Keep S&P500 or trade it for SDY!!

[trixs]

Keep S&P500 or trade it for SDY!! ..

This is a question that is really bothering me. The more I research the more I want to convert my portfolio to a dividend generation machine while I still can without to much capital gains. Just sweeping dividends into a moneymarket account all year and then using those for living expenses seems to be the ultimate withdrawal method.

Anyway here is the portfolio I am considerig:

Vanguard Wellesley Income Fund Inv Shares VWINX 20%
Vanguard Wellington Fund Investor Shares VWELX 20%
Vanguard Strategic Equity Fund VSEQX 10%
Vanguard Windsor Fund Investor Shares VWNDX 10%
S&P 500 Aristocrate High Yield Index SDY 20% or 25%
International Dividend Index PID 20% or 15%
Vanguard Prime Money Market Fund VMMXX -- just for holding funds

Of course this is all in a taxable account as I want to start withdrawals at 38 when I retire from the military and collect a pension.

 

[Nords]

Put it all in the TSP...

Keep S&P500 or trade it for SDY!!
This is a question that is really bothering me.  The more I research the more I want to convert my portfolio to a dividend generation machine while I still can without to much capital gains.  Just sweeping dividends into a moneymarket account all year and then using those for living expenses seems to be the ultimate withdrawal method.

TH & Unclemick have turned me into a closet dividend investor.  It's hard to reconcile that with Berkshire Hathaway & small-cap value but the dividends are awfully attractive.

Business Week's Robert Barker profiled SDY in this article from the 12 Dec issue.  SDY isn't based on the S&P500-- it's derived from over 6000 stocks tracked by S&P that have raised dividends for 25 straight years.  There are only 85 stocks that qualify, and the top 50 are in the Aristocrats.  Over a dozen of the Aristocrats are too small for the S&P500 and three of them are too small to even make the midcap S&P400.  SDY yields 3% with an ER of 30 bp.  Not too bad, and perhaps competitive with the DOW Dividends ETF (DVY).  I'm tempted.

Of course this is all in a taxable account as I want to start withdrawals at 38 when I retire from the military and collect a pension.

You say "of course" as if it has to be that way, but it doesn't.  John Greaney started 72(t) withdrawals from his conventional IRA when he ER'd in his 30s, and Roth IRA contributions can be withdrawn penalty-free (with a few gotcha fine-print details).  I'm a little fuzzy on TSP withdrawals (anyone withdrawing from their TSP, please jump in here!) and the TSP may have its own early-withdrawal rules, but I believe just about any tax-deferred investment can be rolled into an IRA and then subjected to 72(t).

Hopefully you're already maxing your TSP contributions.  Vanguard has some good ERs but the TSPs' were 5-6 bp in 2004 and not more than 10 bp in 2005.  TSP contributions have the additional advantage of tax deferral.  This month is still limited to 10% of base pay, but starting next month (2006) it goes right to the IRS limit of $15K.  You could set your TSP deduction at 100% of your base pay and it'll max out until it hits the $15K limit (at which point you'd start receiving deposits in your bank account again).  If my spouse is getting any Navy Reserve pay next year, she won't see a penny of it!

 

[wildcat]

Vanguard Wellesley Income Fund Inv Shares VWINX 20%
Vanguard Wellington Fund Investor Shares VWELX 20%

So why do you want own both? Seems like it should be either or - pretty similar except one is 60/40 and the other is 40/60. Both large value stock allocation with bonds + you want the Windsor - large value - as well. Just trying to help...

 

[trixs]

Thanks for the replys all:

Nords,

I probably will end-up letting the S&P 500 index go and purchasing some type of dividend fund. I have read everything I can find about all of them, PID, SDY, DVY ect.. So many choices. I was looking forward to the new vanguard dividend index fund but it seems thats been pushed way back. OH well.. SDY looks nice as its not all financials and utilities like the rest of em.

I would contribute to a Roth IRA or the like if I could get through the loopholes. I’ve read about it but I really don’t think it will work for my plans. Withdrawing a substantially similar amount every year seems like it would be rather difficult Just think if your only using divs as a withdrawing method and you get an average raise of 6%+.. I probably don’t understand this correctly though lol.. Also I’ve never even touched the TSP and probably wont..

wildcat,

Good question lol! I started with those funds awhile back when I was completely naive. Now my thinking is its easy to use: Add both of them together and divide by two: your bond allocation! heh
I will also probably phase Windsor out overtime.. That’s what I’m asking these questions for:

To create the ultimate Dividend Paying portfolio for the future! Large value is where the dividends seem to be!

 

[cute fuzzy bunny]

I owned both wellesley and wellington at the same time, and it made perfect sense to me. At the time I wanted a roughly 50/50 stock/bond mix, and buying both of those gave it to me.

Sure, I could have bought large cap value and a bond fund and self-balanced for a few basis points less, but I dont mind paying 5 basis points for someone else to manage the money and balancing for me.

