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A Simple Portfolio for a 4% Yield
By JLP | December 20, 2007
The January 2008 issue of Money featured an interesting article by Michael Sivy titled The 4% Solution, which is about finding yield for a retirement portfolio. The article mentioned a simple portfolio that currently yields a little over 4%. As Michael mentions in his article, the reason 4% is so important is that most retirees are advised to limit their annual income from their portfolio to 4%. If a retiree can get that 4% in the form of yield, they shouldn’t have to eat into their principal.
The Simple 4% Portfolio
To construct the above graphic, I used today’s prices for the current price and the distributions from the past 12 months for calculating the current yield.
It’s important to note that this portfolio is not without risks. For instance, 10% of the portfolio is invested in financial preferred stocks using the PowerShares Financial Preferred Portfolio (PGF). Although preferred stocks are safer than regular stocks, they are still subject to market declines. Another 10% is invested in high-yield bonds via Vanguard’s High-Yield Corporate Fund Investor Shares (VWEHX). Corporate bonds typically carry more risk than government bonds. The remaining 80% of the portfolio is invested in the SPDR S&P Dividend ETF (SDY), which tracks the S&P High Yield Dividend Aristocrats index.
I did a small amount of research and found out that the PowerShares Financial Preferred Portfolio holds 28 preferred stocks, the Vanguard High-Yield Corporate Fund holds 240 bonds, and the SPDR S&P Dividend ETF holds 50 stocks. This leads to the question: Is there enough diversification there?
Personally, I think I would prefer a more diversified portfolio. More on that later.
Topics: Investing, Retirement Planning |
