My future live-off-dividends portfolio

[ken-do-nim]

I'm still in the accumulation phase now, but at some point I plan to switch gears and place my money in dividend producing equities.  My aim is to have a bell curve of percentages, with the bulk being at the 7-8% mark.  (That said, I'm not particulary enamored with the stocks I know of in that range).

The 12%+ yielders (10% of the portfolio):
Oxford Lane Capital (OXLC) - 18%
Orchard Island Capital (ORC) - 15.06%
Annaly Capital (NLY) - 12.04%

The 9-11% yielders (20%)
Pimco High Income Fund (PHK) - 10.67%
Pimco Energy and Tactical Credit Opportunities Fund (NRGX) - 10.69%
a bunch of oil stocks like XOM could go here, but I doubt they'll be any good in 15-20 years

The 7-8% yielders (40%)
Altria (MO) - 8.7%
Tortoise Midstream Energy (NTG) - 7.68%
AT&T (T) - 7.61%

The 4-6% yielders (20%)
IBM might go here, but honestly I think it's a dying company
Otherwise I need to research what's good to invest in here

The 2-3% yielders (10%)
Johnson & Johnson (J) - 2.73%
Caterpillar (CAT) - 2.44%

[fenders53]

We speak freely here in hopes of being helpful so feel free to defend your position. Is this a plan or your current port?

I might consider that port if I was 70yrs old and desired very high current income, but I doubt I would even then. You are under 50 right? You need much more growth potential in that port. I do hold some high yielders, and consider anything yielding 6%+ as inherently risky. We currently live in a world of zero rates and sketchy finance. We don't know when, but there are some bad years ahead for risky financing and dying industries. At a glance it looks like you are open to putting 50% of your port in oil, T and MO? I don't like that strategy even a little for a 47yr old.

[crimsonghost747]

And when is this "at some point".

If the plan is to move to this allocation in 10-20 years, then I think it's fairly pointless to make any sort of lists as to what you want to buy. You are targeting high yield, super high yield in a lot of these cases. Half of those companies/funds won't be around or they will have lowered their dividend at some point along the way. Every single one of those companies will look different than it looks today.

Interest rates change. Things such as taxes change. Rules regarding share buybacks could change. Probably all of these, and many other things that we can't predict, will happen in the next 10 to 20 years. This is why I also think it's pointless to spend time thinking about what sort of yield you want and drawing up these yield bracket thingies etc. The idea itself is ok, but those numbers too will change along the way as the world changes around them.

If you aren't planning on switching to this allocation in the next few months, then it's probably best to to focus more on the concept rather than on the details. But concepts change too. 10 years ago a high yield income generating portfolio might have had 30% of bonds in it.

[fenders53]

IMO it's very good to wargame future strategies. Crimson is correct that those tickers will not be the same in the future, and a few won't likely exist in their current form. You spent some time developing that list, why not invest another hour? Back test it to a date like 1/1-2018. Before you look at past share prices, divide the allocations in accordance with your post. Keep it easy and approximate the yield. How much income since then? How much gain/loss of capital to date? We've had a modest bull market since then, with a couple harsh dips, moving interest rates. Then watch it for another year or two as we have political changes and more money printing. The port you listed should yield as much income as the equity market's routine total returns going back 100yrs. It sounds too easy and reliable, but is it?

[ken-do-nim]

(10-18-2020, 09:07 AM)fenders53 Wrote: Is this a plan or your current port?    

(10-18-2020, 09:51 AM)crimsonghost747 Wrote: If you aren't planning on switching to this allocation in the next few months, then it's probably best to to focus more on the concept rather than on the details. But concepts change too. 10 years ago a high yield income generating portfolio might have had 30% of bonds in it.

Okay, let me rephrase.  Today I have zero of these equitiies, and in 15-20 years, when I plan to switch over to this style of portfolio, you are right many of these companies may be gone.  So it was really presented as, "If I were to retire now and live off my portfolio, this is what I'd get into, and when I'm ready to retire, I will look for similar equities."  I think the 10-20-40-20-10 bell curve is the most significant takeaway.

But yes, I'm 47 now and the very earliest I could think about retirement is at age 55 when child support drops off and assuming I remarry, but if I'm still doing well at my job I would be very excited to actually get my full salary.  Most likely I'll soft-retire at 62ish into a lower paying but less stressful job.

[fenders53]

I understand you aren't really buying these today but the high yields made me curious. I took a look at the first security which is OXLC which is closed end fund listed at an 18% yield. I was curious how it did during severe markets but it didn't exist until 2011. It's dropped from about $19 to around $4.40 after being under $2 earlier this year. That's about a 75% loss of capital during a nine year bull market. The yield is now down to 18% because they cut the dividend in half a few monthes back. I wonder if they might be distributing the capital back to the shareholders? That's a very interesting pick. Am I missing something?

[crimsonghost747]

(10-18-2020, 03:08 PM)ken-do-nim Wrote: Okay, let me rephrase.  Today I have zero of these equitiies, and in 15-20 years, when I plan to switch over to this style of portfolio, you are right many of these companies may be gone.  So it was really presented as, "If I were to retire now and live off my portfolio, this is what I'd get into, and when I'm ready to retire, I will look for similar equities."  I think the 10-20-40-20-10 bell curve is the most significant takeaway.

