2020-02 Dividend Income Report

Here is the dividend income report for February, 2020.

The monthly dividend income came out to $208.18. The yearly income total for 2020 through the end of the month was $196.17.

The income for February, 2019 was $229.17, and the yearly income for 2019 through the end of February was $138.45.

I am skipping January since there was not much income. Just the money market funds. The bond funds do not pay out in January.

I am writing this from notes I took before the markets went haywire due to the Coronavirus. I will go into more detail in my post about my March income. So I might write something here that is contradicted by what I write later.

One of the blogs that I follow is Dividend Growth Investor. I consider this to be one of the better dividend growth investing blogs out there, but recently the author had a post that said some things that I disagree with (or more accurately, they recently sent an older post to their mailing list subscribers that I disagree with).

The author is generally against dividend ETFs. I am not sure I agree with that. Keeping track of individual stocks is a lot of work. The author says that dividend ETFs are “Good for beginning investors who are still learning and have less than $10,000.” I think you need a lot more than $10K to go into individual stocks. At least $100K. Maybe even a million. If you have less, you wind up buying very small amounts, and you have a lot to keep track of. For 3M (MMM), I had 10 shares, and each quarter I was getting 0.08 shares. It took seven years to buy two shares. One argument they give against dividend ETFs is “Investors have no say about which stocks the ETF holds.” Yes and no. You can look at the criteria of the index and then pick an index you like.

Granted, I have no idea how well the Dividend Aristocrats will hold up. We will see who is right. I think that companies that have been increasing dividends for 25 or more years will do pretty well. But these days, “pretty well” is relative.

One claim the author made that I do not agree with is that an S&P 500 Index fund could be a dividend growth fund. They recommend IVV by iShares. I might move some money into a broader index fund as a temporary refuge, but I think for dividend investing the broader indexes are a bad idea. Yes, general index funds (not targeted towards dividend investing) have increased their dividends over time based on the dividends from their constituent companies. But that is not their main focus, so I do not think they should be considered dividend funds. Cash flow is better than capital gains. The author says Amazon, Facebook and Google might pay a dividend someday. And maybe they won’t. A dollar in a stock that does not pay a dividend is a dollar wasted. Why put money in dead weight?

One fund the author recommends (with disclaimers) is Schwab US Dividend Equity ETF (SCHD) (ETFdb page here, Schwab page here)  It tracks the Dow Jones U.S. Dividend 100 Index. To be eligible, stocks must be in the Dow Jones U.S. Broad Market Index, and have paid a dividend for at least 10 years. Unlike the S&P Composite 1500, Dow Jones U.S. Broad Market Index does not filter out companies that are not profitable. (Here is the “Financial Viability” criteria from the methodology document for the S&P Composite 1500: “The sum of the most recent four consecutive quarters’ Generally Accepted Accounting Principles (GAAP) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter.“) However, the Dow Jones U.S. Dividend 100 Index methodology document states the index ranks the stocks on four factors:

  • Cash flow to total debt
  • Return on equity
  • Indicated dividend yield
  • Five-year dividend growth rate


It ranks all eligible stocks, and then picks the top 100. If it looks at dividend growth rate, I guess maybe this is a dividend growth index. I will have to look into this one.

It does seem like even though Dow Jones bought S&P that there are some differences between the DJ indices and the S&P indices. The S&P indices (at least the domestic ones) seem to filter out companies that have not made a profit in the past year. This is probably why Tesla is not in the S&P 500. When it does make a profit, it seems to lose at least the same amount the next quarter. The S&P indices seem to combine automation and profit. We will see what happens to this index going forward.

Note: Not all S&P Indices look at financial metrics. Under “Financial Viability” for S&P Total Market Index, the methodology document states “There is no financial viability requirement for index eligibility.” According to ETFdb.com, the iShares Core S&P Total U.S. Stock Market ETF (ITOT) tracks the S&P Composite 1500,  but the prospectus available from the ITOT iShares page says ITOT tracks “the S&P Total Market Index™(TMI) (the “Underlying Index”), which is comprised of the common equities included in the S&P 500® and the S&P Completion Index.” Perhaps the fact that the index is called “TMI” is a warning. According to its page, the S&P Completion Index “comprises all members of the S&P TMI Index except for the current constituents of the S&P 500®.” So it looks like ITOT’s prospectus chose a wordy way to describe itself. The TMI page lists some iShare funds as the official funds, including ITOT. The S&P Composite 1500 Index (which does have financial viability criteria) is tracked by State Street’s SPDR® Portfolio S&P 1500® Composite Stock Market ETF (SPTM).  That fund’s page on ETFdb.com states it tracks the Russell 3000 Index. The S&P Composite 1500 page states the ETF is SPTM (although they simply list the fund by name and do not provide a link). I do not know why the pages at ETFdb.com are incorrect as to which funds track which indices. Perhaps S&P and Russell changed funds and ETFdb.com did not know about it.

