Income investing – a basic portfolio of stocks, REITs and bonds

 

Intro

My father passed away in 2004, at the age of 70.  He was fairly frugal and had his investments set up to last for some time, so I inherited part of his IRA account (he had taken his pension/401K and gotten it put it into an IRA when he retired).

For those of you who have not had an “inherited IRA” – when you receive it, the IRS has you calculate your remaining years of life, based on your current age. At that time, the IRS tables said I could expect to live another 41.6 years, and so I had to pull out  1/41.6th of it. Each year, the number drops by 1, so the following year, I had to pull out 1/40.6th of it…..

I kept in with the same investment advisor for about a decade, and it grew as I was only taking out the minimum required. However,  in tracking I found they were always about -1.5% less than what I could have gotten from a regular diversified portfolio that I could set up. I made the decision in 2015 to take it away from them and invest it myself.

As one gets older, one starts to look at how to move from “saving for retirement” to spending your retirement money – and making sure it lasts for the remaining years. The traditional way that has been done is to setup your investments to generate income – through bonds and stock dividends. In the past, you could build quite an income portfolio with a mix of 6-7% bonds and 5-7% dividend stocks.

The issue has been that, with the low interest rates in place for the last several years, bonds have been returning very poorly (1% – 4%) and companies have not been paying dividends (the S&P 500 has been paying out about 2.2% dividends for the last year or two). What is a guy to do?

I picked up an interesting book, titled Yes, you can be a successful Income Investor by Ben Stein (Yes, that Ben Stein) and Phil DeMuth. The book was written  in 2005 (after the dot.com bust, but before the 2008 crash) but the concepts still hold up. They list a variety of income-yielding securities and then tell you how to combine them in a portfolio where you can get maximum yield for minimum risk. The concepts are followed in numerous articles on the web and in finance magazines as well.

The book covers three areas

  • Bonds (IOU’s from companies, you are loaning them money). They pay you back a set amount each year, and then the loan amount when the loan is due
  • Dividend paying stocks: Companies take a portion of the revenues and pay them out to shareholders on an annual basis. Depending on what price you purchased them at, this ‘yield’ can be somewhat high. This is in addition to any growth in share price of the stock
  • REITs (Real Estate Investment Trusts): Real estate companies that are created as trusts have special tax rules, but they must pass on a significant amount (90%) of their profits in dividends. This makes them good income producing stocks, but they can be risky (see 2007 real estate bust)

They end by providing sample portfolios with actual companies or mutual fund recommendations.  Some of the approaches are very easy (Just 4 mutual funds) and some are somewhat involved (3 mutual funds, 10 stocks, 20 REITs). Overall, it’s a good read, and provides an excellent basis for building your income portfolio.

For my portfolio, in an attempt to keep it simple, I chose to go with 2 bond mutual funds, 4 REITs, and 4 dividend paying stocks. I tried to stick to the book’s proposed 50% bonds, 25% REITs and 25% stocks. My plan was not to reinvest dividends, but to use them to rebalance the account, and to pull out at the beginning of each year when I had to take a required distribution (I am up to 1/29.6th).

For the bond fund, I chose to go with two vanguard low-cost index fund, one that represents the entire bond market (VBTLX) and one that represents intermediate bonds (i.e. 7-10 years) and it’s symbol is VBILX.

For the stocks, I looked at the Dow Jones and S&P 500 for high dividend stocks. I chose Verizon, Caterpillar and Chevron, as they were paying high dividends at the time. I also chose to invest in an ETF fund, in this case the iShares account for preferred dividend stocks, symbol “PFF”.

For the REITs, I started with the list provided by the Stein & DeMuth book, and whittled it down, based on yield, P/E ratio and general company health.

In 2015, they did well, with a dividend return of 3.7%, and capital gains of 6.9% (total of 10.6%). The stocks and REITs did very well, but the bonds pretty much stayed level. Not bad for a portfolio with 50% bonds.

For 2016, I traded out the Caterpillar (it had grown over 50% and my calculations showed there wasn’t much upside versus my new pick, Cisco). Other than that, I let everything ride.

So for early 2017, here is where I was.

