I love December. It’s dividend season for my mutual funds. Like a kid eagerly awaiting Christmas morning, I excitedly anticipate the arrival of my dividend payments. I don’t even have to unwrap them. They just show up in my investment accounts!
Dividends are pretty awesome, but I don’t want to overstate my reliance on dividend income in my early retirement financial planning. I’m a firm “slice and dice” index fund investor with fixed asset allocations I use to periodically rebalance my portfolio. Right now I’m almost entirely invested in equities through mutual funds. All those equity mutual funds pay dividends. This adds up to a lot of dividend income without even trying to be a dividend investor.
What is “a lot” of dividend income? You may recall from my “four months in retirement” update that we earned $13,134 of dividends in December. Here’s a snapshot from Personal Capital showing all the December dividends:
I didn’t sign up for Personal Capital until October, so I don’t have all of 2013’s financial information in their system. I manually totaled the dividends I received in 2013 from my financial institutions’ websites. What a pain. 2014’s dividend tracking should be much easier since Personal Capital is now tracking all investment transaction data from all of my accounts.
For all of 2013, we received $22,300 of dividend income (including the $13,134 received in December 2013). The dividends are concentrated in December because some mutual funds in our investment portfolio only pay dividends once per year, and the payment falls just before the end of the calendar year.
The $22,300 dividend total for 2013 includes dividends paid into our taxable brokerage accounts as well as those paid into our HSA, IRA’s and 401k’s. The distinction between taxable and tax deferred accounts is important because we can easily use the dividends in the taxable account for living expenses.
In December 2013, we received $4,850 of dividend income in our taxable accounts. For all of 2013, we received $7,700 dividend income in our taxable accounts.
Our retirement budget is $32,000 per year, which means the $7,700 in dividend income is enough to fund around 25% of our expenses during early retirement. The other 75% of retirement expenses will be funded by selling appreciated funds in the taxable account (for the first 10-15 years).
2014 Dividend Forecast
We have a lot of dividend income, but where does it come from? Take a look at my forecast of 2014 dividends. I used the currently reported yields on these funds when available. In the case of the international investments, I calculated the yields based on 2013’s actual distributions divided by the current share prices of the respective funds or ETF’s. My assumption is that the funds in my portfolio will pay the same amount in 2014 as they did in 2013. I actually expect the dividends to go up a small amount as long as the economy remains moderately strong in 2014. However for simplicity’s sake, I kept the dividends the same in 2014.
This table is an extension of my asset allocation table in this post.
You’ll notice the projected 2014 dividends of $22,590 are slightly higher than what we actually received in 2013 ($22,300). There are a few reasons. We were contributing to our investments all year, so dividends weren’t being paid in the early months of 2013 on some of our investments. Our portfolio differs from the all-Vanguard portfolio I show above for various reasons, with the result being the dividend yields are a little different where we own other mutual funds outside of Vanguard.
We don’t have exactly $1 million worth of dividend paying investments. We have a bit more than that. We also have some investments that don’t pay dividends at all (the crappy proprietary funds in my 457 account, for example).
In the 2014 dividend forecast chart, the yield on the entire portfolio is 2.26%. The actual 2013 dividend yield on our account was closer to 2.1%.
I provided the forecast chart because those are the funds where I want to be long term with my investments. I plan to sell some non-Vanguard funds and move to lower cost options at Vanguard (and keep more of the yield for myself!).
I want to point out a few things on the forecast chart. REIT’s and international funds tend to have the highest dividend yields. The “value” oriented funds also tend to pay higher dividends than blended or growth funds. I haven’t picked any of the funds in my asset allocation for their dividend paying ability, but by leaning toward value and international investments, I have inadvertently created a portfolio with a slightly higher dividend yield (at 2.26%) than the 1.95% yield offered by the Vanguard 500 index fund (for example).
The higher yields from the international funds can be deceiving because international companies are more likely to pay variable dividends from year to year. That is, in good years when the companies are highly profitable, they will reward shareholders by paying out most of the profits. In years where profits are slim, dividends are likely to be low or nonexistent. In other words, during a recession when profits are lower, an international mutual fund is likely to decrease dividends more than a domestic mutual fund. In 2009 and 2010, for example, the Vanguard Developed Markets fund paid 20-25% fewer dividends than the years before or after the recession.
