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My wife is retired and I will be retiring at the end of the year. With pensions and SS we will have all of our expenses covered. We have 300k in IRA accounts. (50% Roth,50% Traditional) . I don’t like the idea of buying an annuity so I am considering investing in Dividend stocks for additional income and reinvesting the income until the time would possibly come in the future that we might choose to use the income.
Would you do this if you were in my situation?
If so, do you have any recommendations?
What are your HD thoughts?
My strategy has been to hold Dividend-paying stocks as a hedge so that if the market drops I don’t have to make withdrawls when it’s down;I can just take my dividends. Roughly half of my savings are in individual dividend-paying stocks, and they pay me (annually) almost as much as my SocSec. So far it’s working.
My reason for investing in and recommending dividend funds (and stocks) is NOT in order to harvest dividends for current income. As several have pointed out (https://humbledollar.com/2024/08/yielding-no-advantage/), for most of us it is easy enough to intentionally choose what and when to sell when we need more cash.
Rather I value that these funds and the stocks contained therein are generally more conservative investments, holding less debt, bringing in more free cash flow, and so forth. As such, they are someplace in between holding debt (including bonds) directly and leveraging higher earnings multiples and debt obligations (held by others) for higher returns.
I believe such a middle ground better suits many investors, and in particular may outperform balancing a mix of riskier equities and less rewarding bonds.
Imagine that we wanted to stabilize a teeter totter (seesaw). While we can balance two weights at the ends, the most stable teeter totter is achieved by concentrating the weight as close to the middle as possible. The ride may be a lot less exciting, but a whole lot more calming.
If in a nontaxable account sure, else driving up unnecessary taxable income
That’s my reason for holding a dividend growth fund as well. But, I would stop short of saying it’s a middle ground between stocks and bonds. It’s most definitely stocks, maybe with a bit more quality/less volatility than a total market index fund, but not by much.
I was wondering if anyone had data on annual dividends over decades for international stocks. (such data for US stocks seems far easier to come by) In other words, how have dividends for international or emerging market stocks (I realize data on EM will be more limited) varied by year over the past one hundred years or so?
I think this would be useful information for dividend investors since it would show the risk of dividend income variability in extreme market events (recessions, etc).
Thanks in advance.
I hold a 60/40 Equity/Fixed income split in my taxable accounts. The dividends and interest provide sufficient income for our lifestyle, pre-Social Security. The equity portion has a small cap/value tilt and these are low cost index funds or ETF’s (Vanguard, Fidelity, I-Shares.) They have appreciated substantially over the years. The fixed income portion is a 7 year bond ladder. The ladder is a 50% muni bonds and 50% corporate bonds, all investment grade.
Schwabs dividend fund SCHD is a low cost diversified way to invest. I still also invest in individual stocks, but try to make them those with a higher rate than SCHD.
Schwab also offers the Thomas Partner offerings. There you will have a professionally managed portfolio the stocks will be in your own Schwab account with monthly income. Check with Schwab.
I think the first thing you need to think about is are you content with your inflation protection regarding your pensions and SS. If you have concerns about it, than you’re other investments at some point are likely to be needed to help bridge that potl gap.
The next issue that you haven’t addressed is your desire to leave an estate or not. (No judgements, but it would affect how you would want to manage your portfolio and your distribution plans)
For the Portfolio, without knowing the monthly income, I’m just guessing that it’s the equivalent of fixed income around $1M, such that your investments are about 25% of your true nest egg. I’d be comfortable holding that completely in equities, esp. if as you imply, you’re not even sure you’ll spend it. Since everyone is suggesting Vanguard, I’ll go a different route, Fidelity Zero Funds:
There are plenty of ways to allocate, you sound conservative, US/Intl 70-30.
I’d also recommend a variable rate withdrawal strategy, where you are allowed 6% of the portfolio in any given year, because according to you, you’re OK if the amount was zero (so if there’s a long bear market smaller available draws won’t affect your happiness/lifestyle, while it’ll give you a nice $18k boost right away to take advantage of early retirement).
Just as important, have you considered your tax implications. Depending on the amount of your SS/pensions, you could have headroom in your tax brackets to avoid IRMAA and do Roth conversions such that you avoid heavier taxation later esp if there’s a period when only one are alive (losing the higher married tax bracket at the same time RMDs start going up).
The holy grail of investing is “total return”. Mr Grossman had a nice Sunday-morning piece a while back about the folly of chasing dividends at the expense of total return.
I agree. When we need to rebalance I just sell the portion of our portfolio that has increased the most and place it in our brokerage money market account to use for future expenses.The easiest way to do this is if you have a two fund portfolio of a (world or US) total stock and bond fund. This does not work with a target date or balanced fund as you are selling a percentage of each.
Here’s a link to Adam’s piece:
https://humbledollar.com/2024/08/yielding-no-advantage/
I appreciate everyone’s input. I’m not sure if my next question should maybe be a new topic/thread…
Some have recommended holding some bonds. Nobody has mentioned that I don’t have any International exposure.