% Symbol Name Current Shares Current Price  Current Value Yield Type Dividend
23.4% VBTLX Vanguard Total Bond Index 2814.3 $10.65 $29,972 1.80% Bond $552.47
26.9% VBILX Vanguard Int-term Bond index 3058.1 $11.24 $34,373 2.10% Bond $606.09
5.9% HR Healthcare Realty Trust 250.0 $30.33 $7,583 4.10% REIT $300.00
7.4% HPT Hospitality Properties Trust 300.0 $31.75 $9,525 8.40% REIT $609.00
4.5% O Realty Income Corp 100.0 $57.50 $5,750 2.80% REIT $249.96
7.1% UMH UMH Properties Inc 600.0 $15.04 $9,024 7.70% REIT $540.00
3.5% CSCO Cisco 150.0 $30.24 $4,535 3.72% Stock $168.72
4.6% CVX Chevron Corp 50.0 $117.77 $5,889 5.10% Stock $214.50
12.5% PFF Ishares Preferred 430.0 $37.22 $16,005 5.70% Stock $980.12
4.2% VZ Verizon 100.0 $53.39 $5,339 4.50% Stock $227.25
$127,994 3.48% $4,448.11

 

The overall yield provided is scheduled to be about 3.48%. Nowhere near the yields it used to be, but it gives you some idea of what you could expect this portfolio to ‘throw off’ in the years ahead. Note that this does not include company growth for the stocks and REITs, so you can hope (?) that this keeps pace with inflation.

I’ll report back periodically on how this portfolio is doing.

Kevin

 

More on hobbies

 

I had the opportunity last week to travel to Pittsboro NC and take a woodworking class at the Woodwright’s School (www.woodwrightschool.com). Many folks may remember Roy Underhill as that manic woodworker who uses only the tools from the 18th and 19th century to make wonderful pieces of furniture and household items. I have several of his books, and took a class with him back in 2015 that was fantastic.

This class was taught by Roy’s peer and fellow woodworker, Bill Anderson. It covered how to make a wooden molding plane from scratch. Wooden molding planes used to be the way you would make intricate moldings in wood (coves, ovalos, etc.) for furniture and homes. Until the powered routers and shapers came along, these tools were prized elements of a woodworker’s kit.

The classroom is very nice, with ten workbenches, and plenty of room to operate. There is hardly any powered machinery (tablesaws, planers, etc.) – it is all hand powered work (there are a few grinders in back for sharpening). Each workbench has a basic set of tools, and some specialty tools for that specific class.

For molding planes, you take a piece of birch or beech wood, about 2in x 10in, that is set up to be very stable. You then cut in the profile you want on the bottom, create a mortise and slot for the iron and wedge that hold it in place, then create the iron (annealing it with heat, initial sharpening, then heat treating to finalize). There is an awful lot of tweaking which takes place to get the plane operating smoothly.

I find classes like this to be very rejuvenating, as you get to work with your hands – something lacking for a lot of us in today’s world. It’s great that folks with decades of knowledge are willing and able to pass their knowledge down. In some of the classes I’ve been to, there have been young folks in their early 20’s who are looking to make this a way of life. I’m sure the instructors love the fact that their knowledge will be passed down.

Whatever your hobby is, I hope you take the time to take some classes in it, to enhance your abilities and help teachers who are passing down the knowledge.

 

Again, I’d ask what hobbies are you currently taking part in, or are planning to take on in the years ahead as you prepare for Financial Independence?

Book Review – Complete Retirement Guidebook by Wall Street Journal

This is a pretty good book for those people who are preparing to retire or achieve financial independence in the next 5 years. Written in 2007, it doesn’t have as many charts and equations as many “retirement” books, but it does include a great number of web links, and great advice on the social side of preparing for and moving into retirement.

One of the things I liked about it was that, instead of going through the numbers, the book first emphasizes creating the lifestyle you want to retire to. It is here in the first quarter of the book where it really shines out versus other books I’ve reviewed.

It first asks what I think is a key question you need to consider when pursuing financial independence. How do I want to spend my time in retirement? From there is goes on to offer advice on working (or not), volunteering, relocation and fitness/health. In each of these areas, the book provides a lot of useful links and places to seek additional guidance, while covering (in broad strokes) many of the key issues you need to consider. Just reading this first part will definitely leave you with a lot of questions you will need to answer before you can proceed.

The second part of the book covers “Money Mechanics” and provides much of the same information that many retirement books provide (saving for retirement, budgeting, social security, estate planning, etc.). Again, each chapter provides plenty of links and useful information, as well as charts and forms to fill out to determine the optimum way to handle your finances.

Finally, the book ends with some excellent success stories of recent retirees – how they set themselves up for success and what their new lives are like. It’s a great way to end the book with some motivation.

Overall, I think its an excellent book that should be part of anyone’s study who is thinking of moving on shortly. Grade 4 stars out of 5

 

Mr. 39 months

 

 

 

 

 

 

 

Early Retirement – Good or Bad?

Early in the month, Financial Samurai had a great post about the dark side of early retirement

http://www.financialsamurai.com/the-dark-side-of-early-retirement-risks-dangers/

He starts out with some of the reasons folks want to retire early, including job difficulties, realization of time slipping away, and general feelings of hopelessness in their current environment. He then moves into some of the dangers, and lays them out in convincing fashion.

  • What if you get bored and change your mind?
  • What if you run out of money?
  • What if you lose relationships due to your changed lifestyle?