The 10-20-40-20-10 indeed sounds like a good starting point. Just keep in mind to keep everything but the highest 10% in a range where the dividend is safe. And even more importantly, I'd pay attention to building the portfolio so that total estimated dividend growth beats inflation. 

These will undoubtedly lower the current yield expectations, and I know that's hard especially when you plan on living on the dividend payments. But if you do retire at 62-ish, that'll still hopefully give you 20-30 years to enjoy retirement. That is an eternity in the financial world. Somewhere in that 20-30 years a part of your dividend income will get wiped away when a company cuts it's dividend. This I can almost guarantee. At the same time, each and every year, inflation eats up 1-3% of your purchasing power if the dividend payments remain the same. You simply do not want to be left in a situation where your portfolio is generating less and less purchasing power each year, so some growth should still be a requirement to account for inflation and those eventual dividend cuts which will happen.

All this becomes even more valid if you do indeed eventually put these holdings into a trust that would keep paying your children and grandchildren.

And the reason why I'm pointing these out? Because I think that in this very rough draft that you've made in your first post, everything in the first 70% of your portfolio (with the exception of AT&T) will either lower their dividend or not match inflation during the next few decades. I'm not saying they are bad picks, I just think that you are "forcing" extremely high yields and that might work for a year or two, but it most likely won't work for a decade or two.

And I realize that this is just a rough draft. But indeed if I were to do a similar portfolio exercise right now, I think it might look something along these lines.
1st bracket (10%): yield 7%+
2nd bracket (20%): yield 5-6%
3rd bracket (50%): yield 3-4%
4th bracket (20%): yield 2-3%

I left out the last bracket since 1-2% yield really doesn't make sense if you want income, and instead put that 10% into 3rd bracket since that is a level where I'm comfortable finding companies where dividend growth will beat inflation.

I also did some calculations with my own portfolio about a year ago, and I came to the conclusion that with my current dividend growth rates, I could comfortably sell 2% of my whole portfolio every year, and the dividend growth would still beat inflation. So that might be something to consider here too as an alternative to extremely high yield. This also gives you a bit more flexibility, just in case you need more (or less) cash in some years. I think it's time for me to do that calculation again at the end of 2020 and see if that is still the case.

[fenders53]

Excellent post for Crimson IMO.  I too feel like "ken" is forcing yield which ends up being a yield trap FAR too often.  I only have to look back to MAR 2020.  The small part of my port that yields much above 6% got smoked, but partially recovered.  You really have to look at these carefully.  I'm not interested if they haven't been around 20 years and proven they don't overleverage or pay back your capital with a "fake dividend", only to die in a severe market downturn. To pay you dividends with your own capital is not different than selling shares in an equity when it is down because times got tough.

Not suggesting you buy them, but look at DNP, RQI, JSP charts.  These are funds with a long record and good management.  As long as you buy them when the market is getting slammed they seem to recover capital, and keep on paying the high but not obscene dividend.  If you want higher yields you are playing with companies that are holding a port of notes from companies on the brink of BK, smaller oil company bonds and other such highly speculative securities, or gong long options in sketchy stuff.  This is why many of them go away.  Its just a matter of when, not if, most of them bite the dust.   

The bottom 10% of this model would be solid growth stocks with very little dividends.  There is some chance they will mostly save an otherwise bad income port. Now isn't a perfect time to buy them of course, but you aren't doing this today.

[ken-do-nim]

(10-18-2020, 09:27 PM)fenders53 Wrote: I understand you aren't really buying these today but the high yields made me curious.  I took a look at the first security which is OXLC which is closed end fund listed at an 18% yield.  I was curious how it did during severe markets but it didn't exist until 2011.  It's dropped from about $19 to around $4.40 after being under $2 earlier this year.  That's about a 75% loss of capital during a nine year bull market.  The yield is now down to 18% because they cut the dividend in half a few monthes back.  I wonder if they might be distributing the capital back to the shareholders?  That's a very interesting pick.  Am I missing something?

Admittedly I'm very leery of OXLC as well.  Now, I did own ORC and NLY for many years.  ORC went down down down, but I did buy more at the bottom in March and it tripled since then, which was nice, and I sold.  But it has stabilized since.

NLY I had about $25K in for many years, and getting those quarterly $700 dividends was wonderful.  It traded in a tight $10-$12/share band, until it dropped like a rock this year, thankfully after I got out, and like ORC has since stabilized.

The ones I only recently discovered but am very excited about are the two PIMCO funds paying around 10%.  It will be interesting to see how they do.

[fenders53]

(10-19-2020, 08:23 AM)ken-do-nim Wrote:

(10-18-2020, 09:27 PM)fenders53 Wrote: I understand you aren't really buying these today but the high yields made me curious.  I took a look at the first security which is OXLC which is closed end fund listed at an 18% yield.  I was curious how it did during severe markets but it didn't exist until 2011.  It's dropped from about $19 to around $4.40 after being under $2 earlier this year.  That's about a 75% loss of capital during a nine year bull market.  The yield is now down to 18% because they cut the dividend in half a few monthes back.  I wonder if they might be distributing the capital back to the shareholders?  That's a very interesting pick.  Am I missing something?

