MMB Portfolio Dividend & Interest Income Update – October 2023

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Here’s my quarterly income update as of October 2023 for my MMB Portfolio. I prefer to track the income produced as an alternative metric to performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing.

Here is the historical growth of the S&P 500 total dividend, which tracks roughly the largest 500 stocks in the US, updated as of Q3 2023 (via Yardeni Research):

That is a much smoother ride than the price index. I imagine my portfolio as a factory that churns out dollar bills, or a tree that gives dividend fruit.

More details on dividends. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI) via StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. The starting yield is currently higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS).

The dividend yield (dividends divided by price) also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. – Jack Bogle

My portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would started out paying ~$24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the dividends/interest every quarter but added no other contributions, as of October 2023 it would have generated ~$47,000 in annual income over the previous 12 months.
  • If I spent all the dividends/interest every quarter and added no other contributions, as of October 2023 it would have generated ~$36,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has increased over time and with dividend reinvestment.

I’m using simplified numbers to explain things, but isn’t that a more pleasant way to track your progress?

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 10/2/23), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period.

My ttm portfolio yield is now roughly 2.69%, a bit lower than last quarter’s value. That means if my portfolio had a value of $1,000,000 today, I would have received $26,900 in dividends and interest over the last 12 months.

What about the 4% rule? For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). I really believe too much time is spent on this number. It’s just a quick and dirty target, not a number sent down from the heavens!

During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am trying to fully appreciate the “my kids still think I’m cool and want to spend time with me” period of my life. It won’t last much longer. (I’m actually dreading when I have to delete this sentence from my updates!) I am consciously choosing to work when they are at school but also consciously turning down work that doesn’t fit my priorities and goals. This portfolio income helps me do that.

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MMB Portfolio Asset Allocation & Performance Update – October 2023

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Here’s my quarterly update on my current investment holdings as of October 2023, including all of our combined 401k/403b/IRAs and taxable brokerage accounts but excluding our primary residence and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real-world, imperfect, low-cost, diversified DIY portfolio.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
Here’s how I track my portfolio across multiple brokers and account types. There are limited free advanced options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard (previously known as Personal Capital) and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have an archive of my holdings dating back many years.

2023 Q2 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Holdings” and “Allocation” tabs of my Empower Personal Dashboard.

Humble Portfolio Background. I call this my “Humble Portfolio” because it accepts the repeated findings that the ability to buy and sell stocks and exceed the performance of basically doing nothing is exceedingly rare. Charlie Munger believes that only 5% of professional money managers have the skill required to consistently beat the index averages after costs.

Instead, by paying minimal costs including management fees, transaction spreads, and tax drag, you can essentially guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the broad funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. You’ll find that whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. My goal is more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target asset allocation.

  • 30% US Total Market (ex. VTI)
  • 5% US Small-Cap Value (ex. VBR)
  • 20% International Total Market (ex. VXUS)
  • 5% International Small-Cap Value (ex. AVDV)
  • 10% US Real Estate (REIT) (ex. VWO)
  • 15% US Treasury Nominal Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Details. According to Empower, my portfolio is up about 5.0% YTD to 10/1/2023. The S&P 500 is up 11.7% YTD, while the US Bond index is down around 1%.

The most notable action this quarter has been… inaction. There was only minor rebalancing via new purchases with cashflows (mostly dividends) this quarter. I haven’t bought any new ETF tickers or sold a single share of anything. I am considering increasing my estimated tax payments to the IRS to compensate for the extra interest being earned on my FDIC-insured savings accounts and Treasury bonds.

I’ll share about more about the income aspect in a separate post.

