Shouldn't you always go for the highest dividend?

matt8745

Let me preface by stating, I am retired, collecting a pension and SS and all monies are in either in a regular or Roth Ira.
Prior to retirement I redid my portfolio. Went from 100% equity to 35 % equity (as a hedge for inflation) and 65% income (split among 3 bond funds)

Since I do not need the added income, all bond and equity fund distributions are reinvested.
When the time comes that I need added income, I will take the monthly distribution from only the bond funds. I have no intentions of ever redeeming principal.

Therefore, if I am not redeeming shares I should not be concerned with NAV fluctuation and go for the largest dividends.
Any thoughts about my strategy?
Matt

Old_Joe

Hey Matt-

Well, I've used that strategy in the past when I've owned individual bonds, not through bond funds. With the bonds, you can always wait until maturity and at least be sure of getting your original investment back (assuming no bankruptcy), although devalued by any inflation which occurred during the holding period.

The problem with bond funds in this regard is that there is in fact no "maturity". You are really investing in a pool of bonds, so there is no fixed point where you can be sure of getting back your original investment. If the bond markets should be in a steep NAV decline for an extended period when you might need to reclaim your investment principal, you will really take a beating.

That said, I no longer use individual bonds, but have about 1/3 of our stuff in various bond funds. But I watch them like a hawk, ready to bail at any time if need be. And I wouldn't be too surprised if the time comes to bail: given the precarious state of our economy, it's almost a sure thing that the Fed will allow the most inflation that they think we can away with, over the long haul. Have you noticed your food and fuel costs lately? Going down, are they? I almost forgot- those are "volatile" costs, so they don't count. Unless of course you need to go someplace. Or to eat. Or, worst case, drive a bit of a distance to do your food shopping.

Another issue with "largest dividends" is the fact that the larger the dividend, the greater the risk factor. We're in our early 70's, in a similar position with respect to pensions & SS, and to be honest, I wouldn't sleep too well with almost 2/3 of our life savings tied up in bond funds, with a presumption that nothing will probably go wrong there. My 70 years on this planet have taught me at least one thing: Murphy is always waiting for that worst possible moment.

Regards- OJ

matt8745

Old Joe,

I appreciate your comments, but if you are leary about bond funds, where do you put your money if you're looking for income?

Matt

Old_Joe

Matt, if I knew a good answer to that one, I'd be the head honcho at Goldman and pull down 8 gazillion per year. I think that the key to sleeping well is to project, as accurately as possible, your anticipated annual expenses. I did this many years ago with a spreadsheet, where I could vary the inflation rate and see what might happen 25 years out, but you could do the same sort of thing with a calculator.

Do this also with SS and your pension income, if that has a COLA. Assume that both SS and your pension will always lag the real rate of inflation by maybe 2% as a safety factor.

Now you will have a rough projection of your income and expenses, and you will be able to determine what your needs will be from your investments. Once you have a good handle on that, you can determine, again roughly, what sort of division you can get away with between bonds, equities, (or bond & equity funds) and cash. You may find that you will be able to assume less risk, and thus upgrade your bond exposure and maybe stash away a percentage as no-income cash. For instance, we are now roughly 1/3 each in bond funds/equity funds/cash. Before retirement, less cash, less bonds, more equity.

The thing is, as Murphy knew full well some 70 years before "Black Swans" were discovered, "if anything can go wrong, it will go wrong, and at the worst possible moment". My spreadsheet incorporated various disaster scenarios, and I could see the potential results of a future market crash by varying both the future year and the amount of the decline. And guess what? 2007 was the year it happened, right after we retired: the worst possible moment. But because of our diversified investment reserve, we have survived and recovered.

The best of luck to you sir!

OJ

scott

It's really a massively difficult time for older individuals looking for stable income (CDs, etc.) What are seniors supposed to do, get Brazilian bonds? In terms of yield, it's hard to find yield without risk. That's what I've discussed with the emerging market bond funds, which have had a really great run, but can certainly take a hit if things turn. For those who have that risk tolerance, great. For those who do not want to take a substantial hit just to get a 5-7% yield....? The MLPs are another example. I own (and very much like) Brookfield Infrastructure - not an MLP, but MLP-like) and that yields 5%.

It's too bad that we do not have public/private partnership investments (investing in roads, government buildings and other public infrastructure) as much in this country, as there are a few foreign funds that offer this, and that would be another option for yield (although not a super low risk one) and in many cases the investments are inflation-linked. Brookfield Infrastructure has a little of this, but there isn't an investment devoted to it here.

I do absolutely think there is a place for fixed income in every portfolio, but it may vary depending on environment and it certainly depends on age. I don't think that anyone should be 100% bonds though, nor do I believe they should be 100% stocks.

00BY

Highest yield usually means perceived highest risk. So I would never give a blanket recommendation to always go for the highest dividends.

matt8745

Scott,
Whar are MLPs

Accipiter

A handy source for unknown financial acronyms

http://www.investopedia.com/terms/m/mlp.asp

MikeM

Matt, in case you did not notice the article in JohnN's post earlier today on MLP's, I linked it here for you to read.

Are Energy-Partnership Funds Worth the Energy?
By IAN SALISBURY

http://online.wsj.com/article/SB10001424052748704810504576305774005723978.html#printMode

Sven

As the WSJ article below pointed out, "...Buy ETNs only in tax-deferred retirement accounts." considering tax disadvantages in taxable account.