Vanguard High Yield Corp Admiral CL

[pcola_pam]

[edited thread title to remove all upper case - moderator prudent]

I am 70, single, retired, and living off SS and approx $700/mo in monthly bond distributions-I have a very modest lifestyle by choice. Unless I have a major purchase, home insurance or other large infrequent expense, I do not have to take other distributions from my portfolio. I have approx. 24% of my asset allocation in the above-referenced Vanguard Fund (VWEAX) because it currently pays dividends of over 7%. Based on the current economic situation, should I reduce that percentage?

My current allocation is:
34% stock (Vanguard)
39% bond (Vanguard)
3% short term reserves (Vanguard)
24% outside annuity (USAA which I will not annuitize, but draw from when I don't want to pull from Vanguard)

[AlwaysLearningMore]

Greetings. I'm going to take an educated guess that you're not going to get much support for your approach on this form. The vast majority of posts center around taking X percent from a balanced portfolio that would include something akin to the Vanguard total bond fund. You'll probably also get responses about a vanguard target retirement income fund, etc. And you're very likely get posts telling you that dividends are nothing special.

[exodusNH]

Greetings. I'm going to take an educated guess that you're not going to get much support for your approach on this form. The vast majority of posts center around taking X percent from a balanced portfolio that would include something akin to the Vanguard total bond fund. You'll probably also get responses about a vanguard target retirement income fund, etc. And you're very likely get posts telling you that dividends are nothing special.

Dividends on bonds are different from stocks. The former is mostly interest, while the latter is just a company moving money, that you already partially own as an equity holder, into your bank account.

[exodusNH]

I am 70, single, retired, and living off SS and approx $700/mo in dividends-I have a very modest lifestyle by choice. Unless I have a major purchase, home insurance or other large infrequent expense, I do not have to make other distributions from my portfolio. I have approx. 24% of my asset allocation in the above-referenced Vanguard Fund (VWEAX) because it currently pays dividends of over 7%. Based on the current economic situation, should I reduce that percentage?

My current allocation is:
34% stock (Vanguard)
39% bond (Vanguard)
3% short term reserves (Vanguard)
24% outside annuity (USAA which I will not annuitize, but draw from when I don't want to pull from Vanguard)

"High yield" bonds are what you would have known as "junk bonds." Vanguard's are a little higher quality than most junk bonds funds.

In it's history, it has had a maximum draw down of 28%, which was during the GFC. The biggest draw down since 2009 was 13%. As long as you're comfortable with the value fluctuating that much, it's probably OK as long as you understand it is riskier debt than total bond. The economy has generally been strong since the GFC, but if a recession hits, some of those bonds may default.

[AlwaysLearningMore]

Greetings. I'm going to take an educated guess that you're not going to get much support for your approach on this form. The vast majority of posts center around taking X percent from a balanced portfolio that would include something akin to the Vanguard total bond fund. You'll probably also get responses about a vanguard target retirement income fund, etc. And you're very likely get posts telling you that dividends are nothing special.

Dividends on bonds are different from stocks. The former is mostly interest, while the latter is just a company moving money, that you already partially own as an equity holder, into your bank account.

Understood. OP said "dividends" (which I took to mean stock dividends) and not "bond coupons" or "bond distributions." Perhaps I misinterpreted.

[tibbitts]

I am 70, single, retired, and living off SS and approx $700/mo in monthly bond distributions-I have a very modest lifestyle by choice. Unless I have a major purchase, home insurance or other large infrequent expense, I do not have to make other distributions from my portfolio. I have approx. 24% of my asset allocation in the above-referenced Vanguard Fund (VWEAX) because it currently pays dividends of over 7%. Based on the current economic situation, should I reduce that percentage?

My current allocation is:
34% stock (Vanguard)
39% bond (Vanguard)
3% short term reserves (Vanguard)
24% outside annuity (USAA which I will not annuitize, but draw from when I don't want to pull from Vanguard)

I hold this fund but I always assume there will be a 1-2% reduction in yield due to either defaults or downgrades+sales. I believe Vanguard will try to sell bonds before they default, but of course that might not always be possible, and will result in locking-in losses. So I wouldn't say the full yield is sustainable, and this has manifested in a reduction in NAV over the years.

[delamer]

At your age, you can pull between 4% and 5% of your current total portfolio value out each year and not have to worry about running out of money.

So if your portfolio is $500,000, you can take out $25,000 (5.0% times $500,000) in 2023. Then in 2024 going forward, you’d adjust the $25,000 by the inflation rate. If it’s 5%, then you’d take out $26,250. And so on, and so on.

That’s your safe withdrawal rate.

