Need Income - Wellesley Income or Wellington Fund

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equivestor
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Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

Hi All, I am trying to figure out which fund will give me the most income, Wellesley Income (VWIAX) or the Wellington Fund (VWENX). I like both funds and will be investing approximately $500,000 in a taxable (non-retirement) account. Because each fund compliments each other, I thought about investing in both, but prefer not to rebalance in order to avoid further potential tax liability. I will probably re-invest the capital gains, if any, or use them, if absolutely necessary. I will be receiving a $30,000 per year state pension and want to use one of the above mentioned funds for additional income. I also have an 457 tax deferred account with $500,000 and a Roth IRA with $150,000. I will not be taking RMD's on the 457 until the year 2033, when I turn 70.5. I would like some advice, comments, opinions and suggestions regarding which fund(s) I should select. Thanks.
Last edited by equivestor on Mon Oct 06, 2014 9:25 pm, edited 1 time in total.
Tamales
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Re: Need Income - Wellesley Income or Wellington Fund

Post by Tamales »

I think Wellington is closed to new investors.
mjb
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Re: Need Income - Wellesley Income or Wellington Fund

Post by mjb »

Wellesley and Wellington are both tax inefficient due to their bond distributions and dividends. Both are good funds and Wellesley is intended for income and would be more predictable than Wellington.

Alternatively, for tax purposes, you could mimic the Wellesley fund by having 60% in an intermediate tax exempt bond fund and 40% in the total market fund or one of the dividend oriented funds (or value indicies).
jlawrence01
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Re: Need Income - Wellesley Income or Wellington Fund

Post by jlawrence01 »

Tamales wrote:I think Wellington is closed to new investors.
There is NO indication of that on the Vanguard website:

https://investor.vanguard.com/mutual-fu ... torder=asc
Tamales
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Re: Need Income - Wellesley Income or Wellington Fund

Post by Tamales »

jlawrence01 wrote:
Tamales wrote:I think Wellington is closed to new investors.
There is NO indication of that on the Vanguard website:

https://investor.vanguard.com/mutual-fu ... torder=asc
Interesting. I noticed it as being closed a couple weeks ago. It's indicated as closed on Mstar, and when I just tried to place an order via non-vanguard brokerage acct I got this message:
Order Messages: This fund is closed to new investors. Only accounts which currently have a position in this fund may place a buy order at this time.
Perhaps it's still open for new investment via Vanguard accounts?
investor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by investor »

A supplement to Welington Prospectus (of a few weeks back) states:

"Vanguard Wellington Fund will be closed to all prospective financial advisory, institutional, and intemediary clients (other than clients who invest through a Vanguard brokerage account). "

A current shareholders may continue to purchase, exchange, or redeem shares of the Fund online, by telephone or by mail.

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dbr
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Re: Need Income - Wellesley Income or Wellington Fund

Post by dbr »

equivestor wrote:Hi All, I am trying to figure out which fund will give me the most income, Wellesley Income (VWIAX) or the Wellington Fund (VWENX). I like both funds and will be investing approximately $500,000 in a taxable (non-retirement) account. Because each fund compliments each other, I thought about investing in both, but prefer not to rebalance in order to avoid further potential tax liability. I will probably re-invest the capital gains, if any, or use them, if absolutely necessary. I will be receiving a $30,000 per year state pension and want to use one of the above mentioned funds for additional income. I also have an 457 tax deferred account with $500,000 and a Roth IRA with $150,000. I will not be taking RMD's on the 457 until the year 2033, when I turn 70.5. I would like some advice, comments, opinions and suggestions regarding which fund(s) I should select. Thanks.
You don't have to adjust your investments so that distributions of dividends match your income need. Money is fungible meaning that you can withdraw from assets by collecting dividends, collecting capital gains distributions, or by selling shares. If distributions exceed desired income, the excess can be reinvested. The only thing that matters is the balance between how much you withdraw and what the total returns of the investment are from year to year. A secondary effect is the tax cost of how this is managed. If you manage that way you can set your income scheme any way you want it with no more than a few mouse clicks no matter how you are invested.

