Two questions from a blogger regarding mandatory retirement withdrawals by boomers

It has been awhile since I receive any questions from fellow bloggers that could be answered in a post. I thought that since I am a baby boomer, these questions might make an interesting post. This is what he wrote:

“I’ve seen more than one article regarding baby boomers starting to take mandatory retirement withdraws this year. This is the start of some significant money leaving tax deferred accounts for many years.”

1. Do you see this significantly affecting asset management companies?
2. Do you see this money going back into investments or going into daily living expenses and recreational “retirement” stuff?

 

Background and Research

Having worked as a financial advisor, the majority of my clients had little interest in saving for retirement. It was at the bottom of their priority list. It comes to no surprise that nearly half of U.S. families have no retirement account savings at all.

A 2015 Government Accountability Office study found that show that 29% of Americans 55 and older don’t have any retirement nest egg or even a traditional pension plan. Those who do have retirement funds don’t have enough money: 55 to 64-year-olds have an average of $104,000 and those 65 to 74 have $148,000 in savings

Aside from this lone anomaly, we see pretty well-defined growth in average IRA balances as age increases. Pre-retirees generally have well over $100,000 in their IRA, while Americans in the 65-69 age range have over $212,000.

Now these averages are not the most accurate gage because of the amount of wealth held by the super-rich, see the chart below.

 

 

The simple answer to question number 1 is boomer’s mandatory retirement withdrawals should have little effect on asset management companies. In fact, they could be a good long-term investment. One factor that has clause Generation X and millennials to delay purchasing a home was due to the housing crisis, perhaps they will save more for retirement after watching their parents delay or struggle in retirement.

Some additional research

Social Security benefits are much more modest than many people realize; the average Social Security retirement benefit in June 2016 was about $1,350 a month, or a bit over $16,000 a year.

For someone who worked all of his or her adult life at average earnings and retires at age 65 in 2016, Social Security benefits replace about 39 percent of past earnings. For 61 percent of elderly beneficiaries, Social Security provides the majority of their cash income. For 33 percent of them, it provides 90 percent or more of their income.

Social Security is a particularly important source of income for groups with low earnings and less opportunity to save and earn pensions, including African-Americans and Latinos. Social Security represents 90 percent or more of income for 41 percent of Asian Americans, 45 percent of African-Americans, and 52 percent of Latinos, compared with 32 percent of whites.

The answer to question number 2, the majority of retirement funds in North America will be used to cover living expenses.

In my humble opinion, a retirement crisis is coming because we are living longer and saving less. Social Security is funded by two trust funds, one for retiree benefits and one for disability benefits. The 2034 date is the exhaustion date for both funds when combined. But if considered separately, the old-age fund will be exhausted by 2035, after which it would be able to pay just 77% of benefits.

Two ways to get answers to your financial questions: send me an email (ricodilello@rogers.com) or post a comment on my Financial Question and Answer page.

 

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Will Trump disappoint Wall Street & America?

There is no doubt that the Republican Party was totally surprised and unprepared by the November election results. Trump’s management style is going to drive his management team, the media, most of the American people and the world nuts. A new reality show has come to Washington, “The Billionaire Apprentice”, who will be the first to get fired?

I think that there is going to be more than the usual amount of personnel turnover in the first six months. The media will be writing about how Trump can’t keep people and about all the chaos in the White House. The world has never seen an American president with this type of management style. It is going to make most of us uncomfortable.

The stock market has high expectations regarding less regulations, infrastructure spending, a new tax policy and the replacement of Affordable Care Act. Failure to deliver something that at least comes close to meeting those expectations is going to have a significant negative impact on the markets and the economy. Some market watchers believe that a correction will show up in the next 60 days if there are cracks in Trump’s agenda.

Being Canadian, I am not an expert on American politics. In my humble opinion, a civil war maybe brewing between Trump and the Republican Party on the implementation of a new tax policy and infrastructure spending. Repealing and replacing the ACA isn’t going to be easy without some bipartisan cooperation. Some republicans maybe hesitant to support some of Trump’s agenda in fear of losing their seat in upcoming congressional elections in Nov. 2018! Trump’s team could be stuck in the Washington swamp!

