Friday, January 23, 2015

Why Am I the Target of Every New Tax? Because I'm "Rich!"

As you've no doubt heard, the President wants to raise taxes....among those mentioned, taxes on your assets and taxes on 529 educational savings plans.  Ay Carumba!  (529 article posted below)

What is really frustrating to me, is the notion, which goes largely unchallenged, that families earning $250k per year are the "rich."  I'm fortunate (perhaps even lucky);  my family income is greater than $250k per year...therefore, I'm rich!  Further, our president is fond of saying that those of us earning over $250k are the "fortunate" and the "lucky."  It's our responsibility to forego tax breaks, pay higher taxes and fees, so that we can transfer our hard earned money to those "less fortunate."  What is it that differentiates the fortunate from the less fortunate?

Is it just our current family income?  Why is income the only measure of the fortunate?  How about someone who comes from a wealthy family, inherits millions, but doesn't choose to work, so has a lower income.  Is that person less fortunate?  How about the many kids I grew up with, all of whom had the same opportunities as me, but chose different paths, perhaps easier paths, and now earn much less than I do?  Are they really less fortunate?  How about an athlete receiving a full ride to college, but who didn't bother to study or get a useful degree, and is now making low wages.  Is that person less fortunate?

I am a non-union professional, and always have been.  I come from a modest background; my father was a middle school counselor, and my mother couldn't work due to chronic illness.  I paid for 100% of my college education.  My first job after college paid me $28.5k per year.  I've worked hard to get to this level of income, and its taken 25 years of long hours and strong job performance. I've never been fired from a job, but I've always been an "at will" employee, with the threat of job loss ever present.  Is that "luck?"  Perhaps.

I don't have a pension awaiting my retirement, I have to build my own pension with a 401k, rollover IRA (the Chump portfolio), and regular savings. I may or may not have social security when I retire in 15 years or so.  The Social Security website places an asterisk next to my benefits, which states that by 2030 (my retirement year), there will only be enough money to fund 77% of projected benefits.  Hmmmm

As someone who enjoys more than $250k in annual income, I also DO NOT qualify for many useful tax benefits and programs including:

  • Can't deduct IRA contributions
  • Don't qualify for a Roth IRA
  • Pay a higher federal tax rate on earnings
  • Don't qualify for any college financial aid
  • Can't deduct 529 contributions from state tax
  • and many, many more
Is $250k really indicative of a "rich" person?  In my family, after federal and California state taxes, $250k becomes $162k.  A mortgage in CA, or a rental for that matter, is around $3k/month, or $36,000.  And when you add in property taxes and outrageous prices for gas, electricity and water, mello roos and hoa fees, etc...housing consumes around $50k per year.  That leaves $112k.

Food, gas, home insurance, life insurance, car insurance, autos, clothing, healthcare, cell phones, cable, and other expenses for a family of five eat up around $50k per year, taking me down to $62k for non-essentials.  Among the non-essentials are things like vacations ($10k), the kids sports and hobbies ($12k).  Another frustrating non-essential cost is education.  The public schools in California are among the worst in the country, thus, we pay for supplemental tutoring for our 2 younger kids ($5k), and are likely to try and send them to a private high school ($13k/year).  My oldest is a freshmen in a California public a cost of $34,000/year.  Ignoring private high school for the moment (I have a year before it hits, whew!), I'm left with....drumroll....$1,000.  That's right, after all of the above, I would have $1,000 left!

Oh, and let's not forget about retirement.  I need to send money to my 401k for retirement, into a 529 account for three kids college, where I'll need to pay 100% of their education, and I have to find some savings for our regular (taxable!) savings & investment account for emergencies and rainy day!

Could I spend less?  Of course, and we do.  We can take fewer and cheaper vacations, we can drive older cars (we do) that are 100% paid for.  We can eat out less, buy new clothing less frequently, and cut back on sports and hobbies.  We could even sell our modest 2,600 square foot home and find a smaller one.

But I ask you, is this what "rich" families do?  

Thank goodness I've been socking away a few bucks from every paycheck into my 529 account.  I now have enough saved to pay for my son's four years of public university, and I'm on track to have enough for my two daughters when they hit college ages.

