Considering Dividend Income as the Fed Lowers Rates

If you are in retirement, or even semi-retirement, having a dividend rich portfolio is quite a necessary thing. The dividends you receive serve as a significant source of replacement income, filling the gap left by regular W-2 wages.

It's a delicate balancing act. I mean, just because you leave the workforce doesn't mean you no longer want to still grow your portfolio while covering your living expenses—who doesn't always want more money if you can have it? Avoiding having to dive into the principal is a big consideration as well. Especially in the beginning years. And of course, even when inflation is low, it's still a factor to keep in mind. That $100 you have today will not be worth the same $100 tomorrow because inflation will eat away at some of the value.

You need to have a reliable source of income to pay your bills while continuing to build your wealth as much as possible, and that means making things so that the dividend income you are receiving exceeds what you are using to fill the gaps.

That means sensibly managing dividend yields to ensure you can get the best bang for your invested dollars. But, in all fairness, that can be a bit tricky with so many variables to consider.

When we had the massive decades high inflation, courtesy of poor economic policy by the Biden administration, it came with at least one silver lining, and that was higher yields on basic savings from banks as the Fed raised rates in an attempt to slow down the economy.

In other words, being able to get a 5% yield on "safe" money was an advantage, and offered a bigger incentive to be cash heavy during that time. The thing is that when you are relying more heavily on dividend income as a major source of your income in retirement and semi-retirement, you want to keep your money as close as possible. You don't want an enormous amount of risk because the bulk of your growth opportunities have come to pass.

Chasing massive yields from monthly payers, such as can be found with many ETFs, can be very risky. Seeing yields surpassing 10% is not uncommon but share valuations can fluctuate wildly. So, finding more sure investments become crucial to maintain as much of your portfolio balances as possible.

Ideally, anything between 4%-8% is considered a good yield as an average to shoot for.

Now that interest rates are falling, it becomes less desirable to hold money in a high yield savings account and it becomes more important to start looking back to the markets to increase your dividend income.

The rate on my Ally savings account, for example, has fallen to 3.8%, and will likely drop further as the Fed continues to lower the benchmark rate. A $100,000 balance which offered $5,000 a year will now only offer $3,800 a year. I don't want to simply lose the $1,200 difference. But rather, I want to adjust my cash position to bring it back around.

One ETF I like is BXMX which offers a 7% yield and happens to be rather stable. While a 7% yield is always more attractive than a 5% yield, because the cash position was "safe," it offered a desirable compromise at the time. Now it offers a better opportunity to earn higher dividend income even if my principal will not have the same benefits of safety that my savings account did.

The key takeaway here is something I have always said that no matter whether you are still working or retired, your money should never be left in a set it and forget it mode. You have to be constantly aware of what's happening with your money, and what's in the best interest of maximizing its value, both in terms of growth and income.

The balancing act part comes in as you try to mitigate risk and offer all of the things you wish to get from it. Growth, income and relative safety.

Even finding something that offers 4% is better than making spending adjustments from the 1.2% you no longer will realize and is a decision that recoups at least $200 worth of potential lost income. It's still important to keep enough cash handy to deal with emergencies and keeping that money safe and accessible is essential. The rest of it should be maximized to offer the best return and income possible.

Currently I am only moving the dividends from the high yield savings to higher yielding stocks and ETFs. But as interest rates continue to fall, more of that cash position will be moved to higher ground.

Balancing growth and income while managing inflation and avoiding principal depletion can be a daunting task, but it's well worth being one to take on. Sensibly managing dividend yields and staying aware of market conditions, even when you no longer have a more reliable source of income, maximizes the value of your wealth and ensures more financial stability, even when things become more complicated or difficult.

It's more important to consider levels of safety in retirement and semi-retirement. Of course. But being too safe can cost you more money than a carefully considered level of added risk would.

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© 2024 Jim Bauer

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The Biden Inflation Catalyst
Certainly, there are myriad factors as to what causes inflation to occur. Do presidents have a role? Most certainly they do, although they do not necessarily directly impact inflation, fiscal and other policies absolutely do. So, how can we tell Biden is the man behind the inflation we have now?

Don't Let Your Money Leave You Stranded

WHEN IT COMES TO MANAGING YOUR MONEY, THERE HAS ALWAYS BEEN ONE STATEMENT THAT I HAVE STRONGLY DISAGREED WITH, and that is to just simply save it and forget it. In other words, you will hear a good many people, and even sometimes from certain financial advisors, to not watch the daily nuances of the markets—

Lest you wish to drive yourself completely insane.