He finishes with some words of warning (be careful who you listen to about early retirement, looking beyond the conventional wisdom) and discusses what he believes the real goal should be – Financial Independence, not early retirement. While keeping an age or year as a goal to motivate and to do this so that you can live a happy, productive life doing the work you love – not the job you hate.

I think it is an excellent warning, as so many of the Early Retirement community have the potential of falling into the trap. I see a lot of websites with people in hammocks and lovely beach scenes. What is funny is to read the ones of folks who have reached it, and to find out that they either continue to work (maybe at reduced hours/stress) or have found other “work” that they do which fills their day.

I belong to the baby boom generation, a generation which has defined itself (for both good and ill) by their job and function in society. While my goal is to be financially independent by July 2020, I know that I won’t be able to just sit down. While I might take some time to relax, travel and do a few things I’ve always wanted, I know that within 12 months I will be going stir crazy. That’s why I am big on hobbies, and will probably find some part-time work to stay in the game/keep my mind working.

What are your thoughts on this? When you hit financial independence, will you walk away?

 

 

You’ve got to have hobbies

 

One of the things they will always tell you about retirement is that you have to have hobbies or other interests in order to keep you from going batty once you gain your freedom. There are numerous stories of people retiring, and passing on a couple of years later, because their purpose in life has ended. I myself had a father-in-law who passed away 2 years after retirement.

For me, I have two primary hobbies (other than this blog) – backpacking the Appalachian Trail, and woodworking.

Backpacking the AT: When I was 38 years old, I was visiting my mother in East Tennessee. We took the opportunity to visit the Smoky Mountains National Park, and there I saw a large map (48” x 12”) which shows the entire length of the AT from Georgia to Maine. I had enjoyed backpacking in my youth, but had stopped when I joined the army. For some reason, I decided right there that I would seek out to hike the entire 2,100 mile length over the next 10-15 years.

Well, its been about 15 years, and I’ve only been able to get 716 miles done so far (about 1/3). Primarily that is because life and work continues to get in the way. I’ve been able to get it done from Shenandoah park to Connecticut (and some other states) but I still have a lot to do. I’ve currently got about 100 miles scheduled for 2017, so that should push me a little over 800 miles.

This weekend, I was able to hike it with a bunch of friends, and we did about 12 miles, even though it rained a great deal on Saturday. Its great to get out, talk with other folks from the world hiking, and just get the exercise.

The other primary hobby I have is woodworking, specifically the making of furniture by hand. I’ve managed to accumulate a full set of power tools (tablesaw, jointer, planer, drill press, bandsaw, etc.) and an excellent collection of hand tools – which I’m starting to use more and more. I will try and share some of these in the future as well.

What hobbies are you currently taking part in, or are planning to take on in the years ahead as you prepare for Financial Independence?

 

 

 

 

Book Review: $100 Startup by Chris Guillebeau

Chris is an entrepreneur and author, who spends the majority of his time traveling the world, interviewing other entrepreneurs, and hosting the World Domination Summit (a gathering of creative people).

 The book was published in 2012, and contains stories from over 50 different entrepreneurs, as we learn their startup lessons. The key lesson that Chris tries to get across is that you don’t need large sums of money to get started and you don’t need to turn your startup into a giant, multi-billion dollar enterprise. Most of the people in the book are satisfied with smaller operations (often 1-person), which fulfills their needs and allows them to pursue the work and lifestyle which they want.

 The first part of the book covers basic stories of people who became entrepreneurs. It covers how individuals got their ideas, how they worked to make get the business off the ground, and some of the ways they found to succeed. One of the key points that Chris emphasizes in the book is the idea of value – how you need to provide value to potential clients in order to succeed.

 The second part of the book goes into more details of how to start and succeed in your small business. It talks about simple, one-page business plans, startup/launches, and using everything possible to self-promote the business. It also has some interesting ideas on how to fundraise (including the story of how one business got started with a car loan when the owners couldn’t get a business loan).

 The final part of the book covers some steps you can take in order to grow your business and take it to the next level. He talks about leverage, how to franchise, and getting as big as you want (but no bigger). He finishes up with a chapter on “what happens if you fail” in which he talks about several entrepreneurs who failed their first and even second time before finally making it. The key is to persevere.

 A lot of the items covered have been dealt with before, and his writing tends to gloss over many of the details the reader might wish were covered in more depth. Overall, I’d give the book 3 stars out of 5

 

 

Status Update: April 30, 2017

Status Update for end of Month 39

I thought I’d start putting out regular status updates for where I am, and goals for where I am going forward. The idea would be to provide information to the reader, and to help motivate me as I move forward.

I understand that for some folks, they may not be able to relate (the numbers may seem too large or too small for their current situation) but I believe that everyone can benefit from more information. Take what I am doing with a grain of salt and with the other reading you are doing, and make your plans appropriately.

