What Investment Rate of Return do you Use?

[pb4uski]

I would be more concerned about concentration and lack of diversification. Think like Enron and WorldCom. They had similarly stellar returns for many years leading up to their implosions. Can you hedge all or some of the market risk associated with your former employer stock?

Alternatively, you might be able to do an exchange of those shares with an ETF and receive ETF shares which would be more diversified though I don't know if that would be a taxable event in Canada. Or perhaps a similar transaction with the market maker of your employer stock.

 

[Meadbh]

Thanks. That was a good article. Agree that my income approach is not optimal. Problem is I kind of got stuck with it, ie I needed to own a lot of my employer's stock up until 6 months after I retired. By then the shares had appreciated so much, the cap gains tax would have been prohibitive to switch out. Couple that with the obvious knowledge and comfort ( not to mention continuing excellent performance) I have with this stock, I have been slow at switching out. So do I stick with the company I know, or look for something else, probably in the US market.

The recently announced tax increases also make my income approach less advantageous. Divs are taxed at about 30% while cap gains would be 24%. Also cap gains are only on the actual gain, not the whole proceeds.

Just hard to find something that might be better than what I have. CAGR total return since 1997 is about 12%. Got any ideas? Doubt index ETF's would match this, especially based on real returns people are forecasting in this thread.

It's ironic that you are asking me for advice, given that my bank and investment fees are paying for a tiny fraction of your pension!

I can't think of anything that would match your CAGR of 12%. You will surely be on the receiving end of a larger income tax bill from our new government, whereas I expect mine to go down by $670. Your bank stocks are probably as safe as any stock could be. You could still use a total return approach in organizing your "income". Also, if you wanted to realize some capital tax free, you could sell your principal residence in Canmore and move to one of your Ontario properties. Then you could sell that and move to your other Ontario property. Can't help you with the Arizona property, though. Nice problems to have.

 

[Danmar]

I would be more concerned about concentration and lack of diversification. Think like Enron and WorldCom. They had similarly stellar returns for many years leading up to their implosions. Can you hedge all or some of the market risk associated with your former employer stock?

Alternatively, you might be able to do an exchange of those shares with an ETF and receive ETF shares which would be more diversified though I don't know if that would be a taxable event in Canada. Or perhaps a similar transaction with the market maker of your employer stock.

Yes. It's a big concern. Have considered your ideas. Problem is I lose about 15% of portfolio value to taxes if I sell these shares. My plan is to gradually switch out over time. Have sold/ gifted couple million$ in last 2 years.

 

[Danmar]

It's ironic that you are asking me for advice, given that my bank and investment fees are paying for a tiny fraction of your pension!

I can't think of anything that would match your CAGR of 12%. You will surely be on the receiving end of a larger income tax bill from our new government, whereas I expect mine to go down by $670. Your bank stocks are probably as safe as any stock could be. You could still use a total return approach in organizing your "income". Also, if you wanted to realize some capital tax free, you could sell your principal residence in Canmore and move to one of your Ontario properties. Then you could sell that and move to your other Ontario property. Can't help you with the Arizona property, though. Nice problems to have.

Yes, agree that a less div centric approach to generating cash flow would save tax but at a very high up front cost. Our Canmore house is under water and the prospect of selling in the current market is very poor. Also, residing in Ontario increases max marg rate by several percentage points. Thanks for the ideas though. Yes, good problem to have.

 

[GTFan]

Yes. It's a big concern. Have considered your ideas. Problem is I lose about 15% of portfolio value to taxes if I sell these shares. My plan is to gradually switch out over time. Have sold/ gifted couple million$ in last 2 years.

LOL - given that what you've sold is more than most people here have to live on for ER, worrying about divs vs. CGs should be small potatoes in the grand scheme of things.

 

[kcowan]

Here's an article from today's Globe and Mail on spending dividends.

Why high-net-worth investors should avoid living on dividends alone - The Globe and Mail

My immediate reaction is "what portfolio can I construct that offers no dividends?" Typically the divvy payers are blue chip and the non-payers are higher risk and so more volatile.

 

[Danmar]

My immediate reaction is "what portfolio can I construct that offers no dividends?" Typically the divvy payers are blue chip and the non-payers are higher risk and so more volatile.

Yes, that was my thought too. If you reduce your WR to reflect the higher risk levels you will probably be no further ahead. Also, you might consider the need to hire an advisor to help transform your portfolio. Factor in their cost (say 50 bps) and it is unlikely you are ahead. The old tax tail?

 

[Danmar]

LOL - given that what you've sold is more than most people here have to live on for ER, worrying about divs vs. CGs should be small potatoes in the grand scheme of things.

Maybe so, but still a concern. I didn't get where I got without paying attention to the details.

 

[ERD50]

My immediate reaction is "what portfolio can I construct that offers no dividends?" Typically the divvy payers are blue chip and the non-payers are higher risk and so more volatile.

Yes, that was my thought too. ...

BRK pays no dividends, and total returns have outperformed SPY and DVY:

PerfCharts - StockCharts.com - Free Charts

Although BRK appears more volatile, the 2007-2009 dp was no worse than DVY or SPY.

-ERD50

 

[kcowan]

BRK pays no dividends, and total returns have outperformed SPY and DVY:

PerfCharts - StockCharts.com - Free Charts

Although BRK appears more volatile, the 2007-2009 dp was no worse than DVY or SPY.

-ERD50

Yes I should have said more volatile rather than risk. If I can avoid selling on the dips using divvies to finance my budget, I will.

Also I avoid BRK because I disagree with some of their investments. (I live in Mexico half the year and observe the unhealthy consumption of Coke, for example. I also avoid the latest technology from Gillette. Also the high degree of concentration in insurance. And the bailout of Goldman Sachs.)

But that is just me and I do hold some companies that are less than sterling.