Archives for May 2023

The hard problem of retirement planning continues to be how to turn a pile of assets (like in a 401k plan) into the maximum reliable income stream for decades without running out of money. Historically, companies that pay a high-yet-reliable dividend have been referred to as “widow and orphan” stocks. The academic paper Why Dividends Matter by Paul Schultz explores the underpinnings of this practice, including the “implicit contract” between the company and shareholders that “you can consume at the level of the dividend for the foreseeable future without fear of running out of money.” The debate about investing based on dividends will not be resolved by this paper, but here are a few quotes:

It is not necessary to think that a practice of consuming only from dividends is a result of limited rationality, biases, or mental accounting. When firms establish a quarterly dividend, they implicitly tell investors that they can consume at the level of the dividend for the foreseeable future. So, investors who want to smooth consumption can do so by consuming dividends.

As a whole, the investors in this survey are far more concerned about the danger of depleting assets by selling stock, than by spending dividends. This is why investors like dividends. They allow to investors to smooth consumption by indicating how much they can consume without depleting assets.

Now that we have many ways to backtest historical stocks returns, the popular counter-argument is that we have other ways to decide how much is “safe” to withdraw, and that amount is often more that the current dividend yield available. We can simply some stock shares as needed if the dividend is not enough. Which is the better way to decide how much is safe to withdraw?

Historically, do dividend payouts keep up with inflation? This would seem to be important if investors are only spending the dividends every year. Otherwise, they would eventually need to sell shares of stock anyway. Table I of the paper “Changes in Dividends and Inflation” covers this using CRSP data for all US stocks. Hat tip to Klement on Investing, who converted Table I into a nice visual chart:

Over the past nearly 100 years, the dividend growth rate has mostly matched inflation. Dividend growth did fall behind inflation during the period of 1970s high inflation. In turn, dividends have grown much faster than (historically low) inflation in the last 20 years.

Here’s another chart from Hartford Funds which separates the portion of S&P 500 total market returns into share price appreciation and dividends.

I would note that these charts cover the broad US stock market, not just a subset of high-dividend stocks nor international stocks. I certainly don’t think we can get away with buying only the highest dividend-yielding stocks and calling it a day. However, I do believe that dividend payouts are is a useful data point to consider, amongst many others. I tend to pay attention to the dividend yield on the S&P 500 and also certain indexes like those tracked by the Vanguard Value Index Fund ETF. I also expect the dividends on both to grow more or less with inflation over the long run.

Even Vanguard’s founder Jack Bogle had the following to say (source):

But you ought to think about all sources of your retirement income. Having said that, when you own an equity portfolio, don’t get into it for market reasons, get into it for income reasons. Oversimplifying, what you want to do when you retire is walk out to the mailbox on Social Security day and on dividend payment day for the funds—assuming they’re the same day—and make sure you have two envelopes out there. One is your fund dividend and the other is your Social Security check. The Social Security will keep up with inflation year after year, and dividends are likely to increase year after year. They have been going up. Every once in a while there is an interruption, such as the Great Depression of the early 1930s. And many bank stocks eliminated their dividends in 2008, so there was obviously a drop. But it has long since recovered, and then some.

Bet on the dividends, and not on the market price. You’ve got those two envelopes and that’s your retirement. If you have a pension plan (one that is not likely to go bankrupt—and a lot of them are likely to) that is a third envelope. You want to be concerned about whether you have enough income to pay utility bills, pay for your food, pay your rent or your mortgage, whatever it might be, every month. You want income to help you pay those bills. And in the retirement stage, that’s what investing should be about—regular checks from dividends and/or from Social Security and/or from a pension account.

For the average person, the most valuable information may be knowing how to identify and avoid the most current financial scams. Nearly everyone I know has either been targeted or has become a victim of one of these scams, and I am betting many people who lost money are too embarrassed to admit it publicly. (Literally in the middle of writing this post, I received another scam call.)

One scam that you may not have heard of is the ACAT Transfer scam. A thief will obtain enough of your personal information to open a new E*Trade brokerage account, and then they will request an ACAT transfer of the entire contents of your existing brokerage account (ex. Fidelity) to that new fake E*Trade account which they control. At this point, they can quickly liquidate the account and send the money elsewhere. The key here is that they just need to be able to open an empty, new brokerage account in your name plus find your Fidelity account numbers from a statement. They don’t need your Fidelity username and password (or pass two-factor authentication).