Would diversifying into something like VYMI (Vanguard High Yield International Fund) be a good way to get both?
Funny you mention, as I thought about international after my first reply. You could swap in some Vanguard Dividend Appreciation International( VIGI). If so, I’d consider keeping it in a taxable account to be able to take credit for foreign taxes paid. Interestingly it has a significant growth tilt unlike its US counterpart VIG which has a bit of a value tilt. Not sure why that is.
You made a typo as I believe VYMI is an international stock fund.
You are correct
Interesting topic. For different reasons I like a total market fund but I do also like a dividend growth fund. Your split of 50/50 makes sense to me. (You said you’re half in VUG but I assume you meant to type VIG.)
I would definitely choose a dividend growth fund like VIG or a sensible high dividend yield fund like VYM over individual stocks.
I notice we’re only talking about these holdings being in IRAs. If that’s the case, the tax treatment of dividends or capital gains is irrelevant, as anything you take from these accounts will be taxed as ordinary income. In a taxable brokerage acccount, whether you are paid dividends or sell at a gain, it’s basically the same 15% tax (can be higher but I think 15% in your situation).
I also agree with the comment to hold some bonds, and would do so in the Traditional IRA.
One clarification there is no capital gains tax for single taxpayers with incomes between $0 and $47,025; married couples filing jointly with incomes between $0 and $94,050.
So if you have limited expenses and can manipulate your taxable income (like we have the past two years due to inheriting a Roth IRA), you can avoid capital gains completely!
We are utilizing the inherited Roth funds to maximize our ability to convert my wife’s traditional IRA to a Roth for future tax free income.
You should be adding the standard deduction on to the upper end of those income ranges.
I should have pointed out the info quoted from the IRS is taxable income, which I know.
If we are going to bring up deductions then seniors also can take a senior deduction of $1,550 per, and another $1,500 if blind.
Yes, indeed. Here are those numbers:
https://humbledollar.com/money-guide/income-vs-capital-gains/
Good point. One of my early HD articles was about this very thing.
Thank you for commenting, I appreciate your input
Nope, VUG is correct. This split had worked out well for me the last seven to ten years. I do think about switching from vug to vym to reduce tech holdings but I am actually comfortable with both of these funds.
My view of bonds is they only keep up with inflation and that our pensions and SS accounts serve a similar purpose to bonds.
The growth I’ve gotten over the years have put me in a position that even with a 30% decline (which on average recovers in 12-18 months) I will still be ahead of where I would have been with a 60/40 mix for the last decade.
The other thing they can do is provide ballast for your stock holdings. Great that your portfolio has turned out well, but that’s after time to recover from drops, not having to withdraw during them. Not saying you’re wrong, just something to think about.
VUG is Vanguard Growth Index Fund ETF, which I had to look up. That brings me to my periodic plea: Please, please, please stop referring to funds solely by their ticker symbols. I suspect that most readers are like me, and ignore comments with ticker symbols they don’t recognize.
Ok, thank you. Lesson learned. I never thought of the ticket symbol issue. I’ve always just looked it up in two seconds if I was curious
I prefer total stock market index funds. In a taxable account, long term capital gains from selling these are taxed the same as qualified dividends.
in answer to you’re last question: You should not.
Thank you for your opinion. Would you please support it with reasons?
Dividend investing isn’t an optimal way to invest. My reasons are listed here:
https://humbledollar.com/2023/01/death-to-dividends/
I am a dividend investor – I like paying 15%, or 18.3%, Federal tax on my income. If you are retired and have considerable money in a brokerage account, it might work for you. It is also a more conservative option than an S&P 500 fund – dividend stocks won’t go down as much, and will usually continue paying – although there are exceptions!
Depending on your expected time horizon for withdrawing from your IRA assets, you might think about investing in some bond funds as well. I’d recommend total bond market, short-term treasuries, and short-term TIPS index funds.
For stocks, I’d rather own a total stock market index fund but some people have greater comfort from higher dividends. If that’s the case, I’d suggest a low-cost dividend fund rather than a collection of stocks you pick yourself.
Thank you. I appreciate your thoughts
I would recommend dividend growth and or appreciation index fund(s). They tend to invest in companies with a large moats (ie have a competitive advantage) such as Coca Cola and are deemed to have provided dividends for many years and are expected to grow those dividends.
Just invest in the fund(s) and let them do the work while you reap the benefits!
That is sort of where we are. Both our Roth & Traditional are split 50% VTI and 50% VUG
I do something similar. I invest in bond funds, two individual stocks and several stock mutual funds, all the income from them is currently reinvested.
After years of doing this the total monthly income is greater than my gross social security benefit. Should I need the extra income I will turn the reinvesting off one on or more of the investments. The goal is to leave that supplemental income for my surviving spouse if she needs it.
Both my stocks are utilities, one my former employer, but suggesting any specific investment is beyond my skill level.
Thank you Mr.Quinn for your thoughts, I always appreciate them