Dividend ETF Comparison: Total Market vs. High Dividend vs. Steady Dividend Growth

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After my post on mailbox money last week, I did some poking around comparing different dividend-focused ETFs. Specifically, the idea of focusing on companies with a steadily growing dividend, not a high dividend yield. Here are three different ways that you could buy an ETF and live off the dividends:

  • Vanguard Total Market ETF (). The CRSP US Total Market Index includes ALL of the US companies in proportion to their size (market cap). SEC yield was 1.83% as of 4/30/19.
  • Vanguard High Dividend Yield ETF (). The FTSE High Dividend Yield Index screens for companies with high dividend yields. SEC yield was 3.25% as of 4/30/19.
  • Vanguard Dividend Appreciation ETF (). The NASDAQ US Dividend Achievers Select Index screens for companies with at least ten consecutive years of increasing annual regular dividend payments. SEC yield was 1.86% as of 4/30/19.

We see that buying the high-dividend ETF would definitely get you bigger quarterly dividends upfront. But what about total return (share price appreciation + reinvested dividends)? We don’t know the future, but let’s see how things worked out through the Great Recession. Both of the dividend ETFs started in 2006, so here is what would have happened to $10,000 invested in each of the ETFs as of January 1st, 2007. I used for this.

Here are two main takeaways:

  • At the depths of the crash in early 2008, the high-dividend ETF (VYM) suffered the worst drawdown, while the steady dividend ETF (VIG) had the mildest drawdown. Your $10,000 would have gone down to $5,175 with VYM, $5,564 with VTI/VTSAX, and $6,400 with VIG.
  • The total return numbers are relatively similar over the long run. Right now, the steady dividend ETF (VIG) is even leading slightly. As of 5/18/2019, your final values for the $10,000 invested in 1/1/2007 are $24,267 with VYM, $26,610 with VTI/VTSAX, and $26,831 with VIG.

What about consistency of dividends? One of the difficult things about retirement investing is that while the price of things can vary, most people like the idea of a steady income. We can look back and see if the steady dividend ETF really delivered even through the 2008 Great Recession. Here’s are the quarterly dividends from 2007 to 2018 for both the Vanguard High Dividend Yield ETF (VYM) and Vanguard Dividend Appreciation ETF (VIG):

The Vanguard Dividend Appreciation ETF (VIG) did provide a much more steady “paycheck” through 2008 and 2009 than the Vanguard High Dividend Yield ETF (VYM). If you relied on this money to pay your monthly bills, a steady dividend that didn’t drop with the overall stock market would be greatly appreciated.

Bottom line. Simply buying stocks with high dividends is not the solution to all your problems, as that high dividend may drop significantly during a bear market. In this historical comparison, the steady dividend method worked out pretty well. Since 2007, you got a lower drawdown during the bear market, solid long-term returns, AND a steady dividend check throughout. The future may not turn out the same way, but it’s definitely something to research further. One might even accept a little bit less total return for a more reliable stream of income.

Disclosures: I own VTI, aka the entire haystack. I don’t own VIG or VYM.

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Mailbox Money in Retirement: Social Security, Pensions/Annuities, Bond Interest, and Stock Dividends

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I am always curious about the nitty-gritty details of how real-world financial planners guide their clients. has shared some unique insights on their website, including the topic of creating retirement income in :

Financial Freedom occurs when multiple streams of income exceed all expenses (needs and wants), and can last until the age of 100.

They call this “mailbox money” – stable sources of income that show up reliably and automatically at predictable intervals. Here are four different streams of income that they include:

Social Security: Optimize to best navigate hundreds of claiming rules
Pension: Either corporate pension or a personal pension
Municipal & Treasury Bonds: Safest most liquid form of mailbox money
Dividends: Inflation beating mailbox money

You’ll note that there is no mention of “safe withdrawal rates”, where you keep taking out some percentage because it has worked out historically 95% or 99% of the time (but you still check your statements nervously if the value goes down).

Let’s take a closer look at these four sources of retirement income.

Social Security. Social Security benefits are paid monthly, and it increases with inflation each year for the rest of your life (backed by the US government, so safer than an insurance company). In addition, you can delay claiming up to age 70, which increases your monthly payment (and thus all future payments). This means you can effectively “buy” a bigger inflation-adjusted annuity by spending down your personal savings for the years that you are delaying Social Security. Smart people have done the math and shown it’s a good deal relative to private annuities.

(It can be even more complex than this, especially for couples with different incomes and ages. There are paid services devoted to optimizing your Social Security benefit.)

Pension and/or annuities. Whether through a corporation, government, municipality, or private insurer, these are all sources of monthly income that will last for life. Some adjust with inflation, some don’t. Some have full joint survivorship benefits, some are limited. There is still some risk if you have a flat payout, as the purchasing power will decrease over time as inflation eats away at it.

