Portfolio with 3.2% Yield

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
scarson
Posts: 23
Joined: Thu Sep 13, 2018 5:28 pm

Portfolio with 3.2% Yield

Post by scarson » Fri Sep 21, 2018 12:48 pm

My current 401(K) is in a Fidelity Target fund and I am not happy with their expense ratio and also the active funds within it. I am moving to a new job next month and they have Vanguard funds in their plan. I am thinking of the below allocations.

VWINX - Vanguard Wellesley Income Fund - 34%
VHDYX - Vanguard High Dividend Yield - 33%
VDAIX - Vanguard Dividend Appreciation - 33%

The dividend yield of above blended portfolio is 3.2% and has a 5% annual dividend growth.

The above portfolio is 65% stocks and 35% bonds and returned around 11.3% a year when I back tested it in Portfolio Visualizer from 2007 until 2018. During the same time period a balanced fund (I tested with Fidelity Balanced FBALX) generated 10.2% per year and the current dividend of FBALX is 1.45%.

Do you see any risks with this portfolio or can it be improved further?

Thanks

Sam

User avatar
whodidntante
Posts: 4054
Joined: Thu Jan 21, 2016 11:11 pm

Re: Portfolio with 3.2% Yield

Post by whodidntante » Fri Sep 21, 2018 12:56 pm

Yes, I see uncompensated risks with this portfolio. Dividends are not a source of risk and return; they are a way of returning capital to investors. A total return approach where you sell to achieve return of capital is preferred in my opinion.

aristotelian
Posts: 4687
Joined: Wed Jan 11, 2017 8:05 pm

Re: Portfolio with 3.2% Yield

Post by aristotelian » Fri Sep 21, 2018 12:57 pm

You are making selective bets on certain types of stocks. You are taking a risk that you may underperform (as Wellesley has this year). Also, having a high dividend yield can give you less flexibility in managing your tax efficiency.

Darth Xanadu
Posts: 453
Joined: Sat Jan 27, 2018 1:47 am
Location: Middle Earth

Re: Portfolio with 3.2% Yield

Post by Darth Xanadu » Fri Sep 21, 2018 1:07 pm

aristotelian wrote:
Fri Sep 21, 2018 12:57 pm
You are making selective bets on certain types of stocks. You are taking a risk that you may underperform (as Wellesley has this year). Also, having a high dividend yield can give you less flexibility in managing your tax efficiency.
But distributions in a 401k plan are not a taxable event.
"A courageous teacher, failure is."

scarson
Posts: 23
Joined: Thu Sep 13, 2018 5:28 pm

Re: Portfolio with 3.2% Yield

Post by scarson » Fri Sep 21, 2018 1:09 pm

I dont understand the risk, the average annual total return of this portfolio is a little higher than 11% and this includes the 2007-2008 subprime financial crisis. The 3% dividend will be paid even if we get into an extended bear market for 10 years. So I need not rely on capital withdrawal and the 3% meets the IRS SEEP portion since I am planning to retire at 55 which is 6 years from now.

Maybe I am missing something.

Sam

Admiral
Posts: 1367
Joined: Mon Oct 27, 2014 12:35 pm

Re: Portfolio with 3.2% Yield

Post by Admiral » Fri Sep 21, 2018 1:15 pm

Past results are not indicative of future returns. And certainly not a recent 10 year period which correlates to and is predictive of nothing.

Take a look at the Three Fund Portfolio in the Wiki.

Why are you worried about high-yield funds and dividends? Unless you're retired and need dividend income to live on, I see no reason to base a portfolio on dividend paying stocks/stock funds.

User avatar
David Jay
Posts: 5632
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Portfolio with 3.2% Yield

Post by David Jay » Fri Sep 21, 2018 1:17 pm

Sam:

Funds that focus on dividends typically have lower total return. This is especially true in the last 6-8 years as investors have been looking for "income" in a low interest rate environment. So you can expect higher total return from an SP500 fund or a Total Stock fund than from High Dividend or Dividend Appreciation style funds.

"Dividend investing" will lead you to lower performance.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

cheezit
Posts: 43
Joined: Sat Jul 14, 2018 7:28 pm

Re: Portfolio with 3.2% Yield

Post by cheezit » Fri Sep 21, 2018 1:21 pm

The risk is that the entirety of your equity allocation is in one portion of the market. You are making a large bet that the total return of high-dividend stocks will outpace or match the return of the total market going forward. You have near zero diversification benefit from multiple funds due to how similar the funds are, just as someone who split their whole equity allocation between IJR, NAESX and SPSM wouldn't have achieved much over only holding one of those funds.

scarson
Posts: 23
Joined: Thu Sep 13, 2018 5:28 pm

Re: Portfolio with 3.2% Yield

Post by scarson » Fri Sep 21, 2018 1:25 pm

Thanks a lot to all of you. I am convinced and will go for the popular 3 fund approach. I have some closed end funds in an IRA and will have to sell those now so the portfolio is simplified.