My Goals for 2017 (some financial, some not):

  1. Put in $33,000 in tax-advantaged accounts throughout the year
  2. Put in all bonuses, gifts, and our previous house payments into regular accounts (estimate of $26,000 year)
  3. Increase dividend income from our investments to $18,000/year (and reinvest them)
  4. Get Passive income up to 65% of living expenses
  5. Beat a 6% growth rate on our net worth
  6. Begin attending local real estate investment association meetings, to learn about and begin preparing for real estate investing in 2018
  7. Start a blog (i.e. this one)
  8. Fitness: Increase weight lifted by 10% over the year
  9. Average 3 hours of cardio each week
  10. Go on an international trip
  11. Visit one national park

The primary reason we can devote so much money to investing in our 401K/IRAs and other accounts is that we’ve managed to pay off our mortgage last year, and I got a significant raise. With my wife’s and my salary, and no debt, we are doing the typical thing folks in their 50’s do – pouring a ton of money into investments to try and prepare for retirement/financial independence.

We live fairly frugally (average under $4000 in expenses per month in one of the more expensive places in the US to live). While we have the funds to do a lot of stuff, we chose to keep our expenses low, so we can save and keep our stress level low.

At the end of April, here is where we are:

  • Savings/Checking/CDs: $141,601 (my wife likes to have a lot in cash; we argue about this sometimes)
  • Investments: $220,285
  • 401K/IRA’s: $468,883
  • Roth IRAs: $195,602
  • Total: $1,026,372

For the first time in our lives, we are over $1M in liquid net worth! With the 4% rule, we could take out $40,000/year for the rest of our lives. Just knowing this dramatically decreases the stress that we are feeling.  Based on the social security payments we could get (I know, if we get), we could go to $66,000/year right now, even if we only got 75% of our benefits.

Overall, I would have to say that I’m pleased where we are at this point. Based on savings plan and growth, my hope is to be over $1.1M by the end of the year, as we progress towards financial independence.

I’ll try to go over my investment strategy and allocation in a future post.

Thanks for reading, and let me know your thoughts.

A little context….

39 Months

 

Thought I would give folks a short life history, in order to give some context for my story and struggles.

I worked my butt off in High School, and managed to get accepted to West Point (the US Military Academy). By joining the military, I got my college paid for, and got a fairly good engineering degree out of it. At the end, I went straight into the combat arms (Tanks) and was deployed to Germany during the last few years of the Cold War. I actually got a tour 3 weeks after arriving on my battle position and where I probably was going to die when the Russian’s invaded.  Gotta love those crusty platoon sergeants!

I also got married to my lovely wife, Mrs. 39 months, right out of school (and we’ve been together for 31+ years).

After five years in, and a stint in Desert Storm where my tank unit fought the Republican Guard, I got out in 1991, right as the economy was going into recession. Took me about 6 months to finally find a position in warehousing in New Jersey (within 3 hours of my wife’s family) and that is where we ended up settling for the last 26+ years.

I’ve worked in warehousing since then, either in management (Supervisor, Manager, etc.) or as an engineer, designing storage and processes, etc. It’s a great industry to be in, and it’s big throughout the US and the world. I’d recommend it to anyone who wants to get started in an industry with potential growth. Let me know if you want further details.

For finances, I signed up for the 401K retirement plan at the first job I had out of the military (since I was only in 5 years, I didn’t get a military pension), but I only put in for the matching amount. After about 9 years, I hadn’t accumulated that much – and then the 2000 crash hit.

Suddenly I was 36 years old, and realized how little I had set aside for retirement. At my wife’s new job (she’d had it for 3 years) the company had been putting 10% of her salary away, and she had almost as much as I had accumulated over 9 years (with the crash taken into account). Needed to get started!

I bounced my 401K percentage up to 10% of my salary in 2001, and by 2003 I was maxing it out. I got a promotion the following year, and dumped all that money into both of our Roth IRAs. So by age 40, I finally was on track with maxing out our tax advantaged accounts. It sucks that I had lost all those years of accumulation, though!

I also started doing a lot of reading (Dave Ramsey, Millionaire Next Door, etc.) which helped to further motivate me.

Over the last 10+ years, we’ve managed to continue to fully fund my 401K and our Roth IRAs, pay down all our debt, and finally pay off the house in 2015 (Yeah!). So we’re debt free and heading for the finishing line in 39 months.

Now we have to start working on what our life will be like when we achieve financial freedom?

 

Mr. 39 Months

And so it begins….

Welcome to the 39 months Blog. I chose to create this blog as a way for me to track my countdown to financial independence. Along the way, I hope to share interesting stories, links, book reviews and opportunities for the readers to benefit from my quest.

 

With good planning, good decisions, and a little luck, I hope to be financially independent by July 2020 (my independence day!). Wish me luck and follow along.

 

Mr. 39 Months

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