This point is view is not a philosophy or a choice but rather a mathematical absolute no matter what anyone prefers or how anyone thinks about the issue.

If it is a question of what funds to choose, the issue is not what distributions are made but rather what kind of assets are held by the funds. Choosing W & W is a specific choice of certain assets in stocks and bonds while there might be other types of portfolio constructions using different assets. I do not believe that it can be proven that W & W use asset allocations that are significantly superior to a total market three fund portfolio or to various sorts of slice and dice options. There will be people who are ready to jump up and argue that, to which everyone is welcome.
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bertilak
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Re: Need Income - Wellesley Income or Wellington Fund

Post by bertilak »

equivestor wrote:Hi All, I am trying to figure out which fund will give me the most income, Wellesley Income (VWIAX) or the Wellington Fund (VWENX). I like both funds and will be investing approximately $500,000 in a taxable (non-retirement) account. Because each fund compliments each other, I thought about investing in both, but prefer not to rebalance in order to avoid further potential tax liability.
I invest 50/50 in the two Ws. I do not worry about rebalancing. The relative value of the two funds will drift around a bit but that doesn't bother me since picking an AA is not an exact science anyway. The relative allocations to stocks vs bonds will drift even less than the relative allocation of the two Ws since each has both stocks and bonds at middle-of-the-road allocations. If I ever need to take money out or get the chance to put money in I will do so in a way to favor a 50/50 balance. (I did just take some out for a major septic system repair.)

If you are in a high tax bracket you might want to consider building your own with a stock fund and a muni bond fund, as mentioned above. To better replicate the Ws lean towards large-value stocks (Vanguard has a fund for that) but it is the large value stocks that tend to pay higher dividends. Check the details!
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
Dandy
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Re: Need Income - Wellesley Income or Wellington Fund

Post by Dandy »

Just a note of caution - VG does an honorable job of closing off investing in funds rather than having them grow beyond their portfolio team's ability to invest properly -- especially compared to other fund companies. That said is it a signal? that the assets size is getting somewhat near the point that would be a concern.

I would think twice before committing a large taxable investment to any fund that is active and may be getting too large to handle properly. It may not be a problem for several years (or ever) but if it does it may join the list of faded star funds. At that point you may be sitting on some large capital gains and will have a choice of paying taxes or staying with a faded star. Not so much of a problem in tax advantage accounts since you can move out without a tax issue.
Topic Author
equivestor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

Thanks to all of you for your responses. I have a follow up question regarding Wellesley (vwiax) and Wellington (vwenx). When interest rates rise will the dividend income distributed by wellesley/wellington also increase and will the net asset value of the funds go down? I'm curious as to how both these funds will react, with regards to income, in a rising interest rate environment, especially wellesley. Thanks.
Last edited by equivestor on Wed Nov 19, 2014 4:58 pm, edited 2 times in total.
Grt2bOutdoors
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Re: Need Income - Wellesley Income or Wellington Fund

Post by Grt2bOutdoors »

Dividends are based on earnings growth for the equity investors. Bond interest is based on yields - if rates rise the value of bonds will be impacted by duration of portfolio and credit quality of portfolio. NAV will fall most likely while yields may rise, though I would not be overly excited if the yield rose by 1 percent but nav falls by 3 percent.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
dbr
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Re: Need Income - Wellesley Income or Wellington Fund

Post by dbr »

Initially bond yields go up and bond NAVs go down, but the dividend payment remains constant.
Topic Author
equivestor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

I think I phrased my previous question incorrectly....but I think I understand now. These funds (W/W) produce yield income, which is bond income and dividend income, which is stock income. In a rising interest rate environment the bond yield should increase and the dividend income should remain constant?...so if income is the goal should Wellesley be the better fund?
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G12
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Re: Need Income - Wellesley Income or Wellington Fund

