VBTLX (BND) - Yield to maturity -> 1.4%

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invest2bfree
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VBTLX (BND) - Yield to maturity -> 1.4%

Post by invest2bfree »

Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?


For the last 20 years it had returned 4.27%.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
401K:(VDIGX 70%, VGIT 30% ) Taxable:(VT 70, BND 30%)
alex_686
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

It is hard to predict the future but that is a good place to start.

That bond have returned higher in the past is irrelevant. Returns don't mean revert.
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Always passive
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by Always passive »

Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
dbr
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by dbr »

alex_686 wrote: Tue Oct 12, 2021 2:35 pm It is hard to predict the future but that is a good place to start.

That bond have returned higher in the past is irrelevant. Returns don't mean revert.
Yes, it is a good return today, but that does not mean we are not currently victims of a bad stretch of history like it or not. There is nothing that can be done about it.
secondopinion
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
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HomerJ
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by HomerJ »

secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Dividends.
A Goldman Sachs associate provided a variety of detailed explanations, but then offered a caveat, “If I’m being dead-### honest, though, nobody knows what’s really going on.”
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

secondopinion wrote: Tue Oct 12, 2021 3:47 pm I have yet to understand what concretely defines "income" from an investment.
That is simple. Well, mostly. I assume we are talking about plain vanilla mutual funds and stocks.

The IRS has classified certain transactions (mostly cash flow related) to be "reportable" transactions to the IRS. The purpose is to calculate taxes. It is strictly a accounting standard.

Bonds can be a little more tricky because of premiums and discounts to par at purchase. These need to be accreted or accrued over the life of the bond. But this only applies to individual bonds.

It has nothing to do with "Total Return" or economic return. The actual return that you can go out and buy stuff with.
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dbr
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by dbr »

secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Boy oh boy, you sure are right there. Viewed as a portfolio there is only return and not income. There is an expected return, the average of the distribution of possible returns in a period, and risk, the variability of that distribution. You run the statistics on the compounded sequence of such returns and estimate the range of future growth. If you want income you sell something, or you collect some interest or dividends, or whatever because it doesn't matter; it is just a withdrawal and you subtract those out from your growth estimate. If you want to know your returns you can average the compound growth (CAGR) and if there are contributions or withdrawals compute an internal rate of return or a time weighted average.

I think the income idea goes back to questions of mechanics where the mechanisms for taking withdrawals were not as flexible as cost free selling is today. If you had bonds you literally clipped off a coupon and took it too the bank. The coupon amount was fixed, hence "fixed income." If you wanted money back from stocks with such difficulty selling arbitrary amounts cost free, you had them mail you a dividend check. In the old days in England when wealthy peers owned entailed estates that could not be sold their wealth was measured in the income they had from rents, agriculture, etc. There were also consoles which were perpetual bonds paying fixed interest forever.

Obviously bonds today certainly are sources of income in that one has a fairly stable store of wealth from which income can be taken at any arbitrary rate no matter the yield. The only issue is the consequence for the growth of the assets. People in retirement are supposed to have negative wealth growth as they spend the money they saved. What else was the reason for saving it?
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

HomerJ wrote: Tue Oct 12, 2021 3:58 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Dividends.
I can understand that with stocks (earnings are earnings). But bond's coupon is not really exactly income since it can take from the basis.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by dbr »

alex_686 wrote: Tue Oct 12, 2021 4:07 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm I have yet to understand what concretely defines "income" from an investment.
That is simple. Well, mostly. I assume we are talking about plain vanilla mutual funds and stocks.

The IRS has classified certain transactions (mostly cash flow related) to be "reportable" transactions to the IRS. The purpose is to calculate taxes. It is strictly a accounting standard.

Bonds can be a little more tricky because of premiums and discounts to par at purchase. These need to be accreted or accrued over the life of the bond. But this only applies to individual bonds.

