When investing, should you focus on income, or total return? I like the idea of living off dividend and interest income, but I also think it is easy for people to reach too far for yield and hurt their overall returns. But what is too far? That’s the hard part. Certainly there are many bad investments lurking out there for desperate retirees looking for maximum income. If possible, I’d like to invest for total return and then live off the income.
A quick and dirty way to see how much income (dividends and interest) your portfolio is generating is to take the “TTM Yield” or “12 Mo. Yield” from Morningstar quote pages. Trailing 12 Month Yield is the sum of a fund’s total trailing 12-month interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed over the same period. SEC yield is another alternative, but I like TTM because it is based on actual distributions (SEC vs. TTM yield article).
Below is a close approximation of my most recent portfolio update. I have changed my asset allocation slightly to 60% stocks and 40% bonds because I believe that will be my permanent allocation upon early retirement.
| Asset Class / Fund | % of Portfolio | Trailing 12-Month Yield (10/18/14) | Yield Contribution |
| US Total Stock Vanguard Total Stock Market Fund (VTI, VTSAX) |
24% | 1.78% | 0.43% |
| US Small Value WisdomTree SmallCap Dividend ETF (DES) |
3% | 2.81% | 0.08% |
| International Total Stock Vanguard Total International Stock Market Fund (VXUS, VTIAX) |
24% | 3.35% | 0.80% |
| Emerging Markets Small Value WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) |
3% | 2.97% | 0.09% |
| US Real Estate Vanguard REIT Index Fund (VNQ, VGSLX) |
6% | 3.51% | 0.21% |
| Intermediate-Term High Quality Bonds Vanguard Limited-Term Tax-Exempt Fund (VMLUX) |
20% | 1.70% | 0.34% |
| Inflation-Linked Treasury Bonds Vanguard Inflation-Protected Securities Fund (VAIPX) |
20% | 1.78% | 0.36% |
| Totals | 100% | 2.31% |
The total weighted yield was 2.31%, as opposed to 2.49% calculated last quarter. This means that if I had a $1,000,000 portfolio balance today, it would have generated $23,100 in interest and dividends over the last 12 months. Now, 2.31% is significantly lower than the 4% withdrawal rate often recommended for 65-year-old retirees with 30-year spending horizons, and is also lower than the 3% withdrawal that I prefer as a rough benchmark for early retirement. Hurray for zero interest rates!
So how am I doing? Using my 3% benchmark, the combination of ongoing savings and recent market gains have us at 90% of the way to matching our annual household spending target. Using the 2.31% number, I am only 69% of the way there. That’s a big difference, and something I’ll have to reconcile. Consider that if all your portfolio did was keep up with inflation each year (0% real returns), you could still spend 2% a year for 50 years. From that perspective, a 2% spending rate seems extremely cautious.
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Didn’t your last post say your asset allocation was 70% stocks 30% bonds? Or is the 60-40 asset allocation limited to your retirement accounts only?
Yes it is currently 70/30 but will shift to 60/40 upon retirement. I wanted to see what my portfolio would generate as a 60/40 retirement portfolio, although it is not really that much different than 70/30.
Jonathan, Can you elaborate on your choice of Wisdomtree rather than the equivalent Vanguard funds?
Well, those two ETFs comprise the “fun” part of my portfolio, or the Explore in Core & Explore. Either ETF makes up 3% or so of portfolio, so not a huge chunk. Vanguard has a US Small Value ETF, which is great, but it is not quite as small (average company size) or value-y as the Wisdomtree ETF when I was researching them. But DES costs more than VBR, so it may underperform due to that. Vanguard doesn’t have an international small value fund/ETF, and they definitely don’t have one just focused on emerging markets. So DGS it is. I wouldn’t strongly recommend either one to others; I just happen to think they are kind of neat and round out my portfolio.
I also like the idea that small, value companies more closely approximate private small businesses not included in mutual funds.
https://www.mymoneyblog.com/total-economy-portfolio.html
Not sure if this is the post to bring this up, but how often (if ever) do you consider diversifying into other currencies? It seems this could be at least a partial answer to dealing with potential weakness in the dollar or slow growth encouraged by Fed policies.
Personally, I’ve been building up a decent savings in AUD as a side-effect of living in Australia. I’m getting about 3.75% on my savings account here. That’s somewhat offset by recent weakness in the AUD vs. USD (assuming I want to convert back someday), but it seems to be a net positive.
I don’t really pay attention to currencies as I intend to retire in the US. I feel that currency moves will more or less even themselves out over the long term. If a country has deposit accounts paying high interest rates, they probably have higher inflation as well. There are plenty of people trading currencies to negate any edge that I could achieve. I also know a lot of people who have lost a lot of money speculating on currencies, as speculation is really the right term for short-term movements. Also, most international stock index funds like VXUS are not currency-hedged so the return from those holdings will respond to currency moves.
You’re doing ok. Better than most, I would say. I like your fund choices a lot (I really like Vanguard in general). I think the allocation is set nicely, though I personally don’t have that many funds.
Jonathan, looks like you only need another percent to reach your goal of 3%. Have you considered selling covered calls against your long positions. You can easily make 1% a year. Selling covered calls is like generating your own dividend. There is a lot of information available online that shows how to successfully do that.
Johnathan,
Do you include your housing expenses and medical insurance into living expenses when you’re shooting for a 100% replacement of your living expenses?
Also, incidentals like travel/gifts etc.-do you factor in it somehow?
Thank you
Our primary residence is paid off, so I don’t include mortgage or rent. I do include property taxes, homeowners insurance, and estimated home maintenance. I do include family medical insurance premiums that we currently don’t pay, as well as a budget for travel and gifts. Those numbers are based on historical expenses.
When evaluating your progress towards your 3% benchmark, how do you account for the fact that some (perhaps most?) of your wealth is tied up in tax deferred accounts that cannot be accessed until 59 1/2?
Well, most of my wealth is actually now in taxable accounts, but there is always Rule 72(t) that waives the penalty if you need to access your tax-deferred accounts and you have enough for early retirement. See older post:
https://www.mymoneyblog.com/early-retirement-planning-taking-early-withdrawals-without-penalty-from-your-401k-or-ira.html