Tag Archives: inflation

Unlocking Wealth: Dividend ETF Investing

Posted By |
Pixabay: Gerd Altmann

By Sa’ad Rana, Senior Associate, BMO ETFs

(Sponsor Blog)

When it comes to investment strategies, dividend or income investing holds a special place in the hearts of many investors, especially retirees. It’s not surprising, considering that dividends often constitute a substantial portion of a portfolio’s total return. Let’s dive into this popular approach and understand how Exchange-Traded Funds (ETFs) can be a game-changer.

The Dividend Advantage

Now, let’s dissect the significance of dividends in the realm of equity returns. Looking over the long-haul equity return expectations, the S&P has returned an average of around eight per cent over a 40+ year period[i]. In historical context, dividends have accounted for a significant portion of this return, ranging from three to four per cent. This underscores how dividends contribute almost half of the total equity market return annually[ii]. However, their true power lies in compounding. While you collect dividends each year, reinvesting them into equities sets the stage for exponential growth. This compounding effect is what propels your portfolio to higher echelons of growth.

Moreover, dividends are more than just monetary gains; they serve as a vital indicator of a company’s financial health. While not the sole indicator, companies with robust dividend policies often signal financial stability. It’s crucial to note, however, that not all dividends are created equal, a distinction we’ll explore further.

The Art of Portfolio Construction

We’ve witnessed a surge of interest in dividends:  evident in the significant influx of investments into the dividend space. But what are the actual benefits of incorporating dividend investments into your portfolio?

From a portfolio construction perspective, the benefits of including dividend-paying stocks are evident. We’ve examined 32 years of returns across various companies in the Canadian equity market. Dividing them into dividend growers, dividend payers, dividend cutters, and non-dividend payers, a clear pattern emerges.

The standout performers are the dividend Growers, showcasing the potential of quality dividend-paying stocks. Over this period, they have consistently outperformed the broad index, offering a higher average return. Moreover, when it comes to managing risk, dividend Growers and high-quality dividend payers exhibit a slightly lower level of volatility compared to the broader market. This suggests that a focus on sustainable, high-quality dividend stocks can lead to both enhanced returns and a controlled risk profile, making them a compelling addition to a well-rounded investment portfolio. It’s worth noting that not all dividends are created equal, and a discerning approach is crucial for maximizing the benefits of dividend investing.

Ensuring Sustainable Dividends

One of the crucial aspects of dividend investing is ensuring the sustainability of the payouts. Stepping into the shoes of a prudent investor, it’s imperative to avoid falling into yield traps: companies offering high yields but lacking the financial backing to sustain them. Enter the analysis of a company’s overall health, a task made easier by assessing key metrics.

Cash as a percentage of total assets and payout ratios are key indicators of a company’s financial fortitude. In recent times, the top quartile of companies has seen a surge in cash reserves, an encouraging sign of their resilience. Moreover, evaluating the payout ratio provides insights into the sustainability of dividends. A company paying out more than it earns in the long run is walking on thin ice, whereas those with ratios in the 40-50% range are on relative solid ground.

Dividends in an Age of Inflation

Amid the specter of inflation, dividend strategies have shone brightly. Companies with robust dividend policies, characterized by stable cash flows, have weathered the storm far better than their growth-oriented counterparts. Inflation, while posing challenges to certain sectors, has not dampened the dividend-driven approach. In fact, historical data (monthly excess returns over the MSCI World Index for the last 45 + years) indicates that dividend-paying companies fare even better in high CPI environments, providing a reliable anchor for portfolios.

At the heart of the resilience of dividend-paying companies lies their ability to generate steady and predictable cash flows. These companies often operate in industries with stable demand for their products or services, which provides a buffer against the uncertainties associated with inflation. By virtue of their financial stability, they’re better positioned to maintain and perhaps even grow their dividend payouts, providing a reliable source of income for investors.