Benefits of Dividends
In addition to being a good source of cash flow, dividends have a lot of other benefits, too.
Tax free income – If you are in the 15% tax bracket or lower, all of your qualified dividend income is tax free. For US funds, virtually all of your dividends will be qualified. For international funds, typically around half to two thirds of your dividends will be qualified dividends (with ordinary income tax being due on the non-qualified dividend income). Dividends can be a pretty sweet way to fund your retirement expenses since you could potentially enjoy a fairly high income yet pay zero federal income tax.
Psychology of automatically receiving dividends – In early retirement, you might worry excessively about selling in a down market and how to fund next month’s expenses. When markets are in the dumps, dividends can provide pain free cash in your pockets! They keep arriving (for the most part) in good markets and bad. Unless your portfolio’s yield is higher than your withdrawal rate, you’ll still have to sell some of your holdings to fund your monthly expenses, but having a large part of your expenses automatically funded by dividends can make it less painful.
Long term growth of dividends – The dividends paid by the stocks and funds you own will increase as the underlying companies grow their profits over time. The growth in dividends will keep inflation at bay. Dividends can grow faster than the rate of inflation, thereby providing a real increase in your standard of living.
Emergency funds – If you hit a bump in the road and need an extra source of cash before you reach financial independence, you can consider your dividends as a source of emergency funds. At a 2% yield, a “modest” portfolio of $100,000 can produce $2,000 of dividend income per year. I was lucky to never need the extra cash while working, but when my job suddenly ended and I decided to retire, it felt great to know I had an instant source of about $8,000 per year with a few clicks.
Dividend focused portfolios
If you want to become a dividend investor, you could copy my asset allocation and get a 2.26% yield without trying very hard.
Or if you want to be a hot shot investor, you can try to hand pick the “best” dividend stocks out there and craft a portfolio that pays 3-4% or more. I’m not particularly good at picking stocks so I wouldn’t personally choose this route.
I like easy solutions that don’t take a lot of work. Vanguard has a few excellent offerings that are dirt cheap (which is a good thing when you are shopping for an investment).
The Vanguard High Dividend Yield Fund is available in mutual fund or ETF format (ticker: VHDYX or VYM respectively). The ETF version (VYM) has a nice low expense ratio of 0.10% (which is great!). This fund invests in stocks that consistently pay higher than average yields today. The fund yields about 3% currently.
You can sacrifice a bit of yield today in exchange for higher dividend growth in the future with two different Vanguard funds. The Vanguard Dividend Appreciation Index Fund (ticker: VDADX for mutual fund or VIG for ETF) is the better choice since it has a low 0.10% expense ratio and a current yield around 2%. The other option, the Vanguard Dividend Growth Fund (ticker: VDIGX) comes with a higher expense ratio (0.29%) and a similar 2% yield.
Another great way to put together a dividend focused portfolio is by purchasing a basket of solid dividend paying stocks through Motif Infesting (full review here). For $9.95, you can buy a slate of up to 30 stocks. You can choose your own 30 stocks based on your own dividend screens. For example, yield over 4% with a history of stable and growing dividends. Or you can pick from one of Motif Investing’s many pre-selected “motifs” (basket of stocks) centered around high dividend yield or dividend growth. Buying motifs is slightly more complicated than buying a dividend mutual fund, however you can skip the 0.10% to 0.29% expense ratios by owning the stocks directly. That means a 3% yield after expenses would become 3.1% to 3.29% without the expenses. Definitely worth checking out Motif Investing if you want to maximize your yield.
Parting Thoughts
Dividend yields can be a great way to generate cash to fund an early retirement. I personally don’t put too much emphasis on dividends in my own portfolio, since I’m expecting long term appreciation of my investments to keep me flush with cash as I continue to enjoy my early retirement. But a 2-3% dividend yield can fund the majority of your budgeted retirement expenses if you don’t exceed a 4% annual withdrawal rate from your portfolio.
I came of age and started buying my first investments during the roaring 1990’s tech bubble when everyone was making easy double digit returns and no one cared about a few percent yield. The focus was all growth growth growth, and sometimes profit profit profit was ignored. After the tech bubble burst and double digit losses replaced double digit gains, the dividend investors sat back and smiled since their dividend focused portfolios sailed through the crash relatively unscathed.
