Generating Passive Income Thru Dividends

[SoReadyToRetire]

I know this is probably a dumb question--but it's a serious one, so please just humor me with your responses. I haven't retired yet, but almost.

I have $315K in one IRA and $140K in a 401k.

I'd like to have the IRA generate a passive income of $10k-$12k/year.

Is it possible to generate that kind of an income by putting the entire balance of $315K into a single income-producing mutual fund?

 

[GravitySucks]

FDVV, which I have a small holding, would generate $13,230 if the dividends stay steady. I would be hard pressed to put all my eggs in that one basket though.
VWINX would yield $8,800. Lots of folks here swear that's the one true managed fund worth it's fees.

 

[dtbach]

Not sure I'd put everything in one mutual fund. Sometimes bad things happen to even the best funds. Split it up at least 3 ways and you have more diversification and more safety.

 

[Andre1969]

I'd think it should be pretty easy. $12K / $315K is about 3.8%, so that doesn't seem too hard to do. Although, like others said, I'd try to find 3 or 4 funds to spread it over, just in case one has a rough patch.


I have about $560K in an online brokerage with Ameritrade. It's comprised of 14 different stocks, and it's set to throw off about $30K in dividends this year. However, some of those stocks are tech stocks that either pay nothing (GOOGL, AMZN, NFLX, FB), or very little (AAPL, V). Two of them are Master Limited Partnerships (FUN, PSXP) that give off a "distribution" instead of a dividend. The distribution isn't taxed, on the federal level at least (can't remember the state), if you've held the asset more than 30 days. But sometimes an MLP can generate other sorts of taxable events. And investment companies don't like you having an MLP in an IRA or 401k. I think it generates extra paperwork, that they'll sometimes charge you for. Plus, in an IRA/401k, having a dividend be "tax free" is not to your advantage, anyway.


So, I'm actually poised to see a total dividend yield of around 5.35% for the 2019 year. I don't think you'd call it "passive" though. I do tweak the portfolio a bit. If a stock falls far enough, I'll sometimes sell some, to get a tax writeoff (again, something you don't get the benefit of in an IRA/401k). And, I rebalance from time to time.

 

[pb4uski]

How much risk are you willing to take? $10k/$315k is 3.2%. $12k is 3.8%.

To get either of those returns with no risk is a stretch other than perhaps snagging a credit union CD special at over 3%... see the Best CD & MM Rates Thread 2019.... but even then in the long run you would have reinvestment risk.

Many of us snagged some 3.5% 5 year CDs earlier in 2019 but those seem to be gone.

So to get that much passive income you'll need to take some risk... the other risk that you are probably not considering is inflation risk... in 15 years that $10-12k of passive income will only buy $7-9k worth of "stuff".

You would be better off taking a total return approach... put the whole $315k in Wellesley or a blended stock/bond index portfolio or even Vanguard's Managed Payout fund and set up an automatic withdrawal for $10-12k a year or $833 - $1,000/month and let it ride... it is very unlikely that you would ever run out of money.... with that approach you could even increase the income for inflation.

 

[gwraigty]

A long term corporate bond ETF such as IGLB, VCLT, or SPLB has current SEC yields of about 3.5% to 4%. Preferred stock ETFs such as PFF or PSK are yielding almost 5.5%. Like GravitySucks, I also own some FDVV, yielding just over 4%. A good screener will give you many options. I wouldn't put the entire nest egg in just one either.

 

[Badger]

Years ago I invested in a fund with a good reputation that had been riding high for many years until it didn't. Fortunately it was a relatively small amount and I was invested in other funds. However, it got my attention and I adjusted my thinking on investing and the benefits of spreading my investments around. I look back at it now and consider the experience as paying my tuition for a life lesson.


Cheers!

 

[mrfeh]

Is it possible to generate that kind of an income by putting the entire balance of $315K into a single income-producing mutual fund?

Why would you want to?

https://www.bogleheads.org/forum/viewtopic.php?t=276554

 

[marko]

We live off dividends from a variety of mutual funds that are both inside and outside our tax deferred accounts. Our dividends are then dropped automatically into a MM fund until we need to withdraw. But I would find 2 or 3 or 4 more funds to diversify a bit.

One caveat: Any dividends paid inside your IRA pay the ordinary income tax rate while outside the tax is generally 0% or 15%.

 

[target2019]

I know this is probably a dumb question--but it's a serious one, so please just humor me with your responses. I haven't retired yet, but almost.

I have $315K in one IRA and $140K in a 401k.

