Early Retirement Portfolio Income Update, November 2015

monopoly_divI like the idea of living off dividend and interest income. Who doesn’t? The problem is that you can’t just buy stocks with the highest dividend yields and junk bonds with the highest interest rates without giving up something in return. There are many bad investments lurking out there for desperate retirees looking only at income. My goal is to generate reliable portfolio income by not reaching too far for yield.

A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).

Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 11/5/15) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.92% 0.46%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.98% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.83% 0.66%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.44% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.92% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
20% 2.99% 0.60%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 1.31% 0.26%
Totals 100% 2.41%

The total weighted 12-month yield was 2.41%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $24,100 in interest and dividends over the last 12 months. Now, that is significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I have previously used as a rough benchmark. I’ll note that the muni bond interest in my portfolio is exempt from federal income taxes.

Given the volatility of stock returns, the associated sequence of returns risk, and current high valuations, I still like the income yield measuring stick. I feel that the income yield number does a rough job of compensating for stock market valuations (valuations go up, probably dividend yield go down) as well as interest rates (low interest rates now, probably low bond returns in future). With 60% stocks, I am hoping that the dividends will at least keep up with inflation, and that I will never have to “touch the principal”. Over the last 15 years or so, the annual growth rate of the S&P 500 dividend averaged about 5%.

As noted previously, a simple benchmark for this portfolio is Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.07%. Taken 11/9/2015.

So how am I doing? Staying invested throughout the last 10 years has been good to me. Using the 2.24% income yield, the combination of ongoing savings and recent market gains have us at 84% of the way to matching our annual household spending target. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems like a very conservative number. As such, we are currently redirecting a chunk of our monthly savings into a college savings account. We are doing well and we want to help pay for our children’s higher education, so might as well get that tax-deferral started now.

Comments

  1. Hi Jonathan,

    Long time reader here – thanks for your website.

    I have one thing that worries me about Vanguard, Fidelity, and like places. I know that the SIPC limit is $250k? per account? (correct me if I’m wrong). If I currently have 50k in Vanguard, and assuming it will grow beyond 250k by the time I actually retire, should I fund it somewhere else like Fidelity or even another bank?

  2. I think you may have meant the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) when you were referencing a benchmark for a 60/40 stock/bond split. The fund that you referenced in the post (VASGX) is 80/20.

  3. Sofaking Nuts says:

    Which 529 plan do you use if you don’t mind my asking? I thought I had previously read you’re in the Utah plan. I’m trying to decide between Utah and Nevada and it’s probably splitting hairs.

    Thanks for all your work on this blog.

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