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Monthly Dividend ETF/Mutual Funds
Old 02-18-2015, 10:33 AM   #1
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Monthly Dividend ETF/Mutual Funds

As part of my preparation for ER I have moved some cash into some funds that play a monthly dividend as a pseudo paycheck replacement (no pension for me ). I am on the lookout for others for diversification as right now I have mainly bond ETF's. I don't look at these for growth (I have other investments for that) but monthly income.

Does anyone else do the same? What are some of your favs? I just sold my ESPP so I've got some new cash that needs a home. I've been looking at some preferred ETF's but I'm not that familiar with preferred stocks of any kind
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Old 02-18-2015, 12:51 PM   #2
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Sorry, but monthly dividends come from bond funds which is something to avoid. You would be better off buying equity ETFs that pay little to no dividend, then selling shares every month in a tax-aware method: Sell only shares that have losses (tax-loss harvest) or shares that have long-term gains (with highest cost basis). That way, return of capital is tax-free and you reduce your tax burden while benefitting from unrealized capital gains and the long-term capital gain tax rate.
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Old 02-18-2015, 12:58 PM   #3
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There are a lot of good investment that pay quarterly instead of monthly. I don't think you should dismiss the funds that pay quarterly.
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Old 02-18-2015, 05:26 PM   #4
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Originally Posted by nuke_diver View Post
As part of my preparation for ER I have moved some cash into some funds that play a monthly dividend as a pseudo paycheck replacement (no pension for me ). I am on the lookout for others for diversification as right now I have mainly bond ETF's. I don't look at these for growth (I have other investments for that) but monthly income.

Does anyone else do the same? What are some of your favs? I just sold my ESPP so I've got some new cash that needs a home. I've been looking at some preferred ETF's but I'm not that familiar with preferred stocks of any kind
In early 2012 an elderly family member asked me for advice about finding more monthly income for spending. At that time more than 10% of his portfolio was uninvested cash. He purchased shares in a high-yield fund, using about 1.5% of the total portfolio at that time. This was in a taxable account, so not the best solution. All dividends were taken, enjoyed, and taxed at an average of 10%. The investment is still showing a decent gain.

Longish story, of course, but it is something to keep in mind if you go for monthly income. You need to monitor the position, pay taxes, and so on. But you may come out ahead of just sitting on the cash.

Realty Income Corp (O) is a monthly payer. It is a REIT, so the dividends and distributions are not qualified, and you would be better off not holding it in taxable account.

If I were convinced this was a reasonable part of the plan, trying to duplicate a monthly paycheck or pension, I might look for quarterly dividend payers that have payout in staggered months to what I already have. I'd also be sure to stick with qualified.
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Old 02-18-2015, 06:30 PM   #5
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I see where you are coming from regarding the tax situation LOL! and target2019. I am not however putting all my $$ in these funds so it is part of my diversification. A couple of years ago I was probably 90% stocks now I'm more like 75% stocks. It seems to me LOL! (perhaps you can explain it more) that selling equities could eventually end up draining my account since you cannot always sell losses and unless the gains were keeping up with a monthly withdraw the account would start to lose $ fast. Whereas the bond payments might not deplete the principal too much. I cannot see how I can come out ahead sitting on cash that makes nothing either. Unless I'm missing something pay tax on something that pays me 4% is better than not pay tax on something that pays 0.5% amiright Granted I never thought through the tax implications clearly (though I do have taxes accounted for in my RE budget)

I do have quarterly dividends but was looking at something that was more of a steady stream of income. Strangely credit card companies frown on you if you only pay them 4x a year :P. It is also (I know) part of the learning of going from a regular paycheck to a withdrawal strategy and while I have cash to tide me over while I learn there is is going to be a learning curve
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Old 02-18-2015, 06:39 PM   #6
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Most of our income consists of dividends paid on a quarterly basis. I withdraw a regular amount each month (our monthly "paycheck") but it is buffered by a cash balance equal to three months of dividends (or 25% of the annual dividend total). It might be possible to have a smaller buffer amount but with three months total I feel like I can "set it and forget it".
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Old 02-18-2015, 06:56 PM   #7
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I am very satisfied with Powershares Preferred (PGX) and Powershares Financial Preferred (PFF), they pay monthly. I bought these shares 2008/2009 during the "Big One" and have some CGs. But the monthly checks were my objective.
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Old 02-18-2015, 06:57 PM   #8
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Originally Posted by nuke_diver View Post
I see where you are coming from regarding the tax situation LOL! and target2019. I am not however putting all my $$ in these funds so it is part of my diversification. A couple of years ago I was probably 90% stocks now I'm more like 75% stocks. It seems to me LOL! (perhaps you can explain it more) that selling equities could eventually end up draining my account since you cannot always sell losses and unless the gains were keeping up with a monthly withdraw the account would start to lose $ fast.
If I sold something at a loss, I would simply rebalance to get back to my desired asset allocation. So I am using a total return approach and not an income approach. Here is a white paper on the subject:
https://personal.vanguard.com/pdf/s352.pdf
and an earlier version:
https://personal.vanguard.com/pdf/s557.pdf

