Author Topic: Ok, bring on the wolves  (Read 11872 times)

Barbarossa

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Ok, bring on the wolves
« on: January 30, 2016, 08:33:21 AM »
My investment rational seems to be a little different than everyone else's, and I'm always open to being proven wrong, so here goes.  My question for my fellow Moustachians is, why don't I see any discussion here of using closed end funds as a viable way to beat the 4% rule?

MMM likes a $650,000 portfolio of index funds generating 4% a year.  With a diversified cef portfolio that generates, say, 8% a year, twice the 4% rule figure, it seems logical that a guy could hit FI with $325,000, which seems a lot more manageable target for many people.

I'm not here to defend cefs, I'm just here to see if I'm missing anything, and to point out that there may be another option to those index funds.  (I'm in cefs for the income, not any growth.)  It's worked for me.  I quit working fulltime in 2004, bought a sailboat and took my family sailing the Bahamas, then came back and work parttime now, with a goal of quitting my "career" in a couple of years to go back to delivering sailboats for fun and a little profit.

The portion of my portfolio in closed end funds has returned me around 10% a year since I started buying cefs, which was around 2006.  Month after month, year after year, I get yield in the form of cash dumped into my accounts.  Yes, a couple have stopped or reduced dividends a time or two over the years, but it's always been temporary.  (KYN may be the next)  And yes, they have gone up and down, just like the stock market.  (But they seem remarkably more stable if you compare ten year charts)  And yes, they have higher fees than an index fund, but, who cares?  The yield is independent of the fee.  (And yes, I've verified that)  None of mine have gone bust, while over the years a couple of my stocks have done so.  (WaMu, GM)  I used to trade options and did fine, but that was a lot of time in front of a computer and I have better things to do.  So I've slowly migrated to cefs.  (I also have stock, etfs, index funds, etc, but none of those have returned what the cefs have.)

Here are my current cef holdings and the current yield.  I built this list from my old broker back when I had one, John Dowdee's book, (on Amazon) Doug Albo on SeekingAlpha, and a LOT of research.  I have another list of comparable cefs on my shopping list, when they are on sale at a decent discount to NAV I add them.  I also have a comparable list of Federal tax-exempt cefs in a cash account.  They don't return as much, closer to 6%, but it's income-tax free.  I live in a state with no state income tax.
These are all none or very little ROC, (return of capital) most have a long track record, and they are somewhat diversified among options, bonds, global, utilities, healthcare, energy, REITs and a few other categories I can't remember.  They are also as diversified as I could get among various financial institutions, I didn't want a portfolio with nothing but Nuveen funds, for example.

BKN  5.6
CHI  12.7
ESD  9.4
GAB  9.4
KYN  14.7
PDT  7.8
PKO  11.2
RNP  8.4
CII  9.4
GOF  13.6
HQH  9.9
JRS  9.6
RFI  9.6
UTF  8.7

14 funds, with an average return of 10% a year.  I don't have records going back to 2006, but that's been about my average.  That beats the heck out of the 4% rule.  So why would anyone buy an index fund that pays 4% or less?

Butch

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Re: Ok, bring on the wolves
« Reply #1 on: January 30, 2016, 09:31:28 AM »
Have you read up on the 4% rule and the many threads on the 4% rule (particularly this one by forummm)?

in short, it works historically the SP500 has returned much more than 4%/year, and that average return makes up for the inevitable down years when you will still be withdrawing 4%.  30-year return periods are closer to 7% after inflation with dividends reinvested (but vary from as high as 10.2% to as low as 3.4%)

If someone could find an investment that paid a greater return than the SP500 with less volatility you could certainly use a higher WR... Peter Lynch's Magellan fund comes to mind, - but those investments are exceedingly hard to find looking forward. Several notable posters on this forum have argued passionately that their ability to get +2-4%/yr returns allows them to use a much higher WR (and they are correct, so long as they can continue doing it going forward).

Final note; from 2009-2016 has been on of the greatest bull markets in our history, so looking only at returns during this time period isn't very informative for a 30+ year retirement horizon.  The returns of just the SP500 during this period have been 12.3%/yr after inflation.

sirdoug007

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Re: Ok, bring on the wolves
« Reply #2 on: January 30, 2016, 09:35:29 AM »
What makes you think a fund structure is going to protect you from the next bear market?  These funds may be doing great recently but all investments have ups and downs.  Just because it's a cef basically means nothing if the underlying businesses aren't somehow superior.


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StacheEngineer

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Re: Ok, bring on the wolves
« Reply #3 on: January 30, 2016, 09:58:39 AM »
As an FYI, over the past 5 years, VTSAX has returned 10.55% CAGR total return. Have any of your CEF's returned that much over the past 5 years?

I also generally expect CEFs to perform worse in bear markets because of their leverage and so if they lose during one of the greatest bull markets, I expect them to lose always.

CEFs that don't beat VTSAX over the past 5 years total return according to my quick googling:
PKO
KYN
BKO

I stopped looking after that.

Barbarossa

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Re: Ok, bring on the wolves
« Reply #4 on: January 31, 2016, 06:52:01 PM »
Thanks for the comments guys.  But...I'm still not sure...  I have to scratch my head and wonder, why do cefs seem to be so underrated and maligned, and what's wrong with using them to boost retirement income?

SirDoug, I agree, I don't think the fee structure is going to protect me from a bear market. That's why I have multiple cefs in all kinds of areas.  Bonds, convertibles, utilities, healthcare, energy, preferreds, REITs, you name it.  VTSAX is just the stock market.  I'm more diversified than it is.

StacheEngineer, I wonder if you just looked at the price/nav for your comparison?
 
I'll use PKO for my example here, since KYN is a MLP and with the bottom dropping out of oil, it's obviously not going to match the last few years bull market.  And I have records on PKO going back to 2008 when I bought it.  I bought $10000 worth, at around twenty bucks, and today the price is, coincidentally, still around twenty bucks.  So no gain there, true.  But it's paid me around $7487 in cash in that seven years.  It's almost bought itself.  That's almost a 75% gain to my pocket, and that doesn't include what the $7487 earned me along the way.  VTSAX is up around 56% since then, bull market and all.  A nice run, but in early 2009 it was down some 40% compared to when I bought PKO.  PKO was also down, but paid me right through the 2008 crash, missing only a few quarters.  If you look at the last five years only, yes, PKO looks pretty bad.  But it's still paying, and since I don't need to sell it's not an issue unless they begin consistent ROC.  Then I'd sell. 

This is fairly typical of my longer-held cefs.  I have about $450,000 in them, and I've been getting about $45,000 a year out of them. 

The biggest concern I can find with cefs as a long term holding is reduction in NAV due to ROC.  However, it's not that difficult to construct a portfolio of cefs that do not have any, or very little, ROC. 

I wouldn't advocate an entire portfolio of these, but it sure seems like a good bet to enhance investment income.

30 year window?  Who knows?  But we are talking about retirees here, guys who want some investment income so they can do something besides spend their lives in a cubicle.   As with anything, if things change in the cef world, moustachians will adapt.  After all, who can guarantee that VTSAX will be around in 30 years? 

Cheers!




