Ep. 41: International ETFs, Dogs of the Dow, SCHD vs Options, and Retiring on $500K

What if I told you that doing like absolutely nothing with a highly
popular dividend ETF over five years, made an investor about $23,000.
But spending just 15 minutes every Friday, running a really specific option
strategy made $125,000 in the exact same market.
I mean, it sounds like one of those late night infomercial pitches, right?
But but the math behind that back test is actually very real.
And it fundamentally challenges that whole conventional wisdom
that passive investing is the only way to go.
Exactly. And that is exactly why you are here for this informative investing
special of the deep dive. Welcome in.
Glad to be here as always.
So our mission today is to essentially sift through a giant mountain
of recent dividend investing research. We're pulling from 10 different sources today.
Yeah, it's a lot of data.
It is. From Morningstar breakdowns to some pretty deep philosophical shifts in portfolio management.
And we're doing all this to extract actionable takeaways for your portfolio.
We're going to look at the macroeconomic storm we are in right now pivot into some specific
defensive plays. Look at some brand new dividend increases.
And yes, we are going to break down the exact mechanics of that super provocative
option strategy you just mentioned. Right, we have to.
And we also need to talk about the explosion of these new high yield ETFs.
Because some are brilliant, but you know, many of them are outright traps yielding up to 40%
that will absolutely just erode your capital. We'll cover how to spot the difference there.
And eventually we're going to tie all of this together into a really tangible six step blueprint
for retiring on $500,000. So okay, let's unpack this. Let's get into the reality of the 2026 market.
Let's do it.
According to the latest dividend informer, the macro backdrop right now is incredibly tense.
Following the US and Israeli strikes on Iran in late February,
Brent crude spiked to around $100 a barrel.
Yeah, that is a 40% jump heavily disrupting the state of hormones.
And you know, just to be super clear for the listener here before we dive into this,
we are looking strictly at the economic ripple effects of this.
We aren't taking any kind of political stance on the conflict itself.
Right, absolutely.
Our focus is entirely on that financial cascade because that geopolitical shock,
I mean, it pushed gas prices up nearly a dollar per gallon almost overnight.
Which is insane.
Right. And when diesel and jet fuel go up,
airline costs, shipping rates, and eventually consumer goods,
they all get way more expensive.
Which perfectly brings us to the Fed.
You'd think with consumers feeling that terrible pinch at the pump, relief might be coming.
But the data shows the Fed is holding rates at three and a half to 3.75%.
And the real kicker here is that seven of 19 FOMC participants are projecting zero rate cuts
for the entirety of 2026.
None at all.
Zero.
And at the exact same time, the S&P 500 forward priced earnings ratio is sitting way up at 23X
with a lot of skepticism mounting around whether these multi-billion dollar AI infrastructure
investments are actually going to pay off anytime soon.
And this is exactly why everyday investors are feeling so anxious right now.
Because let's break down why that 23X multiple is so dangerous.
Please do.
Core PCE inflation is sticky at 2.8%.
And because inflation is sticky, the Fed won't cut rates.
And because rates stay high, the 10-year treasury is hovering right near 4.5%.
Right.
So if you buy the broader S&P 500 index right now,
you are paying a premium valuation for a measly 1.2% dividend yield.
It's terrible.
I mean, it's like driving a heavily loaded truck uphill with the parking brake fully engaged.
You've got expensive gas, high interest rates, and really heavy valuations.
Why would anyone take on all that equity risk, the risk of a market crash
for a 1.2% yield when a risk-cree treasury pays almost four times that?
Exactly.
It's a horrible setup for passive indexers right now.
So if the US market as a whole is historically expensive and vulnerable to these high rates,
where do we actually hunt for value?
The research points pretty heavily toward a defensive rotation.
Yeah, definitely it does.
Let's look abroad first.
Morningstar highlighted a few really specific international plays
to sort of hedge against US concentration.
International markets are often cheaper, but you really have to be selective.
Take SCHY, right?