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Bond Drawdown and Growth Comparison Charts: Short vs. Intermediate vs. Long-Term Bonds

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When investing in bonds, one of the decisions is how long you want the “term to maturity”, or how much longer the bond will pay interest and then upon maturity repay the principal. The longer the term, the more sensitive the bond price is to interest rates. They are usually broken up into short-term, intermediate-term, and long-term categories. iShares manages a set of popular ETFs that invests in US Treasury bonds of certain maturities:

  • iShares 1-3 Year Treasury Bond ETF (SHY)
  • iShares 7-10 Year Treasury Bond ETF (IEF)
  • iShares 20+ Year Treasury Bond ETF (TLT)

Historically, the longer the term, the higher the return. In exchange for this potential higher return, the longer term leaves you expose to higher interest rate risk. A recent “Chart of the Day” from Abnormal Returns compared the drawdowns of short-term (SHY), intermediate-term (IEF), and long-term (TLT) Treasuries over the last 20 years. I found it a very good visualization of the greater interest rate risk of longer-term bonds in terms of a dropping balance in your brokerage account.

Right now, you might look at this chart and question why anyone would have wanted to own long-term Treasury bonds if you could experience a drawdown of 41%! And from “100% safe government bonds” no less! 😡

Well, lots of people were quite happy with their long-term bonds up until recently. Here is a Morningstar chart that tracks the growth of $10,000 first invested 10 years ago (2013) in the long-term Treasury ETF TLT. During the initial COVID response, your $10,000 investment would have been worth nearly $17,000 when interest rates were dropping. But as of today, you are basically back to only $10,000 again after a long 10 years.

The Growth of 10k chart for the intermediate-term Treasury ETF IEF is similar, but a bit downsized. The peak value in 2020 was about $13,000 before coming back to close to $10,000 again as well. (Focus on blue line only.)

Finally, the Growth of 10k chart for the short-term Treasury ETF SHY was much more ho-hum. Notice how the vertical axes increase in much smaller increments. The peak value in 2020 was only about $11,000 before ending just slightly lower at ~$10,700. (Focus on blue line only.)

In fact, if you compare all three ETFs, the short-term ETF SHY had the highest ending value (and highest total return) over the last 10 years. Term risk showed up, and you could have had both a calm ride and more money in the end.

This is not a recommendation to only buy short-term bonds. Interest rates have been rising recently at one of the fastest rates in history, and that may stop or reverse at any time. Many people still choose to purchase longer-term Treasury bonds as a protection against deflation and/or dropping interest rates. Mostly, these charts help illustrate how these different types of bond terms respond to volatile interest rates. You may wish for a quieter ride (and less downside potential), even if you give up some upside potential. Or not.

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FI Calc: Visually-Friendly Retirement Withdrawal Calculator

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If you enjoy tinkering with financial calculators, FI Calc is a new one that is visually easy to use and thus potentially more educational. The portfolio inputs are somewhat limited (“stocks” = S&P 500, “bonds” = 10-year US Treasuries) but I enjoy changing up the rest of the variables and seeing how that affects the results. You can support the creator here.

Here’s an example scenario using a 70% stocks/25% bonds/5% cash portfolio (rebalanced annually) along with a 4% withdrawal rate adjusted annually for inflation ($40,000 initially on a $1 million portfolio). The success rate for a 40-year withdrawal period (longer than the usual 30-years) was calculated to be 91.2% (“103 out of 113 retirement simulations were able to sustain withdrawals for the entire retirement.”)

If you scroll down, you can actually see which specific 40-year periods resulted in portfolio successes ✅ (including big successes 💰 ) and failures ❌ (and near failures 🥜).

If you click on the 1972-2012 box, you can see how the $1 million portfolio value would have gone down over time, running out of money in 2006.

Yet if you look at the average annual return over that 40-year time period, stocks earned 6.74% real (11.09% nominal) and bonds earned 4.20% real (8.55% nominal). The growth chart for the S&P 500 (shown below) looks great during that same time. It’s just that the “sequence of returns risk” popped up where the returns were low in the beginning of the period and high at the end. If you spend down your portfolio too much in the beginning, it doesn’t have enough money left to come back later.

This also why when people just assume stocks will go up 8% a year, it’s very different than a 8% guaranteed return. The volatility really hurts when you are spending down your assets.

But, when you lower it to a 3.5% withdrawal rate ($35,000 initially on $1 million), your portfolio was able to mount a comeback:

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Social Security Claiming Age: Theoretically Optimal vs. Real World Decisions

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An important choice in retirement planning is when to start claiming your Social Security benefits. If you claim earlier, your monthly benefits will be reduced for the rest of your life. If you claim later, your monthly benefits will be increased for the rest of your life. Here is how much of the benefit taken at “full retirement age” will change based on your birth year. Taken from Fool.com using data from SSA.gov. Found via Early Retirement Forums.

