Income Portfolio Questions

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Topic Author
baseballcb95
Posts: 17
Joined: Mon Dec 03, 2012 5:12 pm

Income Portfolio Questions

Post by baseballcb95 »

Hey Bogleheads!

I am turning 18 in a few months and have about $15,000 invested (total) in various funds that different family members have set up for me. Most havent been doing well the past few years, they have high expense ratios, and I like being in control. I plan on closing out these funds and starting an income portfolio based on dividends (to build up over 30+ years). My ultimate (and probably unrealistic) goal is to be able to live comfortably off the dividends.

I currently have about ~5,000 in checking+savings, and I contributed 4,000 to my roth IRA this past year. I have a college fund set up and no monthly expenses.

Now I have a couple questions that I am hoping you guys can help with:

1) Is this a good step to take? (I am not working much right now and wont be this year because of college, so I'd say the most I could possibly contribute to my IRA this year is about $1,000.)

2) Where should I hold these dividend paying stocks? I may not have to worry about taxes now, but since I am in it for the long haul, I want to make the right choice...

3) How many companies should I divide the money up between? I was thinking maybe 5? Pick five different sectors and my favorite company within that sector?

4) Is there a better alternative for the $15,000?

THANK YOU, I REALLY APPRECIATE ANY INPUT

baseballcb95
DualIncomeNoDebt
Posts: 436
Joined: Wed Jul 18, 2012 3:38 am

Re: Income Portfolio Questions

Post by DualIncomeNoDebt »

Instead of picking five companies, I'd suggest investing in a dividend growth fund instead. Maybe something like Vanguard Dividend Growth Fund (VDIGX).

Remember companies can reduce, or even suspend, a dividend with a simple board vote. Share price usually suffers when that happens. So you lose both income and capital. For a long time people thought huge bluechip stocks General Electric and General Motors would never cut their dividends. Same thing with massive banks like Citigroup. Just a few years ago during the crisis GE cut its dividend around 70%, and GM suspended its dividend on the way to bankruptcy. Citigroup still hasn't recovered from its 10-1 reverse stock split. There's a lesson for you there.
Topic Author
baseballcb95
Posts: 17
Joined: Mon Dec 03, 2012 5:12 pm

Re: Income Portfolio Questions

Post by baseballcb95 »

DualIncomeNoDebt wrote:Instead of picking five companies, I'd suggest investing in a dividend growth fund instead. Maybe something like Vanguard Dividend Growth Fund (VDIGX).

Remember companies can reduce, or even suspend, a dividend with a simple board vote. Share price usually suffers when that happens. So you lose both income and capital. For a long time people thought huge bluechip stocks General Electric and General Motors would never cut their dividends. Same thing with massive banks like Citigroup. Just a few years ago during the crisis GE cut its dividend around 70%, and GM suspended its dividend on the way to bankruptcy. Citigroup still hasn't recovered from its 10-1 reverse stock split. There's a lesson for you there.
Thank you for the advice.. I am not afraid of risk but will consider that fund, my roth is with vanguard and i couldn't be happier. Where would be the best place to keep that fund?
DualIncomeNoDebt
Posts: 436
Joined: Wed Jul 18, 2012 3:38 am

Re: Income Portfolio Questions

Post by DualIncomeNoDebt »

I think the general rule of thumb is to put bond funds in your tax-advantaged accounts (Roth, IRA, 401k, etc.), and perhaps the dividend fund in your regular brokerage account (if you have one, which you almost certainly do if you are with Vanguard).

Never too early to learn. So read this: http://www.bogleheads.org/wiki/Principl ... _Placement. Will really help you.
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: Income Portfolio Questions

Post by Default User BR »

I don't see much point in a young person investing in dividend-payers. This is the latest hot buzzword topic. You'd be better off with a diversified portfolio and adding to it over the years. You can worry about living off dividends when you have enough that it's a possibility.


Brian
NYBoglehead
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Joined: Fri May 25, 2012 9:38 am

Re: Income Portfolio Questions

Post by NYBoglehead »

I'd go with the Total Stock Market fund for the long haul. It still pays out roughly 2% in dividends, which isn't much lower than dividend focused funds once you plug the numbers. The TSM Admiral shares also have a .06 expense ration compared to .34 for the Dividend growth fund. So Dividend Growth fund would have to pay out 28 bps higher in dividends AND experience the same price appreciation.

Go with the TSM. If you build it up over the years there is a very good possibility that you can survive off just the dividends (but go for a total return approach, why limit yourself to what you can spend in retirement?)

