Former Equifax chief apologizes to Congress over hack

WASHINGTON (Reuters) – The former head of Equifax Inc (EFX.N) apologized repeatedly on Tuesday at a congressional hearing for the theft of millions of people’s personal data in a hacking breach, saying it took weeks for the credit bureau to understand the extent of the intrusion.

Richard Smith retired last week but the 57-year-old executive led the company over the time of the hack, which Equifax acknowledged in early September.

Late on Monday, Equifax said an independent review had increased the estimate of potentially affected U.S. consumers by 2.5 million to 145.5 million.

In March, the U.S. Department of Homeland Security alerted Equifax to an online gap in security but the company did nothing, said Smith.

“The vulnerability remained in an Equifax web application much longer than it should have,” Smith said. “I am here today to apologize to the American people myself.”

Equifax keeps a trove of consumer data for banks and other creditors who want to know whether a customer is likely to default.

Former Republican Senator Saxby Chambliss checks his watch as he and City of Pasadena Councilmember Steve Madison stand with Richard Smith, former chairman and CEO of Equifax Inc., prior to Smith’s testimony before House Energy and Commerce hearing on “Oversight of the Equifax Data Breach: Answers for Consumers” on Capitol Hill in Washington, U.S., October 3, 2017. REUTERS/Kevin Lamarque

Smith said both technology and human error opened the company’s system to the cyber hack, which has been a calamity for Equifax, costing it about a quarter of its stock market value and leading several top executives to depart.

A company employee failed to tell the information team a software vulnerability that hackers could exploit should be fixed, Smith said. Then, a later system scan did not uncover the weak point.

Slideshow (3 Images)

Smith said he was notified on July 31 that “suspicious activity had occurred,” after security personnel had already disabled the web application and shut down the hacking. He said he only learned in the middle of August the scope of the stolen data.

On Aug. 2, the company alerted the Federal Bureau of Investigation and retained a law firm and consulting firm to provide advice. Smith notified the board’s lead director on Aug. 22.

That timing could help lift suspicions that three executives who sold stock on the first two days of August illegally used insider knowledge of the hack. Smith said the three “honorable men” did not know about the breach at that time.

Smith deferred to the FBI on questions of whether the hack had been sponsored by a nation-state.

“It’s possible,” he said when asked if the hackers were from another country.

Writing by Lisa Lambert and Patrick Rucker; Editing by Clive McKeef and Bill Rigby

Our Standards:The Thomson Reuters Trust Principles.


Former Equifax chief will face questions from U.S. Congress over hack

WASHINGTON (Reuters) – U.S. lawmakers are due to question the former head of Equifax Inc (EFX.N) at a Tuesday hearing that could shed light on how hackers accessed the personal data of more than 140 million consumers.

Richard Smith retired last week but the 57-year-old executive will answer for the breach that the credit bureau acknowledged in early September.

Late Monday, Equifax said an independent review had boosted the number of potentially affected U.S. consumers by 2.5 million to 145.5 million.

In March, the U.S. Homeland Security Department alerted Equifax to an online gap in security but the company did nothing, said Smith.

“The vulnerability remained in an Equifax web application much longer than it should have,” Smith said in remarks prepared for delivery on Tuesday. “I am here today to apologize to the American people myself.”

Smith will face the House Energy and Commerce Committee on Tuesday but there will be three more such hearings this week.

Equifax keeps a trove of consumer data for banks and other creditors who want to know whether a customer is likely to default.

The cyber-hack has been a calamity for Equifax which has lost roughly a quarter of its stock market value and seen several top executives step down alongside Smith.

Smith’s replacement, Paulino do Rego Barros Jr., has also apologized for the hack and said the company will help customers freeze their credit records and monitor any misuse.

There has been a public outcry about the breech but no more than 3.0 percent of consumers have frozen their credit reports, according to research firm Gartner, Inc.

Smith said hackers tapped sensitive information between mid-May and late-July.

Security personnel noticed suspicious activity on July 29 and disabled web application a day later, ending the hacking, Smith said. He said he was alerted the following day, but was not aware of the scope of the stolen data.

On Aug. 2, the company alerted the FBI and retained a law firm and consulting firm to provide advice. Smith notified the board’s lead director on Aug. 22.

Patrick Rucker contributed from Washington; editing by Clive McKeef.

Our Standards:The Thomson Reuters Trust Principles.


Ford creates team to ramp up electric vehicle development

(Reuters) – Ford Motor Co has formed a team to accelerate global development of electric vehicles, an executive said on Monday.

One aim of Ford’s “Team Edison” is to identify and develop electric-vehicle partnerships with other companies, including suppliers, in some global markets, according to Sherif Marakby, vice president of autonomous vehicles and electrification.

Marakby said the group will be based in the Detroit area and work with regional Ford electrification teams in China and Europe.

The team will report to Ted Cannis, who has been named global director of electrification.

Reporting by Paul Lienert in Detroit; Editing by Jeffrey Benkoe

Our Standards:The Thomson Reuters Trust Principles.


Equifax reviews its top lawyer's role in executive stock sales: WSJ

(Reuters) – Equifax Inc is reviewing its Chief Legal Officer John Kelly’s involvement in stock sales by company executives made weeks before the credit-reporting service disclosed a massive data breach, the Wall Street Journal reported on Sunday.

Three senior executives including the company’s chief financial officer sold $ 1.8 million in shares within three days of the company learning on July 29 that hackers had breached personal data for up to 143 million Americans.