I'd like to have the IRA generate a passive income of $10k-$12k/year.

Is it possible to generate that kind of an income by putting the entire balance of $315K into a single income-producing mutual fund?

It is possible, but I would go with more than one fund. I'd study the selections to be made long and hard. Understand that fund prices go up and down. So it is possible, but not a certainty.

It's also generally said around here that the entire portfolio asset allocation is what you should look be considering.

 

[Running_Man]

Duff and Phelps closed end fund DNP which is in the energy and utility sector with stocks bonds and MLP's will at present have a monthly distribution of $1,600 on your investment of $315,000, which would allow you to take $1,000 per month and reinvest the additional $600 per month into something more diversifying or perhaps buying an additional 45 shares per month of DNP (raising your net shares by about 2.3% per year).

Or you put 200K in DNP to get the $1000 per month and 100K into a 10 year US Treasury Bond Ladder, so that 10K is coming due each year and about 1.5K of interest is received from the US Bonds. This would have the advantage of in case of an absolute calamity, you would have 10 years of redeeming bonds to figure something out.

 

[ERD50]

Duff and Phelps closed end fund DNP which is in the energy and utility sector with stocks bonds and MLP's will at present have a monthly distribution of $1,600 on your investment of $315,000, which would allow you to take $1,000 per month and reinvest the additional $600 per month into something more diversifying or perhaps buying an additional 45 shares per month of DNP (raising your net shares by about 2.3% per year).

Or you put 200K in DNP to get the $1000 per month and 100K into a 10 year US Treasury Bond Ladder, so that 10K is coming due each year and about 1.5K of interest is received from the US Bonds. This would have the advantage of in case of an absolute calamity, you would have 10 years of redeeming bonds to figure something out.

I don't see the attraction of DNP. I much prefer to be far more diversified than a sector fund like this, and not be subject to the whims of active management, and the market's value of a closed end fund.

Performance wise, the long term look is that you would lose it all in DNP - you recommend it?

http://bit.ly/36qEOKU << portfolio analyzer link; $1600/month W/D, inflation adjusted, $315,000 starting portfolio


Portfolio ___ Initial_Balance Final_Balance _ Stdev
VFINX(500 Index) ___ $100,000 $1,418,430 ____ 14.67%
DNP ________________ $100,000 $ ___ 0 __ ____ 14.67%
VFINX/VBMFX 75/25 __ $100,000 $ _884,048 ____ 12.22%

DNP goes to ZERO, while both a 75/25 broad index AA and a 100% stock investment grow many times, and DNP has the higher standard dev than a the 75/25, and the same std dev as the 100% stock allocation.

I can understand trading lower total return for lower volatility, but DNP looks like a lose-lose situation.

-ERD50

 

[Chuckanut]

Why would you want to?

https://www.bogleheads.org/forum/viewtopic.php?t=276554

OP, if you read the above link, read ALL of it. IMO, the OP in that thread is very confused about how mutual funds and money work.

 

[flyingaway]

Even for different dividend funds, do they have more or less the same or similar stocks, especially for index dividend funds?

 

[pb4uski]

I don't see the attraction of DNP. I much prefer to be far more diversified than a sector fund like this, and not be subject to the whims of active management, and the market's value of a closed end fund.

Performance wise, the long term look is that you would lose it all in DNP - you recommend it?

http://bit.ly/36qEOKU << portfolio analyzer link; $1600/month W/D, inflation adjusted, $315,000 starting portfolio


Portfolio ___ Initial_Balance Final_Balance _ Stdev
VFINX(500 Index) ___ $100,000 $1,418,430 ____ 14.67%
DNP ________________ $100,000 $ ___ 0 __ ____ 14.67%
VFINX/VBMFX 75/25 __ $100,000 $ _884,048 ____ 12.22%

DNP goes to ZERO, while both a 75/25 broad index AA and a 100% stock investment grow many times, and DNP has the higher standard dev than a the 75/25, and the same std dev as the 100% stock allocation.

I can understand trading lower total return for lower volatility, but DNP looks like a lose-lose situation.

-ERD50

Above is a bit flawed in that the OP only wants $1,000/month (3.8% WR).... not $1,600/month (6.1% WR)... it is a perceptive glimpse of the obvious that a 6% WR would be more likely to ruin a utiity stock fund compared to a high stock fund for the periods tested.

Also it is unclear if OP intends to increase withdrawals for inflation or not. OP seems to be MIA... so I'm not sure if we'll ever know.

Below is with $1,000/month withdrawals no inflation... next one is with inflation adjusted withdrawals.

