Bogleheads

[MollyRN]

We (recent retirees) have a chunk of change coming soon from maturing CDs in our taxable account. About 25% of our total portfolio is in tax deferred IRAs (in VG total bond Idx), & 75% taxable. Would like to generate income from taxable. Would Wellesly be a good fund to put this in? Any other suggestions? Many thanks for any input, especially from retirees. Molly

[bob90245]

As a conservative (40/60 stocks/bonds), all-in-one fund to draw off income, I think it would be a good choice. Just realize that, unlike a CD, the Net Asset Value will fluctuate.

[Sheepdog]

For income, it is an excellent choice. It has 35% in value stocks with their dividends for growth. It's present yield is 4.4%. It is my major income fund. I, however, am taking distribution from Target Retirement Income (30% stocks 4.1% yield) and Life Strategy Income (27% stock and 4.1% yield).
Jim
_________________
Frame every so-called disaster with these words "in five years, will this matter?"

[Sheepdog]

[at ease]

Sheep Dog,
how is it on capital gains in a taxable account ? recently i asked a Vanguard rept. about it and she suggested Target Retirement Income might be an alternative to consider because of possible cap.gains and the unplesant year end tax suprise? i see you use 3 income funds , based on your experience, what fund or combo would you suggest for income and a little growth to offset inflation, in a taxable account??

[ken250]

Molly,

Wellesley Income (VWINX) is an excellent fund for your stated purpose. Don't forget that Admiral Shares are available for it.

But what you need to be careful of is the income from VWINX is largely taxable as normal income because of the heavy bond allocation in the fund. This means you want to be spending the income from VWINX.

It's ok if you reinvest a small amount of the income each year as an inflation adjustment, but just make sure you spend most, if not all, of the income.

If qualified dividends are extended or made permanent you might consider a small allocation to Equity Income in your taxable account also.

[dbr]

If you want income a capital gains distribution should be fine. The "nasty year end surprise" doesn't apply if you would take the income anyway, for example by selling shares of the fund. The real issue if you are taking income is to look at whether any of the distribution is ST rather than LT and what fraction of the dividends is qualified vs. not qualified.

As stated a balanced fund that contains bonds will have significant unqualified dividends. If you really think you have a tax problem then a pure equity fund balanced with a tax exempt bond fund could generate higher after tax income, depending on your tax bracket, including state tax. In high tax states LT gains may not receive preferential treatement (they don't in at least 22 states that have income tax).

Off the cuff advisors at Vanguard really should not be making tax based fund recommendations without having very specific information regarding the tax position of the investor. A good way to see what might happen is to go into some tax prep software such as Turbotax and dummy up some scenarios for yourself. Be aware that tax brackets, exemptions, and AMT thresholds change from year to year.

This page at Vanguard may help with the distributions https://personal.vanguard.com/....I&Sc=0

[mijo40]

Would someone who owns Wellesley have the breakdown on the percentage of dividends that are qualified gains? I suppose being heavily in bonds the percentage would be rather low.

Being retired, but looking for some income I would like to have as much as possible tax favored. Money Mkt, CD's and bonds are not very desirable on that count.

Milan

[ken250]

mijo40,

A little over 28% of VWINX's income is qualified, as of 12/2007.

Do a search on the VG site for "qualified dividends".

NOTE: VWINX provides interest and dividend income.

[mijo40]

ken250,

Thanks, my brain isn't working this morning. I thought I had looked everywhere but for some reason didn't think to do a search.

Milan

[MollyRN]

Thank you all! You have given me things to think about re: capital gains while also giving me reassurance re: VWINX for income. Our CDs were all taxed as ordinary income & I want to avoid that if possible. My job now is to figure approx amt of income we need from this chunk of $, then add any extra to other funds such as total stock & international (which we want to increase anyway to get better asset allocation). 2007 fed tax rate will be 31% (because of overenthusiatic selling hi cost stocks all in the same yr); state is 6% but next yr fed rate should back down 28%. Again, it's great to have this forum & get such thoughtful responses! Molly

[BigD53]

From the Vanguard website:

"Vanguard® Wellesley® Income Fund seeks to provide long-term growth of income and a high and sustainable level of current income, along with moderate long-term capital appreciation."

Ivestment strategy:

"The fund invests approximately 60% to 65% of its assets in investment-grade corporate, U.S. Treasury, and government agency bonds, as well as mortgage-backed securities. The remaining 35% to 40% of fund assets are invested in common stocks of companies that have a history of above-average dividends or expectations of increasing dividends."

Perhaps a combination of Target Retirement Income and Wellesley would be to your liking. Of course, be sure to consult a tax professional.

Wellesley has an outstanding performance history and a current yield of 4.31%. The manager holds 50 stocks in the portfolio.

Target Retirement Income has total diversity of U.S. stocks and Foreign stocks. On the bond side, you have Total Bond Index and TIPS. Very nice performance and a current yield of 4.08%.

[Bob]

Looking at Vanguard's historic data on their site, Wellesley Income looks like a good choice for a fund for Income. If I remember, somewhere on this forum there was also some analysis of how it did over time given annual withdrawls, and if I remember right, it kept capital pretty steady over time even as one took out the dividends.

Question I have is how could one best create their own "do-it-yourself" version of a Wellesley Income-like portfolio using just Index funds (or ETFs) so one could keep expenses low, reduce ST Gains (vs. LT ones) so taxes are lower, and also still keep the income level of the stock dividends that Wellesley Income does with their very selective choices.

Anyone tried to do this?

[ken250]

Bob,

You may wish to take a look Stein & DeMuth's "Successful Income Investor" and "Retiring Comfortably", a lot of good income on building an income/dividend portfolio and SWRs.