Early Retirement Portfolio Income Update, April 2016

dividendmono225I 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 absolute 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 4/14/15) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.94% 0.46%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.80% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.82% 0.66%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.03% 0.10%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 4.21% 0.24%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
20% 2.90% 0.60%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 0.82% 0.26%
Totals 100% 2.31%

The total weighted 12-month yield was 2.31%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $23,100 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 market valuations (valuations go up probably means 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 overall income will 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 2.12%. Taken 4/14/2016.

So how am I doing? Staying invested throughout the last 10 years has been good to me. Using the 2.31% income yield, the combination of ongoing savings and recent market gains have us at 88% 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 conservative number, even with the many current predictions of modest future returns.

Comments

  1. Linda Buchanan says:

    I enjoy your newsletter very much. Do you know of anyone who writes a newsletter but uses Fidelity accounts vice Vanguard?

  2. John,
    Your math on TIPS doesn’t add up. It should be 10bps lower. 0.2 x 0.82% = 0.164%.
    Also, how about capital gains? I don’t think you mentioned how your portfolio performed in that area.
    Thanks.

  3. Scott Guirlinger says:

    I don’t know that annual yield can be compared with withdrawal rate. You’re not trying to maintain your nest egg; you’re trying to make sure it doesn’t run out too soon.

    4% withdrawal rate with 30 year spending horizon and 2.31% annual yield still leaves you with $240,000. You would not run out of funds until somewhere during your 38th year.

  4. If you’re looking for income, another option is peer-to-peer lending and real estate.

    There’s more risk, of course, but if you have enough loans/properties it spreads the risks out. And the income will be significantly higher than 2.3%.

    I have P2P loans and real estate and am adding dividend-producing stocks. I believe in multiple, diversified income generators.

  5. Tom Stephens says:

    Look at James Alpha – a mutual fund of only publicly traded REITs – consistently high dividends because underlying commercial real estate payments are generally much more predictable than corporation profits.

    • Look at James Alpha – it underperformed S&P 500 by 60% and Vanguard REIT index fund by nearly 50% in the last 5 years. Also, look what happened to it in mid 2013 when the Fed started to talk about rates increase.
      Why do you think it is good investment?

  6. Immigrant in CA says:

    What is the fidelity equivalent of Vanguard LifeStrategy Moderate Growth Fund (VSMGX)?

  7. MMB,

    Nice breakdown and 2.3% is not “too” bad. Have you considered aristocrats, though, that are > 3% to bring that closer to that metric – surely an extra $7-$10K will help you feel better about living off that income, no?

    -Lanny

  8. grandola says:

    This is a lot to keep track of. I have found that a simple allocation of 20% to SPY, 20% to QQQ, 40% to TLT, and 20% to VNQ works best. It has a good track record of outperforming the S&P, has a significantly less drawdown, and down years are much less impacted than what the S&P has experienced, plus I would wager that the income is equal to or better than what you are experiencing with your allocation over the long term.

  9. Investing in US Real Estate might be a bad idea. I know all the banks are regulated hard rules after GFC. but still.. investing in US real estate, can be a bad idea.

  10. Am a newbie and enjoy your info. I am trying to determine my yield, but don’t know where to find on Morningstar. Found the trailing 12-month yield but not yield contribution. Btw, I called fidelity about four months ago and they did not know how to determine which of their funds had the best payouts. Thanks for your blog.

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