I definitely consider myself rich, but its because I have an incredible family, some great friends, and we're blessed with good health, not because of my income.



Push to Tax ‘529’ Plans Stokes Debate

Obama Touts Proposal as Means to Restructure Student Aid, but Critics See Challenges for Middle Class

President Barack Obama ’s push to start taxing college-saving accounts, including the popular “529” accounts, would affect millions of Americans who are stashing money for their children’s education, stirring debate about how to structure federal student aid and how to define the middle class.
The proposal, which has sparked a public backlash but faces dim prospects in Congress, targets so-called 529 savings accounts that boomed after Congress passed the tax breaks starting in 2001. States have promoted the plans as a way for middle-class parents to combat escalating college costs.
The president’s push, unveiled as part of a broader tax overhaul last weekend, would strip the main federal tax benefit from the plans by taxing any money earned from future contributions. Currently, earnings aren’t taxed and the White House says existing funds would be shielded from the new tax.
Administration officials say the changes are part of a move to restructure a slew of education tax benefits that, according to the College Board, amounted to $17.4 billion in 2012. The net effect would be to boost aid for low- and middle-income families while removing benefits currently enjoyed by wealthier families, the White House said.
The president’s proposal, which has critics within his own party, has generated concern among middle-income families who say they prefer the current system.
Elizabeth Philips, a single mother in San Diego, opened a 529 plan last year for her two boys, ages 6 and 9. She said that without more details, she is skeptical.
“I think we should be making it easier for parents to get started with 529s and not add any more roadblocks,” said Ms. Philips, who said she earns six figures but under $150,000 as a marketing professional at a technology company. At time of rising college costs, she said, “the No. 1 thing people should be doing is setting up these accounts as early as possible to maximize the time value of money.”
To buttress its case in the context of a sharpened focus on the middle class, the White House points out that around 70% of funds in 529 accounts and lesser-known Coverdell plans—which would also be affected—belong to households earning more than $200,000 a year. Thus the benefit of the tax break skews heavily toward the highest earners.
While the president’s push to eliminate tax breaks on ‘529’ college-saving plans isn’t likely to clear Congress, it has sparked debate over how to structure student aid and how to define the middle class. Here, the University of Mississippi campus in Oxford.ENLARGE
While the president’s push to eliminate tax breaks on ‘529’ college-saving plans isn’t likely to clear Congress, it has sparked debate over how to structure student aid and how to define the middle class. Here, the University of Mississippi campus in Oxford. PHOTO: ASSOCIATED PRESS
Chye-Ching Huang, senior tax policy analyst at left-leaning Center on Budget and Policy Priorities, said the president’s plan is sound. “Overall, the plan would scale back benefits that primarily benefit students from high-income families and would attain college anyway without those tax subsidies, and redirect it more towards people who actually need help for college and more likely to react to incentives,” Ms. Huang said.
Slightly over half of all the college-saving accounts are held by Americans making under $150,000 a year, according to a 2012 Government Accountability Office report. About 30% earned under $100,000 a year. There are about 12 million 529 accounts in total, according to the College Savings Plan Network, an industry group, while the average balance in a 529 account is about $21,000—enough to cover almost two years average tuition, room and board—minus aid—at a public four-year university.
Ryan Ellis, tax policy director for the conservative think tank Americans for Tax Reform, said the proposal violates an Obama campaign pledge to not raise taxes on middle-income Americans.
“This idea that this is an account for the preserve of the Huxtables out there that make $250,000 a year is kind of ridiculous,” Mr. Ellis said. Many owners of 529 plans are young parents who take pride in saving money in advance for their children’s college education, he said. “You’ve made them look like chumps for saving whatever they’ve saved so far.”
Other critics, including Capitol Hill Republicans and conservative think tanks, said the president’s plan of “streamlining” education tax benefits was vague and that removing the 529 tax break would ultimately hurt middle-income families. The change, critics say, would dissuade parents from saving and ultimately push more families to borrow for educations at a time when student debt burdening many middle-class Americans.
“What these accounts are designed for is the middle-income families that can’t afford to pay as you go and aren’t going to get need-based aid,” said Betty Lochner, head of the College Savings Plan Network. “It doesn’t make any sense to” take away the incentive to save, she said. Ultimately, many families would have to borrow more to cover expenses without the 529 tax break, she said.
The White House said 529 plans would continue to receive “favorable” tax treatment even with the proposed change. The accounts would still grow tax-free, with funds being taxed only after being withdrawn. Also, the earnings would be taxed as income to the beneficiary—the student. Officials pointed out that in most cases students are in lower income brackets than their parents and thus pay a lower tax rate.
The 529 provision was pitched as part of a broader tax overhaul, which faces steep odds on Capitol Hill. Sen. Lamar Alexander (R., Tenn.), chairman of the committee that oversees education policy, said the 529 provision is “sure to go nowhere in Congress.”
But the larger restructuring, were it to pass Congress, would make the system fairer, the White House said.
“Under the president’s plan, every dollar saved from consolidating and curbing inefficient education tax breaks—and tens of billions more—is ploughed right back into higher-education tax benefits for students and middle-class families,” an Obama administration official said.
The vast majority of middle-income families who would lose the tax break for 529 earnings would benefit from an expansion of the American Opportunity Tax Credit under the president’s plan, the official said.
Write to Josh Mitchell at