The Schwab International Dividend Equity ETF.
Okay.
It charges just eight basis points and yields about 3.1%.
But what is crucial is how it's built.
It intentionally caps emerging markets at 15% to protect your downside.
So it's heavily defensive?
Highly defensive.
It is entirely designed to lag during raging bull markets.
But to fundamentally protect your capital during the exact kind of high rate,
high oil drawdowns we are seeing right now.
Makes sense.
Then there is Vanguard's VGI, which operates a bit differently.
It requires a really strict seven-year,
consecutive dividend growth hurdle to even be included in the fund.
Which is a great filter.
Right, that hurdle just completely weeds out the yield traps.
Companies with high dividends only because their stock price is currently collapsing.
And finally, there's IEFA,
which gives you broad exposure to essentially 99% of the investible developed overseas market
with a solid 3.2% yield.
Those are all solid options.
But let's bring it back to US soil for a second,
because we have a really telling showdown in the consumer's staple sector from the sources.
Proctor and gamble versus coalgate palm olive.
Oh, this one was fascinating.
It is.
This comparison is basically a masterclass in looking under the hood of legacy dividend payers.
PNG is facing a severe $400 million annual headwind from recent tariffs.
Ouch.
Yeah, they're operating income actually declined by over six and a half percent.
And to protect their margins,
they're currently executing 7,000 job cuts.
I mean, they are entirely on the defensive right now.
While coalgate is totally on the offensive,
they beat revenue estimates with 2.2% organic growth,
largely by using AI analytics to speed up their supply chain execution.
Yeah.
But wait, I'm looking at the notes here.
And coalgate took a massive $919 million hit
for something called a goodwill impairment
from their Philorca skincare acquisition.
I mean, a near-billion-dollar hit sounds absolutely terrifying to a retail investor.
It sounds awful, yeah.
But we have to separate the accounting from the actual cash flow.
Okay, explain that.
Goodwill is basically just the premium accompany pays
over the fair value of an asset when they buy it.
So say you buy a business for $2 billion,
but its actual hard assets are only worth $1 billion.
That extra billion is goodwill,
the value of the brand name, essentially.
Right.
If the brand loses appeal,
accountants force you to write down that value.
So coalgate took a paper loss,
but it doesn't affect the actual cash
they generate selling toothpaste today.
Their core operations are incredibly strong.
Ah, okay, that makes a little more sense.
All right.
Well, speaking of terrifying charts,
the research also brings up United Health ticker UNH
as a classic dogs-of-the-dow candidate.
Oh, yeah, this is a highly debated one.
I'm looking at UNH's stock chart right now,
and it is just a bloodbath.
They've been dropping steadily.
My instinct as an investor is to run away from this
so I don't catch a falling knife.
How does any strategy justify stepping in front of that?
It all comes down to a concept called mean reversion.
The dogs-of-the-dow strategy,
it intentionally targets underperforming
mega-cap blue chips,
precisely because they're depressed stock prices
result in these really elevated dividend yields.
Yeah.
The underlying thesis is that United Health
is simply too deeply embedded
in the American health care infrastructure
to permanently fail.
Wall Street Consensus actually supports a turnaround here.
You are taking on short-term discomfort
to lock in a premium,
historically dominant company
at a deeply discounted valuation.
You're buying when there is blood in the streets, essentially.
Exactly.
Okay, so finding beaten-down stocks
is one approach.
But true compounding takes off
when a company actively increases your payout year after year.
We reviewed a really interesting retrospective
from an analyst who spent six years
deeply focused on dividend investing.
Right, and his biggest takeaway was that
you have to stop trading tickers
and start actually buying businesses.
It is a critical mental shift.
It really is.
He distinguishes between slow growth
and high-growth stocks.
So with a slow-grower like Coca-Cola
which micro earnings say 5% a year,
the price you pay matters enormously.
Right, because if you overpay,
they can't grow their way out of it.
Exactly.