Historical data, tracked against the Consumer Price Index (CPI) reinforces the notion that dividend-paying companies can act as a reliable anchor for portfolios during inflationary periods. These companies tend to exhibit a degree of insulation from the market volatility often associated with rising prices. By consistently delivering returns through dividends, they offer investors a source of stability in an otherwise uncertain economic environment.

Methodology Matters

In the realm of Dividend ETFs, the choices are vast, and not all ETFs are created equal. Each comes with its unique methodology, impacting performance. Factors such as weighting methodology, sector caps, and company quality screenings play pivotal roles in the outcome. This underscores the importance of understanding the underlying strategy before investing. Continue Reading…

Were you nervous before you Retired?

Posted By |

By Fritz Gilbert, TheRetirementManifesto

Special to the Financial Independence Hub

“Were you nervous before you retired?”

I was recently asked that question, and it brought back a flood of memories from my “near-retirement” days.

I suspect most of us were nervous before we retired, but it’s not something we talk about.  I believe there’s value in sharing the psychological journey in those final days before retirement.  For folks nearing retirement, it’s reassuring to know they’re not alone.

Recently I had the opportunity to talk about it with a reader who is on the cusp of retirement. We had a wide-ranging discussion and the conversation became the trigger for today’s post.  I suspect many of the questions he asked are also on the minds of other readers who are approaching retirement.

This one’s for you, Mike.  Thanks for letting me share our discussion with the readers of this blog.  I trust they’ll all benefit from our discussion…

 

Were you nervous before you Retired?

That’s one of the questions a reader, Mike, asked me on a recent phone call.  Mike’s a month away from retirement and reached out to me a few weeks ago.  I typically decline reader requests for phone calls (unfortunately, a downside of writing a blog with a large following).  If I said yes to every request, I’d be spending far too much of my time helping folks on a one-on-one basis, time that could otherwise be spent writing and reaching thousands of people with the same effort. It’s a “scalability” thing, and I trust you understand.

However…there was something about Mike.

His initial email hit a chord with me.  Here’s what he said:

Good morning Fritz,

Have heard you on several podcasts and just finished your latest discussion with Jason Parker.  I will be retiring in January and your point about helping others hit a cord.  I would love the opportunity to speak with you about your blog.  I’m currently a financial advisor and feel there is a huge need for financial literacy for just about everyone.  As a former teacher, my passion is teaching/sharing.  Would like to understand better how you got started with your blog, what are some of the watch outs, and any other insights you could provide.

Thanks for your consideration and congratulations on living your best life!

What caught my attention?  The fact that he didn’t ask a single financial question and was focused on helping others. He had some ideas about teaching/sharing and he was considering starting a blog.  I appreciate readers applying the lessons I’m sharing in their lives and searching for Purpose in retirement.  I also had a bit more free time than I usually do, so I agreed to a phone call.

Following are some of the highlights of our discussion, in no particular order.  I trust you’ll find them of interest.

how do I retire

Questions From A Soon To Be Retiree

Should I start a Blog In Retirement?

My first reaction to any question that says “Should I start…” is to say yes.  It’s critical, especially in early retirement, to foster your creative curiosity and try anything that interests you.  Many won’t “stick,” but you’ll likely find a few that do.  Once you’ve found one or two, you’re on your way to a great retirement.

Mike has a passion for teaching and is exploring various avenues to reach others.  I strongly encourage anyone who has an interest in starting a blog to give it a try.  7 years ago, I started this blog on a whim.  I’m 100% self-taught and technically inept.  It’s easy to start a blog these days, with Bluehost and WordPress both designed for folks who have never built a website.  Starting this blog is one of the best things I’ve ever done and has become a Purpose of mine in retirement. I hope it works out as well for others who are considering it.