If you have any doubts that protectionism is at the top of Trump’s agenda, you clearly need to watch Trump’s inauguration speech. President Trump’s first few days in office was to pull out of the Trans-Pacific Partnership and signed an executive order to renegotiate NAFTA.

My buy American and hire American playbook

Avoiding:

• Auto industry (including part suppliers)
• Canadian lumber producers
• Health care and biotech
• Oil & gas (watching U.S. fracking companies)
• Retail & Restaurants
• U.S. industrials that depend on infrastructure spending

Investments that could be Trump Free

• U.S. banks (including some regional banks)
• Tech stocks (including semi-conductors, cloud plays)
• Some U.S. domestic stocks
• Gold & silver stocks
• Cash (in case of a correction)

What do you think? Has President Trump over promised and will he under deliver?

 

Carbon tax: a sign that oil prices will stay lower for longer

The federal government of Canada plans to impose a national carbon tax on any province that refuses to establish one on their own. They argue that putting a price on carbon will give people and companies an incentive to look for lower emission options to save money.

In reality, Canada is the second largest country in the world, just ahead of the United States and behind Russia However, our population is one-tenth the size of our largest trading partner, the United States and one-quarter the size of Russia. I estimate that 75% of Canadians live in rural areas where driving is a necessity and switching to electric heating or electric cars is way too expensive.

At the Golden Globe Awards, Meryl Streep called Canadian actors nice. I would like to add that we, as a nation, are dumb when it comes to energy. Refineries in Eastern Canada are spending billions to purchase about 700,000 barrels a day of foreign oil to meet customer needs while 3 million barrels of Western Canadian oil is sold to the United States at a discount due to lack of pipeline capacity between producing fields in Western Canada and refineries in the East.

Our governments rely on tax revenues from the oil and gas industry which are down with the price of oil. In truth, this carbon tax has nothing to do with lowering emissions but just another tax grab. This is a clear sign that the government believes a rebound in the price of oil is many years away.

The Canadian economy is fragile and the last thing it needs is yet another tax. The potential costs for the average Canadian family by 2022 is up to $2,569 per year. The carbon tax will also increase the price of food and clothing. It will mean lost jobs and make Canadian businesses less competitive.

Lack of pipelines makes me bearish on the Canadian oil patch

1. It will take years to build the Keystone XL pipeline even if approved by Trump. Plus there will be a massive backlash, both on the ground and in the courts that could tie this project up for many more years.
2. Prime Minister Justin Trudeau gave the green light to Kinder Morgan’s Trans Mountain pipeline expansion but I expect protestors will also delay this project.
3. The Line 3 Replacement Program was also approved and is the largest project in Enbridge’s history. The anticipated in-service date for this project is 2019, pending U.S. regulatory approvals.

Additional reasons to be bearish on Canadian oil stocks

1. Most Canadian oil companies are still losing money
2. The profitable ones have very high price to earnings ratios (CNQ – EPS for 2017 is $1.04 or 39 times earnings and SU is 27 times earnings for 2017)
3. Shipping oil by rail is way more expensive than by pipeline
4. The biggest risk to the Canadian oil patch is Trump! He could put a 20% border tax on imported oil.

Foreign oil stocks that I own for yield

I bought some Royal Dutch Shell (RDS.A) for it’s 6.8% yield in my wife’s retirement account. The dividend is exempt from U.S. withholding tax because it is in a retirement account. Converting the U.S. dividend to Canadian dollars gives me a current yield of 6.8% times 1.32 or 8.98% which is much higher than owning bonds. Plus I can sell covered call options that could boost my returns by 5% or to protect against a fall in oil prices.

I also own Alerian MLP ETF (AMPL) which is a energy partners ETF with a 8% U.S. dollar yield. It has a 10.5% yield in Canadian dollars but does has a high management fee of 0.85%, still better than owning bonds. There are higher yielding limited partnerships but they carry more risk than owning an ETF.

