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Author: mdlangford Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Please suggest an income portfolio Date: 11/4/2013 1:23 PM
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Hello, my mother in law recently sold her home, and currently the proceeds of that sale ($500k+) are sitting in various savings accounts. My wife and I are trying to convince her to put that money to work, but all 3 of us distrust "financial advisers" that just try to sell you expensive funds to pad their commission.

She has enough income from SS, 401k, and military survivor benefit to cover her expenses, so income on this principal would be for discretionary expenses. Her priorities are:

1. Preserve principal as much as possible (appreciation of principal is not a high priority)
2. Achieve 3-5% yield annual yield (some yield volatility is acceptable, since she's doesn't need the yield to pay the bills)

I'm not too knowledgeable about income investing, but here's what I came up with just from a few hours of research:

10% in a high yield money market account, ~1% yield
10% XLU-utility ETF, 3.9% div yield,
10% XLP-consumer product ETF, 2.7% div yield
10% DTD-broad dividend ETF, 2.7% div yield
10% DEM-emerging market dividend ETF, 4.0% div yield
10% TDIV-broad dividend ETF, 2.5% div yield
10% DHS-high yield dividend ETF, 3.6% div yield
10% EDV-treasury ETF, 3.4% div yield
10% ITR-corporate bond ETF, 2.9% div yield
10% EAD-junk bond fund, 8.9% div yield

Average yield of this portfolio is about 3.6%. Asset allocation is 10% cash, 60% dividend-paying equities, 30% bonds.

Thoughts? Thanks in advance.
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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73686 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 2:27 PM
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Personally, I'd pick about 10-12 dividend paying stocks over all the ETFs. Get a more consistent dividend yield from quarter to quarter. Probably get a higher yield without too much risk. No management fees.

JLC

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Author: mdlangford Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73687 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 2:42 PM
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Thanks for the input. My concern with buying individual stocks would be the risk of events that could batter individual stocks (Exxon causing an oil spill, P&G selling tainted drugs and getting sued, etc.) ETFs are exposed to general market ups and downs, but less exposed to individual corporate crises.

I play "stock picker" with my personal investments, because I can accept the risk. But I don't want my MIL to lose a big chunk of money because of a single corporate scandal or something.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73688 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 2:46 PM
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My concern with buying individual stocks would be the risk of events that could batter individual stocks (Exxon causing an oil spill, P&G selling tainted drugs and getting sued, etc.)

That's always a concern.

My thinking, if you start out with the list of Dividend Champions (companies that have increased their dividend payment each year for at least 25 years) you probably increase your chances of getting good companies. And just think of all things that could have and did go wrong during all that time. And they still keep chugging along.

Or you could go the orphans and widows route with utilities.

JLC

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Author: mdlangford Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73689 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 3:33 PM
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"Or you could go the orphans and widows route with utilities."

That's a serious consideration too; utilities seem to have better yield vs. volatility than broader dividend equities. I keep reading that utilities will take a beating when the Fed stops giving out free money though.

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Author: op456op Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73690 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 3:40 PM
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I would take a look at Vanguard ETF's. You can probably find a similar mix of what you're looking for at a much lower expense ratio. They have some of the lowest in the industry and are very shareholder friendly. Their ETF's trade commission free. Also their mutual funds have low expense fees and are no load. Their people do NOT work on commission so your fear of churn by sales people won't be a concern.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73691 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 3:45 PM
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This looks pretty good.

I don't have the time to cross check these, but I sense there might be some overlap, such as with consumer products, broad dividend and high dividend ETFs you show.

I'd start by breaking down the income-securities marketplace into income groupings that have poor income correlations. Here are some that come to mind:

Consumer non-cyclicals
Consumer staples
regulated utilities
equity REITs
Consumer finance
non-banking preferred stock
Energy
MLPs
Investment grade debt
high-yield debt

Note: I treat preferreds and MLPs as a separate income group due to their rules for making distributions rather than the industry they are grouped with.

Now, find the ETFs that most closely aligns with these groups.

You also need to calculate the income expense ratio for each ETF you find. This is the % of the ETFs gross income that goes to the house. Forget the quoted ER, as this can be manipulated. You might be surprised to find how expensive an income ETF can be.

Personally, I hold a couple of income ETFs (VIG and JNK), but almost entirely I hold individual income securities representing the income groups I've listed above. But you are right...this does require more work and an understanding of how companies are able to sustain and grow their distributions over time...and there are certainly those who want the reliable income but not the work to find and sustain it. Income ETFs will be good fits for these individuals....just make sure you've got the right ETF :-)

BruceM

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73693 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/4/2013 5:11 PM
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I keep reading that utilities will take a beating when the Fed stops giving out free money though.

That's true with just about any dividend paying stock. When the Feds cut the rates to near zero, people had to go somewhere.

So you buy some dividend stocks. Fed stops QE(x) and rates go up. Your stocks go down. If you're not in it for the capital gains, who really cares as long as they keep paying out their dividends? (within reason, no one wants to see a 50% haircut)

JLC

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73696 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/5/2013 8:42 AM
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Their ETF's trade commission free.

Depends on your brokerage company.

Last time I looked at Fidelity, charged a commission to trade Vanguard but not Blackrock's iShares.

JLC

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Author: mdlangford Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73698 of 75335
Subject: Re: Please suggest an income portfolio Date: 11/5/2013 10:16 AM
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Thanks! Good input. My original portfolio didn't have any REIT exposure, so I swapped in VNQ (Vanguard EIT ETF) for TDIV.

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