Dividend Generating Portfolio for Retirement

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YellowBrickRoad
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Joined: Fri Oct 05, 2018 7:26 am

Dividend Generating Portfolio for Retirement

Post by YellowBrickRoad » Wed Apr 17, 2019 9:01 am

We use a small investment group to manage our sizable portfolio which includes about 70 individual stocks and a bond fund (Pimix) in a 70/30 allocation for a 1% fee for our fiduciary advisers. We have a 2/3 taxable and 1/3 non taxable allocation as well.

It has provided returns significantly beyond a three fund portfolio by several percent for nearly the last ten years, with no future promises of course.

We are still in the acquisition phase for the next several years and re invest all dividends and new money.

My purpose for this post is partly to ask what others here would add to my consideration for eventually switching to a three fund portfolio to self manage, if and when the management group can no longer justify their 1% fee and additional services.

It is particularly on my mind of late with the billionaire and politician discourse about raising tax income and population equity equality distribution through increased taxation on dividend/interest income. This post is Not meant to discuss the merits of this discourse but rather what are the ways to pivot or mitigate the potential of increased dividend and interest tax rates in the future as the other part for the purpose of this post.

I have considered putting all new dividend/interest and portfolio contributions into a three fund portfolio as one method and ultimately want to avoid the very, very painful capital gains on selling each stock to put into an ETF. I suspect my query is not unique but with recent tax discussions find it back in my/our thoughts.

Thank you all in advance for your consideration on the matter.

ExitStageLeft
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Re: Dividend Generating Portfolio for Retirement

Post by ExitStageLeft » Wed Apr 17, 2019 12:44 pm

I suspect the strategy would be little different from those used to unwind a complicated taxable portfolio that is not tax-efficient. Your ultimate goal would likely be a three-fund portfolio with bonds in the tax-deferred and tax-efficient stock funds in taxable. If you adopt the mindset of not wanting your current taxable portfolio to get any worse, then taking all dividends and investing in VTSAX or equivalent seems like a wise preventative measure.

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CyclingDuo
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Re: Dividend Generating Portfolio for Retirement

Post by CyclingDuo » Wed Apr 17, 2019 1:16 pm

YellowBrickRoad wrote:
Wed Apr 17, 2019 9:01 am
We use a small investment group to manage our sizable portfolio which includes about 70 individual stocks and a bond fund (Pimix) in a 70/30 allocation for a 1% fee for our fiduciary advisers. We have a 2/3 taxable and 1/3 non taxable allocation as well.

It has provided returns significantly beyond a three fund portfolio by several percent for nearly the last ten years, with no future promises of course.

We are still in the acquisition phase for the next several years and re invest all dividends and new money.

My purpose for this post is partly to ask what others here would add to my consideration for eventually switching to a three fund portfolio to self manage, if and when the management group can no longer justify their 1% fee and additional services.

I have considered putting all new dividend/interest and portfolio contributions into a three fund portfolio as one method and ultimately want to avoid the very, very painful capital gains on selling each stock to put into an ETF. I suspect my query is not unique but with recent tax discussions find it back in my/our thoughts.

Thank you all in advance for your consideration on the matter.
With 70 different individual stocks, you already have your own DIY "index" fund assuming the companies you own shares in provide a diversified basket of stocks. You can read about the strategy of passively managing individual stocks here:
https://www.bogleheads.org/wiki/Passive ... ual_stocks

Each of the studies cited in that thread are interesting and you might find them interesting with regard to your current 70 stock portfolio.

As you mention, one strategy while you are still in the accumulation phase would be to reinvest all dividends from the 70 positions along with the new cash you are adding over the next few years into VTI and VXUS in your taxable account and BND in tax deferred account(s) for a few years to grow your Total Stock Market, Total International Stock Market, and Total Bond Market for the Three Fund Portfolio. You are already facing the taxes on the dividends each year, but we certainly wouldn't recommend selling all the taxable positions and being faced with the large capital gains bill to move it all over at once into a three fund portfolio. Directing the dividends and new cash will slowly morph your current portfolio into a hybrid of index funds and individual stocks that would still perform quite well. You pay no ER fees on the stocks, but the 1% fee going to the AUM advisor(s) is a drag on returns compared to not paying 1%.

You mention your returns have been better than the index funds. Does that include the 1% AUM fee as well as taxes along the way? Are you comparing a 70/30 individual equity and bond portfolio to a 70/30 three fund portfolio for those ten years?

