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Yielding Results

William Ehart

I INVEST FOR GROWTH, not income. That will likely change as I get closer to my 2028 planned retirement. For now, I diversify my portfolio mainly with cash and short-term bonds with the goal of stability, not yield. Yet this article is about the yield I receive.

Why focus on yield? Some say everyday investors overemphasize the importance of dividends, and maybe that’s true of me. But with much of the U.S. stock market richly valued—and now that I’m only five years from retirement—I feel pretty good about my portfolio’s yield, currently around 3%.

Indeed, if the stock market’s price-earnings multiple stops its upward trajectory of the past 40 years, dividends should become a greater part of total return than in the past. Likewise, with the decades-long bond bull market probably over, yield will be an even more important driver of returns for bond investors going forward.   

My portfolio yield is higher than the pair of funds I benchmark against, iShares Core Growth Allocation ETF (symbol: AOR), which yields 2.3%, and iShares Core Aggressive Allocation ETF (AOA), which yields 2%. Both are global funds that track the major developed and emerging market stock indexes, as well as those of U.S. and foreign bonds.

My relatively large allocation to cash investments, including money market funds, certificates of deposit and short-term Treasurys, contributes greatly to my portfolio’s overall yield. Thanks to today’s high federal funds rate, my cash investments yield more than the 4.3% offered by the overall investment-grade bond market, as measured by iShares Core U.S. Aggregate Bond ETF (AGG).

I also own some conventional bonds through my two balanced funds, and I’m slowly building a position in high-yield “junk” bonds with my 401(k) contributions. High-yield bonds are a new asset class for me. Why bother? With the U.S. stock market so pricey, I wanted to take a bit less risk with the aggressive side of my portfolio, while still having the chance for rich returns.

My 3% yield is also partly earned from my stake in foreign value stocks. They’ve done well this year relative to the broader foreign indexes, as I wrote here. Most of my foreign exposure is through my largest position, iShares MSCI World ETF (URTH), a global developed markets index fund that includes U.S. shares. But I add a value tilt to my international stock holdings with Dimensional International Value ETF (DFIV) and Dimensional International Small Cap Value ETF (DISV).

These two funds invest only in developed countries, and yield 4% and 2.6%, respectively. Meanwhile, my emerging markets exposure comes from iShares MSCI Emerging Markets ex China ETF (EMXC), which yields 2.4%.

My value bias at home also comes with good dividends, even if U.S. value stocks’ overall returns have lagged growth shares this year. Vanguard Small-Cap Value ETF (VBR) yields 2.3%, compared with 1.5% for the S&P 500. The Income Fund of America (AMEFX) and Exxon Mobil (XOM) shares that I inherited yield 3.5% and 3.7%, respectively, while the Lockheed Martin (LMT) shares I purchased in late 2021 yield 2.7%.

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