How long does it take to get to $50000 per year in dividends?

/ humblefi / 42 Comments

When I defined what Financial Independence means to me (here), $50000 dividend dollars per year seemed good to me….how I came up with that number is listed in that link. I did not have any notion of how to get there apart from creating passive income streams (cash from bank interest + dividends from stocks). How I designed the passive income streams is explained here and here.

The next question for me now is: how do I get to $50000 per year OR roughly $4000 per month. This post will talk about the next steps for me.

Assumptions

  • Dividend Distribution Frequency
    • Dividends can be distributed with different frequencies i.e. monthly, quarterly, half-yearly, yearly. I have mutual funds with all the above frequencies.
    • So, for the entire portfolio, what distribution frequency should I assume?
      • Monthly is the most aggressive (most amount of money compounding) and Yearly is the most conservative (least amount of money compounding).
      • Most of my funds are either quarterly or less, one of them is half yearly and one is yearly.
    • So, I have decided to go conservative and assume a yearly dividend distribution.
  • Dividend Reinvestment Plan (DRIP)
    • If the dividends are re-invested into the same assets that produced the dividends in the first place, we call this the Dividend Reinvestment Plan.
    • The assumption is that I am going to use DRIP as I do not need to use the dividend money right away.
  • Dividend Tax Rate
    • Dividends are taxed at a different rate depending on the tax bracket.
    • I will assume that my dividend tax rate is 15%.
  • Average Annual Dividend Yield
    • I have assumed 3%….a reasonable, middle of the road dividend yield assuming a 2% to 5% spread.
  • Yearly Investment
    • I will assume a yearly investment of $12000 i.e. $1000 per month.
    • I will assume that I will not increase this investment money each year.
  • Investment Time Period
    • I will assume 10 years since my wish is to achieve financial independence in 10 years.
  • Tool used
    • I am going to use a wonderful dividend calculator from Dividend Ladder.
    • If I had known about this tool, I would have used this when I defined my goals…I just came to know about this recently.

Case 1: Base Case

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 3%
  • Yearly Investment = $12000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $12725
  • New Principal = $424176

This is a far cry from the $50000 per year dividends I need to reach. So, which of the above parameters do I need to change to get the dividends closer to $50000 per year?

Case 2:  Add 5yrs to the 10yr FI plan

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 15 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results, which is much closer to $50000 dividend dollars per year:

  • New Annual Dividend Income = $45483
  • New Principal = $909663

So, to get close to the $50000 per year, I need to do the following:

Contribute $24000 annually instead of $12000 as per Case 1.

  • If I buy a house, then this increase in money is impossible. If not, then this should be doable.
  • Bottom line is that for the next 15 years, $24000 per year => $360000 investment into passive income streams.
  • How this money is spread across 15 years I am not sure yet, but it is a target for me.

Work for 15 more years instead of the 10 years I had initially planned

  • This is not acceptable, but it seems like I have no choice.

Assume a dividend yield of 5% instead of 3%.

  • This is acceptable because….
  • Some of the funds I own distribute capital gains as well. This is also re-invested.
  • Some of the funds I own and federally tax exempt and one of the them is state tax exempt also. So, dividend gain of 3% and add no taxes to it, makes it equivalent to a higher yield.

Case 3:  Stick to the 10yr plan

Lets say I do not want to work an additional 5 years i.e. stick to the 10yr FI plan. If so, what numbers do I see?

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $31632
  • New Principal = $632657

So, if I can adjust my need for money from $50000 per year to $31000 per year, then I can stick to the 10yr plan.

 Conclusion

It is very hard to see 10-15 years ahead in life. Who knows what can happen in future? But, assuming that things go well (touch wood), I will continue to aim for $50000 dividend dollars per year and contribute money trying to reach it. If I reach somewhere in between $31000 to $50000 dividend dollars per year, I would be happy. If it is tending towards $31000, then I may think of increasing the yearly investment or reducing dollar requirements in future.