The best thing you can do with any excess money after contributing to a Roth is to completely avoid accruing any debt while in college. Max out the Roth, stay out of debt, and with any excess funds maintain an adequate emergency fund for the post college years and being a taxable account.

The fact that you are already thinking about this at 18 tells me you are going to be just fine.
Topic Author
baseballcb95
Posts: 17
Joined: Mon Dec 03, 2012 5:12 pm

Re: Income Portfolio Questions

Post by baseballcb95 »

Default User BR wrote:I don't see much point in a young person investing in dividend-payers. This is the latest hot buzzword topic. You'd be better off with a diversified portfolio and adding to it over the years. You can worry about living off dividends when you have enough that it's a possibility.

Brian
Thank you for the response.. Wouldn't that be too late though? I mean if you want to live off dividends at say 50, you can't just put all of your money into a stock with a 3% yield at 49 and call it a day.. Don't you have to build up shares over time through a dividend reinvestment plan? I could be way off as every member on this forum is likely more knowledgable than myself..

But in a perfect world, I was thinking about this scenario: buy ~$2,000 worth of 5 different companies in different sectors that are dividend aristocrats. Reinvest the dividends while monitoring the company and their dividend. If the dividend decreases, company falters, they borrow money to pay the dividend, etc. Then pull my money from that position. 30 years down the road I will own thousands of shares of ~15-20 stable companies in different sectors that continue to pay dividends.. I would factor in growth potential as well as income potential when researching these companies by the way.

Idk, is that unrealistic? a fantasy or possibility?
Johm221122
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Re: Income Portfolio Questions

Post by Johm221122 »

baseballcb95 wrote:
Default User BR wrote:I don't see much point in a young person investing in dividend-payers. This is the latest hot buzzword topic. You'd be better off with a diversified portfolio and adding to it over the years. You can worry about living off dividends when you have enough that it's a possibility.

Brian
Thank you for the response.. Wouldn't that be too late though? I mean if you want to live off dividends at say 50, you can't just put all of your money into a stock with a 3% yield at 49 and call it a day.. Don't you have to build up shares over time through a dividend reinvestment plan? I could be way off as every member on this forum is likely more knowledgable than myself..

But in a perfect world, I was thinking about this scenario: buy ~$2,000 worth of 5 different companies in different sectors that are dividend aristocrats. Reinvest the dividends while monitoring the company and their dividend. If the dividend decreases, company falters, they borrow money to pay the dividend, etc. Then pull my money from that position. 30 years down the road I will own thousands of shares of ~15-20 stable companies in different sectors that continue to pay dividends.. I would factor in growth potential as well as income potential when researching these companies by the way.

Idk, is that unrealistic? a fantasy or possibility?
It is possible but try BOGLEHEADS philosophy

'A simple portfolio has many advantages. It almost always lowers costs (including taxes), makes analysis easier, simplifies rebalancing, simplifies tax-preparation, reduces paper-work and record-keeping, and enables caregivers and heirs to easily take-over the portfolio when necessary. Best of all, a simple portfolio allows you tospendmore time with family and friends, and less time managing your finances.

A portfolio held by many Bogleheads forum members is the three fund portfolio, which allocates investments among a U.S. Total stock market index fund, aTotal International stock market index fund, and a U.S Total bond market index fund."
John
http://www.bogleheads.org/wiki/Boglehea ... philosophy
Default User BR
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Re: Income Portfolio Questions

Post by Default User BR »

baseballcb95 wrote:Thank you for the response.. Wouldn't that be too late though? I mean if you want to live off dividends at say 50, you can't just put all of your money into a stock with a 3% yield at 49 and call it a day.. Don't you have to build up shares over time through a dividend reinvestment plan? I could be way off as every member on this forum is likely more knowledgable than myself.
Your focus should be on accumulating and diversifying your money into a variety of investments. Dividends are one way a stock grows. The other is capital appreciation (share value). Both are important.


Brian
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Sbashore
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Location: USA

Re: Income Portfolio Questions

Post by Sbashore »

I agree with some of the comments above. My first thought was at your age you should not limit yourself to a focus on dividends. Total return is what's important. So having said that I think you should begin to use the resources of this site, especially the wiki, to educate yourself. You've already got a leg up by being concerned at your age! Congratulations. :happy
Steve | Semper Fi
FinancialDave
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Joined: Thu May 26, 2011 9:36 pm

Re: Income Portfolio Questions

Post by FinancialDave »

I think the Vanguard Total Stock Market Index Admiral shares is the way to go (VTSAX). This is much safer, and IMO will end up being a much larger nest egg for you.