You can create your own pension using immediate annuities from a private insurance company. For a male/female couple that are both 65, a recent sample quote showed a 5.74% payout rate. That means a $1 million lump-sum payment would pay out $57,400 per year for as long as one of you are alive. However, this also means that your heirs get nothing from that lump sum.

Municipal and Treasury bonds. They stick with the safest bonds, which means US Treasury bonds and AAA-rated municipal bonds. They don’t like any mutual funds or ETFs, so they buy individual issues.

I am partial to the idea of sticking with the safest bonds available. I don’t want to take risk with bonds either. However, I prefer the diversification and convenience benefits of low-cost Vanguard Treasury bonds and/or muni bond funds over individual holdings, especially if you are a DIY investor and don’t want to manage that additional complexity (or keep paying an advisor to manage that complexity).

The average 10-year Treasury yield is now under 2.5%. That’s roughly $25,000 per year on $1 million invested. Individual Treasury bonds pay out interest semi-annually, although mutual funds can pay out more often. If you choose to spend all the interest as “mailbox money”, then your monthly purchasing power will also probably decrease slowly over time due to inflation.

Dividends. They like to take the dividends from individual stock holdings picked from high-quality companies. They use the Dividend Aristocrats list as an example, which are companies that have grown dividends for at least 25 consecutive years. (I prefer to bank the dividends from low-cost Vanguard funds.)

I believe that dividend investing has a behavioral advantage if an investor can focus on the income showing up and then allow themselves to ignore swings in the share price. The only way to realize the higher total returns of stocks is to hold on during the downturns. (I would concede that the future total return of Dividend Aristocrats might be lower than the S&P 500. The question is whether the greater peace of mind is worth any difference?)

If you take the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and add back in the 0.35% expense ratio (because you self-manage), the dividend yield is currently 2.5%. That’s roughly $25,000 per year on $1 million invested. The good news is that this form of mailbox money should increase faster than inflation over time.

I think it is helpful to visualize all of these different options when planning out your own retirement income plan. How much of your personal savings do you put towards delaying and thus increasing your Social Security benefit? Creating a bigger steady annuity paycheck but with no estate leftover? Creating a smaller paycheck with bonds but with high safety and full liquidity? Creating a smaller paycheck with dividends but with higher future growth? I also like the idea that each of these streams are designed to minimize the stress from reading news headlines. Definitely food for thought.

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Berkshire Hathaway Post-Shareholder Meeting CNBC Interview 2019 Full Video, Full Transcript (Buffett, Munger, and Gates)

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On the Monday after the recent Berkshire Hathaway shareholder meeting, Becky Quick of CNBC did another 2-hour interview with Warren Buffett, Charlie Munger, and Bill Gates. CNBC has thankfully posted the along with a .

As usual, I like things directly from the source, so I watched the entire thing. Here are my notes that deal with investing:

Warren Buffet-style value investing distilled. You start out by picking a good business first. Then, you pay attention to the price. If the price is good, you buy. If the price is not attractive, you don’t. You can’t predict the mood of Mr. Market, he may be depressed or manic. (If it’s not a good business, then skip it no matter the price.)

But we watch the prices of things we do more than current events. Because in the end– we aren’t buyin’ ‘em because what’s gonna happen next month or next quarter. You know,we’re really buying ’em because we think they’ll be good businesses ten years from now. If somebody came to us with a good business today, we’d buy it. And we’d buy it regardless of what’s going on in the tariff situation. We might this wouldn’t be the case. But you might– we’re more likely perhaps to get something when other people are– fearful. You see that in a big way instantly in the market, you know, in the market for businesses. It’s– but it’s–still there in people’s minds.

On share buybacks and Apple. Share repurchases, or buybacks, are when a company buys its own shares outstanding. People argue about how this is “good” or “bad”, when really it’s all just rather pointless.

Repurchases can be the dumbest thing in the world or the smartest thing in the world. and I’ve seen both but they’re just — repurchases by the company are just like purchases to us, they’re dumb a one price and smart at another price. And I like it when companies — I like it when we’re invested in companies where they understand that. Many companies just repurchase and repurchase, you know, it’s the thing to do, and they’re encouraged to by some shareholders and by their brokers. Repurchases can be dumb. They can be smart. At Apple, they’ve been smart.

Berkshire has never bought at stock at IPO. Here’s a simple thought model that shows why buying a new-issue stock on IPO is nothing to get excited about.