A decade later, the old high growth tech bellwethers like Apple, Microsoft, and Intel have become somewhat boring dividend payers (yes, Apple is boring).
Some companies are good at consistently earning money but still don’t pay any dividends at all. Warren Buffett’s Berkshire Hathaway is one of those companies. Mr. Buffett thinks it more efficient to reinvest all the corporate earnings from Berkshire’s holdings instead of giving part of the earnings to shareholders in the form of dividends. Berkshire Hathaway’s impressive track record of outperforming the S&P 500 by 4-5% annually for a few decades means Mr. Buffett knows what he’s doing.
I mention Berkshire Hathaway’s solid investment performance to highlight a company you would completely miss if you were strictly a dividend investor.
Dividend focused strategies can pay off, but so can investment strategies that are spread across many asset classes.
Do you follow a dividend-based investment strategy? What’s your dividend yield?
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Diggin’ the breakdown! And loving that dividend income. Very nicely done!
I invest in individual dividend growth stocks, but whereas our methods and strategies differ our overarching goals are the same – to reach financial independence. And congrats to you for reaching it so early.
I will make one note about Buffett. I’m a huge fan of all things W.B. (I consider him a personal idol), however I will not that while BRK doesn’t pay a dividend, most of the companies (especially the big positions) he invests in (through common stock, not wholly owned enterprises) pay dividends to Buffett with which he can use to reinvest elsewhere as he sees fit. So I choose to invest like W.B. instead of with W.B. 🙂
Best wishes!
Thanks – I figured you would like this particular article given your predilections for dividends. 🙂
I’m following Buffett’s philanthropy plan – building up my nest egg to give some of it to charity once I no longer need it.
Nice breakdown of dividend income. I like relying on dividends, because they are always positive, and once you receive them, they cannot be taken back from you. Further, dividends are much more stable than capital gains, and tend to grow above the rate of inflation.
That being said, I think dividend investing is easier when you pick individual securities, rather than paying an annual royalty to the mutual fund company.
I really like your site, and find your story amazing. When you minimize your tax expenses to the bone, you can build up your nest egg much faster.
Good luck in your retirement. I am sorry if I have kept pushing for more posts from you on Twitter 😉
I tend to agree that you can pick up some extra yield by selecting stable 3-4%+ yield stocks, but I also think it introduces some risk. It’s definitely outside of my skill set!
It is important to only do what you are comfortable with. I would stay if it works for you, stick to your strategy no matter what everyone tells you.
But on a side note, I focus on companies that grow their dividend payments every year. They can do that, if they manage to grow earnings per share. I also look at sustainability of dividend, and do an analysis of each company. I do not focus merely on dividend yield.
Best Regards,
Dividend Growth Investor
Thanks for the summary Justin! Very interesting to see the allocation of your portfolio and what yield each allocation produces. I’m currently in the process of hammering out my early retirement plan and finalising the details, which will obviously include an investment strategy. I’ll see if any of these funds are available in the UK (or equivalent) to include in my portfolio.
One quick question actually, how long do you have to hold a fund before you qualify for dividends? I am presuming if I buy a load of funds in November I don’t get the full percentage payout in December?
All of the equity funds I listed pay out the full dividend if you are the owner on the “ex-div” date (see, for example: http://en.wikipedia.org/wiki/Ex-dividend_date ). So you can buy in mid December and still receive the full dividend in late December. It’s not quite that magic though – the fund value drops by the amount of the dividend on the ex-div date.
Thanks. I was confused at first with your answer and was thinking what is stopping someone buying 1 day before the date, receiving the dividend, and selling 1 day after, but if the company value drops then that makes sense why you would not do that. Is is always an exact correlation? I.e. if Divs are paid at say 2% then the following day the stock would be start trading 2% lower? Is that why there was a bit of a mini drop in the S&P500 in December from roughly the 9th to the 16th then, with many companies paying out dividends in that period?
That may have been why the S&P dipped. I don’t follow it that closely. 🙂
The drop when divs are being paid is an exact correlation. In fact, if you have open limit orders with your broker, the limit price will be decreased automatically to account for the payment of the dividend. Unfortunately for us clever folks, the higher powers in the investing world already figured out that some might try to arbitrage stocks around the ex div date.