It has nothing to do with "Total Return" or economic return. The actual return that you can go out and buy stuff with.
That is correct. But income defined so that taxes can be collected indeed has nothing to do with the economic value of assets or what they can be exchanged for by selling the asset and using the cash to buy something.

It would certainly be interesting if a tax assessment could be made against the asset value of stocks and bonds rather than against transactions involving payment of interest or dividends or selling assets at a gain. I forget the Constitutional nuances for why real property can be taxed on value and stocks aren't -- or something like that.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

secondopinion wrote: Tue Oct 12, 2021 4:14 pm I can understand that with stocks (earnings are earnings). But bond's coupon is not really exactly income since it can take from the basis.
As somebody who has done a fair amount of investment accounting for bonds I can say with a fair amount of confidence this is not the way that bonds work.

What exactly are you referring to?
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

dbr wrote: Tue Oct 12, 2021 4:17 pmI forget the Constitutional nuances for why real property can be taxed on value and stocks aren't -- or something like that.
The Federal government can't tax property, real or otherwise. They can only levee taxes in proportion to a state's population. See Article 1, Section 9, Clause 4. "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken." So you can't tax wealth, etc. Hence the reason we had to have a constitutional amendment that explicitly allows for a income tax.

States can. Or at least there is nothing in the Federal Constitution that bars them. I assume you are thinking about your local property taxes.
Last edited by alex_686 on Tue Oct 12, 2021 4:30 pm, edited 1 time in total.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

alex_686 wrote: Tue Oct 12, 2021 4:07 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm I have yet to understand what concretely defines "income" from an investment.
That is simple. Well, mostly. I assume we are talking about plain vanilla mutual funds and stocks.

The IRS has classified certain transactions (mostly cash flow related) to be "reportable" transactions to the IRS. The purpose is to calculate taxes. It is strictly a accounting standard.

Bonds can be a little more tricky because of premiums and discounts to par at purchase. These need to be accreted or accrued over the life of the bond. But this only applies to individual bonds.

It has nothing to do with "Total Return" or economic return. The actual return that you can go out and buy stuff with.
Yes, I know how the IRS looks at it. But when things take from the basis, it does call to question whether it is truly income.

When you work, they are not taking from your bank account to pay you a paycheck. Nor are they withholding some of your paycheck to pay you later...
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

alex_686 wrote: Tue Oct 12, 2021 4:18 pm
secondopinion wrote: Tue Oct 12, 2021 4:14 pm I can understand that with stocks (earnings are earnings). But bond's coupon is not really exactly income since it can take from the basis.
As somebody who has done a fair amount of investment accounting for bonds I can say with a fair amount of confidence this is not the way that bonds work.

What exactly are you referring to?
I mean if you pay above par. The coupon is receive effectively contains some of the excess principal, because you are only going to receive the par value at the end.

My mistake; I meant principal and not basis.
Last edited by secondopinion on Tue Oct 12, 2021 4:34 pm, edited 2 times in total.
hudson
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by hudson »

invest2bfree wrote: Tue Oct 12, 2021 2:28 pm Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?
The payout was 2.08% on Sep. 30, 2020.
It was 1.82% on Sep 30, 2021
SEC as of Oct 12 showed as 1.34%
The Yield to Maturity does show 1.4%
From eyeballing the distribution yield table of VBTLX....https://investor.vanguard.com/mutual-fu ... ions/vbtlx,
I speculate that the payout on Sep. 30 2022 will be about 1.62%
Will the 1.4% YTM hold up?
The average duration is 6.8 years.
My speculation is that 1.4% might be a little high over the next 6.8 years.
I plan to hold my VBTLX until I find a better deal.
Last edited by hudson on Tue Oct 12, 2021 4:44 pm, edited 1 time in total.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by hudson »

secondopinion wrote: Tue Oct 12, 2021 4:31 pm
alex_686 wrote: Tue Oct 12, 2021 4:18 pm
secondopinion wrote: Tue Oct 12, 2021 4:14 pm I can understand that with stocks (earnings are earnings). But bond's coupon is not really exactly income since it can take from the basis.
As somebody who has done a fair amount of investment accounting for bonds I can say with a fair amount of confidence this is not the way that bonds work.