Interest Compound

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Re: Ok, bring on the wolves
« Reply #5 on: January 31, 2016, 09:11:08 PM »
If you want my personal opinion of your portfolio...you're being gamed. Scammed. They are taking advantage of your ignorance. Because Vanguard has the market for cap-weighted broad-based index funds pretty well sewed up, other companies can't compete with Vanguard on cap-weighted index funds, and therefore there is a flood of propaganda that all has one thing in common: cap-weighting sucks, buy my fund that costs a little more but departs from cap-weighting so it's better. It is hard to get people to pay extra for something they can get from Vanguard for less, but you can get them to pay a little extra for something that's a little different.

You can't get around the fact that the "market portfolio," the set of all stocks in the stock market, is cap-weighted. That gives cap-weighting a special claim to be the default, the standard, the plumb line from which other things "tilt" in various directions. If you depart from cap-weighting, half the ways you depart from it will do worse, half will do better, and everyone that notices one that has done better is going to promote it, add their fee on top, and sell it to you.

Of course, there's no way of telling the winners in advance, and studies show the recent winners (read - the funds being promoted as better than cap-weighting) actually do worse than average moving forward, so it's impossible to consistently profit from this over the long-term.

There are so many problems with this thread, it would require us to write a whole series of blog posts (reinventing the wheel) to get them all out. Seriously, and I say this with love, this level of misunderstanding and lack of knowledge for someone who wants to live (is already living?) on their portfolio for the long-term...is incredibly troubling.

Here are some issues I see:

  • Dividends vs total return
  • Thinking you're more diversified than those using the 4% rule, because "VTSAX is just the stock market"
  • You think market timing can work over the long term (the rest of your life), because of what you've seen in some specific funds since 2008.
  • A misunderstanding of survivorship bias
  • You seem to have been all over the place this last decade, stock options, individual stocks, cefs, specific market sectors...etc.
  • Big misunderstanding of the 4% rule.
  • Big misunderstanding of efficient market theory, it seems you think you can beat the market with your list of 14 funds with high yields.
  • You seem to be confusing "yield" with "return".

Please understand, there are plenty of people on this forum who claim VTSAX sucks, and think they can beat the market. That's not the problem here. I highly recommend reading up a bit on indexing, the 4% rule, and what MrMoneyMustache is talking about, then you'll either understand, or you'll come back with better questions :) Here are some good resources to start:

These videos bring you from beginning to end, from creating an IPS, to knowing how and where to invest.  Yes, the guy is over-the-top silly, he's clearly a nerdy guy, but he hits all the right points, and explains it very well - http://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy

A detailed view on how to invest -  http://www.bogleheads.org/wiki/Bogleheads®_investment_philosophy
http://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

The best stock market overview - http://jlcollinsnh.com/stock-series/

Good books, the last two are on Audible:

http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/1118921283/ref=dp_ob_title_bk
http://www.amazon.com/gp/product/0071700781?ie=UTF8&tag=bogleheads.org-20
http://www.amazon.com/gp/product/0470138130?tag=bogleheads.org-20
http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393352242/ref=dp_ob_title_bk

And I'll leave you with some fun quotes:

A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth. ~Warren Buffet

Most investors would be better off in an index fund. ~Peter Lynch

Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing. ~Charles Schwab

Most investors should simply invest in index funds. ~Robert Rubin, Former Secretary of the Treasury

For most of us, trying to beat the market leads to disastrous results. ~Prof. Jeremy Siegel, author

Over the long-term the superiority of indexing is a mathematical certainty. ~Jason Zweig, senior writer for "Money"

Indexing virtually guarantees you superior performance. ~Bill Bernstein, author, financial adviser

With the market beating 91% of surviving professional stock pickers since the beginning of 1982, it looks pretty efficient to me. ~Bill Miller, portfolio manager

The smartest thing people can do if they want money in the equities market is buy an index fund and forget about it. ~Elliot Spitzer, NY Attorney General

"Of the 355 equity funds in 1970, fully 233 of those funds have gone out of business. Only 24 oupaced the market by more than 1% a year. These are terrible odds." Jack Bogle (2007)

tj

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Re: Ok, bring on the wolves
« Reply #6 on: January 31, 2016, 09:17:26 PM »
Quote
After all, who can guarantee that VTSAX will be around in 30 years?

This is a pretty absurd thought. All American public equity would basically have to cease to exist for this fund not to exist 30 years from now.

Aphalite

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Re: Ok, bring on the wolves
« Reply #7 on: February 01, 2016, 09:43:43 AM »
Barbarossa, the short answer is that most posters in this forum (including everyone that's made a post so far) have the "man with a hammer" syndrome, and their solution to everything is low cost index funds. As long as you are comfortable with the securities underlying your holdings, you don't need to worry about matching what other people are doing. The most successful investors don't try to argue with know nothing investors that turn a perfectly intelligent course of action (DCA into low cost index funds) into a religion. Manage your expenses well, eliminate as many middlemen as you can while carrying out your close fund strategy, and ignore the noise. Watch out for concentration risk and make sure that the securities that are in your closed funds don't have massive correlation to each other, so that one single event doesn't wipe you out.

The only thing that worries me is this: TJ is right - an index fund like VTSAX will always be around, the name may change if Vanguard decides to stop doing business, but holding a basket of American securities has always been safe and will likely always be safe. If you don't understand that (ie, looking at the underlying securities in the vehicle, and not just the tagline of VTSAX or PKO), then you could be one of those investors who is chasing yield - as Interest Compound pointed out, it's not an intelligent thing to focus solely on yield (that is, if you are chasing yield without understanding the underlying risks of the security)

Vagabond76

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Re: Ok, bring on the wolves
« Reply #8 on: February 01, 2016, 10:50:30 AM »
Butch,

I think you and I have a similar goal, but I'm not sure you understand what you own.  Nor do you understand the prevailing view on this site.

I too, want a portfolio that pays enough income to fund my early retirement lifestyle.  Instead of owning VTI (or VSTMX) which pays a 2.1% yield (meaning the other 1.9% needed to meet the 4% rule must come from sales), I want to own a portfolio that pays 4%.  Therefore, I do not have to rely on sales and hopes that the price is high.  I have a number of individual holdings and VYM (3.4% yield) plus a number of profitable companies that meet basic human needs and have a long history of steadily raising their dividends.  The combined portfolio yield is about 4.5%.  My $1M portfolio therefore pays about $45k per year, and that number steadily grows.

Your portfolio is chasing yield.  Yes the yields are high and appear juicy, but consider:

-  You are paying between 0.9% and 12.6% in fees, with a median fee of 1.25%.  (For the 12.6% fee, I understand that MLP funds are required to include underlying company expenses.)  This is a very expensive portfolio, and those fees will compound against you.

- Those high yields are only supported by high leverage.  The interest on the leverage is a big reason the fees are so high.  In a down market, the leverage will not go away, but the value of the fund will.

- All but one holding trades at a discount.  On the surface, this is a good thing--you are paying less than the reported net value of the underlying assets.  But in all case the discount has grown (or the premium shrunk) over the last year.  This tells me that the market increasingly believes that management cannot get the reported net value if the fund has to unwind.