and one more for fun:
http://www.vanguard.com/pdf/icrsp.pdf
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Old 02-18-2015, 07:07 PM   #9
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I have used IYLD, which is a hybrid fund of bonds, preferred stocks and common stocks and REITS, dividend is variable depending on results, and FAX which is Asia bonds, I sold out of this a year ago I would not get back into this right now, it is quite a volatile price changer affected by the US dollar as well as interest rates, although the dividend is the same each month. Also utilize DNP which is a utility based closed end fund in stocks and bonds that pays out a consistent dividend each month paying out capital to offset interest.
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Old 02-18-2015, 07:15 PM   #10
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I see where you are coming from regarding the tax situation LOL! and target2019. I am not however putting all my $$ in these funds so it is part of my diversification. A couple of years ago I was probably 90% stocks now I'm more like 75% stocks. It seems to me LOL! (perhaps you can explain it more) that selling equities could eventually end up draining my account since you cannot always sell losses and unless the gains were keeping up with a monthly withdraw the account would start to lose $ fast. Whereas the bond payments might not deplete the principal too much. I cannot see how I can come out ahead sitting on cash that makes nothing either. Unless I'm missing something pay tax on something that pays me 4% is better than not pay tax on something that pays 0.5% amiright Granted I never thought through the tax implications clearly (though I do have taxes accounted for in my RE budget)

I do have quarterly dividends but was looking at something that was more of a steady stream of income. Strangely credit card companies frown on you if you only pay them 4x a year :P. It is also (I know) part of the learning of going from a regular paycheck to a withdrawal strategy and while I have cash to tide me over while I learn there is is going to be a learning curve
At the moment you decide to look for a 4% payer rather than cash at 0%, you take on some amount of risk. And that is exactly the conversation I was having. For this part of the portfolio I mentioned, we chose to look at some of these smaller decisions in isolation. Some people may refer to this as play money. The result is something like $700 in taxable dividends vs. $1.98 or so if left in bank.

Also, look at your tax bracket now, and what will it be in your first full year of retirement. You would like to stay in a lower bracket, and not have this play money push you into the next higher one.

SDIV is another monthly. I am not familiar with it, but it has been described like this:

"SDIV tracks the 100 highest-yielding equity securities (including REITs and MLPs) from across the world and then equally weights them to create its portfolio."
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Old 02-19-2015, 07:28 AM   #11
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Originally Posted by nuke_diver View Post
As part of my preparation for ER I have moved some cash into some funds that play a monthly dividend as a pseudo paycheck replacement (no pension for me ). I am on the lookout for others for diversification as right now I have mainly bond ETF's. I don't look at these for growth (I have other investments for that) but monthly income.

Does anyone else do the same? What are some of your favs? I just sold my ESPP so I've got some new cash that needs a home. I've been looking at some preferred ETF's but I'm not that familiar with preferred stocks of any kind
A major part of my ER plan back in 2007-08 was to cash out my company stock (ESOP) using NUA to take advantage of low tax rates and buy a lot of shares of a bond fund at bargain-basement prices in late 2008.

This Big Bond Fund (BBF) has been generating a big monthly dividend to replace the biweekly paycheck I had been receiving while working. The monthly Dividends Per Share has dropped by just over 1/3 in the last 6 years but I have also added nearly 1/3 more shares in that same time, nearly canceling out the DPS drop. I use excess cash from dividends to buy more shares.

I also have a stock fund whose quarterly DPS has increased a lot in those same 6 years. I have also added many shares in that time. Last year, to supplement the BBF's drop in monthly dividends, I now take the quarterly dividends in cash instead of reinvesting them. These quarterly dividends happen to coincide with the spikes in my expenses which makes budgeting a little easier.

I began using this system back in 2008 when I was 45 and it has worked well for me in the last 6 years. I will keep using it for another ~8 years until my "reinforcements" arrive: unfettered access to my Rollover IRA, my frozen company pension, and SS. If I at some point have to tap into principal (doubtful), that's okay. I also have some other (smaller) bond funds I can tap into if necessary.
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Old 02-19-2015, 07:51 AM   #12
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You might want to check out iShares US Preferred Stock (PFF). Pays monthly, has a nice yield. The expense ratio is a little high .47% for a ETF.
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Old 02-19-2015, 10:32 AM   #13
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Thanks for the links LOL! I'm working through them. I do get the tax implications but my tax rate will fall rather dramatically once I ER since that salary will go away so income will drop but ~50% or so. So I expect to be in a much lower tax bracket than I am today.

I have checked into SDIV and PFF as well. I was looking at such funds for the simplicity of it as well. In order to get something approaching a monthly income I would need several selected dividend paying stocks so there were be an awful lot of research to find 12 good ones. Now I do already have some so it might not be such a big deal but finding good ones that have payouts on a schedule that is different than those I already have but it may take some time to find them.

