Changes to Income Account due to four years of lessons

AS you know, I have been using my father’s inherited stretch IRA to experiment with creating an income generating account. It is similar to what folks used back in the day for their retirement – using stock and bond dividends to create a stream of income, and one with lower taxes (due to the lower taxes charged on dividend income).

I have been following the results of the account since I started it in late 2015, and after four years, here are some of the results.

Asset % of Portfolio Annual Growth Annual Dividends Total Annual Returns
Income Stocks 25% 10.4% 4.4% 14.8%
REITs 25% 13.0% 5.1% 18.1%
Bonds 50% 3.3% 2.1% 5.4%

As you can see, the Stocks and REITs have paid a significant amount out over the last four years, even with the dip in 2018. Even their dividends have beaten the yield of the bond funds. A lot of this is due to the low interest rates currently being paid on the market, and unfortunately, I do not see much relief on the horizon for this. Even if rates did start going up, it would penalize existing bonds, due to their lower bond rates (i.e. why buy a 2% bond from 2019, when I can get a 3%+ bond in 2021?)

After a lot of soul-searching over the holiday season, I have decided to walk away from bonds in my investment portfolio for income. I know a lot of you will be saying “about time!” in this regard, but I felt I wanted to experiment and learn from this. I believe four years of getting sub-standard income returns is enough here.

Therefore, I have gone back to my broker and re-adjusted the plan.

  • Going with a 50/50 split between stocks and REITs
  • Going to keep my iShares (PFF), even though their growth has not been as good as other income stocks. That is because their dividend is very high (it has averaged a 7.2% yield year-over-year, and a 7.5% growth, so it’s about the same as my 14.8% average for stocks)
  • Going to try the “dogs of the Dow” strategy, where every year you start with the ten stocks in the Dow 30 who have the highest yields. This should be because their stock price is down in comparison to the dividends they pay. The idea is that, over the year, they should bounce back to the average yield of the Dow, which means the stocks will go up, while the dividend stays the same (or goes higher)
  • The “Dogs of the Dow” strategy calls for you to review at the end of the year, sell the stocks that are no longer in the top 10 for yield, and buy the new ones.

Based on this, my stock purchases will be equal dollar amounts:

Stock Current Price  Est. Dividend Yield
Dow  $    47.18  $       2.80 5.93%
ExxonMobil  $    64.74  $       3.60 5.56%
IBM  $  138.62  $       6.63 4.78%
Chevron  $  110.39  $       5.00 4.53%
Verizon Communications  $    59.91  $       2.49 4.15%
Pfizer  $    40.16  $       1.52 3.78%
Walgreens Boots Alliance  $    52.23  $       1.87 3.57%
3M  $  175.63  $       6.06 3.45%
Cisco Systems  $    47.47  $       1.52 3.20%
Caterpillar  $  135.73  $       4.27 3.15%

I will report on how this is going over the year.

Mr. 39 Months

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