A Case Study in Dividend Success

“The following post is by E.J. Smith, at YourSurvivalGuy.com. There was a time when I would point investors to low-cost index funds, but as you can see, that ship has sailed.” — Dick Young

In an excellent review of a festering problem in the market today, Randall Smith of The Wall Street Journal, outlines the $1.3 trillion Vanguard Total Stock Market Index Fund (VTI), and the growing importance of the CRSP U.S. Total Market Index to the future of markets.

What’s concerning to Your Survival Guy is that the top 10 companies of the CRSP U.S. Total Market Index comprise a quarter of its value. Does anyone remember the plight of the Nifty 50 in the 70s? When people fell out of love with the Fifty, the S&P crashed 48.2% from early January 1973 to early October 1974.

The problem with indices or lists is they’re always evolving. Names come and go. Do you really want to hitch your life’s savings to a Total Stock Market Index that’s so top heavy?

Action Line: This is a stock picker’s market. I want you to get paid no matter what in the form of dividends, regardless of what prices do. Stocks have a history of doing nothing for longer than you care to remember. If you need help building an investment plan that’s right for you, I would love to talk with you.

Not only do they have a history of doing nothing for long stretches of time, but names are also replaced with more frequency than one cares to remember.

Smith explains here how oblivious the public is to the massive movements of the VTI, and the CRSP U.S. Total Market Index, writing:

Everyone knows the New York Stock Exchange. And its rival, Nasdaq.

But there is a mutual fund that invests in stocks based on a relatively unknown market index that has grown so large it might be considered a third stock market unto itself.

That fund is the $1.3 trillion (yes, trillion, including all share classes) Vanguard Total Stock Market Index Fund (VTSAX) and its exchange-traded-fund shares. The fund, from Vanguard Group, now accounts for 10% of all assets in U.S. stock mutual funds and ETFs in the market, according to Morningstar Inc. No other mutual fund or ETF comes close to it in asset size. The next largest is an $821 billion Vanguard S&P 500 index fund.

The paradox is that this biggest beast among funds is tied to the most unassuming of stock indexes—the CRSP U.S. Total Market Index, developed at the University of Chicago’s Booth School of Business.

While many investors may not be familiar with CRSP, the influence of the index and the Vanguard fund is felt minute to minute on Wall Street. Traders say they sometimes check the Vanguard fund’s ETF version, with the symbol VTI, to get a better idea of what is happening in the market overall, since it effectively covers more stocks than any of the three major indexes—the Dow Jones Industrial Average, S&P 500 index and Nasdaq Composite.

“When the stock market is open, VTI gives you a better picture of what it’s doing than anything else,” says Rick Ferri, an investment adviser in Georgetown, Texas. The CRSP, he adds, “drives this gigantic mutual fund, and most of the general public doesn’t even know that CRSP exists.”

Originally posted on Your Survival Guy.

Vanguard is owned by the funds managed by the company and is therefore owned by its customers.

Companies faced with limited supplies of raw materials and rising costs of goods are narrowing down the models of products they make to only the most profitable. That usually means that they are building the higher-end, pricier models in their product portfolios, leaving families with lower earnings unable to find cheaper alternatives. The Wall Street Journal reports:

Anthony Coughlin’s appliance shop has little trouble filling orders for high-tech washing machines or designer ovens. More difficult: satisfying customers on the hunt for bare-bones, low-budget machines.

“There was a day when a customer could walk in the door and buy a secondary piece or a landlord special and have 100 options to choose from,” said Mr. Coughlin, a co-owner of All Shore Appliance in Port Washington, N.Y. “Now it’s more along the lines of, we explain to the customer what we have.”

As the global supply-chain crisis snarls production and bloats manufacturing and shipping costs, companies that make products from lawn mowers to barbecue grills are prioritizing higher-priced models, in some cases making cheaper alternatives harder or impossible to find, company executives, retailers and analysts say.

Some are pushing upscale products in an effort to make up for added labor, shipping and manufacturing costs. Whirlpool Corp. WHR 0.06% , maker of washing machines, KitchenAid mixers and other home appliances, said in July it would shift toward higher-price products as part of a plan to help cover rising costs.

Auto makers and other companies, faced with strapped suppliers, are directing limited parts to their highest-margin products.

“A combination of inflation and scarcity is pushing manufacturers toward higher-priced goods,” said David Garfield, head of the consumer-products practice at consulting firm AlixPartners. “If a manufacturer can’t get enough parts to make all the product they’d like, they may make more of a premium product to protect their profitability.”

