December 30, 2009: Retirement Portfolio Concepts For The Average Joe and Josephine

There are as many formulas for retirement planning as there are financial planners and talking heads. Here is my view, inspired in part from an article by two well known financial advisers.

This program is not designed for the sophisticated investor, but I have found that at times simplicity is divine. There are takeaways here for everyone.

The retiree will likely need to replace 100% of pre-retirement final salary income. Many retirees are finding that their expenses don't actually get lower in retirement.

Four big costs can almost guarantee rising aren't often on the average retiree's radar screen:

1. Inflation. Since 1992, Americans have been lucky. Inflation has not been an issue. The end is near for this period. As recently as 1990 America had 5% inflation, and double digit inflation was the norm in the 1970s-80s. A few percentage points difference in the inflation rate can have a huge impact on how long your savings last.

2. A Longer Life. The average life expectancy is rising. That's good. But, many people haven't factored that into their retirement planning. It's not unreasonable to live thirty or more years after officially retiring.

3. Health Care. Health care costs have tripled since 2001. Despite government's efforts at health care reform, costs will continue to rise, whether as insurance premiums or taxes to pay for the largess associated with practically every government-run program.

4. Taxes. Government cannot keep printing money and borrowing against itself at a rate of close to 0% interest forever. There are already scores of state and local taxes being levied, Fees are being increased for essential services and licenses. Federal tax rates are going up for the gainfully employed.One can only imagine what type of "revenue enhancement" scheme will be floated next.

Retirement poorly planned is failure. Here are a few investment ideas and tactics to assist towards tilting the odds in one's favor to enjoy the golden years.

1. Social Security. It may or may not happen in total. Right now, the average retiree receives approximately 39% of their income from social security. Apply for benefits at the right time and maximize the abundant gifts government provides within this program.

2. Manage expenses. Pay off your mortgage and other financial obligations. Don't retire with an overhang of debt. The retiree will still have fixed expenses such as insurance, utilities, property and other taxes, maintenance and repairs. These costs will rise, not decrease, in retirement.

3. Lifestyle. Entertainment, transportation and travel costs will likely increase in retirement. There is nothing wrong with enjoying a full and active lifestyle, but you need to account for higher expenditures in this area. Few want to be reclusive, living a hermit-like existence caused in large part by poor money management.

4. Inflation. Already discussed.

5. Rate Of Return on Investments. How many average people do you know whom have earned 10%/year over the past twenty years in the stock market? Plan on earning 6-8%annual return with conservative investments, factored for inflation.

6. Move to a temperate climate,avoiding extreme seasonal utility bills and high property taxes. There are plenty of "halfbacks" in North and South Carolina. Halfbacks are northeasterners who moved to the far South, became frustrated for one reason or another, and moved, literally "halfway back" to their original locale.

Some investment ideas:

1. The obvious ones are to educate yourself early and continue to educate yourself as a lifelong strategy, live within your means,save at least 20% of your net income, invest regularly and holistically within your comfort zone, choose your mate wisely,avoid divorce and take care of your mental and physical health.

2. Don't try to be too smart by half with your investment decisions. For most, that means to keep it simple using the magic of compounding interest and index ETFs. Divide your retirement pay (sans social security and/or a defined benefit pension)into five categories. For simplicity, here is a 20x5 approach (five categories with twenty-per cent investment monies in each).

1. Open up a U.S Treasury Direct account,purchase six month t-bills and roll them over upon maturity. This gives you protection (laddering effect) as inflation ebbs and flows.

2. Open an on-line brokerage account. Scottrade is easy and cheap to use. Others as fine, too. Purchase Vanguard's Total World Stock Market ETF (VT).

3. Purchase Barclays SPDR Capital Convertible Bond Fund ETF (CWB) and iShares' iBoxx Investment Grade Index ETF (LQD) in equal share.

4. Purchase iShares' MSCI Emerging Market ETF(EEM)and PowerShares' DB Commodity Trading Index ETF (DBC) in equal share.

5. Purchase iShares' International Dividend Fund (IDV) and iShares' US Select Dividend Fund (DVY) in equal share.

Rebalance this portfolio every six months. Maximize your tax-advantaged accounts (although tax rates rates may be so high in the future that some of these type of strategies may be neutered). For those with the correct temperament, rental real estate offers outstanding income potential and tax advantages, which would be used to augment the above retirement strategy.

One additional, and vital point. I believe that pure retirement is becoming a rare event. You will most likely morph into a different type of job or career upon your initial "retirement". Educate and further prepare yourself for obtaining a job you love when that time arrives. Or, don't retire at all. Playing golf while hearing about your foursome's health problems and is not exactly living halfway to heaven.

