When it comes to the financial health and well being of an investment portfolio, I find it’s good to be able to sit down and review if it’s doing everything that I expect it do to. For me, that’s monthly. After all, I want to ensure that it’s going to be there to support me for the long term. 2022 is the transition year where my severance package came to an end and any income derived from any external sources outside of my B&D portfolio comes to an end as well. From 2023 and on, my current expectation is that all my income will be coming directly from my B&D portfolio. Ultimately, it doesn’t get more real than that.
For those of you who are still on their journey towards financial independence as well as the retire early option, will your investment portfolio allow you to move to that next stage in your financial futures at the point that you expect?
As was previously highlighted, here is the break down what I’m going to consider as part of my monthly review.
- How are my B&D portfolio allocations doing?
- How is my B&D portfolio doing compared to the comparable portfolios?
- Is the B&D portfolio hitting it’s 7.50% overall annual growth target?
- What is the dividend yield for the B&D portfolio?
Let’s get started.
The b&d portfolio allocations
Based on my prior posts here, here and here, I’ve eliminated the ETFs VSB, MFT, and ZPR from my portfolio and replaced it completely by XLB. This was a tough decision to make. My B&D has remained relatively unchanged since March of 2020 outside of adding cash when it became available and purchasing more ETF units.
The one exception though was purchasing MFT at the beginning of 2022 in anticipation of rising interest rates. Well, it was a stinker and I’ve moved on from it.
I will also admit that I am still questioning eliminating the last 12% allocation of ZPR and may reconsider. For now, I will need to think that over before taking any action, if any.
With all those changes made in July 2022, let’s review the portfolio target allocation versus the actual allocation. The portfolio is currently sitting at 66% equities and 34% fixed income. It should be 65/35 however I’m letting this go for the time being.
Looking past this, I’m going to apply the 5/25 rule I had previously discussed here. Based on the 5/25 rule, I don’t need to consider any immediate rebalancing of the portfolio at this time. Therefore, I’m going to leave things as they are for now.
The b&d versus the comparables
Here is a list of prior monthly summaries:
Compared to June 30, 2022, my B&D portfolio YTD return has improved from -11.69% to -7.56%. I also now hold the number 1 position against 14 comparables.
When it comes to the average, mean, worst and best comparable, the difference between my own B&D portfolio and the comparables has widened again in my favour. July 2022 was a great month for markets. My own portfolio is a 65/35 portfolio (65% equities/35% fixed income) while most of the other portfolios are 60/40. When the markets turn negative, the impact is felt more by my own B&D however the same is true when markets turn positive. I continue to feel that my portfolio construction has been holding up well in these uncertain times.
Now, let’s include the detailed breakouts of my own B&D portfolio and of each of the comparable portfolios.
The B&d portfolio growth targeT
Every calendar year, I set myself a goal of organically growing my B&D portfolio by 7.50%. When I say organic, I don’t mean hormone free, antibiotic free, free-range, or herbicide/pesticide free (beware, each blog post must contain a certain amount of cheese – if not, I should be flogged).
What I mean by organic is that any new funds added to the portfolio after the beginning of the calendar year from outside sources (e.g. from employment income) are excluded not to over-inflate the return. Also, as of 2023, funds coming from external sources will no longer occur as my reliance will be 100% on my B&D portfolio.
Obviously, with a YTD return for 2022 of -7.56%, even as this an improvement from -11.69% dated June 30, 2022, I’m off by quite a bit.
Regardless, negative years occur and as was seen with the comparables above, my portfolio is holding up considering the volatility we’re currently experiencing.
Next stop, let’s consider the dividend yield on the portfolio.
the B&D portfolio Dividend yield
My goal is to take a 4% SWR (safe withdrawal rate) from my B&D portfolio each calendar year. The dividend yield on my portfolio is a very important component of my SWR.
Why?
While I want as high of a dividend yield as possible, I want to ensure it’s made up of quality investments. I also want to ensure those quality investments pay dividends that are consistent, reliable and growing.
Also, the closer my dividend yield is to my 4% SWR, the less I’ll be reliant on selling investments to cover the difference between the dividend yield and SWR.
As at July 29, 2022, my B&D portfolio dividend yield is 3.1525%. This is lower than the prior month however with the move out of VSB, MFT, and especially ZPR, this slightly lower yield was expected. Also, I don’t gouvern my portfolio solely on dividend yield. I also need to factor in capital growth as well as risk minimization.
Two further caveats though.