It pays to know your index. Check the home pages for your funds and your indices on a regular basis. You should only invest in about half a dozen at a time. Granted, most dividend indices are based on other indices, so you might have to look at another index to understand the one you are investing in.

It was either Ron DeLegge on the Index Investing Show or one of his guests who pointed out that one trick a lot of active managers pull is to compare their funds to Russell indices, particularly the 1000, 2000 and 3000. Very few managers compare their performance to the S&P 500, 600, 400 or Composite 1500. Unlike those S&P indices, Russell indices just look at market capitalization, and do not consider any financial metrics.

Granted, in my work 401(k) I really have few choices about where my money goes. But they put the money into an S&P 500 index fund. We should automate, but not run on auto-pilot.

Here is a table with the year-to-date amounts, the monthly amounts, and the three- and twelve-month moving averages for each February from 2012 through 2020:

Month YTD Amount 3MMA 12MMA
2020-02 $208.18 $196.17 $1259.50 $871.11
2019-02 $229.17 $138.45 $847.72 $589.58
2018-02 $126.02 $66.43 $654.60 $581.51
2017-02 $684.93 $466.05 $570.90 $511.78
2016-02 $620.16 $383.08 $524.89 $460.41
2015-02 $567.34 $353.85 $492.40 $375.72
2014-02 $496.28 $336.61 $363.62 $295.33
2013-02 $358.51 $248.39 $348.20 $287.16
2012-02 $497.58 $308.90 $337.51 $264.48


Here are the securities and the income amounts for February, 2020:

  • Vanguard Total Bond Market ETF: $176.31
  • Vanguard Total International Bond ETF: $9.71
  • Brokerage Money Market: $3.39
  • Brokerage Treasury Account: $6.76


Big Jim does not think automating something in your life means you should give up control.

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A Look At Global Aristocrats Index

The international index that I have picked is the S&P Global Dividend Aristocrats Index. Its ETF is the SPDR S&P Global Dividend ETF, WDIV.

The Global Dividend Aristocrats Index is based on the S&P Global BMI (Broad Market Index). Stocks in the Global BMI must have a market cap of at least USD $100 million, must meet liquidity standards (at least 20% of a stock’s market cap should be traded in a twelve-month period for stocks based in developed markets, 10% for emerging markets), be in a developed or emerging market, have at least 50% of their shares available for public trading, and it only includes common stocks (no fixed-dividend shares, closed-end funds, investment trusts, convertible bonds, unit trusts, equity warrants, mutual fund shares, limited partnerships, business development companies (BDCs) and no preferred stock with a guaranteed fixed return).

The S&P Global Dividend Aristocrats Index is weighted by yield. The criteria are:
– The stocks are taken from the S&P Global BMI (Broad Market Index)
– It includes stocks with market caps of at least USD $1 billion.
– Stocks have a maximum payout ratio of 100%, or not have a negative EPS
– Max yield of 10%
– The goal is for the index to contain 100 stocks (there are rules for what happens if less that 100 meet the criteria)
– No more than 20 stocks can come from one country (right now, US and Canada each have 20)
– Stocks must have increased or at least maintained their dividend for at least 10 years (since the index is weighted by yield, I do not know if a dividend grower would take priority over a dividend maintainer)

I assume one reason they include dividend maintainers is that raising dividends may not be as common in some countries. In many countries, companies do not pay a set amount every quarter like American companies do.

There is an S&P International Dividend Aristocrats Index. It is the Global Aristocrats Index without any US stocks. Its ETF, FID, has a high expense ratio of 0.60%. I find it odd that the ETF page on ETFDB does not have a link to the actual ETF. Even though it has a high ratio, the website looks cheap and does not inspire confidence. I find it odd that index providers do not license their indexes (or at least related indexes) to one firm. Or at least reputable firms. Frankly, I don’t trust anybody from Wheaton.

“S&P”, “Dividend Aristocrats”, and possibly a few other terms are trademarks of S&P Dow Jones Indices LLC.

Big Jim will invest his money with companies he thinks he can trust.

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A Look At Dividend Aristocrats

My look at dividend indexes brings me to the Grandaddies of all dividend indexes: The S&P Dividend Aristocrats and the S&P High-Yield Dividend Aristocrats.

