Search Results for: bogle book

Free eBook on Small Business Tax Deductions (Expired)

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(Update: Free promo is expired, it’s back at $9.99.) Just a quick note that there is a Kindle eBook about tax deductions for small businesses, including self-employed people, that is currently free called Small Business Tax Deduction Secrets by Stephen Nelson, CPA. The author participates in the Bogleheads investment forum under the username SeattleCPA.

I downloaded and skimmed the book briefly, and it does have helpful information for those looking to maximize qualified business expenses and deductions (as you should!). Free for a limited time, so as usual my advice is download now and read later! You can download software to read Kindle books on PC, Mac, smartphones, and tablets.

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The Most Important Thing Illuminated by Howard Marks (Book Review)

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Updated. I bought the original version with my own money, but then got offered a review copy of the newly released The Most Important Thing Illuminated which contains the same material but with additional commentary from respected investors Christopher Davis (David Funds), Joel Greenblatt (Gotham Capital), Paul Johnson (Nicusa Capital), and Seth Klarman (Baupost Group) as well as an extra chapter from Howard Marks. Most serious investors will recognize these names. The original is great, but if you’re willing to spend a bit more money (eBook is $9.99), this new version does have a little more meat to it. I’ve updated this review to include the new chapter.

If you wrote a book about investing and wanted some big-name endorsements, you couldn’t do much better than this – The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks has recommendations from Warren Buffett, Jeremy Grantham, Jack Bogle, Joel Greenblatt, and Seth Klarman.

Howard Marks is already famous around many investment circles for his Client Memos as the chairman and cofounder of Oaktree Capital Management, although not as well-known as Buffett’s shareholder letters. This book is basically a distillation of those memos into book form. Here are my personal notes.

Efficient Markets
Marks is an active investor, and this book is about successfully generate excess turns (alpha). Some people seem to think that “efficient markets” is black and white – either you believe in the Easter Bunny or you don’t. Market prices are completely perfect or investing is purely skill. This book helps you view market efficiency as a continuum. Beating the market by trading large-cap common stocks which are following by thousands of professionals is exceedingly hard. Oaktree Capital chooses to focus on what he perceives as less efficient markets – things like convertible securities and high-yield debt from distressed companies (“junk bonds”).

Developing your own investment philosophy
I enjoyed this quote:

Where does an investment philosophy come from? The one thing I’m sure of is that no one arrives on the doorstep of an investment career with his or her philosophy fully formed. A philosophy has to be the sum of many ideas accumulated over a long period of time from a variety of sources. One cannot develop an effective philosophy without having been exposed to life’s lessons

Quality vs. Price
The title of the book is a bit misleading, as there is no single “most important thing”. Basically each chapter is an expansion of one or more of his memos and it titled “The Most Important Thing is… XXX”. However, an overarching theme of the book is about risk control. I’ve already written about higher risk vs. higher investment return.

A related idea is that people tend to think of investments only in terms of quality. Strong companies vs. struggling companies. Highly-rated bonds vs. Lower-rated bonds. Strong developed countries vs. Weaker emerging countries. But what’s important is the price. A high-quality company can be a high-risk or low-risk investment, depending on what price you pay for it. A junk bond can be a high-risk or low-risk investment, depending on what price you pay for it.

Cycles
Marks strongly believes in the recurrence of cycles. One side of the pendulum occurs when people seems think that there are minimal risks, either because of recent history or some new invention that eliminates risk (CDOs?). Often, the only worry remaining is that we’ll miss out on the opportunity for great returns. The other side of the pendulum is when uncertainty is everywhere. Here, people say things like “I’m staying out of the market until the dust settles.” This reminded me of a chart I pulled out a lot during the housing bubble:

If you’re going to pick a time to invest, it’s better when people are scared, because at least they are properly considering all the potential risks. It should be scary and uncomfortable. He reminds you, as Charlie Munger says, “It’s not supposed to be easy.” If you wait until the dust has settled, there won’t be great prices anymore.

Illuminated-only Bonus Chapter: Reasonable Expectations
This is good reminder about having a clear goal as to what you want to achieve with your portfolio, but also to keep that goal within reason:

The key questions are what your return goal is, how much risk you can tolerate, and how much liquidity you’re likely to require in the interim.