WARREN BUFFETT: Well, because I looked at it, I really don’t want to discuss Uber. And I don’t have any special feelings about it than any other coming to market. But I would say that in 54 years — well, I don’t think Berkshire’s ever going to – I mean, the idea of saying the best place in the world I can put my money is something where all of the selling incentives are there, commissions are higher, you know, the animal spirits are rising. I mean, that’s going to be better than 1,000 other things I can buy where there is no similar selling enthusiasm and the desire to get the deal done on extra commissions. That’s the single best thing to buy on a given day. I mean, it’s –

CHARLIE MUNGER: And I can’t think of a time we’ve ever done it.

WARREN BUFFETT: Yeah.

BECKY QUICK: Ever bought an IPO.

CHARLIE MUNGER: Yeah. Never will.

When asked about a book recommendation, Buffett said by Melinda Gates. There are some other practical observations about topics like politics and healthcare, if that floats your boat.

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Callan Periodic Table of Investment Returns 2019

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One of the harder things about investing is buying an investment that has been performing poorly. How many people are getting media attention for pushing the idea of diversification in international stocks right now? None. I mean, some folks are talking about it, but nobody is getting any media attention. It’s not “trending” because nobody’s interested. US stocks have been smoking European and Japanese stocks for a while.

Even if something is a good long-term investment, the short-term ride can be very bumpy. Callan Associates updates a “periodic table” annually with the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one at their website . The best performing asset class is listed at the top, and it sorts downward until you have the worst performing asset. Here is the most recent snapshot of 1999-2018:

The Callan Periodic Table of Investment Returns conveys the strong case for diversification across asset classes (stocks vs. bonds), investment styles (growth vs. value), capitalizations (large vs. small), and equity markets (U.S. vs. non-U.S.). The Table highlights the uncertainty inherent in all capital markets. Rankings change every year. Also noteworthy is the difference between absolute and relative performance, as returns for the top-performing asset class span a wide range over the past 20 years.

I find it easiest to focus on a specific Asset Class (Color) and then visually noting how its relative performance bounces around. In last year’s update, I noted that Emerging Markets (Orange) and MSCI World ex-US (Light Grey) had bounced back to the top. Of course, by the time 2018 ended, they were right back to the bottom again.

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Charlie Munger: Financially Independent at Age 38 in 1962

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Despite the fresh packaging, we should remember that the “FIRE” concept (Financially Independent, Retire Early) is anything but a new concept. Even I can’t help being a little intrigued by the clickbait title “This Secret Trick Let This Couple Retire at 38”. Such an article could have been written about the 95-year-old Charlie Munger before he started investing alongside Warren Buffett:

The first 13 years I practiced law, my income [from practicing law] was $300,000 total. At the end of that 13 years, what did I have? A house. Two cars. And $300,000 of liquid assets. Everyone else’d have spent that slender income, not invested it shrewdly, and so forth.

I just think it was, to me, it was as natural as breathing, and of course I knew how compound interest worked! I knew when I saved $10 I was really saving $100 or $1,000 [because of the future growth of the $10], and it just took a little wait. And when I quit law practice it was because I wanted to work for myself instead of my clients, because I knew I could do better than they did.

Net worth analysis. According to his Wikipedia bio, the 95-year-old Munger graduated from law school in 1948. Let’s say he practiced law from 1949 to 1962. At the end of those 13 years, he states that he had $300,000 in liquid assets, a house, and two cars. The median value for a Los Angeles area house in 1962 was about $15,000. The median cost of a new car in 1962 was about $3,000. Adding this all up means his net worth in 1962 was about $321,000.

That was a significant amount of money in 1962. According this , that is the equivalent of $2.7 million in 2019 dollars. In other words, the Munger household was financially independent when he was 38 years old.

Income analysis. He also states that in those 13 years as a lawyer, he made $300,000 total. For the sake of simplicity, let’s just say he earned the same income every year. That works out to $23,000 per year. This was a relatively high income – $193,000 per year in 2019 dollars. According to this source, the was $6,000 per year. That means he was earning about four times the median average household income.

Super-saver, super-investor, or a little of both? Maybe he shared this somewhere else, but I don’t know his saving rate or his investment return. He does boast of both not spending all that “slender” income and also about investing it “shrewdly”. We have his annual income and his final ending net worth, so you can set one and figure out the other using a compound return formula. I’m assuming everything is after-tax for simplicity again.

  • Let’s say he was a super-saver with a 50% saving rate. That means he saved $11,500 every year and invested it for 13 years. That would work out to an 10.5% annual compounded rate of return.
  • Let’s say he was a super-investor with a 20% annual compounded rate of return. That would work out to an annual savings of $5,500 per year, or a 24% savings rate.

I found that the annualized return of the S&P 500 index from January 1949 to January 1962 was about 18% when you include dividends (). Thus, my guess is that he was somewhere between these two markers: 50% savings rate/10.5% annual investment return and 24% savings rate/20% annual investment return. These stats are definitely admirable and impressive, but also show that he didn’t hit the lottery or anything crazy.