This can be a complicated question, but if you were to force a rule of thumb*, it would probably be to wait to claim as late as you can in order to maximize your total lifetime benefits. (* Don’t just follow this blindly. There are many online calculators to help you with the details, especially for couples, like the free Open Social Security.)

Social Security is the only place you can “buy” a lifetime of guaranteed inflation-adjusted income. The difficulty is that you have to “buy” it by living off your other investments until your claim age.

Here are some interesting charts from the article The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions, which analyzed the “actual Social Security decision and wealth accumulation of 2,024 households in a Social Security Administration sponsored panel survey.”

As you can see, the optimal claim age to maximize total lifetime benefits is mostly tilted towards the maximum age of 70. However, the actual claim age is heavily clustered towards the earliest possible age of 62.

How much difference are we talking about? Here is a chart showing of the average lifetime increase in income if you went for the optimal instead of the actual (in percentages).

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Different Types of Taxable Bonds: Long-Term Performance and Returns Comparison

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As part of its “Portfolio Basics” series, Morningstar has an educational article on taxable bonds, including corporate bonds, US government bonds, and foreign government bonds, along with their different credit grades and maturity lengths.

Over the last 20 years, things have played out pretty much as the traditional theory would have predicted. The higher the “risk”, the higher the return. High-yield “junk”-rated corporate bonds have had the highest return, but also the bumpiest ride due to their higher credit risk and higher interest rate risk (they are usually of longer maturity). Short-term US Treasury bills (“cash”) has had the lowest return but the lowest credit risk and lowest interest rate risk. Personally, I see this chart and am satisfied with my holdings of intermediate-term US Treasury bonds (green line) that keeps the highest credit risk but with effectively a ladder out to a longer average maturity.

But hey, those high-yield bonds still returned a lot more money over the last 20 years instead. Why not just hold those instead? First, don’t forget to step back and look at the bigger picture:

If you’re going to accept big swings, you might prefer one of the highest returning assets in the top-right corner. (I have no idea which one will be the absolute highest in the next 20 years, but I don’t think it’s an accident that all the stocks are grouped together in that top-right corner.) If you can hold on through the scary periods, the gap between stocks and bonds over the long run (~100 years below) is huge:

This is why many will advise you to own more stocks if you want an overall higher risk/potentially higher return profile, as opposed to riskier bonds. But before you get carried away, read this book excerpt Courage Required from William Bernstein. Bleak times will come again. Safe things have value beyond the rate of return.

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Big List of Anti-Lists: Asset Classes NOT Owned By Some Experienced Investors

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Every asset class has its energetic supporters, from rental properties to altcoins to gold. Listening to each group, you may feel that you need to own every asset class in order to be “diversified”. However, sometimes less is more, and it can be useful to read about why many seasoned veterans consciously avoid certain corners of the investment world. I find it a refreshingly different perspective, even if I may or may not agree. Everyone’s needs are different, and I own several of the things below myself. Here are a few lists along with supporting arguments.

William Bernstein – MD, author and wealth manager. I compiled this list while listening to the linked interview.

  • Commodities Futures
  • Individual Stocks
  • Corporate bonds
  • Long-term bonds
  • Fixed annuities

Jonathan Clements – financial author and long-time WSJ columnist

  • Savings bonds.
  • Long-term bonds.
  • High-yield “junk” bonds.
  • Municipal bonds.
  • International bonds.
  • Individual stocks.
  • Immediate fixed annuities (but he does plan to buy some eventually).
  • Deferred income annuities.
  • Gold
  • Commodities
  • Real Estate Investment Trusts (REITs)
  • Rental properties.
  • Long-term-care insurance.
  • Life insurance.
  • Disability insurance.
  • Flood insurance.

Amy Arnott – CFA, portfolio strategist for Morningstar Research

  • Actively Managed Funds
  • Real Estate Investment Trusts (REITs)
  • Sector Funds
  • Alternative Investments
  • I Bonds
  • High-Yield Bonds
  • Gold

Let me know if you come across any other “What I Don’t Own” lists.