What you are doing now is chasing income. If the yield falls or the value of your investment falls, suddenly you have a lot less income. For instance, if your fund is worth $100,000 and yielding 7%, then you get $7,000/year. But if your fund drops to $80,000, then your income drops to $5,600, even if the yield stays the same.

Take a look at the Boglehead-recommended lazy portfolios and consider one of them: https://www.bogleheads.org/wiki/Lazy_portfolios

To the extent your money is in taxable accounts [not IRAs or 401(k)s], though, be careful about selling and incurring taxes.

Good luck.

[exodusNH]

Greetings. I'm going to take an educated guess that you're not going to get much support for your approach on this form. The vast majority of posts center around taking X percent from a balanced portfolio that would include something akin to the Vanguard total bond fund. You'll probably also get responses about a vanguard target retirement income fund, etc. And you're very likely get posts telling you that dividends are nothing special.

Dividends on bonds are different from stocks. The former is mostly interest, while the latter is just a company moving money, that you already partially own as an equity holder, into your bank account.

Understood. OP said "dividends" (which I took to mean stock dividends) and not "bond coupons" or "bond distributions." Perhaps I misinterpreted.

Unfortunately, the term is used for both even though they are fundamentally different.

[grabiner]

This fund should only be held in an IRA, because the high dividend yields are taxable at your full tax rate. (And, even worse, the dividend yield is more than the expected return, since you will lose capital when some bonds default or are sold after downgrades.)

In an IRA, it's fine to hold this fund, but you should recognize that it behaves like half bonds and half stocks, not like other bond funds. In an economic decline, the stock market falls, and bond defaults become more common, so junk-bond funds lose value as well.

The current situation shouldn't really affect your investment decisions. High-yield bond funds have more risk than investment-grade bond funds, but the yield is a fair compensation for the risk. If the risk increases, the gap in yields will also increase, since bond traders will only trade the high-yield bonds at a higher yield premium.

[Weathering]

OP, you should check the current yield and the yield to maturity. The current yield can be calculated by dividing the monthly payouts by the fund share price. You will find it is closer to 5.8% than 7+%. Some will say the fund earns the 7% yield to maturity when it sells bonds; however, with an inverted yield curve, the shorter-term bonds sold by the fund may require a higher yield-to-maturity than the longer-term bonds they purchase. If that is the case, the fund will not earn the stated yield-to-maturity for the bonds in its portfolio but some percentage less.

[Kenkat]

I also hold this fund although in a lower percentage than you do.

The Vanguard fund holds the higher rated high yield aka “junk” bonds. This fund will act like a hybrid of stocks and bonds in terms of performance. If the economy goes into a recession, these bonds will lose some value due to concerns among investors that the bonds will default. The fund will also slowly lose value over time due to downgrades or defaults; this is the risk for receiving the higher yield.

If this fund makes up 24% of your portfolio, covers your $700 income need and you are not taking other withdraws, I personally think your strategy is fine. High yield bonds get discussed a lot here, with some people loving them and others not. There are of course other ways to achieve the same thing you are doing - i.e., generating $700/mo. in income from your portfolio - but yours is one valid way as long as you are comfortable with the above behavior.

[tibbitts]

What you are doing now is chasing income. If the yield falls or the value of your investment falls, suddenly you have a lot less income. For instance, if your fund is worth $100,000 and yielding 7%, then you get $7,000/year. But if your fund drops to $80,000, then your income drops to $5,600, even if the yield stays the same.

Wouldn't it be unlikely for the yield percentage (vs. amount) to remain the same when the NAV plunges? I don't remember exactly but it seemed like even through the GFC the amount of my dividends from this fund didn't vary that much, even when the asset value dropped.

[exodusNH]

What you are doing now is chasing income. If the yield falls or the value of your investment falls, suddenly you have a lot less income. For instance, if your fund is worth $100,000 and yielding 7%, then you get $7,000/year. But if your fund drops to $80,000, then your income drops to $5,600, even if the yield stays the same.

Wouldn't it be unlikely for the yield percentage (vs. amount) to remain the same when the NAV plunges? I don't remember exactly but it seemed like even through the GFC the amount of my dividends from this fund didn't vary that much, even when the asset value dropped.

The dollar amount won't change much, unless you have a lot of defaults.

The SEC yield includes adjustments for the bond's market value vs maturity value. That's why there's typically a difference between distribution yield and SEC yield.

[grabiner]

OP, you should check the current yield and the yield to maturity. The current yield can be calculated by dividing the monthly payouts by the fund share price. You will find it is closer to 5.8% than 7+%. Some will say the fund earns the 7% yield to maturity when it sells bonds; however, with an inverted yield curve, the shorter-term bonds sold by the fund may require a higher yield-to-maturity than the longer-term bonds they purchase.