Munger’s example reaffirms that if you have a relatively high income, save a high percentage of that income, AND invest that money into productive assets, your net worth will grow quite quickly.

A criticism of financial independence seekers is that it is pitched to “everyone” but only works for the rich. It is absolutely true that it is the easiest for high-income earners. How could it be any other way? At the same time, there are many households that earn high incomes that spend 95%+ of it every year. If these folks realize they have financial independence within their grasp, and then change their behavior to achieve it, I still view that as a positive thing. It’s always hard to spend less than the people you hang around with.

In our case, we both eventually earned six-figures, but not the entire time. When we earned a combined $60,000 a year, we lived on $30,000. When we earned a combined $100,000, we lived on $50,000 per year. When we earned $200,000, we lived on under $100,000. Would we have been able to maintain the 50% savings rate on a $60,000 income for 15 years? I’ll never know. I know it would have been much more difficult, and I’m glad we didn’t have to try. I’m also glad we started when we were young and without kids.

Managing expenses (frugality) alone will not get you there, but I still believe it is an important factor once you get your income to a certain level. I would argue that a household earning $100,000 and spending $50,000 per year is much better off in the long run than a household earning $150,000 and spending $125,000 or even $100,000 per year. Now, if someone is making minimum wage, it will be hard to have a lot left over to invest. Your efforts would be best focused on the income side of the equation.

Bottom line. Charlie Munger was born in 1924 and reached financial independence at age 38 from his earnings as a lawyer (before he became partners with Warren Buffet). While he is now best known as a billionaire investor, he took a familiar path to financial independence: solid 9-5 income, consistently high saving rate, and prudent investment of the difference. The same formula he started using in 1949 remains available 70 years later to someone starting in 2019.

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Immediate Annuities vs. Safe Withdrawal Rates

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Annuities have a rather mixed reputation, which I think is mostly deserved. Some are amazingly complex and expensive (the word “Indexed” can be bad in this world). Then there are simple, straightforward ones that are worth consideration, including single premium immediate annuities (SPIA). The most basic version lets you convert a lump-sum payment into a regular stream of income payments that is guaranteed and doesn’t ever vary, period.

Michael Edesess has an article . The article is on a site meant for financial advisors, so it’s got a lot of jargon inside. However, I do like that it provided some hard numbers to consider.

Here are current market rates:

In other words, a 65-year-old male hands over $100,000 and will get $6,720 per year ($560 per month), every year, for the rest of his life. Putting up $1,000,000 will get you $67,200 per year ($5,600 per month). Whether he lives to 68 or 108, he will end up with zero dollars. A female would get a bit less due to a longer average lifespan, and a joint annuity even less than that as the likelihood of at least one person living a long time is higher.

The article then compared the annuity payout against the “safe withdrawal rate” as calculated by popular industry methods. The Bengen method has a fixed payout percentage every month, adjusted annually for inflation. The HWS strategy uses a variable payout with a floor rate and allows a higher payout if the portfolio has high returns. I’ll just share one of them.

As you can see, the immediate annuity offers a higher annual payout in almost all cases. This is good.

However, you are giving up certain things in exchange for this higher income. Once you die, there is nothing left for heirs or charity. Thus, part of your return is simply them giving your own money back to you (return of principal). You have lost permanent control of that money, with no liquidity if for any reason you had a big expense. Finally, unless you buy a special inflation-adjusted annuity with a much lower initial payout, your monthly payment will buy less and less as inflation eats away at it over time.

I would also read about your applicable and always stay under them. It is rare for an insurance company to fail, but it has happened. Read about the . The state guaranty association system is not as good as FDIC insurance, but being within the limits is much better than being above the limits!

Bottom line. I would research single-premium immediate annuities as a source of retirement income once your reach age 59.5. I would avoid any annuity that is linked or “indexed” to the stock market. Personally, I am thinking of annuitizing a fraction of my portfolio (less than 10%) once I reach a certain age, but only if it remains under state guaranty limits.

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Charlie Munger 2019 Wall Street Journal Interview Transcript

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The best thing I read today was definitely , the full transcript of a 6-hour interview with Charlie Munger about his philosophies on business, investing and life, as conducted by Jason Zweig and Nicole Friedman of the Wall Street Journal. (I’ve tried to share a link via my paid WSJ subscription, but there may still be a paywall. Articles like this definitely help make me feel that my subscription is worth the money.)

I enjoy Munger’s direct and open take on many things. Honestly, I think reading his advice helps make me a better person, not investor. Also, he’s a 95-year-old billionaire – can you imagine anyone more incentivized to do exactly what they want with their remaining time? The article is rather long, so while I recommend reading the entire thing for yourself, here are some selected highlights.