Kelly had the responsibility for approving the share sales and is also central to broader questions facing the Equifax’s board because he is responsible for security at the company, the WSJ reported, citing people familiar with the matter.

Kelley had broad responsibilities beyond legal services in his position at Equifax that differed from peers at rival credit-reporting companies, WSJ said.

Equifax was not immediately available for comment.

In a letter to the U.S. House of Representatives, made public on Friday, Equifax said its board of directors has formed a special committee to review the stock sales.

The data breach was disclosed publicly on Sept. 7 and has since sparked a public outcry, government investigations, a sharp drop in the company’s share price and a management shake-up.

Reporting by Ismail Shakil in Bengaluru; Editing by Sandra Maler

Our Standards:The Thomson Reuters Trust Principles.


The Power Of The Platform Isn't Always What It's Cracked Up To Be

It seems like every business discussion today is just counting the seconds before the term “platform” comes up. Books and articles are written, pundits swoon and conference audiences nod and exchange glances in knowing agreement. Everyone, it seems, wants to transform their business into a platform.

Yet take the argument to its logical conclusion and the message becomes problematic. Platforms, as many have observed, function as multi-sided markets and therefore must connect value to value. So if everybody becomes a platform, who actually creates the value to make a vibrant marketplace?

The truth is that, while some amazing platform businesses have been created, there is also a considerable amount of survivorship bias going on. We notice the Amazons, Ubers and AirBnB’s, but forget about the thousands of platform startups that failed. Make no mistake, even in an increasingly networked world, you still need to create, deliver and capture value.

Creating Value

When Elance was founded in 1999, it seemed like a really good idea. Taking its name from a Harvard Business Review article titled The Dawn of the E-Lance Economy the founders sought to match freelance contractors and firms much like did for full-time recruiting. Unfortunately, the business really never gained any traction.

So the investors decided to hire a new CEO and take the company in a new direction. Instead of matching firms to freelancers, it would help companies manage relationships. This idea met with much greater success and Elance became a pioneer in vendor management software. In fact, it became so successful that it attracted stiff competition from the likes of SAP and Oracle.

So Elance sold the software business and return to the original idea. This time though, it applied what it had learned about making relationships successful rather than just making matches. It partnered with training firms to help freelancers build and certify skills, created private talent clouds for customers and developed algorithms to create better engagements.

The strategy was a resounding success and the company later merged with oDesk to form Upwork, the world’s largest freelance platform. Elance is no exception either. From Netflix to Amazon to just about everything in between, it seems that eventually platform businesses eventually need to go beyond merely making matches and create a product or service.

Delivering Value

One industry that’s been absolutely ravaged by the platform economy is retail. With digital commerce platforms offering better prices, selection and convenience, how can brick and mortar retailers ever compete? After all, who goes into a store anymore?

Apparently, just about everybody. According to the most recent data from the US Census more than 90% of sales still go to traditional retail outlets. While clearly automation and e-commerce have depressed margins and sent many companies reeling, there’s still a lot to be said for an in-person, in-store experience.

Take a closer look and you’ll find that digital commerce has its limitations. For example, AirBnB’s estimated revenues of $ 2.8 billion are impressive, but represent less than 1% of the $ 500 billion hospitality industry. That shouldn’t be surprising. Many travelers — especially business travelers — are looking for more than just a hotel room, but also the service that comes with it.

That’s why Apple has invested so much time, effort and money into its stores and why successful platforms like Amazon and and Warby Parker are opening up retail locations. An online purchase is only a mere transaction, but in a retail environment, well trained salespeople can build relationships, cater to a particular customer’s needs, service purchases and upsell.

Capturing Value

One of the most attractive aspects of platform businesses is how easy they are to start. Pretty much anyone can build a website, aggregate disparate information and offer it as a solution to customers. You don’t need to rent expensive commercial space or even develop particularly sophisticated software. You just collect data, make it accessible and you’re in business.

Yet that is also the platform model’s achilles heel. Low barriers to entry lead to aggressive competition, which makes an expensive marketing war almost inevitable. That’s why becoming a successful platform so often depends on how much of a war chest you can attract from venture capital funds and, because platforms tend to be “winner take all” propositions, there are far more losers than winners.

To see how this often plays out, take the time to read Timothy B. Lee’s profile of Uber. Yes, Uber has driven down the cost of taxis, but it has lost billions in the process. It’s not at all clear whether it has actually built a sustainable business model or is just in a predatory race to drive competitors out of business so that it can use its monopoly power to drive up prices.

Sure, it’s possible that Uber may eventually become profitable, but is it really the paragon of the new economy that its advocates make it out to be, or a throwback to the robber baron days of Vanderbilt, Rockefeller and Carnegie?

Harnessing The True Power of Platforms

None of this to say that platforms are all hype and no substance. As I’ve written before, platforms allow us to access ecosystems of talent, technology and information in an incredibly powerful way. That, in turn, is changing how we need to compete, shifting the basis of competition from optimizing efficiency to widening and deepening connections.

To understand why, let’s return to Elance. As a freelance matching service, it offered little benefit. Most companies have their own networks of contractors they like to work with. It was only when it started to create value above and beyond a simple search function that it became a profitable business. There’s no free lunch. Value creation is simply not something you can run a successful business without.

In a similar vein, Amazon allows you to access ecosystems of retailers and that’s incredibly helpful and powerful, but its competitive advantage is its distribution system. If all it was doing was showing you offers, anybody could compete with it on an even playing field and that would make it very hard for the company to make money.