If you buy Coke at a high multiple,
their slow growth will never value out
if the valuation contracts.
But with a high-grower like Microsoft,
paying a premium is often mathematically justified
because their explosive future earnings
will quickly catch up to whatever price you paid.
He also referenced Bill Ackman
to make a really great point
about capital expenditures.
You have to understand the difference
between maintenance,
capex, and growth capex.
This is such an important distinction.
Think of telecom companies spending billions
just to upgrade cell towers to 5G, right?
They aren't actually winning new customers.
They are just spending cash
so existing customers don't leave.
That is maintenance.
Growth capex is what tech companies are doing right now.
Building AI data centers
that already have contracted,
paying customers lined up.
One treads water
and the other builds a completely new river of cash.
Keeping that framework in mind is vital
when we look at the six recent dividend increases
highlighted in these sources.
We need to ask,
are these companies treading water
or are they growing?
So let's look at Qualcomm.
They just increase their dividend by 3.4%.
Not huge,
but they also authorize a massive
$20 billion share buyback.
It's huge.
I want to spend a second
on how buybacks work
because it's effectively a hidden dividend.
Imagine you and nine friends buy a pizza.
There are 10 slices.
If the company buys back shares,
it's like two of your friends getting up,
leaving the table and leaving their slices behind.
That's a great way to picture it.
Right.
Your share of the remaining pizza
and the company's future profits
just got about 14% bigger
without you having to spend a single time.
And with Qualcomm's forward price to earnings ratio,
sitting at an incredibly cheap 11.5,
executing a massive buyback right now
is just a brilliant allocation of capital.
Absolutely.
Then you have real-t income,
ticker O,
they just marked their 32nd consecutive year
of dividend growth,
yielding around 5.09% right now.
But since they are a real estate investment trust,
they rely really heavily
on borrowing money to buy new properties.
Right, so that brings us right back
to the Fed holding rates steady.
Exactly.
The research uses a dividend discount model,
which values a stock based on its future dividend payouts.
And that model prices real-t income's fair value
between roughly $68 and $72.
Okay.
But with a 66% chance of zero rate cuts this year,
borrowing stays really expensive for them.
That consistent monthly dividend they pay
is basically the primary reason investors
are willing to hold the stock
through this high rate environment.
Let's look at a couple of other quick hikes.
Watts go just hit investors
with a massive 10% dividend increase.
Why?
Because they are actively expanding
their gross margins targeting 30%.
They have the free cash flow to actually afford the hike.
Which is fantastic.
On the flip side,
CSW industrials bump theirs by 11.1%.
But their organic revenue actually declined.
See, that is a major red flag.
If organic revenue is down,
it means they are completely reliant
on an aggressive acquisition spree
to fund that dividend.
If the acquisition stop or if debt gets too expensive,
that dividend is in real danger.
We also briefly saw agree-reality
doing great with 66.8% investment grade tenants,
just opportunistically growing.
Yeah, a much safer play.
So we've established that traditional dividend growth
is a really solid foundation.
But this brings us to probably the most
provocative piece of research in our stack today.
Oh, this one is going to ruffle some feathers.
It is.
It asks a really uncomfortable question.
What if the overwhelmingly popular
just by the SEHD ETF and Chill narrative
is leaving hundreds of thousands of dollars on the table?
This is where we get into that back test you mentioned
at the very beginning of the deep dive.
It's a five-year test from April 2021 to April 2026,
putting $50,000 into SEHD head-to-head
against a purely mechanical options strategy.
The SEHD T-side is basically the ultimate passive dream, right?
You invest the 50 grand,
you reinvest the dividends,
and you go to sleep.
Over five years,
that grew to $73,740.
That's a 47.48% total return,
generating about $10,198 in pure dividend income.
Zero effort.
But the option strategy just could completely
blew it out of the water.
They sold QQQ put credit spreads.
Now, if you are unfamiliar with options,
selling a put credit spread is essentially acting
like an insurance company.