How do you spend your day?

Well, I have always sought, since I quit law practice [in 1965], to have a lot of time in every day to read and think. And talk to a few friends about this or that. And I don’t do that because it will make me more money, I do it because it’s my nature. And I had to use that nature because I needed a living for a big family. But it’s just my nature.

Warren’s the same way. We both hate too many appointments in one day. We both have long segments [of free time]. The lives we live would look to anybody else like academics.

Will Berkshire Hathaway beat the S&P 500 in the future?

I think it we’ll beat it a little. But that’s not bad with a market cap of over $600 billion. That’s difficult! Most people won’t do as well as we will. I talked to Warren today. We’re buying one little company…as we sit here. And we haven’t bought anything big for a long, long time. It’s really getting hard for us. These other people will pay a lot more.

Q: If there were one company other than Berkshire you would recommend for the next decade or two, what would it be?

In America it would be Costco. Other than in America, buy the strongest companies in China.

Q: A lot of young Americans seem to be turning against capitalism, on the grounds that income inequality is out of control. What can be done about that?

The world as I know it, from personal experience and from reading, has always concentrated power.

Without the inequality, you don’t get modern private-ownership capitalism, which is what produces the plenty. And so even your kids, if they tried to make an equal civilization, and farm the land that way, would end up with not enough to eat. You’ve got to have individual ownership of a lot of things, with somebody getting and gaining for himself, because otherwise you don’t get the plenty. And the only option you have is to make the social safety net big or small, and you can make it stupid or [you can make it] wise[r], the richer you are.

In other words, the better your inequality-producing civilization that produces the plenty is, the more you’ve got to put into the social safety net. Now if you get a place like Denmark or Sweden or something, a lot of these modern students would like it better, free education, free medical care and so forth. And if you have to bet, the United States will be way more like Canada pretty soon, in terms of more free education at the university level and more Medicare and some kind of medicine for all. And that we can afford without ruining the productivity of the civilization.

…. We can afford [a higher minimum wage]. If you make it too high it will be counterproductive but yes, a prosperous civilization can have a higher minimum wage the way it can have a social safety net. Don’t make it too great and you can afford it.

I have more Democratic children than I have Republican children. I’ve got both.

On Jack Bogle.

You’ve got to remember, Bogle happened to be right about something important. But that [was] his only advantage. He was a monomaniac. And so that’s an odd characteristic. I would not pick Bogle to have the run of the place. He just was very right on one very important subject [the importance of minimizing investment costs], and therefore he’s been very useful.

On payday lenders, the lottery, and legalized gambling.

These goddamn payday lenders, they’re the scum of the earth. Everybody’s working on it but not hard enough. That’s a group that ought to be forced out of existence.

And the way we abuse the poor with the lottery! Think of how contrary it is to the interests of the poor to play the lottery. It’s like a tax on ignorance. They’re vulnerable. I don’t think we should be doing that, but of course everything like it I’m voting against. I always vote against legalized gambling. I just lose all the time. I feel like I’m pushing on a straw and somebody is just pushing back harder every time.

On selfishness and the value of a good reputation.

Another thing that really helps is people, a lot of people think that real selfishness, very extreme, is what works. But it doesn’t.

If you have a reputation for being decent to work with and unselfish, you make more money, not less. And at Berkshire, I can’t tell you the things that we have bought where the people wanted a good home for something that they love and they trusted us to take care of their loved one. That sounds ridiculous to talk about, in that language about businesses. But why wouldn’t you love something you spent your life building up? It’s very natural to love it – it’s your own creation. Of course you want it in good hands.

On his ability to delay gratification (aka “frugal cred”).

The first 13 years I practiced law, my income [from practicing law] was $300,000 total. At the end of that 13 years, what did I have? A house. Two cars. And $300,000 of liquid assets. Everyone else’d have spent that slender income, not invested it shrewdly, and so forth.

I just think it was, to me, it was as natural as breathing, and of course I knew how compound interest worked! I knew when I saved $10 I was really saving $100 or $1,000 [because of the future growth of the $10], and it just took a little wait. And when I quit law practice it was because I wanted to work for myself instead of my clients, because I knew I could do better than they did.

On opportunities.

You only get a few opportunities, and you have to grab them aggressively when they come because even in the most favored life, they’re really rare. My mother listened to all this stuff, and it meant nothing to her. She was never interested in money or worldly success, but she just appropriated the stories to me because they’d amused her.

I always feel that the opportunities are rare. I only get a few and then I have to seize them aggressively.

This last quote is definitely something that I strongly associate with Munger. Even in this interview, you notice he says it twice. It’s something to keep in the back of your mind, whether is applies to an investing opportunity, a career opportunity, or even finding a life partner. Work hard, do your analysis, but in the end you’ll have to take action to get the big results.

