Search Results for: Buying Stocks

What happens when you finally want to live off of your portfolio? Most withdrawal methods call for a combination of spending dividends and selling shares to cover the rest. But what if you wanted to live only off of dividends from your stocks and the interest from bonds? I was curious to see how this would have worked out historically.

Let’s say you had $100,000 invested in a mutual fund, and you had to live off the dividend income produced from those shares without any additional buying or selling. I found historical price data and dividend distributions for select funds from Yahoo Finance that went back to 1987-1990, and added up the trailing 12 months of dividends to see how much money they would have generated over a year’s time.

The Vanguard Wellesley Income Fund (VWINX) is a low-cost, actively-managed fund which has been around since 1970. It is composed of approximately 35% dividend-oriented stocks and 65% bonds (mostly corporate for higher yields). This conservative allocation is designed to create a steady income stream with less focus on capital appreciation. Let’s see how $100,000 invested in 1988 would have done in terms of income:

In 1988, interest rates were relatively high and $100,000 of Wellesley shares would have created nearly $9,000 of annual income. In 2012, that same set of shares would be worth $156,000 and your income would be about $5,400 annually. The income produced had some swings, but overall did not seem to track with inflation although the share price did better. According to the CPI, $100,000 in 1988 would buy as much stuff as $180,000 today.

The Vanguard 500 Index Fund was the first index fund available to the public and is now one of the largest funds in the world, passively following the S&P 500 index of large US companies since 1976 and thus always 100% stocks. Even though this is not a dividend-focused fund, it still does produce a regular stream of dividends from the companies it tracks:

In contrast, $100,000 of the Vanguard 500 Fund would have only created about $2,700 of income in 1988, but that income has grown over the next 24 years to about $8,800 today in 2012. Also of high significance is that the value of your $100,000 worth of shares from 1988 would be worth around $500,000 today.

This is just a limited snapshot of two funds, but it would suggest that you can’t just buy an income-oriented fund that has a large chunk of bonds and expect to sit back and spend whatever dividends are spit out. However, things would have turned out much better if one was reinvesting a big chunk of those Wellesley dividends when the overall yield was high. I can still envision a income-oriented portfolio, but I will have to set a reasonable withdrawal rate that isn’t too high and have the discipline to plow the rest back into buying more shares.

I took some time this weekend to check on my investment portfolio, including employer 401(k) plans, self-employed plans, IRAs, and taxable brokerage holdings.

Asset Allocation & Holdings

You can view my target asset allocation here, along with links to other model asset allocations. Despite the headlines, I still like to buy, hold, and rebalance primary in low-cost index funds. Here is my current asset allocation:

I continue to rebalance continuously with new cashflow. Everything looks okay; stocks have been on a pretty good run recently for whatever reason and bond yields are still kept low by central bank policy. My personal outlook for the world economy is still uneasy. My current ratio is about 75% stocks and 25% bonds, but my goal is to get closer to a 60% stocks and 40% bonds setup, the classic balanced fund ratio within the next 5-7 years.

The main change since last time is that I dropped the stock funds in my 401k plan and moved them all to my taxable accounts for tax-efficiency reasons. I needed for space for bonds. I also stopped buying shares of the stable value fund in my 401k because new purchases only earn 1.25% interest. Instead, I am buying the only other bond option which is the behemoth PIMCO Total Return (PTTRX) which has a relatively low 0.46% expense ratio due to it being an institutional share class. This fund is actively managed and includes various types of bonds, but since the portion is so low, I’m still classifying it under my short-term nominal bond asset class.

Stock Holdings
Vanguard Total Stock Market ETF (VTI)
Vanguard Small-Cap Value Index Fund (VISVX)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard MSCI Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VGSIX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX)
PIMCO Total Return Institutional* (PTTRX)
Stable Value Fund* (3% & 1.8% yield on existing balances, no longer contributing)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities

* Denotes 401k holdings due to limited choice.

The overall expense ratio for this portfolio is in the neighborhood of .20% annually, or 20 basis points, which is much lower hurdle to overcome than the average mutual fund expense ratio of over 1% annually. This is all self-directed inside accounts held at Vanguard (IRAs, taxable), Fidelity (401k, Solo 401k), and a small retirement plan provider. I have some “play money” assets at other discount brokers that is invested in individual stocks, but the total is less than 2% of our net worth and not included here.

Goal Progress

Due to our goals to achieve financial independence early, I use a 3% theoretical safe withdrawal rate on my portfolio for the purposes of my tracking. This means that I expect every $100,000 that I save will provide me an inflation-adjusted $3,000 in expenses forever. However, in reality we will probably adjust our withdrawals based on our personal inflation, continuing income, and market returns.

With portfolio increases and additional contributions, at a 3% withdrawal rate our current portfolio would now cover 50% of our expected non-mortgage expenses. If you recall, I also plan to have the house paid off, and I will be making a lump sum payment shortly to bring our home equity past 50% as well. Hopefully as we cross the 50% hump, things will accelerate as portfolio growth will benefit from compounding returns and our mortgage balance will shrink faster from the opposite effect as more of our monthly payment goes towards principal as opposed to interest!