Equity dividend ETF + CASH better than intermed bonds

[galeno]

In October, our portfolio looked like this: 60/30/10 (stocks/bonds/cash).

With our 30% in SCHZ (intermed bonds) yielding so little, we decided to trade 30% of SCHZ for 5% SCHD (equity dividends) + 25% CASH (5yrCD ladder).

The bet turned out to be a good one. SCHD has increased by 21% since we did the exchange.

So our SCHD+CASH has increased 4.6% since October vs a 0.7% loss for SCHZ.

 

[bUU]

How did this change affect your investment in risk long-term?

 

[galeno]

In our case, since we are US-NRAs (US-non-resident aliens) who invest via the USA, we pay a 30% upfront tax on all interest and dividend income with the exception of FDIC-insured bank accounts and US Treasury instruments held directly. We pay 0% capital gains taxes.

In October, the net yield on our SCHZ was (70% of 1.41%) 0.99%. Net yield on SCHD was (70% of 4.2) 2.94%. A brokered 5yrCD had a net yield of 1.25%.

It really was a no-brainer swap for a total-return guy like me. The interest rate risk of SCHZ was is its 5 year duration. The purpose of our cash and bonds is portfolio ballast.

At time, the only thing with a better SEC yield (and a reasonable cost) would have been an offshore bond fund (PTTAX). I did not like the leverage or the options used in that fund so I eliminated it for consideration.

Since then, PTTAX has de-leveraged considerably.