“My Money Blog has partnered with CardRatings for our coverage of selected credit card products. My Money Blog and CardRatings may receive a commission from card issuers. All opinions expressed are the author’s alone, and the content has not been provided nor approved by any of the companies mentioned. Datenfluss.info is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for supporting this independent site.”

Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts

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Updated for 2019 Meeting. Berkshire Hathaway’s Annual Shareholder Meetings are held in Omaha, Nebraska every May. Although most of my portfolio is in a diversified mix of index funds, I also own individual shares of Berkshire Hathaway and respect the rational and practical advice given out by Warren Buffett and Charlie Munger.

I also like getting the information directly! I missed the live event again in 2019, but I plan catch up by first reading the WSJ liveblog, and then listening to the entire Q&A session via Yahoo Finance podcast at my own pace. Here are the many ways that you can catch up on past shareholder meetings.

Full Videos

  • . Yahoo Finance is the exclusive online host of the Berkshire Hathaway 2019 Annual Shareholders Meeting that occurred May 4th, 2019. View the entire Q&A session in its entirety on demand.
  • . Footage of In 2018, Berkshire gave CNBC a box of old VHS tapes (!) which were converted to digital videos so that everyone can view them for free. Additional material from CNBC including interviews, highlights, and short-form videos is also available.

Transcripts

  • (Placeholder for 2019 notes. I’m hopeful that someone will share something in the coming days.)
  • by Adam Blum.
  • by David Kass.
  • by David Kass.
  • by Ingrid R. Hendershot.
  • by David Kass.
  • [PDF] by Alex Bossert.
  • Several individual investors share their own notes and transcripts after each meeting online each year.

Liveblogs

  • . Wall Street Journal has done a liveblog each year with highlights from the Q&A session. This is a good option if you are short on time. . . . . .
  • (no liveblog for 2019). . . .

Podcasts

  • Yahoo Finance also makes the BRK meeting available as a podcast, so you can listen in parts during your commute or chores. I listened to the entire 2018 meeting in the car while driving, and I liked it much better than sitting in front a computer. 2019 is already uploaded. . .

Books

Reminder: This post is about the live shareholder meeting, and is separate from the annual shareholder letters (which are also great).

“My Money Blog has partnered with CardRatings for our coverage of selected credit card products. My Money Blog and CardRatings may receive a commission from card issuers. All opinions expressed are the author’s alone, and the content has not been provided nor approved by any of the companies mentioned. Datenfluss.info is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for supporting this independent site.”

Best Interest Rates on Cash – May 2019

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Here’s my monthly roundup of the best interest rates on cash for May 2019, roughly sorted from shortest to longest maturities. There hasn’t been much movement recently, and the rate curve is still pretty flat with long-term rates only slightly higher than short-term ones. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 5/1/19.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. has a 13-month No Penalty CD at 2.50% APY with a $10,000 minimum deposit. 13-month No Penalty CD at 2.35% APY with a $500 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • has a 12-month CD at 3.00% APY ($10,000 minimum) but with a big early withdrawal penalty of 12 months of interest. If you have a military relationship, has a 10-month special at 2.75% APY with add-on option.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • currently pays an 2.44% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.36%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • currently pays 2.64% SEC Yield ($3,000 min) and 2.74% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF () has a 2.74% SEC yield and the iShares Short Maturity Bond ETF () has a 2.75% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current . As of 5/1/19, a 4-week T-Bill had the equivalent of 2.42% annualized interest and a 52-week T-Bill had the equivalent of 2.39% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF () has a 2.30% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF () has a 2.24% SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2019 and October 2019 will earn a 1.90% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2019, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend or use any of these anymore.

  • The only notable card left in this category is at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore, either.

  • The best one right now is Orion FCU Premium Checking at 4.00% APY on balances up to $30,000 if you meet make $500+ in direct deposits and 8 debit card “signature” purchases each month. The APY goes down to 0.05% APY and they charge you a $5 monthly fee if you miss out on the requirements. There is also the TAB Bank 4% APY Checking, which I don’t like due its vague terms. Find a local rewards checking account at .
  • If you’re looking for a high-interest checking account without debit card transaction requirements then the rate won’t be as high, but take a look at at 1.60% APY.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going.

  • has an 18-month CD at 3.10% APY ($10,000 minimum) but with a big early withdrawal penalty of 12 months of interest. has a 19-month CD special at 3.00% APY ($1,000 minimum) with an early withdrawal penalty of 6 months of interest.
  • 5-year CD rates have been dropping at many banks and credit unions, following the overall interest rate curve. A good rate is now about 3.25% APY, with offering 3.35% APY on a 5-year CD with an early withdrawal penalty of 1.5 years (!) of interest..
  • You can buy certificates of deposit via the bond desks of and . These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable fixed early withdrawal penalties. Nothing special right now. As of this writing, Vanguard is showing a 2-year non-callable CD at 2.45% APY and a 5-year non-callable CD at 2.75% APY. Watch out for higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10+ years? You can buy long-term certificates of deposit via the bond desks of and . These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.00% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 5/1/19, the 20-year Treasury Bond rate was 2.74%.

