, up to $20,000, keep this in a cash fund (TDB8150) and have some money available for emergencies or for buying stock in a bear market.