Income Investing Results

[corn18]

Don't get me wrong, I wish I had done Roth 401k, but the tax savings maxing out pretax at such a high rate I felt was more beneficial. I can't convert for the next 3 years to try and get subsidy for ACA. After that, who knows, but time won't be on my side. Congrats to you!

Flieger

You are doing great with what you have. Someone just starting out might want to look into back door Roth stuff so they can get a lot of tax free growth.

 

[pb4uski]

YOC is just the yield based on my cost for the investment vehicle. If my cost basis is lower than the current price, YOC is a little more than the calculated Yield, and vice-versa for cost basis being higher.

Flieger

And as a hold-to-maturity guy, I focus more on yield to cost... absent a default that is what I will earn if held-to-maturity.

 

[Flieger]

And as a hold-to-maturity guy, I focus more on yield to cost... absent a default that is what I will earn if held-to-maturity.

So you too look at YOC.

Flieger

 

[pb4uski]

Interesting thread.

Those that have most of your portfolios in income producing assets, what is the optimal strategy for placement of these assets? In a taxable account or a tax deferred account (trad IRA) or a Roth IRA?

If you shuffle income from one account to another what is the preferred sequence?

My brokerage account is all preferred (other than one inherited VTSAX position). Many of those preferreds are qualified dividends but some are not. I have enough trouble finding good quality preferred with good yields to fret about the tax status. In my circumstances it isn't a huge differentiator.

Most of my tIRA is bonds. Our Roth's are a mix of preferred and bonds.

 

[pb4uski]

What is the difference between dividend yield and yield on cost?

For both, the numerator is income (interest or dividends). The denominator is fair market face for dividend yield and cost for yield on cost.

So for my preferred I focus on annual dividends divided by my cost rather than divided by current value.

 

[corn18]

So you too look at YOC.

Flieger

I view this as Return On Invested Capital (ROIC). Common finance term.

 

[Flieger]

So the usual and common way yields for stocks and etf’s are “reported” or announced on financial sites is the yield based on the current price of the item. What I am looking at is the yield based on what I paid (cost basis). I like that method better for my analysis and decision making.

Flieger

 

[Taco]

What I am looking at is the yield based on what I paid (cost basis). I like that method better for my analysis and decision making.

What is it about YOC that makes you prefer it to using current yield?

 

[Flieger]

What is it about YOC that makes you prefer it to using current yield?

Just a preference I guess. I also like to be able to make decisions on which I keep based on the yield against my cost rather than the daily price.

Flieger

 

[pb4uski]

What is it about YOC that makes you prefer it to using current yield?

Because it is MY yield rather than the yield of someone that buys at today's current price. So let's say I buy a full allocation of a $25 stated value preferred stock that has a 6% fixed dividend of $1.50 a year at $18.75 so it yields 8%. After I buy it, the price increases to $22 so it then yields 6.8%. Since I am a long term income holder, the 8% is more relevant to me than the 6.8%. Same principle for bonds... since I intend to hold-tp-maturity my purchase yield is more relevant to me than the current yield someone buying it today would receive.

 

[surprising]

Because it is MY yield rather than the yield of someone that buys at today's current price. So let's say I buy a full allocation of a $25 stated value preferred stock that has a 6% fixed dividend of $1.50 a year at $18.75 so it yields 8%. After I buy it, the price increases to $22 so it then yields 6.8%. Since I am a long term income holder, the 8% is more relevant to me than the 6.8%. Same principle for bonds... since I intend to hold-tp-maturity my purchase yield is more relevant to me than the current yield someone buying it today would receive.

You can also look at YOC vs. current yield for opportunities to reinvest. For example, if you bought a fund with 10% YOC and after some time, current yield is 2% due to price increase, you could sell and reinvest in something paying 10% again.

 

[Flieger]

You can also look at YOC vs. current yield for opportunities to reinvest. For example, if you bought a fund with 10% YOC and after some time, current yield is 2% due to price increase, you could sell and reinvest in something paying 10% again.

Exactly.

Flieger

 

[COcheesehead]

We live on a 30/70 allocation. The 70% is in a mix of individual bonds laddered, income closed end funds both taxable and tax free. The individual bonds range from treasuries, to muni’s, to corporates. The portfolio throws off about 2.2 times our expense needs. The yield in our taxable account is almost 7.5% of which 55% is tax free.
I treat it like a game. I track all our income on a spreadsheet and target growing the overall total while reducing taxable income. To me it’s just fun.

