After the Crash: Portfolio Income Planning

My portfolio is of course paying much less than two years ago as far as stock dividends and Certificate of Deposit interest are concerned. Naturally I have cut expenses as much as I can without sacrificing lifestyle quality (too much :-) ). Also I have some job opportunities, the sort of jobs that can supplement my income and bring joy in retirement. The question on my mind for several months now is how and whether to balance the following:

(1) drawing down principal. I have a large cash reserve for the proverbial rainy day of seven or so years, a la what IIRC jIM has proposed several times here.

(2) waiting for a few bank stocks to 'bounce back.' They may not anytime soon. If they do bounce back, then I suppose their formerly relatively high dividend yield will precede the stock price returning. Which means there is no point to selling them, except to reduce my exposure to the higher risk bank sector.

(3) waiting for a few finance-based stocks, which slashed their dividends, to 'bounce back' in price, then selling them. E.g. HOG and some REITs. Their stock prices are making a better comeback than some banks. Their company earnings often justify the rise in stock prices, too. Will their dividend yield return as well? I am thinking maybe not as fast as their stock price. IR is a case in point. Its price has bounced back. If it were not in my IRA, I would be considering selling it, because its dividend has been slashed so much.

I am studying my beloved Robert Shiller S&P 500 data and see dividends after the 1929 yada collapse took on the order of 20 years to return to their 1930 level. If financial bubble theory and how economies crash and rebuild are logical phenomena (as opposed to numerology), I can see a couple of decades being necessary for my portfolio income to return to its 2007 or so level. This is so far away that I almost think it is not worth planning for too exactingly. After all, I will be receiving Social Security in 13 years, assuming SS does not go under. And it might.

My inclination is to shift my CDs coming due in the next year to non- financials with good fundamentals. Granted this is exactly what the Fed wants me to do. My income from my portfolio will be flat for some years as a result. This is because the CDs are currently paying upwards of 4.5%, whereas the stocks I am contemplating pay mostly south of this in dividend yield. It is not too troubling, because a lot of my costs seem under control, like grocery bills and gasoline. Milk has been under $2 a gallon for some weeks now, and ditto for many other food products. Of course, one really bad medical ailment and I could be in bankruptcy.

I would welcome others' ruminations on this, especially those living largely off a portfolio. It is a very strange time, with for example income rates so low for so long, and proving that financial history does not repeat per se.

Reply to
Elle
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Be prepared for a financial awakening. You will not find much advice recommending dividend stocks to replace CDs.

Elle wrote:

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Reply to
dpb

Yes and yes. I own outright my small, relatively inexpensive house with the huge garage and pleasing view.

I am in the United States.

I can take the spikes due to a huge cash reserve supplemented by sizable CDs coming due for another two years.

I agree food and gasoline could oscillate quite a bit. But for the most part, if they go up I expect company earnings to go up, which I think will tend to drive up my dividend income.

The COLA for U.S. Social Security recipients in 2010 is nil, for your reference, meaning inflation was negligible to none by the usual standard here in the U.S. for about the last year. Of course the usual standard can be useless to many of us.

I continue to monitor how my net worth has changed since 2003, since full retirement. I am down about 1% from 2003. I am not sure this will hold, since after a nice run-up, my house's appreciation has been declining this past year. Of course my greatest assets are stunning good health, maybe a few brains, and lots of buds with whom to enjoy adventures.

Sorry about Canadian milk. I would pay $4 a gallon if I could get Canadian health care, though. ;-)

Reply to
Elle

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Reply to
dapperdobbs

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Reply to
Elle
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Reply to
HW "Skip" Weldon

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Reply to
rick++

:-)

Reply to
Elle

Immediate annuities don't have much of a payout until one gets to retirement age, and maximum tax credit occurs at age 70+. I would suggest waiting until interest rates go up because annuity yields are partly dependent on interest rates. If a person anticipates having a short remaining life span than annuities should be avoided.