Tuesday, January 20, 2015

WBA and Update to my Rules for the Portfolio

WAG is now WBA post the Walgreen's Boots-Alliance merger.  It took a few days, but FASTGraphs now tracks the WBA symbol, so I can see how WBA is valued.  On my previous post I left WBA valuation as TBD.  Below is the FASTGraph for WBA:

Previously, I listed all the Chump holdings and whether the stock was "Core" to the portfolio.  WBA is a core holding for now with a great dividend growth streak of 39 years.  I'll continue to watch the integration of Alliance Boots, but plan to hold this stock for awhile.  

That said, WBA has reached a dangerous level of overvaluation.  I trimmed the stock some right near year end (reduced my holding by 20%), and now I'm going to turn off automatic dividend reinvestment.

In fact, I'm instituting a few new rules to the portfolio:
  1. Decide whether a holding is core or not.  Core tend to be dividend growth Champions, have very high quality financials and performance, and an excellent track record over decades. (This rule is not new)
  2. When a core or non-core position gets overvalued, say 20% - 50%, then turn off dividend reinvestment, and have the dividends go to cash for investment elsewhere in the portfolio
  3. When a core position gets dangerously overvalued (greater than 50%), then trim it back to a full position
  4. If a non-core position gets dangerously overvalued (greater than 50%), then sell it completely, and find a good replacement with a better valuation and dividend.
With these new rules in play, I've turned off dividend reinvestment to MO, GD, and WBA.


Wednesday, January 14, 2015

2014 Year End Holdings, Performance, and Valuation

Here are the Chump holdings from year end 2014, and my estimates of valuation based on prices from the 1st week of January....

32 positions, full position size is just a bit over 3% at the current portfolio value.  A few other comments here:
  • 3/32 pay 5% or more
  • 8/32 pay 4% or more in yield
  • 2/32 pay 3% or more
  • 12/32 pay 2% or more
  • 7/32 pay 0.8% or more
  • Total current yield of the portfolio is 2.92%
  • I've identified 14/32 holdings as "core," and would like to hold these forever, even when overvalued (though I may trim these occasionally)
  • Will add to three core positions due to undervaluation...T, EMR, DOV
  • Apple is largest holding, at nearly a 2x size position, but won't sell until it becomes overvalued
  • I'm going to invest the $12k in cash asap, and try to beat the S&P 500 this year.
  • BBL and TUP have been my biggest losers....holding both for now.
  • HAL has given back a 100% gain and sits close to my original purchase price...ouch
Finished the year at 12.48% total return, vs. S&P 500 return of around 13.7%.  Not bad, but not good enough.



Started a Position in UTX today.....

Limit order filled at $113.25.  1/3 full position.  Dividend contender, 21 straight years of dividend at fair value.  Nice opportunity to add a high quality industrial stock...  more to come.