What exactly are you referring to?
I mean if you pay above par. The coupon is receive effectively contains some of the excess principal, because you are only going to receive the par value at the end.
Isn't that just for individual bonds held by a fund. Does that guarantee that the NAV of the fund will drop or rise because of what happens to individual bonds?
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

secondopinion wrote: Tue Oct 12, 2021 4:31 pm I mean if you pay above par. The coupon is receive effectively contains some of the excess principal.
First, the accretion for premium bonds occurs over the holding period of the loan. The payment of the coupon has nothing to do with it. And probably most critically it flows in as a loss, negative income. It reduces taxes owed.

You are probably thinking about discount bonds, zero-coupon bonds, or other items with OID. This is where you buy the bond at below par.

What you are referencing is accrual accounting. Here they try to match accounting income with economic income. Most people would call this a positive. There were some really abusive tax techniques and strategies around this before they closed the loophole.
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dbr
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by dbr »

alex_686 wrote: Tue Oct 12, 2021 4:21 pm
dbr wrote: Tue Oct 12, 2021 4:17 pmI forget the Constitutional nuances for why real property can be taxed on value and stocks aren't -- or something like that.
The Federal government can't tax property, real or otherwise. Hence the reason we have a constitutional amendment that explicitly allows for a income tax.

States can. Or at least there is nothing in the Federal Constitution that bars them. I assume you are thinking about your local property taxes.
Right, local property taxes. It goes to apportionment and a bunch of other Constitutional law issues.

Here is evidence that there have been state taxes on intangible personal property:

https://www.cga.ct.gov/2007/rpt/2007-r-0197.htm

More here:

https://pocketsense.com/intangible-tax- ... -8802.html
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by GoneOnTilt »

secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
Last edited by GoneOnTilt on Tue Oct 12, 2021 4:46 pm, edited 2 times in total.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

hudson wrote: Tue Oct 12, 2021 4:37 pm Isn't that just for individual bonds held by a fund. Does that guarantee that the NAV of the fund will drop or rise because of what happens to individual bonds?
Can you rephrase what you are trying to say? I am not quite following. But you seem to be on the right track.

Public funds (mutual funds and ETFs) must use accrual accounting.

NAV is a accountant's estimate of the fund's value. It is done from a accounting perspective.

You want this accounting estimate to match as closely as possible to the economic reality. If there is a gap interesting things can happen which are mostly bad for the shareholders.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by hudson »

alex_686 wrote: Tue Oct 12, 2021 4:44 pm
hudson wrote: Tue Oct 12, 2021 4:37 pm Isn't that just for individual bonds held by a fund. Does that guarantee that the NAV of the fund will drop or rise because of what happens to individual bonds?
Can you rephrase what you are trying to say? I am not quite following. But you seem to be on the right track.

Public funds (mutual funds and ETFs) must use accrual accounting.

NAV is a accountant's estimate of the fund's value. It is done from a accounting perspective.

You want this accounting estimate to match as closely as possible to the economic reality. If there is a gap interesting things can happen which are mostly bad for the shareholders.
Rephrase? That was my best shot. :)
I guess I'm saying that the NAV of a fund is influenced by expenses and the internal working of bonds. It is also influenced by market forces; sometimes the market forces overrule the internal workings of a fund.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

invest2bfree wrote: Tue Oct 12, 2021 2:28 pm Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?


For the last 20 years it had returned 4.27%.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
Normally YTM is not a good measure. Actual return should likely be higher. You nor the fund are holding the underlying bonds to maturity so YTM is not a good measure. The fund has a latter of reasuries that it rolls. As the treasuries roll down the yield curve, their interest rate drops. Prices are inverse to interest rates, so the price increases. This is called roll yield. If you include roll yield in your estimate of future returns, you'd expect ~2.3% currently.