Here is the table:
symbol   yield           fee           leverage   premium
BKN      5.68%   0.90%   35.72%   -17.75%
CHI      12.68%   1.50%   33.87%   -5.47%
ESD      9.54%   1.25%   17.29%   -9.81%
GAB      12.32%   1.07%   21.99%   -11.08%
KYN      16.43%   12.60%   52.83%   5.94%
PDT      7.71%   1.41%   34.84%   -8.03%
PKO      11.24%   1.79%   44.85%   -5.12%
RNP      8.39%   1.03%   25.79%   -11.43%
CII      9.28%   0.95%   0.06%   -16.63%
GOF      13.55%   1.72%   34.80%   -5.21%
HQH      9.90%   1.00%   0.00%   -11.90%
JRS      9.68%   1.32%   30.09%   -8.17%
RFI      8.15%   0.94%   0.00%   -17.66%
UTF      8.80%   1.30%   31.09%   -8.26%


The prevailing view here compares total returns to total returns.  In your post, you compared your alleged total return to an assumption that "4%" means the yield.

Here are your holdings returns (since 1/1/06 or specified start date):

symbol   date            start            end            dividends  Avg annual return
BKN      01/01/06    $17.64     $15.64     $9.75    3.68%
CHI      01/01/06    $20.04     $8.99     $13.26    1.05%
ESD      01/01/06    $17.60     $13.21     $14.50    4.61%
GAB      01/01/06    $7.96     $4.87     $7.11    4.14%
KYN      01/01/06    $24.86     $15.35     $22.09    4.15%
PDT      01/01/06    $10.15     $14.00     $11.61    8.38%
PKO      01/01/06    $25.25     $20.28     $24.41    5.83%
RNP      01/01/06    $26.11     $17.65     $16.73    2.77%
CII      01/01/06    $17.46     $12.93     $15.75    5.05%
GOF      07/27/07    $20.00     $16.13     $13.38    5.87%
HGH      01/01/06    $17.85     $23.83     $16.92    8.54%
JRS      01/01/06    $20.19     $9.92     $13.41    1.45%
RFI      01/01/06    $18.87     $11.90     $13.38    2.95%
UTF      01/01/06    $20.41     $18.18     $16.19    5.31%

Compared to VTI, only two outperformed while 12 underperformed.  those two happen to be the only two that sell for more now than they did 10 years ago.  Your median return was 4.15%, meaning an you barely eked out the 4% rule assuming you had equal investments in each holding.  You were well under VTI:

symbol   date            start            end            dividends  Avg annual return
VTI      01/01/06    $62.58     $98.33     $14.14    5.99%




Vagabond76

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Re: Ok, bring on the wolves
« Reply #9 on: February 01, 2016, 10:52:51 AM »
The columns all lined up in the editor.

nereo

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Re: Ok, bring on the wolves
« Reply #10 on: February 01, 2016, 11:00:00 AM »

I too, want a portfolio that pays enough income to fund my early retirement lifestyle.  Instead of owning VTI (or VSTMX) which pays a 2.1% yield (meaning the other 1.9% needed to meet the 4% rule must come from sales), I want to own a portfolio that pays 4%.  Therefore, I do not have to rely on sales and hopes that the price is high. 

Vegamond - why do you want to avoid sales of shares?  ... just curious.

tj

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Re: Ok, bring on the wolves
« Reply #11 on: February 01, 2016, 12:09:48 PM »
Barbarossa, the short answer is that most posters in this forum (including everyone that's made a post so far) have the "man with a hammer" syndrome, and their solution to everything is low cost index funds. As long as you are comfortable with the securities underlying your holdings, you don't need to worry about matching what other people are doing. The most successful investors don't try to argue with know nothing investors that turn a perfectly intelligent course of action (DCA into low cost index funds) into a religion. Manage your expenses well, eliminate as many middlemen as you can while carrying out your close fund strategy, and ignore the noise. Watch out for concentration risk and make sure that the securities that are in your closed funds don't have massive correlation to each other, so that one single event doesn't wipe you out.

The only thing that worries me is this: TJ is right - an index fund like VTSAX will always be around, the name may change if Vanguard decides to stop doing business, but holding a basket of American securities has always been safe and will likely always be safe. If you don't understand that (ie, looking at the underlying securities in the vehicle, and not just the tagline of VTSAX or PKO), then you could be one of those investors who is chasing yield - as Interest Compound pointed out, it's not an intelligent thing to focus solely on yield (that is, if you are chasing yield without understanding the underlying risks of the security)

I personally am not 100% invested in indexes and I've had people yell at me here when I've suggested there are perfectly reasonable low-cost managed funds. I think in a taxable acccount, it's a no brainer to index, but I do more "exploration" in my tax-advantaged accounts where things like capital gain distributions and dividends are kind of irrelevant. Nobody suggests index funds because the fund managers are idiots, the question is if they can recoup their costs. In a taxable account, they need to recoup their costs after taxes, which would be even harder.

aperture

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Re: Ok, bring on the wolves
« Reply #12 on: February 01, 2016, 12:42:17 PM »
Hey Barbarossa, thanks for your questions.  I am pleased to have an opportunity to learn by lurking in this thread.  Best wishes on your retirement plan of delivering sail boats for fun and $s.  -Ap.

BFGirl

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Re: Ok, bring on the wolves
« Reply #13 on: February 01, 2016, 12:57:47 PM »
Butch,

I think you and I have a similar goal, but I'm not sure you understand what you own.  Nor do you understand the prevailing view on this site.

I too, want a portfolio that pays enough income to fund my early retirement lifestyle.  Instead of owning VTI (or VSTMX) which pays a 2.1% yield (meaning the other 1.9% needed to meet the 4% rule must come from sales), I want to own a portfolio that pays 4%.  Therefore, I do not have to rely on sales and hopes that the price is high.  I have a number of individual holdings and VYM (3.4% yield) plus a number of profitable companies that meet basic human needs and have a long history of steadily raising their dividends.  The combined portfolio yield is about 4.5%.  My $1M portfolio therefore pays about $45k per year, and that number steadily grows.



Vagabond, would you be willing to detail your investments that pay $45K on $1M? 

Vagabond76

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Re: Ok, bring on the wolves
« Reply #14 on: February 01, 2016, 01:46:12 PM »

I too, want a portfolio that pays enough income to fund my early retirement lifestyle.  Instead of owning VTI (or VSTMX) which pays a 2.1% yield (meaning the other 1.9% needed to meet the 4% rule must come from sales), I want to own a portfolio that pays 4%.  Therefore, I do not have to rely on sales and hopes that the price is high. 

Vegamond - why do you want to avoid sales of shares?  ... just curious.

When many people say they are investing "for the long term" they follow that up with a time from...1 year, 2 years, 5 years, etc.  I view investing in terms of generations.  I work but I don't have to.  I have the fortunate opportunity to live off of investment income.  I would like my kids and (eventually) grandkids to have the same opportunities...work if they want but not be a slave to the employer.

If I have a portfolio of investments that pays 4% cash to me every year, then I can live according to the 4% rule and don't need to sell anything.  Therefore, (1) I don't really care if the price goes up or down and (2) the investments generate income for generations.