First, I wouldn’t pull any money out of my TFSA. Therefore, the dividends deposited in my TFSA will be reinvested. I would either sell additional securities from my RRSP or my non-registered account to make up for that. Taxation would be the deciding factor between the RRSP and the non-registered account.
Second, I can’t actually pull any funds out of the LIRA until I turn 55 years old. So, same as the TFSA, either I’ll compensate by pulling funds from the RRSP or the non-registered account, whichever is more tax efficient.
Overall, what’s important is that the dividends continue to be paid out and negative market conditions have had no impact on that.
In conclusIon
In reviewing everything above, my thoughts continue to be the following:
Steady as it goes for now.
What do you think? As much as July 2022 was a great month for the markets, there’s a lot of volatility going on out there. Talks of recession as well. How does that make everyone feel?
do you use any technical analysis when you made decisions when to buy and sell or is it strictly to keep the balance 65/35?
none of the etf’s are very good for preferred shares. you need to learn about individual prefs to maximize that part of your portfolio.
i don’t see any REIT holdings. is there a reason for this?
regards
Hi Nestor and thanks for commenting.
In regards to your questions, no, I don’t use technical analysis. I’m not that smart. Lol. I listen to what goes on in Canada as well as around the world and make my decisions based on that. Nothing more complicated than that.
For preferred share ETFs, I prefer keeping things simple. If I start to over analyze, that will lead to analysis paralysis. At least for me. I’ve found sticking mostly to ETFs, I’ve done ok and I’m happy with that.
Lastly, regarding REITs, I haven’t been a fan for some time. Very low interest rates until recently and a continuing work from home culture (potentially less so now but still prevalent) don’t make it something that I’m excited about. Rising interest rates will hurt them a bit. If you compare XRE to something like ENB (Enbridge) or even XSP since March 20, 2020 when we came off the covid lows in the market, XRE has lagged significantly.
Hope that answers your questions.
sounds good. if you’re happy with your performance and results, then stick to what you are doing.
Best of Luck.
I went from -7.5 to -8.5 and I’m currently at -6.89. I’ll check out XLB; I’m not happy with ZPR.
Carryover from Greater Fool, you ask is there a better way.
I’ve mentioned many times to you that I have transitioned my portfolio to one that holds Blue Chip Canadian Companies that are also high dividend payers. Many of these companies were trailing the market recovery in the fall of 2020 so I started selling off my index funds and buying individual stocks (I still hold 3 dividend ETF’s), with the reasoning that I would be able to live off the income and not have to worry about another market crash like in March 2020.
In my situation I find this method to be stress free, extremely consistent and still profitable (profitable enough?, you decide). On top of all this it is incredibly tax efficient.
Oh and just like you I have no other income or pensions. I am 57 and wife is 59 so CPP and OAS will only add to these numbers. I have also a cash buffer which I can use to boost my income but for this exercise I don’t think it’s important.
Here the numbers and I welcome your critique.
Wife’s RSP- 275,000
My RSP- 130,000
Total TFSA- 310,000
Total Cash accounts- 800,000
Grand Total- 1,515,000
Dividend Yield- 74,400/yr or 4.91%
Let us assume for now there is no buying or selling of stocks to determine how much tax is paid.
Wife- 16,000 RSP withdrawal, 27,200 eligible dividends. Total $43,200, $6000 of which gets transferred to TFSA for next year. Tax paid $1,017
Now lets use the same numbers for myself.
Total we get is $86,400 income ($12,000 goes back into TFSA for the next year, portfolio balance does not change), total tax $2034 (including Ontario Health care premium). Tax rate of 2.35%.
These are Blue Chip companies many of which have never suspended or cut a dividend, the dividends increases tend to outpace inflation over time.
Once again I welcome you to pick it apart.
Penny Henny
forgot to add this
https://www.wealthsimple.com/en-ca/tool/tax-calculator/ontario
I’m a little surprised at your plan to use a 4% SWR. AFAIK you aren’t looking at a “regular” 30y retirement and when the trinity study is expanded to 50y+ the failure rate increases significantly.
I was initially aiming for 25x too, but reading the thorough analysis from ERN changed my thinking.
Highly recommended:
https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
Plugging your own data in here can be enlightening:
https://earlyretirementnow.com/2017/01/25/the-ultimate-guide-to-safe-withdrawal-rates-part-7-toolbox/
My own numbers and situation brought me to a 3.25% SWR which was a big haircut (almost 20% less spending in retirement?!) so I adjusted “my number” until I would have enough of a nest egg to get a 3.67% withdrawal rate which led me to discover my 10k=$1/d rule(“ten kay, dollar-a-day”):
With a 3.65% SWR you can spend $1 per day per $10k invested.