 

[bingybear]

IIRC you noted the money is in TIRA and 401ks. While you may be pulling the dividends out, they would be taxable as distributions from the TIRA/401k and held to those rules.

 

[ERD50]

Above is a bit flawed in that the OP only wants $1,000/month (3.8% WR).... not $1,600/month (6.1% WR)... .

No, I don't think so. He said take out $1,600 a month. Yes, he is reinvesting $600 in other funds, so he would have that money, but DNP still would have been run to zero, while this report say the alternate investments would have still grown with the $1,600 monthly inflation adjusted W/D.

OK, questionable if he intended for it to be inflation adjusted, but I think that is the best way to look at it, as inflation is real. And I was consistent across the other investments.

-ERD50

 

[Running_Man]

From October 31 1999 to Today 20 years time period - DNP returned 340% VFINX 235%
If 20 years ago you for some reason wanted to start 6% inflation adjusted withdrawls with DNP with 100K start you'd have bought originally 10,319 shares (yielding over 7.43% then) take 6K per year in dividends and reinvesting $1,430 per year. Today inflation adjusted you would have 11,244 shares valued at 135K and at this point withdrawal is up to 9,182 inflation adjusted while DNP portfolio is paying out $8,096. FVINX 100% portfolio would have gone bust in 2013.

Start the analysis in October 1987 and DNP portfolio today is at 1.2 million about 50% ahead of the VFINX portfolios. But nobody should ever expect a portfolio to hold on for 6% inflation adjusted over long term, but even in your scenario DNP did not fail until Year 34 from 1985 to 2018

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1987&firstMonth=10&endYear=2019&lastMonth=12&calendarAligned=true&endDate=03%2F14%2F2016&initialAmount=315000&annualOperation=2&annualAdjustment=1600&inflationAdjusted=true&annualPercentage=0.05&frequency=2&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=VFINX&allocation1_1=100&allocation1_3=75&symbol2=VBMFX&allocation2_3=25&symbol3=DNP&allocation3_2=100&total1=100&total2=100&total3=100

 

[gauss]

Another Approach...

I setup a 10 year (investment grade) bond ETF ladder recently via the Invesco Bulletshares defined-maturity funds.

I plan to hold each years ETF to maturity or close to it.

Should be possible to get somewhat close to your lower income bound with this strategy depending on prevailing interest rates when you buy.

The nice thing is that there is little direct stock market risk with this strategy (other than possible defaults by the bond issuers. The bonds would like be downgraded first and then sold off, likely at a loss, by the fund managers first).

I keep the other half of my portfolio in pure equity (broad market index) investments which I don't look at too much any more.

Invesco Bulletshares also have a series of defined-maturity ETFs for non-investment grade bonds. One is for "junk" bonds and the other is for "emerging market" bonds. These could be added in to the mix to 'goose' your return with the corresponding increased risk of loss of some of your principal.

-gauss

 

[pb4uski]

No, I don't think so. He said take out $1,600 a month. Yes, he is reinvesting $600 in other funds, so he would have that money, but DNP still would have been run to zero, while this report say the alternate investments would have still grown with the $1,600 monthly inflation adjusted W/D.

OK, questionable if he intended for it to be inflation adjusted, but I think that is the best way to look at it, as inflation is real. And I was consistent across the other investments.

-ERD50

Sorry bud, you're wrong. Go back to the OP... the $1,600 came another post but the OP is only looking to generate $10-12k a year from a $315k IRA.

I know this is probably a dumb question--but it's a serious one, so please just humor me with your responses. I haven't retired yet, but almost.

I have $315K in one IRA and $140K in a 401k.

I'd like to have the IRA generate a passive income of $10k-$12k/year.

Is it possible to generate that kind of an income by putting the entire balance of $315K into a single income-producing mutual fund?

(emphasis added).

 

[ERD50]

Sorry bud, you're wrong. Go back to the OP... the $1,600 came another post but the OP is only looking to generate $10-12k a year from a $315k IRA. ....

Yes, I was responding to Running_Man's post (which I quoted in that post, and follows here)...

Duff and Phelps closed end fund DNP which is in the energy and utility sector with stocks bonds and MLP's will at present have a monthly distribution of $1,600 on your investment of $315,000, which would allow you to take $1,000 per month and reinvest the additional $600 per month into something more diversifying or perhaps buying an additional 45 shares per month of DNP (raising your net shares by about 2.3% per year). ....

OK, he also offered that you could perhaps reinvest those divs back into DNP. I just went with showing what happens if you take $1,600, inflation adjusted from DNP versus the broad indexes.