You obviously have options, but if things have been going well and you are happy with your returns, you are obviously going to have to ask and answer the questions about what it is you want to change and why. Passively managing a portfolio of individual stocks that are held long term with a minimum of trading costs also fits a DIY strategy.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

delamer
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Re: Dividend Generating Portfolio for Retirement

Post by delamer » Wed Apr 17, 2019 1:38 pm

To mitigate against future increases in tax rates, you can design a portfolio that minimizes the dividends and interest that it throws off.

Some index funds are very tax efficient.

Of course, you can make changes to your non-taxable portfolio without any tax consequences. So that would be the obvious place to shift over to a 3 fund portfolio.

Good Listener
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Re: Dividend Generating Portfolio for Retirement

Post by Good Listener » Wed Apr 17, 2019 2:34 pm

We have to wait and see what happens. I am 60/40 with most in taxable and use the Total stock market index for stocks (international in Ira/Roth) and municipal bond fund exclusively. I am very concerned too about what I am hearing and dont think we should make a change yet. However the loss of preferred tax treatment of dividends would reduce the equity expected greater return in my mind and I would likely slowly increase my municipal bond percentage. Its after tax returns that matter.

Topic Author
YellowBrickRoad
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Joined: Fri Oct 05, 2018 7:26 am

Re: Dividend Generating Portfolio for Retirement

Post by YellowBrickRoad » Thu Apr 18, 2019 8:16 am

All good input thanks everyone who responded.

Perhaps the "dividend aristocrats" will pivot to bring their greatest stock holder after tax equity return with any future changes as well?

Another issue to get your feedback on is how to change/adjust your portfolio after the income exceeds your annual spending needs?

bhsince87
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Re: Dividend Generating Portfolio for Retirement

Post by bhsince87 » Thu Apr 18, 2019 8:38 am

Your desire to move to three fund is good, though as mentioned before, you may be diversified enough already.

We own about 40 individual stocks in taxable, and I've toyed with shifting that over in chunks, but decided to take an approach much like yours. Use dividends and new investment dollars to buy into Total Stock, and let the individual stocks ride until we're in a lower tax bracket.

However, I think you are off the mark worrying about future tax changes. Whether the changes come or not, you will face a similar situation with your Total Stock fund or S&P 500 (or whatever you choose).

It looks like Dividend Aristocrats are yielding around 2.5%. Total Stock and S&P 500 are around 2%.

Even assuming something radical like a 30% tax rate on dividends, your net tax would be 0.75% on the high yield stocks versus 0.6% on the total fund, or around 0.15% difference.

Compare that to the elephant in the room, the 1% fee. Which is something you CAN control, now. IMO, getting rid of that fee should be your first concern.
Retirement: When you reach a point where you have enough. Or when you've had enough.

Topic Author
YellowBrickRoad
Posts: 7
Joined: Fri Oct 05, 2018 7:26 am

Re: Dividend Generating Portfolio for Retirement

Post by YellowBrickRoad » Thu Apr 18, 2019 8:50 am

bhsince87 wrote:
Thu Apr 18, 2019 8:38 am
Your desire to move to three fund is good, though as mentioned before, you may be diversified enough already.

We own about 40 individual stocks in taxable, and I've toyed with shifting that over in chunks, but decided to take an approach much like yours. Use dividends and new investment dollars to buy into Total Stock, and let the individual stocks ride until we're in a lower tax bracket.

However, I think you are off the mark worrying about future tax changes. Whether the changes come or not, you will face a similar situation with your Total Stock fund or S&P 500 (or whatever you choose).

It looks like Dividend Aristocrats are yielding around 2.5%. Total Stock and S&P 500 are around 2%.

Even assuming something radical like a 30% tax rate on dividends, your net tax would be 0.75% on the high yield stocks versus 0.6% on the total fund, or around 0.15% difference.

Compare that to the elephant in the room, the 1% fee. Which is something you CAN control, now. IMO, getting rid of that fee should be your first concern.
As a frugal skeptic, in good company here, I look for reasons to justify switching to a three fund portfolio for increased simplicity, 'control', and value from my fiduciary investment advisers but year after year they more than justify their 1% not only in returns but also in myriad services.

Agree with not over reacting with changes in tax treatments that may never come but failing to prepare is preparing to fail per(severated by) my wise dad.

bloom2708
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Location: Fargo, ND

Re: Dividend Generating Portfolio for Retirement

Post by bloom2708 » Thu Apr 18, 2019 8:51 am

Just move the individual stocks "in kind". Dump the 1% fee.

If you are raking in 3% dividends you are taking a 33% haircut with the fee. They are all stocks, so there is no re-balancing.

Use a calculator like this to see what "only 1%" does over 20,30,40 years.

https://www.dinkytown.net/java/compare- ... -fees.html
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead | “It’s not things that upset us but rather our opinions about things.” Epictetus

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