It’s a neat rule for planning little luxuries like if you want a 1h massage every week for $70 you know that requires $10 per day so it takes $100,000 of bank to finance it indefinitely. (I’ve moved to SEA, so a massage is closer to $7)
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I changed my PF a little this past month as well to target 85/15. currently at 84/16
14% xiu
70% VOO/ZSP
16% HTB
-10% YTD (a dismal 11th place on your list, but arguably the simplest PF of them all)
I should note that while I retired in Oct 2020 My severance package was for 5 years so I won’t be making withdrawals until 2026 which is factored into my SWR toolbox spreadsheet and accounted for in my 3.67% SWR
I’ve read some of ERNs blog as well. He does have a nice perspective on things although he is admittedly conservative. Nothing wrong with that. Especially when we’re dealing with irregular retirement horizons. You need to be careful. I was in his camp considering more a 3%-3.5% SWR range however I’ve had a change of heart over the last couple of years.
In my case, I consider the dividend yield of my B&D portfolio. I don’t have any DRIPs (Dividend ReInvestment Plan for anyone unaware of the acronym) so all distributions/dividends sit as cash. My July 29, 2022 day end portfolio dividend yield is at 3.1525%. As a result, I only need to think about where to get the remaing 0.8475% from. Normally, you’d sell a portion of your portfolio. In my case, I set aside about $30,000 in my bank account so selling when markets are down is not necessary.
Also, as I have years where the B&D outperforms its set annual return goal currently at 7.590, I’ll replenish that $30,000. It may mean that I will need to up that $30,000 to a higher level in the future depending on inflation rates but for now, it works ok.
Also, when it comes to the 4% SWR, I also perform a monthly check on it. When portfolio values rise, it’s a pointless exercise, when portfolio values drop, as they have this year, it becomes a very useful tool. I want to see monthly the impact of a lower 4% SWR on the overall year so that I ensure my spending is in line with the lower amount (so far so good). My goal is not to have a shock at year end and have to drastically readjust my spending habits. Right now, I’m still in Canada however the plan is to exercise geo-arbitrage in the Fall and enjoy lower cost of living in South East Asia, Central America, etc. When that’s factored in, I’ll likely have a much lower spending level than a 4% SWR. Big fan of $7 massages. I pay around $100 now.
Also, I do like the $1/day spend for every $10k invested.
As for the 5 year severance package, 👏👏👏! That’s amazing! Good on you!
Lastly, I’m curious about your preferred location(s) in SEA. Would you mind sharing?
Sorry, I lost track of this for a bit there.
I agree that ERN is on the conservative side, but I also feel that I need to be. Unlike many(most?) people in FIRE I was a blue-collar worker so if things go south in 10 years, I don’t have a degree to fall back on. That and it’s really made me a “measure twice, cut once” kinda guy. Fingers crossed that GT is right and we get our own “roaring twenties” so we can just throw all the math out the window =)
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As for SEA, I have visited a few but admittedly haven’t given each country a fair shake. Despite that we still decided on Vietnam for quite a few reasons:
Pros:
♦The people are the most genuinely kind and welcoming in our experience.
♦The weather is excellent and since the country is very “tall” you can go north or south within to avoid the “bad” seasons (which are still better than a “good” Canadian one IMO)
♦The lack of crime. It is extremely rare to find a place outside of Canada where my wife can safely walk home alone from a bar at 4 am (that’s not our thing but you get the idea) I’ve left my keys in my scooter on a public street for a weekend and left my phone at a restaurant more than once without issue (not that I recommend either)
♦The price. You can check numbeo.com, but I think only Cambodia is consistently cheaper.
♦Food. It’s just great. There are almost zero chains here (maybe a dozen total buildings between BK, McD, and KFC) so it’s all mom&pops places. Also unlike most of SEA, they have bread and cheese here- that might seem like a small thing, but I really missed it while living in Taiwan.
Cons:
♦A complete lack of retirement or nomad visa. This is actually a huge PITA and I’m currently doing a visa run to Thailand every 30 days to get a new tourist visa for VN. There is hope that they will re-implement the 90-day one from the pre-covid days, but I’m looking into other options like starting a small “consulting” company here…
Runner-up:
Thailand.
Pros:
♦Visa situation is way better already, and they are talking about a 10year DN visa coming soon.
♦”The land of smiles” is second only to VN in my experience, but sometimes it did feel a little fake since it changes outside of the tourist areas.