Admittedly I'm very leery of OXLC as well.  Now, I did own ORC and NLY for many years.  ORC went down down down, but I did buy more at the bottom in March and it tripled since then, which was nice, and I sold.  But it has stabilized since.

NLY I had about $25K in for many years, and getting those quarterly $700 dividends was wonderful.  It traded in a tight $10-$12/share band, until it dropped like a rock this year, thankfully after I got out, and like ORC has since stabilized.

The ones I only recently discovered but am very excited about are the two PIMCO funds paying around 10%.  It will be interesting to see how they do.

If you don't listen to anything else, look for a couple decades of performance, and research the management.  I didn't cherry pick your list to find a problem.  I just grabbed OXLC because it was listed first and it looks like the worst investment idea ever.  You are likely only attracted to the too good to be true yield.    Just understand whether the yield is a real dividend from FCF, or merely financial hocus pocus. I highly suspect the latter in this case.  Virtually all the high yielders get beat up in a market downturn.  That is just how it is.  That is when you buy, no matter how much patience it requires.  I consider my high yielders solid, and I still have to wait a long time between adds.  A "safish"'' 7% yield is infinitely safer than a 15% yield today.

[ken-do-nim]

(10-19-2020, 09:45 AM)fenders53 Wrote:

(10-19-2020, 08:23 AM)ken-do-nim Wrote:

(10-18-2020, 09:27 PM)fenders53 Wrote: I understand you aren't really buying these today but the high yields made me curious.  I took a look at the first security which is OXLC which is closed end fund listed at an 18% yield.  I was curious how it did during severe markets but it didn't exist until 2011.  It's dropped from about $19 to around $4.40 after being under $2 earlier this year.  That's about a 75% loss of capital during a nine year bull market.  The yield is now down to 18% because they cut the dividend in half a few monthes back.  I wonder if they might be distributing the capital back to the shareholders?  That's a very interesting pick.  Am I missing something?

Admittedly I'm very leery of OXLC as well.  Now, I did own ORC and NLY for many years.  ORC went down down down, but I did buy more at the bottom in March and it tripled since then, which was nice, and I sold.  But it has stabilized since.

NLY I had about $25K in for many years, and getting those quarterly $700 dividends was wonderful.  It traded in a tight $10-$12/share band, until it dropped like a rock this year, thankfully after I got out, and like ORC has since stabilized.

The ones I only recently discovered but am very excited about are the two PIMCO funds paying around 10%.  It will be interesting to see how they do.

If you don't listen to anything else, look for a couple decades of performance, and research the management.  I didn't cherry pick your list to find a problem.  I just grabbed OXLC because it was listed first and it looks like the worst investment idea ever.  You are likely only attracted to the too good to be true yield.    Just understand whether the yield is a real dividend from FCF, or merely financial hocus pocus.  I highly suspect the latter in this case.  Virtually all the high yielders get beat up in a market downturn.  That is just how it is.  That is when you buy, no matter how much patience it requires.  I consider my high yielders solid, and I still have to wait a long time between adds.  A "safish"'' 7% yield is infinitely safer than a 15% yield today.

Very solid advice.  My thinking was to put a small amount of money in some of these too-good-to-be-true funds.

[crimsonghost747]

That is fine, as long as you are ok with the fact why we consider them to be too-good-to-be-true. Some risk is necessary, it's more about balancing the risk and reward.

I picked Pimco high income fund (PHK) randomly yesterday to take a look at since I didn't recognize most of the names. And the name is pretty nice and straight forward so I got interested. Also, I didn't want to look at the monster yield but something a bit more doable.

So, yield is 10%.
They deal in bonds. A quick look to their portfolio reveals that in their top 25 holdings there are only 2 bonds that themselves pay out more than 10%. The majority of the bonds yield somewhere around 6-7%... so how are they exactly taking a 2% management fee and still paying out 10% to investors? Yeah... strike one.

Their largest investment, with a 5% weight, is a 12% bond from Sequa Corporation. Opening their website: well for one, it looks like it was designed by a 15 year old at a highschool computer class somewhere in the 1990's. Secondly, last news on the company's official news feed? 2015. Yeah.
What do they do?

"Chromalloy, Sequa's largest business unit, provides the airline industry with a broad range of aftermarket services and ranks as the leading independent supplier of advanced repairs for jet engine parts"

Aircraft aftermarket would not be my first choice of industry for a high yield bond these days. Highest weight in a super dodgy looking company dealing in an industry that is currently being absolutely decimated? Strike two!

Dividend history?
They were essentially at $0.122/month for years, from 2003 to 2015. Then down to $0.103 in 2015, down to $0.081 in 2017, to $0.061 in 2019 and currently down to $0.048. In other words, in the past 5 years they have lowered their dividend payout ratio constantly, down 60% from where it was in 2015. You do not want to get dragged back to work when you're 70 because your income went down 60%, do you? And it's still not low enough, so unless something changes another cut is coming. Strike three and out!