Income Portfolio

[Bossman]

Wish to create an income portfolio of 3-4 low expense ETFs, preferably dividend ETFs that will on average return 4% or more. At this moment, looking at Invesco Preferred ETF (PGX) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD).

As this type of portfolio will have significant risk during an inflationary cycle, I am soliciting suggestions for additional ETFs to complete this income portfolio as well as any commentary regarding the first two ETFs that I have selected (PGX and SPHD). Thanks!

 

[target2019]

We hold SCHD, SPYD and PGX in small quantities in taxable brokerage. Growth complements to those are SCHG and SPYG.

 

[Koolau]

Not much help here, but I was under the impression most dividends average below 4%. Therefore, a fund or ETF with high enough aggregate dividends to meet your 4% desires might be vulnerable to wide shifts in value over time. Just a thought so YMMV.

 

[pjigar]

"Chasing the yield" ends up in portfolio with subpar companies weighted in limited number of sectors. "Total returns" generally beats "Income portfolio". Invest in some broad market funds which should throw about 2% dividends. You sell some funds to cover any excess cash needs beyond 2%. You may end up paying lower taxes with the "Total Return" portfolio so there is that. YMMV. Here is some food for thought.

 

[ERD50]

Wish to create an income portfolio of 3-4 low expense ETFs, preferably dividend ETFs that will on average return 4% or more. At this moment, looking at Invesco Preferred ETF (PGX) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD).

As this type of portfolio will have significant risk during an inflationary cycle, I am soliciting suggestions for additional ETFs to complete this income portfolio as well as any commentary regarding the first two ETFs that I have selected (PGX and SPHD). Thanks!

I'm not a fan of sector funds, these High Dividend funds, by definition, invest in a sector of the market to get those dividends. The data shows you are best served by a more diversified portfolio, like VTI (Total Market) or SPY.

If you check that SPHD, you'll find it is "low volatility" in name only - in the only dip we have data for (SPHD was started in 2012, so no 2008 data), it drops more than VTI.

And SPHD does not "return" 4% on average. It provides dividends of ~ 4%. It's "return" (total value to the investor) is lower than VTI.

VTI dividends are ~ 1.3% - if you need 4%, you can just sell ~2.7% each year (or spread it through the year) to make up the difference. Those dividends are mostly an illusion - there is essentially no difference between you selling some of the holding for income, and the High-Div ETF distributing a dividend. If the ETF did not distribute that div, it would be held and be on the books, raising it's value, which means you could then sell it for income.

The advantage to you selling some of VTI or SPY, is you will pay less in taxes (only a portion of the sale will have taxable gains), and you are in control. And, you will be better diversified.

Some data:

https://bit.ly/2Rt4kwn << short-link to portfoliovisualizer.com

If you invested $100,000 in VTI and SPHD at SPHD inception (NOV 2012), VTI would have grown to $352,979, SPHD lagged and would be worth only $246,574. A $106,405 delta is nothing to sneeze at. And, you'd likely pay less taxes with VTI/SPY.

And if you add in a 4% annual, inflation adjusted withdrawal to that analysis, to show the effect of providing a steady income from each source, the balances are VTI: $281,108, SPHD: $192,108.

Every analysis I've done shows these dividend ETFs to be a loser in every way. They don't lower volatility, they don't provide more value. And those divs can vary over time, so you might still need to do dome selling or reinvesting to maintain 4%. An occasional sale of VTI or SPY really is almost no effort.

-ERD50

 

[OldShooter]

Wish to create an income portfolio of 3-4 low expense ETFs, preferably dividend ETFs that will on average return 4% or more. At this moment, looking at Invesco Preferred ETF (PGX) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD).

As this type of portfolio will have significant risk during an inflationary cycle, I am soliciting suggestions for additional ETFs to complete this income portfolio as well as any commentary regarding the first two ETFs that I have selected (PGX and SPHD). Thanks!

@Bossman, you are seeking the magic bullet. Sorry to say, there are no magic bullets in investing.

"Chasing the yield" ends up in portfolio with subpar companies weighted in limited number of sectors. "Total returns" generally beats "Income portfolio". Invest in some broad market funds which should throw about 2% ...