December 26, 2009: Are You Ready To Yield?

For 2010, I believe that we will experience one of those years where the markets move sideways. Certainly there will be individual security and sector exceptions, but this article will focus upon a few random investment-worthy securities that you may wish to consider to obtain a high yield.

Here they are:

Alpine Global Dynamic Dividend Fund (AGD). Slaughtered in 2008 through most of 2009, this CEF appears back on its feet and presents an excellent monthly distribution with capital gain potential. AGD is also a modest hedge against a weak greenback. Trading at $10.15 with a market cap of $240m, AGD holds approximately 45% in U.S. securities and 55% in ROW. The fund at present pays a 13% yield.

Petroleum and Resources Corporation, a CEF, has been producing yield and total return since 1934. PEO fails to make headlines and talking head touts, but this well-run, conservative ETF annually throws out a total distribution between 7-12%. Trading at $24.02, PEO has a $570.4m market cap. It is presently trading at an almost 12% discount, so this may be a great time to consider PEO for your 2010 portfolio.

Barclays Convertible/SPDR Bond ETF (CWB). This ETF deserves more respect. This ETF tracks the >$500m Barclays U.S. Cnvertible Bond Index. CWB trades at $38.23 with a market cap of $237m. I like the holdings in this ETF, which may provide modest capital appreciation in addition to the nice yield, which is 5.67%.

IShares Preferred Stock Index ETF (PFF) tracks the S&P Preferred Stock Index. Trading at $36.85 this $3.1b fund yields 8.72%. It is by nature heavy into financials, but I do not believe that the integrity of PFF or its juicy yield are threatened. This is my favorite preferred ETF amongst the several available.

IShares iBoxx Corporate Grade Bond ETF (LQD) follows the iBOXX Liquid Investment Grade Index. Trading at $104.57, this $12.9b market cap ETF yields 5.24%. LQD is wildly popular, but there is a risk due to the lower investment grade ratings of holdings. That said, diversification and size does make this concern a small one.

I enjoy the hunt for juicy hybrid preferred stocks. Although some of the characteristics can be complex, if successfully researched, one can find high yields that appear to be mispriced based upon the underlying asset mix. A few examples:

Archer Daniels Midland 6.25% (ADMpfA) trades at $43.65 and yields 7.16%. Par is $50.00 if it is called.

Bank of America Preferrred Series J (BACpfJ) trades at $22.32 and yields 8.12%. Par is $25.00 if it is called.

National City Bank 6.625% (NCCpfA) trades at $22.29 and yields 7.43%. Par is $25.00 if it is called.

I do not want to create the impression that one should only invest for yield. Commodity ETFs such as DBC, foreign bond ETFs such s BWX, inflation-protected security ETFs such as TIP and a dose of precious metals and wisely purchased real estate should tendered as a portion of the well-rounded portfolio.

The author will not take an additional position, if any, on the above securities for seven trading days beginning December 26th, 2009.

December 24, 2009: Be Thankful

As we begin to close out 2009, and celebrate Christmas, why not take a few quiet moments and give thanks for the things that make your life worth living. As one becomes older, it is easy to become a cynic. It is easy to find the bad, or the "what-ifs" in life. Envy may take hold. But for what? Do we realise how good we actually have it compared to so many others.

Two day ago I received a cheerful Christmas card from an old neighborhood friend close to Chicago. She is in her mid-40s. She lost her first husband to a prescription drug interaction twenty years ago. She lost her job at the community college after 24 years and nine months, in realty, because she did not speak fluent Spanish. Yet, she was positive with a ready smile and always willing to help the neighbors.

Her hand-written note was inquiring about my family, how my mother (her old neighbor) was doing at age 100, and other family-centered things. Then she casually mentioned that her father was killed in a head-on car accident in Wisconsin in October. Her mother only recently was released from the hospital and lives alone. Two weeks after her father's death, she was diagnosed with breast cancer and is presently undergoing chemotherapy - which is pretty expensive since her health insurance was cancelled. It has spread to her lymph nodes.

Yet, she is celebrating Christmas, with two close friends and her cat, and mentioned that she looked forward towards seeing me next time I entered Chicago. Always positive and optimistic.

Measure that against monetary losses, or being mad about trivial things.

Be thankful at Christmas. And approach the New Year with confidence.

December 19,2009: Ares Capital, 11.8% + Astute Management = A Winning Combination

For investors who are looking for a high dividend with upside potential for superior growth, Ares Capital Corporation (ARCC) may well fulfill that hope.