However, interest rates are expected to rise and this will cancel some of the return you can expect. The effect of this is likely to be a wash with roll yield, and so you end up back around 1-1.5% expected return over the next few years.

We can see that the return of bond funds have historically been much higher than their YTM - even during periods of flat rates. For example, VFITX has a CAGR of 3.75% since June 2003. 5 year interest rates averaged much less than that - under 2% for the last 19 years. A very small portion of the differenceis because rates are lower today than they were in June 2003, but 5-yr rates were pretty low in June 2003 (2.7%).

The main reason that VFITX returned higher than the prevailing interest rate or YTM, is *roll yield.*
Last edited by skierincolorado on Tue Oct 12, 2021 4:54 pm, edited 1 time in total.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

GoneOnTilt wrote: Tue Oct 12, 2021 4:43 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
But does that apply to investment that returns your principal? I can have a high coupon bond, but it could yield nothing; it just returns principal back to you. It is not money received.

Similarly, a stock paying a higher dividend than its earnings (besides being not overly wise) is going to pay some of its value.

Taxwise is one thing, but I think paying from principal is not income in the sense of the word as presented.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

Another example, controlled for changes in interest rates:

April 2003- September 2018.

Starting and ending interest rate were both ~2.9%. Not a falling rate environment.

VFITX CAGR: 3.46%
Average 5-yr Treasury Rate during this period: 2.2%

The 1.26% difference? Roll yield.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

hudson wrote: Tue Oct 12, 2021 4:48 pm Rephrase? That was my best shot. :)
I guess I'm saying that the NAV of a fund is influenced by expenses and the internal working of bonds. It is also influenced by market forces; sometimes the market forces overrule the internal workings of a fund.
No. But let me say we are getting into the weeds. Lots of people make errors here.

Let say we buy a bond for $50 that matures in 5 years for $100. It pays no coupon. How should we tax it?

1. It has no coupon payments so it generates no income so no taxes are owed.

2. You earn $50 after 5 years in a lump sum. Allows you to defer taxes for 5 years. Maybe even get it classified as long term capital gains. Not as sweet as option #1 but still pretty good.

3. Accrue $10 in income every year. This matches the economic reality. The bond should be increasing in value by $10 every year.

Note, right now we are talking about income. i.e., stuff that goes onto the Income Statement. This is just about calculating taxes for the tax man.

NAV is based on the Balance Sheet.

We are going to mark-to-market that bond every day. If the market price is $40 we are going to use that price to calculate the NAV. $120? That is the price we are going to use.

These unrealized gains/losses do not make it to the Income Statement. You would need a Sell Transaction to generate a transaction where the realized gain/loss actually hits the income statement.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by hudson »

Doesn't the balance sheet include the daily price of the holdings?
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

hudson wrote: Tue Oct 12, 2021 5:05 pm Doesn't the balance sheet include the daily price of the holdings?
Yes it does. You are correct there.

But we are talking about 2 different subjects.

"Income" is a tax/accounting construct. It lives on the "Income Statement". Stuff that lives on the income statement does does not directly translate to the balance sheet.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by willthrill81 »

invest2bfree wrote: Tue Oct 12, 2021 2:28 pm Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?

For the last 20 years it had returned 4.27%.
When it comes to bonds in particular, past is not prologue. For instance, from 1941-1981, bonds returned about -1.6% on an inflation-adjusted basis. Bonds are unlikely to have returns even matching inflation for the next decade at least.

The current YTM for any bond fund is a very good estimate of its forward return.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by hudson »

alex_686 wrote: Tue Oct 12, 2021 5:15 pm
hudson wrote: Tue Oct 12, 2021 5:05 pm Doesn't the balance sheet include the daily price of the holdings?
Yes it does. You are correct there.

But we are talking about 2 different subjects.

