Can ETFs best a high yielding stock portfolio in retirement?

Managing an income portfolio sounds time consuming. It could be but done right, and that means doing the minimum, it just sits essentially untended spitting out dividends. The overall value may go up and down at the whim of the market but as we are not paying all that much attention, the gains and losses go mostly unnoticed.

Over a lifetime of investing, I've invested in mutual funds, ETFs, stocks and bonds. I found mutual funds generally paid out too much in MER charges. Bonds, either purchased outright or bundled into an ETF like XBB, left me unimpressed. ETFs had their strengths, diversity being a big one, and pure stock portfolios delivered excellent yields thanks to the dividends. As you can see, I gravitated to owning individual stocks and ETFs.

Today, I own almost two dozen stocks and three ETFs and there are almost no surprises. I own Emera and Fortis, doesn't every retiree. I own the top six Canadian banks. The bank dividends are safe dividends. The Canadian banks have a history of hundreds of years of uninterrupted dividend payments. I also own pipelines and telcos. All the usual stuff. My portfolio has been more volatile than I like but I can ignore the ups and downs when the dividends continue to pay the bills. My portfolio yields 5% today.

But my mainly stock portfolio may be nearing its end. I have been experimenting with a nine ETF income portfolio with the stocks chosen for their overall excellent historic performance and a yield that is as good as my present stock portfolio. I insist on the yield being generous enough to cover all annual expenses so that one is not forced to sell units in order to live.

The nine ETFs making up the portfolio are:

• CDZ: iShares S&P/TSX Canadian Dividend Aristocrats Index ETF
• RIT: CI Canadian REIT ETF
• VIDY: Vanguard FTSE Developed ex North America High Dividend Yield Index ETF
• ZUT: BMO Equal Weight Utilities Index ETF
• ZWC: BMO CA High Dividend Covered Call ETF
• ZWG: BMO Global High Dividend Covered Call ETF
• ZWH: BMO US High Dividend Covered Call ETF
• XEI:iShares S&P/TSX Composite High Dividend Index ETF
• XSP: iShares Core S&P 500 Index ETF (CAD-Hedged)
  

I'd go into more detail but until I know more about how well this portfolio performs I am going to go light on the details. To work out the percentage of each ETF in the portfolio, I created a spreadsheet. I varied the percentages until I got something that I could live with and that delivered dividend income similar to my stock portfolio.
I have withdrawn $3,666.66 in each of the last two months as I created this portfolio in April with an amount of money equal to my actual portfolio on that day. My nine ETF portfolio has a value today of slightly more than my actual portfolio. In other words, so far this ETF approach is working. I kept about 10% of the portfolio in a cash account paying 4.55% and so it is no surprise that I have not had to sell any investments to raise money for the monthly payments.
There is one other portfolio approach that I am testing using Portfolio Manager and that is putting all my retirement savings in the iShares Portfolio-in-One-ETF: XEQT. I chose XEQT because it invests in about 10,000 stocks worldwide and it does not own any bonds at all. If you prefer a balanced portfolio containing some bonds, there are companion ETFs from iShares that include bonds.
As this is a very new portfolio opened with very little cash, I sold 69 units of XEQT this month in order to withdraw an amount of money equal to the amount  withdrawn monthly from my actual retirement portfolio. Of the three portfolios being tracked, the one that has the most value today is XEQT even after the unit sale.

Why run a portfolio when you can buy XEQT?

My personal portfolio is composed of a number of individual accounts holding a diverse mix of stocks and ETFs. I earn a good income from the dividends and the capital gains keep the overall value of my portfolio increasing. Yet, I cannot help but wonder if I could do as well or better by simply owning the iShares ETF XEQT.

XEQT is an exchange-traded fund (ETF) offering investors a complete portfolio in just one ETF. It is a complete portfolio assuming you don't want to hold any bonds. I don't. XEQT is an all-equity ETF. No bonds.

XEQT holds four iShares ETFs: 

• iShares Core S&P Total U.S. Stock Market ETF for U.S. equity exposure (44.6% weight)
• iShares Core MSCI EAFE IMI Index ETF for international developed markets equity (25.7%)
• iShares Core S&P/TSX Capped Composite Index ETF for Canadian equity (24.9%) 
• iShares Core MSCI Emerging Markets IMI ETF for emerging markets equity (4.8%)

This one ETF holding four ETFs provides a diversified portfolio of around 10,000 stocks representing the U.S., the international developed markets, the Canada market, and lastly the emerging markets. XEQT gives one exposure to the global equity market for a management fee of only 0.20% when last I checked.

XEQT only yields about 1.89% in dividends but it offers very good long-term capital growth. If I had all my money in XEQT I would have to sell some units annually and add that cash to my dividend income to cover my living expenses.

