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Creating A Portfolio For Safe Retirement Income

Summary I searched through all ETFs and found six for safe income given the current environment. The portfolio I created generates safe income and has the potential for increasing income if interest rates rise. The six ETFs I found cover: U.S. Equities, International Equities, Bonds, Preferred Stocks and Cash. In this article, I will be creating a simple portfolio that balances steady income with safety for a retirement portfolio. The goal of the portfolio is to hold six ETFs to generate safe income with the potential for income to increase. U.S Equity: ProShares S&P 500 Dividend Aristocrats ETF (NYSEARCA: NOBL ) I chose NOBL because it only holds stocks from the S&P 500 (NYSEARCA: SPY ) that have increased their dividend for at least 25 consecutive years. In addition, what makes NOBL different from other dividend ETFs is that the fund equally weights its holdings, which reduces concentration risk. The chart below from the NOBL fact sheet shows that the dividend aristocrats index that NOBL tracks has outperformed the S&P 500 and done so with lower volatility. [Chart from NOBL fact sheet] International Equity: PowerShares S&P International Developed Low Volatility Portfolio ETF (NYSEARCA: IDLV ) I chose IDLV because it holds mainly large cap companies in other developed markets excluding the United States and overlays a low volatility strategy to select only the stocks with the lowest volatility. The following chart from ETFreplay shows that IDLV has underperformed the largest developed markets ETF, which is the iShares MSCI EAFE ETF (NYSEARCA: EFA ). However, as you can see IDLV has had much lower volatility than EFA and when volatility is factored in IDLV outperforms, which is shown in the table below. IDLV EFA Total Return 29.70% 35.50% Volatility 12.20% 15.20% Return/Volatility 2.43 2.34 [Chart from ETFreplay] (click to enlarge) Short-Term Corporate Bonds: Vanguard Short-Term Corporate Bond Index ETF (NASDAQ: VCSH ) I chose VCSH because the yields for investment grade corporate bonds are higher than corresponding yields on treasury bonds. I did not want to choose just any corporate bond fund; therefore, I decided to select a short-term fund because of the possibility of rising interest rates. The following chart shows a comparison between VCSH, the Vanguard Intermediate-Term Corporate Bond Index ETF (NASDAQ: VCIT ) and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ). The period I looked at was from February 2nd 2015, which was the low point in interest rates for the year, to June 10th, 2015, which was the high point in rates for the year. As expected VCLT performed the worst because it holds only long-dated corporate bond and VCSH performed the best because it holds only short-term bonds. (click to enlarge) [Chart from Google Finance] Floating Rate Preferred: PowerShares Variable Rate Preferred Portfolio ETF (NYSEARCA: VRP ) I chose to include VRP because of its 5% dividend yield and the fact that it has income upside potential during a rising rate environment. Like VCSH above, I compared VRP and PFF to each other during the rising rate period I described above. As you can see VRP outperformed PFF by just over 1%, which is not a large amount. PFF pays a dividend yield of 5.78%, which is higher than VRP at 5%, however, the 0.78% difference in yield does not make up entirely for the 1%+ in outperformance from VRP. With the upside potential in income during a rising rate environment, I expect VRP to be the superior choice. (click to enlarge) [Chart from Yahoo Finance] Covered Call ETF: Horizons S&P 500 Covered Call ETF (NYSEARCA: HSPX ) As part of my U.S. equity allocation, I chose to include HSPX to increase the income of the portfolio while maintaining income safety. I chose HSPX over the more popular PowerShares S&P 500 BuyWrite Portfolio ETF (NYSEARCA: PBP ) because HSPX pays a monthly dividend where PBP pays a quarterly dividend. HSPX writes out-of-the-money calls on the long positions it holds of all option eligible stocks within the S&P 500. The covered calls, along with dividend income received from individual stocks, makes the current yield based on the average dividend over the last twelve months to be 4.3%. In a declining market, covered call strategies are attractive because of the potential to capture all of the premiums from selling the calls. Cash: PIMCO Enhanced Short Maturity Strategy ETF (NYSEARCA: MINT ) My final selection was MINT because, for retirees, having cash or a cash substitute for an emergency or well-timed purchase of an income generating investment that is trading at depressed values is something to consider. For example, if a retired investor was holding cash during the financial crisis and an opportunity like the bottom of the financial crisis presented itself as a buying opportunity to dividend aristocrats that had been unjustly sold down with the rest of the market. The retired investor having cash available, would have been able to increase their income by buying an ETF with high quality companies at depressed prices. Those high-quality companies have been through ups and downs and still have paid increasing dividends for at least 25 straight years. Portfolio Overview I have provided an example of what the portfolio would look like if each category would be equally weighted. Since NOBL and HSPX both are U.S. equity funds, I split the 20% allocation between the two. Using this allocation, the portfolio yield would be 2.81%, which is not a lot, however it is higher than the rate on treasury bonds. The portfolio has the potential for increasing income in the form of increasing dividend payments from dividend aristocrats and from increasing coupon payments on short-term bonds and variable-rate preferred stocks. Weight Yield W*Y NOBL 10.00% 1.90% 0.19% IDLV 20.00% 3.11% 0.62% VCSH 20.00% 1.92% 0.38% VRP 20.00% 5.00% 1.00% HSPX 10.00% 4.30% 0.43% MINT 20.00% 0.94% 0.19% Portfolio Yield 2.81% Portfolio Composition Stocks 40.00% Bonds 20.00% Other 20.00% “Cash” 20.00% Closing Thoughts While the portfolio I created does not have a large yield, it has exposure to high quality U.S. companies with long a long history of dividend increases, international stocks with low volatility and short-term investment grade corporate bonds and variable rate preferred stocks, both of which should provide safety and increasing income during a rising rate environment. Looking back to my goal, I believe I have created a portfolio that generates safe income and has the potential for increasing income. Disclaimer : See here .