Extraordinary skill is rare. When someone else promises returns “too good to be true”, the next question to ask is “why me?” If they found a can’t miss investment opportunity, why are they sharing this with you? If some talking head on TV makes a bold prediction, why aren’t they busy betting their net worth on the outcome? With today’s complex derivatives and betting markets, they should be rich and sunning themselves on a yacht instead.

Recap
Even though I am primarily a low-cost, buy, hold, & rebalance type of investor, I felt this book still provided me with new information for my own evolving investing philosophy. Creating alpha is not easy, and most people who try to do so consistently fail, so you should be very careful and realistic when assessing your own skills. I’ll be sure to read his future memos. Thankfully, they can be found at the Oaktree Capital website, free and available to all.

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Bogle on Earning Dividend Income From Stocks

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I was following an interesting discussion about living off of dividend income from stocks over at the Bogleheads forum, and member Beagler posted a link to a excerpt on income investing from the book Bogle on Mutual Funds.

You may know that John Bogle is the founder of Vanguard, now one of the largest fund organizations in the world and a pioneer in low-cost index funds. But what I really like about his books is his focus on common sense as the foundation for his advice. An example of this is his Gotrocks parable [pdf] adapted from Buffett. But back to this excerpt. He first points out how stock dividends have been a good way to create an income stream over the long run that grows faster than inflation.

Of course, by investing in common stocks you assume the risk that dividends will decline during periods of recession or depression […] What is truly remarkable is that the record of dividend payments by U.S. corporations heavily favors rising dividends over declining dividends, almost irrespective of prevailing business conditions.

Here’s a chart of the historical S&P 500 annual dividend, inflation-adjusted. (Note this is absolute dividend, not dividend yield percentage.)


Image credit to Multpl.com, data from S&P and Shiller

Now, the problem is that you can also pay too much for dividends. He shares an example of how if you were comparing the dividend income from a diversified stock portfolio yielding 3% and growing at 6% annually or a long-term bond yielding 7% each year, it would take 26 years for the dividend income to total the bond income payments.

Unfortunately, defining what constitutes too high a price for dividends is a fallible exercise, one that must take into account not only the average historical valuations for stocks but the current valuations for other investment alternatives as well. History suggests that stocks are relatively expensive when the price paid for $1 of dividends is above $30 (i.e., a yield of 3.3%) and relatively cheap when the price paid is less than $20 (a yield of 5%). However, stocks may well be attractive at a yield of, say, 3.5% if there are compelling reasons to assume that their dividends will increase rapidly or if yields on other classes of financial assets are relatively unattractive.

In the example shown in Figure 2-5, buying a portfolio of stocks at a 3% yield rather than a bond at a 7% yield might not be a sensible investment, especially considering the incremental risk incurred in holding stocks. When stocks yield 4.5% and bonds yield 6%, that may be quite another story.

What would Bogle say right now, when the S&P 500 yield is ~2% and 30-year Treasury bonds are ~3%? The relative difference between the stock yield and the bond yield is less than 1%. I would argue that his last sentence would suggest stocks are actually preferred over other classes at this point.

Now, I’m not turning in a stock bull, and I still have about 70% stocks and 30% bonds in my portfolio, but this line of thinking makes me happier with my 70% in stocks. I’ve also been looking more at living off of dividend income in “early retirement”.

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Jack Bogle Makes Market Prediction For Next Decade

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I don’t usually post market forecasts, but I just wanted to jot this one down for posterity. Jack Bogle, founder of Vanguard, is interviewed in a WSJ article Why a Legendary Market Skeptic Is Upbeat About Stocks where he makes a prediction of 7% annual returns for stocks for the upcoming decade. He correctly predicted 10%+ gains for the 1990s, and also low single-digit returns for the 2000s. Let’s see if he’s correct for the 2010s.

Over the next decade, Mr. Bogle said stocks are likely to generate an average annual return, including dividends, of around 7%. “Your money will double in 10 years,” he said. “How bad is that? People ought to get over the illusion [of higher expectations] and realize that they may have to invest for longer time periods, start earlier and save more.”

