Dividends as a form of annuity

In the long list of humanity's bad ideas, the creation of the annuity industry sits near the top. In my opinion, classic annuities, as sold by insurance and financial companies, are a horrifically bad investment, yet they are widespread, with almost a quarter trillion (that's a "t," as in "tomfoolery") dollars of new annuities sold in 2018.1 Insurance industry annuities are difficult to understand, the fees are cleverly obfuscated, they lock up capital with expensive exit charges, and they often have complex tax ramifications. A properly constructed set of index funds generally can accomplish the same purpose. They are, in my view, a bottom tranche of the financial industry - you have to try hard to find a worse investment.

If someone tries to sell you an annuity, I have one piece of advice: run.

With all of those accolades, it is time to cue the United States Congress. Never seeing lobbyist money that is not attractively green, in May the House passed the Secure Act which will make it *easier* for financial firms to lace 401(k) plans with annuities. The Secure Act eliminates much of the legal liability on the annuity provider, paving the way for industry growth in retirement plans. You can read more about it here.

Notice above that I said "classic annuities as sold by insurance companies." The concept of an annuity, as opposed to an annuity product, is wonderful indeed. An annuity is a fixed sum of money paid each year, often for the remainder of an individual's life. That is inbound cash flow, something we like here at One Day In July. And there is a simple way of achieving it.

They're called dividends and interest, and they are the money that businesses and bonds pay their owners. When you wrap hundreds or thousands of them together in an index, you wash away the default risk on any one security, and reduce the risk in the financial instrument.

Dividends and interest are not guaranteed to rise, but historically, over time, they have. Looking at the second quarter dividend on the S&P 500 via a Vanguard ETF,2 the per-share payment rose from $1.01 in 2017 to $1.16 in 2018 to $1.39 in 2019 in the June quarter. That is over a 37% rise in just two years, and the investor didn't have to pay an insurance company 8% of his/her capital to buy it!

That rise is above average, but I encourage you to look at the column second from the right on this page at the NYU business school. You can see that the yearly dividend on the S&P 500 rose from $16.07 per share in 2000, to $53.61 in 2018. So regardless of the gain in the investment, the investor got an annuity each year, and in most years it rose. In fact, since 1960, it has only declined six times. And much of this annuity is taxed at the lower dividend tax rates.

This is the type of annuity you want as an investor: transparent, simple, inexpensive to own, tax-efficient, and liquid. You receive the benefits instead of an an insurance company.

Dan Cunningham

1. Secure Act - CNBC 7/3/19
2. VOO ETF via Stocknews.com

Return to Articles
DIFFERENTIATORS
GETTING STARTED
MATERIALS
How We Are Different
Understanding Your Financial Statement
Articles by Dan Cunningham
Investing with Low Cost Index Funds
Pay Yourself First
Why Use a Fiduciary Financial Advisor?
Vermont Financial Planning
Quarterly Booklets
Financial Planning
Investor Resources
Investment Tools
Financial Firm Comparison
The Investment Process
One Day In July in the Media
Local Financial Advisor
How to Switch Financial Advisors
Frequently Asked Questions
Book Recommendations
Types of Investors
One Day In July Careers
Prospect Booklet
Square Mailers
Fee Calculator
SERVICES
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Investing in Bennington, VT
Vermont Financial Advisors
Investing in Albany, NY
Investing in Saratoga Springs, NY
New Hampshire Financial Advisors
INVESTING THOUGHTS
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
Inflation
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Taxes on Investments
How Financial Firms Bill
Low Investment Fees
Retirement Financial Planning
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Investing Concepts
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics
The Forward P/E Ratio

Vergennes, VT Financial Advisors

206 Main Street, Suite 20

Vergennes, VT 05491

(802) 777-9768

Wayne, PA Financial Advisors

851 Duportail Rd, 2nd Floor

Chesterbrook, PA 19087

(610) 673-0074

Burlington, VT Financial Advisors

77 College Street, Suite 3A

Burlington, VT 05401

(802) 503-8280

Middlebury, VT Financial Advisors

79 Court Street, Suite 1

Middlebury, VT 05753

(802) 829-6954

Hanover, NH Financial Advisors

26 South Main Street, Suite 4

Hanover, NH 03755

(802) 341-0188

Rutland, VT Financial Advisors

734 E US Route 4, Suite 7

Rutland, VT 05701

(802) 829-6954


v 2.4.59 | © One Day In July LLC. All Rights Reserved.