All rates were checked as of 5/1/19.



“My Money Blog has partnered with CardRatings for our coverage of selected credit card products. My Money Blog and CardRatings may receive a commission from card issuers. All opinions expressed are the author’s alone, and the content has not been provided nor approved by any of the companies mentioned. Datenfluss.info is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for supporting this independent site.”

Savings I Bonds May 2019 Interest Rate: 1.40% Inflation + 0.50% Fixed Rate

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sb_poster

Update 5/1/19. The fixed rate will be 0.50% for I bonds issued from May 1, 2019 through October 31st, 2019. This is the same as it was for the last 6 months. The variable inflation-indexed rate for this 6-month period will be 1.40% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in May 2019, you’ll get 1.90% for the first 6 months. See you again in mid-October 2019 for the next early prediction.

Original post 4/11/19:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at , which allows us to make an early prediction of the May 2019 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2019 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. September 2018 CPI-U was 252.439. March 2019 CPI-U was 254.202, for a semi-annual increase of 1.16%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.40%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in April 2019. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.50%. You will be guaranteed a total interest rate of 2.82% for the next 6 months (0.50 + 2.32). For the 6 months after that, the total rate will be 0.50 + 1.40 = 1.90%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2019 and sell on April 1, 2020, you’ll earn a ~2.06% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. Comparing with the best interest rates as of April 2019, you can see that this is lower than a current saving rate or 12-month CD.

Buying in May 2019. If you buy in May 2019, you will get 1.40% a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the has dropped from 1% to about 0.5%. My best guess is that it will be 0.20%. Every six months, your rate will adjust to your fixed rate (set at purchase) a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (minimum floor of 0%).

Buy now or wait? In the short-term, these I bond rates will definitely not beat a top 12-month CD rate if bought in April, and most likely won’t if bought in May either unless inflation skyrockets. Thus, if you just want to beat the current bank rates, I Bonds are not a good short-term buy right now.

If you intend to be a long-term holder, then another factor to consider is that the April fixed rate is 0.5% and that it will likely drop at least a little in May in my opinion. You may want to lock in that higher fixed rate now.

Honestly, I am not too excited to buy either in April or May, but if I really liked the long-term advantages of savings bonds (see below), I would consider buying now in April rather than May due to my guess of a higher fixed rate. You could also wait, as things might change again during the next update in mid-October. For my own accounts, as I am now semi-retired and thus no longer a big saver looking for any tax-deferred space possible, I will probably just buy TIPS in other accounts instead since the real yield is similar.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at , after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with . If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – ]

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Vanguard ETFs Now Permanently Cheaper Than Admiral Shares (More Examples)

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vglogo

Updated with more examples. Up until recently, Vanguard has had a long history of keeping the expense ratios of their corresponding ETFs and Admiral Shares mutual funds the same. As of 2019, this is no longer the case. Inside a Vanguard notice, this was quietly added:

The growing size and scale of our funds have helped fuel operational efficiencies that lower our costs to serve clients, particularly ETF shareholders. As a result, the ETF share class of these ten funds is now lower than their Admiral™ share class counterparts.

Initially, I figured it was just a matter of the reporting dates being staggered and the Admiral Shares expense ratio would soon be updated back to being identical. But Allan Roth at interviewed a Vanguard spokesperson who confirmed that the expense ratios of ETFs and Admiral Shares will no longer automatically be matched up:

What’s largely driving these changes is the increasing adoption of ETFs by Vanguard investors as their index vehicle of choice, which has enabled us to pass along the cost savings of scale,” Woerth said. “To put some numbers around it, even though ETFs make up only about 20% of our assets, they’ve garnered more than 35% of Vanguard’s net cash flow over the past three years.”

Another reason given is that the mutual fund structure requires more administrative paperwork than ETFs and thus inherently cost more to run.

The most recent as of 4/26/19 is further evidence of this new stance. The expense ratios of 21 different ETFs were dropped, yet the corresponding mutual fund expense ratios all remained the same.

