Mom update and WWMMD with this $$

[niq]

PDQ.

We are closing on Mom's condo this week. hooray! Because she had taken out a HELOC, the payments plus HOA were a big drain on cash flow.

After fees, commissions, paying off a loan we took out to get the place ready to sell, etc., we'll have about $120K left over. What should she/we do with this money? She gets $900/month from social security, and we help with some of the household bills (groceries, phone, car insurance, etc.). She doesn't need it for her daily needs, but a few hundred bucks/month in dividends would help. She certainly won't need to withdraw assets any time soon.

Any thoughts on where we should park the money? Money Market returns are abysmal. Are there low-fee funds out there that focus on dividends instead of long-term asset growth?

ETA since we don't expect to need to withdraw principal, I am fine with short- and medium-term market fluctuations.

[oswin]

I could be wrong, but I think @shoegal knows about dividend-focused investments. Also congrats on selling, that must be a relief.

[Deleted]

The two tend to relate, so they are pretty hard to separate. (Given stocks rise in price for lots of reasons, but often because growth expected in dividends.)

I love big fat index funds. Vanguards total market and Vanguards s and p 500 are good examples.

Big blue chip oriented funds are another good place to look...ex: P and G is a nice consistent dividend spinner.

[Deleted]

Oh, and one more place for more superduper dividend experts - the Money Mustache forums are a great place, and many are super focused on dividend income to live off of.

[Poppy]

The thing about dividends is that they are not exactly related with "safety" or whatever. I mean, essentially the money you make on a stock is the dividend rate plus the price growth, and the price growth of a given company will be reduced by whatever arbitrary amount the company decides to issue as dividends. Sure, some companies are more likely to spin off more dividends based on the type of company they are, but it's not like dividends = no risk. With dividend income you have less control because you get what they give when they give it rather than withdrawing money as-needed, and then you owe taxes on it even if you don't spend it. It's a psychological trick IMO to make stocks seem like bonds.

You know how I feel about broad index funds and bond funds (essentially I use the balance between the two investments to control my risk). But if you are looking for other ways to do lower risk, you can get funds made up of less volatile companies, irrespective of their dividend rates. Just don't fool yourself that dividends are some magic way to make more money with no risk.

[oswin]

Ooh, this is fascinating actually. We have some Vanguard funds and I know that we get dividends from some of them - the bond one yield dividends monthly, but it's not a lot. Anyway, apparently you can go to Vanguard and check out the Distribution yield for various funds - see here the comparison for Bond funds: investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list?assetclass=bond#tab=overview. So you could maybe choose something like one of those - bonds are usually a fairly stable investment, and some of those have decent yields.

[niq]

Oct 17, 2014 12:49:58 GMT -5 Poppy said:

The thing about dividends is that they are not exactly related with "safety" or whatever. I mean, essentially the money you make on a stock is the dividend rate plus the price growth, and the price growth of a given company will be reduced by whatever arbitrary amount the company decides to issue as dividends. Sure, some companies are more likely to spin off more dividends based on the type of company they are, but it's not like dividends = no risk. With dividend income you have less control because you get what they give when they give it rather than withdrawing money as-needed, and then you owe taxes on it even if you don't spend it. It's a psychological trick IMO to make stocks seem like bonds.

You know how I feel about broad index funds and bond funds (essentially I use the balance between the two investments to control my risk). But if you are looking for other ways to do lower risk, you can get funds made up of less volatile companies, irrespective of their dividend rates. Just don't fool yourself that dividends are some magic way to make more money with no risk.

Yeah, I don't know how to think about this. I'd like to generate some cash flow for her and still have some asset growth. Bonds get the first but not the second, right? The Vanguard dividend funds seem to pay out quarterly, rather than when specific companies pay out dividends.

Like, in my head, I'd want there to be some magic asset that kicked out cash every month or quarter. If mom needed the money for something (plane ticket, car repairs, whatever), she'd spend it, but if she didn't need it, she could reinvest it.

[mlvmd]

I like Vanguard Wellesley and Wellington for situations like this.