And of course there is going to be more risk than sitting in a bank but even that has risk (impact of inflation). I never want to pay a lot of tax but I also recognize that you need to make it to pay it so getting a better return can be worth the taxes (as well as the hassles). It does appear that almost all monthly pay funds are not qualified though so I need to do some more research.
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Old 02-19-2015, 01:22 PM   #14
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You might want to check out iShares US Preferred Stock (PFF). Pays monthly, has a nice yield. The expense ratio is a little high .47% for a ETF.

Certainly not bad to look at. However, I believe it is really weighted heavily in financials as most preferreds are issued today from that ilk. I buy individually and avoid the exp. ratio which is a major drag on yield. Since yield is what I want from buying them, I avoid the ETF. I also prefer buying utilities and insurance companies, so I weight mine that way by purchasing individual preferreds though I do own a small amount of bank preferreds.


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Old 02-19-2015, 01:41 PM   #15
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Regarding monthly payers, one good reason to disfavor them is because they are monthly payers. Since there will always be people who favor the supposed ease of budgeting with monthly inflows, rather than less frequent inflows, this is a source of demand for the security that is unrelated to its value.

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Old 02-20-2015, 08:16 AM   #16
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Regarding monthly payers, one good reason to disfavor them is because they are monthly payers. Since there will always be people who favor the supposed ease of budgeting with monthly inflows, rather than less frequent inflows, this is a source of demand for the security that is unrelated to its value.

Ha
For a fund this should not be an issue should it? They are doing the allocation of funds and paying out monthly as a convenience, the key would be I think the expense ratio.

FAX the foreign bond fund that pays monthly that I mentioned is actually selling at a 10 percent discount to NAV, though expense ratio is over 1 percent.

DNP 70 % Utility stocks 15% bonds and 15% MLP's trades at a 4 % premium but has managed to pay out 6.5 cents per share every month since 1997 and is a very nice paying conservative fund for this purpose. This fund was in 2012 selling at a 40% premium which was far too high but now premium is only 4% and I think an excellent and steady provider of monthly income with a very good chance of being able to maintain this payout another 18 years, based on their philosophy of investment. It would take a prolonged bear market in utilities of several years for the fund to cut the distribution. Possible but most likely any stock investment would be trouble in that environment. Expenses are high at 1.05% and this is a valid complaint about the fund, however the performance for a managed utility fund has been quite good. For someone who is hesitant to invest in stocks and wants a monthly "check" this is a good conservative way to put them into stock exposure, as they manage the buying and selling of securities to maintain the consistent monthly income for you.
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Old 02-20-2015, 08:45 AM   #17
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I use Vanguard Int Term Muni for a portion of my monthly "paycheck". No tax issues and has been a good performer.
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Old 02-20-2015, 10:04 AM   #18
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Dividend stocks have different payment dates. Some pay in Jan, Feb or Mar then repeat. So you can construct a portfolio that pays each month but a different payer. For example

Kimberly-Clark pays Jan,Apr,Jul,Oct
AT&T pays Feb,May,Aug,Nov
Chevron pays Mar,Jun,Sep,Dec

The dripinvesting site, The DRiP Investing Resource Center - DRiP Information, Tools, And Forms, maintains a list of "dividend champions". It's a good source for to look through for dividend payers

There are some other articles on this approach, Building A Monthly Income Portfolio | Seeking Alpha
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Old 02-20-2015, 10:05 AM   #19
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Originally Posted by nuke_diver View Post
As part of my preparation for ER I have moved some cash into some funds that play a monthly dividend as a pseudo paycheck replacement (no pension for me ). I am on the lookout for others for diversification as right now I have mainly bond ETF's. I don't look at these for growth (I have other investments for that) but monthly income.

Does anyone else do the same? What are some of your favs? I just sold my ESPP so I've got some new cash that needs a home. I've been looking at some preferred ETF's but I'm not that familiar with preferred stocks of any kind
I use a total return approach as well. I don't see it as a good idea to let a focus on income drive your investment policy. Also, to have bond income from taxable accounts is horribly tax inefficient. I accomplish the same thing by just having converted a portion of my fixed income allocation to cash in an online savings account and a monthly transfer to my bank accounts is my monthly "paycheck".

If you decide to do it anyway, CDs or target maturity bond funds might be a good way to mitigate interest rate risk.
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Old 02-20-2015, 10:22 AM   #20
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I don't choose my mutual funds because of their dividends. Most of my portfolio is invested in index funds.

Still, I use my dividends from both equity and bond funds (and Wellesley!) for expenses, but in a roundabout sort of way that is less direct. I receive them in cash, which I can use for rebalancing during the year if needed.

During the first week in January, I withdraw all of the following year's spending money (which I require to be less than or equal to the previous year's dividends), and then rebalance. In other words, right now I am spending my 2014 dividends.

Maybe this sounds more complicated but for me it has been a simpler and smoother way to extract spending money. I only withdraw from Vanguard once each year.
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