I really like this breakdown as well. Is this your rolled over 401k that you are now handling yourself? I have never paid attention to dividends because l always had it reinvested. I need to have a closer look at my portfolio. I just might copy you like you say!
This is how 90% of our portfolio is invested. We have maybe 15-20 different accounts in total at a few different firms. But I treat all the different accounts as one big account for asset allocation and rebalancing purposes. That’s why aggregating all my different accounts into one place (using Personal Capital) is so important.
I left my 457 intact at my old employer for example, because I can withdraw from it at any time without penalty (just pay tax on withdrawals). The fund choices suck pretty bad, and a large cap index at 0.21% expense ratio is the best option. So that makes up a big part of my large cap allocation, and I own the small caps, international and REITs elsewhere.
I have been considering dividend focused mutual funds for a while now. I think this article may be the kick in the pants I need to start tweaking my portfolio with an eye towards dividends.
Go for it! There’s something rewarding about seeing the dividends paid into your accounts. It’s somehow more tangible than seeing the share value of a fund go from $10 to $10.70 in a year (for example).
Congrats first of all. Nicely done. One question: Do you just ignore the Long Term Capital Gains from those mutual funds? I also obsessively track my dividends, but for the first few years, I just lumped it all in as dividends. I thought, if it’s a payout, I’ll count it as a dividend!
Only this year did I decide that was totally inaccurate, and now I only count “real” dividends. So my total only increased this year by 3%, but I now have a more accurate tally.
I haven’t received any significant cap gains in quite a while. Well managed index funds tend to pay very few CG’s. But when I do receive them in my taxable account, I’ll probably spend them. They aren’t dividends, but are cash flow into my accounts.
If you consume the cap gains, you are really slowly eating away at your principal (since cap gains are just return of your capital).
Generating dividend income is a large focus of my investing strategy. Dividend ETF’s are really helpful if you don’t want to pick a lot of individual stocks. I have a percentage of my portfolio in VYM. I’d recommend it to anyone looking for an easy way to get a higher dividend yield without much effort.
It seems like a smart choice if you want easy dividends. I don’t personally own it, but it looks solid. Can’t beat the expense ratio on it!
Good summary! My problem is I received all that real estate money all at once and the market is sky-high and I know it’ll collapse as soon as I buy in. I’ve just been slowing limping in, but it’s very frustrating!
Totally agree with your strategic approach, though!
That’s a tough problem to have right now. I have a $12000 pension rollover check sitting in cash somewhere that I’ll have to figure out where to invest.
Try Value Averaging into the market. I first heard of this concept from the book The Intelligent Asset Allocator, recommended by (I think) JCollins. I’m doing this now with a large-ish amount of cash since I don’t want to go all-in at once (same fears Nick has), but I also know that I need to be in the market long-term. http://www.investopedia.com/terms/v/value_averaging.asp
I’m totally on-board with investing in dividend paying assets. Dividends will play a very large role in my eventual early retirement. However I like to pick and choose my own stocks. I find this yields a slightly high return with a 3-4% yield. I also feel comfortable doing this since such a small portion of my overall portfolio is used for it.
I love it. Way to go. I’m still working full time, so I don’t have much of a dividend focus yet. My funds do pay dividends for the most part but they’re on auto reinvestment until I come on over to the bright side of early semi-retirement. 🙂
Justin, I’m loving the blog so far. Keep it up, you are going very well. 🙂
Thanks! Glad you stopped by.
You may have answered this already…. How are you protecting all these assets? When you become older, you may be placed in a Nursing Home and from what I understand, they will have ownership of your assets. Do you have a Trust? Thanks in advance, Denise~
I haven’t done anything today to shield assets from nursing homes. I hope we are at least a few decades away from that! 🙂
I love December as well for all of the dividends I earn. I love just logging into my investment accounts and seeing extra cash there from the dividends. Just curious, who do you use as your HSA administrator? I’m trying to find one that offers decent investment choices (low fee mutual funds) and don’t charge their own administration fees as well. I haven’t found anything yet as all seem to tack on added expense for having an investment account along with the traditional HSA.