The shift to upscale products comes in addition to other steps companies are taking to recoup costs and get as many products as possible to consumers. Across industries, manufacturers of products from toilet paper to televisions are raising prices, winnowing product assortment and imposing purchase limits on retailers.

Supply-chain bottlenecks, worsening as the pandemic persists, have led to extensive congestion at ports as well as soaring costs for transportation and raw materials. Meanwhile, manufacturers, retailers and consumers are getting hit by higher inflation, expected to last well into next year.

A cheap outdoor grill, for instance, might be tougher to track down. Weber Inc. WEBR -3.49% generally builds its less expensive models in China, while the company’s U.S. operations supply the bulk of the company’s product line, which tends to come with higher price tags, Chief Executive Chris Scherzinger said in an interview. Because port slowdowns in China have delayed the shipment of goods from the country, products made there are less readily available than U.S.-built options, he said.

Mr. Scherzinger said, however, the bigger factor driving stronger sales of more premium options is that consumers are favoring pricier grills as they spend more time at home and outdoors amid the pandemic. “Whatever we can’t offset through productivity, we have the ability to go to the market and offset that with price,” he said.

Back in 1971, I had just started in the institutional research and trading business on Federal St. in Boston. Our firm traded and researched gold shares. I would in fact shortly be on the way to London to begin research on a lengthy gold study. This presentation by Claudio Grass published on LewRockwell.com is pretty much as I remember events, and is a great summary of the facts and events of that time. He writes (abridged):

This year marked the 50th anniversary of President Nixon’s decision to unilaterally close the “gold window”. The impact of this move can hardly be overstated. It triggered a tectonic shift of momentous consequences and it changed not just the global economy and the monetary realities, but it also shaped modern politics and severely affected our society at large.

The Nixon Shock

In July 1944, representatives from 44 nations convened in the resort town of Bretton Woods, New Hampshire, to figure out how the global monetary system should be structured after the end of the war. The US took the clear lead during these talks, exploiting the considerable leverage it had over other countries devastated by WWII or even still occupied by Germany. After all, at that point, Americans were the creditors of the world and had accumulated tons of gold throughout the 1930s and during the war, as the US was widely seen as a safe haven amid the conflict and uncertainty that prevailed at the time. 

Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election. 

Indeed, the Bretton Woods system didn’t last long. It wasn’t fully implemented until 1958 and by the mid 60s it was already obvious that its days were numbered. The US gold stockpiles were dwindling as European central banks soon began redeeming their dollar claims, and there were real fears that US gold holdings might eventually be exhausted. Also, the Bretton Woods system, even though it was “managed” and much weaker form of the classical gold standard, did still at least partially keep government spending and deficits in check, something that Nixon resented, especially with a view to the next election.

And yet, there were a few voices that spoke out, for common sense and Reason. As the Cato Institute outlined, “Milton Friedman wrote in his Newsweek column that the price controls “will end as all previous attempts to freeze prices and wages have ended, from the time of the Roman emperor Diocletian to the present, in utter failure.” Ayn Rand gave a lecture about the program titled “The Moratorium on Brains” and denounced it in her newsletter. Alan Reynolds, now a Cato senior fellow, wrote in National Review that wage and price controls were “tyranny … necessarily selective and discriminatory” and unworkable. Murray Rothbard declared in the New York Times that on August 15 “fascism came to America” and that the promise to control prices was “a fraud and a hoax” given that it was accompanied by a tariff increase.” 

Claudio Grass is an independent precious metals advisory based in Switzerland.

Click here to read about how to invest in gold. 

My recent study covers four of the most widely owned equity-based mutual funds.

1. Vanguard Equity Income
2. Vanguard Dividend Growth
3. T. Rowe Price Dividend Growth
4. Fidelity Dividend Growth

Here’s the 10-year compounded growth rate for each:

• T. Rowe Price Dividend Growth 12.0%
• Vanguard Dividend Growth 12.0%,
• Vanguard Equity Income 11.7%
• Fidelity Dividend Growth 10.0%.

Today, each of these four multi-billion dollar funds has become far too big to allow crafting a portfolio with a suitable number of stocks that would meet my criteria. There are simply not enough publicly owned candidates.

Note how the long-term returns for all four of these funds are basically the same. In fact, the numbers for two are precisely the same.

Given these insurmountable roadblocks, your proper option is to stick with individual stocks.

For over three decades my family-owned investment firm has managed individual retirement portfolios (both current and future), comprising individual stocks (as well as bonds) meeting the rigorous dividend criteria I have written about since the early 1970s.

Each hand selected stock must pass my dividend tests of quality, seasoning, and liquidity.