There other good observations in the article, although they won’t surprise any Bogle followers. I previously wrote about Bogle’s future return prediction methodology where total stock returns are the sum of earnings growth (aligns with GDP growth), dividend yield, and P/E ratio changes. The diagram below is reproduced from his 2007 book Little Book of Common Sense Investing, which also shows us a 7% forward prediction at the time. Well, we’ve got some catching up to do…

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Bogle & Enough: Not Everything That Counts Can Be Counted

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John Bogle is the founder of the Vanguard Mutual Fund Group, and the creator of the first index fund. Reading his latest book Enough: True Measures of Money, Business, and Life was like listening to one of his many speaking engagements, a distillation of a lifetime of wisdom from a man who changed the way that billions of dollars are invested today.

As Heller famously responded when told by Kurt Vonnegut that a hedge fund manager had made more money in a single day than his classic novel Catch-22 made in its entire history, “Yes, but I have something he will never have… enough.

Very simply, this book outlines the problem with making how much money we have the way to measure “success”. Such a philosophy affects how individuals invest, how business is conducted, and how lives are led. Bogle warns that this is taking our country down a dangerous road, which may leave our future less bright than the past. As Albert Einstein said: “Not everything that counts can be counted.”

His words about the need for character, accountability, and stewardship definitely ring true. However, I just can’t see the people of Wall Street turning down all this easy money without some “convincing” from the rest of us. Sure, they may feel a tinge of guilt now and then. But as Bogle paraphrases Upton Sinclair: “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to.”

In my opinion, it all ends up falling on us common folk as a whole to vote with our own dollars by not allowing overpaid CEOs as shareholders and consumers, not investing in high-cost complex investments, and not valuing “stuff” so much. We need to change things from the bottom up, not just with top-down rules and regulations.

Finally, my favorite part of this book is how Bogle acknowledges that his success was largely due to a mixture of luck and the assistance of many other people who believed in him. Too many successful people look back and think they did it all themselves. Sure, they may have worked very hard, but every one of us had help. A loving and supporting parent. A teacher who went the extra mile. A mentor who shared their own experience. Knowing that you didn’t do it alone, makes it easier to stop thinking of only yourself, which helps you find the balance of “enough” that includes thinking of others. At least that’s how I see it.

Recap
This is not a book about what kind of stock to buy. If you want Bogle’s view on that, read the more in-depth Common Sense on Mutual Funds or the concise Little Book of Common Sense Investing. I actually like the short one better.

Nor is this a book about frugality or living below your means. Instead, this tends to be more of a “Big Picture” book, about our definition of what “success” is. What should our goals be? What do we value? If you’re looking for some guidance in this area, or feel like there is something missing to this pursuit of money, then this is the book for you.

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Motley Fool Interviews Vanguard Founder John Bogle

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Speaking of being a BogleHead, I just finished listening to an interview of Bogle on NPR’s Motley Fool radio show, available online here. Thanks to reader Jonathan for sending it to me. John (Jack) Bogle, if you don’t know, is the founder of The Vanguard Group, and is known as the father of index funds.

My favorite part was where the Motley Fool asks him about picking individual stocks. Remember, Motley Fool makes their money by selling their stock picks. You can just feel Bogle trying not to rip them. He holds back and just says “the odds are against you”. Hah. To satisfy the stock-picking urge that many of us suffer from, he recommends a “funny money” account, much like my play money portfolio.
[Read more…]

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Book Review: Common Sense on Mutual Funds

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Common Sense on Mutual Funds Book CoverIt took me a bit longer than I thought, but I finally wrapped up Common Sense on Mutual Funds by John C. Bogle. Overall, I liked the book, but not as much as some of the others I have read. The first three Parts have to do with Investment Strategy, Choices, and Performance. Basically, costs are most important, you can’t beat the market on average, and Indexing is best. This part of the book was so-so, it wasn’t superbly organized. I felt like The Four Pillar of Investing did a much better job presenting Indexing as the best approach to long-term investing, with A Random Walk Down Wall Street a close second and a better overall primer.
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Simple Personal Finance Lessons and Quotes from Harry Markowitz (1927-2023)

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Harry Markowitz, who received the 1990 Nobel Prize in Economics for his contributions in creating modern portfolio theory, passed away recently. He introduced the use of mathematical methods to illustrate the power of diversification and how you can combine multiple different components into a portfolio that can achieve the highest expected return while taking on the minimum amount of risk. This NY Times obituary outlines his long list of achievements.

These days, anyone can run many backtests to optimize for a historically optimal portfolio using a number of different asset classes (as of today, it will be different in 5 or 10 years). However, if you listen to many of his interviews, Markowitz doesn’t necessarily think the average investor needs optimize relentlessly. Here are some useful quotes that don’t require any advanced math.