That said, it’s important to consider your motives.  If you’re doing it to make money, I suspect you’ll fail.  For 3 years, I wrote every week without making a dime and only started adding those annoying ads when I retired.  I get some complaints about them but believe I shouldn’t have to incur costs when there’s an option of generating some revenue for my “work.” As blogs grow, the costs increase (Mailchimp costs me $220/month based on my ~13k subscribers), and I felt it was time to at least cover my costs.  Making money has never been my motive, and it shouldn’t be yours.  Even now, after 7 years, the income from this blog basically pays my health insurance.  Nice to have, but not enough to change our life. Unless you’re in the 0.1%, you won’t get rich writing a blog. Continue Reading…

Was Inflation transitory?

Posted By |

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Inflation is coming down in Canada and the U.S. And one can argue that the rate hikes have had little effect. After all, Canadians and Americans are spending money, and employment is strong. The economy has been very resilient. Perhaps inflation was transitory after all, caused by the pandemic and the invasion of Ukraine. This is not the traditional inflation fight script. The economic soft landing argument is getting more support. Was inflation transitory?

Total inflation in Canada is back ‘on target’ in the 2% to 3% range.

That said, core inflation is still sticky.

From this MoneySense post …

According to Statistics Canada, the June slowdown was driven primarily by a year-over-year drop of 21.6% in gasoline prices. Meanwhile, the largest contributors to the rise in consumer prices are food costs — which rose 9.1% in June — and mortgage interest costs (up 30.1%).

It’s likely a very good guess that rates are staying higher for longer. The bond market is certainly suggesting that as well.

The 5-year remains elevated.

Fixed-rate mortgage holders will likely be resetting at higher borrowing costs over the next 2 to 3 years – adding several hundred dollars a month to the typical mortgage payment. Of course, that takes money out of the economy and money that would have been spent on goods and services.

Next year may be sunnier than forecast

In the Globe & Mail, Ian McGugen offered a very interesting post. Ian looks to one of the most optimistic economists, and that is a growing group.

Jan Hatzius, chief economist at investment banker Goldman Sachs, has set himself apart from the crowd in recent months by declaring that the United States will not sink into a recession. Continue Reading…

Why the 4% rule is actually (still) a decent rule of thumb

Posted By |

By Mark Seed, myownadvisor

Special to Financial Independence Hub

I’m not a huge listener to podcasts but I do enjoy them from time to time …

A few years back, I listened to a BiggerPockets Podcast with financial independence enthusiast, U.S. financial planner, commentator and educator Michael Kitces as a guest.

This podcast delved into the 4% safe withdrawal rate that so many, many, many….DIY investors in the early retirement community rely on and why Michael Kitces ultimately believes the 4% rule actually remains a very good rule of thumb to plan by – to a point. 

If you don’t have an hour and 22 minutes to listen to this episode (not many people do…) then no worries, I’ve captured the essence of the interview below.

In this updated post (with some new links), I share my own thinking on this subject and why I won’t use the 4% rule myself for any detailed planning work for us.

Could the 4% rule remain a decent rule of thumb?

In general terms, the “4% rule” says that you can withdraw “safely” 4% of your savings each year (and increase it every year by the rate of inflation) from the time you retire and have a very high probability you’ll never run out of money.

Some things to keep in mind when you read this:

  1. This ‘rule’ originated from a paper written in the mid-1990s by a financial planner in the U.S. who looked at rolling 30-year periods of a 50% equity/50% fixed income asset allocation. His name was Bill Bengen.

4% rule

2. This rule was developed almost 30 years ago. A lot has changed since then including real returns from bonds. There are also products on the market now that allow investors to diversify far beyond the mix of large-cap U.S. stocks and treasuries the Bengen study was based on.

3. The study was designed to answer the question: “How much can I safely withdraw from my retirement savings each year and have my nest egg last for the duration of my retirement?” Little else.

4. The study assumed (at the time) most retirees would retire around age 60. Therefore, a “good retirement” would be ~30 years thereafter; what is the safe withdrawal rate to make it through retirement until death.