So, the plan is to do the following:

  • Invest $24000 per year
  • Work for the next 15 years (5 more years than my plan for FI)
    • i.e. $360000 over the next 15 years
  • Assume a 5% dividend yield instead of 3% (the safe number)

Wish me luck to finish in 10 years instead of 15!

How to fund my Retirement?

/ humblefi / 1 Comment

I learnt about Financial Independence in early 2014 (here). I spent a lot of time studying the different blogs that talk about Financial Independence and came to a definition of what Financial Independence means to me. I also realized that there are two different kinds of retirement…early and real retirement phases. Since I wanted to gain financial independence by year 50 (wish me luck), I decided that my retirement will have two phases.

  • Early Retirement (50-70yrs)
  • Real Retirement (70-100yrs)

Now, with my health issues, I am sure I will not live until 100. But, I do not want my family to run out of money. So, I am going to plan assuming retirement lasts until 100…if we have a few down years in the market, this additional planned period should help compensate.

The next question is: how do you fund the two retirement phases? Here is my high level design

  • Early Retirement (50-70 yrs)
    • Funded by Passive Income Streams
  • Real Retirement (70-100 yrs)
    • Funded by 401k and IRAs

Early Retirement Funding (50-70 yrs, $50000 pa)

Having decided that passive income streams will fund my early retirement years, the following questions come next.

  • Why Multiple Passive Income streams?
  • What kind of Passive Income?
    • My choice are Interest from cash and Dividends from stocks and bonds.
    • Details here
  • What are the core principles I should follow for my Passive Income Streams?
  • How should I implement the passive income design principles?

I established multiple passive income streams in 2014 and let them fly. In 2015, I would like to put the investments on auto pilot and let the investments compound from all the automatic investment amounts and the dividends that each investment produces. The progress of these investments are tracked here.

Real Retirement Funding (70-100 yrs, $30000 pa)

For real retirement, I wanted to use the traditional funding vehicles like 401k and IRAs. To support 30 years of $30000 pa, I would need at least $900K in my retirement fund. Since I had 401Ks from multiple companies, I decided to combine my previous employers’ 401Ks into one single Vanguard IRA. The next important question was how to invest the money inside the IRA.

There are a few main ideas I wanted to follow for my IRA investments

  • Automated rebalancing
    • I.e. Target retirement funds
  • Spread the risk across 5 year time periods
    • Lets take a 2030 Target date retirement fund.
    • This fund will get super conservative as it approaches 2030 i.e. sell stocks and move that money to bonds and cash.
    • If there was a 5 year bad stretch of the market preceding 2030, then all the stock investments sold will be at a loss.
    • So, I wanted to make sure that not all the money is invested in 2030…some in 2035, some in 2040, some in 2045, etc. This will spread the risk of a bad 5 yr market performance across many 5 year periods.
    • In addition, this will keep the IRA money in buckets with different conservative basis i.e. there will be a growth component as well for some of the funds.

Considering the above main ideas, I have spread the IRA money into different 5 year buckets:

  • Vanguard Target Retirement 2030 Fund (55 yrs of age)

  • Vanguard Target Retirement 2035 Fund (60 yrs of age)

  • Vanguard Target Retirement 2040 Fund (65 yrs of age)

  • Vanguard Target Retirement 2045 Fund (70 yrs of age)

The goal is that when I reach 70 years of age, the above four funds would have reached their most conservative state and be ready for consumption during the retirement years.

Conclusion

My expectation with the two pronged attack (early and real retirement funding) is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.

Bonds and Interest Rates

/ humblefi / Leave a comment

There is a lot of stuff on the internet that deals with understanding bonds…many of them are either too technical OR too simple. How do I know this? I know because reading just one leads to a lot of unanswered questions and doubts. So, I decided to see if I can simplify them to a level where one can understand with just a single read. This level of over simplification will put me on top of the murder list for most financial experts, but please bear with me and let me know if I am egregiously wrong in any of the simplifications and I will correct them.

That said, it is time to learn some bond terminologies.

