Where to park $60k in a taxable dividend producing portfolio?
Posted Dec 26, 2020, 5:57 AM UTC
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Sorry if cross posting is not allowed. Didn't see it mentioned under rules
3
Posted Dec 26, 2020, 5:57 AM UTC
Sorry if cross posting is not allowed. Didn't see it mentioned under rules
Your post is lacking significant details of your employment situation, financial goals, time horizon, etc.
If you have your emergency fund squared away, maybe consider a diverse mix of factors/sectors.
The first step is to choose an asset allocation because that will reflect your Risk Tolerance.
Asset Allocation - Bogleheads
Are you aware all stocks/funds can swing wildly in the short term? Look at Feb-March 2020. REITs and high dividend yield suffered more than the broader Market.
They still haven't recovered YTD even with the Fed stepping in.
r/dividends is so focused on yield and pay out that there seems to be a lack of discussion on Total Return and the tax implication of ordinary vs qualified dividends.
Companies' net profits matter, NOT the fact that a security pays you a dividend.
Dividends aren't free. They come from a company's net profits and on the ex date, the exact dividend dollar amount leaves the share price. In a taxable account, you owe taxes on any earned dividend regardless if you reinvest or not.
US high dividend yield (VYM, SPHD, etc) and US dividend growth funds (VIG, NOBL, DGRO) have underperformed broad blended funds like VTI or VOO over time because the Market includes valuable non-dividend payers that drive current Market growth.
If you don't have any exposure to these non-dividend payers, you may stunt your overall Total Return (share price appreciation + dividends).
VTI and VOO have 99% correlation to each other and are considered a proxy for the Total US market. They're perfect tax loss harvesting partners.
If you already have a source of income from your job(s) and intend on working longer into the future, why would you need current cash flow in the form of dividends from your portfolio?
Have you thought about switching to a dividend focused strategy later on in retirement instead of focusing on dividends now?
Companies that pay so much net profits out to shareholders in the form of dividends today may be stagnating and lacking innovation. Look at the historical charts of T, F, IBM, MMM, and so on. Compare those to VTI or VOO which also pay dividends, but have also seen far greater price appreciation.
In your r/dividends post, I saw a suggestion for 90% VTI and 10% stock picks. That could be a good start for you.
If you want to learn more basics:
Good start are the side bar links at r/investing and r/personalfinance:
https://www.reddit.com/r/personalfinance/wiki/commontopics
Google the terms: Risk Management, Bogleheads new investor, tax efficient investing, asset allocation, modern portfolio construction, Recessions and investing.
This link from Vanguard shows historical average annual returns based on different asset allocations of stocks and bonds:
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
Notice the "Worst year" and "Years with a loss."
90% of stock pickers (including the pros) fail to beat the S&P 500 over a 10 year time span.
Source: 31 years old. Focused on Total Returns. Dividend yield has never matter to me because it's more tax efficient to sell shares when I'm ready to take a tax hit. I'm focused on increasing exposure to US small/mid-caps and international stocks because those are underweight compared to my US large-cap exposure. Maxed out 401k is FXAIX (S&P 500). Maxed out Roth IRA is VWELX. Taxable accounts are QQQ, QQQJ, VXUS, VDIGX, VXF. I gamble with 5% of my total portfolio (TSLA + PLTR).
Here's 1 of my 2 taxable accounts: M1 Taxable Pie
Within my 2 taxable accounts, I have little overlap.
This website helps determine the amount of overlap between 2 ETFs. Helps reduce redundancy:
https://www.etfrc.com/funds/overlap.php
I use Personal Capital app which shows me my asset allocation, US sector exposure, size exposure, and other important aspects of my total portfolio (retirement + taxable).
It even shows me my Time Weighted Return (excludes cash flow) against the S&P 500.
It's hard to be down this year. I'm up 21.83% YTD.
as of 12/26/2020 - Personal Capital
Incredibly helpful post. Thanks for sharing your input and providing references.
Sure thing.
We're all trying to get ahead and investing is a meaningful way to help supplement our nest egg since stock returns have outpaced inflation over time.
I wish personal finance and investing basics were taught to me in middle and high school.
Very informative! Not sure how I missed this response. Thank you. I'm 35, employed, max 401k, roth, hsa and want to retire asap. I usually let excess $ sit in the bank. Trying something different. Work is for the birds & if I can pull of $500-$1k/yr in divs that'd be a nice benefit.
Context helps a lot.
However my response above still stands.
Selling shares will be just as effective as earning dividends in terms of funding early retirement.
In fact, it'll be more tax efficient to sell shares since you can decide exactly when to incur a tax hit.
With dividends earned in a taxable account, you're constantly losing some returns to Uncle Sam.
So ideally you want to have your taxable accounts in tax efficient assets poised for long term price growth - insert any broad index fund.
If you check out any of the financially saavy posts at r/Bogleheads and the FIRE movement subreddits like r/financialindependence, r/leanFire, r/fatfire, you'll notice the focus is purely on asset allocation and staying tax efficient even if retiring early or retiring at the standard age.
What made you call out MMM? Looking at back testing, they outperformed VTI until covid and then the recovery hasn’t been substantially less.
You're absolutely right.
However from 2005-2020, VFINX (VOO) would have still been the better choice.
MMM vs VFINX (VOO) with dividends reinvested Jan 2005 - Nov 2020
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