The S&P Dividend Aristocrats is a subset of the S&P 500, and the S&P High-Yield Dividend Aristocrats of the S&P Composite 1500, which is a combination of the large-cap S&P 500 (stocks with market capitalization of $6.1 billion or more), the mid-cap S&P 400 (stocks with market caps between $1.6 billion to $6.1 billion) and the small-cap S&P 600 (stocks with market caps between $450 million and $1.6 billion).

The S&P Composite 1500 index has the following criteria:
– The stock must be for a US-based company (filing a 10-K, having a plurality of its assets in the US, or traded on a US exchange)
– The stock must be traded on one of the following exchanges: NYSE, NASDAQ, Investors Exchange (IEX), a Cboe exchange (BZX, BYX, EDGA, E)
– Only common stocks and REITs are eligible
– At least 50% of the shares outstanding must be available for trading (not held by insiders, private equity or venture capital firms or sovereign wealth funds; presumably they would buy and sell on private markets)
– The stocks should have positive GAAP earnings for the most recent quarter, or averaged over the most recent four quarters
– The stocks should have adequate liquidity (such as trading 250,000 shares a month)

The Dividend Aristocrats Index has the following criteria:
– Stocks must be part of the S&P 500.
– Each stock must have a history of increasing dividends for at least 25 consecutive years.
– Each stock must have a market cap of at least $3 billion as of the rebalancing reference date. The S&P 500 has a minimum cap of $6.1 billion; I am not sure why there is a discrepancy.
– Each stock should have a daily trading volume of at least $5 million for the three months prior to the rebalancing reference date.
– The index should have at least 40 members. Hands will be waived if the number is below 40.
– No sector should constitute more than 30% of the index.

The Dividend Aristocrats Index is an equally weighted index. It currently has 57 stocks.

The High Yield Dividend Aristocrats Index has the following criteria:
– It includes stocks that are part of the S&P Composite 1500.
– Stocks must have raised their dividend every year for at least 20 years.
– Stocks should have a market cap of at least $2 billion on the rebalancing reference date.
– Each stock should have a daily trading volume of at least $5 million for the three months prior to the rebalancing reference date.
– No stock should make up more than 4% of the index.

The High Yield Dividend Aristocrats Index is weighed by yield, so higher yielding stocks make up a greater proportion of the index. It could have stocks with low yields, they just wouldn’t make up much of the index. Perhaps “High Yield” is a misnomer. It currently has 111 stocks.

Out of all of the indexes I have looked at, I think I like these two the best. There are no proprietary eligibility criteria, there are no analysts estimates or consensus; it is all data and rules driven. Yes, it looks backwards, but I prefer that over someone’s guess about the future. We cannot argue about whether the past happened, just about what it tells us. And no buybacks. It is all about the payouts, baby.

The Morningstar US Dividend Growth Index eliminates stocks whose yield puts them in the top decile, I do not think it is a necessary step for a dividend growth index. I think a couple of decades of dividend increases will make disaster less likely to happen.

The fund for the Dividend Aristocrats, NOBL, has an expense ratio of 0.35%. The fund for the S&P High Yield Dividend Aristocrats Index, SDY, also has an expense ratio of 0.35%. SDY has a nice yield. I will read the prospectus and perhaps sell my shares in VIG and VYM and get SDY.

“S&P”, “Dividend Aristocrats”, and possibly a few other terms are trademarks of S&P Dow Jones Indices LLC.

Big Jim is looking at the tried and true.

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A Look at Another Dividend Growth Index

One fund I am thinking about buying is the iShares Core Dividend Growth ETF (DGRO) (ETFDb page here, iShares page here).  It tracks the Morningstar US Dividend Growth Index.

You can get the methodology docs for Morningstar indexes here. I do not think you can get to their index page from their main page or vice versa. I had to google to find it. Their methodology documents have some graphics summarizing the base criteria, and are probably the easiest methodology documents that I have gone through so far (out of the three firms’ documents).

The Morningstar US Dividend Growth Index is a subset of the Morningstar US Market Index. The Morningstar US Market Index has the following criteria:
– It includes mostly common stocks, REIT, or tracking stocks which trade on one of the three major U.S. exchanges: The New York Stock Exchange, Nasdaq, or the NYSE Market LLC. It may include ADRs if there is no corresponding stock.
– Each security must have no more than 10 nontrading days in the prior quarter
– Each security must be in the top 75% of remaining companies based on liquidity score, determined by trading volume over the prior six months.

The Morningstar US Dividend Growth Index takes the Morningstar US Market Index, and includes stocks with the following criteria:
– It only includes stocks that pay qualified income as dividends (so REITs are out)
– A stock’s dividend yield must not be in the top 10% of the parent index (so companies with super high yields are excluded)
– A stock must be currently paying dividends and have at least five years of uninterrupted annual dividend growth
– “Security must have a positive consensus earnings forecast and a payout ratio less than 75%.”
– If a stock does not raise or decrease its dividend, but does execute a share buyback, it can remain in the index

There are a few things that I like about this index, and a few things that I do not like.