I have yet to see multi-generational calculations on MMM's plan to save 25x expenses.  I agree wholeheartedly that it will work for one's lifetime, but does each generation have to start over?  I don't know.


soupcxan

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Re: Ok, bring on the wolves
« Reply #15 on: February 01, 2016, 01:50:40 PM »
CEFs sound like perpetual money making machines - borrow at 2%, invest at 5%, pocket the 3% difference forever. So why doesn't everyone do this? Because more leverage = more risk. If the yield curve flattens, you will get hosed.

Also, it's apples-to-oranges to compare a levered CEF return against an unlevered VTI return. If you bought VYM with 30% leverage you could get a 5% dividend yield in the stock market (on top of your capital gains). But you would also be taking on more risk, just like CEFs do.

I don't object to owning some CEFs in a portfolio but relying mainly on them to generate an 8% withdrawal rate so you don't need as large a nest egg is extremely risky IMO. There is no free lunch to get you from 4% WR to 8% WR.
« Last Edit: February 01, 2016, 01:54:08 PM by soupcxan »

Retire-Canada

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Re: Ok, bring on the wolves
« Reply #16 on: February 01, 2016, 02:13:29 PM »
I have yet to see multi-generational calculations on MMM's plan to save 25x expenses.  I agree wholeheartedly that it will work for one's lifetime, but does each generation have to start over?  I don't know.

If you run a 90/10 stock/bond $1M portfolio through cFIREsim taking out $40K inflation adjusted each year for 40yrs the average ending portfolio is $3.8M and the median is $2.4M. The highest ending value is $21.8M and there are 9.5% of the start years where that failed and you ended up running out of money. These are all inflation adjusted 2016 dollars.

http://www.cfiresim.com/

So with a plan where you are selling stocks to cover a portion of your 4% WR there is certainly multi-generational wealth potential.

nereo

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Re: Ok, bring on the wolves
« Reply #17 on: February 01, 2016, 02:27:47 PM »

When many people say they are investing "for the long term" they follow that up with a time from...1 year, 2 years, 5 years, etc.  I view investing in terms of generations.  I work but I don't have to.  I have the fortunate opportunity to live off of investment income.  I would like my kids and (eventually) grandkids to have the same opportunities...work if they want but not be a slave to the employer.

At least on this forum, most people talk in terms of decades, and a lot of straw is spun about whether a 30 year timeline is really "long term" when looking at FI/RE.    Whether gifting enough to grandkids is another topic that has been extensively debated.  To each their own.

Quote
If I have a portfolio of investments that pays 4% cash to me every year, then I can live according to the 4% rule and don't need to sell anything.  Therefore, (1) I don't really care if the price goes up or down and (2) the investments generate income for generations.
Selling share of an ETF doesn't mean the fund will become depleted, even if the time frame is multiple decades.

Quote
I have yet to see multi-generational calculations on MMM's plan to save 25x expenses.  I agree wholeheartedly that it will work for one's lifetime, but does each generation have to start over?  I don't know.
See monte-carlo simulations and Retire-Canada's summary of cFIREsim. 

None of these points means that CEFs are bad for you.  I'm just trying to understand your concern with selling shares of an ETF - it seems that you may be misunderstanding this.

Interest Compound

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Re: Ok, bring on the wolves
« Reply #18 on: February 01, 2016, 04:48:44 PM »
Lots of misinformation in this thread, which can confuse the newbies. So let's state the mathematical facts:

1. A dividend is mathematically equivalent to selling an equivalent amount of stock.

2. If you're expecting X% return, it doesn't matter if you realize it through dividends, or by selling assets.  You will never run out of either.

As a result of the above two mathematical facts, focusing your portfolio on yield alone, will only serve to reduce your diversification, causing your portfolio to be more risky, for equivalent return. If you do this in a taxable account, taxes will result in your portfolio being more risky, for a lower return.

MustacheAndaHalf

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Re: Ok, bring on the wolves
« Reply #19 on: February 01, 2016, 04:54:09 PM »
...
KYN  14.7
GOF  13.6
PKO  11.2
CHI  12.7
...
These four funds are half your portfolio, and I'm going to try to single one of them out as better than the others.

Morningstar shows KYN as having a 12.60% expense ratio (twelve percent).  If accurate, Vanguard Energy ETF has a one hundred times lower expense ratio (0.10%) while avoiding leverage.  The Oil sector is up to OPEC now, so I'd have to select one of the other 3 as this looks like the worst of the four.

GOF is tempting owing to being a bond fund 3.9% volatility (3 years).  Half of it's bonds are "BB" rated, which is below investment grade.  Now the sad part: these are the highest quality bonds of the four, even with half being junk bonds.  In the past 3 years, this fund showed 3.9% volatility - roughly equal to it's performance, which is what you expect from a bond fund.

CHI seems to be hiding from something: it holds stock from only 4 market sectors: utilities, healthcare, industrial, and consumer defensive.  Someone in charge of this fund is expecting a recession.  Sadly, in the past year Vanguard Total Stock Market lost 2.7% while this fund lost 21.6%.  Not sure how they brace for a price drop, get a price drop, and then still lose -19% compared to the stock market... Expense ratio is 1.84%, so if you must keep a stock fund, this pick is better than the leveraged energy fund.

One fund left, a bond fund: PKO.  Morningstar says this fund is "139% bonds", so it's another leveraged fund.  But 22% of those bonds are "not rated", 27% are "below B" (which means in default), and 27% are below investment grade but not in those other two categories.  This fund lost less than the other four, at only -7.36% in the past 12 months.  But the volatility is almost 6% out of a performance of 3% for the past 3 years.  In other words, this fund has some stock-like volatility but only bond-like returns.  Maybe it's the leverage, but I think this one doesn't quite make it as my pick.

Limited to only those 4 closed-end funds, I'd favor "GOF" (Guggenheim Strategic Opportunities Fund) for a few reasons:
1. I hate 2.16% expense ratios, but at least it's lower than 2.43% or 12%.
2. Junk bonds are risky, but at least it's closer to conventional risk.  And compared to the other bond fund (leveraged with bonds in default), it's actually higher quality.
3. It's probably not using leverage, and it's volatility is consistent with it being a bond fund without leverage

I would prefer you pick Vanguard sector funds and just implement this approach yourself.  You could buy Vanguard Energy, Vanguard Utilities, etc.  When times are good, leverage looks great.  Even the S&P 500 can't beat twice as much money invested in the S&P 500, which is how leverage works.  But it's also more dangerous, and more costly (borrowing money to invest) for the funds, so they have high expenses.

You should really read about how expense ratios can help predict returns.  There's no guarantees, of course, but lower expense ratios tend to perform better than really high expense ratios.  When times get really bad, you will suddenly discover how junk bonds and leverage interact.  It's much better to read about now than go through it later.

But if none of that convinces you, I'd say GOF is better than the other 3 (KYN, CHI, PKO) if you're looking for analysis.

StacheEngineer

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Re: Ok, bring on the wolves
« Reply #20 on: February 01, 2016, 08:12:42 PM »
If I have a portfolio of investments that pays 4% cash to me every year, then I can live according to the 4% rule and don't need to sell anything.  Therefore, (1) I don't really care if the price goes up or down and (2) the investments generate income for generations.