Post by G12 »

equivestor wrote:I think I phrased my previous question incorrectly....but I think I understand now. These funds (W/W) produce yield income, which is bond income and dividend income, which is stock income. In a rising interest rate environment the bond yield should increase and the dividend income should remain constant?...so if income is the goal should Wellesley be the better fund?
The expected return of Wellington should be higher longer term due to it higher equity allocation. If you are taking income from Wellesley in a rising interest rate scenario you would not benefit from the higher yielding bond scenario until bonds mature or are sold and reinvested by the fund. Dividend income tends to increase during expansions and can contract during recessions or worse, sometimes the decline is minimal, sometimes it's worse and highly dependent on the quality of the company and management decisions.
Topic Author
equivestor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

I'm sorry G12, I did not understand your response. Both funds pay out quarterly distributions. I will only be taking the quarterly distribution from the funds, whatever it may be and will not be touching the original investment. So given this, should Wellesley's distribution be higher if rates were higher?
leonard
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Re: Need Income - Wellesley Income or Wellington Fund

Post by leonard »

dbr wrote:
equivestor wrote:Hi All, I am trying to figure out which fund will give me the most income, Wellesley Income (VWIAX) or the Wellington Fund (VWENX). I like both funds and will be investing approximately $500,000 in a taxable (non-retirement) account. Because each fund compliments each other, I thought about investing in both, but prefer not to rebalance in order to avoid further potential tax liability. I will probably re-invest the capital gains, if any, or use them, if absolutely necessary. I will be receiving a $30,000 per year state pension and want to use one of the above mentioned funds for additional income. I also have an 457 tax deferred account with $500,000 and a Roth IRA with $150,000. I will not be taking RMD's on the 457 until the year 2033, when I turn 70.5. I would like some advice, comments, opinions and suggestions regarding which fund(s) I should select. Thanks.
You don't have to adjust your investments so that distributions of dividends match your income need. Money is fungible meaning that you can withdraw from assets by collecting dividends, collecting capital gains distributions, or by selling shares. If distributions exceed desired income, the excess can be reinvested. The only thing that matters is the balance between how much you withdraw and what the total returns of the investment are from year to year. A secondary effect is the tax cost of how this is managed. If you manage that way you can set your income scheme any way you want it with no more than a few mouse clicks no matter how you are invested.

This point is view is not a philosophy or a choice but rather a mathematical absolute no matter what anyone prefers or how anyone thinks about the issue.

If it is a question of what funds to choose, the issue is not what distributions are made but rather what kind of assets are held by the funds. Choosing W & W is a specific choice of certain assets in stocks and bonds while there might be other types of portfolio constructions using different assets. I do not believe that it can be proven that W & W use asset allocations that are significantly superior to a total market three fund portfolio or to various sorts of slice and dice options. There will be people who are ready to jump up and argue that, to which everyone is welcome.
OP - this seems like a very good point.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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G12
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Re: Need Income - Wellesley Income or Wellington Fund

Post by G12 »

equivestor wrote: I will only be taking the quarterly distribution from the funds, whatever it may be and will not be touching the original investment. So given this, should Wellesley's distribution be higher if rates were higher?
If you are invested in Wellesley when a rate increase occurs, the yield of the fund will be higher at that point due to a drop in the fund NAV (think of this as the value of the fund, when rates increase outstanding bond values decrease) but the distribution will remain the same until some bond turnover and subsequent reinvestment into higher yielding bonds by the fund managers occurs.
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G12
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Re: Need Income - Wellesley Income or Wellington Fund

Post by G12 »