Obviously, I like the fact that it is a dividend growth index. Five years is a short threshold, but it’s better than none. I also like that they exclude stocks with the highest yields. Sometimes a high yield can be a sign of trouble. I think more dividend indexes should do this, particularly those (like the FTSE High Dividend Yield Index) that are not dividend growth indexes. This exclusion becomes less necessary with a higher time threshold.

I do not like that it considers buybacks as some sort of equivalent to dividend increases. A lot of people say that buybacks “return cash to shareholders”, but that is not true. It’s just another example of the Greater Fool Theory. Dividends are actual cash to shareholders, not “I hope somebody will buy it for more than I did”, which does not always work. And as we saw during the Great Recession, will probably not happen when you really need it to happen. I think buybacks are a plague on the financial ecosystem. We got along fine without them until 1981, I think we should go back to that. After all, it is the “Morningstar US Dividend Growth Index”, not the “Morningstar US Dividend Growth Or Something That Only Stupid People Think Is Close Enough Index”. Either a company increases its dividend, or it does not. End of story. If I wanted to deal with the stupidity of buybacks, then I would find a buyback ETF.

I am also leery of this criterion: “Security must have a positive consensus earnings forecast and a payout ratio less than 75%.” First off, whose consensus? I do not like the idea of someone’s guesses forming the basis of my retirement. And I am not too sure about the payout ratio criterion either. While a lower ratio is better, sometimes companies have to go into debt to maintain their dividend, and have better ratios when things turn around. For example, I did not buy shares in Old Republic International (ORI) when I started looking at DGI stocks because although they were increasing their dividend, they were losing money. But now they seem to be doing fine. How will this index do in a recession?

How this index would do in a recession is a concern to me. The methodology document states: “The inception date of the index is April 7, 2014, and the performance inception date of the index is December 19, 2003, when the first back-tested index value was calculated.” However, I have not been able to find any performance data for this index going back to 2003. Plus, since they are using consensus forecasts, it is not truly rules-based, so backtesting may not be too useful.

So far, I think I like the NASDAQ US Broad Dividend Achievers Index (DAA) index the best, but its ETF has pretty high costs.

“Morningstar” and other terms with the word “Morningstar” (like the names of their indexes) are trademarks of Morningstar, Inc.

Big Jim thinks that an index should not rely on someone’s opinion.

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A Look at High Yield Index

One of the funds that I am invested in is the Vanguard High Dividend Yield ETF (VYM).  Another one is the Vanguard International High Dividend Yield ETF (VYMI). They both track the FTSE High Dividend Yield Index, with VYM holding companies that are based in the USA or trade on American stock exchanges, and VYMI holding stocks from the rest of the world. The FTSE High Dividend Yield Index is a subset of the FTSE All-World Index (you can find the methodology at this link). All of the dividend indexes are sub-indexes of general global or national stock indexes.

They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant.

The FTSE All-World Index has the usual requirements about longevity, market cap and liquidity as other world indexes. It excludes MLPs, LLPs and LLCs. For developed markets, at least 5% of the voting shares have to be owned by “unrestricted shareholders”, which I think means entities not associated with the company. The companies have to have a free float of at least 5%. The company, exchange and country should have few restrictions on foreign ownership. The liquidity threshold is that at least 0.04% of a company’s shares should turn over every month.

The FTSE High Dividend Yield Index excludes REITs and any companies that are not forecast to pay any dividends over the next 12 months, and ranks what is left by yield. The stocks in the index are weighted by “investable market capitalisation, i.e. after taking account of free float and foreign ownership restrictions”. It calculates the dividend yield using “the most recent I/B/E/S forecast DPS value”.  (Forecast by whom? I am not too clear.) I think I/B/E/S refers to Institutional Brokers’ Estimate System (IBES) It is made by Thompson Reuters.

In section 5 of the methodology document, it says: “The FTSE All-World High Dividend Yield Index aims to contain the highest yielding stocks accounting for 50% of the investable market capitalisation of the Eligible Securities as defined in Section 4.” I guess this means they take the stocks with the highest yield and go down the list until they get enough stocks to make up 50% of the total market capitalization.

Like the pages about IBES linked above say, it uses analysts’ estimates. Why should I base my retirement on analysts’ estimates? Why not just use past data like other indexes? I know that past performance is not a guarantee of future results, but neither is someone’s guess. Besides, we are dealing with publicly traded corporations. Why not just use the publicly available data?

