I have one IRA portfolio dedicated to income-type investments. Preferred stocks, income CEFs & ETFs, etc. This is my fixed-income asset allocation. Yields ranging from 5.09% (NRGX) to 9.68% (MCN). Net portfolio yield is about 7.4%. No bonds or bond funds, because those are currently “yield-free risk”.
The low-risk holding is things like FLRN and VCSH-----yields very very low, barely worthwhile.
Don’t need the income, so have had them set to reinvest dividends.
Now I am wondering if this makes any sense. Seems to me that the dividend income doesn’t do me any good. Doesn’t lower the risk, since the dividend is used to immediately buy more shares. Why bother? Why not just go ahead and invest in equities instead of these income-type investments?
The alternative is to not do automatic reinvestment, let the cash accumulate for awhile and then invest later. This is more-or-less active investing, so what’s the point?
Now I am wondering if this makes any sense. Seems to me that the dividend income doesn’t do me any good. Doesn’t lower the risk, since the dividend is used to immediately buy more shares. Why bother? Why not just go ahead and invest in equities instead of these income-type investments?
I learned that 25 years ago. I have no desire or interest in getting dividend and interest income in excess of my current level of annual spending in retirement. Better to leave those funds invested in stock market untouched, rather than pay taxes on the dividend and then reinvest what’s left.
Minimizing the “skim” – the key to retiring early.
You are right. Investing for income when income is not your investment objective is like investing for capital appreciation when you need income. It makes no sense.
You are right. Investing for income when income is not your investment objective is like investing for capital appreciation when you need income. It makes no sense.
Thanks, this is helping me get my mind right.
Jim (mungofitch) has been making some strong recommendations for various stocks like KMX, DLTR, DG, GOOG, etc. and of course BRK-B. Not for a quick profit, but as long(ish) run many-bagger.
Problem is…when you are retired you don’t have a paycheck coming in, so you can’t buy something without having to sell something else. And I’ve got all this money in income-related stocks that are throwing off dividends that I don’t really need.
Who knows when the market will bottom, but it seems like we are closer to the end of the bear market than the beginning. This seems like a propitious time to start investing in these fallen angels.
You are right. Investing for income when income is not your investment objective is like investing for capital appreciation when you need income. It makes no sense.
I’ve been retired for 28 years, so obviously I’m drawing on my retirement portfolio for annual income. The challenge is how to do that in the most tax efficient way possible.
So you have dividends and interest income, capital gains (if you choose to realize them) and tax free returns of capital. There is some mix of the three that yields the lowest tax liability in a given year while producing the desired level of annual spending, and it’s almost never going to be “100% dividend income”.
Also, today there is the opportunity for “free Obamacare” or perhaps a tax credit for an electric vehicle. It’s useful to be able to manage your Federal income tax liability to take advantage those. Having too large a percentage of your income being provided by dividends, whether you need them or not, prevents that.
Minimizing the “skim” – the key to retiring early.
Seems to me that the dividend income doesn’t do me any good. Doesn’t lower the risk, since the dividend is used to immediately buy more shares.
Since this is an IRA, it doesn’t matter whether you are paid a dividend or if you instead are provided unrealized capital gains - it is all taxed as income.
And yes, it does lower your risk if you increase (or perhaps more accurately, retain) your allocation to fixed income vs increase your allocation to equities. That doesn’t make it necessarily the preferred investment but fixed income in general is lower risk than equities.
Also, since this is an IRA with auto-reinvesting of dividends, it would probably be easier to sell and buy units/$ at a future date than it would be to try and invest the piddly amount of cash you might accumulate monthly.
If you are still working, and if you have limited options for funding a Roth IRA (as an example), would there not be a case for investing in something like QYLD and generating additional cash in the Roth to then take positions in other stocks/funds?
This is something I have been considering, especially this year as my holdings are all down. It needn’t be QYLD, but any relatively stable dividend paying stock or fund would work.
If you are still working, and if you have limited options for funding a Roth IRA (as an example), would there not be a case for investing in something like QYLD and generating additional cash in the Roth to then take positions in other stocks/funds?
Or you could just invest in QQQ, sell off some of it when the your holding value hits a trigger amount, and use that cash to buy other positions. QYLD has a higher expense ratio of 0.60% when compared to QQQ (0.20%), doesn’t really provide significantly more downside protection than QQQ, and, because the forced sales on the covered calls, caps the upside.
If you are still working, and if you have limited options for funding a Roth IRA (as an example), would there not be a case for investing in something like QYLD and generating additional cash in the Roth to then take positions in other stocks/funds?
There is nothing magic about dividends. It is effectively the company selling some fractional shares and giving the proceeds to you. Financially you are better off investing in a non-dividend paying stock and selling a few shares when and if you need some cash.
As far as " using the cash to then take positions in other stocks/funds?", the thing you’d want to do is put the money into what you think is the best stock/fund. If that is the one that paid the dividend – like QYLD – you should just let the broker reinvest the dividends automatically.
If that is not what you think is the best one, then why are you holding it in the first place?
You should sell it and put the money into what you think is the best one.
you may not be investing for income but your dividends can help you generate moneys for stock investments if you think that re-investing the dividend in another stock is a better opportunity.
Do you have a pension?
I do not. So I will have to extract the income I need to cover my expenses from my portfolio. But I also want to grow that portfolio so I want to continue investing in it and dividends is money I can use for that after all my expenses are covered.
But dividend is mostly taxed.
But that can be controlled by when and by the amount you decide to take out from the portfolio. Maybe with a multi year cushion, you can gain more flexibility as to when you would sell over that period. Maybe applying such delays can set you into a more favorable market pattern so your portfolio can flourish.
I guess if your portfolio reach an escape velocity then your required withdrawal rate would decrease in time, and you would have less and less concerns about your portfolio’s survivability.