I take issue with both of those statements.

1. You should care if the price goes up or down. This is the same argument as to why bond funds decline in value when interest rates rise. Even if you are still getting the same dollar payments, your money could have been invested in something else that is now yielding more than 4%.

Imagine  you own a company XYZ that pays all of its profits into dividends and its currently yielding 4%. Something crazy happens inflation rises to 4% and interest rates double and so XYZ's stock price falls 50%. It is now yielding 8% but your investment is still only yielding 4% or just at inflation. You now will need to sell your shares to keep your real 4% withdrawal rate.

2. Those investments will NOT be around for generations. Companies are acquired or go bankrupt and its extremely unlikely that the set of investments you own right now will pay the amount of dividends you expect forever. So you will have some turnover in your portfolio and you will then care what price you can get for shares.

Generally speaking, dividends are not a free lunch.

Vagabond76

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Re: Ok, bring on the wolves
« Reply #21 on: February 01, 2016, 09:03:15 PM »
The beauty of income investing is you don't have to jump ship in order to meet basic living expenses. I'm not good at market timing, which is what I would be tempted to do if I watched the investments. Stocks are not money, they are pieces of a company. Ownership entitles the holder to (1) a share of the profit via dividends and (2) an annual vote. MMM even explained this.

If inflation rises, the companies will raise prices to meet expenses and generate a profit. Everyone will bitch and moan that the cost of everything from toothpaste to garbage collection  has gone up, but most will pay he higher price because they like having teeth and don't like having trash.

It is true that some companies will go bankrupt, which is why it is stupid to hold just one. So what if a company gets acquired? The buyer either gives me cash or shares of a new company. It's not like the value disappears.

I own companies that have paid dividends for 50 to 100 years. Of course that doesn't guarantee anything in the future, but it is a pretty solid track record that no management team wants to break.


nereo

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Re: Ok, bring on the wolves
« Reply #22 on: February 02, 2016, 05:52:37 AM »
The beauty of income investing is you don't have to jump ship in order to meet basic living expenses. I'm not good at market timing, which is what I would be tempted to do if I watched the investments. Stocks are not money, they are pieces of a company. Ownership entitles the holder to (1) a share of the profit via dividends and (2) an annual vote. MMM even explained this.

If inflation rises, the companies will raise prices to meet expenses and generate a profit. Everyone will bitch and moan that the cost of everything from toothpaste to garbage collection  has gone up, but most will pay he higher price because they like having teeth and don't like having trash.

It is true that some companies will go bankrupt, which is why it is stupid to hold just one. So what if a company gets acquired? The buyer either gives me cash or shares of a new company. It's not like the value disappears.

I own companies that have paid dividends for 50 to 100 years. Of course that doesn't guarantee anything in the future, but it is a pretty solid track record that no management team wants to break.
No one is arguing that owning stocks is a bad strategy.  We are challenging your assumptions that owning things that pay a 4% dividend is somehow safer than owning an ETF with a lower yield. 
I'm not trying to argue CEFs vs ETFs here, I am just trying to help you understand that your assumptions about running out of shares if you follow a 4% rule on an ETF with a 1.9% yield*  are incorrect.

As StacheEngineer said: dividends are not a free lunch.

*the current yield of the SP500.

LadyStache in Baja

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Re: Ok, bring on the wolves
« Reply #23 on: February 02, 2016, 08:25:00 AM »
Lots of misinformation in this thread, which can confuse the newbies. So let's state the mathematical facts:

1. A dividend is mathematically equivalent to selling an equivalent amount of stock.

2. If you're expecting X% return, it doesn't matter if you realize it through dividends, or by selling assets.  You will never run out of either.

As a result of the above two mathematical facts, focusing your portfolio on yield alone, will only serve to reduce your diversification, causing your portfolio to be more risky, for equivalent return. If you do this in a taxable account, taxes will result in your portfolio being more risky, for a lower return.

OK, this is interesting.  Please explain!  I mean I understand that a dollar is a dollar, no matter where it comes from (is that what you mean by #1?), but how do you explain #2, if I'm selling shares, and the price is going down, then I'll need more shares to get the same dollar amount, so they could run out, whereas dividends never will....because I'll still have the underlying share.

nereo

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Re: Ok, bring on the wolves
« Reply #24 on: February 02, 2016, 01:12:15 PM »
Lots of misinformation in this thread, which can confuse the newbies. So let's state the mathematical facts:

1. A dividend is mathematically equivalent to selling an equivalent amount of stock.

2. If you're expecting X% return, it doesn't matter if you realize it through dividends, or by selling assets.  You will never run out of either.

As a result of the above two mathematical facts, focusing your portfolio on yield alone, will only serve to reduce your diversification, causing your portfolio to be more risky, for equivalent return. If you do this in a taxable account, taxes will result in your portfolio being more risky, for a lower return.

OK, this is interesting.  Please explain!  I mean I understand that a dollar is a dollar, no matter where it comes from (is that what you mean by #1?), but how do you explain #2, if I'm selling shares, and the price is going down, then I'll need more shares to get the same dollar amount, so they could run out, whereas dividends never will....because I'll still have the underlying share.

Ok, a simplified version.  Suppose you have one stock that pays a 4% dividend and is worth $100.  You want to use a 4% WR.  At first glance all seems fine and dandy - you can take the 4% dividend and keep every share, right?  Well, not so fast.  Let's say it drops 20% - the dividend would go up 20% (good... right?) - except that during economic downturns companies often cut their yield.  Problem - now you need more than a 4% yield to have the same amount of real dollars. 
Even more important, there is inflation to consider.  If the company's share price stays the same and it's dividend stays the same you will have less purchasing power every year.  Even if you have a company with a 5% yield you are still relying on growth to maintain a 4% WR - after just 13 years the yield alone can no longer sustain the WR if inflation goes along at 2%.  If inflation is higher (3%) it's a mere 9 years.
This isn't to say that this strategy can't work.  If the company's stock price grows at the rate of inflation and the yield stays at or above 4% you can sustain a 4% WR.  But it's no "magic bullet."  You will always need either the price to increase OR the yield to exceed WR + inflation. 

Now let's look at using an ETF that tracks the SP500.  It has a yield of 1.9% right now, meaning that to maintain a 4% WR you must sell some of your shares.  This scares people, and leads them to the erroneous conclusion "if I am selling shares I will eventually have no shares left!"
This is not necessarily the case, and here's why:  The stock market goes up. 

Ok, want a slightly more detailed explanation?  Consider this example.
Suppose you have shares of the SP500 ETF with a current yield of 1.9% and the share price of this ETF is currently $100.  You own 10,000 shares with a value of $1MM. Using a 4% WR you would have $40k/year to live off of. Let's assume real-adjusted growth of 5%6%/year***, which around the historical average.  During the first several years you will need to sell some shares to cover the difference between the dividend and your 4% WR. For example, in year 1 your dividend will supply $19k, and you will need to sell 210 shares @ $100 to generate the remaining $21k. Oh no!  people say... Now I have 9790 shares, eventually i'll be doomed!
 
