Looking for income

[pb4uski]

.... My question is really this: At age 57, with AA of 70% stock, 30% bonds, what are the pros/cons of buying individual dividend stocks instead of buying bonds? Based on my current spend, I should not need to sell the new stocks any time soon. So even if they lose value for 10 years, it shouldn't matter since I will have the income from them coming in.

Even dividend stocks are stocks... so if you substitute dividend stocks for bonds you are effectively increasing your AA above 70/30 to higher stock allocation.

Now, given your situation where your regular spending is already covered by pensions and passive income it probably doesn't matter much and would be perfectly safe to increase your AA above 70/30... but don't fool youself that dividend stocks are bonds... if we have a recession the values of dividends stocks and bonds will behave very differently.

Blue line is Vanguard High Dividend Yield Index Inv and red line is Vanguard Total Bond Market Index Inv. See the difference?

 

[OldShooter]

... My question is really this: At age 57, with AA of 70% stock, 30% bonds, what are the pros/cons of buying individual dividend stocks instead of buying bonds? Based on my current spend, I should not need to sell the new stocks any time soon. So even if they lose value for 10 years, it shouldn't matter since I will have the income from them coming in.

I'll ask a question that I ask often in threads like this: What problem are you trying to solve?

IOW, what is the purpose of the money? Aggressive growth to benefit heirs and charities at your death? Ultra-conservative investments for an ironclad guarantee that you will never run out of money? Just a way of keeping score, like piling up chips at a casino? When you don't know where you're going, any road will get you there.

Yes, worrying about "principal" is a shell game. Actually it's called "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) In 20 years at 2.5% inflation, that "principal" that you will have been protecting has a purchasing power of 60 cents on the dollar. So what does "protect" even mean? Does it mean that you should only spend real return (above inflation) and squirrel away the rest? Or does it mean that holding the nominal dollars and ignoring purchasing power is a sensible "principal protection" strategy?

Mostly questions. Few easy answers.

 

[24601NoMore]

Some good insight and suggestions everyone, thanks.

Regarding the "total return" vs. chasing yield debate.... Right now I am able to live on my pension plus interest/dividends/capital gain distributions. So I am not pulling any money from my principle. Which feels really good to me, perhaps a false sense of security. If I sell some of the principle, I lose that plus whatever yield it was producing. Perhaps its just a shell game, but it feels better to keep all investments intact.

There are a few of us here that take an income first, growth second approach (as it sounds like you also do).

Not to open up the whole TR vs. Yield debate again as that's gone around in circles a lot of times now - both here and on Bogleheads. But suffice it to say you're not the only one that wants "paycheck replacement" without eating into your principle. And for that, you need yield and income - not sales of existing stocks, bonds or mutual funds.

FWIW, I just saw an ad from PIMCO the other day on M* and they either have or are just coming out with a Retirement strategy that basically splits your assets into two categories of focus - one that's income-oriented, and one that's growth oriented.

I've been doing exactly that (quite by accident initially - I was stockpiling cash as I also wanted that 'sense of security' that only cash can provide while also having my stock and bond investments for long-term growth). So, it's good to see a major firm like PIMCO that is now apparently advocating the exact same income (for paycheck replacement) + growth (for long term) approach..

If you want monthly income, consider Realty Income (ticker: O). They've paid increasing monthly dividends forever and are IMHO a rock solid company with plenty of FCF to safely cover the divvy. I believe they're south of 4% at this point, though but one of my favorite income stocks..that and Welltower (Healthcare REIT). But, WELL is quarterly dividends and only slightly north of 4%..

 

[Montecfo]

I don’t reach for high yields. I just pull my annual income from the portfolio without concern about dividends or interest. I sell whatever is highest to meet my annual withdrawal and rebalance to my target AA.

I think this is the way to go. You are taking on a lot of interest rate risk going with equities to replace bonds.

This is simply one of the risks of buying individual bonds or other term securities: you get your money back but no way to know the market environment which will exist at that time.