Bond Terminologies

Let us discuss a few of the terms you will find in almost all articles on bonds in the internet.

Types of bonds (lowest risk and hence lowest reward first)

  • Treasury bills or T-bills
  • Government bonds
  • Corporate bonds
  • High Yield bonds
  • Emerging market bonds

Bond Parameters

  • Purchase price
    • Price paid to buy the bond 🙂
  • Coupon or Interest
    • The periodic (yearly, half yearly, etc) interest payments paid to the bond holder
  • Yield
    • A fancy term used to describe the return provided by a fixed income investment like a bond
    • Yield = Coupon(Interest) / Purchase price of the bond
  • Maturity
    • After what time period will the bond principal be returned back to the investor (me).
    • When I buy a bond, I am loaning the bond purchase price amount to somebody (us govt, municipality, company)
    • For the duration of the maturity period (say 10 year bond), I get periodic coupon/interest payments.
    • At the maturity date, I get money I loaned out back.

Example:

  • Lets say that purchase price of bond X is $1000.
  • The  guaranteed Coupon or Interest is say $60 per year
  • The yield will then be $60/$1000 = 6%
  • Bond X has a yield of 6% earning $60 interest/coupon per year.

Bond Rating

We talked about Bond X in the previous example. We said that the guaranteed coupon/interest is $20 per year. The only exception to the guarantee is if the bond issuer defaults on the payment. For example, some bond issuers in Detroit have defaulted on the bond interest payments and declared bankruptcy. To gauge the credit worthiness of a bond, there are some rating agencies (big ones are Standard and Poor’s, Moody’s, Fitch ratings)  that classify different bonds into the following rating bands:

  • AAA: Prime
  • AA  : High Grade
  • A    : Upper medium Grade
  • BAA: Lower medium Grade
  • BA  : Non-investment grade speculative
  • B    : Highly speculative
  • CAA: Substantial risks/Extremely speculative
  • CA  : Default imminent with little prospect of recovery
  • C    : In Default
  • D    : In Default

Obviously, AAA is the best and D is the worst in the scale above.

Interest rates increases and effects on Bonds

Many many articles on the net talk about this statement “Interest rates and bond prices have an inverse relationship. When interest rates fall, bond prices usually rise and when interest rates rise, bond prices usually fall.”. What the hell does this mean? Let us take some examples and see what it means to a non-financial person.

Let us take the story of two bonds: Bond X and Bond Y.

Bond X

  • AAA rated, 6% yield, purchase price=$1000, 10 yr maturity
  • yield = coupon/purchase price => coupon/interest = yield * purchase price = 6% * 1000 => $60

Bond Y

  • AAA rated, 7% yield (interest rates increased by 1%), purchase price is still $1000, 10 yr maturity
  • coupon = 7% * 1000 => $70.

So, we have two bonds, with the same rating and purchase price, offering different yields. Bond Y will pay $70 dollars every year for 10 yrs but Bond X will pay $10 less for the same 10 years. So, why would anybody buy Bond X? This is the reason why Bond X’s value will fall when interest rates rise as there is a newer bond that offers more interest/coupon money for the same purchase price.

Let us take this one step further.

  • The total return for Bond Y is: 10 years * $70 per year => $700
  • The total return for Bond X is 10 years * $60 per year => $600
  • For Bond X to compete with Bond Y, Bond X should also somehow lead to an equal return for the purchaser i.e. the $100 difference has to be made up somehow.
  • But, the coupon/interest for Bond X is fixed at $60 per year…so, the only other way to make up the $100 difference is to reduce the purchase price from $1000 to $900.
  • So, Bond X is now sold like below:
    • AAA rated, purchase price=$900, 10 yr maturity
    • yield = coupon/purchase price = 60/900 = 6.66% yield (up from 6%)
  • A rising yield is hence bad news for any bond as it  usually means that the bond price has been lowered forcefully.
    • I.e. if I had bought Bond X for $1000 and I am forced to sell it for some reason when the interest rate has risen by 1%, I am going to lose $100 for each bond that I bought at $1000.