... Every analysis I've done shows these dividend ETFs to be a loser in every way. They don't lower volatility, they don't provide more value. And those divs can vary over time, so you might still need to do some selling or reinvesting to maintain 4%. ...

This, from @pjigar and @ERD50, is wisdom.

WADR, @Bossman, you need to study the total return concept until you completely grasp it. It is the way to best portfolio performance, including best income. Here is a six-minute video to get you started:

Kenneth French on Dividends: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[disneysteve]

I am relatively new to this site, but in that short time I've learned that dividends vs. total return is one of the common points of discussion.

Here's my view. We own VYM Vanguard's High Yield Dividend Fund, so I'm not opposed to the concept of having that as part of our portfolio. We also own a few individual stocks that pay dividends, though that wasn't the primary reason we invested in them.

I am about to receive an inheritance that includes a substantial position in 2 individual dividend-paying stocks. Once I get them, I'll need to decide what to do with them. They currently yield 3.39% and 2.38% so pretty decent by current standards.

I looked up their trailing returns and discovered that one of them has trailed both its sector and index for YTD, 1, 3, 5, 10, and 15 year periods. The other has trailed its sector and index for 3, 5, 10, and 15 years. In both cases, my relative would have been far better off having just invested in index funds and not worried about the dividends. Sure, he wouldn't have had that dependable quarterly check and he would have needed to sell shares from time to time, but he would have ended up with a lot more money.

The more I read here and online, the more I'm shifting to the Total Return mindset rather than the Dividend mindset.

 

[ncbill]

As others note, "high dividend yield" ETFs/funds normally means taking on sector risk.

Looking at returns over time the above underperform broad-based index ETF/funds, so you're not being compensated for that extra risk.

Historically, taking the dividend from a broad-based ETF & selling to make up the difference results in a higher total return.

 

[OldShooter]

... I am about to receive an inheritance that includes a substantial position in 2 individual dividend-paying stocks. Once I get them, I'll need to decide what to do with them. They currently yield 3.39% and 2.38% so pretty decent by current standards.

I looked up their trailing returns and discovered that one of them has trailed both its sector and index for YTD, 1, 3, 5, 10, and 15 year periods. The other has trailed its sector and index for 3, 5, 10, and 15 years. In both cases, my relative would have been far better off having just invested in index funds and not worried about the dividends. Sure, he wouldn't have had that dependable quarterly check and he would have needed to sell shares from time to time, but he would have ended up with a lot more money.

The more I read here and online, the more I'm shifting to the Total Return mindset rather than the Dividend mindset.

Good job, @disneysteve. Another important thing to consider is diversification. It is almost impossible for an individual investor to build a diversified portfolio out of individual stocks. It just takes too many. The most aggressive number I have read says that 30 stocks are needed (each at ~3% of the portfolio), but more common numbers are 60 or 100. For diversification to work the stocks have to be distributed across lines of business, size, geographic location, location of markets, etc. IMO that's far too much work for even a very knowledgeable person who could do the work quickly. So for that reason IMO you should strongly consider selling the inherited stocks regardless of other factors. Really, for us little guys, the only feasible path to diversification is the old, boring, standby: low cost broad market mutual funds.

I tell my Adult-Ed investment class that investing is boring. If you're not bored, you're doing it wrong.

 

[tulak]

IMO, the only reason to invest in dividend yielding stocks is if it allows you to increase your equity exposure.

It is psychological, but if you decide to ‘never sell’ and live off only your dividends, then having a 100% invested in dividend yielding equities (or funds) is a good way to go. Dividends are rarely cut during a market downturn (assuming you’re diversified).

This approach will do better than total return, because most total return investors will offset their allocation with bonds/FI investments.

Otherwise, it’s better to invest for total return and rebalance as needed.

 

[mrfeh]

"Chasing the yield" ends up in portfolio with subpar companies weighted in limited number of sectors. "Total returns" generally beats "Income portfolio". Invest in some broad market funds which should throw about 2% dividends. You sell some funds to cover any excess cash needs beyond 2%. You may end up paying lower taxes with the "Total Return" portfolio so there is that. YMMV. Here is some food for thought.