So don’t be fooled. Leveraging the power of platforms can be an excellent way to extend and improve a strong business model, but it cannot replace one.


A Legendary Dividend Growth Stock Trading At Fire Sale Prices

As a contrarian value dividend growth investor, I know the best time to buy a high-quality company is when Wall Street thinks it’s broken.

After careful research, I’ve come to the conclusion that this is how the market feels about Disney (DIS). However, as with most such situations, the market’s short-term focus is blinding it to the company’s likely bright dividend growth future.

That’s why I’ve recently added this legendary entertainment conglomerate to my real money EDDGE 3.0 portfolio, and think you should consider doing the same.

This Is Why Wall Street Is Worried

The key to contrarian value investing is to understand why the market is down on a stock, and to determine whether this is a growth thesis killing problem.

ChartDIS Total Return Price data by YCharts

In other words, “is this time really different”, or will a company that has managed to enrich investors with decades of market crushing total returns persevere and overcome its obstacles and continue its long-term success.

In the case of Disney’s recent 14% slide, there are two main negative factors driving the share price lower.

Source: Earnings Release

I’ll admit that Disney’s earnings performance to date is lackluster at best, with flat revenue and free cash flow (YTD), and declining EPS, despite buying back 3% of its shares in the past year.

Those poor results are largely being blamed on the media segment, specifically troubles at ESPN, which has seen steadily falling subscribers in recent years.

Source: Kenra Investors

In addition, ESPN has faced rising content costs, in order to maintain its dominant position in live sports (it has exclusive rights with the NFL and college football), which has been badly hurting that segment’s bottom line.

Disney has been able to offset this decline somewhat by raising its cable fees, but now Altice USA (ATUS), the nation’s fourth largest cable company (with 5 million subscribers), is challenging Disney’s pricing power.

Specifically, Disney is asking Altice for $ 100 per subscriber per year ($ 8.30 a month) for its total ESPN content, which is a 10% increase over the current average ESPN subscriber fee of $ 7.54.

Understandably the market is concerned that Altice won’t pony up the dough, given that ESPN’s popularity is flagging (potentially due to increased political content on the air which can alienate viewers), sports ratings are down, and ESPN itself is facing a challenging turnaround; having recently let go a significant amount of its on air talent.

And while Altice by itself represents a small contract dispute, Disney investors are worried that should it back down and discount its content that would serve as poor precedent in future negotiations with much larger cable companies.

This Is Why Wall Street Is Wrong

The market’s huge focus on ESPN is likely overblown given that it ultimately represents about 12.5% of Disney’s total revenue.

In addition, Disney is making the right call by launching an ESPN streaming service in 2018, though only time (and pricing) will tell whether or not it will be able to stabilize the brand’s bottom line.

However, to truly understand Disney’s growth potential requires looking at its other segments, such as the wildly successful studio segment.

Of course, we need to keep in mind that some of Disney’s business segments, especially its studios, are highly cyclical due to the lumpy nature of the movie business.

For example, 2017’s large YTD decrease in studio revenue and earnings isn’t necessarily a sign that Disney has lost its mojo, but rather that 2016 was a triumph, where the company’s especially large number of films released dominated the global box office.

Source: Boxofficemojo

For example, in 2017, there have been far fewer films than last year.

Yet even before Disney releases: Thor: Ragnarok, Star Wars: The Last Jedi, and Pixar’s Coco, it still boasts three of the top 10, and four of the top 20 movies of the year so far. In addition, on a per movie basis, Disney is actually doing better than last year.

And given the historical track record of how well Star Wars, Marvel, and Pixar films do internationally, it’s likely that Disney can expect around $ 2.5 to $ 3 billion combined from these remaining releases, and further domination of the global box office (six of the top 10 and seven of the top 20 releases this year). In fact, once these three likely major blockbusters come out, Disney’s 2017 average box office per film should rise to about $ 725 to $ 750 million, far higher than its record 2016 haul.

And the long-term view is similarly bright as Disney benefits not just from Star Wars and Marvel franchises but also Pixar, Disney Animation, and the continuing trend of live action remakes of its most popular animated classics (including this year’s most popular global movie Beauty and The Beast).

Add to this the fact that Disney’s cable networks are seeing strong international growth, and it’s obvious that, while the domestic market will always be important, Disney’s true growth prospects lie in its dominance overseas, especially in faster growing emerging markets such as India and China.

This also applies to its booming parks segment, which saw successful openings of Shanghai Disney Resort and and improved performance of Disneyland Paris, spurring impressive 17% earnings growth for the division.

According to Technavio, the amusement park industry is set to grow 11% CAGR through 2021, and Disney is well situated to gain a fair amount of this business thanks to continued expansion and revamping of its properties, including the recently opened Pandora World Of Avatar attraction at its Animal Kingdom, plus dozens of new attractions outlined by the D23 plan:

  • Star Wars: Galaxy’s Edge, part of Disneyland and Disney World Hollywood Studios, opening 2019 and featuring two feature rides, the Millennium Falcon, and Star Wars battle experience.
  • Guardians Of The Galaxy ride at California Adventure will be expanded into a full fledged Marvel Land.
  • Star Wars Luxury Resort: the company’s “most experiential concept ever,” a starship themed hotel where every window has a view of space.
  • Major upgrade of Epcot including: a highly upgraded Future World, a Guardians Of The Galaxy ride, and a Ratatouille attraction in the French pavilion, a Mission to Mars ride, and a space themed restaurant.
  • An intense roller coaster Tron ride next to Star Wars Hotel in Magic Kingdom, as well as a new theater and show in that park.
  • Toy Story Land in Hollywood Studios.
  • New Disney Riviera Resort near Epcot, part of the exclusive Disney Vacation Club.
  • Pixar Land at Disney World California Adventure.
  • New York Hotel in Disneyland Paris to be rebranded and refurbished as a Marvel based resort.

