investing for Income is becoming more important than investing for capital gains

[imoldernu]

I didn't want to start a new thread, but I think this might be interesting, even if you don't believe it. Gloom....
[mod edit - different topic, new thread]

https://www.peakprosperity.com/blog/114803/dude-wheres-my-cash?utm_campaign=weekly_newsletter_376&utm_source=newsletter_2019-02-16&utm_medium=email_newsletter&utm_content=node_link_114803

It's about how and why investing for Income is becoming more important than investing for capital gains.

 

[donheff]

Nothing new there that I can see. We all know a recession is on he way -- it always is. The question is when. If you can time it right and time getting back into equities right you are golden. Good luck with that. For those of us with feet of clay looking at the long term charts is some solace since what goes down has always come back up. Maybe this time is different but I am not betting on it based on some guy's chasing income paper.

 

[Tiger8693]

I couldn't get to the article after seeing crazy eyes on the lead in.... Guess I'll just miss out on this gem of advice.

 

[Spock]

While I agree the last 10 years of excess liquidity has pulled in many years worth of future growth with no investment to backfill, there is no advice in the link. Its just a hook to get you to pay for their premium service so you can get their opinion. One of those get you wound up/scared so you'll buy their newsletter.

 

[OldShooter]

Quite funny, actually. Capital gains are income.

Click bait with multiple click bait tags and embedded opportunities to read more click bait. My ad blocker reports 34 ads on the page. Ho hum.

 

[target2019]

Most blog articles are simply an author's un-researched thoughts. Hardly worth a read IMO.

 

[imoldernu]

Here's part of the article that you don't have to read...
https://www.peakprosperity.com/blog/114545/primacy-income

I realize you all know more than me... I'm just trying to catch up...

 

[pb4uski]

Irrelevant click bait... a waste of bits and bytes.

I think I'll take Vanguard's advice instead.

 

[triangle]

It might be a click bait article and we might all be cynics; but that is independent of any point the article might make. I have read numerous articles starting 2-3 years ago that warned that the next decade 'might' have lower returns than normal due to accelerated gains in the recent past, coupled with increasing debt at all levels, unfunded obligations, demographics, yada-yada.

[Mod Edit]

To the central point I think there should be a balance between income and capital gains, at least in after tax accounts. As the income will be taxed that year and can be reinvested differently (or spent). Although paying taxes now is never fun and arguably not the best option financially, it gives the investor more control.

 

[marko]

Imoldernu, you must spend hours a day surfing and finding these articles!!

I really appreciate you bringing all these to us, some of it useful, some not, but mostly thought and discussion provoking.

 

[Amethyst]

No kidding! We just spent some CG on a vacation.

Quite funny, actually. Capital gains are income.

Click bait with multiple click bait tags and embedded opportunities to read more click bait. My ad blocker reports 34 ads on the page. Ho hum.

 

[marko]

Quite funny, actually. Capital gains are income.

+1
We live off our dividends and dip into our MF CGs to supplement any shortfalls in a given year. We view dividends and CGs as income (as does the IRS)

 

[audreyh1]

We invest for total return. Never cared about investing for yield although I understand why some do or would like to as they dip less into their nest egg. However, it generally takes a much larger portfolio to live off only the yield and yet still be reasonably diversified and not fall behind inflation. Lucky heirs!

 

[foxfirev5]

While we live on income from dividends and interest we also have a good portion in total return oriented Roth's. It is allocated for either LTC or our heirs. We'll let fate determine the final outcome.

 

[NW-Bound]

Some of us pick on the author's choice of words, though we understand that by "investing for income" he means dividend stocks. And his point is that in the immediate future, slower growth will favor dividend stocks over growth stocks.

I own both types of stocks, and not in an index fund but individually so I can see their movements.

Have you looked at the 1-year performance of utility companies vs. many tech stocks? Whether that outperformance will continue may be subject of debate, but it is there.

 

[pb4uski]

Some of us pick on the author's choice of words, though we understand that by "investing for income" he means dividend stocks. ...

No, I think he means more than that... he's talking about "From bonds, to dividends (common and preferred), to real estate, to royalties".

Like audreyh1, we invest for total return. Last year was the first year since we retired 2012 that our portfolio didn't increase, but it is still 16% higher than when we retired and 25% higher if I include wthe value of our winter condo which was paid for by retirement portfolio withdrawals as part of our investments.