 

[Taco]

...since I intend to hold-to-maturity my purchase yield is more relevant to me than the current yield someone buying it today would receive.

I think that makes complete sense for hold-to-maturity investments like bonds.

I don't think it makes much sense for common stocks where there is no maturity. It seems to me that the longer a common stock is held, the less relevant YOC becomes.

As an example, I own some stock that I bought back in the 90s and still hold. My YOC on that is around 50%. The current yield is 2.14%. (It is AFLAC.) What does that 50% YOC tell me? It is definitely unrelated to the return I am getting / have gotten. (i.e. I'm not making a 50% annual return from the dividend!). If I'm focused solely on income investing, there are other stocks with a higher current yield that would produce more income. Switching to a higher (current) yielding stock would lower my YOC but produce more income. I just don't understand how that 50% number is useful in any way.

Perhaps someone has an example of how the 50% is used and provides meaning.

 

[pb4uski]

You can also look at YOC vs. current yield for opportunities to reinvest. For example, if you bought a fund with 10% YOC and after some time, current yield is 2% due to price increase, you could sell and reinvest in something paying 10% again.

Agree, if you can find it but it is unlikely in general for bonds and preferred. Common stocks are different.

 

[pb4uski]

I think that makes complete sense for hold-to-maturity investments like bonds.

I don't think it makes much sense for common stocks where there is no maturity. It seems to me that the longer a common stock is held, the less relevant YOC becomes.

As an example, I own some stock that I bought back in the 90s and still hold. My YOC on that is around 50%. The current yield is 2.14%. (It is AFLAC.) What does that 50% YOC tell me? It is definitely unrelated to the return I am getting / have gotten. (i.e. I'm not making a 50% annual return from the dividend!). If I'm focused solely on income investing, there are other stocks with a higher current yield that would produce more income. Switching to a higher (current) yielding stock would lower my YOC but produce more income. I just don't understand how that 50% number is useful in any way.

Perhaps someone has an example of how the 50% is used and provides meaning.

I have negligible common stocks... 97% bonds, preferred and cash.

This is an income investing thread, right?

 

[Taco]

I have negligible common stocks... 97% bonds, preferred and cash.

This is an income investing thread, right?

Dividends from common stocks are still income, right?

And the conversation drifted (as it often does) to YOC, hence my questions about it.

 

[Quattro73]

We live on a 30/70 allocation. The 70% is in a mix of individual bonds laddered, income closed end funds both taxable and tax free. The individual bonds range from treasuries, to muni’s, to corporates. The portfolio throws off about 2.2 times our expense needs. The yield in our taxable account is almost 7.5% of which 55% is tax free.
I treat it like a game. I track all our income on a spreadsheet and target growing the overall total while reducing taxable income. To me it’s just fun.

7.5% tax free yield??

 

[COcheesehead]

7.5% tax free yield??

Reread the post. 55% is tax free,

 

[pb4uski]

No, he said:

almost 7.5% of which 55% is tax free

Or put another way only 45% of the overall 7.5% yield is taxable

 

[pb4uski]

Reread the post. 55% is tax free,

Reading is hard.

 

[Flieger]

Yes, this is an Income Investing thread, and the YOC vs Current Yield discussion is just a side discussion on ways to evaluate analysis for decision making. Let's return to the main topic...

Flieger

 

[COcheesehead]

No, he said:

Or put another way only 45% of the overall 7.5% yield is taxable

Correct

 

[Koolau]

Because it is MY yield rather than the yield of someone that buys at today's current price. So let's say I buy a full allocation of a $25 stated value preferred stock that has a 6% fixed dividend of $1.50 a year at $18.75 so it yields 8%. After I buy it, the price increases to $22 so it then yields 6.8%. Since I am a long term income holder, the 8% is more relevant to me than the 6.8%. Same principle for bonds... since I intend to hold-tp-maturity my purchase yield is more relevant to me than the current yield someone buying it today would receive.

Sorta like you think of a CD. You put a certain amount in and you yield a given %.

 

[Quattro73]

Correct

Anyway you slice it, that is a high yield. What are you invested in?