Expense ratio comparison, ETF vs. Admiral Shares (4/30/19):

Fund ETF expense ratio Admiral Shares expense ratio
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
0.03% 0.04%
US Large (S&P 500)
Vanguard 500 Index Fund (VOO, VFIAX)
0.03% 0.04%
Total World Stock
Vanguard Total World Stock Index Fund (VT, VTWAX)
0.09% 0.10%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
0.09% 0.11%
International Real Estate
Vanguard Global ex-U.S. Real Estate Index Fund (VNQI, VGRLX)
0.12% 0.14%
Emerging Markets
Vanguard Emerging Markets ETF (VWO, VEMAX)
0.12% 0.14%
Total US Bond Market
Vanguard Total Bond Market Fund (BND, VBTLX)
0.035% 0.05%
Municipal Bonds
Vanguard Tax-Exempt Bond Index Fund (VTEB, VTEAX)
0.08% 0.09%
Total International Bond
Vanguard Total International Bond Index Fund (BNDX, VTABX)
0.09% 0.11%

 

Should I convert my Admiral Shares to ETFs? Vanguard lets you convert most Vanguard mutual funds held at Vanguard to their ETF version (if it exists) on a tax-free basis. Allan Roth goes on to discuss this question as well. You should first set your tax lot tracking to “SpecID” if you want the cost basis to carry over to every specific share (otherwise they would use average cost basis on all of them).

I always liked the “slow food” feel of mutual fund investing. Your trade doesn’t execute until the end of the day. You just enter your trade whenever, and it gets filled at the end of the next market day. The price is set exactly at net asset value (NAV). There are no high frequency traders involved.

Now, a single basis point (0.01%) is a difference of $1 annually per $10,000 invested. In many cases, the difference may not be worth much attention. However, if you have $1,000,000, that becomes $100 every year. Two basis points is $200 every year. Will the gap widen further?

Sometime this year, I will probably convert my Admiral Shares to ETFs. Vanguard is basically telling me that mutual funds are old technology, and they won’t be spending any more resources on future updates. In the last few years, Vanguard has been aggressively converting people with old mutual fund-only accounts into brokerage accounts.

I’ve kept my primary brokerage account at Vanguard because they offer commission-free trading of mutual funds. However, if I am switching to ETFs, then I can have commission-free trades at many different brokerage firms. I recently opened a new IRA account at M1 Finance because they will give me back free dollar-based transactions of mutual funds (i.e. I can buy exactly $500 via fractional shares) while also adding a free rebalancing service that has Vanguard never offered.

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The Personal Finance Index Card: Book Version Differences

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After rediscovering the young adult versions of fitting personal finance advice on an index card, I decided to go back and read the book by Helaine Olen and Harold Pollack. (I was able to find it via library eBook.)

I noticed that the book version of the “index card” was slightly different. The original card had 9 items, but two of them were merged away into each other (401k/IRAs) and (Pay Attention to Fees/Buy Index Funds). I bolded the new additions below. (You can see all chapters on the Amazon page.)

  1. Strive to Save 10 to 20 Percent of Your Income
  2. Pay Your Credit Card Balance in Full Every Month
  3. Max Out Your 401(k) and Other Tax-Advantaged Savings Accounts
  4. Never Buy or Sell Individual Stocks
  5. Buy Inexpensive, Well-Diversified Indexed Mutual Funds and ETFs
  6. Make Your Financial Advisor Commit To a Fiduciary Standard
  7. Buy a Home When You Are Financially Ready
  8. Insurance – Make Sure You’re Protected
  9. Do What You Can To Support the Social Safety Net
  10. Remember The Index Card

Here again is the original:

Here are my notes on the newly-addressed topics of home-buying and insurance.

Home-buying. This will always be a hard topic because it mixes in emotion, personal history, peer pressure, and all that fuzzy stuff. If you want to own a home, you need to make sure the purchase won’t blow up your overall financial picture. Nothing really surprising, but still good advice.

  • Get your debt under control first.
  • Save up as close to a 20% down payment as you can.
  • Stick with a 15 or 30 year fixed-rate mortgage.
  • Prioritize what you really want and need in a home. Stay within your budget.
  • Location, location, location.

Insurance. There are low-probability events that can destroy decades of hard work, and that’s why humans invented insurance to spread the risk. Here are their cut-to-the-chase bullet points:

  • Emergency fund – Maintain one!
  • Life insurance – If you’re young(ish), just buy 30-year level term insurance.
  • Property insurance – Raise your deductible as high as you can handle.
  • Health insurance – Always sure you stay in-network.
  • Liability insurance – Coverage for at least twice your net worth.

I’m glad that this book still retained its “quick-and-dirty” nature. No single rule will cover every scenario, but it’s good to have a clear and concise collection of the big points along with just enough explanation that you understand the basic reasoning behind it.

“My Money Blog has partnered with CardRatings for our coverage of selected credit card products. My Money Blog and CardRatings may receive a commission from card issuers. All opinions expressed are the author’s alone, and the content has not been provided nor approved by any of the companies mentioned. Datenfluss.info is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for supporting this independent site.”

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