"Income" is a tax/accounting construct. It lives on the "Income Statement". Stuff that lives on the income statement does does not directly translate to the balance sheet.
Thanks alex_686!
I don't know about income and accounting as part of the NAV.
My position is that changes in the NAV are due to many factors in addition to the workings of individual bonds.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by GoneOnTilt »

secondopinion wrote: Tue Oct 12, 2021 4:52 pm
GoneOnTilt wrote: Tue Oct 12, 2021 4:43 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
But does that apply to investment that returns your principal? I can have a high coupon bond, but it could yield nothing; it just returns principal back to you. It is not money received.

Similarly, a stock paying a higher dividend than its earnings (besides being not overly wise) is going to pay some of its value.

Taxwise is one thing, but I think paying from principal is not income in the sense of the word as presented.
I see what you mean. It's more complicated than I understand. So, not so simple.

You have made me think about it. It seems to me that I wouldn't personally consider return of principal to be "income."
secondopinion
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

GoneOnTilt wrote: Tue Oct 12, 2021 5:42 pm
secondopinion wrote: Tue Oct 12, 2021 4:52 pm
GoneOnTilt wrote: Tue Oct 12, 2021 4:43 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
But does that apply to investment that returns your principal? I can have a high coupon bond, but it could yield nothing; it just returns principal back to you. It is not money received.

Similarly, a stock paying a higher dividend than its earnings (besides being not overly wise) is going to pay some of its value.

Taxwise is one thing, but I think paying from principal is not income in the sense of the word as presented.
I see what you mean. It's more complicated than I understand. So, not so simple.

You have made me think about it. It seems to me that I wouldn't personally consider return of principal to be "income."
I would not. Think if an employer paid an employee partly from the employee's bank account...
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by willthrill81 »

GoneOnTilt wrote: Tue Oct 12, 2021 5:42 pm
secondopinion wrote: Tue Oct 12, 2021 4:52 pm
GoneOnTilt wrote: Tue Oct 12, 2021 4:43 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm
Always passive wrote: Tue Oct 12, 2021 2:38 pm Yes, as a source of income, bonds are uninvestable! The only purpose of bonds at this time is portfolio stability.
I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
But does that apply to investment that returns your principal? I can have a high coupon bond, but it could yield nothing; it just returns principal back to you. It is not money received.

Similarly, a stock paying a higher dividend than its earnings (besides being not overly wise) is going to pay some of its value.

Taxwise is one thing, but I think paying from principal is not income in the sense of the word as presented.
I see what you mean. It's more complicated than I understand. So, not so simple.

You have made me think about it. It seems to me that I wouldn't personally consider return of principal to be "income."
In a stock context, this is part of the reason why viewing dividends as 'income' can be problematic. The value of the shares you own may fall such that your net return is zero or negative. If a $100 stock I own pays $5 in a dividend, and the market value of the stock drops to $95, I haven't gained anything. And unless I sell the stock to realize the loss, I've actually lost because I had to pay taxes on the $5 dividend.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
GoneOnTilt
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by GoneOnTilt »

willthrill81 wrote: Tue Oct 12, 2021 6:17 pm
GoneOnTilt wrote: Tue Oct 12, 2021 5:42 pm
secondopinion wrote: Tue Oct 12, 2021 4:52 pm
GoneOnTilt wrote: Tue Oct 12, 2021 4:43 pm
secondopinion wrote: Tue Oct 12, 2021 3:47 pm

I have yet to understand what concretely defines "income" from an investment.
Income puts food on the table.

in·come
/ˈinˌkəm/
noun
money received, especially on a regular basis, for work or through investments.

So for investments, think dividends or interest. Simple.
But does that apply to investment that returns your principal? I can have a high coupon bond, but it could yield nothing; it just returns principal back to you. It is not money received.

Similarly, a stock paying a higher dividend than its earnings (besides being not overly wise) is going to pay some of its value.

Taxwise is one thing, but I think paying from principal is not income in the sense of the word as presented.
I see what you mean. It's more complicated than I understand. So, not so simple.

