Anytime You Learn Something, Ask Questions
Careful and thoughtful readers ask great questions. One such question came from someone who sends me a message from time-to-time. I always appreciate his questions, because he is taking what he is learning and seeing how the knowledge might be applied to his own situation. Let’s face it, just because something works for me doesn’t mean it is right for every one of my readers.
A Reader’s Observation
He staged his thinking this way: “I have seen quite a few posts/blogs about dividend investing. You also have VYM, DGRO and SCHD ETFs in your accounts according to your blogs. I was reviewing a few stock purchases such as ABBV, EMR, JNJ, JPM, KO, PEP LMT, MCD, MMM, NEE, PEP, RTX,TXN. Upon review of VYM holdings, most, if not all are in VYM holdings.”
He then asks his question
“Thus a question for you: Are there any reasons to hold individual stocks? just hold SCHD, VYM , DGRO or VIG and possibly DVY … earn approx. 3% dividend (similar to holding individual stocks) . This way one should have to keep track of ETFs rather than individual stocks! What are your thoughts?”
First of all, this is a great question. It tells me a couple of things. 1) He has looked at some individual stocks I have mentioned in various posts and 2) then he dug deeper into the holdings of the ETFs I recommend for dividend growth investing. There is no one-size-fits-all answer. However, it might help you, my reader, to understand why I use both ETFs and stocks in my investing strategy. (When I say “ETF” I also include mutual funds that have low expense ratios.)
The Audience Matters
Most of the time when I help individuals who don’t want to think about managing a portfolio of individual stocks, I encourage them to pick four-to-six low-cost index funds or ETFs like the ones I typically mention. If you want to keep it simple, then don’t buy stocks unless you have a couple of favorites that you want to own.
At one time I had about 300 different stocks in my portfolio. For the average person, and even for some more advanced investors, that is viewed as too many. I did not struggle with having so many, but I decided to gradually reduce my individual holdings and take the proceeds and add to my VYM and SCHD investments. It also gave me an opportunity to increase my investment in some stocks that I particularly like. As I get older, I don’t want my investments to be too complicated. Also, my wife Cindie would not want to manage or think about so many different investments. She wouldn’t really have to do much when I die, as I don’t think my approach requires too much ongoing maintenance. I’ve told her and our son and daughter that they can just let it ride and make minor changes as the years unfold.
Reasons for Both
There are some strategic reasons to own both ETFs and stocks. The reasons are increased buy/sell flexibility and an opportunity to sell portions of an investment or an entire stock investment at a profit. Fund managers don’t let you vote on the stocks they are buying or selling, so you have to take what they do and live with it. I don’t sell my ETF shares, because they are earning income and they keep me very diversified. Stocks are a different animal.
I am now down to about 185 holdings in our six accounts, but only about 134 unique positions. So, for example, I own shares of PFE in four accounts. Here are some reasons I want to hold both ETFs and stocks.
1. Capital Gains: Some positions appreciate very rapidly, much faster than an ETF can or will, and that gives me an opportunity to sell all or some of a position when I believe it is overvalued. That isn’t my approach with ETFs. A recent example is my 100 shares of SCHW. See item number six.
2. REITS: I like having a mix of REITs in my portfolio, and I have yet to find a Real Estate ETF that picks the best of the REITs based on my criteria. The REIT-focused ETFs are OK, but they don’t have the focus I want. I also like to use REITNOTES to find the ReitRating™ score. You cannot do that with an ETF. Some of them, like “O” pay monthly dividends. I also like LTC, MPW, and STAG.
3. BDC’s: There are ETFs that have a BDC focus, and the ones I have found fall short. I have a significant investment in BDCs. This is a wonderful stream of monthly income. Some examples are GAIN, MAIN and LAND.
4. Utilities are one area where I can simplify some more. But I probably wouldn’t buy a utility ETF. I would more likely sell a couple of utilities and focus on 2-3 of the ones I want to own for the dividends. Why buy a mix of good and bad utilities with a sector fund? Well, it is easier.
5. Monthly Dividends: ETFs tend to pay dividends quarterly. I like the flexibility of having dividend income every month. My lowest dividend month is about $7,000 and the highest is about $13,000. Of course, this bounces up and down, but my average month of dividend income is $9,700. This then provides cash for major purchases, for giving, and for other things not in the basic family budget. When the cash isn’t needed, it makes it possible for me to invest in any given month. That proved helpful in March and April of this year.
6. Covered Calls: I want to be able to make income by selling covered calls on some of my positions. This can be a great way to lock in profits and get some extra one-time income before you do. So far this month I have sold a covered call on my shares of SCHW, resulting in over $130 of pure profit.
A pure ETF approach is perfect for the investor who doesn’t want to think about or research more complicated investments. I like to tailor my holdings a bit more and gain the potential advantage of some opportunistic selling or buying.
The key reasons I want to hold some stocks in addition to ETFs are: Profit-taking opportunities; more flexibility and focus for REITs, BDCs and utility stocks; the ability to have monthly income; and the opportunity to sell covered calls for income.