It would be advantageous to you to run trial tax returns for what your early retirement scenario would look like and determine how much qualified dividends you can receive to keep your tax costs low. Look up the W/W annual distributions from recent years, determine how much was tax friendly, ie QDI, and see how different investment scenarios would impact you. Then determine if W/W helps you get to where you want or are other options more advantageous to you along your retirement path. It may sound like a PITA, but can greatly help you down the road.
Topic Author
equivestor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

G12 wrote:
equivestor wrote: I will only be taking the quarterly distribution from the funds, whatever it may be and will not be touching the original investment. So given this, should Wellesley's distribution be higher if rates were higher?
If you are invested in Wellesley when a rate increase occurs, the yield of the fund will be higher at that point due to a drop in the fund NAV (think of this as the value of the fund, when rates increase outstanding bond values decrease) but the distribution will remain the same until some bond turnover and subsequent reinvestment into higher yielding bonds by the fund managers occurs.
Got it! thanks
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bertilak
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Re: Need Income - Wellesley Income or Wellington Fund

Post by bertilak »

equivestor wrote:I'm sorry G12, I did not understand your response. Both funds pay out quarterly distributions. I will only be taking the quarterly distribution from the funds, whatever it may be and will not be touching the original investment. So given this, should Wellesley's distribution be higher if rates were higher?
In a bond fund, as the individual bonds mature, they get sold off and replaced by newer bonds. If rates are going up these newer bonds will have higher returns, meaning the bond fund will also have higher returns overall. There is a delay related to the maturity of the bonds currently held by the fund -- they will not all mature at the same time. In the mean time, the bonds that have not (yet) sold off will lose value causing the NAV of the fund to go down but this is temporary since as bonds reach their maturity date their NAV moves towards their nominal value, recovering that NAV loss. You are also getting paid and perhaps reinvesting those increasing dividends as this NAV recovery happens. This is all complicated by the fact that interest rates are always changing so nothing ever "settles down."

Bottom line, rising rates are bad short-term and good long-term. The shorter the duration, the shorter short-term is. The trade-off is that shorter durations have an inherently lower return (usually).
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
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bilperk
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Re: Need Income - Wellesley Income or Wellington Fund

Post by bilperk »

equivestor wrote:I'm sorry G12, I did not understand your response. Both funds pay out quarterly distributions. I will only be taking the quarterly distribution from the funds, whatever it may be and will not be touching the original investment. So given this, should Wellesley's distribution be higher if rates were higher?
The truth is, no one really knows exactly what will happen. First, just because the FED raises rates by say .25%, that doesn't mean that intermediate corp rates will necessarily rise. Also, in addition to rate rises, there are behavioral factors, like every one with their fingers on the trigger waiting to run for the exits that could cause deep temporary NAV declines even with a very modest rate increase.

Also, we don't know what will be going on with the equity portion. Increasing rates often hurt equities also.

If you are a long term holder, you should expect to get more dividends from Wellesley (dividends being equity and bond distributions) but more capital gains from Wellington, due to its 50% more equity allocation. For example, this year Wellington is set to distribute 3.3% in capital gains, while Wellesley is less than half that.

As mentioned above, however, total return for a given level of risk is the only real benchmark as to which fund will be superior, including the 3 fund portfolio. Unfortunately, we can't really know that in advance. What you can know and control, however is how much tax you have to pay. A fund that distribues more than you need in a taxable account forces you to pay taxes you don't need to pay and lowers the capital available to work for you.

For that reason, I would look for tax efficient funds in your case.
Bill
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Re: Need Income - Wellesley Income or Wellington Fund

Post by sport »

You might want to think in terms of "total return" rather than "income". A dollar that is withdrawn can be spent just as easily as a dollar of dividends. The fund that "returns" the most dollars is what you want rather than the one that yields the most dollars. Yield consists of dividends. Return consists of dividends plus distributed capital gains and undistributed capital gains. You can spend any of those if you wish.
Jeff
Topic Author
equivestor
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Re: Need Income - Wellesley Income or Wellington Fund

Post by equivestor »

thanks to everyone for your comments...
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