ARCC is a closed-end, non-diversified finance company called a Business Development Company (or, BDC). Ares Capital went public in 2004 with proceeds of $140m. It now has approximately $30b of committed capital. This company, with offices in Los Angeles, New York, London, Chicago, Atlanta, Paris Stockholm and Frankfurt has the global reach and seasoned managerial expertise to spot under performing assets and acquire them or provide financing and other services when the price is right. ARCC's most recent deal was taking possession of Allied Capital, once a behemoth in real estate areas which had fallen on hard times. The smart money says Ares got a great deal in buying Allied Capital for less than $4.00 per share.

Ares also provides a one-stop solution to meet the distinct and underserved financing needs of private middle market companies across diverse industries. With traditional banks squeezing these type entities, Ares is there to assist deserving companies finance necessary operations. Being a patient, long-term investor with permanent capital, Ares has developed a reputation for flexibility, a willingness to hold large positions, and the ability to offer sponsors and management teams to increase the chances of a mutually successful relationship.

ARCC runs many Limited Liability Corporations under their corporate umbrella. Ivy Hill Middle Market Credit Fund, Ivy Hill Asset Management Company and Ares Capital Management Company are but a few. The asset balance is diverse and not widely susceptible to a sector contagion. The overall quality of assets appear lower investment-grade, as the company has a S&P BBB rating. I have looked at a few of the deals, and they appear to have excellent collateral and other guarantees cooked into them. That said, do not confuse my document skimming with a thorough analysis.

Trading at $11.89 per share, ARCC sports an 11.80% dividend and trades a hefty volume for liquidity. Technical trends for this $1.3b market cap company are strong, overall.

In short, Ares Capital should be on investors' short list of worthwhile inclusions as they look for growth and income clout for their 2010 portfolios.


The author does not hold a position in ARCC at this writing.

December 15, 2009: My Favorite Author, Paul Johnson

In a world of blogs, twitter, 24 hour news cycles and instant analysis, it is a welcome respite to indulge intellectual curiosity through a great book penned by a master author. My favorite author is Paul Johnson.

Paul Johnson has kept me engaged in history through a dense, yet superbly entertaining and engaging style. A one-time socialist turned realist, this 81-year old English Catholic craftsman has published books that are richly researched on a variety of topics that only a pure genius could entertain.

Known as an historian, Paul Johnson's works ranges over the millennia and practically the entire gamut of human activities. He is not a prolific author, but every few years concocts a brilliant book. I can imagine his intellectual wheels turning and a smile appear on his noble face when he decides to write. All of his books have opened my eyes to little-known facts and anecdotal situations that had a profound impact upon the subject being parsed. Even if I was not especially keen on the subject, Paul Johnson's style MADE me gain interest. I have enjoyed his monthly feature in Forbes magazine for years.

I recently finished reading his 2008 book, "Heroes". This three hundred page masterpiece visit such diverse personages as Henry V, George Washington, Emily Dickinson, Abraham Lincoln, Robert E. Lee, Marilyn Monroe, Margaret Thatcher, Ronald Reagan and Pope John Paul II. The Washington Post Book World had it right when the reviewer stated, "It is Johnson's gift that he can make his subjects human and fallible enough that we would, indeed, recognize them instantly, while also illuminating what made them heroes."

Most, if not all of Johnson's works are available in paperback. www.amazon.com. is a good source. I recommend all of his books. Here are my favorites:

A History of the American People
The Birth of the Modern Era - a lengthy, colorful look at the world from 1800-1830.
Intellectuals - my favorite, which strips the veneer from history's most self-righteous leftists.
Modern Times - the 20th century
A History Of Christianity - written in the mid-1970s, this is his most detailed, dense and solemn book.
Napoleon - a pocket biography
Washington - a pocket biography
Art: A New History - absolutely fascinating read on a subject that had little interest to me, until I read the book.

There are others, and I hope Johnson continues to write as long as he as able.

Paul Johnson has stepped into criticism for some of his views and stands, but that makes his works even more interesting, as he backs up with facts everything he presents, oftentimes with the best English wit. He has made some enemies along the way.

His comment on history: "The study of history is a powerful antidote to contemporary arrogance.

Read Paul Johnson, and be entertained and informed.

December 13, 2009: Fifteen Dividend Ideas For The Gift That Keeps On Giving

Dividends are important to many investors. They are important to me, more so than years ago when I was happy with only growth. Instead of being satisfied with dividend yields of companies that are raised by a pittance and lowly corporate and government bond rates, I believe that investors serious about seeking higher yields need to be a bit more creative using securities that are not generally on the radar of retail investors to achieve meaningful dividends and interest.

Some ETFs provide higher yields with safety. Certainly, preferred stock ETFs such as PowerShares Financial Preferred Stock (PGF), PowerShares Preferred Stock (PGX) and iShares' U.S. Preferred Stock Index (PFF) are worthy for consideration within an income-oriented portfolio.