This is NOT a dividend growth index. This is just looking at stocks based on how big analysts think the yields will be. So it could have a lot of weak companies that are struggling to maintain their dividends.

If a company increases its dividend for a decade, it is probably in pretty good shape. Why rely on someone’s guess on companies that do not increase dividends?

The use of estimates over historical data is one reason that I am thinking about selling these funds. Another is that they are not really dividend growth funds. I admit, I got them to juice performance a bit, but I am starting to reconsider that. Another thing that bothers me is that they just take all stocks that have a yield. As any good investor knows, a yield can be too high, even a sign of trouble. Some indexes exclude stocks whose yield puts them in the top decile in terms of yield. Granted, if a fund has a few hundred stocks, then any fallout from bad stocks would be minimized.

Nevertheless, since these funds are not true DGI funds and use analysts’ estimates as opposed to historical data, I am considering replacing them. Honestly: Did Vanguard get all the crappy indexes? Is that why they are so cheap?

FTSE refers to the FTSE Group.

Big Jim has decided to be more focused with his ETF investments.

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A Look At Dividend Appreciation Index

One of the funds that I am invested in is the Vanguard Dividend Appreciation ETF (VIG). It has stocks in the NASDAQ US Dividend Achievers Select Index. The index has the symbol DVG, although you cannot trade the index directly. There is no stock or ETF with the symbol DVG.

All of the dividend indexes are sub-indexes of general global or national stock indexes. They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant. There are also a lot of rules about how the daily prices of the indexes are calculated.

The NASDAQ US Dividend Achievers Select Index is a subset of stocks that are in the NASDAQ US Broad Dividend Achievers Index (DAA). The NASDAQ US Broad Dividend Achievers Index itself is a subset of the NASDAQ US Benchmark Index (NQUSB).

As far as I can tell, the NASDAQ US Benchmark Index (NQUSB) is covered in the document “NASDAQ Global Index Family Methodology” (go to https://indexes.nasdaqomx.com/Resource/Index/Methodology and search for “Global”).

Section 2 gives the basic criteria:

  • Must be listed on an Index Eligible Stock Exchange (section 2.2.1). Generally, an exchange is eligible if it does not put too many restrictions on foreign ownership.
  • Must be an eligible security type (section 2.2.2). Common shares are eligible, as are preferred shares, REITs and depository receipts. Generally, ETFs, preferred shares, closed-end funds, limited partnerships, limited liability companies and pass-through entities are not eligible.
  • Must have a minimum worldwide market capitalization of $US 150 million (section 2.2.3)
  • Must have a minimum three-month average daily dollar trading volume of $US 100 thousand (section 2.2.4)
  • Must have a minimum free float of 20% (or in some cases 5%) (section 2.2.5)
  • Must have “seasoned” for at least three months on an eligible stock exchange (section 2.2.6)
  • Must be in a country classified as Developed or Emerging (sections 3.1 and 3.2)
  • Must not be issued by an issuer currently in bankruptcy proceedings (section 6.2.1). I guess in some countries a bankrupt company can still be traded; I am pretty sure in the USA bankrupt companies are delisted.

So I guess the NASDAQ US Benchmark Index (NQUSB) has stocks that are eligible to be in the NASDAQ Global indexes and trade on US exchanges.

The NASDAQ US Broad Dividend Achievers Index (DAA) is comprised of US accepted securities with at least ten consecutive years of increasing annual regular dividend payments. Index eligibility is limited to specific security types only. The security types eligible for the Index include common stocks, limited partnership interests, shares or units of beneficial interest and shares of limited liability companies.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Benchmark Index (NQUSB) except for limited partnerships;
– limited partnerships must be listed on the Nasdaq Stock Market® (Nasdaq®), the New York Stock Exchange, NYSE American, or the CBOE Exchange;
– have a minimum three-month average daily dollar trading volume of $1 million;
– have at least ten consecutive years of increasing annual regular dividends based on ex-date;
– one security per issuer is permitted. If an issuer has multiple securities, the security with the highest three-month average daily dollar trading volume will be selected for possible inclusion into the Index;
– may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being Index eligible; and
– may not be issued by an issuer currently in bankruptcy proceedings.

The NASDAQ US Dividend Achievers Select Index (DVG) is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments. DVG only includes common stocks.

To be eligible for inclusion in the Index a security must meet the following criteria:
– be included in the NASDAQ US Broad Dividend Achievers Index (DAA) excluding limited partnerships and REITs; and
– “additional proprietary eligibility are applied” (this is an exact quote from the document).

So it is interesting that limited partnerships are not in the general US index, allowed in the DAA, and excluded again in the DVG.

