Help with dividend yielding investments

[disneysteve]

Let's say you are a retiree living comfortably off SS and some income from your investments. You have a relatively small portion of your portfolio in equities because you know you need to have some growth but it is less than 100 - your age. In the past year or two, some of your CDs have come due. What had been better interest rates are now sub 1%. You're thinking of feeding a little more into stocks with good dividend yields to boost your overall returns a bit. You aren't planning to get too crazy as you understand the higher risks involved but you can afford to take a bit more risk than you currently do.

So here's the question. Do you choose 2 or 3 good blue chip stocks with decent yields such as PEG, PMI, etc. or do you go with a dividend mutual fund like VDAIX or more of a balanced fund like VBIAX? Or do you do something else entirely?

Considering the low CD rates, you only need to put a portion of your current CD money into the stock investments to match or beat the return. For example, if you have 20K in a 1% CD, you could keep 10K in a 1% CD and put 10K into a balanced fund or dividend fund yielding 2% and boost your total yield by 50% (overall average return of 1.5%).

Thoughts?

[snafu]

Whatever choice is made, anything bought can be sold if you see things going in another direction or should cash be needed. What is the retiree's goal? To preserve accumulated savings, a CD would do trading safety for decreasing buying power due to inflation. If retiree is in good health with lower likelihood of needing expensive care/medical intervention, most retirees aren't huge consumers.

If goal is to grow accumulated savings, buying a few blue chip stocks works with a one time charge each buy and sell. A blue chip MF has an ongoing MER with an 'expert' making buy and sell decisions. Another choice is Dividend ETF with buy and sell fees. Higher risk could be Gold Bullion ETF for inflation.

Just my .02 cents with great concerned about the state of the USA economy since the politicians are busily fighting between themselves and not taking care of the work they were elected to administer.

[Mr Nice Guy]

REITs and CEF's are another possibilty for the income-seeking investor

[KTP]

There is another option (no pun intended) for replacing low rate CDs with income that is much less risk than individual dividend stocks and perhaps is lower fees than the mutual funds.

Write 1 year in the money covered calls on SPY.

SPY pays a dividend of 1.96% and has an expense of .09%. Even right there you are doing better than a 1% CD with a yield of 1.85%.

Now write a relatively deep in the money call against your SPY stock, for Jan 2013 expiration. If you want to protect your capital, write it for a strike price that is 10% below the current price...say a strike of $125 or so. For Jan 2013 $125 strike call options you would get a premium of $17. At the current price of $137, this would mean the shares would cost you $120 to purchase. Assuming the stock market stays flat, goes up, or falls by no more than 10%, your yearly return including dividends would be around 6.25%. While obviously not as safe as a 1% CD, you have increased your return by over 600%.

I plan to do something similar to this when we early retire. Using an index takes out the risk of owning individual stocks. Note that I would also have some uncovered stock index funds to allow my portfolio to grow over time...this type of covered call index is just to take the place of money losing CDs in this low interest rate fake environment we have created. (A 1% CD loses you about 2% a year in real money).

[kork13]

I can only recommend what I've used and have experience with... so take it for what it's worth. I've been quite happy with them, but ymmv...widely. Out of curiosity, DS, am I correct to guess that you're asking for/about your mother? You've mentioned before that you're occasionally involved with her finances.

Personally, I'm a big fan of federal I-Bonds. They're just as safe as CDs with the additional guarantee that they'll at least keep up with inflation...plus, they're making much better returns. They're currently earning 3.06% for a bond bought today... The ones I've gotten over the last 2 years are making from 3.06%-4.92% right now. Unfortunately you can only get $5k/yr through TreasuryDirect (although you can still get additional paper I-bonds in a couple ways... For example, you can get your tax returns in the way of paper I-Bonds). I see myself continuing to buy I-Bonds every year for the foreseeable future because of the advantages that I see in them (instead of ever going into CDs).

Another one I've found to do well for myself are GNMA Trust (bond) mutual funds. Over the last 6 years or so, I've consistently had annual returns between 4%-6% (currently about 4.3%). Even through the mess of the stock market meltdown (and the 2 or 3 periods of gains since), both the value and returns from the GNMA bonds have been surprisingly steady, values within a range of about +/- 4.5%... I've had expense ratios between .23% (current) and .46% (previous).

Otherwise, I'd agree with others and say a stock dividend ETF or MF could be a good option. I'm using one currently getting about 3.5% dividends, with expenses at .18%. It's subject to a good deal more risk than other options though, so that definitely needs to be considered.

Last idea (which I've not used yet) would be to buy individual bonds to hold through to maturity...thus eliminating the price fluctuation risk. Obviously, finding the right bonds are important, but if you can do the research to find it, I think some bonds would be a good option.

[disneysteve]

Thanks for the replies so far. Keep them coming. Yes,kork, it is for my mom.