However, there's two important things going on here.  1) each share is now worth more (the market goes up!), and 2) over time the need to sell any shares will go away.  As the share price of the ETF goes up, the dividend (historically) goes up with it.  Each time the share price goes up you need to sell less shares to meet your 4% WR target. Remember, your WR is fixed to when you started taking it out, indexed to inflation.   

In year 2 you will need to sell just 196 192 (14 fewer shares) to make up the difference.  This is because each share is worth more ($105), and you need to sell less of them because you will get more from the dividend ($19.17k).
By year 5 you will need to sell 141 shares (share price $117, dividend provides $22.2k)
By year 10 you will need to sell just 69 shares. (share price $142, dividend provides $28.3k)

After 15 17 years the dividend (which is a function of the share price) will actually provide more income than you need, even though the yield is still hovering around 1.9%. Remember, the yield is a function of the share price.  After just three years the number of shares will actually start to increase as the increase.  The total number of shares you will have to sell over the first 15 17 years will be 1,554 (leaving you with 8,445 8,623 shares now valued at $220 each, giving you a portfolio of $2.2MM
From this point forward the total number of shares owned would increase every year. 

Here's how it would look in graphical form.
Year, Share price, % Withdraw from dividend,
1     $100        47.5%
2     $105        47.9%
3     $110.3     50.3%
4     $115.8     52.8%
5     $121.5     55.4%
...
10   $155.1     70.8%
...
15   $198.0     90.4%

By year 15 18 the yield surpasses the real-adjusted $40k necessary for the example above (e.g. you can now get $40k/year from the yield alone.. thanks to a steadily rising share price).  At that point total # of shares start to increase as the leftover dividend buys more shares.  If we look at the 30 year mark, that 1.9% dividend will provide 2.5x expenses.

*(note - this is obviously a very simplistic example, where the share price increase every year by 6% in real adjusted returns, and the WR is kept exactly constant at 4%/$40,000.  It is meant ONLY to illustrate how having a portfolio of only an SP500 ETF can result in more shares over time that are worth more money.  In reality it would not be so smooth a ride, as the market will jump up and down.  The dividend also fluctuates, and has been above 3% for the majority of the last 100 years... but not since the mid 1990s)

** if you want to look at actual historical scenarios just plug numbers into FIREcalc nad cFIREsim - given that the SP500 yield has never gone below 1% and typically stays above 2%, anytime a portfolio exceeds 2-4x its starting value by extension the yield exceeds the input WR, and the # of shares owned increased.  It's not surprising considering that roughly 3/4 of 30y simulations using a 4% WR wind up with more money than they started with.

***EDIT: I went back and changed the numbers in the example to reflect 5% growth before a dividend.  This is more in line with the historical, real-adjusted returns of the SP500. 
« Last Edit: February 02, 2016, 01:30:19 PM by nereo »

Aphalite

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Re: Ok, bring on the wolves
« Reply #25 on: February 03, 2016, 06:47:08 AM »
A dividend and selling a share of stock are NOT the same. Even if you're comparing the exact same company against itself, you need to evaluate whether that dollar of dividend will have more utility staying in the company (reinvested at its marginal return on invested capital) or distributed to shareholders. THEN you need to evaluate if the share itself is valued fairly. Selling the security would be preferable to collecting dividends if the company is being valued exuberantly.

The underlying three assumptions the posters that insist dividends = selling shares are
1. The security is priced perfectly, neither over or undervalued
2. Opportunity cost of the cash is equal whether reinvested or distributed as dividend
3. Companies are all equivalent, and a fast growing company like say, Sprouts farmers market versus an old stodgy company like say, AT&T, should have the same capital management strategies because "a dividend is equivalent to selling a share"

Thats three pretty huge assumptions to make

That said, its becoming more and more apparent the OP is chasing yield and has some serious holes in his or her understanding of securities and how amalgamated/levered vehicles work. I agree with the rest of the posters that OP should switch to a total market fund. More money has been lost reaching for an extra point of yield than anything else.
« Last Edit: February 03, 2016, 06:51:04 AM by Aphalite »

Interest Compound

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Re: Ok, bring on the wolves
« Reply #26 on: February 03, 2016, 07:27:39 AM »
A dividend and selling a share of stock are NOT the same. Even if you're comparing the exact same company against itself, you need to evaluate whether that dollar of dividend will have more utility staying in the company (reinvested at its marginal return on invested capital) or distributed to shareholders. THEN you need to evaluate if the share itself is valued fairly. Selling the security would be preferable to collecting dividends if the company is being valued exuberantly.

The underlying three assumptions the posters that insist dividends = selling shares are
1. The security is priced perfectly, neither over or undervalued
2. Opportunity cost of the cash is equal whether reinvested or distributed as dividend
3. Companies are all equivalent, and a fast growing company like say, Sprouts farmers market versus an old stodgy company like say, AT&T, should have the same capital management strategies because "a dividend is equivalent to selling a share"

Thats three pretty huge assumptions to make

That said, its becoming more and more apparent the OP is chasing yield and has some serious holes in his or her understanding of securities and how amalgamated/levered vehicles work. I agree with the rest of the posters that OP should switch to a total market fund. More money has been lost reaching for an extra point of yield than anything else.

Nothing to argue with here :)

Typically when people chase yield, they believe dividends are magic "free money" from a mechanical point of view. I try to dispel this by showing that mechanically, a dividend is mathematically equivalent to selling an equivalent amount of stock. If you own a stock that grows 7% a year, and pays 3% dividends, but you want 4%...simply sell a portion of your holding to get that extra 1 percent. You'll never run out.

If you go deeper, then your assumptions come into play. But I don't think the OP got that far :-P

nereo

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Re: Ok, bring on the wolves
« Reply #27 on: February 03, 2016, 07:36:05 AM »

Nothing to argue with here :)

Typically when people chase yield, they believe dividends are magic "free money" from a mechanical point of view. I try to dispel this by showing that mechanically, a dividend is mathematically equivalent to selling an equivalent amount of stock. If you own a stock that grows 7% a year, and pays 3% dividends, but you want 4%...simply sell a portion of your holding to get that extra 1 percent. You'll never run out.

If you go deeper, then your assumptions come into play. But I don't think the OP got that far :-P
Likewise!  My rather long-winded example above was intended to combat the frequently held notion that selling shares would result in running out of shares after a few decades. 
Aphalite - I agree with what you said that from a technical standpoint a dividend is not the same as a share.  But from the OP's perspective of whether 'living off dividends' is inherently safer than selling shares it's a mute point: the former is not safer than the latter, and it's the underlying investments that makes all the difference.

Retire-Canada

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Re: Ok, bring on the wolves
« Reply #28 on: February 03, 2016, 08:29:32 AM »
The dividends vs. shares discussion should be a sticky right below 4% SWR. It's literally a weekly if not daily discussion item that has to be explained again and again.

JetBlast

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Re: Ok, bring on the wolves
« Reply #29 on: February 03, 2016, 09:21:19 AM »
As others have pointed out, the OP should consider whether they really understand what they own, and are willing to accept that level of risk in retirement.