In other words, Disney, which operates seven of the top 12 and 12 of the top 25 most visited theme parks in the world, will continue to dominate this growing and highly lucrative industry.

And let’s not forget that while the consumer segment has been having a down year (due to tough comps), Disney is a legend at monetizing its brands through licensing and toys. This segment should continue to grow in the coming decades (about 6% a year according to analysts such as Morningstar’s Neil Macker); especially thanks to the company’s popularity in emerging markets.

Finally, while there is no guarantee of success, should the GOP tax reform plan pass, then Disney is likely to benefit immensely from the lowering of corporate tax rates to 20%.

That’s because the company’s TTM effective tax rate was 32.8%. Thus, should that rate drop to 20%, then Disney’s bottom line (EPS and FCF) would grow by an impressive 39%; something the stock is clearly not pricing in right now (forward PE would drop to 11.1).

Long-Term Dividend Profile Makes Disney An Income Investor’s Dream

Disney has an impressive record as a fast dividend grower.

Source: Simply Safe Dividends

Company Yield TTM FCF Payout Ratio 10-Year Projected Dividend Growth 10-Year Projected Annual Total Return
Disney 1.6% 27.6% 7.9% to 10% 9.5% to 11.6%
S&P 500 1.9% 39.5% 5.9% 9.1%

Sources: Gurufocus, Fast Graphs, Factset Research,,

However, I’m sure that many readers will take one look at Disney’s low yield and reject it as an income investment.

I understand that, and in fact, I agree that if you are someone looking to live off dividends in retirement, and have 10 years or less before you plan to exit the labor force (or a retired now), then indeed Disney likely isn’t for you.

However, if you have 10+ years to let the company compound its payout, then it’s actually an excellent income investment. That’s especially true given the rock solid dividend safety (strong balance sheet and low payout ratio), and solid prospects for long-term double-digit dividend growth.

Years Projected Inflation Adjusted Yield On Invested Capital
5 2.35%
10 3.45%
15 5.10%
20 7.45%
25 11.0%
30 16.1%
35 23.65%
40 34.75%
45 51.1%
50 75.0%
55 110.25%
60 162.0%
65 238.05%
70 349.75%
75 514.0%

For example, assuming a conservative 10% long-term dividend growth rate (not unrealistic given that Disney’s 30-year dividend CAGR is 17.3%), and 2% inflation rate, then Disney shares bought today, if given enough time to compound, can become a fantastic retirement stock.

The key is to start as early as possible, meaning that if you are young and just starting out saving and investing (in your 20’s), then 40 to 50 years of dividend growth compounding can greatly help ensure your financial future.

And if you are planning to have children (as I am eventually), then I recommend you consider buying some Disney stock for them, because such a gift, with potentially 70 to 75 years of compounding time could wind up incredibly valuable. This is both as an income source or an asset that can be sold and the funds allocated elsewhere, such as higher-yielding stocks if they so choose.

One Of The Few Stocks Trading At Fire Sale Prices Right Now

ChartDIS Total Return Price data by YCharts

Thanks to its recent weakness (a 14% decline of its recent high), Disney has underperformed the market by about 11% in the past year. However, that just creates a potentially excellent buying opportunity.

Company Forward PE Historical PE Yield Historical Yield
Disney 15.4 17.2 1.6% 1.2%
Industry Median 22.9 NA 1.8% NA

Source: Gurufocus

After all, when we compare the company’s forward PE ratio to either that of its peers, or its own historical norm, we find Disney highly undervalued.

That’s only more so if we consider the most important valuation metric to dividend investors, the yield, and where it stands in comparison to its usual levels.

Source: Yield Chart

For example, while a 1.6% yield isn’t necessarily high in and of itself, the fact remains that over the past 22 years, Disney’s yield has only been higher about 7.5% of the time.

In my book, that makes this dividend growth stock highly appealing, especially given the company’s wide moat and “buy and hold forever” nature.

But of course, all such backwards looking valuation metrics have a major flaw, which is that all profits are derived from the future.

Which is why my favorite valuation metric for dividend growth stocks is a discounted free cash flow or DCF analysis.

TTM FCF/Share Projected 10-Year FCF/Share Growth Rate Fair Value Estimate Growth Baked Into Current Share Price Margin Of Safety
$ 5.40 6.9% (conservative case) $ 140.17 2.4% 30%
9.3% (likely case) $ 169.17 42%
11.2% (bullish case) $ 196.22 50%

Sources: Fast Graphs, Gurufocus, Morningstar

Basically, the idea is that a company’s fair or intrinsic value is the net present value of all future free cash flow.

I use a 9.0% discount rate because that is the opportunity cost of money. Specifically, the S&P 500’s (the best default alternative to any individual stock) historical 9.07% return, net of expense ratio for a low cost ETF, can realistically be expected to generate 9.0% total returns.

Such an analysis shows that even using conservative FCF/share growth estimates, Disney is incredibly undervalued, thanks to the market pricing in essentially flat FCF/share growth forever.