I-bonds are a good way to go and she owns some (as do I). The problem with them is that the only way to realize the income is to cash out the bond. We're looking more for something that she can either get a regular distribution from (monthly or quarterly) or something that she could liquidate partially as needed by selling part of the holdings while keeping the rest.

[KTP]

There is nothing magical out there that has no risk but a higher return than a CD or Ibond (and Ibonds are limited to 5K a year, so they are insignificant in your situation...even at 3% return, investing 5K in an Ibond is going to give you around $12.50 a month income stream from a 5K investment...not even enough to upgrade her cable for Wheel of Fortune in HDTV.

I think it has to be either individual dividend stocks or as you mentioned a managed fund of high dividend stocks. I would not want to try and convince your mother to trade options, even though covered call option writing is about as safe as you can get. If she does want to buy a selection of individual stocks, I would recommend setting up a Wells Fargo checking account to get the 100 free trades each year in the PMA package with Wells Fargo Investments. This will save you $$$, especially if she sells a bit of stock along with collecting dividends each year.

If she really does want to be an options trader , you can't beat Optionshouse....100 free trades for signing up, $3.95 stock trades and $5 for 5 option contracts, or $8.95 plus $0.15 a contract for 10+.

[bjl584]

I can suggest a few lower risk funds yielding decent dividends.

One from Hartford:

HFLCX, currently yielding 4.1% paying monthly

One from Thornburg:

THICX, currently yielding 3.1% paying monthly

One from Guggenheim:

CGDIFX, curently yielding a little under 2% paying monthly

If you want to go higher risk:

ECT or ERF. Trust funds yielding around 10%
CHI. Bond fund yielding 9% paying montly
AGNC. REIT paying 20% quarterly

[kork13]

I-bonds are a good way to go and she owns some (as do I). The problem with them is that the only way to realize the income is to cash out the bond. We're looking more for something that she can either get a regular distribution from (monthly or quarterly) or something that she could liquidate partially as needed by selling part of the holdings while keeping the rest.

hmmm.... for some reason I was thinking that monthly distributions were an option... my mistake I guess.

Side note, I was just looking at it, and apparently the annual limit was increased to $10k/yr of electronic bonds with the removal of paper bonds as a regular option starting in 2012. woot...

[jpg7n16]

So here's the question. Do you choose 2 or 3 good blue chip stocks with decent yields such as PEG, PMI, etc. or do you go with a dividend mutual fund like VDAIX or more of a balanced fund like VBIAX? Or do you do something else entirely?

Considering the low CD rates, you only need to put a portion of your current CD money into the stock investments to match or beat the return. For example, if you have 20K in a 1% CD, you could keep 10K in a 1% CD and put 10K into a balanced fund or dividend fund yielding 2% and boost your total yield by 50% (overall average return of 1.5%).

Thoughts?

I'd likely go the MF route. Since you like Vanguard, consider VHDYX. It's based on large cap stocks with higher div yields.

https://personal.vanguard.com/us/funds/snapshot?FundId=0623&FundIntExt=INT

Given what you said that she was underweighted on stocks, and needed some degree of income, this would accomplish both - and keep the portfolio diversified at the same time. Would prevent income falling from a single company reducing their dividend, etc.

[ea1776]

I like SCHD, which has 0.17% expense ratio and a 2.55% yield.

https://www.schwabetfs.com/summary.asp?symbol=SCHD

It's also well diversified.

I prefer a low-expense-ratio ETF like this for dividends, rather than 1, 2, or 3 stocks. You get the juicy yields with significantly less risk... and you are (currently) paying 0.17/2.55 = ~6.7% of the total yield payment for the additional "insurance" you get with SCHD. Further, you can buy it free through Schaub (as you know, same with Vanguard's ETF's). That won't be true with individual equities most likely.

Many people see risk with stock investing. Looking at high quality dividend paying companies' track record in America, I'd say it's risky to NOT invest in these wonderful companies. Ever get risk averse? My solution is look at a long term chart of S&P 500 with dividend payments highlighted like this:

[ea1776]

One from Hartford:
HFLCX, currently yielding 4.1% paying monthly
One from Thornburg:
THICX, currently yielding 3.1% paying monthly
One from Guggenheim:
CGDIFX, curently yielding a little under 2% paying monthly

HFLCX has a 1.72% expense ratio. Yikes! watch out.
THICX has a 1.22% expense ratio. no thanks.
CGDIFX - I could not find this ticker.

Too much of the yield is eaten up in the expense ratio for my blood.
I don't believe these could outperform other low-expense-ratio funds out there over a 10-year period. At least, I wouldn't BET ON IT!

[LivingAlmostLarge]

I like i-bonds as well when the fixed portion used to be above 2%. Sigh. I put my mom in some. I also think individual dividend paying stocks can be the way to go. My MIL does that and has a nice portfolio paying around 5%. Insurance companies do well.

What portion of a portfolio? I'd lean towards stock investing and holding.