A dividend and selling a share of stock are NOT the same. Even if you're comparing the exact same company against itself, you need to evaluate whether that dollar of dividend will have more utility staying in the company (reinvested at its marginal return on invested capital) or distributed to shareholders. THEN you need to evaluate if the share itself is valued fairly. Selling the security would be preferable to collecting dividends if the company is being valued exuberantly.

The underlying three assumptions the posters that insist dividends = selling shares are
1. The security is priced perfectly, neither over or undervalued
2. Opportunity cost of the cash is equal whether reinvested or distributed as dividend
3. Companies are all equivalent, and a fast growing company like say, Sprouts farmers market versus an old stodgy company like say, AT&T, should have the same capital management strategies because "a dividend is equivalent to selling a share"

Thats three pretty huge assumptions to make

Far more succinct than I could have written. Thank you!

nereo

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Re: Ok, bring on the wolves
« Reply #30 on: February 03, 2016, 09:25:54 AM »
The dividends vs. shares discussion should be a sticky right below 4% SWR. It's literally a weekly if not daily discussion item that has to be explained again and again.
Agreed.  The "selling shares each year will eventually leave me with 0 shares, oh no!" myth is one of the ones that particularly irks me, almost as much as the "I can't possibly access my 401(k) accounts before age 60!"

Mmm_Donuts

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Re: Ok, bring on the wolves
« Reply #31 on: February 03, 2016, 09:50:22 AM »
Lots of misinformation in this thread, which can confuse the newbies. So let's state the mathematical facts:

1. A dividend is mathematically equivalent to selling an equivalent amount of stock.

2. If you're expecting X% return, it doesn't matter if you realize it through dividends, or by selling assets.  You will never run out of either.

As a result of the above two mathematical facts, focusing your portfolio on yield alone, will only serve to reduce your diversification, causing your portfolio to be more risky, for equivalent return. If you do this in a taxable account, taxes will result in your portfolio being more risky, for a lower return.

I have a question about this. If dividends are basically equal to selling shares in terms of value, then would it be fair to say that when dividends are more favourably taxed, then it would be better to hold securities that focus on a higher yield?

I've started building my taxable account recently, and since my earned income is quite low, I've decided to focus on higher yielding etfs like VDY and pref shares. This keeps things simple, since I don't want to have to track share sales, I just want to build a portfolio that pays dividends that I can add to my income. Since I probably won't earn much more than 50k per year, these dividends are more tax efficient than having to sell shares. I'm hoping they'll be tax free. Is it technically wrong to chase yield in this case?

In my TFSA i focus on growth stocks, and my rrsp is split between US stocks and bonds.

I agree that a sticky about this topic would be really helpful!

tj

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Re: Ok, bring on the wolves
« Reply #32 on: February 03, 2016, 09:58:56 AM »
Quote
I have a question about this. If dividends are basically equal to selling shares in terms of value, then would it be fair to say that when dividends are more favourably taxed, then it would be better to hold securities that focus on a higher yield?

Depends. You're not taxed on unrealized capital gains until you sell the shares, and when you sell the shares, only a small part of it is the gain, most of it is your invested principal...obviously depends on how large of gains we are talking about relative to your original investment.

In USA at least, dividends are not more favorably taxed than capital gains.

nereo

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Re: Ok, bring on the wolves
« Reply #33 on: February 03, 2016, 10:02:04 AM »
Lots of misinformation in this thread, which can confuse the newbies. So let's state the mathematical facts:

1. A dividend is mathematically equivalent to selling an equivalent amount of stock.

2. If you're expecting X% return, it doesn't matter if you realize it through dividends, or by selling assets.  You will never run out of either.

As a result of the above two mathematical facts, focusing your portfolio on yield alone, will only serve to reduce your diversification, causing your portfolio to be more risky, for equivalent return. If you do this in a taxable account, taxes will result in your portfolio being more risky, for a lower return.

I have a question about this. If dividends are basically equal to selling shares in terms of value, then would it be fair to say that when dividends are more favourably taxed, then it would be better to hold securities that focus on a higher yield?

I've started building my taxable account recently, and since my earned income is quite low, I've decided to focus on higher yielding etfs like VDY and pref shares. This keeps things simple, since I don't want to have to track share sales, I just want to build a portfolio that pays dividends that I can add to my income. Since I probably won't earn much more than 50k per year, these dividends are more tax efficient than having to sell shares. I'm hoping they'll be tax free. Is it technically wrong to chase yield in this case?

In my TFSA i focus on growth stocks, and my rrsp is split between US stocks and bonds.

I agree that a sticky about this topic would be really helpful!
Ah... see you are in Canada (as I am), so your situation will differ somewhat from someone in the US.
In Canada (and unlike in the US) capitol gains and dividend income is treated the same.  AS I understand it, in Canada you will pay your marginal tax rate on 50% of your capitol gains.

Mmm_Donuts

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Re: Ok, bring on the wolves
« Reply #34 on: February 03, 2016, 10:09:56 AM »
OK thanks nereo, that's what I thought. Just checking that this argument was mostly applicable to US investors.

I got the dividend idea a few years back from this article in the globe:

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/you-do-the-math-almost-50000-in-earned-dividends-0-in-tax/article4599950/

Dividends are taxed more favourably than cap gains here. So I think it's OK to go for more yield in a taxable account. $50k a year in tax free dividends would be pretty sweet :)

Interest Compound

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Re: Ok, bring on the wolves
« Reply #35 on: February 03, 2016, 10:40:45 AM »
OK thanks nereo, that's what I thought. Just checking that this argument was mostly applicable to US investors.

I got the dividend idea a few years back from this article in the globe:

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/you-do-the-math-almost-50000-in-earned-dividends-0-in-tax/article4599950/

Dividends are taxed more favourably than cap gains here. So I think it's OK to go for more yield in a taxable account. $50k a year in tax free dividends would be pretty sweet :)

I don't have all the details about tax rates in your country, but there's a saying that applies here, "Be careful not to let the tax tail wag the portfolio dog" (something like that).

A married couple in the US living off their portfolio, can sell $73,8000 a year in long-term capital gains before having to pay any taxes:



Source: https://www.kitces.com/blog/understanding-the-mechanics-of-the-0-long-term-capital-gains-tax-rate-how-to-harvest-capital-gains-for-a-free-step-up-in-basis/

Non-Qualified Dividends are treated as income, which are taxed less favorably. Even if the dividends are all Qualified (taxed the same as Long Term Capital Gains), you don't get to choose when the withdrawal happens. Most of us in this community will be in a lower tax bracket in the future, but a dividend forces us to pay taxes on that amount now, while we're in a higher tax bracket. Vanguard has a paper that investigates this:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

Quote
In conclusion, the total-return approach to spending is identical to the income approach for investors whose portfolios generate enough cash flow to meet their spending needs. For those investors who need more cash flow than their portfolios yield, the total-return approach is the preferred method. Compared with the income-only approach, the total return approach is likelier to increase the longevity of the portfolio, increase its tax-efficiency, and reduce the number of times that the portfolio needs to be rebalanced. In addition, for most investors, a total return approach can produce the same cash flow as an income-only approach with no decrease in return and a lower tax liability.