However, I find this a ludicrously pessimistic assumption given this growth rate is about 50% below the global economy’s growth rate, and Disney’s strong international opportunities mean it’s virtually certain to clear this very low performance bar.

In other words, Disney now offers one of the largest margins of safety for a Grade A (low risk) quality company that you’ll find in this overheated market.

Risks To Keep In Mind

While I am bullish on Disney in the long term, there are several short- to medium-term risks to keep in mind.

First, ESPN, which represents 25% of Disney’s FCF, is likely to continue struggling in the face of ongoing cord-cutting and declining sports ratings. Worse yet, sports programming costs are only going to make things worse for now as Disney recently had to renew its contracts with the MLB, NBA, and NFL by almost $ 2 billion a year.

Which means that ESPN, which the market is obsessing over right now, will continue to be a drag on the company’s growth, and could result in further share price weakness.

Now personally, I would love for further opportunities to add to my position at lower prices; however, if the price falls too low, then activist investors could step in and lobby for a selling or spinning off of ESPN; something media deal making legend John Malone has recommended.

The risk of such a sale could be especially high in mid-2019, since CEO Bob Iger is set to retire at the end of July of that year. His successor could feel pressure to “do something” and sell ESPN.

That in turn would slash FCF/share and could greatly impair Disney’s ability to grow its dividend at its historically high rates.

And speaking of Iger stepping down, we can’t forget the succession risk that will come with a new CEO, whoever that may be. Personally, I’m confident that Disney’s fourth extension of Iger’s contract to give them more time to prepare and groom a worthy successor means the company will continue on a similar trajectory once the man is gone.

Finally, we can’t forget that the entertainment world is constantly shifting, with changing consumer tastes and new disruptive technologies.

While Disney’s $ 2.6 billion purchase of 75% of BAMtech, ahead of its launching of its own streaming service in 2019 may end up generating a strong recurring revenue stream, UBS has estimated that Disney would need 32 million subscribers to break even at $ 9 per month.

In the meantime, the company will have to increase its capital spending to build its streaming service, and upon its launch, forgo $ 500 million it’s currently getting from licensing its content to other companies such as Netflix (NFLX).

Given the market’s short-term focus, any missteps in launching its streaming services could put further downward pressure on the stock in 2019, and further fuel calls for potentially knee-jerk reactions from the new CEO (unless Iger’s contract is extended for the firth time).

Bottom Line: Disney’s Unbeatable Brands Own The Future Of Entertainment And The Current Price Is Too Good To Pass Up

Don’t get me wrong, I’m not saying that Disney’s shares are certain to rise in the short term because markets can remain irrational for long periods of time.

However, if you are, like me, a value focused dividend growth investor, with a time horizon of 10+ years, then today Disney shares represent one of the most undervalued grade A opportunities you can find in this otherwise overheated market.

Which is why, when I saw Disney within 5% of its 52-week low recently, I took the opportunity to add it to my own portfolio, and recommend you consider doing the same.

Disclosure: I am/we are long DIS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Should Retirees Really Try To Live Off Of The Dividend Income?

Many retirees express the desire to “live off of the income”. They want to create a portfolio that provides enough income and income growth to fund retirement needs, without the need of selling shares. Obviously, if a retiree wanted to spend 4.5% of total portfolio value, they would need a total portfolio yield of 4.5%. They would also need some income growth if they want to adjust spending needs in line with inflation.

A dividend growth investor might be more than challenged to create a portfolio that generates a 4% plus yield. If we look at the US High Yield Dividend Growth indices, we see yields in the range of 3%. From the Schwab website, here are the yield details for the Schwab U.S. Dividend Equity Fund (SCHD).

And here is the yield offered for Vanguard’s higher-yield offering, from the Vanguard site, for the Vanguard High Yield Dividend Fund (VYM).

Of course, the two fund companies apply some quality screens in the attempt to find more sustainable income and income growth. As I have suggested in the past, it might be worthwhile for investors to check the indices to see if their companies have passed the dividend health screens. We can have a look or cross reference against professional analysis at no cost. As is often written, we, Indexers and Index skimmers, are freeloaders.

Here are the top 10 holdings from SCHD:

And here are the top 10 holdings from VYM:

You can go down the list of top holdings into the top 20 and top 30, and you’ll see that the funds have considerable overlap. I doubt that there will or be little difference between the two fund offerings over time. Courtesy of, here’s the comparison of VYM as Portfolio 1 vs. SCHD as Portfolio 2. The time period is the inception date of SCHD from November of 2011 to end of August 2016. We see a slight edge of VYM due to some slightly lesser volatility and drawdown. The Sortino ratio (risk adjusted returns are slightly higher). Of course, past performance does not guarantee future returns. Past dividend payments and dividend growth are not guaranteed to repeat.

We see though that the historical income is slightly higher for VYM over SCHD. The following chart represents the income with dividend reinvestment – accumulation stage:

The starting yield for VYM in 2012 was 3.57%. The starting yield in 2012 for SCHD was 3.13%, according to portfolio visualizer. The next chart shows the income without dividend reinvestment – the decumulation or retirement funding stage:

There would have been no need for a retiree to stretch for yield to get the portfolio to an initial 4% or 4% plus yield. The Portfolio grew into the 4% yield quite quickly. That is the magic of dividend growth when things are working to your favour. In 2014, VYM was already delivering a 4.2% yield on cost. SCHD was at 4% yield on cost. In 2016, both funds are approaching 5%. That retiree is getting some incredible raises. That retiree can spend more or collect a cash pile if the income is surpassing spending needs. Heck, they can take the surplus and reinvest the income into those higher-yielding dividend payers.