♦Food also excellent with more variety than VN (both western&eastern)
♦Weather and prices are also good
Cons:
♦Left-hand drive. Driving a motorcycle in SEA is sketchy enough, re-wiring your brain adds unnecessary complication.
♦Illegible script. Maybe I’m just old, but while I’m up for learning another language, I really want recognizable characters.
♦Racism. It’s not really bad most of the time, just “special prices” for “farang”, but sometimes there’s a strong resentment towards foreigners/ immigrants that you can really feel. This can probably be blamed in part on sex tourism, and it does seem to diminish when I’m with my (western) wife.
For the rest: Bali, Philipines, Malaysia, Cambodia, and Laos: Traffic, crime, religion, crime, and poverty respectively.
Now, I’m not saying that any of those places don’t have a little paradise in them, and I freely admit that I haven’t spent enough time in any of them to really make judgments, but… based on my first impressions VN just came out too far ahead in each category for me. So while I will certainly tour those places in-depth over the coming years(decades?) I’ll be making VN my home base from which to do so.
If you’d like to continue this conversation outside of the blog feel free to email me. It’s rare to find someone else in our situation- most people in the FIRE community are either just starting the accumulation phase or are so deep into it that they don’t talk about it anymore. Not counting the famous ones like MMM who have made millions off of their blogs about frugality 😉
“These are Blue Chip companies many of which have never suspended or cut a dividend, the dividends increases tend to outpace inflation over time.
Once again I welcome you to pick it apart.”
800.000 * 4,9% = 39.200 (not 54.400) i have assumed your dividends are uniform throughout your portfolio. maybe you can clarify. beyond that, you have issues…
i. there are a limited number of Canadian blue chip companies. most are banks, insurance co’s, pipelines, utilities and telco’s. so you run into a diversification problem, you don’t have enough capital to be properly diversified buying individual stocks. which banks will you own? all of them? which pipelines? which telco’s? all of them? also, you have all your eggs in Canada.
ii. none of these companies are growth companies. if you are using the dividends to live off (rather than re-investing), then your capital may stagnate. or even decline for long periods of time. so your capital will not beat inflation. here are some examples.
BNS peaked 2007 at 54, now 78. that works out to 2.48% growth over 15 years
BCE peaked 2000 at 50, now 64 . 1.13% for 22 years
CIBC peaked 2007 at 53, now 65. 1.37% growth for 15 years.
ENB peaked in 2015 and is down since then… 7 years
iii. in a rising rate environment, these companies will have an issue. some of them have massive debt loads and higher rates can be an issue. cost of capital at zero interest rates is one thing. but how do they manage their businesses if rates get to 3%, 5%? also, their income streams will be valued less. like bonds.
look at AT&T and Verizon in the US. nice dividends. both peaked in 2000 and are below those levels.
so, unless you have a sure way to time the entry and exit of the shares you own, you may run into a problem long term.
is your intention just to buy and hold living off the dividends? do you intend to rebalance? not sure if your plan is to own any bonds or prefs.
just some thoughts.
you forgot the 310,000 in TFSA also collecting 4.9%.
Banks- Big 5
Telco- BCE, T
Pipelines- PPL, ENB, TRP
Energy- CNQ, SU
Utilities- AQN, FTS
ETF- XEI, VDY, ZWU
All Canada- Yes, guilty.
Re Growth- You are correct that if I timed it perfectly wrong and bought at previous peaks that would suck. Most of these purchases though were in Sept- Nov of 2020 (there have been adjustments along the way), so the capital growth since then has been over 40% luckily.
Yes just living off the divies and over the next 1- 8 years 2 CPP’s and 2 OAS’s will start trickling in.
No bonds or prefs for now.
do yourself a favour and look into prefs. i’m not talking about the etfs. those are garbage. but individual ones where you can manage your exposure between perpetuals and fixed resest/floaters.
one of the best sources on Canadian prefs is James Hymas. https://www.himivest.com/
he offers a monthly subscription which is very cheap. i think you can buy one issue to try.
income is opportunistic. you have to take advantage when the chance comes. large sell offs in prefs offer the chance to make outsized gains with very little risk. i bought a bunch in 2020 during the sell off. IFC.pr.A was paying 7.8% at $10.75 (which promptly sold off to $7.6 before rebounding) it’s now $19.17. it will reset at the end of Dec at 5 year canada + 172 bpts. based on today’s 5 year rate, the new dividend will be 10.6% until the end of 2027.
I need to learn more about them. Thanks
and thank you for your comments