From his landmark 1959 book Portfolio Selection: Efficient Diversification of Investments:

A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.

How did Harry Markowitz actually run his own personal portfolio? From Jonathan Zweig’s NYT article about emotions and investing:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

From a Chicago Tribune interview by Gail MarksJarvis:

Early in his career, he did not take the risks some investment advisers suggest for young investors to maximize returns. Rather, he saved regularly and put half his money into stocks and half into bonds to grow while controlling risks. When he thought he had accumulated too much in either category, he stopped putting money there for a while and directed savings to the neglected group. […]

“I never sold anything,” he said. If stocks were increasing in value, he would let that portion grow for a while, but eventually he would stop stock purchases and beef up the bonds. The idea: The bonds would insulate him from the downturns that crush stocks from time to time without clear warning. […]

“Say you were 65, and invested $1 million, with 60 percent in stocks and 40 percent in bonds,” he said. “It became $800,000 [during the financial crisis], and you are not happy, but you lived to invest another day.”

From this Business Insider article via Bogleheads forum post (emphasis mine):

In an interview with Personal Capital, Markowitz was asked, “What are the top pieces of advice you give people about money?”

“I only have one piece of advice: Diversify,” he replied. “And if I had to offer a second piece of advice, it would be: Remember that the future will not necessarily be like the past. Therefore we should diversify.

From ThinkAdvisor:

“Perhaps the most important job of a financial advisor is to get their clients in the right place on the efficient frontier in their portfolios,” he told me. “But their No. 2 job, a very close second, is to create portfolios that their clients are comfortable with. Advisors can create the best portfolios in the world, but they won’t really matter if the clients don’t stay in them.

Thank you, Mr. Markowitz, for your contributions to economics, behavioral finance, and investing. Thanks also for the simple, actionable lessons that don’t require a degree in mathematics or economics: keep saving regularly, maintain a diversified portfolio of both stocks and bonds, rebalance when it gets off, and stick with it for a long time (don’t panic sell).

Image credit: Quantpedia

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MMB Portfolio 2022 2nd Quarter Update: Dividend & Interest Income

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via GIPHY

Here’s my quarterly update on the income produced by my Humble Portfolio (2022 Q2). I 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 them as building up a factory that churns out dollar bills. You can still track your dividend and interest income with a total return portfolio. You don’t need a bunch of high-yield stocks, MLPs, leveraged REITs, or covered call ETFs.

Background: Overall stock market dividend growth. Stock dividends are a portion of net profits that businesses have decided to distribute directly to shareholders, as opposed to reinvesting into their business, paying back debt, or buying back shares directly. 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. Dividend cuts tend to be avoided. Thus the starting yield is lower, but it can grow faster. 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. Currently, 31% of VTI’s net earnings are sent to you as a dividend. Notice how it grows gradually, with the current annual dividend 76% higher than in September 2013:

European corporate culture tends to encourage paying out a higher (sometimes fixed) percentage of earnings as dividends, but that means the dividends move up and down with earnings. Thus the starting yield is higher but may not grow as fast. Here is the historical growth of the trailing 12-month (ttm) dividend paid by the Vanguard Total International Stock ETF (VXUS). Currently, 47% of VXUS’s net earnings are sent to you as a dividend. Notice how it stays more stable (but also dropped during 2020 due to COVID), with the current annual dividend only 25% higher than in September 2013:

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.

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 have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$48,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has changed.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar, 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 2.99%, 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) 25% 1.61% 0.40%
US Small Value (VBR) 5% 2.12% 0.11%
Int’l Total Stock (VXUS) 25% 3.87% 0.97%
Emerging Markets (VWO) 5% 3.35% 0.17%
US Real Estate (VNQ) 6% 3.14% 0.19%
Inter-Term US Treasury Bonds (VGIT) 17% 1.25% 0.21%
Inflation-Linked Treasury Bonds (VTIP) 17% 5.59% 0.95%
Totals 100% 2.99%

 

Commentary. My ttm yield is now ~3%. Both US and international stock prices have gone down, and my ttm dividend yield has gone up. The price of my Treasury bonds have also gone down as nominal rates have gone up, but the yield will eventually go up as the money is reinvested into new bonds at higher rates. My TIPS yield has gone up significantly as CPI inflation has spiked. Of course, the NAV on my TIPS has also gone down, as real yields have gone up (again will be better as money is reinvested). TIPS are a bit complicated like that.