Our HSA is held at Fidelity through Mrs. Root of Good’s employer. Zero fees, and we can invest in anything. Well, stocks, bonds, ETFs, funds at least. Not sure about options or anything more fancy. I think Fidelity only offers HSAs for workplace sponsored plans.
Might be an obvious question, but are the dividends paid to cash or reinvested into additional shares?
I take all the dividends in my taxable accounts ($7700 in 2013) in cash. The other dividends in the 401k and IRAs are reinvested (since I don’t need them right now).
Hi Justin – I’m new to investing, and I plan on purchasing the same Fund/ETF as in your portfolio. I have been reading about tax-loss harvesting, and would like to ask you which funds/ETFs are equivalent to your portfolio that will not trigger a wash sale. Can you provide a list please? Also, what is your recommendation on whether to reinvest dividends or take dividends in cash? Btw, these questions are for a taxable account. Thanks in advance! -Joseph
A list might take a while, but I would suggest checking out all the funds listed at Vanguard (if you want vanguard funds). In the Large Cap US allocation, there’s the total stock market index and the Vanguard 500 index that are fairly similar. For broad international, the total international index is similar to the FTSE-ex US and the Developed markets/Tax managed international funds. For some asset classes, there isn’t a similar vanguard fund. But there’s probably a similar fund at fidelity or schwab or available from ishares or elsewhere. International real estate: VNQI and WPS are fairly similar. SCZ/VSS for small cap international. The downside to going outside vanguard is higher costs (and for ETF’s, sometimes less liquidity, bad bid/ask spreads, or disadvantageous discounts/premiums to NAV).
As for dividends, I don’t think it matters a lot. I reinvested the divs my whole investing career until now (since I’m starting to spend them). The downside is you have to keep track of each div reinvestment for tax purposes, although since 2013, the tracking has to be completed by the brokerage firm (I’d still keep my own records). The easier way (tax-wise) is to collect divs and only reinvest once per quarter or once per year, or just add them in to whatever new purchase you might be making.
Thank you, Justin. Your blog is helping me get closer to financial independence! The blogs are will written, descriptive, and easy to understand. Your background is especially interesting because you are able to retire early even with having a wife and three children. Please keep up the great work!
Just found your site through a link on Rockstar. We get dividends every quarter because we invest in individual stocks and bonds. Dividend paying stock certainly is the way to go. Wen ONLY invest in dividend payers, even avoiding Apple until they started paying a dividend. We don’t go with mutual funds because of the herd mentality. As everyone rushes to redeem shares, the fund has to sell off shares to make the redemption, thus they no longer hold some of the dividend payers which decreases your income even if you choose to hold your shares. By having individual stocks, we can ride out a slump without a disruption to our dividend income. At any rate, enjoyed this article and plan to return.
Thanks for stopping by, Kathy! I’m loving the dividends even though we don’t follow a pure dividend-focused investment strategy. But it works for a lot of folks, and it’s hard to argue with relatively consistent quarterly income plus the long term growth potential stocks offer.
What’s your take on Vanguard Equity Income Fund VEIPX ? I recently started with that. I have most of my $ invested in growth type funds (T. Rowe Price), but decided it was time to start looking at generating some quarterly income.
It’s not bad if you have the option in a 401k and can’t pick Vanguard High Dividend Yield Index Fund (VHDYX or ETF version VYM). The expense ratio on the Vanguard High Dividend Yield Index Fund are a little lower, and the yield is a bit higher. But the VEIPX fund is decent, for sure. There’s also an Admiral share class ($10,000+ minimum initial investment) of VEIPX (ticker for admiral class = VEIRX ) that will get the expense ratio down to almost what the Vanguard High Dividend Yield Index Fund VHDYX is at.
Thanks, Justine.
After joining this group, I have invested 100K in these funds; please let me know what you think.
I would also like to get t list as Joseph requested for additional investment in moderate conservative allocation. I don’t know detail of all funds in my vanguard investment- some might be similar.
