Question:
I have a theoretical question that relates to the safety of owning ETFs and mutual funds vs. a basket of individual stocks: When I own a basket of individual stocks, it is obvious to me that I own shares in the specific companies. If I own the same shares through an ETF or mutual fund, I am not sure, technically, what I own. For example, let’s say I invest my retirement money into two investment vehicles—Vanguard Total Stock Market Index Fund (VTSAX) and Vanguard Total Stock Market ETF (VTI). In the unlikely event that Vanguard went bankrupt for some reason, is there a way that I could lose my entire investment by owning a mutual fund or ETF instead of an equivalent basket of individual stocks?
Answer:
When you own shares of either an index fund or an index ETF, you own a portion of the underlying securities. They are designed to offer diversification—by sector or index—for those who do not want to manage individual stocks. There are some subtle differences between mutual funds and ETFs in how they are managed, fees charged and how they approach taxes.
The main difference is that ETFs experience price changes, as they are bought and sold throughout the day rather than the end-of-day pricing a mutual fund has. You also have the ability to sell short, buy on margin and purchase as little as one share.
However, from a safety perspective, there is no difference between a mutual fund and an ETF. The underlying investments are held in a trust for the investors. There is a separation between the money manager and the custodian in most cases. If the fund manager or a subsidiary of a management firm were to go bankrupt, the manager has no proprietary rights to the assets held by individuals. The assets should be divvied up among the investors and you should receive a check.
When considering a mutual fund or ETF, there is no risk to your money other than the underlying investments that can go up or down in the market. You are at no risk if the manager were to fail. The Securities Investor Protection Corporation (SIPC) protects the clients of brokerage firms that are forced into bankruptcy by returning cash, stock and other securities, and other customer property. The insurance provides customers up to $500,000 coverage for cash and securities held by the firm.
Question:
I’d like to know more about two stocks with high dividends. One is Suburban Propane Partners that pays 7.7 % dividend. The other is a stock I’ve owned a few shares of for many years, DNP Utility. It pays high dividend, and I’ve always worried about the price crashing if they can’t keep up that high dividend; however, the price seems to have remained fairly stable for many years. What do you think of these two holdings?
Answer:
We’d like to start with DNP Select Income Fund Inc. (NYSE:DNP). DNP is a closed-end diversified management investment company. So the first thing you need to look at is if it is trading at a discount or at a premium. If it is trading at a premium, we highly suggest you avoid the investment as you will be paying more than the underlying assets are worth. Currently, DNP is selling for more than a 30% premium. We suggest that you avoid it, regardless of its high dividend yield of 7.1%.
Suburban Propane Partners, L.P. (NYSE:SPH) is a master limited partnership, so the partnership does not pay taxes from the profit. The dividends are only taxed when unitholders receive distributions. The company specializes in the distribution of propane, fuel oil and refined fuels, as well as the marketing of natural gas and electricity in deregulated markets.
Suburban Propane is worth consideration, with a dividend yield at 7.7%. The dividend appears relatively safe as Value Line shows that the company has been paying it for nearly 20 years. However the natural gas prices have decreased. Propane is a byproduct of the production process for natural gas and petroleum products. The company could see more pressure, as their pricing power is gone. The weak housing market and the warmer-than-normal weather are all detractors from the stock. The stock does not meet our financial strength criteria. However, if you have already purchased this stock, it has probably performed well for you.
Disclosures:
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