Buy only enough annuity to meet current expenses so that the remaining assets can grow.

Annuities are insured by the state in which they are issued, but there are dollar limits.

-- Ron

Reply to
Ron Peterson

Your management, as evidenced in the paragraph below, is really sound, IM[studied]O. I've looked at some 'privately managed' portfolios as well as mutual funds, and your examples below are better than what I've seen. Investing in areas one understands is a 'competitive advantage.' I don't really understand defense (e.g. GD) I couldn't figure out TXT, 20 years ago, the Osprey and VTOL. Also, TXT seems to have left their knitting with ventures into photo-masking (?).

Good rational weighting is important (e.g. KO). Electric utilities got swept up into the Enron energy futures "game" a decade or so ago. DUK got itself into real trouble trying to market in CA etc. (NC to CA??) Now I don't believe their mgmt statements. Gov't control into utilitites would be horrible.

I see what you're saying. And I have stories to tell about my fond new involvement with orange trees and grape vines. Want some oranges? I have plenty!:-) I'm studying up on soil. I tried finding an infrastructure or water management company, and failed. I bought TTEK, but the mgmt got into cell-phones without warning, bombed out badly, and I sold on the recovery for break-even. Mgmt one can trust is important! DD is into soil and agriculture. Buffett's Burlington Northern overall reasoning is interesting. I like CHRW for the growth potential and product / services.

The reason for going into all that is that it does relate to retirement portfolios. Earnings growth enables higher stock prices, and higher dividends. A sound company establishes a sound dividend policy, and untradiionally low yields attract questions. The great innovaion of the high-tech era made fast-growth companies easy to find (MCHP). Today it looks like polticial stability and capitalism is the driver (e.g. BRIC countries), and US multi-nationals have exposure there - not fast growth overall, but growth, if they play it right. PG, KMB, for example - low-ticket items, but with substantial barriers to entry (R&D, product goodwill). I'm not sure where to get reliable data on foreign companies. The thing about investing is that it is the turtle winning over the hare. Steady as she goes! ("Steady" is a 10mm word!:-)

Reply to
dapperdobbs

Think in terms of cash flow instead of reserves.

Examine the financials of your bank stocks and sell those that are in bad shape.

Sell IR, it shouldn't matter if it is in your IRA or not.

CLMT is high dividend stock for you to consider.

If you can, and are still in good health, postpone SS until you are 70 even if you have to live off savings.

Stock investing functions best by harvesting capital gains to take advantage of lower taxes.

-- Ron

Reply to
Ron Peterson

Hi Ron,

Good advisement principles :-) If I may pick your mind a bit:

1) why are you pessimistic about IR's business?

2) do you own Calumet? I glossed over their 10k, but had some difficulty reconciling their hedging losses to their derivatives losses. I know these are a problem for commodity based industries.

3) Calumet seems it reorganized from partnership to corporation (the payout policy confuses me a little). Do you know how old the company is, and if it has always had the same basic businesses? It looks like they are doing well, and it's hard to complain about the price entry point. Refineries (I've heard) are very expensive, so age of plant as well as legal liabilities require analysis
Reply to
dapperdobbs

For small caps, I only buy funds.

Versus buy and hold? With all due respect, I think there is much disagreement on your point.

Reply to
Elle

My positions in GD and UTX are small. I bought them in the last couple of years because of some confidence that governments (ours and overseas) will not cease to keep their war machines strong and will also tend to continue to support contracts to defense companies because members of Congress want their constituencies employed. I also think many in government see the U.S. military as a jobs and education program. So military cuts are not entirely on the horizon. Both companies seem to have large international exposure.

I do not expect everyone to buy this reasoning. This is why my positions in the two companies are small. Also I am recalling the 70s when there were major cuts in the defense industry, with accompanying layoffs.

With all due respect, I cannot generalize like this. I have always thought Enron was not a utility like those that actually produce power (from coal, gas turbines, nuclear, whatever).

