Solid income portfolio?

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vu8
Posts: 339
Joined: Tue May 29, 2018 10:15 am
Location: Columbus, Ohio

Solid income portfolio?

Post by vu8 » Sun Mar 17, 2019 6:42 pm

Hi there, provided I already have a well diversified low cost index fund portfolio, can I build a second portfolio specifically for income? (Little earned income besides this)

1/3 Vanguard REIT (4-5%)
1/3 High yield junk bond (5-6%)
1/3 emerging market bonds (5-6%)?

Is this a good 2nd portfolio to be built specifically for income? (Expenses 20000 a year, so only need 500000 to satisfy my living)

delamer
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Joined: Tue Feb 08, 2011 6:13 pm

Re: Solid income portfolio?

Post by delamer » Sun Mar 17, 2019 6:50 pm

Well, you can.

But you always should be investing for total return.

What happens when the value of your income portfolio takes a nose dive?

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steve roy
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Re: Solid income portfolio?

Post by steve roy » Sun Mar 17, 2019 6:58 pm

You could rope in various instruments for income. Since what you show is higher risk, lower risk instruments could be ...

Vanguard Short-Term Bond
Vanguard Prime Money Market
Laddered bank CDs ...

Higher Risk stuff (like you already have) ...

Pimco Enhanced Short Maturity Active ETF
Fidelity Floating Rate-High Income (etc.)

Another way to go is use bond-stock combinations ...

Vanguard Target Date Income (bonds/stock)
Vanguard Wellesley
Vanguard Life Strategy Conservative Growth
Vanguard Tax Managed Balance Fund ... (etc.)

There aren't any iron-clad guarantees. You want higher returns, you take higher risks to get them. Way it works.

satoriboat
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Re: Solid income portfolio?

Post by satoriboat » Sun Mar 17, 2019 7:06 pm

With all due respect to delamer, " what happens when the value of your income portfolio takes a nose dive?" This Is the difference between a total return BH and and a retiree who is deaccumulator and income guy. The total return BH will be selling low, incurring a permanent lose of capital. The income guy gets needed cash flow and retains shares.

delamer
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Re: Solid income portfolio?

Post by delamer » Mon Mar 18, 2019 11:52 am

satoriboat wrote:
Sun Mar 17, 2019 7:06 pm
With all due respect to delamer, " what happens when the value of your income portfolio takes a nose dive?" This Is the difference between a total return BH and and a retiree who is deaccumulator and income guy. The total return BH will be selling low, incurring a permanent lose of capital. The income guy gets needed cash flow and retains shares.
My point actually was that the income portfolio will not necessarily generate the same income if there is a drop off in the portfolio value.

Some people have the idea that an income portfolio yields the same dollar amount of income through all market conditions, and that is not true. Nor does a total return portfolio yield the same return, of course.

But many income investors have a false sense of security in terms of their income staying constant regardless of what the stock market is doing. As an example, it took 4 years for S&P 500 dividends to get back to the same (nominal) level during the Great Recession.

And, just for the record, I am not a guy. :wink:

ohai
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Re: Solid income portfolio?

Post by ohai » Mon Mar 18, 2019 12:12 pm

1/3 Vanguard REIT (4-5%)
1/3 High yield junk bond (5-6%)
1/3 emerging market bonds (5-6%)

Other than VNQ, these assets have very high beta relative to stocks. In a market decline, they will go into distress along with other risk assets. There is no preservation of capital, so these fail as a fixed income portfolio. You're better off focusing on total return and liquidating small amounts if you have to spend the money. If you need stable coupons, wait until you have more money for safer assets with lower yields but that satisfy your goal.

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hdas
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Re: Solid income portfolio?

Post by hdas » Mon Mar 18, 2019 12:29 pm

ohai wrote:
Mon Mar 18, 2019 12:12 pm
1/3 Vanguard REIT (4-5%)
1/3 High yield junk bond (5-6%)
1/3 emerging market bonds (5-6%)

Other than VNQ, these assets have very high beta relative to stocks. In a market decline, they will go into distress along with other risk assets. There is no preservation of capital, so these fail as a fixed income portfolio. You're better off focusing on total return and liquidating small amounts if you have to spend the money. If you need stable coupons, wait until you have more money for safer assets with lower yields but that satisfy your goal.
For emerging market bonds, your observation didn’t hold true in the 2016 and 2018 risk off episodes. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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DG99999
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Re: Solid income portfolio?

Post by DG99999 » Mon Mar 18, 2019 7:28 pm

From the Vanguard Site:

"Vanguard REIT Index Fund pays quarterly distributions consisting of dividend income, return of capital, and capital gains. However, the tax characteristics of these distributions cannot be determined until after the end of the year since the REITs in which the fund invests do not designate the composition (i.e., dividend income, return of capital, and capital gains) of their payments until the new calendar year.

Since Vanguard cannot know the taxability of the portfolio's distributions during the year, unadjusted and adjusted effective yields are calculated.

The current unadjusted effective yield is 3.26% as of 02/28/2019, which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).

The current adjusted effective yield is 2.14% as of 02/28/2019. The adjusted yield reflects a reduction in the income included in the yield based on the average return of capital and capital gain distributions received from the fund's REIT investments for the past 2 calendar years.(These percentages are 25.16% for 2017 and 40.94% for 2016.)

Please remember that the yield is calculated monthly like other stock funds and that Vanguard is not quoting a 30-day SEC yield."
I am not a financial professional. My posts are only my opinion on the topic. You need to do your own due diligence and consult with a professional when addressing your financial questions.

elainet7
Posts: 175
Joined: Sat Dec 08, 2018 1:52 pm

Re: Solid income portfolio?

Post by elainet7 » Mon Mar 18, 2019 7:32 pm

I use cd's, corporate bond funds long and inter, junk bond fund for steady income and munis of course in personal acct

rgs92
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Re: Solid income portfolio?

Post by rgs92 » Mon Mar 18, 2019 7:53 pm

The term "income portfolio" is really a misnomer. Income should be derived from a regular retirement portfolio with a reasonable standard asset allocation for your age and circumstances.

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