Interest rates decreases and effects on Bonds

The opposite  happens when interest rate decreases….the older bonds provide higher interest rates than the newer bonds and hence they become more valuable i.e. their yield increases.

Let us take this one step further.

  • The total return for Bond A (older) is: 10 years * $70 per year => $700
  • The total return for Bond B (newer, 1% lower interest rate now) is 10 years * $60 per year => $600
  • Bond A offers a better deal than Bond B by about $100. So, when all we can get today (with a 1% reduced interest rate) is Bond B, Bond A will command a premium i.e. the purchase price for Bond A becomes $1100 instead of $1000.
  • So, Bond A is now sold like below:
    • AAA rated, purchase price=$1100, 10 yr maturity
    • yield = coupon/purchase price = 70/1100 = 6.36% yield (down from 7%)
  • A falling yield is hence good news for any bond as it  usually means that the bond price has been increased by falling interest rates.
    • I.e. if I had bought Bond A for $1000 and I am forced to sell it for some reason when the interest rate has dropped by 1%, I am going to gain $100 for each bond that I bought at $1000.

Important Note

Whether interest rates are falling OR raising, when it comes to individual bonds, the bond purchase price (i.e. the principal) is guaranteed to be returned to the bond purchaser if the bond is not sold until the maturity date.

Next

If we have understood the above basics, the next challenge is to understand what happens to Bond Funds w.r.t. interest rate changes. Note that the impact on Bond funds are different than just Bonds.

Bucket Approach to Retirement

/ humblefi / Leave a comment

There is a common question among those planning/approaching retirement and definitely among those already in retirement.

That question is:

  • How to withdraw money from the retirement funds?
  • How to invest the remaining money while in retirement?
  • How much to withdraw each year?
  • How to not not be too conservative and run out of money?

A recent article I read from Christine Benz (Morning Star, published around 2012) was very informative to me. I am enclosing a link to that article here.

2014 Financial Independence Progress Summary

/ humblefi / 4 Comments

We have reached the end of year 2014 and it is time to look back at some important dates in my humble journey towards Financial Independence.

  • 01/2014
    • Hired a financial planner and got a gut check of where our finances stand
  • 03/2014
    • Tracked my budget for two months
    • Found most of the expenses I had missed in the original budget
  • 04/2014
    • Started my first investments in Vanguard
  • 07/2014
    • Started tracking my progress via this blog
  • 12/2014
    • Wrapping up my first year end of my humble journey to financial independence.

It is very humbling to see where I have come in my first year of the financial independence journey. Admittedly, I did not start with nothing or even negative worth like so many of the bloggers, but I was equally if not more “financially lost” than most of the financial independence bloggers out there.

From when I started tracking my progress (07/2014) to this date (12/2014), what have I achieved? The table below should summarize the progress from 04/2014 to 12/2014 i.e. across 8 months.

04/2014 to 12/2014
Emergency Fund ($72K) 100% 100%
College Fund (80K) 0.00% 31.04%
Passive Income Streams ($4000 pm) 0% 7.36%
Retirement Fund ($900K) 46% 53.91%
Roof for our Family ($1 mil) 0% 0%
Medical Fund 0% 0%
Life Insurance 0% 100% (term life insurance)

I am most proud of having started the Passive Income streams after having studied many of the blogs written by wonderful people like Dividend Mantra, Mr. Money Mustache, Mad Fientist, Financially Integrated, Financial Samurai, Afford Anything, Project 3 million, $25000 Dividends….uff….the list is too long to list. Thanks to all of the people who blog and share their wisdom. And thanks to Vanguard for making the process very easy to learn and start.

What is Tax Efficient Investing?

/ humblefi / Leave a comment

Before we talk about tax efficient investing, lets talk about the two different types of accounts: Tax-advantaged and Taxable accounts.

Tax-Advantaged Accounts

Examples of this type of accounts are 401K and IRA accounts. I do not have to pay taxes when I file taxes every year for any gains produced by investments in these accounts. The gains can be via capital gains, dividend distributions, interest, etc. The gains can grow in a tax-free environment  until money is withdrawn from these accounts. At that time, taxes will need to be paid based on the tax bracket one is at that time.