Any way you slice it, I'm just not a fan of sector investing (which DNP is), as it goes against diversification, which I believe is a very important aspect of investing (not speculating).

-ERD50

 

[ERD50]

....

Start the analysis in October 1987 and DNP portfolio today is at 1.2 million about 50% ahead of the VFINX portfolios. But nobody should ever expect a portfolio to hold on for 6% inflation adjusted over long term, but even in your scenario DNP did not fail until Year 34 from 1985 to 2018

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1987&firstMonth=10&endYear=2019&lastMonth=12&calendarAligned=true&endDate=03%2F14%2F2016&initialAmount=315000&annualOperation=2&annualAdjustment=1600&inflationAdjusted=true&annualPercentage=0.05&frequency=2&rebalanceType=0&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=VFINX&allocation1_1=100&allocation1_3=75&symbol2=VBMFX&allocation2_3=25&symbol3=DNP&allocation3_2=100&total1=100&total2=100&total3=100

I just grabbed all the history that was available, I didn't select any specific time frame.

So OK, DNP did better starting at OCT 1987. But the 'funny' thing is, if I move that start point by just one single month, from OCT 1987 to NOV 1987, the tables turn, and DNP is now down about $380,000 to $1,168,00 with higher std dev than either of the other portfolios. So the results can be quite sensitive to start-end dates.

And the 10 year analysis has DNP just slight ahead of 75/25, but with higher std dev. And if I tweak the AA to get closer to (but still above) DNP performance, the AA portfolio still had lower std dev than DNP.

All I'm saying is, I don't see an reason to think that DNP will provide anything over and above what a reasonable AA of broad index funds will produce. So why add sector and management risk?

-ERD50

 

[SoReadyToRetire]

As usual, I am not MIA ... I am reading with great interest, trying to digest, thinking about what questions I have.

My question was meant as a general question--it doesn't mean I'd be opposed to bringing in MORE income from those funds, for sure!

I truly appreciate each and every response and private message that's been written. Keep talking--I'm learning!

The thing about how dividend income inside an IRA is taxed at a different rate than outside an IRA is completely new to me, so extra thanks to the person who posted that info.

Sometimes it's scary to post on these boards because it seems people assume that if you don't know as much as other posters, you're an idiot. Isn't that why we're here--to learn, and to help others?

FYI, I was raised with 5 siblings on a tiny farm in VT, where my father worked 2 jobs and milked 13 cows in order to support us. Having the amount of money I've been lucky/smart enough to put aside during my career in high tech is new to our family. My mom just stuck her money in a low-rate savings account after my father died and is living in fear of the day it's all gone. I want to "do it differently"--but sometimes it's quite terrifying when you don't know about all the tax laws, the income limits you have to manage, etc etc etc.

Thus why I'm still working ...

 

[mrfeh]

As usual, I am not MIA ... I am reading with great interest, trying to digest, thinking about what questions I have.

My question was meant as a general question--it doesn't mean I'd be opposed to bringing in MORE income from those funds, for sure!

I truly appreciate each and every response and private message that's been written. Keep talking--I'm learning!

The thing about how dividend income inside an IRA is taxed at a different rate than outside an IRA is completely new to me, so extra thanks to the person who posted that info.

Sometimes it's scary to post on these boards because it seems people assume that if you don't know as much as other posters, you're an idiot. Isn't that why we're here--to learn, and to help others?

FYI, I was raised with 5 siblings on a tiny farm in VT, where my father worked 2 jobs and milked 13 cows in order to support us. Having the amount of money I've been lucky/smart enough to put aside during my career in high tech is new to our family. My mom just stuck her money in a low-rate savings account after my father died and is living in fear of the day it's all gone. I want to "do it differently"--but sometimes it's quite terrifying when you don't know about all the tax laws, the income limits you have to manage, etc etc etc.

Thus why I'm still working ...

If you're looking to learn, this is a good place to start: https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

 

[ERD50]

.... The thing about how dividend income inside an IRA is taxed at a different rate than outside an IRA is completely new to me, so extra thanks to the person who posted that info. ...

To be clearer, look at the general case, it's not just "dividend income".

All withdrawals from a traditional IRA are taxed as regular income (at the Fed level, State taxes vary by State). There are no taxes on any income or gains that occur inside the IRA. Only the withdrawals are taxed. And when you make that withdrawal, it makes no difference if that money was increased or decreased by divs, int, or changes in price (up or down), of the holdings.

-ERD50