Even more importantly, you won’t notice unless you log into your account. Opening a new E*Trade or other brokerage account will not trigger a credit alert or most identity protection services. Many brokers (see below) will process an outgoing ACAT transfer without confirming with you or even notifying you in any way. If you don’t look at your statements closely, it may be months or longer before you notice.

You can read about the experiences of multiple victims in this Reddit thread. Here’s a partial quote in case the thread is deleted.

Lost around 150k worth of stock from my fidelity brokerage account to an online scam (ACATS Transfer)

My husband has a fidelity brokerage account and last month all his shares were transferred out of his account. Upon calling the customer care, we were told that his stocks were transferred by him to an account with eTrade.

We communicated that we don’t have any e-trade account and the transfer was not initiated by us. We were shocked that no notification/intimation was sent to us before completing the transfer and no authorization was required!!

It looks like a fake account was created in his name with eTrade which initiated an account transfer. He did not receive any request/emails/text from Fidelity that the stocks are being moved. The etrade account has been frozen but the stocks are already sold and proceeds are transferred to another account.

The good news is that the original poster was eventually able to get back their funds, although it must have been a very stressful two months. It is not clear if Fidelity reimbursed them out of their own pockets or were able to reverse the transactions.

We were able to recover the stocks after waiting and following up for 2 months. Fidelity reps were able able to help us.

The discussion pointed out the potential usefulness of a relatively unique Fidelity feature called Money Transfer Lockdown (Fidelity login required). Here is a summary of the features and how to activate it per Fidelity:

Money Transfer Lockdown, an additional security measure Fidelity provides to its customers, may affect or disallow certain types of transactions. In order to transfer between two of your Fidelity accounts (In your example brokerage and CMA) when Money Transfer Lockdown is enabled, you will need to temporarily disable the feature prior to making the transaction. Once you have successfully made the transfer, you can enable the lockdown again by logging in into your Fidelity.com account anytime and visit “Security Center” from your “Profile” page.

Protected Transactions:

• Outbound money transfers
• Transfers between Fidelity accounts
• Transfer of shares and assets to other institutions
• Individual withdrawals (previously scheduled EFT transfers from an account might still be processed)

Unaffected Transactions:

• Deposits or transfers into a Fidelity account
• Checkwriting and direct debits
• Debit/ATM transactions
• Trading
• Scheduled Required Minimum Distribution (RMD) or Personal Automatic Withdrawal plan
• BillPay

A member of the Bogleheads forum helpfully tested out this service by attempting various transfers out of their “locked” Fidelity account. The Money Transfer Lockdown service did successfully block a legitimate ACAT transfer request from another brokerage. However, ACH pulls went through for those accounts that have routing and account numbers like a traditional bank account. Here are their brief conclusions:

Fidelity’s account lockdown blocks fraudulent ACATS pulls. It is an excellent, differential feature that Schwab and Vanguard don’t have. However, it has some limitations and vulnerabilities. It provides no extra security against fraudulent push of assets and doesn’t block fraudulent ACH pulls. To deal with ACH limitations, using CMA as an intermediary account from brokerage to the external world may be prudent.

As a result, I have taken to using the Money Transfer Lockdown service on all available account types (doesn’t work on 401k accounts, for example). It’s a little extra hassle, but definitely worth the added peace of mind. I hope that Vanguard and other brokers will add a similar feature to make it harder to perform an ACAT transfer without notice. I also believe that Fidelity would do a much better job of working to restore my assets than any other broker, especially the smaller brokers.

Now, if someone gains full access to your Fidelity account (username + password + 2FA), they can simply turn off the Lockdown feature. However, every time I do that I get both a text and an e-mail, so hopefully that will provide early enough notice to block any fraudulent transfers, or at least make the clawback faster. In addition, I feel that most people need to make sure they have a difficult PIN number on their phone, as login security is quickly coming down to having your phone as a type of physical “key”.

The quiet nature of ACAT transfer is what makes this scam possible! They are taking advantage of standard industry practice that is a weak point in financial security. The scammers all know this. We need to change this process to increase security. First, I’ve never had a brokerage account opening trigger any credit alert or identity theft monitoring service. Second, I recently transferred a significant amount of assets to Fidelity from Public using ACAT, and Public did not send me a single email, text, or phone call. My Public account was simply zero one day. I did legitimately request this transfer, but what if I didn’t?!?