[lys]

you need to be comfortable with losing money if you want to take the risk of money in the stock market..
IF you want a reasonably safe approach - I like INDEX funds are the way to go (still a chance of loss, but less severe - you get a return of the overall market rather than a particular sector or individual stock)

[niq]

Okay I have a related dumb question about those "Hypothetical growth of $10,000 investment" charts that I should know the answer to. Do they assume you always reinvest dividends?

RockNVoll SJ

[Poppy]

Oct 17, 2014 13:06:59 GMT -5 niq said:

Yeah, I don't know how to think about this. I'd like to generate some cash flow for her and still have some asset growth. Bonds get the first but not the second, right? The Vanguard dividend funds seem to pay out quarterly, rather than when specific companies pay out dividends.

I guess to me, the question is first, how much income do you want her to get every month? Then, is that within the range of income production of any assets you're considering, based on the principle and the dividend/interest rate?

But I just don't think the amount of dividends that a stock produces are very useful in determining how good it is in an absolute sense. So you still want to be diversified in quality stocks (or other asset classes), and figure out how to generate whatever income stream you need by making withdrawals in addition to whatever dividends you receive to get to that magic number.

[oswin]

You might consider simply investing her money in a fairly conservative portfolio of bonds and stocks (in the form of low-cost funds), from which she'd get some dividends (but really not much, realistically maybe $200/month on average) and some growth. She could still make withdrawals as necessary, but you'd want to keep an eye on the limits imposed by the funds you're investing in - some have limits on how frequently you can withdraw. 

Is there already some leftover from her social security usually, or is that all accounted for?

[Poppy]

Oct 17, 2014 13:15:51 GMT -5 niq said:

Okay I have a related dumb question about those "Hypothetical growth of $10,000 investment" charts that I should know the answer to. Do they assume you always reinvest dividends?

RockNVoll SJ

Yes

[oswin]

Oct 17, 2014 13:15:51 GMT -5 niq said:

Okay I have a related dumb question about those "Hypothetical growth of $10,000 investment" charts that I should know the answer to. Do they assume you always reinvest dividends?

RockNVoll SJ

I would have to assume yes or the math wouldn't work out so favorably. You can check by making your own calculator in excel - I think you have the skills to do so.

[SJ]

Oct 17, 2014 13:15:51 GMT -5 niq said:

Okay I have a related dumb question about those "Hypothetical growth of $10,000 investment" charts that I should know the answer to. Do they assume you always reinvest dividends?

RockNVoll SJ

Yes I believe so

[SJ]

Unfortunately I cannot really give direct advice here.

You may want to look at preferred stocks. Look at the charts. Some are quite stable in terms of price fluctuation but have great solid dividends.

The issue with bonds is that they are so expensive right now (because rates are so low) that even a bond with a coupon rate of 5% may have a YTM of only 1% or so. And if you don't hold the bond to maturity you are at risk of decreasing principal (which will naturally happen when interest rates rise)

[niq]

oswin as long as she's living with us, there some left over unless some three figure bill comes up, like car repair.

When she gets into senior housing, her rent will be about $400-500/month and she'll be paycheck to paycheck or very close to it.

[oswin]

Yeah, I think I'd go with mostly bond funds, which should yield some small monthly dividends, and a bit of stock index funds for more growth (and probably small quarterly dividends), then make withdrawals as necessary every six months or so to maintain some cash in a checking account. Disclaimer: I'm no expert investor or financial advisor, but this is probably what I'd do in your situation. I'd also make a bunch of spreadsheet calculations to figure out approximate expected dividends, withdrawal rates, etc, to see how long it would last in a variety of situations.

[Deleted]

Oct 17, 2014 15:09:00 GMT -5 @songforyou said:

I have no advice, but I have heard Suze Orman recommend municipal bond funds in these instances. I'm really just posting to say congrats on the sale, I know that is a weight off .

SONG - GREAT RECO!  

[barefootcontessa]

late reply here but maybe look at utility companies. typically conservative as far as equities go and usually around 4% dividend.