You have made me think about it. It seems to me that I wouldn't personally consider return of principal to be "income."
In a stock context, this is part of the reason why viewing dividends as 'income' can be problematic. The value of the shares you own may fall such that your net return is zero or negative. If a $100 stock I own pays $5 in a dividend, and the market value of the stock drops to $95, I haven't gained anything. And unless I sell the stock to realize the loss, I've actually lost because I had to pay taxes on the $5 dividend.
I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

GoneOnTilt wrote: Tue Oct 12, 2021 6:32 pm

I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
That part of the gain is not guaranteed at all. The day the company issues the dividend, the stock price falls proportionally. There is no gain from the dividend. The only gain in investing in a company comes from future earnings growth.

There are some notable examples of companies with dividends as high as 8-10% but negative returns. The 10% dividend is more than offset by declines in share price. A company with an 8-10% dividend is not anymore likely to have positive return than a company without a dividend.

You're sort of falling prey to mind games regarding dividends. Own diversified stocks. If that's too much risk, mix in some bonds.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by whodidntante »

Is it really an investment if I expect to lose money? :wink:
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

whodidntante wrote: Tue Oct 12, 2021 7:55 pm Is it really an investment if I expect to lose money? :wink:
It depends on what is meant by "expect to lose money". I am sure the negative rate bond holders in Europe feel like it is a reasonable investment to hold such bonds.
Last edited by secondopinion on Tue Oct 12, 2021 8:01 pm, edited 1 time in total.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by GoneOnTilt »

skierincolorado wrote: Tue Oct 12, 2021 7:23 pm
GoneOnTilt wrote: Tue Oct 12, 2021 6:32 pm

I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
That part of the gain is not guaranteed at all. The day the company issues the dividend, the stock price falls proportionally. There is no gain from the dividend. The only gain in investing in a company comes from future earnings growth.
Wait. If I receive a dividend payment today, and the stock falls to zero tomorrow, am I not better off than if I had never received the dividend? And extreme example, but I'm using it to make a point.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

GoneOnTilt wrote: Tue Oct 12, 2021 7:59 pm
skierincolorado wrote: Tue Oct 12, 2021 7:23 pm
GoneOnTilt wrote: Tue Oct 12, 2021 6:32 pm

I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
That part of the gain is not guaranteed at all. The day the company issues the dividend, the stock price falls proportionally. There is no gain from the dividend. The only gain in investing in a company comes from future earnings growth.
Wait. If I receive a dividend payment today, and the stock falls to zero tomorrow, am I not better off than if I had never received the dividend? And extreme example, but I'm using it to make a point.
I would seriously question where the company got their money if that happened... The cash has to come from somewhere; it has to go somewhere. If they did not pay the dividend, where would it end up?
Last edited by secondopinion on Tue Oct 12, 2021 8:06 pm, edited 1 time in total.
GoneOnTilt
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by GoneOnTilt »

skierincolorado wrote: Tue Oct 12, 2021 7:23 pm You're sort of falling prey to mind games regarding dividends. Own diversified stocks. If that's too much risk, mix in some bonds.
As I said, I'm not a "dividend investor." I just don't mind receiving them. In fact I kinda like it. It's part of the return. That's just reality. Dividends + earnings growth + speculative return. Bogle 101.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by alex_686 »

What matters is "Total Return" (TR), which is driven by "Free Cash Flow to Equity" (FCFE).

2 Points.

Bond Coupons and Equity Dividends are a special class of free cash flow. There is value is decomposing TR into coupon payments and principal payments. Or dividends and principal appreciation. It is next to impossible to start with dividends and coupons are work you way back to TR.