This graph is particularly interesting:


Interest Compound

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Re: Ok, bring on the wolves
« Reply #36 on: February 03, 2016, 10:42:47 AM »
Another fun visualization backing up nereo's post on the shares never running out:


nereo

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Re: Ok, bring on the wolves
« Reply #37 on: February 03, 2016, 10:58:37 AM »
Another fun visualization backing up nereo's post on the shares never running out:
Thanks for this.  Before RL sidetracked me I was going to do something similar - a "what if I invest in a fund that has NO dividend... won't my shares eventually run out then?"
The answer is still "no" - it's an exponential decay function. It hits 0 only at infinity... which is also coincidentally when the portfolio value hits infinity.  Then we divide by zero and the universe implodes :-)

Retire-Canada

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Re: Ok, bring on the wolves
« Reply #38 on: February 03, 2016, 11:00:17 AM »
In Canada (and unlike in the US) capitol gains and dividend income is treated the same. 

They are not treated the same.

http://www.moneysense.ca/columns/dividends-not-as-tax-friendly-as-you-may-think/

http://howtoinvestonline.blogspot.ca/2011/04/how-your-province-income-level-and.html

The differences will depend on the source of the dividends and your income level. You can also control when you realize some capital gains to optimize your taxes.
« Last Edit: February 03, 2016, 11:26:51 AM by Retire-Canada »

nereo

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Re: Ok, bring on the wolves
« Reply #39 on: February 03, 2016, 11:15:33 AM »
In Canada (and unlike in the US) capitol gains and dividend income is treated the same. 

They are not treated the same.

http://www.moneysense.ca/columns/dividends-not-as-tax-friendly-as-you-may-think/

http://howtoinvestonline.blogspot.ca/2011/04/how-your-province-income-level-and.html

The differences will depend on the source of the dividends and your income level.
Huh.  Thanks for the correction Retire-Canada.  As you can see, I'm still learnign the tax laws here, but I was going off information on investopedia, which i've usually found to be fairly accurate.  Live and learn...

Interest Compound

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Re: Ok, bring on the wolves
« Reply #40 on: February 03, 2016, 11:20:39 AM »
In Canada (and unlike in the US) capitol gains and dividend income is treated the same. 

They are not treated the same.

http://www.moneysense.ca/columns/dividends-not-as-tax-friendly-as-you-may-think/

http://howtoinvestonline.blogspot.ca/2011/04/how-your-province-income-level-and.html

The differences will depend on the source of the dividends and your income level.

Interesting. For any US investors wondering about the Qualified Dividend breakdown for their Vanguard fund:

https://personal.vanguard.com/us/insights/taxcenter/qdi/yearend-qualified-dividend-income-2015



Note, the dividend figures on Total International don't take into account the Foreign Tax Credit. Some years Total International is more tax-efficient, and some years Total US is more tax-efficient, so don't take this information to mean you should only put Total International in taxable :), but if you DO have Total International in taxable, don't forget to claim your tax credit!

Here are some fun threads on it:

Foreign tax credit
Reporting Foreign Tax Credit for Total International (VTIAX)

Mmm_Donuts

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Re: Ok, bring on the wolves
« Reply #41 on: February 03, 2016, 11:40:15 AM »
OK thanks nereo, that's what I thought. Just checking that this argument was mostly applicable to US investors.

I got the dividend idea a few years back from this article in the globe:

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/you-do-the-math-almost-50000-in-earned-dividends-0-in-tax/article4599950/

Dividends are taxed more favourably than cap gains here. So I think it's OK to go for more yield in a taxable account. $50k a year in tax free dividends would be pretty sweet :)

I don't have all the details about tax rates in your country, but there's a saying that applies here, "Be careful not to let the tax tail wag the portfolio dog" (something like that).


Thanks for the info. I guess what I am saying is that if qualified dividends are taxed more favourably than cap gains (as is the case in Canada), and most people here are saying that dividend yield is equivalent to capital gains, in theory, dollar for dollar, then wouldn't it be wise to take the tax-favoured approach? While tax implications aren't the ONLY consideration to take while building a portfolio, they should certainly be a consideration.

Retire-Canada

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Re: Ok, bring on the wolves
« Reply #42 on: February 03, 2016, 11:49:09 AM »
Thanks for the info. I guess what I am saying is that if qualified dividends are taxed more favourably than cap gains (as is the case in Canada), and most people here are saying that dividend yield is equivalent to capital gains, in theory, dollar for dollar, then wouldn't it be wise to take the tax-favoured approach? While tax implications aren't the ONLY consideration to take while building a portfolio, they should certainly be a consideration.

In Canada qualified dividends only get that tax benefit over capital gains in Non-Registered accounts not RRSP accounts [TFSA are tax free once $$ invested, but are at the moment very limited in size].

Also dividends come when they come so you can't manage them the same way you can capital gains to realize them at tax optimized times.

Qualified dividends are limited in scope so you either only will have a small % of them in your portfolio or you will be poorly diversified. All capital gains in a Non-Registered account qualify for a reduced marginal tax rate which allows for better diversification.

Mmm_Donuts

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Re: Ok, bring on the wolves
« Reply #43 on: February 03, 2016, 12:51:38 PM »
Thanks for the info. I guess what I am saying is that if qualified dividends are taxed more favourably than cap gains (as is the case in Canada), and most people here are saying that dividend yield is equivalent to capital gains, in theory, dollar for dollar, then wouldn't it be wise to take the tax-favoured approach? While tax implications aren't the ONLY consideration to take while building a portfolio, they should certainly be a consideration.

In Canada qualified dividends only get that tax benefit over capital gains in Non-Registered accounts not RRSP accounts [TFSA are tax free once $$ invested, but are at the moment very limited in size].

Also dividends come when they come so you can't manage them the same way you can capital gains to realize them at tax optimized times.

Qualified dividends are limited in scope so you either only will have a small % of them in your portfolio or you will be poorly diversified. All capital gains in a Non-Registered account qualify for a reduced marginal tax rate which allows for better diversification.

My taxable account is just in the beginning stages, so I'm still trying to figure this out. Is it not possible to solve the diversification and irregular income issues by buying monthly income funds, such as XDV or XEI, that have diverse holdings of Canadian equities? Also I own a pref share fund (ZPR) in my taxable account which pays monthly, and since pref shares are part of my AA, this seems like the best place to hold them because of the tax advantage. As mentioned above, I do own other things (VDU, VTI, VUN, etc) in my registered accounts, but I'm trying to figure out my taxable act in a way that works best for me (low-ish income, and requiring simple, tax efficient monthly income-producing assets.) I hope I'm not derailing the thread, but I'm just trying to understand the "don't-focus-on-dividend-yield" rationale, and whether or not it is true for my situation.

Retire-Canada

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Re: Ok, bring on the wolves
« Reply #44 on: February 03, 2016, 01:13:47 PM »
Is it not possible to solve the diversification and irregular income issues by buying monthly income funds, such as XDV or XEI, that have diverse holdings of Canadian equities?

If you just want to have some qualified CDN dividend producing equities in your Non-Reg account which is a small part of your portfolio that is not a problem.

What your posts above seem to indicate is a desired to really optimize your portfolio along those lines as a main aim. There are a number of road blocks to doing so which I have identified.