If you do wish to go with equities, I think an equity fund like MERFX The Merger Fund has a long track record of conservative growth and stability. I would favor that I think over individual stocks.

if you insist on stocks I would go a basket of dividend growers (not high-yielders) or something like NOBL, the S&P 500 Div Aristocrats ETF. Look at the Morningstar, you are taking on material risk to go with equities compared to bonds.

Just some ideas.

 

[audreyh1]

is there a strategy to pull money out ? like right before rebalance, small portion each month or lump sump, when market is high or don't pull it out when market is low.

The strategy is to pull a year’s worth of money out on Jan 2 or whatever is the first market open day of the year, rebalance, and then leave it alone for a year unless there is a major market change. The amount is based on the Dec 31 value.

 

[jazz4cash]

I'll ask a question that I ask often in threads like this: What problem are you trying to solve?

IOW, what is the purpose of the money? Aggressive growth to benefit heirs and charities at your death? Ultra-conservative investments for an ironclad guarantee that you will never run out of money? Just a way of keeping score, like piling up chips at a casino? When you don't know where you're going, any road will get you there.

Yes, worrying about "principal" is a shell game. Actually it's called "mental accounting." (https://en.wikipedia.org/wiki/Mental_accounting) In 20 years at 2.5% inflation, that "principal" that you will have been protecting has a purchasing power of 60 cents on the dollar. So what does "protect" even mean? Does it mean that you should only spend real return (above inflation) and squirrel away the rest? Or does it mean that holding the nominal dollars and ignoring purchasing power is a sensible "principal protection" strategy?

Mostly questions. Few easy answers.

Well said.

 

[COcheesehead]

With respect, there is a false premise baked in here.

Markowitz and his Modern Portfolio Theory pals have successfully sold the idea that volatility is risk and vice versa. This is necessary for them because they have no idea how to measure risk but they can pretend that they are looking at Gaussian data and can play with standard deviations, T-tests, efficient frontiers, etc. more or less forever.

This apparently works for them. It got Markowitz a Nobel after all, but IMO it is misleading. Risk is also Enron, GE, Montgomery Wards, Lehman Brothers, Under Armour, megabank divididend cuts, etc. IOW, risk involves losing real money, not just playing statistics games or waiting out a market dip.

To the point for this thread, several investment ideas with real risk have been mentioned. For example, U-Haul would not be screwing around hustling retail investors if the professionals had not concluded that the interest rate being offered was not acceptable considering the risk level of the investment. I don't have to read a prospectus to know this. It's just simple deductive logic. Re "asset backed" small loans, really? Who is going to foreclose on that collateral, liquidate it, and send the retail investors their "asset backed" money? At absolute best the sellers of these loans are white hat guys, so the retail investors will get whacked only to the extent of court fees, legal fees, and the price discount necessary to dump the collateral.

Any deal for which there is no ready and liquid market has more risk yet. A forced sale will involve a lot of effort and a big discount if it can be done at all.

Volatility is not all there is to risk, and the riskier the deal the less important the volatility aspect is. Just MHO of course.

My comment was about the security I posted, not a general comment about risk.

 

[RobLJ]

You might get close to 6% with some preferred stock.

I'm using closed end funds in a brokerage account to generate some extra monthly income, but it requires some close monitoring (and I happened to buy some muni closed funds when they had sold off hard a few years ago and PDI last January after the Oct-Dec sell-off). Now it's harder to find Closed-end funds at a large discount. I'm generating about 5.5% but about half are muni closed ends which don't yield as much (but dividends are mostly tax-free).

 

[OldShooter]

My comment was about the security I posted, not a general comment about risk.

Sorry, didn't mean to annoy. Your statement implied, though, that the only cost for higher yield was volatility, which is not generally true. That's what I keyed off of.

 

[Mulligan]

With respect, there is a false premise baked in here.

Markowitz and his Modern Portfolio Theory pals have successfully sold the idea that volatility is risk and vice versa. This is necessary for them because they have no idea how to measure risk but they can pretend that they are looking at Gaussian data and can play with standard deviations, T-tests, efficient frontiers, etc. more or less forever.

This apparently works for them. It got Markowitz a Nobel after all, but IMO it is misleading. Risk is also Enron, GE, Montgomery Wards, Lehman Brothers, Under Armour, megabank divididend cuts, etc. IOW, risk involves losing real money, not just playing statistics games or waiting out a market dip.