One thing that really bugs me about DVG is the “additional proprietary eligibility” criteria. What are the additional proprietary criteria? Am I wrong to get hung up on this? I would like to know how my golden years are going to be funded. But they won’t tell me. Besides, “proprietary criteria” sounds like active management, not indexing.

I have downloaded the holdings for the indexes, and DAA has oil and gas companies and more utilities; DVG has one oil company and a few utilities companies. For telecom, DAA has AT&T, Inc., Telephone & Data Systems, Inc and Verizon Communications, Inc., while DVG only has Telephone & Data Systems, Inc. Lots of profitable stuff is not in DVG, and I think it is due to the mysterious “additional proprietary eligibility”.

You can only download this information from the NASDAQ site during standard business hours. I would prefer being able to get this info 24/7, since I am at work during standard business hours. You can get the annual reports for the ETFs anytime.

So between the lack of information about the holdings from NASDAQ, the lack of a few profitable companies and industries from DVG and the “additional proprietary eligibility”, I am starting to sour on DVG. I will look at other indexes. I like the fact that Vanguard has super-low cost, but I don’t like getting a low-cost black box. I really do not like the “additional proprietary eligibility” part. If I wanted that, I would go with an actively managed product. Maybe all the good indexes were taken by the time Vanguard decided to make some dividend growth ETFs.

Some of the material in this post was taken from material for the NASDAQ indexes. Some of the terms used in this post are NASDAQ trademarks. Generally any phrase with the word “NASDAQ” in it.

Big Jim likes his indexes to be transparent.

“The Immaculate Conception” by Giovanni Battista Tiepolo (March 5, 1696 – March 27, 1770), assumed allowed under Fair Use.

I Am Looking Into a Commodities Fund

I was inspired to look at this fund after an episode of one of the podcasts I listen to called The Index Investing Show with Ron DeLegge. He also runs a couple of other sites: Portfolio Report Card and ETF Guide.

Ron DeLegge thinks everyone’s portfolio should have three parts to it. The first is the Margin of Safety. This is money that does not lose value and that you cannot afford to lose. He never calls it an FDIC-insured savings account, but that is what it sounds like. The second is your Core Portfolio, which should be at least 51% of your portfolio. It should be in low-cost index ETFs covering all the major asset classes: Stocks (domestic and international), bonds (domestic, international, government, corporate), commodities, real estate and cash. Whether the Margin of Safety can count as the cash part is a bit unclear to me, but I think it should be cash in your brokerage account. The final part is the Non-Core Portfolio. This can be individual stocks, futures, day trading, currencies, venture capital and private equity, or a fund that only covers part of the commodity sector.

He liks to criticize Jim Cramer, but that is similar to what Cramer says: You should put most of your money in indexes and only play with any “Mad Money” left over. At least, that is what I got out of his books [Note 1].

Ron also does Portfolio Report Cards. He grades people on risk (whether your portfolio’s risk level matches your self-description), cost, taxes, performance and diversification. He judges diversification based on whether or not you have split your portfolio into the three sections above, and if your Core Portfolio has all the major asset classes covered.

One thing that he has noticed is that a lot of people have no or too little exposure to commodities, and he says he does not understand why this is. I cannot speak for all investors, but I can tell you why I have not had any commodity exposure until now.

One reason is that a lot of commodity funds do not pay dividends. If a stock or fund does not pay, then I do not play.

Another reason is that a lot of commodity funds send a K-1 for tax purposes. I do not want to deal with a K-1. 1099s are just simpler. I know MLPs are going out of style, but I have read that if your have income above a certain threshold from an MLP in a Roth IRA, you could still pay taxes on it. I think that is true of any partnership and anything that uses a K-1 if the asset is held in a Roth IRA. Partnerships do not pay tax because they just send the profits to the partners. (This is why I do not think the “double taxation” of dividends is a bad thing: Corporations exist to shield their members from liability.) But if an investment in a Roth uses a 1099, then you are in the clear. The ETF that Ron uses as his reference, GCC, violates both of my criteria.

When I sold my stocks and got into ETFs, I put my money into dividend stock ETFs, bond ETFs, and for the first time I got into real estate ETFs. For all three of these, I got both domestic and international ETFs. I also got a utilities ETF for a bit more juice. But all the commodities funds were either K-1 funds or had no payout.

A caller asked about GMOM (Cambria Global Momentum ETF) and Ron recommended GAL, the SPDR SSgA Global Allocation ETF. They are multi-asset funds. I think the caller wanted to be in one fund that could cover the Core Portfolio. I was inspired to look at multi-asset ETFs from the top three issuers (Vanguard, State Street and BlackRock’s iShares). This led me to COMT.

COMT is in all the commodities sectors, it uses a 1099, and it pays a dividend. I am going through the prospectus and reports. I am leaning towards buying it.