Use as a retirement planning metric. As a very rough goal, 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 (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). It’s just a target, not a number sent down from a higher being. 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.

Even if do you reach that 25X or 30X goal, it’s just a moment in time. The market can shift, your expenses can shift, and so 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. This is your one life and it only lasts about 4,000 weeks.

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.


MMB Portfolio 2022 1st Quarter Update: Dividend & Interest Income

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.

via GIPHY

Here’s a slightly-altered quarterly update on the income produced by my Humble Portfolio. I track the income produced as way to add a different view of 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 them as building up a factory that churns out dollar bills.

Annual 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 have generated about $24,000 in annual income over the previous 12 months. (2.4% starting yield)
  • If I reinvested the income but added no other contributions, today in 2022 it would have generated ~$46,000 in annual income over the previous 12 months.
  • If I spent every penny of the income every single year instead, today in 2022 it would still have generated ~$36,000 in annual income over the previous 12 months.

This chart shows how the annual income generated by my portfolio has changed.

TTM income yield. To estimate the income from my portfolio, I use the weighted “TTM” or “12-Month Yield” from Morningstar, 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 2.51%, 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) 25% 1.30% 0.33%
US Small Value (VBR) 5% 1.77% 0.09%
Int’l Total Stock (VXUS) 25% 3.21% 0.80%
Emerging Markets (VWO) 5% 2.96% 0.15%
US Real Estate (VNQ) 6% 2.78% 0.17%
Inter-Term US Treasury Bonds (VGIT) 17% 1.19% 0.20%
Inflation-Linked Treasury Bonds (VTIP) 17% 4.52% 0.77%
Totals 100% 2.51%

 

Stock market dividend growth over time. Stock dividends are a portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation. The ratio of dividend payouts to 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.

If you retired back in 2014 and have been living off your stock/bond portfolio, your total income distributions are much higher in 2022 than in 2014. 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 Q1 2022 (via Yardeni Research):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $26,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to over $100,000 a year, even if you had spent every penny of dividend income every year!

Here is the historical growth of the total dividend of the EAFE iShares MSCI ETF, which tracks a broad index of developed non-US stocks (VXUS is a newer ETF), via Netcials.

European corporate culture seems to encourage paying out a higher percentage of earnings as dividends, but is also more forgiving of adjusting the dividends up and down with earnings. US corporate culture tends to be more conservative, with the expectation that dividends will be growing or at least stable. This is not true across every company, just a general observation.

Use as a retirement planning metric. It’s true that 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 an overall numerical goal, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 30 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65).

However, 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. This is your one life and it only lasts about 4,000 weeks.

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.


MMB Portfolio 2021 Year-End (Late Update): Dividend and Interest Income

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.

dividendmono225Here’s my (late) quarterly update on the income produced by my “Humble Portfolio“. The total income goes up much more gradually and consistently than the number shown on brokerage statements (price), encouraging me as I keep plowing more of my savings into more stock purchases. I imagine them as a factory that just churns out more dollar bills.

via GIPHY

Income yield history (percentage of portfolio value). Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014. There appears to be a slight recovery from the early pandemic time period.

I track the “TTM” or “12-Month Yield” from Morningstar, 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 over the same period. (ETFs rarely have to distribute capital gains.) I prefer this measure because it is based on historical distributions and not a forecast. Below is a rough approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 1/24/22) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.21% 0.30%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.75% 0.09%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 3.09% 0.77%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.64% 0.13%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 2.56% 0.15%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT)
17% 1.14% 0.19%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
17% 4.69% 0.80%
Totals 100% 2.44%

 

Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

The ratio of dividend payouts to 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.

Absolute dividend history. Even though the dividend yield hasn’t been too impressive, there is a different story when you look at the absolute amount of income paid out over time. If you retired back in 2014 and have been living off your stock/bond portfolio, your total income distributions are much higher in 2022 than in 2014.

Here is the historical growth of the S&P 500 absolute dividend, which tracks roughly the largest 500 stocks in the US, updated as of Q4 2021 (via Yardeni Research):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $13,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to over $50,000 a year, even if you had spent every penny of dividend income every year.