You are selling someone else the right
to sell you the Nasdaq 100 at a certain price.
Okay.
As long as the market doesn't crash below that price,
you just keep the insurance premium they paid you.
And the rules they used for this were entirely robotic.
They opened the trades exactly at 42 days to expiration
and closed them exactly 21 days later, no matter what.
Any uninvested cash just sat in the treasury bond ETF,
earning interest.
The result.
That strategy grew the $50,000 to $175,566.
A 251% return,
producing over $93,000 in pure income.
See, I have to push back here, though.
This feels like committing apples
to a completely different solar system.
Gerna.
SHD is entirely passive.
Selling quit credit spreads requires actively logging in
and trading every week.
Also, acting as an insurance company sounds great
until the hurricane hits.
What happens to this strategy during a massive market crash?
That is the exact right question to ask.
What's fascinating here is the risk management.
The secret sauce of this strategy was its architecture.
They used a 200-day simple moving average filter.
Meaning what?
They only executed trades when the Nasdaq was trading
above its 200-day average.
When the market dipped below it,
the strategy acted as an automatic circuit breaker.
They completely stopped trading and just collected treasury interest.
That simple rule kept the options trader
entirely out of the brutal 2022 recession.
But it wasn't perfect, right?
I see in the data they took a really heavy $20,000 hit
during the tear of drawdown
and a $33,000 hit during the recent Iran crisis shock.
Right.
Because they didn't manually fix losing trades,
they took the full force of sudden unexpected drops.
But here is the key metric, the sharp ratio.
Right.
The sharp ratio measures your return per unit of risk.
It asks how much volatility did you endure to get these gains.
SCHD had a sharp ratio of 0.369.
Even with those massive drawdowns,
the option strategy had a sharp ratio of 0.763.
What?
It generated double the risk adjusted performance.
So the argument here is that spending 15-20 minutes
every Friday is a remarkably small price to pay for that kind of outperformance.
Listen, I totally get the math.
But selling options manually still sounds terrifying to a lot of people.
Wall Street obviously knows this,
which is why they have rushed to package these exact strategies into ETFs.
But reading through the research,
I mean, it is the absolute wild west out there right now.
Oh, it is an explosion of financial engineering.
Let's look at QQQI.
This is an ETF that uses a data-driven call-option strategy on the NASDAQ
to pay out around a 14% distribution rate.
And the compounding math they modeled on QQQI is staggering.
If you invest $20,000 and relentlessly reinvest that 14% yield,
it hits this mathematical inflection point around year 7.
By year 30, that initial 20 grand theoretically grows to $25,000 shares
worth $1.2 million.
Which is wild.
Having paid out $850,000 in total dividends.
The theory is beautiful, sure.
But the reality of this new ETF landscape is littered with land mines.
There are now over 156 weekly dividend ETFs out there
and many of them will absolutely destroy your wealth.
So what's the biggest danger?
What's the trap?
The single stock weekly ETF.
Take TSYY for example, which tracks only Tesla.
You have zero diversification
and you absorb intense concentrated volatility.
Right.
I like to think of a single stock weekly ETF for income,
like trying to balance on a unicycle and wind storm or like a leaky bucket.
The intense volatility of the underlying stock
causes the capital inside to slowly leak out.
The fund might offer a massive 50% yield,
but all that yield is doing is frantically refilling a bucket
that is constantly draining.
Over time, your new yield investment just shrinks.
You want this stability of a four-wheeled vehicle.
Exactly.
Now, there are some good high-yield funds out there.
CHPY focuses on the semiconductor sector,
NVIDIA, TSMC, AMD.
It yields 40% to 60%.
But crucially, it is broadly diversified
across the entire sector, smoothing out the risk.
But then you have the ugly funds like XDTE.
It yields 40% using zero days to expiration covered calls on the S&P 500.
Explain why that zero days to expiration detail is so bad.
When a fund writes an option that expires on the exact same day,
they are capping their potential upside for that single day.