If, in 2012, that retiree wanted to spend at 4% of portfolio value, he or she would have only needed a very modest cash pile or bond component. As an example on a $ 1,000,000 portfolio with a $ 40,000 spending need (4% spend rate), that retiree would only have needed just over $ 4,000 of cash or bond sales. A $ 10,000 cash pile would have been more than enough to cover the $ 4,000 dividend income shortfall in 2012 and $ 1,100 shortfall in 2013.

Now I am not suggesting for a moment that a retiree enter retirement with only a 1% cash or bond component. From my observations, most retirees appear to hold a very considerable cash and bond component. The above scenario is during a more than favourable start date for a retiree. There has been no major market correction or recession, and there has been considerable stability in the dividend payers that have consistently increased their dividends over time. Retirees have to prepare for the times of stress when the portfolio value and portfolio income might face incredible challenges.

Here’s VYM from January of 2007 through to the end of 2016. We are displaying the income without dividend reinvestment.

The initial yield in 2007 was not quite as generous as present, at 2.7%. It fell to 2.1% in 2010. We did not have dividend growth; we had dividend distress and falling income. It did then recover and increase to 4.1% in 2015. In the above scenario, a retiree would have had to fund up to $ 19,000 in 2010 from non dividend sources. The cumulative cash shortfall from 2007 to end of 2014 is $ 97,700. Now keep in mind, that the market meltdown of 2008-2009 was a major market correction with the S&P 500 falling by 52% according to portfolio visualizer. We may or may not get another market correction of severe proportions. All said, we should prepare for worst case scenarios.

Also, it’s possible that an investor in 2007 might have constructed their portfolio had they avoided the hardest hit companies that were largely housed in the financial sector. That investor might have experienced consistent dividend growth through the recession and we would see more of the income growth scenario displayed in the first income chart for VYM and SCHD for the 2012 to 2016 period. On retirees searching for stability, here’s my recent article The Lowest Volatility Sectors For Retirees.

My readers will know that I appreciate the historical success of adding some bonds and more specifically longer-dated treasuries (TLT) to help in those periods of stress. Here’s how TLT performed in the recession from January of 2008 through the end of 2010.

We see the desired inverse relationship between the stocks and bonds, with the bonds offering price appreciation capital gains opportunity. That retiree could have sold TLT units to plug the income shortfall. Keep in mind that past inverse relationship does not guarantee a future inverse relationship.

And once again, if a retiree has created a portfolio that is delivering dividend growth year over year, the unit harvesting or share harvesting needs decrease every year as the dividend can potentially grow to eventually cover all spending needs. We will use Kimberly-Clark (KMB) as a portfolio proxy. The company is well, a staple within the Consumers Staple (XLP) sector.

Here’s KMB benchmarked against VYM for income for the period of 2007 through to the end of 2011, a five-year period, based on a starting portfolio value of $ 1,000,000. KMB is Portfolio 1. VYM is Portfolio 2.

KMB started the period with a yield of 3.1% and grew that yield to 4.1% in 2011. Even if a retiree held no bonds or cash, this is what the share harvesting scenario would have looked like. For this model, the retiree will be harvesting 4% of portfolio total value. For this example, we will not adjust for inflation. As a backdrop, here’s the dividend history as per the F.A.S.T. Graphs site. For the funding scenario from 2007 to end of 2010, I will use the dividends as per F.A.S.T. Graphs and for share price harvesting. I have used the historical share prices as per Nasdaq. The portfolio begins with a hypothetical $ 1,000,000 and hence 15,338 shares.

Year Dividends Share Harvesting $ Shares sold Share count
Initial 15338
2007 $ 32516 $ 7484 (66) 113 15225
2008 $ 35322 $ 4678 (67) 70 15155
2009 $ 36372 $ 3628 (50) 73 15082
2010 $ 39816 $ 184 (61) 3 15079
2011 $ 42221 0 0 15079

As we can see, the share harvesting did not damage income. In fact, the actual dividend income increased each year even with the share count reduction, courtesy of that dividend growth of course. The number in parenthesis in the shares sold column represents the share price for that share harvesting. Shares were sold in the week preceding the beginning of the next calendar year.

Modest share harvesting does not have to decrease portfolio income. With that realization a retiree would not have to necessarily skip over the Kimberly-Clarks of the world just because the company or basket of companies does not meet current income needs. That retiree might be able to add companies of higher quality and stability but with lesser current yields.

Perhaps there is an unwarranted fear of share harvesting? If a retiree can potentially build a higher-quality portfolio by allowing for lesser yields, that share harvesting need would potentially decrease retirement funding risks, not increase risks.

Seeking Alpha author Eric Landis started a series on creating a 4% plus current income portfolio in today’s environment. You’ll find the first article in that series in Yes, You Can Still Build A 4% Yielding Portfolio In Today’s Environment. You can follow that series and see that the portfolio has already experienced dividend disruptions and portfolio dividend growth has stalled out of the gate. And today’s environment might be qualified as a rip-roaring bull market.

I welcome your comments. Thanks for reading. And always please know and invest within your risk tolerance level. Always know and understand all tax implications and consequences.

Happy investing.