Best And Worst Q4’15: Small Cap Growth ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Growth style ranks eleventh in Q4’15. Based on an aggregation of ratings of 11 ETFs and 427 mutual funds. SLYG is our top-rated Small Cap Growth style ETF and VSCRX is our top-rated Small Cap Growth style mutual fund. The Small Cap Growth style ranks eleventh out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Growth style ranked eleventh as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 11 ETFs and 427 mutual funds in the Small Cap Growth style. See a recap of our Q3’15 Style Ratings here. Figure 1 ranks from best to worst the nine small-cap growth ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated small-cap growth mutual funds. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 29 to 1186). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Vanguard S&P Small-Cap 600 Growth ETF (NYSEARCA: VIOG ) and the PowerShares Russell 2000 PureGrowth Portfolio ETF (NYSEARCA: PXSG ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Managed Porftolio Smith Group Small Cap Focused Growth (SGSNX, SGSVX) and the American Beacon Bahl & Gaynor Small Cap Growth (GBSIX, GBSYX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The State Street SPDR S&P 600 Small Cap Growth ETF (NYSEARCA: SLYG ) is the top-rated Small Cap Growth ETF and the Virtus Small-Cap Core Fund (MUTF: VSCRX ) is the top-rated Small Cap Growth mutual fund. SLYG earns our Neutral rating and VSCRX earns our Very Attractive rating. The First Trust Small Cap Growth AlphaDEX ETF (NYSEARCA: FYC ) is the worst-rated Small Cap Growth ETF and the Dreyfus Managers Small Cap Growth Fund (MUTF: DSGAX ) is the worst-rated Small Cap Growth mutual fund. FYC earns a Dangerous rating while DSGAX earns a Very Dangerous rating. Hawaiian Holdings (NASDAQ: HA ) is one of our favorite stocks held by Small Cap Growth ETFs and mutual funds and earns our Attractive rating. Since 2010, Hawaiian Holdings has grown after-tax profits ( NOPAT ) by 11% compounded annually. The company’s current 12% return on invested capital ( ROIC ) is a great improvement over the 7% earned in 2013 and points to the business becoming more profitable. Despite the improving fundamentals, HA remains undervalued. At its current price of $36/share, Hawaiian Holdings has a price to economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Hawaiian’s NOPAT to never meaningfully grow from current levels. If Hawaiian Holdings can grow NOPAT by just 9% compounded annually over the next decade , the stock is worth $46/share today – a 27% upside. Scholastic Corporation (NASDAQ: SCHL ) is one of our least favorite stocks held by Small Cap Growth funds and earns our Very Dangerous rating. Since 2011, Scholastic’s NOPAT has declined by 8% compounded annually. The company’s ROIC has followed suit from 5% in 2011 to its current bottom quintile 1% in 2015. Despite the deteriorating operations of the business, shares are still priced for significant growth. To justify its current price of $42/share, Scholastic must grow NOPAT by 6% compounded annually for the next 15 years . This expectation seems unlikely to be met considering Scholastic’s inability to grow NOPAT over the past five years. Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.