The simplicity and global diversity of XEQT makes it an appealing answer to portfolio management. I have decided to run a test. I have created a test portfolio composed of only XEQT. The test portfolio opened with a value equal to my portfolio at the close yesterday.

Today, as I write this XEQT is ahead by $518.07. This means very little but stay tuned. Getting out of the business of buying and selling stocks maybe possible. 😊 If you prefer Vanguard to iShares, Vanguard offers VEQT. Your choice. And if you insist on having some bonds in your portfolio mix, both iShares and Vanguard offer ETFs with traditionally balanced constructions as well.

Mullen Group (MTL)

 

Just a quick note before I get going on today's stuff.

I like the Mullen Group. I don't have the money at the moment to invest but if I can round up some cash I am in. 

The stock has dipped below $13 but has not rebounded greatly since touching its low for the year. Check it out. A good company at a good price with a well covered dividend paying out more than five percent. The payout ratio is around 50%. Ideal, don't you think? It sure looks like a buy to me.

And a friend, who is a fine investor, agrees with me on this one as do a number of analysts. Do a Google search. You will find MTL has one booster who sees MTL hitting $22 and the average target price is better than $17. It is hard to see a downside to this buy.

Cheers!

TD Bank is now a HOLD!

TD was one of my core holdings. I was content to hold TD and happy to add to my holdings when the price dropped. Adding to my holdings was a mistake. The market was onto something that I was not: TD was in deep legal trouble in the United States. The second biggest Canadian bank has now put aside hundreds of millions of dollars in anticipation of some damn big fines related to money laundering accusations in the States.

TD is still a core holding of mine. I cannot afford to sell it and as I had no intention to sell, the pain is mitigated. I will hold onto my stock and pocket the 5. 43% dividend. My guess is that the dividend is still safe. TD has gotten enough bad press. It does not have to soil its reputation with its first dividend reduction in its long history.

If you hold TD, as I do, your losses may be around a long time, and keep holding. If you are a value investor, move with care. TD may be facing fines of $1.5 billion U.S. plus annual remediation costs in the hundreds of millions stretched over about four years. The painful scenario appears to be already priced into the price of the stock but have both shoes dropped? I am not so sure.

TD is officially off my buy list.

Expert stock pickers can be wrong and often!

To avoid being sued, I blacked out the analyst's name but the important information is still here. This stock picker has a win-loss ratio of 8:32. Going by his recent picks, he was right only 20% of the time. This fellow should stick to coin-flipping.

His average return was in the red at -6.0%. This is really dismal.

Years ago I gave a few thousand dollars to London Life to invest for my retirement. London Life lost something in the neighbourhood of 75% of my savings. When I retired, because there was a maximum loss clause, London Life game me back 75% of my original investment.

Losers! And they took me down with them.

Invest in dividend-paying, blue-chip companies, spread your money around, in other words diversify, try to not time the market but keep some powder dry to buy when the bear is loose and you should easily best analysts like the one shown or the folks in charge of my London Life investment.

Playing B2 Gold to win

I find B2 Gold (BTO) appealing. Why? Because it is opening a gold mine in Nunavut come early next year. Gold mines are all too often found in iffy parts of the globe. Nunavut is a welcome change of pace.

I paid about $3.64 for my original 2750 shares. I saw it as a bit of a gamble but it is fun to gamble as long as the risk is not too high. I was comfortable with the risk/reward offered by B2 Gold. Shortly after buying BTO I received a dividend of about $150 Canadian.

A few weeks later I sold all my position for $3.88 a share. I made a capital gain of about $640. I immediately put $200 toward my 2025 income tax and used the remaining cash to fund a bid for 2900 shares of BTO at $3.60. It was another gamble. It took some days but the order was eventually filled.

B2 Gold then tumbled daily until it found support at about $3.45. On the surface, that represents a loss but after the dividend and my capital gains are factored in, I am still in the black on my B2 Gold purchase. I have another sell order sitting on the books. This time I am hoping for $4.20. I'm patient. I can wait.

The target value for BTO as shown by WebBroker as been climbing recently. Some analysts see BTO hitting $6.00 and even $7.00 within the coming year but it might be a volatile journey. If it is, I plan on being there to profit.

By the way, I am playing this game using my non-registered account. The CRA does not look kindly on investors using their registered accounts for anything resembling day trading. Gambling, especially when done repeatedly with one stock, is not for one's registered accounts.

Honest, Dr. Graham Brockley, I am not a "bot".

Recently I found an interesting Facebook page devoted to dividend investing: Canadian Dividend Investing. I'd post a link but because of a complaint, I believe, from Dr. Graham Brockley, of Ladysmith Urgent Care in British Columbia, I have been blocked. Why? I think it's because he thinks I am a "bot".