Taxable Accounts

Any account that is not tax-advantaged is a Taxable account. For example, my bank account with cash that produces interest is a taxable account because I will have to pay taxes on the interest money reported by the bank. Likewise, my Vanguard investment accounts, using post-tax money from my bank account, are taxable as well i.e. any dividends and/or capital gain distributions are taxable as well.

Tax-Efficient Investing

Gains produced in taxable accounts will be taxed according to the tax bracket one is in. Lets take an example. Consider the fund VDIGX…a dividend growth fund from Vanguard. The expected distributions for this fund for the  year 2014 are as follows:

Dividend Growth Fund    VDIGX

  • Dividends: $0.17
  • Short Term: $0.07
  • Long Term: $0.25

Each of the different category of gains are taxed at different levels depending on the investor’s tax bracket

  • Short term gains taxed at investor’s tax bracket (say 33%)
  • Long term gains taxed at 20% (fixed)
  • Dividends (qualified 100%) taxed at 15% (for folks in 33% tax bracket)

Tax-efficient investing is choosing investments in such a way that the taxes paid on the gains is minimized as much as possible. In the above example, it would be most tax-efficient if all of the gain comes in the form of dividends which are the least taxed category at 15%.

Consider another example of VCAIX….a California MUNI fund from Vanguard as well. This fund invests in MUNI bonds within California. The special treatment given to such bonds is that the gains form such bonds are both Federal and State Tax free and in most cases AMT free as well. For now, lets ignore AMT free…I will talk about this in another post. Now consider the gains produced by VCAIX for the calendar year 2014.

CA Intermediate-Term Tax-Exempt VCAIX

  • Dividends: $0.02
  • Short term: $0
  • Long Term: $0

For a resident of California, all the gains produced by VCAIX are completely *tax-free* i.e. both federal and state tax free. If not a resident of California, then it is only Federal tax free and state taxes have to be paid. So, in comparison to VDIGX,  for a resident of California, VCAIX isdefinitely more tax efficient than VDIGX.

So, tax-efficient investing is not about NOT_PAYING_TAXES. It is about MINIMIZING-TAXES-PAID and hence maximizing the gain that the mutual fund delivers.

NOTE:

  • VCAIX offers an appx gain of say 3%.But, being tax free means I get to keep the 3% completely.
  • For a taxable (or a less tax-efficient) fund to allow me to keep 3% post taxes, the fund has to produce a gain much higher than 3% to compensate for the taxes that need to be paid.
  • There is a calculator called Taxable Equivalent Yield Calculator (link below) where if I put in 3% and 33% as my tax bracket, I get the result of 4.48%. So, before paying taxes, the fund has to provide a gain of 4.48% so that post tax, I get to keep 3%.
  • For a portion of my portfolio, I may decide to take less risk and go for VCAIX at 3% vs taking more risk and investing in another fund that produces 4.48% gain. Now you see the power of tax efficiency 🙂
  • Of course, I do not want all my investments to be in VCAIX right…it is not diversified enough. So, asset allocation should still be higher priority than tax-efficient placement. Another post for this later….but for now, read the first link in the reference links below.

Reference Links

How I selected my life insurance coverage…

/ humblefi / 1 Comment

I defined what Financial Independence means to me here. One of the pillars of my financial independence is Life Insurance. In this post, I will talk about how I went about choosing life insurance coverage for my family.

General Principles for choosing Life  Insurance

There are few questions to answer when it comes to life insurance. Let us take each one and expand on it. After that, we can talk about the choices I made and why.