[Image credit: Amazon]

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What’s Your Retirement Mindset? Escaping From vs. Escaping To

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In a recent Outside magazine article, the author examined research about how activities can be either positive or negative, not based on the actual activity itself, but your mindset while doing them. For example, exercising could be negative, while playing video games could be positive.

Stenseng’s view, which he first laid out in a 2012 paper, is that we should broaden our concept of escapism to include both negative and positive elements, which he dubbed self-suppression and self-expansion. The former is when you’re running away from bad feelings; the latter is when you’re seeking out good feelings.

Earlier this year in the journal Frontiers in Psychology, Stenseng and his colleagues published a study of 227 recreational runners, in which they tried to tease out the signs of self-suppressing and self-expanding escapism with a series of questionnaires. Runners who agreed with statements like “When I run, I try to learn new things about myself” or “When I run, I open up for experiences that enrich my life” were demonstrating self-expansion. Those who agreed with “When I run, I shut out the difficult things I do not want to think about,” on the other hand, were self-suppressing.

This concept also connects with the pursuit of financial freedom and retirement:

The most powerful message that I take from Stenseng’s work is the distinction between avoidance and approach—between escaping from and escaping to.

What is your primary reason for pursuing financial freedom? If you’re focusing on the negative aspects of your job – horrible bosses, annoying customers, long hours, stressful work, inadequate paycheck, then you are trying to escape from your bad job. That can be a good initial motivator, but it won’t sustain you for very long. You’ll be miserable and prone to burnout. If you do make it to retirement, you might still find yourself searching to ways to fill the day.

This research supports the idea that healthier approach is to start exploring and finding out where you want to escape to. Commit energy into finding a better job laterally and/or entire career switch. Connect with friends and ask about any opportunities. Look at the hobbies you enjoy and pick apart what you like about them. You have to find the “good enough” job that makes the saving phase more like auto-pilot. Even for very early retirees, you are looking at 15-20 years of work. Don’t spend it with people you don’t like or respect. In the end, it’s the retirees with engaging hobbies and friends that are the happy ones.

The August 2023 issue of Costco Connection profiles the second “what if” careers of several different folks. Bank executive turned woodworker. Teacher turned baker. TV producer turned college professor.

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TIPS Real Yields ~2% Across All Maturities; 4.4% Guaranteed 30-Year Withdrawal Rate

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One of my regular bookmarks is the TIPS real yield page (along with the regular Treasury yields). I noticed that the real yield on the 30-year TIPS has nudged above the 2% mark:

At the same time, the 30-year regular Treasury is at 4.3%, making the break-even annual inflation rate about 2.3%. Over the next 30 years, I’d take the over on that, or at least take some insurance out on the possibility of high inflation.

In addition, as David Enna of Tipswatch points out, this is the first time in a long while that all the various maturities (5/10/30 year shown below) are all around 2%.

If you wanted to, you can again construct a ladder of TIPS that will provide you a guaranteed inflation-protected income over the next 30 years (including spending down your principal) of over 4% above inflation (~4.4% as of this writing, as rates are higher today that at the time of writing for that post).

That means if you put $1,000,000 into a 30-year TIPS ladder right now, you can create ~$44,000 income for year 1 and then another ~$44,000 adjusted for inflation (CPI-U) annually for the next 29 years. All fully backed by the US government. No stock market volatility. No chance of annuity insurance company failure. Check out TipsLadder.com and Eyebonds.info if you are ready to get deep into the details.

While I am not looking into investing a lump sum into a TIPS ladder, I do own both regular US Treasuries and TIPS to provide the stable, guaranteed growth portion of my portfolio. (I’m roughly 70% stocks and 30% bonds.) If I’m getting guaranteed 5% growth from US Treasuries and guaranteed 2% + inflation from TIPS, I’m pretty happy with that for the safe part of my portfolio.