Sam :happy

User avatar
vineviz
Posts: 1721
Joined: Tue May 15, 2018 1:55 pm

Re: Portfolio with 3.2% Yield

Post by vineviz » Fri Sep 21, 2018 1:28 pm

scarson wrote:
Fri Sep 21, 2018 1:09 pm
I dont understand the risk, the average annual total return of this portfolio is a little higher than 11% ...
There's a typo in that sentence. The total return has been a little better than 11%, but there is no present tense when it comes to investment returns. You need to know this: picking funds that have done especially well in the past provides virtually no information about whether those funds will do well in the future. You are looking backwards at a portfolio of large cap US stocks during a period in which large cap US stocks have done better than usual. This is a terrible way to choose investments.
scarson wrote:
Fri Sep 21, 2018 1:09 pm
The 3% dividend will be paid even if we get into an extended bear market for 10 years.
You have no way to know this. Companies cut dividends frequently in times of stress.
scarson wrote:
Fri Sep 21, 2018 1:09 pm
So I need not rely on capital withdrawal ...
Dividends are a form of capital withdrawal. It's just that you are letting the companies pick the timing instead of picking it yourself.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

pkcrafter
Posts: 13067
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Portfolio with 3.2% Yield

Post by pkcrafter » Fri Sep 21, 2018 1:48 pm

scarson wrote:
Fri Sep 21, 2018 12:48 pm
My current 401(K) is in a Fidelity Target fund and I am not happy with their expense ratio and also the active funds within it. I am moving to a new job next month and they have Vanguard funds in their plan. I am thinking of the below allocations.

VWINX - Vanguard Wellesley Income Fund - 34%
VHDYX - Vanguard High Dividend Yield - 33%
VDAIX - Vanguard Dividend Appreciation - 33%

The dividend yield of above blended portfolio is 3.2% and has a 5% annual dividend growth.

The above portfolio is 65% stocks and 35% bonds

The stock allocation of this portfolio appears to be 77% stock.

and returned around 11.3% a year when I back tested it in Portfolio Visualizer from 2007 until 2018. During the same time period a balanced fund (I tested with Fidelity Balanced FBALX) generated 10.2% per year and the current dividend of FBALX is 1.45%.

Do you see any risks with this portfolio or can it be improved further?

Yes, it can be improved. Dividends don't really mean anything special since they are part of total return and that's what matters. Certainly the funds you've picked are good ones but they are all in the same category, so in practice, you aren't really well diversified. If your new 401k offers total stock market (first choice) or S%P 500, use one as core and then you can compliment with one of your dividend funds. Also consider 15-25% international, and don't compare anything with recent returns.

Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

bloom2708
Posts: 4797
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Portfolio with 3.2% Yield

Post by bloom2708 » Fri Sep 21, 2018 3:07 pm

List all the available options in your 401k by name and include the expense ratio.

That will make things easier. I would not do your proposed portfolio. Heavy concentration. Total Return > Dividend seeking.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

scarson
Posts: 23
Joined: Thu Sep 13, 2018 5:28 pm

Re: Portfolio with 3.2% Yield

Post by scarson » Fri Sep 21, 2018 3:21 pm

bloom2708 - Yet to join new job, HR person just said Vanguard funds - not sure if it means all or a select few

Thanks to all who answered

Sam

User avatar
whodidntante
Posts: 4054
Joined: Thu Jan 21, 2016 11:11 pm

Re: Portfolio with 3.2% Yield

Post by whodidntante » Sat Sep 22, 2018 9:14 am

scarson wrote:
Fri Sep 21, 2018 1:25 pm
Thanks a lot to all of you. I am convinced and will go for the popular 3 fund approach. I have some closed end funds in an IRA and will have to sell those now so the portfolio is simplified.

Sam :happy
I'm glad the responses here were helpful. If you would like a deeper understanding of why an investor should not prefer dividends, listen to this podcast.

Episode #28: Larry Swedroe “There is Literally No Logical Reason for Anyone to Have a Preference for Dividends”
https://mebfaber.com/2016/11/09/episode ... dividends/

User avatar
watchnerd
Posts: 1428
Joined: Sat Mar 03, 2007 11:18 am
Location: Seattle, WA, USA

Re: Portfolio with 3.2% Yield

Post by watchnerd » Sat Sep 22, 2018 6:29 pm

scarson wrote:
Fri Sep 21, 2018 12:48 pm

The above portfolio is 65% stocks and 35% bonds and returned around 11.3% a year when I back tested it in Portfolio Visualizer from 2007 until 2018. During the same time period a balanced fund (I tested with Fidelity Balanced FBALX) generated 10.2% per year and the current dividend of FBALX is 1.45%.

Backtesting is of limited usefulness, and even more limited within short windows. Why such a short window from 2007-2018?
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

KyleAAA
Posts: 6728
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Portfolio with 3.2% Yield

Post by KyleAAA » Sat Sep 22, 2018 9:25 pm

Dividends can and do get cut in a recession, so it's unwise to rely on that not happening.

tibbitts
Posts: 8006
Joined: Tue Feb 27, 2007 6:50 pm

Re: Portfolio with 3.2% Yield

Post by tibbitts » Sat Sep 22, 2018 9:37 pm

scarson wrote:
Fri Sep 21, 2018 1:09 pm
I dont understand the risk, the average annual total return of this portfolio is a little higher than 11% and this includes the 2007-2008 subprime financial crisis. The 3% dividend will be paid even if we get into an extended bear market for 10 years. So I need not rely on capital withdrawal and the 3% meets the IRS SEEP portion since I am planning to retire at 55 which is 6 years from now.

Maybe I am missing something.

Sam
Where did you get the impression dividends wouldn't be cut during a 10-year recession?

Post Reply