  • Yearly family budget
  • Term life or whole life
  • Policy Term
  • Policy value
  • Which life insurance company
  • What age to buy it at

Yearly Family Budget

The first step in planning for life  insurance is knowing what the yearly budget is going to be. There are many free budgeting tools available online and many financial planners as well. It is well worth the effort and/or the cost to come up with a solid expense budget. Make sure to include future expenses as well. For example, I do not have a house yet…we rent at $2500 pm. In future, when I get a mortgage, I anticipate the mortgage cost to jump to $4500. So, use $4500 as part of the budget. Likewise, if you plan to extend the family in future, scale  up the cost by the number of kinds you plan to have OR number of people you need to support. Run with this budget for a month OR two and see how accurate the budget is. It will take 1-3 months to iron out all the kinks….but if you are off by $1000 for the whole year, no big deal; if you missed a $20000 expense, it can prove painful. Once you have a yearly budget done, move onto the next step.

Term or Whole life insurance

There are two main types of life insurance: term life and whole life.

  • Term life is for a fixed time interval…say 20yrs for example. If I buy a 20 yr policy && die within the 20 yrs, then the policy amount will be paid to my family. If I do not die during the 20 years, then I get *zero* dollars on policy maturity. I.e. term life insurance is a bottom less pit, a black hole, etc etc. The advantage is that it tends to be cheaper than whole life insurance.
    • There are options that can be added to term life insurance policies that can convert the term life policy into a while life policy when the term life reaches maturity. These options are called Riders, which cost a yearly premium. For example, a 20 yr term life with a rider to convert it to a whole life costs an additional $200 per year. NOTE that this $200 per year is just to have the rider. To convert it to whole life, some additional premium will need to be paid…the rider only gives the opportunity to pay the premium to convert to whole life i.e. the conversion is not free.
  • Whole life insurance is for the entire life of the insured. Whole life policies build cash value by way of premiums and dividends. Values for death benefits and premiums are usually determined at policy issue, for the life of the contract, and usually cannot be altered after issue. Since the person may live well into the nineties, the risk of payout carried by the Insurance company is higher too. So, whole life insurance tends to be an expensive proposition.
    • In the first few years of mortgage payment, the payment mainly feeds the interest and the principal does not reduce much. Just like that, the insurance agent gets a lot of the commissions in the first few years of the whole life policy and the policy itself does not build value.

Policy Term

If whole life is chosen, then this question does not arise. If term life is chosen, then what should be the policy term chosen? The idea I liked was to protect the family from any emergencies for the earning years of the primary income earner in the family. Usually, it is until 65 years of age.

Policy value

The idea I liked was this. When the primary income earner dies suddenly, the remaining spouse will be in no shape to start working OR continue working as the case may be. So, life insurance should provide sufficient buffer to replace the yearly budget for a sufficient number of years. I.e. if the yearly budget is $100K, then providing 10yrs of income replacement will mean a $1million policy.

Which life insurance company

Life insurance is offered by many companies….Guardian, Mass Mutual, Northwestern, Fidelity, etc etc etc….The company I chose to protect my family for the next 30 years should itself be able to survive for the next 30 years. There is no guarantee that past performance will lead to future performance as well. But, I went about collecting the ratings of all insurance companies from rating agencies like S&P, Fitch Ratings, AM Best, etc. The top ones came out to be the following:

  • Guardian and Mass Mutual (equal)
  • Metlife
  • NorthWestern Mutual
  • Prudential

What age to buy it at

Earlier the better 🙂 I say this because usually one’s health is much better in 20s than in the 40s. The insurance is much cheaper when one is younger and healthier. So, better to buy as early as possible…when there are people who start depending on your salary.

My design principles in choosing Life Insurance

The design principles I used were

  1. Protect my earning years
  2. Reasonable and fixed monthly cost
  3. Stable Life Insurance company

Protect my earning years

When I starting thinking about Life Insurance, I wanted to protect my family from any emergencies for my earning years i.e. until 65-70 years of age. I may achieve financial independence earlier than that..if so, the life insurance will be a luxury. If not, I did not want my family to suffer.

Reasonable and fixed monthly cost

I decided upon Term Life Insurance because of two reasons…it was cheaper was one reason and spreading the risk was another.