I am taking this opportunity rebalance my existing bond holdings and free cash to create an overall longer duration for my TIPS. I want to lock in that 2% real yield across longer maturities while it is available. Real yields might go even higher, but I’m more worried about it going lower than higher.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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MMB Portfolio 2023 2nd Quarter Update: Dividend & Interest Income

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Here’s my 2023 Q2 income update for my MMB Portfolio. I prefer to track the income produced as an alternative metric for performance. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), which helps encourage consistent investing. I imagine my portfolio as a factory that churns out dollar bills, a tree that gives dividend fruit.

Recently, I came across this ETF Trends interview with Ryan Krueger of Freedom Day Solutions. While I don’t own the MBOX ETF, I do feel aligned with their overall philosophy of watching dividend growth. (I prefer to let the market figure things out via broad passive index fund, rather than active management.)

Crigger: What is the concept of a “Freedom Day”? And how is it different than a retirement age?

Krueger: In one sentence: Freedom Day isn’t about what asset level to retire at, but about what income number. Frankly, I don’t think retirement should be an age thing, anyway. Why not retire at 50—or if you really love what you’re doing, why not 80 or 90?

Freedom Day is our mathematical version of something better than retirement. It’s the day when your cash flow exceeds your outflows; when you finally know for certain enough is enough.

But it all comes back to income. Advisors’ biggest challenge right now is figuring out how to generate increasing income flows for their clients. As a result, investors are reaching for yield, and taking risks they might not realize are there, all to try to catch up and get that 4-5% withdrawal rate. But if you dig your income well before you’re thirsty, rising dividends oer the potential to be larger than withdrawal rates – and that’s free cash flow, not withdrawing.

Background about why I track dividends. Stock dividends are a portion of profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

In the US, the dividend culture is somewhat conservative in that shareholders expect dividends to be stable and only go up. Thus the starting yield is lower, but grows more steadily with smaller cuts during hard times. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total US Stock ETF (VTI), courtesy of StockAnalysis.com.

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that also means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as reliably. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS).

The dividend yield (dividends divided by price) also serve as a rough valuation metric. When stock prices drop, this percentage metric usually goes up – which makes me feel better in a bear market. When stock prices go up, this percentage metric usually goes down, which keeps me from getting too euphoric during a bull market. Here’s a related quote from Jack Bogle (source):

The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. – Jack Bogle

My personal portfolio income history. I started tracking the income from my portfolio in 2014. Here’s what the annual distributions from my portfolio look like over time:

  • $1,000,000 invested in my portfolio as of January 2014 would started out paying ~$24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the dividends/interest every quarter but added no other contributions, as of July 2023 it would have generated ~$51,000 in annual income over the previous 12 months.
  • Even if I SPENT all the dividends/interest every quarter and added no other contributions, as of July 2023 it would have generated ~$39,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has increased over time and with dividend reinvestment. Note that these are nominal values and interest rates and inflation have risen more recently.

I’m using simple numbers to illustrate things, but isn’t that a more pleasant way to track your progress?

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar (checked 4/2/23), which is the sum of the trailing 12 months of interest and dividend payments divided by the last month’s ending share price (NAV) plus any capital gains distributed (usually zero for index funds) over the same period. The trailing income yield for this quarter was 3.33%, as calculated below. Then I multiply by the current balance from my brokerage statements to get the total income.

Asset Class / Fund % of Portfolio Trailing 12-Month Yield Yield Contribution
US Total Stock (VTI) 30% 1.51% 0.45%
US Small Value (VBR) 5% 2.22% 0.11%
Int’l Total Stock (VXUS) 20% 2.94% 0.59%
Int’l Small Value (AVDV/EYLD) 5% 5.68% 0.28%
US Real Estate (VNQ) 10% 4.52% 0.45%
Inter-Term US Treasury Bonds (VGIT) 15% 2.22% 0.33%
Inflation-Linked Treasury Bonds (TIP) 15% 4.32% 0.65%
Totals 100% 2.87%

 

My ttm portfolio yield is now roughly 2.87%, a bit lower than last quarter’s value. That means if my portfolio had a value of $1,000,000 today, I would have received $28,700 in dividends and interest over the last 12 months. (This is not the same as the dividend yield commonly reported in stock quotes, which just multiplies the last quarterly dividend by four.)

