High Yield Dividend Stock in i401k

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lmldm
Posts: 15
Joined: Mon Feb 03, 2020 12:13 pm

High Yield Dividend Stock in i401k

Post by lmldm » Thu Feb 13, 2020 2:52 pm

Hi Bogleheads,

I have another post about being fairly new to investing, but this is a separate topic. I've been doing a lot of reading, and what I am seeing is that many financial analysts feel that when in retirement, it's a better bet to have preferred stock (or high yield dividend funds) providing income during retirement. How do you feel about these DRIPS (or high yield dividend funds) if they are put into a ROTH portion of an i401k? I am about to switch up my husband's funds from Target Retirement 2045 to other funds. Since I manage the money in the family, and I made all the contributions into the i401k, it never gave me the option to do ROTH or Traditional 401k. I believe this is because of the fund that we are in. We have about 72k in his i401k, and we have reached out to Vanguard to try and change the funds and see why it didn't give the option to contribute to Roth.

I was told before that Bond ETF (BND) was a great bet for the employee contribution in a roth or traditional i401k. If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income? The Target 2045 Fund I believe is too aggressive, since we are aggressive in our taxable account.

What fund would you add for the Employer contribution? VTSAX?
Any advice or opinions on income funds and what to put in an employer 401k (fund wise) would be greatly appreciated.

Thank you!

sycamore
Posts: 225
Joined: Tue May 08, 2018 12:06 pm

Re: High Yield Dividend Stock in i401k

Post by sycamore » Thu Feb 13, 2020 5:24 pm

lmldm wrote:
Thu Feb 13, 2020 2:52 pm
Hi Bogleheads,

I have another post about being fairly new to investing, but this is a separate topic. I've been doing a lot of reading, and what I am seeing is that many financial analysts feel that when in retirement, it's a better bet to have preferred stock (or high yield dividend funds) providing income during retirement. How do you feel about these DRIPS (or high yield dividend funds) if they are put into a ROTH portion of an i401k? I am about to switch up my husband's funds from Target Retirement 2045 to other funds. Since I manage the money in the family, and I made all the contributions into the i401k, it never gave me the option to do ROTH or Traditional 401k. I believe this is because of the fund that we are in. We have about 72k in his i401k, and we have reached out to Vanguard to try and change the funds and see why it didn't give the option to contribute to Roth.

I was told before that Bond ETF (BND) was a great bet for the employee contribution in a roth or traditional i401k. If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income? The Target 2045 Fund I believe is too aggressive, since we are aggressive in our taxable account.

What fund would you add for the Employer contribution? VTSAX?
Any advice or opinions on income funds and what to put in an employer 401k (fund wise) would be greatly appreciated.

Thank you!
It sounds like you've got a few questions in there.

Question one is what funds should you invest in. You will find lots of debates here about preferences for "tilting" to one corner of the stock market or another:
- high-flying growth/tech stocks
- small-cap value
- some other factor (like momentum, liquidity, or quality)
- world cap-weighted versus home-country preference
- preferred stocks
- and perhaps everyone's favorite -- "dividend stocks." The debates often focus on why dividends aren't "free" money. They're not. Dividend-focused funds aren't inherently bad either, but they come with trade-offs. I would not invest in them because some financial analysts suggested them. Ask yourself whether their reasons for such funds make any sense? If not, don't use them.

The typical boglehead approach for equities is to use a cap-weighted stock fund like Total Stock Market (VTSAX). That fund includes all kinds of companies, including those that have a high yield payout.

For bonds, Total Bond Market (as either a mutual fund or the BND ETF) is great.

A Target Retirement fund which combines Total Stock and Total Bond and their international versions is also a great choice. I support using such a fund until you work out for sure why you want to focus on specific subsets of the stock market.


Question two is what funds should go in which account. Typically a Roth 401k or IRA is for the fund with higher expected growth (stocks). And a Traditional 401k or IRA is for the fund with lower expected growth (bonds). There's nothing wrong with having some bonds in a Roth account. The main thing is to have the right mix (asset allocation) of stocks and bonds that you're comfortable with. Then you can pick which funds go in which accounts.

You mentioned a taxable account. Ideally you would list all your accounts so we can give better suggestions about which funds go in which accounts. For sure you want to get your AA right across the whole portfolio.

Anyway, a Target Retirement fund would be a good choice for both the 401k and the Roth. Or use the Roth for just stocks, and use the 401k to pick a fund that gives you the right balance of stocks/bonds overall.


Also, regarding your question
The "If it's Roth and is taxed now, would it be better to have a high yielding dividend fund and not get slammed with taxes, capital gains and earn income?"
The question doesn't make sense because with a Roth, any withdrawal is not taxed - you paid the taxes on your income that you used for the contributions. It doesn't matter whether your Roth account balance grew through a rise in the stock market, or from stock dividends, or from bond dividends, or from whatever.

But maybe I misunderstood what you're asking about?

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