You have economic returns. There are accounting principals for shareholder reporting and tax recognition. These are separate and different. While not complete divorced you can't start from one side and work your way to the other without lots of context.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
MIretired
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by MIretired »

Joke? : Most companies don't survive forever. If we could get companies to pay dividends on future earnings, we'd have it made. Right?
Though I think companies consider their forward going prospects when deciding to continue to pay a dividend.
Hedging against a company's downfall.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by MrJedi »

GoneOnTilt wrote: Tue Oct 12, 2021 7:59 pm
skierincolorado wrote: Tue Oct 12, 2021 7:23 pm
GoneOnTilt wrote: Tue Oct 12, 2021 6:32 pm

I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
That part of the gain is not guaranteed at all. The day the company issues the dividend, the stock price falls proportionally. There is no gain from the dividend. The only gain in investing in a company comes from future earnings growth.
Wait. If I receive a dividend payment today, and the stock falls to zero tomorrow, am I not better off than if I had never received the dividend? And extreme example, but I'm using it to make a point.
I'm not really sure what the point is. You can also sell a small chunk of a non-dividend paying stock the day before it falls to zero.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by whodidntante »

secondopinion wrote: Tue Oct 12, 2021 7:59 pm
whodidntante wrote: Tue Oct 12, 2021 7:55 pm Is it really an investment if I expect to lose money? :wink:
It depends on what is meant by "expect to lose money". I am sure the negative rate bond holders in Europe feel like it is a reasonable investment to hold such bonds.
My usual example is how many hamburgers one can purchase. VBTLX holders had better like something less inflationary.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by secondopinion »

whodidntante wrote: Tue Oct 12, 2021 9:15 pm
secondopinion wrote: Tue Oct 12, 2021 7:59 pm
whodidntante wrote: Tue Oct 12, 2021 7:55 pm Is it really an investment if I expect to lose money? :wink:
It depends on what is meant by "expect to lose money". I am sure the negative rate bond holders in Europe feel like it is a reasonable investment to hold such bonds.
My usual example is how many hamburgers one can purchase. VBTLX holders had better like something less inflationary.
"Expect to lose money" with all those hamburgers. :P

But yes, I would not recommend nominal bonds as a large holding (large meaning >40%). We just have to either take risk with stocks or buy I bonds/TIPS. Alternatives always seem dicey to me (but I do have a fairly small position regardless).
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

GoneOnTilt wrote: Tue Oct 12, 2021 7:59 pm
skierincolorado wrote: Tue Oct 12, 2021 7:23 pm
GoneOnTilt wrote: Tue Oct 12, 2021 6:32 pm

I hear you. But, with the dividend, capturing that part of the gain is assured. There's no guarantee that the price of the stock will continue to go up. It could fall below what I paid for it. That's one reason I like dividends (although I don't consider myself a "dividend investor"). Dividends guarantee me a part of the company's earnings. I know it's not the most tax efficient way to receive it. But that's okay with me. Because as I said, there are no guarantees I'll be able to partake of those earnings at a later date.
That part of the gain is not guaranteed at all. The day the company issues the dividend, the stock price falls proportionally. There is no gain from the dividend. The only gain in investing in a company comes from future earnings growth.
Wait. If I receive a dividend payment today, and the stock falls to zero tomorrow, am I not better off than if I had never received the dividend? And extreme example, but I'm using it to make a point.
As another poster already pointed out this is identical to selling some stock the day before it goes to zero.

If you are a decumulator you can either receive dividends or sell shares.

Is you are an accumulator, you are reinvesting dividends anyways.
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

whodidntante wrote: Tue Oct 12, 2021 9:15 pm
secondopinion wrote: Tue Oct 12, 2021 7:59 pm
whodidntante wrote: Tue Oct 12, 2021 7:55 pm Is it really an investment if I expect to lose money? :wink:
It depends on what is meant by "expect to lose money". I am sure the negative rate bond holders in Europe feel like it is a reasonable investment to hold such bonds.
My usual example is how many hamburgers one can purchase. VBTLX holders had better like something less inflationary.
What alternative do you propose to vbtlx?

Stocks? How is a 79 yo retiree better off in stocks which could lose 50% of value? At least bonds won’t do that.
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invest2bfree
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by invest2bfree »

skierincolorado wrote: Wed Oct 13, 2021 8:31 am
whodidntante wrote: Tue Oct 12, 2021 9:15 pm
secondopinion wrote: Tue Oct 12, 2021 7:59 pm
whodidntante wrote: Tue Oct 12, 2021 7:55 pm Is it really an investment if I expect to lose money? :wink:
It depends on what is meant by "expect to lose money". I am sure the negative rate bond holders in Europe feel like it is a reasonable investment to hold such bonds.
My usual example is how many hamburgers one can purchase. VBTLX holders had better like something less inflationary.
What alternative do you propose to vbtlx?