What about the 4% rule? For goal planning purposes, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 33 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (closer to age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a quick and dirty target, not a number sent down from the heavens. During the accumulation stage, your time is better spent focusing on earning potential via better career moves, improving in your skillset, and/or looking for entrepreneurial opportunities where you can have an ownership interest.

As a semi-retired investor that has been partially supported by portfolio income for a while, I find that tracking income makes more tangible sense in my mind and is more useful for those who aren’t looking for a traditional retirement. Our dividends and interest income are not automatically reinvested. They are another “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again to compound things more quickly. Even if we spend the dividends, this portfolio paycheck will still grow over time. You could use this money to cut back working hours, pursue a different career path, start a new business, take a sabbatical, perform charity or volunteer work, and so on.

Right now, I am trying to fully appreciate the “my kids still think I’m cool and want to spend time with me” period of my life. It won’t last much longer. I am consciously choosing to work when they are at school but also consciously turning down work that doesn’t fit my priorities and goals. This portfolio income helps me do that.

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MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


MMB Portfolio 2023 2nd Quarter Update: Asset Allocation & Performance

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Here’s my quarterly update on my current investment holdings at the end of 2023 Q2, including our 401k/403b/IRAs and taxable brokerage accounts but excluding our primary residence and side portfolio of self-directed investments. Following the concept of skin in the game, the following is not a recommendation, but a sharing of our real-world, imperfect, low-cost, diversified DIY portfolio.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.” – Nassim Taleb

How I Track My Portfolio
Here’s how I track my portfolio across multiple brokers and account types. There are limited free options after Morningstar discontinued free access to their portfolio tracker. I use both Empower Personal Dashboard (previously known as Personal Capital) and a custom Google Spreadsheet to track my investment holdings:

  • The Empower Personal Dashboard real-time portfolio tracking tools (free) automatically logs into my different accounts, adds up my various balances, tracks my performance, and calculates my overall asset allocation daily.
  • Once a quarter, I also update my manual Google Spreadsheet (free to copy, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation. I also create a new tab each quarter, so I have an archive of my holdings dating back many years.

2023 Q2 Asset Allocation and YTD Performance
Here are updated performance and asset allocation charts, per the “Holdings” and “Allocation” tabs of my Empower Personal Dashboard.

Humble Portfolio Background. I call this my “Humble Portfolio” because it accepts the repeated findings that individuals cannot reliably time the market, and that persistence in above-average stock-picking and/or sector-picking is exceedingly rare. Charlie Munger believes that only 5% of professional money managers have the skill required to consistently beat the index averages after costs.

If beating a “simple, unsophisticated” Target Retirement Index Fund was so easy, they should simply charge money for it. You give me 2% outperformance, and I’ll pay you 1%. You simply have to cover any and all losses if you happen to underperform the “simple, unsophisticated” index fund. Isn’t it strange how nobody would take that deal?

Instead, by paying minimal costs including management fees, transaction spreads, and tax drag, you can essentially guarantee yourself above-average net performance over time.

I own broad, low-cost exposure to productive assets that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I have faith in the long-term benefit of owning businesses worldwide, as well as the stability of high-quality US Treasury debt. My stock holdings roughly follow the total world market cap breakdown at roughly 60% US and 40% ex-US. I add just a little “spice” to the broad funds with the inclusion of “small value” ETFs for US, Developed International, and Emerging Markets stocks as well as additional real estate exposure through US REITs.

I strongly believe in the importance of knowing WHY you own something. Every asset class will eventually have a low period, and you must have strong faith during these periods to truly make your money. You have to keep owning and buying more stocks through the stock market crashes. You have to maintain and even buy more rental properties during a housing crunch, etc. A good sign is that if prices drop, you’ll want to buy more of that asset instead of less. I don’t have strong faith in the long-term results of commodities, gold, or bitcoin – so I don’t own them.

I do not spend a lot of time backtesting various model portfolios, as I don’t think picking through the details of the recent past will necessarily create superior future returns. You’ll find that whatever model portfolio is popular in the moment just happens to hold the asset class that has been the hottest recently as well.

Find productive assets that you believe in and understand, and just keep buying them through the ups and downs. Mine may be different than yours.