One asset class that is seldom discussed is a preferred security called a trust preferred, which is a listed entity brought to market by major companies. The trust preferred is a hybrid security consisting of a preferred stock issued by a trust and a debt security issued by the company. The trust is a subsidiary of the company set up solely for the purpose of selling and administering the preferred trust.

Companies issue this debt because the interest (dividend) paid on a preferred trust share is deductible from corporate income taxes, whereas normal dividends are not. Trust preferreds are subject to redemption at the company's option, so buying a solid company trust preferred at a discount from the redemption price is wise. It creates the ability to gain from the appreciation of the security as well as the quarterly payout.

The history of payment on trust preferred securities as far as I know has been excellent, so long as the company does not crash. The roster of trust preferred securities is long, and the vagaries of the market appear to have mispriced a number of them. If receiving 6.5-9% on a security is of interest, take note of the following examples to initiate your search. I have included the cusip numbers since these liquid securities may be hard to find with online brokerage searches. Quantumonline has all you need to know regarding these and many other trust preferred securities:

BAC Capital Trust I, 7.00 (cusip 055187207) $21.91
BAC Capital Trust II, 7.00% (cusip 055188205) $21.80
Deutsche Bank Capital Trust V, 8.05% (cusip 25150L108) $24.90
Fifth Third Bank Capital Trust VII, 8.875% (cusip 316780204) $24.37
HECO Capital Trust III, 6.50% (cusip 404156200) $24.20
J P Morgan Capital Trust XI, 5.875% (cusip 46626V207) $21.57
J P Morgan Capital Trust XII, 6.25% (cusip 46626X203) $23.80
KeyCorp Capital Trust X, 8.00% (cusip 49327R103) $22.00
MBNA Capital D TRUPS, 8.125% (cusip 55266J200), $24.17
Merrill Lynch Capital Trust III, 7.375% (cusip 59025D207), $21.66

All of the above have a $25.00 call.

Master Limited Partnerships are tax advantaged vehicles that provide a steady income stream that is usually enhanced each fiscal year. Although there is a downside element to these securities due stock price fluctuation, I believe the following five are solid enough to warrant examination for income with modest price appreciation.

Teekay Offshore Partners (TOO) $17.60/share, 10.35% yield
Enbridge Energy Partners (EEP) $50.65/share, 8.5% yield
Regency Energy Partners (RGNC) $19.10/share, 10.3% yield
Energy Transfer Partners (ETP) $43.87/share, 8.16% yield
Suburban Propane Partners (SPH)$45.45/share, 7.40% yield

Investing for income is noble. To reap high dividends and/or interest by investing in carefully researched securities via preferred trusts and MLP's is divine.

The author holds positions in three of the mentioned securities.

December 3, 2009: Prestige Brands On The Move

Occasionally, I find a stock worth mentioning as an interesting speculation. Such is Prestige Brands (PBH).

Ever see Clear Eyes, Murine, Compound W, New Skin, Dermoplast, Freeze Off, Pergogisic, Compoz, Comet cleanser, Choir Boy, Spic and Span, Cutex on your merchant's shwlves? These are but some of the product brands under the PBH umbrella which market to the entire United States, Canada and elsewhere to a degree.

Prestige Brands has underperformed and has not been viewed with love and respect by the analysts following the stock. That is beginning to change now that new CEO Matthew Mannelly, who began his tenure in September, is having his expertise realised. His successful past experience includes highly successful brand exploitation with Cannondale, Nike, Quaker Oats, Gatorade and a stint with the US Olympic Committee. The new CEO appears to be ideal for this company.

Mannelly has instituted a staff reduction program of 10% (a $2 million dollar reduction to start) and in late October jettisoned the Prell and Denorex shampoo brands to concentrate on other, more promising brand sectors and strategic acquisitions. This CEO is setting the stage for a company turnaround. The Board of Directors is also undergoing changes to accommodate the aggressive brand management style of Mr. Mannelly. He is hitting the ground running.

Presently trading around $7.25/share, the $361.7m company has had a fifty-two week trading range of $3.92-10.78. It does not pay a dividend, but that may change. Interestingly, institutional ownership has risen to 82%.

Investors should note that by acquiring brand names, Prestige Brands does not inherit high-cost production costs. PBH outsources all of their brands to low-cost plants.

Very recently, a couple of analysts have recognized the internal dynamics that speak to a turnaround from a substantial loss and under performance the past several quarters and have blessed the stock.

PBH has popped a bit lately, but my opinion is that this stock is ripe for accumulation around the $7.00 range.


The author initiated a position recently in PBH.