To the point for this thread, several investment ideas with real risk have been mentioned. For example, U-Haul would not be screwing around hustling retail investors if the professionals had not concluded that the interest rate being offered was not acceptable considering the risk level of the investment. I don't have to read a prospectus to know this. It's just simple deductive logic. Re "asset backed" small loans, really? Who is going to foreclose on that collateral, liquidate it, and send the retail investors their "asset backed" money? At absolute best the sellers of these loans are white hat guys, so the retail investors will get whacked only to the extent of court fees, legal fees, and the price discount necessary to dump the collateral.

Any deal for which there is no ready and liquid market has more risk yet. A forced sale will involve a lot of effort and a big discount if it can be done at all.

Volatility is not all there is to risk, and the riskier the deal the less important the volatility aspect is. Just MHO of course.

Im not personally interested in illiquid investments. But the Uhaul investors club isnt horrible if it suits ones purpose. They are also corporate backed. You arent going to get a dolly sent to you for non payment of loan. Many people have used this the past 8 years and are quite satisfied I know. There are $80 million dollars worth of this outstanding in debt. And the founding Shoen family have $20 million of that $80 million personally invested in it.

 

[OldShooter]

Im not personally interested in illiquid investments. But the Uhaul investors club isnt horrible if it suits ones purpose. They are also corporate backed. You arent going to get a dolly sent to you for non payment of loan. Many people have used this the past 8 years and are quite satisfied I know. There are $80 million dollars worth of this outstanding in debt. And the founding Shoen family have $20 million of that $80 million personally invested in it.

Yes, obviously these schemes seem to work for some people, for some amount of time. Maybe for a long time.

But it still has to be true that the borrowers are getting a significantly better deal than they were offered by banks and institutions. If selling to retail investors were not the best deal, why go through the hassle? So to me that points to uncompensated risk-taking by the investors. I didn't investigate the deal, but apparently there is little or no middleman cut, so at least that's a plus.

 

[Mulligan]

Yes, obviously these schemes seem to work for some people, for some amount of time. Maybe for a long time.

But it still has to be true that the borrowers are getting a significantly better deal than they were offered by banks and institutions. If selling to retail investors were not the best deal, why go through the hassle? So to me that points to uncompensated risk-taking by the investors. I didn't investigate the deal, but apparently there is little or no middleman cut, so at least that's a plus.

I see some relative value here, but its not my thing. But if the founding Uhaul family have a quarter of all the loans outstanding I doubt its a bad deal or any way a scheme. Some things are what they are. My local ute still has 6% plus QDI, IG preferred stock outstanding that has been callable for 20 years. Way above current market yield. Why do they care, they get to pass it on as cost of capital and the customers pay it. Im not complaining.

 

[fireorbust]

NHMAX. High Yield Muni fund paying almost 5% monthly dividends and will give you close to that 6% adjusted for taxes (or lack there of).

 

[pb4uski]

NHMAX. High Yield Muni fund paying almost 5% monthly dividends and will give you close to that 6% adjusted for taxes (or lack there of).

Except NHMAX fared very poorly in the Great Recession... value declined 44% from peak in March 2007 to bottom in Dec 2008... about the same as VTSAX... and didn't recover until Apr 2012.... not for the faint of heart.

Certainly not ballast for portfolio stability... albeit good income.

https://www.portfoliovisualizer.com...cation1_1=100&symbol2=VTSAX&allocation2_2=100

 

[COcheesehead]

NHMAX. High Yield Muni fund paying almost 5% monthly dividends and will give you close to that 6% adjusted for taxes (or lack there of).

Folks always bring this fund up and say it yields 5%. It yields 3.58% and has more than 75% of its holding in junk bonds. My mother would sprinkle holy water on your head if she were still alive.

 

[papaof2]

As you're looking at stocks, AT&T has an excellent track record of paying dividends. $2.04/share/year on a $38 share of stock is a little over 5%.

 

[fireorbust]

Folks always bring this fund up and say it yields 5%. It yields 3.58% and has more than 75% of its holding in junk bonds. My mother would sprinkle holy water on your head if she were still alive.

