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Rob Carrick had an interesting article: A blueprint for finding monthly yield

http://www.theglobeandmail.com/globe-investor/investment-ideas/portfolio-strategy/a-blueprint-for-finding-monthly-yield/article1797376/

If one could live off the cash yield of such an income focused portfolio during retirement, could this be a viable asset allocation for the long term (~30yrs), subject to periodic rebalancing?

What would be its biggest negative versus the traditional broad market ETF approach (especially in stocks)?

If you could point out the biggest "red flag" for this income focused approach, what would it be?

Appreciate any input on the matter. Thanks in advance.
 

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OK but....

Thanks for posting the link. It was interesting but I doubt I could sleep well knowing that I'd invested 27% of my life savings in XDV and a further 11.3% in CPD. Those ETFs are heavily weighted towards Canadian financials so there is too much exposure to a single sector for me.

Do others share my concern?
 

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If you can live off that kind if yield, then it is a reasonable couch potato approach. The yield will drop if interest rates rise. So then you will be forced to sell some principal.
 

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I doubt that anyone would want to depend entirely upon this type of income producing portofolio--and we do not have to.

First of all, most of us at 65 will receive CPP and OAS as part of our income.

Then there is the --Pensionize Your Retirement Nest Egg--approach, where you have three silos with different income products in each. The G&M income approach could fill one of these three silos. OAS, CPP, Company Pensions(If you have one) Annuities, GWBP's can fill the others.
 

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True but what other yields can you realistically expect these days? I mean sure there is gold but that carries a lot of risk. I do the gold thing because it's a LT investment. I thought 4.4% was pretty good, maybe I'm missing something though.
You can consistently get more than 4.4% with investment grade, 5+ year bonds.
I personally don't think taking on equity risk for a 4.4% yield (before taxes) is worthwhile.
Even if you pour everything into the top 5 bank stocks, you'll make more than 4.4%.
It would be pretty hard to "live off" a 4.4% yield, unless you are 65+ and are collecting CPP, OAS and guaranteed pension.
Or you live in Costa Rica or Thailand etc.
 

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If one could live off the cash yield of such an income focused portfolio during retirement, could this be a viable asset allocation for the long term (~30yrs), subject to periodic rebalancing?
Of course it could be, but many posters have already begun to point out short comings, diversification being a major limitation of this particular portfolio.

What would be its biggest negative versus the traditional broad market ETF approach (especially in stocks)?
As HaroldCrump points out, 4.4% return over 30 years is not good. With such a long investment duration, a greater allocation to stocks should win in the long run.
 

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True but what other yields can you realistically expect these days? I mean sure there is gold but that carries a lot of risk. I do the gold thing because it's a LT investment. I thought 4.4% was pretty good, maybe I'm missing something though.
Off the top of my head, based on what I paid for them, my income trusts are paying 7% or 8.4%. I picked up a leveraged basket of dividend payers in March 2009 that has paid 31.5% per year since restarting the dividends on June 2009.

Some of my conservative stocks have hit the 7% and 8% mark as I picked them up on sale. If I look at TransCanada Pipe, I paid $10 / share, with a dividend of $1.60, I'm up to 16%.

For more recent options, Triax Diversified High_Yield Trust is paying 6.8%. It would have been better to pick it up in Nov 08 ($6.24) or Mar 09 ($7.60) but it's still respectable.
 

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You can consistently get more than 4.4% with investment grade, 5+ year bonds.
I personally don't think taking on equity risk for a 4.4% yield (before taxes) is worthwhile.
Even if you pour everything into the top 5 bank stocks, you'll make more than 4.4%.
...
But bond interest has an inclusion rate of 100%, whereas the instruments Carrick is suggesting would have a mix of interest, dividends, and capital gains. So the after-tax income may be comparable.
 

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As HaroldCrump points out, 4.4% return over 30 years is not good. With such a long investment duration, a greater allocation to stocks should win in the long run.
Both you and Harold are erring in comparing potential 30-year investment returns to a portfolio where the object is to generate steady annual income flow. Sure you can do better than 4.4% in the long term by buying equity, but what is the pensioner supposed to eat in the years the market goes down?
 