Monday, January 12, 2015

2014 Full Year Results - Dividends

I've calculated my full year dividends received, and here are the results:

I really started my dividend growth, 100% individual stock allocation in 2012, and had the portfolio established on 7/1/2012.  No new money enters this account, only dividend reinvestment.

Since that date, the portfolio has grown in total value from $385,923 to $588,760 at year end 2014.

My dividend income grew over 25% year over year.  That's very cool.  If I can keep up 20% dividend growth, probably tough, but I'll try, the spreadsheet below shows where my income will be in 13 years.....and if I can keep outperforming the 20% target, I can get that income a few years sooner, and enable an earlier retirement.

To do this, I've got to examine the portfolio for dividend "laggards," companies that didn't sufficiently raise the dividend, and replace them with better actors.  I'll be conducting this analysis in the coming days/weeks.



CSX and Diesel Prices

Nice article about CSX today in the WSJ....shown below.  The Chump IRA has a full position+ in CSX, around 3.6% of the portfolio.  It looks like falling oil prices are a boon to CSX's earnings.

Cheaper Fuel Works on CSX Railroad

Surcharges Give Railroad Operator Some Pep

CSX’s December per-mile fuel surcharge was based on October diesel prices that were $3.68 a gallon. The actual average price was $3.41 and now hovers right above $3.00. ENLARGE
CSX’s December per-mile fuel surcharge was based on October diesel prices that were $3.68 a gallon. The actual average price was $3.41 and now hovers right above $3.00. ASSOCIATED PRESS
Like trains themselves—which can take a mile to stop and can’t swerve—railroad operators aren’t very nimble.
But that drawback may result in an unexpected bonanza for the likes of CSX Corp. It will be the first big U.S. railroad to report results for the latest quarter Tuesday and may overshoot. Analysts think it earned 49 cents in the fourth quarter, up from 42 cents a year earlier. Their expectations have risen by just one cent since June when oil prices started their tumble, though.
Some observers have looked at the oil-price situation in a glass-half-empty fashion: The shale boom has overwhelmed pipeline capacity and led to a surge in crude shipped by rail. That has provided a profit boost to outweigh the slump in coal use, a vital freight category for U.S. railroads.
But CSX is among the least dependent on oil shipments and, in any case, there was no evidence of a slowdown in volume recently. While that may change, the overall freight picture looks strong. Nationally, the Association of American Railroads reported that large carriers shipped a little over 4.1 million carloads in the last three months of 2014, an increase of 5.1% year over year.
The other impact of oil’s price slump may be more immediate and beneficial: Railroads, like truckers and parcel services, add fuel surcharges to their fees. In the case of railroads, though, they are based on retail diesel prices with a lag. A rapid drop in prices should cut the railroads’ actual fuel cost immediately and creates a temporary windfall.
December’s per-mile surcharge at CSX, for example, was based on October diesel prices that were $3.68 a gallon. The actual average price was $3.41 and now hovers right above $3.00. The same benefit will be inconsequential for trucking firms like YRC WorldwideInc. that have much shorter lags in adjusting fuel surcharges.
The boost for operators like CSX will be fleeting, but a pleasant surprise and a reaffirmation of upbeat earnings guidance for 2015 could augment the stock’s recent momentum. Despite the fact CSX now trades on a forward-earnings multiple that is at a 15% premium to its average of the past decade, it may be too early to tap the brakes.
Write to Spencer Jakab at

Monday, January 5, 2015

Happy New Year! 2015 (and the Case for God)

Happy New Year to anyone reading the Chump blog....  I just got back from a nice long vacation and a terrible cold.  I'll be posting some articles on 2014 portfolio performance vs. the S&P, income growth in 2014, things I learned in 2014, and what I'll do to improve in 2015.   I need to wait a few weeks for my Fidelity brokerage to post several full year metrics, including my dividends received in Q4.  Until then, here is a great article about God from the Wall Street Journal on Christmas Day.....enjoy!

Science Increasingly Makes the Case for God

The odds of life existing on another planet grow ever longer. Intelligent design, anyone?

