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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%.
Dividends are not “yield.” Dividends are your own money coming back at you with a decrease in share price and a tax bill. Dividends are a behavioral trick to get you to buy the Stock and then feel good.
A company normally pays a dividend to its shareholders from it’s earnings. The share price declines because the company’s assets decline after the payout. This is not a return of your money, but money you have earned as a shareholder.
I believe that the IRS does not tax a return of capital. The fact that the receipt of a dividend is a taxable event says that the IRS agrees that a dividend is not a return of your money.
If corporations never returned cash to shareholders, whether through dividends, buybacks or getting themselves acquired, there’s a risk they’ll disappear without enriching their shareholders as a group:
https://humbledollar.com/2019/11/cash-back/
Sure that’s possible. It can also hit you with dividends. I did DRIP with Washington Mutual and lost thousands with their bankruptcy. I’m with Mark. Being forced to pay taxes on my money that I’m just reinvesting anyway isn’t what I want.
Good link Jonathan. An aside, it’s interesting how Microsoft has rebounded.
It is indeed interesting — and impressive. Big corporations are no different from big government: They tend to become bloated bureaucracies that struggle to innovate. Whenever there’s a turnaround at one of these big organizations, I typically assume that top management deserves a fair amount of credit.
Due to AI I think
I am currently getting 4.32% on my total portfolio, which consists of common stocks, REITs, preferred stocks, Treasury bills, and cash. I moving away from maximizing dividend and interest returns, and looking for more long-term growth.
Thanks Bill. Your article has made me realize that I do not have a very good understanding of the “yield” of the index funds I hold and why I should care … or, in your terms, “Why focus on yield?” I only think about equities in terms of total return. So, for example, I just checked on dividend.com, and VTSAX reports a yield of 1.35% and a 1 year return of 26.6%. I need help understanding why it matters what the yield is, compared to the total return. By contrast, when it comes to, for example, short-term cash equivalents like T-bills and CDs, it’s very clear to me what a 5% yield represents.
It seems that the yield on equities would only matter if one was going to use dividends for current income rather than reinvest them. Is that correct? My thought is that whenever I would need income from the equity side of the portfolio, I would just sell whatever number of shares I need to generate that income.
I’m a little closer to retirement than you (likely in 2026), and perhaps there are some things here that I need to be more aware of.
Agree completely on when I need income, I sell shares …. choosing the EFT and specific lot to minimize the taxable; the LT capital gain. I look for yield and minimal distributions in my taxable account equities.
I should have said total return, not yuekd
Morris, you have very politely pointed out perhaps the most appropriate way to look at equity investment. As Lawrence Swedroe has pointed out, there is no historical alpha among dividend-paying stocks, including those with a history of increasing dividends. One should look at equities as total return. If for some reason one wants try to achieve an advantage in the stock market, investors are better served by “tilting” allocations to factors that have historically outperformed (e.g., value), following evidence based analysis.
https://www.advisorperspectives.com/articles/2023/03/13/the-evidence-against-favoring-dividend-paying-stocks
I have another reason to look for total return. Until the 70s, many blue-chip companies paid div. That shows stability and profitability. The tech revolution started to change the world later, these companies paid zero to much lower div and invested the money in research, acquisitions, and buyback their stock. Investing changed forever, these companies are the world engine.
High-div stocks are kept promoted because Wall St just want your money and make the expense ratio.
I have been debating total return vs high div on several sites and with friends for over 15 years. ATT has been one of these high-div stocks that many owned. All you have to do is look at ATT’s pathetic performance since 2010.
Hey Morris – total return is what is most important, whether we are retired or not. Sure, in a great year for stocks, dividends will seem inconsequential. But my point is that going forward we might not get the same upward trajectory from stocks. In fact, the market is about where it started the year in 2022. In a sideways market or down market, we appreciate dividends more, whether we are reinvesting or not. I’m not betting the farm on bad markets, I’m just glad to have a slightly greater dividend cushion than the overall index. It’s a somewhat more conservative posture.
I have a significant portion of my portfolio in Vanguard Dividend Appreciation and Dividend Growth. These funds tend to invest in large cap funds with a wide moats (competitive advantage in their “genre”). They sift out the highest yielders as that often occurs before the companies die. Their values tend to fluctuate less than the overall market which is comforting.
Thanks for sharing your plan on getting the yield that you’re comfortable with! I enjoy reading how others build their portfolios and the reasons why.
Yesterday my cash in the FIDELITY GOVERNMENT MONEY MARKET (SPAXX) was paying 5% . I’m thinking I should have more in there.
Settlement fund VMFXX at Vanguard currently has a 7 day annualized yield of 5.30% but I think the rates on Treasuries will continue to decline over the next year across the various duration periods. The 52 week T bill auction is currently open and I have decided to use the amount I expect to be the cash I will not use use in 2024 to buy at auction a 52 week T-bill with an expected yield of about 4.8% to lock that rate in. I am covering emergency cash needs and RMDs for 2024 & 2025 in VMFXX. I expect 2026 to be a wild card given the sunset of the TCJA and general uncertainities.
Always had respect for Capital Group. The income fund of America is a good balance fund. American Funds do a good job long term
I second the statement about Income Fund of America. Inherited my mother’s IRA
Enjoyed the article Bill. Have been looking at our bond allocation as you do: “For now, I diversify my portfolio mainly with cash and short-term bonds with the goal of stability, not yield.”
The difference is we are now retired and should probably put already be putting more emphasis on yield, just haven’t made that brain shift. While we’re stock heavy, our largest single holding is a 401k stable value fund that has a great yield, but that’s obviously sitting inside the 401k wrapper. It would probably make sense to be seeking more dividend yield in our taxable accounts.
Believe it or not, back in the 80s stable value funds were paying 16%.
Why so many funds/etfs? VT or URTH plus BSV or BND at 50% stocks/bonds equals just over 3% sec yield with slightly higher yield to maturity. Simplifies things and still fulfills your desire for growth potential along with yield. Enjoy your upcoming retirement.
Fair question, for sure, and I sometimes wish my portfolio were simpler. The two balanced funds and the Exxon were inherited, and for whatever reason I didn’t sell when Mom died. Now they have capital gains. I don’t like VT because I don’t want my money in China. As Michael said, there’s a reason for each position, but it is a lot of positions. Thanks for reading!
So many? I counted seven, and could tell the reason behind each one. That seems well in hand to me. My portfolio, on the other hand…