I have settled into a long-term target ratio of roughly 70% stocks and 30% bonds (or 2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. My goal is more “perpetual income portfolio” as opposed to the more common “build up a big stash and hope it lasts until I die” portfolio. My target withdrawal rate is 3% or less. Here is a round-number breakdown of my target asset allocation.

  • 30% US Total Market
  • 5% US Small-Cap Value
  • 20% International Total Market
  • 5% International Small-Cap Value
  • 10% US Real Estate (REIT)
  • 15% US Treasury Nominal Bonds or FDIC-insured deposits
  • 15% US Treasury Inflation-Protected Bonds (or I Savings Bonds)

Details. According to Empower, my portfolio went up about 8.8% YTD to 7/4/2023. The S&P 500 is up 16% YTD, while the US Bond index is up about 2%. Remaining invested with stocks has paid off this year significantly more than worrying about the details of Treasury bills and cash rate-chasing.

There was only minor rebalancing with cashflows (mostly dividends) this quarter. I loosely keep up with the new DFA and Avantis ETFs that come out, but am somewhat limited in what I buy as I have lot of capital gains built up right now. DFA has an International Small Cap Value ETF (DISV) and an Emerging Markets Value ETF (DFEV). Avantis also has an Avantis International Small Cap Value ETF (AVDV) and Avantis Emerging Markets Value ETF (AVES). I’ll keep them in mind if there are future drops and other tax loss harvesting opportunities.

I’ll share about more about the income aspect in a separate post.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Why I Don’t Use Covered Calls As a Retirement Income Strategy

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

Eventually, you will be presented with the idea of writing covered calls on your portfolio and earning “easy income” from this strategy. I already know intuitively that there must be a cost to this “passive income” and that the net effect is worse performance than simply holding the same index fund or stock for the long term. However, the pushback is usually that you can get a more reliable cashflow in exchange for giving up some of your upside.

The article The Hidden Cost of Covered Call Writing (via Abnormal Returns) does a good job of explaining why there is unfortunately no “free lunch” with this strategy, even if your goal is to create steady income.

Many investors focus on the call premium as a source of portfolio “income” while still participating in a limited amount of appreciation of the stock. As long as the stock stays below the strike price and the call expires worthless, the strategy can generate positive portfolio income, making it ideal for flat or down markets. However, trying to time when stocks and markets will be flat or down is extremely difficult, particularly given the long-term upward bias of the equity markets. As such, there is a hidden cost of covered call writing, which is the potentially significant opportunity cost of having the stock go above the strike price causing lost portfolio appreciation.

Covered calls work great when they work out, since you get to keep your stock and the “free income”. Giving up your upside may seem like a good deal, but you must realize that much of the stock market’s return comes from lumpy periods where it shoots up without warning.

The chart below from the article compares the performance results between simply withdrawing 3% a year from your S&P 500 portfolio from 2013 to 2022, as opposed to writing covered calls with a 3% yield on your S&P 500 portfolio. The chart does add a 0.75% annual management fee for this approach, but even if you add that back in, the difference is still 11.3% vs. 9.2% annualized return.

Lower volatility is also commonly cited as a benefit of a covered call strategy. Well, yeah, if you limit your upside every time the strike price is exceeded, then you will have lower volatility.

In a rising market, covered calls may actually reduce upside portfolio volatility, which is the type of volatility that investors benefit from. As such, when evaluating covered call strategies that show lower volatility statistics than the broader market, investors should be mindful of where that volatility reduction may be coming from.

Am I willing to give up 2% in annual returns for a steady income? Nope. I mean, 2% is already roughly the entire dividend yield of the S&P 500. The problem is that most people who use this strategy aren’t properly tracking their performance and probably won’t know if they are lagging behind simple buy and hold. The call premium income comes in most of the time, so it’s easy not to realize the true cost of missing out on the gains.

There are certainly scenarios where if you think you have an information edge, knowing how to structure an option can help you make the right bet. But they aren’t magic! I am very skeptical of the idea of any options strategy that will somehow give you reliable income without a significant cost of hurting your total returns. That just gives me the same feeling of someone who claims to invent a machine that defies a basic law of physics.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.