If the market drops heavily on Monday,
the fund's value drops.
On Tuesday, if the market fiercely rebounds,
the fund misses out on the recovery
because their upside was capped by the daily option they sold.
Oh, wow.
Yeah, it performs terribly after market drops
because it mathematically cannot recover quickly
due to really bad execution.
Okay, so we've analyzed the high-rate macro-environment,
defensive international ETFs, US consumer staples,
dividend growers,
and the really wild frontier of options ETFs.
How does a listener actually synthesize
this mountain of information into a tangible real-world portfolio?
That's the big question.
And we use the framework from our final source for this.
The multipliers,
six-step blueprint for retiring on $500,000 tomorrow.
They assume a required income of $35,000 a year.
Wait, hold on.
$35,000 on a half-million-dollar portfolio
is a 7% withdrawal rate.
Every financial blog on the internet treats the 4% rule as gospel.
If you pull out 7%,
won't you just go broke the second the market crashes?
You would if you were just selling index funds.
It comes down to something called sequence of returns risk.
If the market crashes 30%,
and you are forced to sell shares to pay your mortgage,
you are permanently destroying capital that can never recover.
Right.
This blueprint only works because its strict asset architecture
prevents you from ever having to sell equities in a downturn.
Let's walk through that architecture.
Step two of the blueprint is the buffer.
20% of the portfolio, or $100,000,
sits entirely in T-bills yielding around 3.6%
That guarantees 18-24 months of living expenses are always liquid and safe.
That's your mode.
Step three is the high yield base.
35% or 175,000 goes into real estate investment trusts
and business development companies
like Realty Income and Main Street Capital.
That targets roughly a 6.3% yield.
Then step four is inflation hedging.
Another 35% goes into classic, reliable dividend growers
like Procter & Gamble, Coca-Cola, Johnson & Johnson.
They only yield about 2.8% right now,
but historically their income stream doubles every decade,
which fights off inflation over a long retirement.
And finally, step five is the options layer.
You use conservative covered calls to generate an extra one to one and a half percent in yield.
The blueprint recommends using a .30 Delta.
What does .30 Delta mean for the everyday investor?
Delta simply measures the probability that an option will finish in the money.
A 0.3 Delta means there is roughly a 30% chance the stock gets called away from you
and a 70% chance you just collect the premium and keep your shares.
It's a very conservative way to juice your returns without taking on excessive risk.
When you add all that up, the organic income generated by the stocks and options alone
covers about 70 to 77% of that $35,000 goal.
The safety bills cover the rest.
But the blueprint stresses one golden rule above all else.
Rebalance quarterly only and never check it daily.
Yeah, that's critical.
Daily monitoring of a portfolio design for 30 years of income
actively causes psychological distress and leads to panic selling.
Totally.
To summarize the whole journey we've taken today,
navigating a world with sticky inflation,
high interest rates, and really expensive stock valuations,
requires so much more than just blindly buying an index fund.
Absolutely.
Whether you lean on the defensive mechanics of those international ETFs or exploit the massive
compounding power of options or build out that resilient four-part retirement structure we just
talked about, the core lesson remains the exact same.
You have to think like a business owner protecting capital.
Which leads perfectly into a final provocative thought from that six-year dividend retrospective
we discussed earlier.
Yeah, I love this point.
We've spent this entire deep dive optimizing stock yields,
agonizing over an extra two or three percent in returns.
But what if the most important business you own is actually yourself?
Right.
If you are only able to invest $100 a month,
the difference between a 10% and a 20% annual return is literally $10.
It is mathematically negligible.
So how much time are you spending analyzing your own personal profitability,
expanding your skills and growing your career income compared to just staring at your stock portfolio?
That is a phenomenal question for you to mull over.
If the broader market feels confusing and overpriced right now,
maybe the highest yielding asset you can invest in today is your own earning power.
Thank you for joining us on this deep dive.
Keep looking at the underlying data.
Keep questioning the consensus and we will see you next time.