VHDYX Vanguard High Dividend Yield Index Fund
VIVAX Vanguard Value Index Fund Investor
VTRIX Vanguard International Value Fund VIMSX Vanguard MidCap
VWELX Vanguard Wellington Fund Investor
VTXVX Vanguard Target Retirement 2015 Fund
VGSIX Vanguard REIT Index Fund Investor
VEIEX Vanguard Emerging Markets Stock Index
VGSTX Vanguard STAR Fund
TSMX Vanguard Total Stock Market Index Fund
VDIGX Vanguard Dividend Growth Fund
VGHCX Vanguard Health Care Fund Investor
VASVX Vanguard Selected Value Fund
FINX Vanguard 500 Index Fund Investor
I don’t see any funds in that list that are bad. Most of the actively managed funds listed are pretty solid choices if you don’t mind paying extra for management fees.
Just maybe a bit overly complicated for $100k of investments.
You have a few funds there that are moderate or conservative like STAR fund, Target retirement 2015, and Wellington.
Thanks Justine,
So it’s more than year with above investment for 100G, Think didn’t do good last year but..
I am only looking for long..long term Mod-conservative growth. Do you suggest making any changes or let it sit!
Please advice.
Thanks
Steve
@Steve: You may want to compare different asset allocations in the website: http://www.portfoliovisualizer.com. On the main page, click on Tools -> Backtest portfolio. I don’t know your percentage allocation per fund, but if I spread out your allocation equally (~7.69% each for 13 funds) and compare with a simpler allocation of: vtsax (40%) + vtiax (40%) + vbtlx (20%) for the years 2015-2017, then the first allocation returns $7 more than the second. If I compare your allocation with vtsax (100%) for 2015-2017 then the second one returns about $2400 more. Of course, all tests are backtests, you don’t know if in the future, the returns will primarily be from stocks or bonds. But you may want to simplify the allocation a little bit. For example, the target retirement funds should be for a future year, not the current or the past. Also try to keep the total expense ratio to a minimum, as RoG pointed out.
Congrats on your Success/ Blog I find it very interesting and use 4 index funds and do my own stock selection for higher dividends. Basically 50/50. Anyhow i was curious unless i saw wrong you have 0$ in Bonds. I use the VBTLX. Any particular reason your not in Bonds and or if you were how or what fund would you be in?
I have a very tiny allocation to fixed income. Around 3% of the total portfolio, and it’s mostly cash (for the next 6 months to 1 year of living expenses). Cash is earning 1% I think at my credit union.
I want to get into bonds, but the yields just aren’t high enough for me right now. I’ll probably move another 5-10% into bonds or CD
s over the next few years if bond yields go up a little. A 5-10% allocation to bonds will cover 2-4 additional years worth of living expenses for me.
For bond funds, the research I have seen says to stick with short to intermediate term, and stick with high quality investment grade corporates or treasuries. I’ll be shopping at Vanguard when I decide to shift into bonds. Short term investment grade, intermediate term investment grade, or the Treasury short/intermediate. Or total bond market index. All good picks really. Nice low cost funds.
Awesome article. Quick question – how did you accumulate $1M by your 30s? That’s so awesome!
Saving more than half of our incomes and investing in low cost funds!
Excellent website,
Need advice for safe retirement accumulation as I won’t need income.
Hybrid annuity has mixed reviews?
low cost dividend funds/REIT/
Thanks
I would go with low cost index funds. That could include stock funds, bond funds, and REITs. Vanguard is a good place to invest and offers a wide range of low cost funds.
Many of you have probably heard Kevin O’leary (Canadian entrepreneur, investor, journalist, writer, financial commentator and television personality) discuss his intro to stock investing. He explains how all his knowledge came from his Mother. Her rules were simple: “Does it pay a dividend?”
He further explains as an investor, if a company is not willing to pay you a return immediately they really aren’t worth owning. Almost like it is an insult for a company not to pay you a dividend as soon as you invest. We never know what the future holds for these companies and there are so many things that go unannounced to the public. Getting a dividend is one of the safest ways to invest. (Assuming it is part of a balanced allocation strategy within your risk tolerance)
Wow your ETF portfolio looks perfect and I love that dividend income. You are on fire. I am a bit of both (purchasing ETFs for majority and purchasing individual solid dividend stocks) and hopefully I would get there in time.
Thanks for your amazing quality article
BeSmartRich
Thanks for posting on dividends! I’ve just started a very small investment with motif using one of their dividend motifs. I’m really interested in learning more about dividend investing.