NHMAX

Pays a .0705 monthly div / share
Closed today at $17.98 / share
Roughly 4.7% yield
Morningstar 5-star for many years and near the top of high yield muni funds

Nothing performed very well in the great recession if you just road it all the way down. I'm pretty sure I can get out of this position with my shirt (if needed), but i'm happy to get that tax free monthly check until then.

I'm in at $17, so that's nice too.

Your $70,000 investment would kick out $275 / month or about $3300 per year

 

[VungTau]

Real Estate

How about real estate debt investing? Accredited investors only & high risk, but you might get your 6% interest! Check: https://www.peerstreet.com/
I have 47 loans. The weighted average interest of all my loans is 7.8%. However, some loans are late or in default. So, the weighted interest of the performing loans is 6.3%. YMMV!!!

I am also in RE! I have both as equity position and loans in a RE Fund from Fairway America. Also accredited only. I am getting 8% on the loans and over 10% on the equity side. Did a lot of DD 5 years ago and took the plunge. Fast forward to today and its been great.

 

[COcheesehead]

NHMAX

Pays a .0705 monthly div / share
Closed today at $17.98 / share
Roughly 4.7% yield
Morningstar 5-star for many years and near the top of high yield muni funds

Nothing performed very well in the great recession if you just road it all the way down. I'm pretty sure I can get out of this position with my shirt (if needed), but i'm happy to get that tax free monthly check until then.

I'm in at $17, so that's nice too.

Your $70,000 investment would kick out $275 / month or about $3300 per year

Your yield doesn’t jive with what is reported elsewhere. Enjoy the ride.

 

[aja8888]

Your yield doesn’t jive with what is reported elsewhere. Enjoy the ride.

I think I read that the fund had a 4.2% front load according to Morningstar.

 

[gwraigty]

Folks always bring this fund up and say it yields 5%. It yields 3.58% and has more than 75% of its holding in junk bonds. My mother would sprinkle holy water on your head if she were still alive.

Yes, it appears that 5% is supposed to be the taxable equivalent yield. I think that figure assumes one is in the highest tax bracket, which is not the case for everyone.

I think I read that the fund had a 4.2% front load according to Morningstar.

True, but it's waived at Fidelity.

Disclaimer: I'm not in this fund. I have no opinion on whether it's a good choice or not.

 

[Raymond01]

As you're looking at stocks, AT&T has an excellent track record of paying dividends. $2.04/share/year on a $38 share of stock is a little over 5%.

I like T but already have a lot of its stock and also a bond.

 

[fireorbust]

NHMAX.

I'll do the math for you.

Monthly dividend of .0705
Yearly $.0705 x 12 = $.846 dividends
Current price = 17.98
$.856 / $17.98 = 4.7052% yield

Taxable equiv yield at various tax bracket rates
10% = 5.2280%
12% = 5.3469%
22% = 6.0323%
24% = 6.1911%
32% = 6.9195%
35% = 7.2388%
37% = 7.4686%

All of the above assumes you buy the fund at no load.

10 year annualized total return is 8.11%.

I'll take my chances.

 

[COcheesehead]

NHMAX.

I'll do the math for you.

Monthly dividend of .0705
Yearly $.0705 x 12 = $.846 dividends
Current price = 17.98
$.856 / $17.98 = 4.7052% yield

Taxable equiv yield at various tax bracket rates
10% = 5.2280%
12% = 5.3469%
22% = 6.0323%
24% = 6.1911%
32% = 6.9195%
35% = 7.2388%
37% = 7.4686%

All of the above assumes you buy the fund at no load.

10 year annualized total return is 8.11%.

I'll take my chances.

Dividends change monthly.

 

[fireorbust]

As you're looking at stocks, AT&T has an excellent track record of paying dividends. $2.04/share/year on a $38 share of stock is a little over 5%.

With 5G on the way, I would be a little concerned owning too much of an individual stock that is in the satellite TV business and wired / wireless phone business.

I think 5G will make cable / satellite companies and their local monopolies a thing of the past. T might be able to re-invent to stay up with the times, but who knows?