Early Retirement Portfolio Income, 2016 Mid-Year Update

dividendmono225I like the idea of living off dividend and interest income. Who doesn’t? The problem is that you can’t just buy stocks with the absolute highest dividend yields and junk bonds with the highest interest rates without giving up something in return. There are many bad investments lurking out there for desperate retirees looking only at income. My goal is to generate portfolio income that will keep up with inflation.

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 (Taken 7/31/16) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
24% 1.83% 0.44%
US Small Value
WisdomTree SmallCap Dividend ETF (DES)
3% 2.98% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
24% 2.71% 0.65%
Emerging Markets Small Value
WisdomTree Emerging Markets SmallCap Dividend ETF (DGS)
3% 3.14% 0.09%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 3.21% 0.19%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX)
20% 2.82% 0.56%
Inflation-Linked Treasury Bonds
Vanguard Inflation-Protected Securities Fund (VAIPX)
20% 0.82% 0.16%
Totals 100% 2.18%

 

The total weighted 12-month yield was 2.18%. This means that if I had a $1,000,000 portfolio balance today, it would have generated $21,800 in interest and dividends over the last 12 months. (I will note that the muni bond interest in my portfolio is exempt from federal income taxes.) For comparison, the Vanguard LifeStrategy Moderate Growth Fund (VSMGX) is an all-in-one fund that is also 60% stocks and 40% bonds. That fund has a trailing 12-month yield of 2.04%, taken 7/31/2016.

Both of those yield numbers are significantly lower than the 4% withdrawal rate often quoted for 65-year-old retirees with 30-year spending horizons, and is even lower than the 3% withdrawal rate that I usually use as a rough benchmark. If I use 3%, my theoretical income would cover my current annual expenses. If I used the actual numbers above, I am still slightly short. I will admit that planning on spending only 2% is most likely too conservative. 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.

I still like this income yield calculation as very conservative lower bound that adjusts for stock market valuations (valuations go up probably means dividend yield go down) as well as interest rates (low interest rates now, probably low bond returns in future). As an aspiring early retiree with hopefully 40 or even 50 years ahead of me, I like having safe numbers given the volatility of stock returns and the associated sequence of returns risk.

Comments

  1. Very nice summary. Thanks.

    Are you planning on adding any higher-yielding investments like real estate or P2P lending? If you did, sounds like you could retire now as you’re not that far away from 3%.

  2. Nice! Is it your goal to stay at 2.x% or are you looking at changing your investment strategy to grow to 3 or 4%?

    • I have played with the idea of changes that create higher current income focus, similar to what Wellington Fund does, but don’t have anything planned. If anything, it will be small changes, I don’t expect any major changes. I will continue to experiment with higher yield investments like real estate lending.

  3. Yes ! One should not fall in to value trap by just looking at the dividend yield ,, we need to look at the sustainability of the cash flow generating from undelying business ! I have been living on passive income on dividend for last two years ,,, dividend matters !
    Cheers

  4. This allocation has dramatically under performed the market over the past 10 years, but in the face of a downturn like we had around 2008-2011, it didn’t fare much better, so I’m not sure you are really gaining much diversification if it is so closely correlated to the S&P when the market does tank, which is the real measure of diversification to me.

    A simple portfolio of 50% total bond market, 40% consumer staples, and 10% real estate would have outperformed your allocation by a factor of 2x.

    • Perhaps, but keep in mind the benefit of hindsight. I certainly don’t recall many experts recommending that “simple portfolio” over all the alternatives 10 years ago.

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