Stocks? How is a 79 yo retiree better off in stocks which could lose 50% of value? At least bonds won’t do that.
Klangfool has a great suggestion, 10 years in bonds for a retiree.
Minimum 70/30 to 30/70.
401K:(VDIGX 70%, VGIT 30% ) Taxable:(VT 70, BND 30%)
asif408
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by asif408 »

invest2bfree wrote: Tue Oct 12, 2021 2:28 pm Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?


For the last 20 years it had returned 4.27%.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
Here's some perspective:

5-yr Treasury rate in 1990: ~8%
Vanguard Total Bond Market return from 1990-2000: ~7.5% https://www.portfoliovisualizer.com/bac ... ion1_1=100

5 yr Treasury rate in 2000: 6.5%
Vanguard Total Bond Market return from 2000-2010: ~6.1% https://www.portfoliovisualizer.com/bac ... ion1_1=100

5 yr Treasury rate in 2010: 2.6%
Vanguard Total Bond Market return from 2000-2010: ~3.7% https://www.portfoliovisualizer.com/bac ... ion1_1=100

The returns of the VBTLX (or VBMFX, the investor class) have been within approximately +/-1% of so of the starting yield. If you expect much different you are expecting something exceptional to occur. The starting yield has been highly predictive of the next decades return. If rates fall you'll get more than 1.4%. If they rise you will get less.
Last edited by asif408 on Wed Oct 13, 2021 9:24 am, edited 1 time in total.
Nowizard
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by Nowizard »

Personally, we hope that bond return will meet inflation over time but generally look at bonds as risk reduction, particularly in times of market downturns. Sometimes, you make the most in terms of returns by losing the least, even when the "losses" are paper losses and no redemptions have occurred.

Tim
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Re: VBTLX (BND) - Yield to maturity -> 1.4%

Post by skierincolorado »

asif408 wrote: Wed Oct 13, 2021 9:06 am
invest2bfree wrote: Tue Oct 12, 2021 2:28 pm Can we assume that 1.4% is a good rate of return for my bond portion of my portfolio going forward?


For the last 20 years it had returned 4.27%.

https://www.portfoliovisualizer.com/bac ... ion1_1=100
Here's some perspective:

5-yr Treasury rate in 1990: ~8%
Vanguard Total Bond Market return from 1990-2000: ~7.5% https://www.portfoliovisualizer.com/bac ... ion1_1=100

5 yr Treasury rate in 2000: 6.5%
Vanguard Total Bond Market return from 2000-2010: ~6.1% https://www.portfoliovisualizer.com/bac ... ion1_1=100

5 yr Treasury rate in 2010: 2.6%
Vanguard Total Bond Market return from 2000-2010: ~3.7% https://www.portfoliovisualizer.com/bac ... ion1_1=100

The returns of the VBTLX (or VBMFX, the investor class) have been within approximately +/-1% of so of the starting yield. If you expect much different you are expecting something exceptional to occur. The starting yield has been highly predictive of the next decades return. If rates fall you'll get more than 1.4%. If they rise you will get less.
Actually your own data shows the opposite. When rates fell in the first two decades they got less. When rates rise from 2010 they got more. This is because if rates rise early in the decade you get a small loss early but then more interest for the rest of the decade.

Another way to look at it would be to look at the average interest rate for the decade. If you do this you will find that the return is substantially higher than the interest rate. This is mostly due to roll yield.

I gave an example above from 2003 to 2018 rates started and ended at 2.9%. The average interest rate during the period was 2.2%. The return was 3.46%. The reason it is higher is roll yield. The bonds are not held to maturity so the return is higher than ytm.
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