U.S. Shale producers are on my watch list

The majority of these producers are still losing money. At the top of my watch list is Marathon oil (MRO) which is currently trading at $17. 45 but has a book value of $27.40. Their losses have been decreasing and the earnings estimates for a fourth quarter is for a loss of 15 cents a share. I am waiting for Marathon to release their results on Feb 15 to confirm that they are lessening their losses and that their revenue is increasing before I invest.

What oil stocks do you own and why?

Disclaimer: Please do your own research or consult with a qualified financial advisor.

 

 

 

 

Bull call spread strategy update

Back on December 13th,  I suggested that a bull call spread can be used as an alternative to a covered call strategy. I was hoping that out of the three examples, there would be one good, one bad and one ugly. All three examples were just paper trades for discussion purposes. It turns out that all three paper trades were profitable if they were closed as of today at 11:00 a.m.

Bull Call Spread: An Alternative to the Covered Call

Quotes as of 11:00 a.m. on Jan 5, 2017

Example #1 Apple @ $116.08

Original buy was 100 shares of Apple at $114.90 sell one call option Jan 20 at $115.00 for $2.60

Action: Buy back call for $2.02 sell stock $116.08

Profit: ($116.08 – $114.90 + $2.60 – $2.02) = $1.76 divided by $114.90 = 1.53%

Original Call spread: Buy 1 Jan 20 $105 call for $10.45 – sell one call Jan 20 at 115.00 for 2.60

Action: Buy back call for $2.02 sell 105 call for 11.10

Profit: ($11.10 – $10.45 + $2.60 – $2.02) = $1.23 divide by $10.45 = 11.79%

Example #2 Netflix @ $131.36

Original buy was 100 shares of Netflix for 123.75 – sell Jan 20 call at $130 for $4.50

Action: Buy back the call for $7.95 sell stock for $131.36

Profit: ($131.36 – $123.75 + 4.40 – 7.95) = $4.06 divided by 123.75 = 3.28%

Original Call spread: Buy one Jan $120 for $9.15 – sell Jan 20 call at $130 for $4.50

Action: Buy back the call for $7.95 sell call for 14.10

Profit: ($14.10 – $9.15 + 4.50 – $7.95) = $1.50 divided by $9.15 = 16.39%

Example #3 Facebook @ $119.65

Original buy was  100 shares of Facebook for$119.40 – sell Jan 20 call at $120 for $3.10

Action: Buy back call for $1.68 sell stock for $119.65

Profit: ($119.65 – $119.40 + $3.10 – $1.68) = $1.67 divided by $119.40 = 1.4%

Original Call spread: Buy one Jan 20 $110 for $10.45 – sell Jan 20 call at $120 for $3.10

Action: Buy back call for $1.68 sell call $9.75

Profit: ($9.75 – $10.45 + $3.10 – 1.68) = $ 0.72 divided by $10.45 = 6.89%

The capital required to purchase 100 shares of each of these three stocks is $35,805 minus $1020.00 from selling the covered call options equals $34,785. Total profit of closing these positions today would have been $749.00 dividend by $34,785 equals 2.15% (not including trading fees)

The bull call spreads requires a total outlay of $3,005 minus $1020.00 from selling the exact same covered calls equals $1985. Total profit would have been $345 dividend by $1985 equals 17.38%. (not including trading fees)

A bull call spread allows for a higher percentage return with less capital. Plus it allows you to trade higher priced stocks. In case you don’t remember, both Apple and Netflix were trading over $700 before they did a 7 for 1 split. Many small investors didn’t have enough capital to invest in these two stocks. In hind sight, I could have pick higher priced stocks like Amazon ($778.00), Google ($790.00) or Priceline($1501.00) but I didn’t currently feel very bullish on these stocks.

There are many stocks trading in the $200 to $300 range like Goldman Sachs, Biogen, Tesla and Chipotle where a bull call spread could be an alternative to a covered call strategy. To reduce trading costs, I would recommend call spreads that contain a minimum of buying 3 calls and selling 3 calls on the underlying stock.