What do I mean by spreading the risk? I decided to invest the difference between term and whole life in the stock market. Historically, the growth from stock market has proved to be better than the growth of the whole life insurance. So, paying for term and investing the difference also spreads the risk….all risk on the insurance company (whole life) vs risk in the insurance company (term life) plus risk of the investments (in many companies).

So, my selection was Term Life Insurance and not Whole life with a policy term of 30 years i.e. until I am 70yrs of age. 65 would have been good, but there was no policy for that many years. By 70 yrs, I hope to have a reasonable financial plan for my family 🙂

The approval process took a long time but the policy has been approved! It costs me a packet every month…a bottomless pit…but, at least my family is covered until 70yrs of age.

Stable Life Insurance Company

Based on my ratings data collection, both Guardian and Mass Mutual were fine. I decided to go with Guardian Life Insurance…the Guardian folks were more prompt in approaching me and thus they were chosen 🙂

Conclusion

Hopefully, the above longish post has given a flavor of how to select an insurance policy and the knobs that are available for people to fine tune the choices to protect their family.

Dividend Investing: Mutual funds v/s Individual stocks

/ humblefi / 2 Comments

Being a lazy investor who likes periodic investments, mutual funds is the most obvious alternative for me. But, there are many people who favor investing in individual stocks that lead to dividend income. If the dividend income is the same in both cases, then which one to pick? I.e. what are the tradeoffs in each method? Here are some thoughts with an example.

Let us consider VDIGX as the example mutual fund and a dividend producing individual stocks basket. The stocks we will assume to be part of both VDIGX and the stocks basket are:

  • Wal-Mart Stores, Inc.
  • Johnson & Johnson
  • Microsoft Corporation
  • Merck & Company, Inc.
  • TJX Companies, Inc.
  • Chevron Corporation

For an investor to maintain an individual stocks basket of the above stocks, he/she has to do a financial analysis of the companies involved OR at the least, spent time studying the reports available in the internet, company’s SEC filings, etc. One also has to evaluate the price of the stock based on its earnings potential. In short, there is a reasonable amount of financial knowledge and capability needed to invest in individual stocks.And, tax time can be a pain 🙂

But, the advantages are that once you own the stocks, you (the investor) gets to decide when to sell the stocks, when to realize capital gains (short or long term), buy and hold forever OR sell at the opportune time, buy and sell instantaneously during the day, etc etc. There may OR may not be commissions involved for buying/selling depending on the stock broker platform used (etrade, vanguard, and a whole host of providers with different fees per trade).

VDIGX, on the other hand, is totally controlled by the fund manager who currently happens to be Don Kilbride, a recognized name in the industry. He decides when to sell or buy company stocks, in what quantity, which companies to buy, etc. So, there is a loss of personal control over the investment. In addition, you (the investor) has to pay Don a fee for managing the investments. Since I do not have the time nor the knowledge to do a financial analysis, I have to pay Don the fees to do the work on my behalf. Since Don has a proven track record of producing reasonable gain, I am betting that past performance is a reasonable (but not guaranteed) predictor of future performance. Due to the loss of control, you (the investor) cannot control the time of selling/buying stocks, realization of capital gains (short or long term), which companies to buy, etc. For example, Don OR some other fund investor could sell VDIGX shares and force a capital gain of the short term. In addition, if you do not invest in the fund anymore after a certain amount of money, you still have to pay Don some money.

The advantage of course, is that you (the investor) does not have to evaluate the financial stability of the company, the value of the stock, etc etc. Don has years of experience in picking such stocks and also has a well known company like Wellington/Vanguard overseeing the process of picking such stocks. And tax time is as easy as taking the 1099 form that Vanguard will send for VDIGX and filling up the form in a tax form 🙂

For the lazy investor (like me), VDIGX is perfect. For the more knowledgeable investor, picking individual stocks may be the way. Hope this article gives a flavor of the issues to be aware of in choosing mutual funds vs individual stocks.

PS: For a more detailed article on tax treatment, please read another post by HumbleFI titled Tax consequences of investing in Mutual Funds