+1000

Total return is the way to go.

 

[pb4uski]

I've been buying preferred stocks for income. Over the past couple years I've put together a portfolio of about 50 preferreds.

My target is investment grade or just below investment grade with minimal call risk. 33% are rated BBB or better... 65% are rated BB+ or better... but keep in mind that preferreds are typically rated one or two notches below senior debt.

Weighted average yield is about 5.5%.

It is a bit of work though.

 

[FANOFJESUS]

Wellington or Wellesley might work.

 

[Bossman]

My thanks to every ones input with extra kudos going to ERD50 for his detailed analysis. For those who are curious as to my final decision, I decided to invest 49% in monthly dividend ETFs (PGX and SPHD) and 49% in a total return ETF (VTI). The remaining 2% will be in cash to provide a cushion for monthly disbursements.

 

[Koolau]

I've been buying preferred stocks for income. Over the past couple years I've put together a portfolio of about 50 preferreds.

My target is investment grade or just below investment grade with minimal call risk. 33% are rated BBB or better... 65% are rated BB+ or better... but keep in mind that preferreds are typically rated one or two notches below senior debt.

Weighted average yield is about 5.5%.

It is a bit of work though.

You just said the magic word w*rk. That's why I retired - to get away from w*rk. If that costs me money, I already know how to sing that tune. If you enjoy doing it, though, it ain't w*rk, so more power to you - especially if it adds a bit of a "kick" to the NW by year's end.

There are 8 million (plus) stories in the FIRE city. This has been one of them.

 

[OldShooter]

I've been buying preferred stocks for income. ...

I have seen your posts on this in the past. I have never looked at these but my understanding is that they are sort of like a bond with no maturity date. Won't your extra income get wiped out by the stocks' loss of value as rates rise? Just curious about your thinking.

 

[Happyras]

I have seen your posts on this in the past. I have never looked at these but my understanding is that they are sort of like a bond with no maturity date. Won't your extra income get wiped out by the stocks' loss of value as rates rise? Just curious about your thinking.

Me too, I would like to understand that rate rise risk and duration issue a bit more. I have also dived into the PGX and single issue preferreds. Mostly, I have bought issues that are close or at call, but still subject to accrued payable dividends. My Wells Fargo was the first to get called, then the great NGH got called on the buyout sweep, but that Monmouth preferred has been a great holding, matches my shares of UPS nicely. The recent call risk of buying DTJ seemed like a no brainer, if called I get what I paid, but until then there is upside interest at 5.25%. I cut back on PGX and PFF due to rate risk concerns as these ETF's seemed sensitive to the rate change where the single issues I held did not. I would really like to know more than I know.

 

[pb4uski]

I have seen your posts on this in the past. I have never looked at these but my understanding is that they are sort of like a bond with no maturity date. Won't your extra income get wiped out by the stocks' loss of value as rates rise? Just curious about your thinking.

One would think so but they don't seem to be nearly as interest sensitive as you would think in real life.... and I'll admit that it is a bit of a mystery to me.

I'll use JPM.PRD as an example. It was issued Sept 18, 2018 for $25 with a 5.75% rate and a $1.44 annual dividend... at the time the 10Y Treasury was ~3.0% and the 30Y Treasury was ~3.2%.

From Sept 2018 until July 27, 2020, the 10Y Treasury yield fell ~2.5% to 0.55% and the 30Y Treasury fell ~2.0% to 1.2%. But JPM.PRD only increased to $27.92... dropping the yield from 5.75% to 5.16%.... a mere fraction of the drop in the treasury rates.

From July 2020 to today, the 10Y Treasury yield increased to 1.64% and the 30Y Treasury increased to 2.37%. But JPM.PRD only dropped to $27.11... increasing the yield from 5.16% to 5.31%.

Another example is IPLDP (Interstate Power & Light) a BBB rated issue with a 5.1% ($1.28) dividend issued in 2013. On 6/14/2014 it was trading at $25 and the 30Y Treasury was at 3.47% and the 10Y Treasury was at 2.65%. Today, it traded at $25.60 yielding 5.0% but the 30Y Treasury is at 2.37% and the 10Y Treasury is at 1.64%. With a 100bps reduction in interest rates between 2014 and now you would think that the price would have increased a lot more than 60c, but it hasn't.