Here is the historical growth of the absolute dividend of the EAFE iShares MSCI ETF, which tracks a broad index of developed non-US stocks (VXUS is a newer ETF), via Netcials.

European dividend culture seems to encourage paying out a higher percentage of earnings as dividends, but as a result those dividends are also more volatile, moving up and down with earnings. US dividend culture tends to be more conservative, with the expectation that dividends will be growing or at least stable. This is not true across every company, but in general there appears to be a greater stigma associated with dividend cuts in US stocks than in international stocks.

Big picture and rules of thumb. If you are not close to retirement, there is not much use worrying about decimal points. 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 result, I support the simple 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 30 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). Build in some spending flexibility to make your portfolio more resilient in the real world, and that’s a reasonable goal to put on your wall.

Using the income before “full” retirement. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “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 still working, 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. This is your one life and it only lasts about 4,000 weeks.

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.


MMB Portfolio Update October 2021 (Q3): Dividend and Interest Income

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.

dividendmono225While my 3rd Quarter 2021 portfolio asset allocation is designed for total return, I also track the income produced quarterly. Stock dividends are the portion of profits that businesses have decided they don’t need to reinvest into their business. The dividends may suffer some short-term drops, but over the long run they have grown faster than inflation.

I track the “TTM” or “12-Month Yield” from Morningstar, 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 over the same period. (ETFs rarely have to distribute capital gains.) I prefer this measure because it is based on historical distributions and not a forecast. Below is a rough approximation of my portfolio (2/3rd stocks and 1/3rd bonds).

Asset Class / Fund % of Portfolio Trailing 12-Month Yield (Taken 10/17/21) Yield Contribution
US Total Stock
Vanguard Total Stock Market Fund (VTI, VTSAX)
25% 1.28% 0.32%
US Small Value
Vanguard Small-Cap Value ETF (VBR)
5% 1.67% 0.08%
International Total Stock
Vanguard Total International Stock Market Fund (VXUS, VTIAX)
25% 2.56% 0.64%
Emerging Markets
Vanguard Emerging Markets ETF (VWO)
5% 2.25% 0.11%
US Real Estate
Vanguard REIT Index Fund (VNQ, VGSLX)
6% 2.65% 0.16%
Intermediate-Term High Quality Bonds
Vanguard Intermediate-Term Treasury ETF (VGIT)
17% 1.18% 0.20%
Inflation-Linked Treasury Bonds
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
17% 2.26% 0.38%
Totals 100% 1.89%

 

Trailing 12-month yield history. Here is a chart showing how this 12-month trailing income rate has varied since I started tracking it in 2014.

Maintaining perspective on portfolio value. One of the things I like about using this number is that 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.

Absolute dividend income. This quarter’s trailing income yield of 1.89% is still near the all-time lows since 2014. At the same time, both the portfolio value and the absolute income produced is higher than in 2014. If you retired back in 2014 and have been living off your stock/bond portfolio, you’ve been doing fine.

Here is the historical growth of the S&P 500 absolute dividend, updated as of Q3 2021 (source):

This means that if you owned enough of the S&P 500 to produce an annual dividend income of about $13,000 a year in 1999, then today those same shares would be worth a lot more AND your annual dividend income would have increased to over $50,000 a year, even if you had spent every penny of dividend income every year.

As a result, I prefer looking at absolute income produced rather than portfolio value or dividend yield percentages. Total income goes up much more gradually and consistently, encouraging me as I keep plowing more of my savings into more stock purchases. I imagine them as a factory that just churns out more dollar bills.

via GIPHY

Big picture and rules of thumb. If you are not close to retirement, there is not much use worrying about these decimal points. 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.

I support the common 4% or 3% rule of thumb, which equates to a target of accumulating roughly 25 to 30 times your annual expenses. I would lean towards a 3% withdrawal rate if you want to retire young (before age 50) and a 4% withdrawal rate if retiring at a more traditional age (closer to 65). Build in some spending flexibility to make your portfolio more resilient in the real world, and that’s perfectly good goal to put on your wall.

How we handle this income. Our dividends and interest income are not automatically reinvested. I treat this money as part of our “paycheck”. Then, as with a traditional paycheck, we can choose to either spend it or invest it again. Even if still working, you could use this money to cut back working hours, pursue new interests, start a new business, spend more time with your family and loved ones, travel, perform charity or volunteer work, and so on. This is your one life and it only lasts about 4,000 weeks.

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.