But that would be just as much the case if the fund was paying out the same amount as the dividend yield. If the yield on a bond increases between today and the day the fund sells the bond, your total return on the bond will be less than the yield to maturity. If the bond is currently at par (distribution yield equal to yield to maturity), you won't earn the yield to maturity because the fund sells the bond for a capital loss. If the bond is currently at a discount, your dividends will be less than the yield to maturity, so even if the fund sells the bond for its current price, you will earn less than the yield.

The reason the fund has a lower current payment than the yield to maturity is that interest rates have risen. If the fund bought a bond for $1000 when the bond had a 5% yield, and the bond is now worth $900, the yield to maturity might increase to 7%, but the coupon on the bond is still $50, which is 5.55% of the current yield. The distributions will increase as the fund sells older bonds and buys newer bonds.

[delamer]

What you are doing now is chasing income. If the yield falls or the value of your investment falls, suddenly you have a lot less income. For instance, if your fund is worth $100,000 and yielding 7%, then you get $7,000/year. But if your fund drops to $80,000, then your income drops to $5,600, even if the yield stays the same.

Wouldn't it be unlikely for the yield percentage (vs. amount) to remain the same when the NAV plunges? I don't remember exactly but it seemed like even through the GFC the amount of my dividends from this fund didn't vary that much, even when the asset value dropped.

That’s interesting. I suppose my example might be more appropriate for dividends & stocks then bonds & interest.

But, OP, my larger point stiil holds — chasing yield isn’t your best option in the long run. A balanced portfolio that you draw down at a safe rate (including sometimes selling shares) is the road to financial security & stability.

[pcola_pam]

Thank you everyone for your input. I'm going to keep an eye on this fund, right now I need the monthly income from it. I've been with Vanguard since 1984 and one of these days I'm going to go transfer my Vanguard mutual funds to the three-fund portfolio recommended by so many of you. I am having a hard time giving up some of my favorites: Primecap Admiral and Extended Mkt Admiral.

Here are my current allocations if anyone has any suggestions once I go to the three-fund portfolio:


Investment
Vanguard Total Bond Market Index Admiral 22%
Vanguard Treasury Money Market Investor 12%
Vanguard Total Stock Market Index Admiral 6%
Vanguard High Dividend Yield Index Admiral 11%
Vanguard High Yield Corp Admiral 43%
Vanguard Total Intl Stock Index Admiral 6%
100%

TIRA
Vanguard Total Bond Market Index Admiral 28%
Vanguard High Yield Corp Admiral 72%
100%

Roth
Vanguard Total Bond Market Index Admiral 15%
Vanguard Total Stock Market Index Admiral 24%
Vanguard Extended Market Index Admiral 18%
Vanguard Total Intl Stock Index Admiral 8%
Vanguard Primecap Admiral 21%
Vanguard Long Term Bond Index Admiral 13%
100%

[sycamore]

Thank you everyone for your input. I'm going to keep an eye on this fund, right now I need the monthly income from it. I've been with Vanguard since 1984 and one of these days I'm going to go transfer my Vanguard mutual funds to the three-fund portfolio recommended by so many of you. I am having a hard time giving up some of my favorites: Primecap Admiral and Extended Mkt Admiral.

Here are my current allocations if anyone has any suggestions once I go to the three-fund portfolio:


Investment
Vanguard Total Bond Market Index Admiral 22%
Vanguard Treasury Money Market Investor 12%
Vanguard Total Stock Market Index Admiral 6%
Vanguard High Dividend Yield Index Admiral 11%
Vanguard High Yield Corp Admiral 43%
Vanguard Total Intl Stock Index Admiral 6%
100%

TIRA
Vanguard Total Bond Market Index Admiral 28%
Vanguard High Yield Corp Admiral 72%
100%

Roth
Vanguard Total Bond Market Index Admiral 15%
Vanguard Total Stock Market Index Admiral 24%
Vanguard Extended Market Index Admiral 18%
Vanguard Total Intl Stock Index Admiral 8%
Vanguard Primecap Admiral 21%
Vanguard Long Term Bond Index Admiral 13%
100%

You can certainly get some suggestions from the Bogleheads But a few answers will give you the most helpful suggestions:

1. How much does each fund represent in the whole portfolio (not per account)? Alternatively tell us what percent each Taxable, TIRA, Roth account are of the whole portfolio, and we can figure out the individual holdings in each account.

2. Do you have any unrealized losses in your taxable account, and on which funds? A typical suggestion is to sell any losing funds in a taxable account and replace them with the most tax-efficient funds.

3. What is your marginal tax rate? This will help decide the impact of bonds or high dividend stocks in taxable.

4. What is your target asset allocation for the whole portfolio? E.g., 60% stocks, 40% bonds?

The best thing would be to provide your portfolio in the format described here: viewtopic.php?t=6212.

Cheers!