High-Yield Utility That Has Fallen Off Everyone’s Radar

Summary Brookfield Renewable Energy yields 6.6%, over 1.6% higher than the typical utility that yields under 5%. The company is riding on the mega-trend train of a global growing demand in renewable energy, and the business has the expertise to bank on acquisition opportunities. The business forecasts dividend growth of 5-9% per year through 2020 and a long-term shareholder return of 12-15%. I’m primarily a dividend growth investor. So, current income and growth of that income is important to me. Utilities are typically known for their high yields. So, buying utilities, I expect a good part of returns to come from their dividends. The lower the price goes, the higher the yield climbs. That’s the case with Brookfield Renewable Energy Partners LP (NYSE: BEP ), as it has fallen over 18% from a year ago. (click to enlarge) Compared to most other popular utilities, Brookfield Renewable has performed quite poorly price-wise in the past year. Particularly, I’ve put it in a chart with Consolidated Edison, Inc. (NYSE: ED ), Duke Energy Corp (NYSE: DUK ), WEC Energy Group Inc (NYSE: WEC ), and Southern Co (NYSE: SO ). Source: Google Finance The utility group typically yields in the 4-5% range, and Brookfield Renewable stands out by yielding 6.6%. But, perhaps, that’s because it is viewed as higher risk with an S&P credit rating of BBB, while the others all have a rating of A-. BEP Dividend Yield (TTM) data by YCharts To consider it as a potential utility holding, the question you want answered is probably: “Is Brookfield Renewable Energy’s distribution sustainable?” First, let’s find out if it’s the kind of business you want to own. Business and Assets Brookfield Renewable has started investing in hydropower facilities 20 years ago. Today, it has become one of the biggest public pure-play renewable businesses with global assets. It focuses on accumulating long-life and low-cost assets that will continue generating cash flows. Since it requires deep operational knowledge and marketing expertise to enter the space, there’re significant barriers to entry. Brookfield Renewable has $19B worth of power assets, including around 250 power generating facilities across 14 markets in 7 countries. 81% of its 7,300 MW capacity is generated by hydroelectric facilities with about 18% generated by wind power. Currently, 50% of its assets are in the U.S., 25% are in Canada, 20% are in Brazil, and 5% are in Europe. Not Just an Income Play, But Also a Growth Play Demand for renewable energy has been growing. New investments in renewables around the globe have grown from $45B in 2004 to $270B in 2014, a CAGR of 19.6%. More recently, from 2013 to 2014, they grew at a rate of 16.4%, which is still admirable growth. Specifically, hydro power capacity grew at a CAGR of 4% over the decade, and 3.6% from 2013 to 2014. Although its growth only keeps pace with inflation, hydro power generation is low cost, and is more reliable than wind power generation. On the other hand, wind power capacity grew at a CAGR of 22.7%, and 16% from 2013 to 2014. In the last four years, Brookfield Renewable acquired and developed about 3000 MW, which is a CAGR of about 14%. How Does Brookfield Renewable Grow? Over the next 5 years, Brookfield Renewable plans to deploy over $3 billion of equity, expecting 15% returns. The focus will continue to be on hydro power generation, and acquiring global renewable assets at attractive prices. For example, in 2004, Brookfield Renewable acquired a 600MW capacity pumped storage asset with its 50% joint partner during a period of low power prices for $99M. It then entered into a 15-year contract that creates a predictable cash flow stream. At the same time, it’s not shy from selling for good profit as well. For example, in 2009, Brookfield Renewable acquired an early-stage wind power development project for $90 million. It finished constructing it and optimized operations by leveraging its wind expertise to maximize value. In July 2015, it sold the asset by attracting global bidders and generated an internal rate of return of about 30%. Like it did in North America and Brazil starting in 2011, Brookfield Renewable can continue its value creation process and repeat it in Europe, Latin America, and other new markets. A Safely Growing Dividend As Brookfield Renewable grows, it doesn’t forget to reward shareholders. From the distribution that commenced in 2011, it has grown from a quarterly distribution of 33.75 cents per share to 41.5 cents per share this year, a CAGR of 5.3%. About 90% of Brookfield Renewable’s cash flows have a 17-year average contract term with inflation-linked escalation, so its cash flows remain stable to support its distributions. Further, it targets an FFO payout ratio of 70%. With FFO expected to increase by $220-$280M a year, Brookfield Renewable forecasts distribution growth of 5-9% per year through 2020. Valuation Brookfield Renewable believes it’s intrinsically worth $34 a share even when excluding potential for rising prices, and existing project pipelines. At $25, it is discounted by over 26%. Adding in organic growth, the business believes it’s easily worth over $40 in the future, implying a significant discount of over 37%. (click to enlarge) Source: Brookfield Renewable October Investor Meeting – Slide 35 What Should Be Your Returns Expectation? Other than forecasting distribution growth of 5-9% per year through 2020, the business’s objective is to deliver long-term total returns of 12-15% to shareholders annually. With a current yield of 6.6% and the distribution estimated to grow at least 5%, that implies a rate of return of at least 11.6%, which is close to the low-end of that objective. Conclusion I just added to my position in Brookfield Renewable last week. How about you? Did you buy any utilities recently? Share in the comments below! If you like what you’ve just read, follow me! Simply click on the “Follow” link at the top of the page to receive an email notification when I publish a new article. Resources and References Brookfield Renewable October Investor Meeting ( pdf ) Brookfield Renewable November Presentation ( pdf ) Ren21 Renewables 2015 Report ( pdf )