Disclosure: I am/we are long BCE, TU, TRP, ENB, BNS, TD, RY, AAPL, BLK, BRK.B, JNJ, PEP, CL, MMM, MDT, ABT, LOW, NKE, CVS, WBA, UTX, QCOM, TXN, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dale Roberts is an Investment Funds Advisor at Tangerine Investment Funds Limited a subsidiary of Tangerine Bank, wholly owned by Scotia Bank; he is not licensed to provide professional advice on stocks. The opinions expressed herein are Dale Roberts’ personal opinions relating to his experience as an investor and are not those of Tangerine Bank or its subsidiaries and/or affiliates. This article is for information purposes only and does not constitute investment advice or an offer or the solicitation of an offer to buy or sell any securities. Past performance is not a guarantee and may not be repeated. Investment strategies are not suitable for everyone and you should always conduct your own research or speak to a financial advisor.


Why Facebook Is So Slow to Recognize Its Faults

Years of limited oversight and unchecked growth have turned Facebook into a force with incredible power over the lives of its two billion users. But the social network has also produced unintended social consequences — and they’re starting to catch up with it:

— House and Senate panels investigating Russian interference in the 2016 elections have invited Facebook — along with Google and Twitter — to testify this fall. Facebook just agreed to give congressional investigators 3,000 political ads purchased by Russian-backed entities, and announced new disclosure policies for political advertising

— Facebook belatedly acknowledged its role purveying false news to its users during the 2016 campaign and announced new measures to curb it. Founder and CEO Mark Zuckerberg even just apologized — more than 10 months after the fact — for calling the idea that Facebook might have influenced the election “pretty crazy.”

— The company has taken flak for a live video feature that was quickly used to broadcast violent crime and suicides; for removing an iconic Vietnam War photo for “child pornography” and then backtracking; and for allegedly putting its thumb on a feature that ranked trending news stories.

Facebook is behind the curve in understanding that “what happens in their system has profound consequences in the real world,” said Fordham University media-studies professor Paul Levinson. The company’s knee-jerk response has often been “none of your business” when confronted about these consequences, he said.


When such issues arise, Facebook generally restricts itself to bland assertions that its policies prohibit misuse of its platform and that it’s difficult to catch everyone who tries to abuse its platform. When pressed, it tends to acknowledge some problems, offer a few narrowly tailored fixes — and move on.

But there is a larger question the company hasn’t addressed direction: Has Facebook has taken sufficient care to build policies and systems that are resistant to abuse?

Facebook declined to address the subject on the record, although it pointed to earlier public statements in which Zuckerberg described how he wants Facebook to be a force for good in the world. The company also recently launched a blog called “Hard Questions” that attempts to address its governance issues in more depth.

But Sheryl Sandberg, the company’s No. 2 executive, has suggested that Facebook has work to do on this front. In a recent apology , she wrote that Facebook “never intended or anticipated” that people could use its automated advertising to target ads at “Jew haters” — that is, users who expressed anti-Semitic views in the Facebook profiles.

That, she wrote, “is on us. And we did not find it ourselves — and that is also on us.”


Facebook’s often unresponsive response to crisis may not work much longer for a company that sometimes still seems to hew to its now-abandoned slogan — “move fast and break things.”

Facebook has so far enjoyed seemingly unstoppable growth in users, revenue and its stock price. But along the way, it has also pushed new features on to users even when they protested, targeted ads at them based on a plethora of carefully collected personal details, and even engaged in behavioral experiments that seek to influence their mood.

How it got here has to do with its exceptionalist company culture, a hands-off approach that values free speech over monitoring what its users post, and the fact that no matter how many people it hires, it will always have what amounts to a skeleton crew to deal with its huge user base.

“There’s a general arrogance — they know what’s right, they know what’s best, we know how to make better for you so just let us do it,” said Notre Dame business professor Timothy Carone, who added that this is true of Silicon Valley giants in general. “They need to take a step down and acknowledge that they really don’t have all the answers.”


Facebook depends on signing up as many users as possible — and pulling in as many advertising dollars as possible — to run its business. Its systems for signing up and for buying ads are both highly automated, a fact that makes the company both efficient and highly profitable.

In the first six months of 2017, Facebook pulled in sales of more than $ 17 billion and reported a profit of almost $ 7 billion.

It also helps explain not only why Facebook can seem so disengaged from its controversies, but also why it’s vulnerable in the first place, said David Gerzof Richard, a communications professor at Emerson College.

Russia, for instance, was able to exploit “the capitalist nature of what motivates Facebook,” Gerzof Richard said. If the company was truly focused on the “content, message and quality of ads,” he said, “there would be a very different platform for how you buy and place ads on Facebook.”


Gerzof Richard thinks Facebook should view the “social hacking” of its platform — that is, the unintended uses that spring from human nature — much the way it has looks at technological challenges such as spam and data breaches.

Facebook already gives out “bug bounties” — that is, prizes for people who find technical flaws in its platform. Why not do the same for oversights that allow social hacks of its ad system, user newsfeeds and the like?

“We as a species are very, very inventive,” Gerzof Richard said. “You give someone a power tool and they will figure out ways to use it that the maker has never intended.”

–The Associated Press


Security firm finds some Macs vulnerable to 'firmware' attacks

(Reuters) – Since 2015, Apple Inc (AAPL.O) has tried to protect its Mac line of computers from a form of hacking that is extremely hard to detect, but it has not been entirely successful in getting the fixes to its customers, according to research released on Friday by Duo Security.

Duo examined what is known as firmware in the Mac computers. Firmware is an in-built kind of software that is even more basic than an operating system like Microsoft Windows or macOS.