I'm really enjoying the tax treatment on the qualified dividends. I just did a first pass at our taxes and although we brought in considerable money on the dividend side, we kept our regular taxable income low enough that the dividends qualfied for the 5% rate. Our total tax load (minus sales and property taxes) should be under 1%.

When the heck is vanguard launching that Dividend Achievers fund?

 

[wildcat]

Seems like he should go for the 60 stock/40 bonds and later switch to the 40/60 if anything. I would rather go for the large value fund + bond index as it can be easily replicated - skip paying for 3 funds when 2 are needed. Additionally, I know you are all about the yield but 50% or so large cap value seems a tad high. You are putting a lof your $$ in - financials, utilities and some energy.

 

[Nords]

Also I’ve never even touched the TSP and probably wont.

I'm completely baffled-- mind explaining the reasoning behind that position?

 

[Mr._johngalt]

I owned both wellesley and wellington at the same time, and it made perfect sense to me.  At the time I wanted a roughly 50/50 stock/bond mix, and buying both of those gave it to me.

Sure, I could have bought large cap value and a bond fund and self-balanced for a few basis points less, but I dont mind paying 5 basis points for someone else to manage the money and balancing for me.

I'm really enjoying the tax treatment on the qualified dividends.  I just did a first pass at our taxes and although we brought in considerable money on the dividend side, we kept our regular taxable income low enough that the dividends qualfied for the 5% rate.  Our total tax load (minus sales and property taxes) should be under 1%.

When the heck is vanguard launching that Dividend Achievers fund?

You're getting way behind on the post count.

JG

 

[trixs]

I'm completely baffled-- mind explaining the reasoning behind that position?

Oh this is an easy one! From what I understand its not a very good plan for many reasons.

1. The very limited investment options. I know the strategy I want my portfolio to employ and this can’t be done to the full extent with the TSP.

2. No matching (military). If there was matching I would invest in a heartbeat.

3. Cant take the money out before I leave the service should I decide to! Unless of course I get a loan on it.

4. Withdrawal Methods available. I don’t want the IRS telling me I have to take out so much because of my expected lifespan. Not to mention I don’t want to have a huge tax bill should I live past 70.

5. Withdrawals are taxed as ordinary income. For a military member it is better to use a Roth IRA as we generally have lower taxe rates now than we will later(bah, bas, ect isn’t taxed.. not to mention deployments) As it is now I don’t pay much taxes therefore it makes more since to invest in a Roth should I want to.

6. Free Cash Flow - What If something drastic happens and I really need that money which was put into the TSP? You never know. (Yea I know everyone should have an emergency fund)

These are just some negative reasons off the top of my head. Now what exactly are the positive points of investing in the TSP? I really can’t think of any! Oh wait.. It’s forced investing for those with no discipline. I suppose that’s a positive.

 

[cute fuzzy bunny]

You're getting way behind on the post count.

JG

Yeah, thats unfortunate huh?

I'd like to have kept puffing up the meaningless stat but the only way I could think to do it was to post a lot of useless stuff, regurgitate the same platitudes over and over, and claiming I was some sort of rugged individualist ex captain of industry while living off my wife and regularly drinking the wrong wines with my meals.

I figured I'd spend more time playing with my kid instead... He really likes hide and seek and peek a boo.

As far as the holdings, i'm roughly 80% large cap value in my taxable port. I'm getting a 3% dividend thats nearly tax free. By historical and current numbers, i'm seeing better than inflation adjustment to my stable principal.

Unless the future is dramatically different from the past, value will continue to bop growth on the head, and even if it doesnt for 5...10...15 years, i'll still be getting my 3% taxed at 0-5%.

Smiling all the way to thinking about going to the bank due to direct deposit...

I'll do it for ya unclemick...heh heh heh.

 

[Nords]

1.  The very limited investment options.  I know the strategy I want my portfolio to employ and this can’t be done to the full extent with the TSP.

I would think that the TSP has enough low-cost index funds to match the vast majority of portfolios.  But if it can't match your plans then you're better off without it... as long as your plan is better than the vast majority of portfolios. 

2.  No matching (military).  If there was matching I would invest in a heartbeat.

Good point as long as you can find something better.  But a TSP is still a source of tax-deferred investing, and I wouldn't give that up just because I didn't have a match.

3.  Cant take the money out before I leave the service should I decide to! Unless of course I get a loan on it.

Well, it's hard to argue against that one.  Although considering the military's demographic of undisciplined teens & 20-somethings, perhaps it's good that we couldn't all take the money & run.

4. Withdrawal Methods available. I don’t want the IRS telling me I have to take out so much because of my expected lifespan.  Not to mention I don’t want to have a huge tax bill should I live past 70.

I agree that leaving one's money in the TSP for the rest of their lives is unwise.  But rolling to an IRA and converting to a Roth IRA will solve those problems.