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OGG, this portfolio is quite exposed to the market as well.
It is not like a govt. bond.
It contains income trusts, REITs, junk bonds, etc.

Also, a $1M portoflio will provide only $44K before taxes.
Whether that is enough or not depends on each individual situation.
And whether someone has $1M to invest in the first place is another matter.
 

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Discussion Starter #15 (Edited)
Both you and Harold are erring in comparing potential 30-year investment returns to a portfolio where the object is to generate steady annual income flow. Sure you can do better than 4.4% in the long term by buying equity, but what is the pensioner supposed to eat in the years the market goes down?
First of all, thanks to everyone for your input. I do have concerns on the relative lack of diversification of some instruments (ex. XDV, as pointed out).

Having said that, the 4.4%, as OGG points out, is the current cash yield of the portfolio. We could anticipate long term capital appreciation as well from such component ETFs like XDV, XRE, CYH, etc., no?

Thanks again.
 

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Wow, I need to read posts more carefully. Somehow I completely missed the word "retirement" in the original post.

The proposed portfolio could be used, big risk in sustaining the 4.4% return though. I think you have to ask yourself whether the 4.4% generated from these exact sources is sustainable.

Will all XDV and CYH be able to sustain current yields and grow at the rate of inflation for 30 years. Periodic rebalancing might be an understatement. I would guess you would have to overhaul every once and awhile.
 

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The asset allocation seems to be about what you will find in major "CDN Neutral Balanced or CDN Equity Balanced" monthly income funds (RBC Monthly Income & TD Monthly Income for example). The over-concentration in financials seems to be normal for this class.
 

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That is very high...what's their yield at current prices?
Care to share some of the top picks?
Hmmm ... my first reply seems to have timed out. I'll try to be shorter.

The basket yielding for me 31.5% is the most risky of the lot - it is a split share. At yesterday's close, the yield is 10.7%.

I figured in early 2009 that Canada's financial system was less exposed than the US system but were being overly punished. Since leverage is good on the upside (but bad on the downside), I decide how much to risk and went looking. I narrowed the list to Dividend 15 Split Corp II (symbol DF) and Big 8 Split (symbol BIG-A on Yahoo.ca or BIG.A on Google).

Once I'd done my homework to confirm how each worked (some have a 1 capital share to 1 preferred ration, other are 4:1), I bought around Mar 2009 for $3.80 / share. The dividends restarted in Jun 2009 at $0.10 / share. I am at risk for my capital gain which is at about $7.80. Since I've made $1.80 in dividends, I can live with a lot of downside or temporary fluctuations.

Here are some links if you want to learn more about split corporations:
http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20051018_132006_3892
http://confusedcapitalist.blogspot.com/2006/11/outperforming-index-split-shares.html

My caution about split corporations are that:
a) it takes a while to understand them.
b) they have expiry dates so timing is important
and c) it takes more due diligence as their setup can vary dramatically
(ex. capital to preferred share rations to figure out valuation,
redemption privileges etc.)

However, if you have the discipline to limit the amount you put in and can catch it while it's down, the accelerated capital gain is nice. For example, Bank of Montreal (symbol BMO) and Bank of Nova Scotia (symbol BNS) are both in the DF basket. Each has a capital gain of approximately 100% for the common stock where DF have a capital gain of over 160%.

I'll post some of the corporation and trust units later tonight or on the weekend. Note that like my TransCanada Pipe or BNS examples, buying a proven dividend payer while it's down not only can generate a nice capital gain, it can help dramatically with the yield (BNS today is a 3.6% yield, buying in Mar 2009 at half price make for a 7%+ yield).

I'll just quickly mention that while PenGrowth Energy Trust (symbol PGF.UN) as of yesterday's close distributed 6.9%, it was available as recently as August with a 8.4% payout.
 

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Being luckier than most, we can easily live off the dividend yield (currently around 3.4%) from our portfolio of equities and pensions. Not worried about equity risk as I believe the dividends are very secure. Inflation worries me more hence the equities. Some retired professor described his approach to retirement investing in last Sat's G&M as being equities that represent key components of Canada's economy. Our approach is similar. We treat our pensions as our fixed income component as they represent about 40% of current spending.
 
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