I might not get an A if I get a Portfolio Report Card, but Ron DeLegge has influenced my thinking. But he is a bit too crypto-friendly for me. I really do not think crypto will amount to anything. People who hate the government used to be happy just complain and shake their fists at the cloud. Now they use enough electricity to power an entire country.

Ron DeLegge does not really make predictions. Unlike gold bugs and inflation bears, he helps you to prepare for any market scenario.

Note 1: There was a trader who went by the handle Airelon who (if I remember correctly) had a similar idea. He tried a few times to make money trading, and kept losing everything. Then he came across the idea of trading buckets, and put each bucket into different types of assets, depending on risk. If his riskiest trade lost money, he did not use his “safe” money to bail the bad investment out. He had a podcast for a while, as well as a blog. He was on Seeking Alpha. He left to be part of some company called Sharpe Trade, but the website is gone and the Twitter account was rebooted and is now all crypto. (I think Airelon might have some crypto, but would be skeptical of the “Cryptocurrency will save civilization!!” claims going around.) His YouTube channel is empty, but somehow a few people have preserved them in playlists: Airelon Trading and Psychology – Aileron Trading.  He moved to Mexico and got off of social media. I did have a brief chat with him on Twitter in 2014, but he seems to have disappeared from Twitter. He does have a private Instagram account, but since it’s private, I have no idea when he last posted. He has a Google Plus account with posts up to mid-2016.

Big Jim is looking into commodities because he is a down to earth guy.

 “Dormition of the Virgin”, a holy snuff painting by El Greco (1541 – 7 April 1614), at El Greco’s site, assumed allowed under Fair Use.

Stock Buying Rules

As I was going through my stuff, I found a list of rule for buying stocks. I assume I wrote them while watching Jim Cramer.

  1. Never buy on margin.
  2. Never use market orders.
  3. Know what you own.
  4. Do not own too many low-priced stocks.
  5. Be diversified.
  6. Own dividend stocks.

I have bought with market orders. I plan on owning stocks/ETFs for a long time, so I don’t think that paying a bit more is that big of a deal. Plus, many times when I put in limit orders, they sit unfilled for weeks, so I just bite the bullet and buy. So far it has worked out.

Big Jim knows the way to succeed in the stock market is to have a plan.

“Regret” (1887) by Miguel Navarro Cañizares (c. 1835 – 23 October 1913), image from Wikimedia,  assumed allowed under Fair Use.

Revisiting Bad Dividend Advice

A little over two years ago I commented on an article recommending people buy Frontier Communications because it had a high dividend yield of 9.6%. I explained that choosing a stock simply because it has a high yield is a bad idea. I wrote that “dividend growth investing”  (or DGI) is a subset of “dividend investing”, and why it was better than simply chasing yield. I also outlined the general criteria that DGI investors use to select stocks. Even though I put most of my money into dividend ETFs, I still think DGI is the way to go and is a good method for selecting stocks. I think that what has happened to Frontier Communications over the past two years shows that.

First off: They are no longer paying their dividend on their common stock. Their last dividend was announced on October 17, 2017, and paid on December 15, 2017. According to their press release page, the only dividend since then was on their preferred stock. I think we can ignore this for a few reasons:

  1. The October 17, 2017 announcement was for both common and preferred stock.
  2. Most people (and institutional investors) buy more common stock than preferred stock.
  3. The article I was responding to in 2016 did not mention preferred stock, so I assume they were talking about common stock.


They started paying dividends in 1972 to 1998, with a few cuts along the way. Then, a telecommunications company stopped paying dividends during the dot-com boom. They resumed in 2004. There were a few dividend raises, but not enough to meet even a DGI threshold of 5 years, which is the lowest I have seen from any DGI investor. But there were more freezes and cuts than raises. They also had a reverse split in 2017, which is never a good sign. If you look waaaaaay at the bottom, there is a row for 2018 that says “Dividend omitted.” I admit, I did not see the row for 2018 at first. Probably because they put it at the bottom out of order.

Here is their dividend data from their web site:

Year Div In Cents
Total dividends in 2004 37.50
Total dividends in 2005 15.00
Total dividends in 2006 15.00
Total dividends in 2007 15.00
Total dividends in 2008 15.00
Total dividends in 2009 15.00
Total dividends in 2010 13.125
Total dividends in 2011 11.25
Total dividends in 2012 6.00
Total dividends in 2013 6.00
Total dividends in 2014 6.00
Total dividends in 2015 6.30
Total dividends in 2016 6.30
Total dividends in 2017 3.441667


If you were hoping to get bailed out by capital gains (never a good idea), you were disappointed there too. On February 1, 2016, the stock was around $70. It peaked at $84 in April, 2016. It hit $70 in August, 2016, and just kept dropping. Now it is at about $7.69. Granted, I always say that price alone is not important, but a drop from $84 to $7 is bad. But I think the DGI criteria are a good signal of the health of a company. A lot of people invest based on price, and they think that a fall in price is a problem. The reality is that a fall in price is the result of underlying problems.