NO, you do not have to build up the dividend payers over time. I just retired last year, and what I did was over the last year or two sell out of enough of my existing stocks and funds to create a portfolio of 20 dividend payers that supports my income needs. The rest is left to grow in the index funds in case I should need it later. Retiring at 50 is an admirable plan, but don't get set on this - as most IRA or 401k money cannot be accessed until 55 or 59 1/2.

Also if you are using a taxable account putting dividend payers in there will be pretty expensive tax-wise. Try to fund your Roth to the max and or 401k (if you have one.)

fd
I love simulated data. It turns the impossible into the possible!
Topic Author
baseballcb95
Posts: 17
Joined: Mon Dec 03, 2012 5:12 pm

Re: Income Portfolio Questions

Post by baseballcb95 »

FinancialDave wrote:I think the Vanguard Total Stock Market Index Admiral shares is the way to go (VTSAX). This is much safer, and IMO will end up being a much larger nest egg for you.

NO, you do not have to build up the dividend payers over time. I just retired last year, and what I did was over the last year or two sell out of enough of my existing stocks and funds to create a portfolio of 20 dividend payers that supports my income needs. The rest is left to grow in the index funds in case I should need it later. Retiring at 50 is an admirable plan, but don't get set on this - as most IRA or 401k money cannot be accessed until 55 or 59 1/2.

Also if you are using a taxable account putting dividend payers in there will be pretty expensive tax-wise. Try to fund your Roth to the max and or 401k (if you have one.)

fd
Is that fund (VTSAX) okay to hold in a taxable account? Love the expense ratio (is that the only benefit of admiral shares?), and risk reward with 98% US stocks.. Thanks for the suggestion!
Topic Author
baseballcb95
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Joined: Mon Dec 03, 2012 5:12 pm

Re: Income Portfolio Questions

Post by baseballcb95 »

baseballcb95 wrote: Is that fund (VTSAX) okay to hold in a taxable account?
Is the expense ration the only benefit of admiral shares?
Any help with these two questions?
KyleAAA
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Contact:

Re: Income Portfolio Questions

Post by KyleAAA »

baseballcb95 wrote:
baseballcb95 wrote: Is that fund (VTSAX) okay to hold in a taxable account?
Is the expense ration the only benefit of admiral shares?
Any help with these two questions?
Yes to both questions.
Topic Author
baseballcb95
Posts: 17
Joined: Mon Dec 03, 2012 5:12 pm

Re: Income Portfolio Questions

Post by baseballcb95 »

FinancialDave wrote:I think the Vanguard Total Stock Market Index Admiral shares is the way to go (VTSAX). This is much safer, and IMO will end up being a much larger nest egg for you.

NO, you do not have to build up the dividend payers over time. I just retired last year, and what I did was over the last year or two sell out of enough of my existing stocks and funds to create a portfolio of 20 dividend payers that supports my income needs. The rest is left to grow in the index funds in case I should need it later. Retiring at 50 is an admirable plan, but don't get set on this - as most IRA or 401k money cannot be accessed until 55 or 59 1/2.

Also if you are using a taxable account putting dividend payers in there will be pretty expensive tax-wise. Try to fund your Roth to the max and or 401k (if you have one.)

fd
Is it okay that I already own part of this investor class fund in my Target Retirement 2055 roth IRA?
FinancialDave
Posts: 1819
Joined: Thu May 26, 2011 9:36 pm

Re: Income Portfolio Questions

Post by FinancialDave »

baseballcb95 wrote:
FinancialDave wrote:I think the Vanguard Total Stock Market Index Admiral shares is the way to go (VTSAX). This is much safer, and IMO will end up being a much larger nest egg for you.

NO, you do not have to build up the dividend payers over time. I just retired last year, and what I did was over the last year or two sell out of enough of my existing stocks and funds to create a portfolio of 20 dividend payers that supports my income needs. The rest is left to grow in the index funds in case I should need it later. Retiring at 50 is an admirable plan, but don't get set on this - as most IRA or 401k money cannot be accessed until 55 or 59 1/2.

Also if you are using a taxable account putting dividend payers in there will be pretty expensive tax-wise. Try to fund your Roth to the max and or 401k (if you have one.)

fd
Is it okay that I already own part of this investor class fund in my Target Retirement 2055 roth IRA?
It is fine, you just have to remember to add all your accounts together when determining if you are close to your asset allocation.

Once you get farther along in the size of your accounts (>$100k) you may want to branch out to add some other funds much like you already have in the Vanguard 2055, and maybe even the Vanguard REIT index.


fd
I love simulated data. It turns the impossible into the possible!
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