When a computer is first powered on — before the operating system has even booted up — firmware checks to make sure that basic components like a hard disk and processor are present and tells them what to do. That makes malicious code hiding in it hard to spot.

In most cases, firmware is a hassle to update with the latest security patches. Updates have to be carried out separately from the operating system updates that are more commonplace.

In 2015, Apple started bundling firmware updates along with operating system updates for Mac machines in an effort to ensure firmware on them stayed up to date.

But Duo surveyed 73,000 Mac computers operating in the real world and found that 4.2 percent of them were not running the firmware they should have been based on their operating system. In some models – such as the 21.5-inch iMac released in late 2015 – 43 percent of machines had out-of-date firmware.

That left many Macs open to hacks like the “Thunderstrike” attack, where hackers can control a Mac after plugging an Ethernet adapter into the machine’s so-called thunderbolt port.

Paradoxically, it was only possible to find the potentially vulnerable machines because Apple is the only computer maker that has sought to make firmware updates part of its regular software updates, making it both more trackable and the best in the industry for firmware updates, Rich Smith, director of research and development at Duo, told Reuters in an interview.

Duo said that it had informed Apple of its findings before making them public on Friday. In a statement, Apple said it was aware of the issue and is moving to address it.

”Apple continues to work diligently in the area of firmware security, and we’re always exploring ways to make our systems even more secure,“ the company said in a statement. ”In order to provide a safer and more secure experience in this area, macOS High Sierra automatically validates Mac firmware weekly.”

Reporting by Stephen Nellis; Editing by Leslie Adler

Our Standards:The Thomson Reuters Trust Principles.


Twitter suspends Russia-linked accounts, but U.S. senator says response inadequate

WASHINGTON/SAN FRANCISCO (Reuters) – Twitter (TWTR.N) said on Thursday it had suspended about 200 Russian-linked accounts as it probes online efforts to meddle with the 2016 U.S. election, but an influential Democratic senator slammed its steps as insufficient.

Senator Mark Warner, the top Democrat on the Senate Intelligence Committee, summoned Twitter officials to testify behind closed doors on Thursday as part of broad investigation of Russian influence in the 2016 presidential election. Facebook (FB.O) faced a similar grilling earlier this month.

Lawmakers in both parties suspect social networks may have played a big role in Moscow’s attempts to spread propaganda, sow political discord in the United States and help elect President Donald Trump. Moscow denies any such activity, and Trump has denied any collusion.

Twitter also briefed the House of Representatives Intelligence Committee on Thursday.

Warner said Twitter officials had not answered many questions about Russian use of the platform and that it was still subject to foreign manipulation.

The company’s presentation to the Intelligence Committee “showed an enormous lack of understanding from the Twitter team of how serious this issue is,” Warner said. He took particular umbrage at what he said was Twitter’s decision to largely confine its review to accounts linked to fake profiles already spotted by Facebook.

Twitter said it had identified and removed 22 accounts directly linked to about 500 fake Facebook pages or profiles tied to Russia and that it unearthed an additional 179 accounts that were otherwise related.

Twitter declined to comment when asked about Warner’s comments.

In addition to the private testimony by its officials, the company published a public blog post Thursday with its most detailed discussion to date of the steps it was taking to combat propaganda.

Warner in remarks to reporters called Twitter’s statements “deeply disappointing” and “inadequate on almost every level.”

The comments signaled that the congressional investigations into Russia’s use of social media platforms would not ease up. Twitter, Facebook and other Internet companies including Alphabet Inc’s Google (GOOGL.O) are facing a steady stream of criticism as more information emerges about manipulation of their platforms during the 2016 election campaign.

Users, lawmakers and technology analysts have long criticized Twitter as too lax in policing fake or abusive accounts. Unlike Facebook, Twitter allows both anonymous accounts and automated accounts, or bots, making it far more difficult to police the service.

On Thursday, researchers at Oxford University published a study concluding that Twitter bots disseminated misinformation and propaganda at a higher rate in U.S. battleground states than in noncompetitive states during a 10-day period around Election Day in November.

San Francisco-based Twitter said Russian media outlet Russia Today, which is close to the Kremlin, had spent $ 274,100 on Twitter advertisements and promoted 1,823 tweets potentially aimed at the U.S. market.

Those ad buys alone topped the $ 100,000 that Facebook this month linked to a Russian propaganda operation during the 2016 election cycle, a revelation that prompted calls from some Democrats for new disclosure rules for online political ads.

Representative Adam Schiff, the top Democrat on the House Intelligence Committee, was more tempered in his assessment of Twitter’s briefing, saying in a statement that the firm expressed a desire to work cooperatively with investigators and conduct additional analyses.


Twitter announced new measures to toughen restrictions on suspect spammers, for example by reducing the time that suspicious accounts stay visible during company investigations.

To thwart abuse via applications interacting with Twitter, the company said it had suspended 117,000 apps since June that had been responsible for 1.5 billion “low-quality” tweets this year.

Twitter said it wanted to strengthen disclosure rules on political advertising, as Facebook has just done.

Warner is leading efforts to introduce legislation requiring internet platforms to reveal who is purchasing online political ads, which would bring them in line with rules governing ads on radio or television.

He told reporters on Thursday he did not have a Republican co-sponsor for a draft measure he was circulating he was confident there would be bipartisan interest.

Reporting by Dustin Volz and Joseph Menn; Additional reporting by Patricia Zengerle; Editing by Jonathan Weber and Cynthia Osterman

Our Standards:The Thomson Reuters Trust Principles.