If you are bullish, earnings season is just around the corner, a call spread strategy could boost your returns. Please note that call spread trading requires having a margin account and approval from your discount broker.

Disclaimer: This post is for discussion purposes only!

 

Dogs of the Dow: A winning strategy in 2016

The “Dogs of the Dow” strategy was popularized by Michael O’Higgins in his 1991 book “Beating the Dow.” The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average with the highest dividend yield. The investor would allocate an equal amount into each of these 10 stocks and hold them for the entire year. They are called investment “Dogs” because rising dividend yields tend to be a function of falling prices.

Typically, an investor would need to only rid about two to three stocks every year and replace them with different ones. The stocks are typically replaced because their dividend yields have fallen out of the top 10, or occasionally, because they have been removed from the DJIA altogether. The strategy’s simplicity is one of its most attractive attributes.

The premise of this investment style is that the Dow laggards, which are temporarily out-of-favor stocks, are still good companies because they are still included in the DJIA. Therefore, holding on to them is a smart idea, in theory. Once these companies rebound and the market has revalued them properly, you can sell them and replenish your portfolio with other good companies that are temporarily out of favor.

Companies in the Dow have historically been very stable companies that can weather any market decline with their solid balance sheets and strong fundamentals. Furthermore, because there is a committee perpetually tinkering with the DJIA’s components, you can rest assured that the DJIA is made up of good, solid companies.

The 2016 returns:

Dogs of the Dow = 16.1%

Dow Jones Industrials = 13.4%

S&P 500 = 9.5%

Here are some historical returns:

Investment	Symbol	2011	2012	2013	2014	2015		1 Year	3 Year	5 Year	10 Year	Since 2000
Dogs of the Dow	–	16.3%	9.9%	34.9%	10.8%	2.6%		2.6%	16.1%	14.9%	10.6%	7.9%
Dow Jones Industrials	–	8.4%	10.2%	29.7%	10.0%	0.2%		0.2%	13.3%	11.7%	9.1%	6.3%
S&P 500	–	2.1%	16.0%	32.4%	13.7%	1.4%		1.4%	15.8%	13.1%	9.1%	5.8%

Variations of the Dogs

Because of this strategy’s simplicity and its returns, many have tried to alter it in an attempt to refine it, making it both simpler and higher yielding. There is the Dow 5, which includes the five Dogs of the Dow that have the lowest per share price. Then there is the Dow 4, which includes the 4 highest priced stocks of the Dow 5.

A contrarian strategy of favoring the worst over the best doesn’t always work out, but it often does. Consider the worst-performing stock in the 30-member Dow Jones Industrial Average in 2015 was Wal-Mart. The retailer’s shares produced a dividend-adjusted loss of 26.6% in 2015 but was up 14.3% in 2016 including dividend. In contrast with Nike which had a big gain of 31.4% in 2015 but had loss of 17.4% in 2016!

The Dogs of the Dow for 2017

Symbol	Company	Price	Yield
	The Dow stocks ranked by yield	12/31/16	12/31/16
VZ	Verizon	53.38	4.33%
PFE	Pfizer	32.48	3.94%
CVX	Chevron	117.70	3.67%
BA	Boeing	155.68	3.65%
CSCO	Cisco Systems	30.22	3.44%
KO	Coca-Cola	41.46	3.38%
IBM	International Business Machines	165.99	3.37%
XOM	ExxonMobil	90.26	3.32%
CAT	Caterpillar	92.74	3.32%
MRK	Merck	58.87	3.19%

Dogs of the Dow strategy is not fool-proof

Dow Industrial Average is price-weighted but the Dogs of the Dow assumes equal weighting which can explain some performance differences over the long-term. Part of the outperformance can also be attributed to differences in overall dividend yields.

The Dogs of the Dow is a simple stock picking strategy and can be very effective over the long-term. Owning 10 of highest yielding stocks of the 30 Dow stocks which are out of favor with Wall Street gives the investor some downward protection and some extra income.

What do you think about “Dogs of the Dow?”

Disclaimer: This post is for discussion purposes only!