Sounds good! Check out http://www.dividendmantra.com/ and http://mydividendpipeline.blogspot.com/ for two quick references on dividends. Otherwise, I’m a pretty poor resource on dividend investing since I focus on total return (but love the automatic cash flow aspect of dividends!).
Justin – quick question for you. In your investment list, you hold US large cap, US large cap value, US small cap, US small cap value. This represents about 44% of your portfolio. I would like to know why you prefer this explicit approach instead of just owning a 44% stake in VTSAX, the US total stock market fund, which includes US large and small cap, and value stocks. I really like to keep it simple, but am wondering what else you gain from this approach. By the way, love your blog … been a regular reader for some time now!!
There’s nothing wrong with VTSAX as a one fund solution for the US market sector of your asset allocation. In fact, I tend to recommend that over the more complicated slice and dice I do.
The advantage to the slice and dice approach is to get some slightly uncorrelated assets that also have produced a consistently higher return over time. The value stocks and the small cap stocks come with an additional percent or so of risk premium to compensate for higher volatility. Mix them all up and it decreases the volatility some while still giving a percent or so extra return. I also get to rebalance between these asset classes, so if small cap value gets crushed one year, I can move better performing funds into the small cap value space. By doing so I’m buying the small cap value at a big discount.
Thanks Justin, this makes a lot of sense. I’ll have to look into it as I sell off high expense mutual funds for index funds.
Great article! I too invest in low cost index funds and look forward to December for the dividends. I try to get my investments to double my dividends by saving as much as we can each year. We have made some serious strides just wish we had started much sooner.
I know this is a two year old post. But i came across your blog while I was researching about investing. The reason I wanted to research is I don’t like my savings to just sit there. It doesn’t feel right. And I am not looking for earn money through buying and selling stocks simply because I think I do not have the knowledge required atm and even if I had it I cannot watch the market close enough to do so. I just want at least half of my savings to give me a 2-3% return at the end of each year. And I am very earlier in my career so do not have a lot of money saved anyway 🙂
After reading your blog, few other articles and some quora posts I think for me investing on dividends ETFs (I’m thinking vanguard for starters) suits the most. So stressing on me being a complete dummy on investing do you think this is a good idea for now?
Nothing wrong with dividend ETFs, and that’s better than letting your money sit in cash or bonds and earn about 0% after inflation.
I would personally buy Vanguard Total Market Index and some Vanguard Total International Index (mutual fund or ETF) instead of the dividend ETF, but that’s just me. Those 2 VG funds are currently yielding around 2-3% plus whatever long term growth of the underlying equities they own.
Thank you for the reply. Yes I was actually looking at Vanguard’s VTI. So when you say 2-3% yield, it will return me said percentage in terms of dividend right? (Still trying to get the hang of it 🙂 )
Yes, a 2% dividend yield means the investment pays you 2% of the value each year in dividends. A $1,000 investment in VTI at a 2% yield will pay $20 per year.
Just remember these are stock mutual funds/ETFs. So they may go up down by 10-20% or more in a given year. I bet it was down over 30% in the crash of 2008. No guaranteed return unless you buy safe bonds.
Okay. Understood. Thank you. Great blog! and congratulations on your early retirement 🙂
Do you mention anywhere what funds/assets you invest into both within your taxable vs. tax-advantaged accounts? I’m curious if tax-efficiency or diversification has played more of a role in your taxable/early retirement account?
I haven’t discussed it too much. I try to keep non-qualified dividends in tax deferred accounts along with anything that pays cap gains (mainly my International Value fund at Vanguard).
I am not a dividend investor but I do like getting dividends. I feel them as income and I spend them with peace of mind. I am still transitioning into a retired mind set (15 months after quitting my job) and even though my nest egg has been going up (everything’s been going up lately) I find it hard to “spend capital” (sell capital to cover regular expenses).
Spending those dividends is psychologically easier than selling capital, that’s for sure!
Dividends are a great way to supplement an income or over time build a retirement income. In the UK we have ISA’s which are a great way to shelter the dividend income from tax.
justin,
how do you get this to show up as a pie chart in Personal Capital? dividends aren’t categorized as income on my dashboard, i have to manually search for them by category and get a tally that way
I’m not sure. It just automatically displays the pie chart when I go to the top of the screen (chrome browser) and do Banking, then Cash Flow then click on Income (or Spending)