 

[haha]

Investing for total return works fine if you start at a time when stocks are going cheaply. But perhaps not so well if you pay up for your stocks. Same is true if you buy a diversified list of dividend payers at a relatively high yield.

This has to be preferable to buying the same stocks at a low yield. But of course this is a back door approach to market timing. I have never understood the professed antipathy to market timing anyway. Would you rather buy the same house at $500,000 or at $400,000? In practice, this type of market timing is what most people do, no matter what they say about it.

Overall, a diversified list of quality dividend payers will give a steadier income than say 4% of the value of those stocks. This is why most of these schemes introduce some sort of approach that smooths the amount withdrawn rather than the % withdrawn in a given year. So the key here is whether your chosen % is relatively low, say 2%, or relatively high, like 5%. Little magic here, but given reasonable choices and reasonable luck everything tends to go well.

In my own case, I would still be working if I had to go with interest and dividend income lower than what it would take to cover my ordinary expenses. A health emergency or something would be outside of this system, but not a vacation, or any other type of more or less voluntary spending. It is true that this requires more coverage of one's expenses than adding capital gains from selling stocks. But in my life the availability of capital gains has hardly been certain.

Ha

 

[Chuckanut]

This has to be preferable to buying the same stocks at a low yield. But of course this is a back door approach to market timing. I have never understood the professed antipathy to market timing anyway. Would you rather buy the same house at $500,000 or at $400,000? In practice, this type of market timing is what most people do, no matter what they say about it.

I must admit that when the market was pushing -20% last year, I did nibble a bit by taking a small amount of cash and using it to hopefully enhance my future return. That's about as close to timing the market as I get.

 

[marko]

I'm going out on a math limb here--never a good idea for me--but if MF dividends are running 2% to 4%, and those like me are still averaging an annual return of 6-7%, we might be enjoying a bit of both income and growth.

 

[scrabbler1]

I live off the bond fund's monthly dividends and stock fund's quarterly dividends, the latter used to improve and balance cash flow with the lumpier expenses which arise. The stock fund's dividends are about 1/4 of the total dividends.


However, the stock fund's growth, from both realized and unrealized cap gains, acts as an inflation guard. I have occasionally rebalanced from the stock fund into the bond fund, capturing some gains while adding bond fund shares which will slightly boost the slightly eroding monthly bond fund income.


The realized cap gain distributions from the stock fund are very erratic. Some years, they were small, but in other years they were large. I usually reinvest them back into the fund, as long as I can cover the added taxes from my regular income sources. But the large one at the end of 2018 generated added taxes I could not really cover, so I took it in cash before splitting it up into several places, from rebalancing to replenishing one of my "slush funds" to paying the added taxes. That large CG distribution also pushed me over the ACA subsidy cliff, but that's for other threads, some of which already exist.

 

[pb4uski]

I must admit that when the market was pushing -20% last year, I did [-]nibble a bit by taking a small amount of cash and using it to hopefully enhance my future return. That's about as close to timing the market as I get.[/-]

rebalance more frequently. I refer to it as opportunistic rebalancing rather than market timing.... in fact, I just put in a couple opportunistic rebalancing trades a few minutes ago.

 

[NW-Bound]

rebalance more frequently. I refer to it as opportunistic rebalancing rather than market timing.... in fact, I just put in a couple opportunistic rebalancing trades a few minutes ago.

On the surface, market timing is anticipating what the market will do. Rebalancing is reacting to what already happens. And I have been guilty of both.

But really, rebalancing is also market timing. You are expecting that the market or a sector or the relative valuation of stocks with respect to bonds will revert to the long-term mean.

And so, rebalancing is still a prediction of the future, although that is based in the past and not a pure speculation about something that has no precedent such as bitcoins.

 

[pb4uski]

I guess that I could describe my opportunistic rebalancing as trying to take advantage of minor market gyrations... I've done it both on the upside (more frequent rebalancing when I "feel" that the market is ahead of itself or has gone up too quickly) and on the downside (like when the market to a good dip after the Brexit vote).

 

[NW-Bound]

And I have done the above more often than most, along with LOL.

And the results have been mixed. But I have fun doing this.

 

[pb4uski]

It's easier for me because I don't try to track the results of my opportunistic rebalancing decisions.