5. Withdrawals are taxed as ordinary income.  For a military member it is better to use a Roth IRA as we generally have lower taxe rates now than we will later(bah, bas, ect isn’t taxed.. not to mention  deployments)  As it is now I don’t pay much taxes therefore it makes more since to invest in  a Roth should I want to.

I think you need to take another look at your tax-rate assumption.  I was in the 25% tax bracket for most of my career, and we were higher than that when my military spouse and I got married.  Now we're solidly in the 15% bracket and our deductions could take us lower than that.  Govt pensions are largely untaxed by states & localities, too, so your effective retirement tax bracket will probably be lower than your active-duty tax bracket.

It does make more sense to invest in a Roth.  But after the Roth is maxed out, it makes more sense to put the remaining investments in another tax-deferred investment (that can eventually become a Roth) than in a taxable investment.

6.  Free Cash Flow - What If something drastic happens and I really need that money which was put into the TSP?  You never know. (Yea I know everyone should have an emergency fund)

I think the "conventional wisdom" of an emergency fund is vastly overrated.  You personally would probably access home equity, advance pay, or even credit cards for emergency funds.  You might even be eligible for assistance from your military relief society.  Medical emergencies contribute to a significant proportion of bankruptcies, but your healthcare is already paid for.  I can't think of an emergency that would have you knocking on the door of your TSP custodian.

Oh wait.. It’s forced investing for those with no discipline. I suppose that’s a positive.

Again considering the military demographic I suppose that's the most responsible choice.  It's also the reason that DCA investing works so well for all investors. 

I dunno.  When I encounter an investment program that offers tax deferral with an acceptable variety of low-cost index funds, I'd look for reasons to include it in my plans.  But I'm not trying to change your mind-- just to educate those who may be thinking about bailing out on the TSP.  You've offered plenty of reasons why the TSP isn't perfect, but you haven't given out equvalent details on a better alternative. 

I'm no portfolio-construction expert but you could probably build your first post's portfolio from TSP funds for lower ERs... and maybe even better performance.  Your other issues against the TSP could also be construed as issues against any tax-deferred investments.  I think Roth conversions & 72(t) withdrawals would answer most of those issues, but everyone has to do their own due diligence on their own portfolios.

 

[retire@40]

When the heck is vanguard launching that Dividend Achievers fund?

I've got some money parked for that fund too. Last I heard, it was coming out this month, but I haven't heard any news lately.

 

[nwsteve]

I've got some money parked for that fund too.  Last I heard, it was coming out this month, but I haven't heard any news lately.

Powershares has both a domestic (pfm) and an Intl Dividend Achiever (pid) etf out now.
Anyone know of any problems with Powershare etfs?
Nwsteve

 

[Nords]

Powershares has both a domestic (pfm) and an Intl Dividend Achiever (pid) etf out now. Anyone know of any problems with Powershare etfs? Nwsteve

I think I remember their ERs being higher than the rest of the pack, but I could be wrong.

I do know that the iShares S&P600/Barra Small-cap Value ETF (IJS) is cheaper than the Powershares equivalent. But it's probably not a big exciting difference.

 

[nwsteve]

I think I remember their ERs being higher than the rest of the pack, but I could be wrong. 

I do know that the iShares S&P600/Barra Small-cap Value ETF (IJS) is cheaper than the Powershares equivalent.  But it's probably not a big exciting difference.

FWIW--expense ratio for both pid and pfm is currently showing 0.5%.  Not the lowest but still pretty cheap.  Powershares had their product on the market while the rest were still talking.  Probably too new to really know where the ER will settle out.
I like the opportunity to have a the Intl diversity especially with the US$ on uncertain footing.
Is anyone aware of another Intl Div Achiever option?
Nwsteve

 

[wildcat]

Powershare is filling niches in the ETF market and therefore charging more for their products as a whole. I only know of iShares Intl Value which will of course yield higher than the avg Intl ETF but probably less than the PP shares Intl Div Achievers.

 

[preben]

I am not so happy with PID consisting of all ADRs (often follow the US market more than "real" foreign stocks) and around 40% financials which is high by most measures but EFV only pays around 2% div. these days with PID being around 3% so if one needs the extra income it might make sense.
Cheers!

 

[trixs]

Hey all,

Im curious if you would consider SDY an active fund or an index fund? It kind of has the likeness of each.. lol

 

[ats5g]

trixs,

From SDY's prospectus:

Principal Investment Strategies. The Fund uses a passive management strategy designed to track the price and yield performance of the Dividend Index. The Dividend Index is designed to measure the performance of 50 highest dividend yielding S&P Composite 1500 constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 years. As of September 30, 2005, the Dividend Index was comprised of 50 stocks.

Thus, it's an index fund. I also like the fact that SDY uses buffer zones to reduce turnover.

If you want to match Wellington and Wellesley's style, I'm still a little confused over why you'd pass up the opportunity to hold the bond portion of these funds tax deferred in the F fund in the TSP. After all, the bond portion of Wellington and Wellesley is just intermediate term investment grade bonds. But, to each his own.

- Alec