In 1966 Time magazine ran a cover story asking: Is God Dead? Many have accepted the cultural narrative that he’s obsolete—that as science progresses, there is less need for a “God” to explain the universe. Yet it turns out that the rumors of God’s death were premature. More amazing is that the relatively recent case for his existence comes from a surprising place—science itself.
Here’s the story: The same year Time featured the now-famous headline, the astronomer Carl Sagan announced that there were two important criteria for a planet to support life: The right kind of star, and a planet the right distance from that star. Given the roughly octillion—1 followed by 27 zeros—planets in the universe, there should have been about septillion—1 followed by 24 zeros—planets capable of supporting life.
With such spectacular odds, the Search for Extraterrestrial Intelligence, a large, expensive collection of private and publicly funded projects launched in the 1960s, was sure to turn up something soon. Scientists listened with a vast radio telescopic network for signals that resembled coded intelligence and were not merely random. But as years passed, the silence from the rest of the universe was deafening. Congress defunded SETI in 1993, but the search continues with private funds. As of 2014, researches have discovered precisely bubkis—0 followed by nothing.
What happened? As our knowledge of the universe increased, it became clear that there were far more factors necessary for life than Sagan supposed. His two parameters grew to 10 and then 20 and then 50, and so the number of potentially life-supporting planets decreased accordingly. The number dropped to a few thousand planets and kept on plummeting.
Even SETI proponents acknowledged the problem. Peter Schenkel wrote in a 2006 piece for Skeptical Inquirer magazine: “In light of new findings and insights, it seems appropriate to put excessive euphoria to rest . . . . We should quietly admit that the early estimates . . . may no longer be tenable.”
As factors continued to be discovered, the number of possible planets hit zero, and kept going. In other words, the odds turned against any planet in the universe supporting life, including this one. Probability said that even we shouldn’t be here.
Today there are more than 200 known parameters necessary for a planet to support life—every single one of which must be perfectly met, or the whole thing falls apart. Without a massive planet like Jupiter nearby, whose gravity will draw away asteroids, a thousand times as many would hit Earth’s surface. The odds against life in the universe are simply astonishing.
Yet here we are, not only existing, but talking about existing. What can account for it? Can every one of those many parameters have been perfect by accident? At what point is it fair to admit that science suggests that we cannot be the result of random forces? Doesn’t assuming that an intelligence created these perfect conditions require far less faith than believing that a life-sustaining Earth just happened to beat the inconceivable odds to come into being?
There’s more. The fine-tuning necessary for life to exist on a planet is nothing compared with the fine-tuning required for the universe to exist at all. For example, astrophysicists now know that the values of the four fundamental forces—gravity, the electromagnetic force, and the “strong” and “weak” nuclear forces—were determined less than one millionth of a second after the big bang. Alter any one value and the universe could not exist. For instance, if the ratio between the nuclear strong force and the electromagnetic force had been off by the tiniest fraction of the tiniest fraction—by even one part in 100,000,000,000,000,000—then no stars could have ever formed at all. Feel free to gulp.
Multiply that single parameter by all the other necessary conditions, and the odds against the universe existing are so heart-stoppingly astronomical that the notion that it all “just happened” defies common sense. It would be like tossing a coin and having it come up heads 10 quintillion times in a row. Really?
Fred Hoyle, the astronomer who coined the term “big bang,” said that his atheism was “greatly shaken” at these developments. He later wrote that “a common-sense interpretation of the facts suggests that a super-intellect has monkeyed with the physics, as well as with chemistry and biology . . . . The numbers one calculates from the facts seem to me so overwhelming as to put this conclusion almost beyond question.”
Theoretical physicist Paul Davies has said that “the appearance of design is overwhelming” and Oxford professor Dr. John Lennox has said “the more we get to know about our universe, the more the hypothesis that there is a Creator . . . gains in credibility as the best explanation of why we are here.”
The greatest miracle of all time, without any close seconds, is the universe. It is the miracle of all miracles, one that ineluctably points with the combined brightness of every star to something—or Someone—beyond itself.
Mr. Metaxas is the author, most recently, of “Miracles: What They Are, Why They Happen, and How They Can Change Your Life” ( Dutton Adult, 2014).