 

[53anddone]

Income

I've been buying preferred stocks for income. Over the past couple years I've put together a portfolio of about 50 preferreds.

My target is investment grade or just below investment grade with minimal call risk. 33% are rated BBB or better... 65% are rated BB+ or better... but keep in mind that preferreds are typically rated one or two notches below senior debt.

Weighted average yield is about 5.5%.

It is a bit of work though.

Same here. I have about 15% of my portfolio in preferreds. It is a bit of work but the yield and diversification is worth it.

 

[olyveoil]

OP,
I am doing similar. I believe that Div payers are part of a total return portfolio.

ETF's / MF's / CEF's / individual stocks I am accumulating are:
NEWT
GAIN
QYLD
GLDI
NUSI
PDI
PDT
C
BMY
ABBV
MRK
BGS
PSX
MPC
YAFFX

Several more on my watch list if you would like me to list them.

My plan is roughly as follows:
$400,000 in div payers where my yield on cost gets me $16k to $20k annual.
$300,000 in low risk bond funds, munis, even cash as a self funded LTC insurance
$1M in the common total return MF's.

Many dividend paying naysayers do not take into account the yield on cost and long term holding aspect of dividend paying assets (including the forbes author). Further, you can find just as many articles promoting dividend investing.

 

[Exchme]

No expert, but I've always hated preferred stocks. The issuer has all the control. If interest rates go up, you are stuck as there is no fixed term like a bond that would help limit your downside risk. If interest rates go down, they can call and either re-issue or issue some bonds.

If the company gets in money trouble, preferred holders are in line after bond holders so preferred carries more default risk than bonds.

The fact that some of these are paying a lot and not being called, seems likely to be due to poor creditworthiness of the company. It's not like the corporate CFOs went to sleep and or said "let's not call these, we like paying more for money than we have to!"

So I think some of these are just junkier versions of junk bonds and buyers should be skeptical if the yield is terrific.

 

[ESRwannabe]

Wish to create an income portfolio of 3-4 low expense ETFs, preferably dividend ETFs that will on average return 4% or more. At this moment, looking at Invesco Preferred ETF (PGX) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD).

As this type of portfolio will have significant risk during an inflationary cycle, I am soliciting suggestions for additional ETFs to complete this income portfolio as well as any commentary regarding the first two ETFs that I have selected (PGX and SPHD). Thanks!

I like monthly paying ETFs so I would suggest ETFs: DIVO, PEY, SPHD, DHS.

Those are all relatively high yield (3.50% to 4.00% for all but DIVO). In particular DIVO is around 5.00% because it strategically adds income from covered calls.

Those fours ETFs will not only pay out a descent amount, but they have also had dividend growth of around 7% on average, in combination if equally weighted.

If you are still short on income you can add in a few more ETFs: JEPI, NUSI, QYLD, XYLD, PFFA, AMZA.

Most of those make money from selling covered calls. PFFA buys preferred stock with modest leverage. AMZA buys MLPs with modest leverage.

I only include AMZA as I think MLPs hit rock bottom last year. They have been absolutely devastated the last 6 years or so. Be cautious on that one because I don't have much trust in MLPs anymore. They maybe permanently un-investable forever...

 

[OldShooter]

... Many dividend paying naysayers do not take into account the yield on cost and long term holding aspect of dividend paying assets (including the forbes author). Further, you can find just as many articles promoting dividend investing.

Sigh ...

 

[olyveoil]

Sigh ...

.... Sigh ....

Got something to say? then say it.

 

[RunningBum]

Many dividend paying naysayers do not take into account the yield on cost

There's a difference between being a dividend naysayer vs. looking for total return. I'm not sure there are any of the former here. Total return advocates, by definition, do take the yield payout of dividends into account, as part of the return. What makes you say differently?

and long term holding aspect of dividend paying assets

Please explain what this long term holding aspect is, and how it differs from the long term holding aspect of a total return portfolio.