The drop in price would not be a surprise if you looked at their cash flow statements. According to Morningstar, here is their net income from their cash flow statements for the past 10 quarters:

Quarter Profit (Loss)
2015-12 (103)
2016-03 (186)
2016-06 (27)
2016-09 (80)
2016-12 (80)
2017-03 (75)
2017-06 (662)
2017-09 (38)
2017-12 (1029)
2018-03 20

So in 2018, they made $20 million, after spending two years losing $2.2 billion. Good times.

A lot of indexers might look at this company and point to it as an example of why dividend investing is a bad idea. People need to realize that DGI investors do not simply chase yield. DGI investors look at the cash flow, the payout ratio and the dividend history. Using the DGI criteria is not a guarantee, but it increases the odds of success. You cannot just point to an individual stock and say to someone, “If you put money in that stock, you would have lost all of it! Therefore, your style does not work!” That objection assumes that a DGI investor would have put money into a bad stock, like Frontier Communications. I think for Frontier, using DGI criteria would have saved an investor from disaster.

Big Jim likes sustainable cash flow.

“DGI” can refer to “dividend growth investing” or “dividend growth investor”, and yes, sometimes I write “DGI investor”, which could be redundant.

Image from Memgenerator, assumed allowed under Fair Use. I have no idea if the misspelling of “advice” is intentional.

Why Investing For Dividends Is Better Than Capital Gains

There are many ways to invest in the stock market.

There are a few I will not discuss here, such as options and other derivatives. I don’t have time to try to understand them, and I honestly think that a lot of the people that deal with these instruments on a daily basis do not understand them too well themselves.

I will discuss two ways in this piece. The first is investing for capital gains. This is done by trying to buy at a relatively low price and hoping to sell later at a higher price. The other is investing for cash flow. This is what I do by investing in stocks that increase their dividends every year.

Even when I was growing up, I would hear people say that the way to make money in the stock market is to buy low and sell high. The capital gains model is drilled into people, and most people never become aware of any alternative. I did not until stocks started going down in 2008. It was not until later that I learned that reinvesting dividends are responsible for at least half of the gains in the stock market in the 20th century. Until about the 1980s, investing for dividends was more common. It is a self-reinforcing cycle. Almost every financial site has charts for stock prices. Technical analysis is mostly about looking at charts of the stock price. But there are far fewer charts for dividends.

During the dot-com boom, prices were rising at an accelerating rate. Why invest for a 3% yield when your stock doubles every year? Because eventually it will stop doubling every year. We saw this again in 2008: Many stocks went down in price by a lot, even stocks that paid dividends. But many of those dividend paying stocks still increased their payouts.

I think that capital gains investing is no different than the Greater Fool Theory.

Granted, these are not entirely mutually exclusive. I have said on this site that “price doesn’t matter”. Actually, it does not matter as much to a dividend investor as it does to a capital gains investor. If one of my stocks goes to $0, then I will get no income out of it. (But it would probably have cut its dividend before that happens.) “Price doesn’t matter as much as you think it does” is more accurate, but has a bit less punch as a catchphrase.

You can only sell once. Dividend investing is like having an animal for its milk or eggs or wool. You can milk a cow, harvest a chicken’s eggs and shear a sheep multiple times throughout its life. But you can only get meat from them once. And you can only sell a share of stock once. If you are only owning something in order to sell it later, you only really get the benefit of owning it when you stop owning it. I think that is pretty strange.

I don’t think pigs produce any goods while they are alive, so perhaps pigs are a better analogy to stocks that do not pay dividends.

You can sell a stock that pays dividends for capital gains. That makes investing for dividends better than just investing for price appreciation. But relying solely on price can be more risky. You can only make money one way, and only at one time: when you sell.

And you are assuming that you will get the price you need when you need it. Liquidity dries up when people need it the most.

Captial gains investing is more like the fixed mindset, and dividend growth investing is more like the growth mindset.

Selling means you are dipping into principal. Eating your seed corn. Someone once compared selling shares for profit like sawing off a tree branch while you are sitting on the wrong side of the branch.

“Bahram Chubina Kills the Lion-Shaped Ape Monster”, Folio from a Shahnama (Book of Kings) by Abu’l Qasim Firdausi (935–1020), available at The Metropolitan Museum of Art, assumed allowed under Fair Use.