Seriously, I think getting a green thumb is a good thing to do in these difficult times. Oranges? I think they have increased in price dramatically in the last decade. Applause to you!

I hear you. For my international exposure, I buy only funds or large, old companies based in the U. S.

All other commentary noted. I am looking at some of the companies you named.

Reply to
Elle

I am not pessimistic about IR's business. I don't like their balance sheet.

Yes, I own Calumet stock in my my IRA making high dividends more tolerable than in a taxable account. Hedging helps keep long term contracts profitable.

The company was formed in 1916. I am not familiar with their history.

CLMT is more of a chemical company than a refiner, so it has a higher gross profit margin making it more immune to price fluctuations.

-- Ron

Reply to
Ron Peterson

I have problems finding decent funds. Funds give you diversity, but that can also be done buying an assortment of stocks.

Holding a stock that is very over priced seems like a losing proposition.

I am a value investor where I assume there is a intrinsic value associated with each stock which may be different than the market price. Management of the company issuing the stock can goof up an destroy that value or there may other factors that do that. I am not good at knowing what the exact value of a stock is.

-- Ron

Reply to
Ron Peterson

I agree but feel I do not have quite enough money to diversify well among small caps. After studying several small cap (value) funds a couple years ago, I chose VBR. I can't defend the choice really well, but I did draw up a spreadsheet and compared VBR with several other small cap funds.

I meant the buy and hold part kind of generally. Otherwise, you sort of caught me. It is true I have sold some stocks when they seemed overpriced, the portfolio was getting a bit top heavy with the position, and I wanted to take the gain and diversify a bit more.

Your admission of this makes you a superior advisor in my book. I run from anyone saying they have a good handle on the exact value of a stock.

Aside: Farewell Professor Paul Samuelson

Reply to
Elle

What is there to look for in a small cap index fund? This is something I don't have in my small portfolio. What benefit can they bring to a young person's portfolio with aggressive growth in mind.

I have a TSX Venture exchange fund but most of it's constituents are mining and energy speculation stocks and I rarely contribute to the fund as it's not a diversified exchange IMHO.

Reply to
The Henchman

I look for sectors that seem to have a future, but am not sure of which companies are going to be the winners. For example, I own TAN which is an ETF holding solar stocks. Sector ETFs may contain large and mid-caps in addition to small caps, but I don't see small caps having a big advantage unless they fill some niche in the market place.

That covers basically two sectors, just get some other sector funds or stocks to balance your portfolio.

-- Ron

Reply to
Ron Peterson

I looked specifically at what I felt were small cap value ETFs. My criteria were:

Expense ratio (lower is better)

Yield (higher is better, to give some idea of whether companies with dividend payments were emphasized)

Average or Median Cap of companies held (lower is better. For some companies I could only get either the average or median. Granted they are not the same statistically, but picking an ETF is not an exact science yada)

Average P/E (lower is better)

% Financials (lower is better. It was a little too easy to overemphasis financials in a fund and so make the fund riskier. I made my purchase in late 2007, before things got really bad. Still, at the time I did not feel good about any small cap value fund with a lot of financials, goosing up yield, lowering average P/E, etc. but all with more risk involved.)

# of positions (more is better)

Turnover (for tax purposes in case I wanted to have a small cap value ETF position in my taxable account)

% Medium, % Small, % Micro (Too large a fraction in medium ruled some funds out for me)

Granted all this is fluid. I might re-do my 2007 spreadsheet and see how things have changed, for my education.

VBR did not win in all the categories above. It was "strong" in just about all.

My largest position in my Roth IRA is in fact VBR. I went this route because value in particular historically has done well, small cap value has done even better. One can google on this and find the historical numbers and discussion.

Small cap value funds are not for what I call "aggressive growth." I am not an "aggressive growth" type investor. I know there are arguments for having a fraction of this category in one's portfolio, for the sake of diversity.

Reply to
Elle

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