Description

Over my career of almost 40 years I have been a successful small cap and micro cap value investor, but the market has changed and the number of opportunities in this sector has significantly decreased. I have traditionally, since the first days of VIC, posted small and micro cap value stocks. But today, like all of my baby boomer colleagues, I face a major challenge:  Retirement with a bond market  whose yields have been crushed by our friend Jay Powell. I am not excited by a ten year treasury yielding 65 basis points or by corporates yielding a little over 1%, with a tremendous risk of loss of principal. So where do we go to get some yield for our retirement portfolio? I don't want anything exotic or risky. I don't think we have much choice but to go to high yielding quality shares. Fortunately, many of these high yielding quality stocks have not participated in the post-Covid rally. So, for the first time I post a large cap recommendation. 

There are many good funds to choose from to provide a good yield from a portfolio of solid large cap companies. I recommend the the purchase of the the Vanguard High Dividend Yield ETF (VYM) to anchor a retirement portfolio that provides a solid yield from a portfolio of high quality large cap stocks. I recommend a small allocation which is built up over time. This should not, obviously, be the only fund in your retirement portfolio. For example, you should consider adding some international diversification with a fund like  iShares International select Dividend ETF (IDV). Why do I like VYM? 

VYM currently yields 3.47%, has a  minuscule expense ratio of 0.06% and is well diversified with high quality high yielding shares. The fund currently has a Morningstar Gold rating. The funds leans toward high-quality dividend-payers that can control the risk of the portfolio. The fund tracks the FTSE High Dividend Yield Index. It starts with all U.S. stocks,, excluding REIT's, and ranks them by their expected yields over the coming year. The index selects those shares that represent the higher-yielding half of eligible dividend-paying stocks. This strategy doesn't directly screen for quality, so it can hold some risky stocks. But, the exposure is still limited by broad diversification and market-cap weighing. The fund's broad diversification prevents risky names from dominating the portfolio. And a market-cap weighing keeps stocks with deteriorating fundamentals from having a significant impact on the portfolio, as those tend to become a smaller portion of the portfolio as their prices fall. This also increases the impact of large businesses with stable cash flows that are more likely to maintain their dividends. With this approach, the fund has consistently out-performed the Russell 1000 Value Index. Leaning toward larger, more stable companies has helped the fund's performance. It has beat the Russell 1000 Value index by 1% annually for the past ten years through August 2020.

Here are the characteristics of the portfolio:

Number of stocks                 424

Median Market Cap               $130.2 billion

Price/earnings ratio               18.1X

Price/Book ratio                      2.1X

ROE                                      7.8%

Fund Total Assets                   $35.2 billion

Equity Sector Diversification:

Basic Materials                         3.9%

Consumer Goods                      14.0

Consumer Services                    8.5

Financials                                18.7

Health Care                             15.0

Industrials                               10.3

Oil & Gas                                   5.9

Technology                               10.4

Telecoms                                     4.7

Utilities                                      8.7

Top Ten Holdings:

1. Johnson & Johnson                  4.0%

2. Proctor & Gamble                   3.3

3. JP Morgan                              3.0

4. Verizon                                  2.4

5. Intel                                      2.1

6. Merck                                    2.1

7. AT&T                                     2.1

8. Pfizer                                     2.1

9. Comcast                                 2.0

10. Bank of America                    2.0

As you can see the names that dominate the fund are all high quality value stocks. The are no FAANG's here! This recommendation is for for those of us approaching retirement and that have a need for a portfolio that provides us with a dependable source of income. It's the best strategy for those of us that believe there is a huge bubble in technology, the bond market is highly risky, and believe value stocks are undervalued relative to the rest of the market.

Catalyst

 There is no catalyst here. The value is already present. Our objective is to obtain a dependable stream of dividends to provide us income during retirement. Time and growth of these value shares is our catalyst for growing dividends and value of our portfolio,