The good doctor is interested in the Frugal Dividend Portfolio created by Norman Rothery and carried by the Globe and Mail. I'm familiar with this portfolio as TD WebBroker reposts it in its News section. The portfolio is the result of a unique screening process devised by Rothery. I gather Dr. Brockley would like to emulate the Rothery screening system. I cannot say for certain as the doctor shut-down our conversation after accusing me of being a "bot".

I liked the direction the doctor was going. I decides to continue my investigation without him. The first thing we must know is how does Rothery structure his screening process? I turned to Andi. Andi is an Ai powered search engine. Andi told me:

 

Norman Rothery constructs his Frugal Dividend portfolio using a multi-step process that focuses on large, stable dividend-paying stocks trading at low valuations.

The process begins with the 300 largest stocks on the Toronto Stock Exchange (TSX) by market capitalization. It then narrows in on the roughly 200 stocks that pay dividends.

From there, it selects the 50 dividend stocks with the lowest volatility over the prior 260 days.

Finally, it picks the 10 stocks with the lowest positive price-to-earnings (P/E) ratios from those 50 low-volatility dividend payers.

The portfolio is typically re-balanced monthly or quarterly. When re-balanced monthly, it has historically replaced about two stocks per month on average.

Rothery's Frugal Dividend approach aims to build a concentrated portfolio of undervalued, stable dividend stocks to deliver market-beating returns over the long run. However, investors should be prepared for volatility.

 

Has his approach worked? Amazingly well if the Ai search engine Andi is correct. According to Andi backtesting has shown the Frugal Dividend portfolio gained an impressive 17.4% annually from 1995-2022, assuming monthly rebalancing. Even with just annual rebalancing, it returned 16.9% per year on average over that period.

A caveat, be aware that while the portfolio has generated strong long-term returns, it can still decline significantly during market downturns. For example, it fell 35% in the 2008 financial crisis and 28% during the 2020 COVID-19 crash.

As of March 2023, the Frugal Dividend portfolio had a median dividend yield of 4.4% and median earnings yield of 12.5%. The latest version of the Frugal Dividend Porfolio that I could find is posted below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com. His ideas on investing are published regularly in the Globe and Mail and reposted by TD WebBroker in their News section. Rothery is a man worth following.

If, like the good doctor who inspired this post, you would like to do your own screening for the the perfect income portfolio, there are a number of screening programs available online. Sadly, many only allow limited access to the screening tool unless a payment, often monthly or annually, is made.

Screens available on the Internet

• Stock Rover - Best for fundamental investors, offering robust screening and research features to help investors make informed decisions and find undervalued stocks. According to the information I found, Stock Rover offers the following pricing plans:

• Free Plan: Completely free
• Essentials Plan: $7.99/month or $79.99/year or $139.99/2 years
• Premium Plan: $17.99/month or $179.99/year or $319.99/2 years
• Premium Plus Plan: $27.99/month or $279.99/year or $479.99/2 years

The search results also mention that Research Reports can be bundled with any yearly or 2-year Stock Rover plan for $49.99/year, otherwise they cost $99.99/year.

• Trade Ideas - Best for technical traders, with its AI-powered stock screener "Holly" that uses machine learning to provide stock recommendations. 10 day test period. According to the search results, the cost of using Trade Ideas depends on the subscription plan: Trade Ideas offers both free and paid subscription plans. 

• The free plan provides access to basic stock scanning and screening tools. 
• The paid Premium subscription plan offers more advanced features like backtesting, auto-trading, and access to the AI trading assistant "Holly". 
• The specific pricing details for the Trade Ideas Premium subscription are not provided in the search results. However, it is mentioned that the Premium plan is designed for active, short-term traders and provides access to institutional-grade trading tool.

• Finviz - Best free stock screener, with a user-friendly interface and the ability to filter stocks based on various fundamental and technical criteria.  

• StocksToTrade - Best overall low float stock screener, with a highly customizable desktop app and an algorithm-based chart analysis tool called Oracle. 

• StockFetcher - Best customizable low float stock screener, allowing users to code their own complex filters using a coding-like language.
  

• ChartMill - Most versatile stock screener for low float stocks, offering a combination of technical and fundamental parameters. 

• Yahoo Finance - Offers a free and advanced stock screener with a wide variety of filters, including the ability to screen for sustainable ESG stocks. 

• TradingView - Has a user-friendly stock screener interface, and also offers forex and cryptocurrency screeners.

• StockFetcher - Supports over 125 indicators to build unique stock filters, though the interface may be overwhelming for beginners.

• Fidelity - Brokers often provide their own free stock screeners, which may be a good option if you already have an account with them.