5. The rule takes none of the following into account:

  • Will you (or your spouse) have a defined benefit pension plan?
  • Do you expect to receive an inheritance?
  • Will you downsize your home?
  • Do you have a shortened life expectancy or health issues that should be considered?
  • Will you continue to earn some form of income in your senior years?
  • And the list of what ifs goes on and on and on …

My 4% rule example

My wife and I aspire to have a paid off condo AND own > $1M personal portfolio to start semi-retirement with. We hope those days are near. We’ve always considered the 4% rule a decent starting point for our portfolio drawdown ideas but that’s where it ends for us.

Using that desired investment value, if we can grow our portfolio to over $1M, the 4% rule tells us we could expect to withdraw about 4% of that million-dollar nest egg ($40,000 per year indexed to inflation) and have virtually no concerns we would run out of money for the next 30 years (early 80s).

But just living off dividends or distributions (which is about 4% of our portfolio yield) doesn’t make much sense in perpetuity. I’ll come back to that point in a bit.

To the podcast and some takeaways!

On the subject of a 4% withdrawal rate – is that conservative?

Michael: Yes. If your time horizon is 30-years, it probably is. Because, when Bengen looked at his different rolling periods … he found the worst case scenario was a withdrawal rate of about 4.15%. “It was the one rate that worked in the worst historical market sequence…”.

Does recent data say anything different since the 1994 study?

Michael: Not really. Michael and his team replicated the Bengen study and generally arrived at the same number. And that’s not the only good news … 50% of the time using the 4% rule you will as Michael puts it “double your wealth.”

So, 50% of the time (market returns willing) you will finish with almost X3 wealth on top of a lifetime of spending using the 4% rule.

“…the reality remains that by withdrawing at “only” a 4% initial withdrawal rate, the overwhelming majority of the time retirees just finish with a massive excess amount of assets left over!”

4% rule Kitces

Check out the outstanding Michael Kitces study on the 4% withdrawal rule – that shows the extraordinary upside potential in sequence of return risk.

From that post:

“…taking even “just” a 5% initial withdrawal rate (and adjusting spending for inflation in each subsequent year) actually runs out of money in nearly 25% of historical scenarios… even though a higher 5.4% withdrawal rate “worked” when projecting the lowest 30-year average returns in history!”

What if you retire at the worst possible time? Example, on the eve of the 2008-2009 financial crisis?

Michael: Doesn’t matter. 4% worked. Thanks to a massive bull run for the 10 years that followed, as bad as the 2008-2009 financial crisis was, you were still trending far ahead. Continue Reading…

Fixed Income: The Outlook & Opportunities

Posted By |

 

Image by BMO ETFs

By Winnie Jiang, Vice President, Portfolio Manager, BMO ETFs

(Sponsor Content)

Little about the current economic cycle has conformed to historical norms. With divergence in employment data and leading economic indicators, recent data released sent mixed signals that left investors perplexed about the near-term economic outlook.

On one hand, the job market remains overwhelmingly strong, with ISM (Institute for Supply Management) Services bouncing back from extreme lows in December and retail sales also rebounding. The re-opening of the Chinese economy will likely provide a breather on global supply chain issues while boosting demand. Consumer credit remains well retained as default rates stay low with no warning signs of near-term upticks.

On the other hand, yield curve inversions, a precedent of most recessions, continue to worsen. 3-month U.S. Treasury yields are pushed above 10-year yields by the widest margin since the early 1980s. ISM Manufacturing PMI (purchasing managers’ index) and housing data also point to a gloomy outlook. Corporate sentiment and capital expenditure showed little signs of recovery, and housing permits have rolled back to pre-pandemic levels after surging strongly during Covid.

Source: Bloomberg, January 31st, 2023

The Outlook

While robust job markets and consumer data keep inflation well above the Fed’s long-term target, recent CPI (Consumer Price Index) announcements indicate things are steadily, albeit slowly, moving towards the right direction. The inversion of the yield curve caps the magnitude of further rate increases that could be absorbed by the economy before it slips into a recession.

Continue Reading…