The truth is that in order for you to fully reap the rewards of any investments you may have, you really do need to keep a good tabs on what's going on with them. Yes, it can be a painful thing to watch your portfolio in the throes of its ups and downs. It can be particularly painful when there are bad days, or strings of bad days.

If you go into the process of looking daily at what you have with the mindset that this is just the way that the market operates, and if you have done your due diligence and have confidence in what your individual investments hold for the long haul, the daily nuances should not have the agonizing impact that they might otherwise have.

Going it blind, to me, just seems like a foolish way to go about things. Perhaps it is a stupid analogy. But imagine driving a car that has no gas gauge. You simply drive around having some general idea of where you need to be and how much gas is left in the tank to get you there. But you have no idea how much gas is actually in the tank.

At some point or another, or at various points, you are going to find yourself on the side of the road trekking to the nearest gas station, gas can in hand, to make up for the fact that you got it wrong. You'll even be filling up when you don't need to.

That's time, folks. And time is money. And it's a cog in the wheel that can throw your whole day off balance.

In order to manage your finances, you need to know how much gas is in your tank so you can make wise decisions about when you need to fuel up, when it might be a good idea to pour a few extra gallons in the tank, or even when you are safe to drive a little bit longer before doing anything at all.

But it does another thing for you when you are watching the daily nuances. It helps you to also make wise spending decisions. Look, let's be real here. We save money not only for the future. But we also save it to have it when we want it to do things.

Watching the money and knowing exactly where you are at any particular time can help you decide if now is the time to take that vacation, or replace the car, or go out to eat one night. If I see I am up for the week, perhaps I allow myself to take a little bit of that money off the table to take it out of the bottom line and do something I want to with it. Conversely, if I am down, I'm not taking money away from it making a bad situation worse.

Money is not the most important thing in our lives. Obviously. But it can certainly have an impact on the quality of our lives.

Again, going into the process knowing the mechanics of money and markets is key, and helps us even to see a silver lining. Remember when the markets lost half their value in 2009? It was a devastating thing to watch really. But, having an idea that we have been to places like that before, and seeing that we not only gained it all back eventually, and then some, gives you great insight into what you need to be doing in times like those.

You could say that back then, in 2009, the tank was running on empty. The choice would have been unwise to just keep on driving hoping you would still get to your destination. The wise choice would have been to put some gas in the car and drive a little less.

And by comparison...spend a little less.

You don't want to find yourself on the side of the road dead while all the other cars whiz past you. You want to be on the road with them, getting to the places you want to, and need to go. Pressing the gas pedal is intent to move forward. But you're going to need gas to actually make the car go.

If you really want to reach your destination, it is best to avoid guessing whether or not you will actually have what you need to get there, or what you need to do in order to have some influence on whether or not you will ever actually arrive.

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Playing Broke To Save Money

There are a ton of tips and tricks on how to stretch your dollars and of course, save money. And believe me, I employ a number of them. I am as miserly as they come, and quite frugal as well to boot. Of course some have another name for me.

Cheap.

Go ahead and have your fun, I say. I am laughing all the way to the bank, and when I really want to have a little extra money for something, I can have it.

So what's one little trick to saving money and having money? It's time to return to the days of make believe like when you were a kid. Only for this play, instead of pretending like you are Warren Buffet or Bill Gates, or perhaps the man who trumps all of their massive wad of cash, you play broke. That is, you severely limit what you have on hand for money, and make it damn difficult to get money in a pinch.

When I was in the Navy one of the things I did, and I'll admit that back then I was still not as good with my money as I am now, but I did still think about. It was a work in progress, shall we say? I made my money hard to get. I left very little funds right up front and accessible, and made sure that the rest was socked away into a savings account at a bank that was 30 miles from where I lived, and that I had no ATM access whatsoever to.

This meant that in order to get access to any of that money I had to physically get into the car during bank hours, and drive 30 miles to make a withdrawal.

That took a little bit of thought. It required a little bit of planning. And that meant that 90% of the time the money stayed at the bank just because it was too much of a pain in the ass to get at. I found other ways to get what I wanted. Or I simply went without.

These days I don't resort to bank accounts miles away. In lieu of that I keep most of my money in my brokerage accounts, and most of that is tied to a stock. It's still accessible. But again, far less accessible than if I could just walk up to an ATM machine and draw it out.

I have to think about a tax implication of selling shares of stock, or have to wait a couple of business days for funds to be transferred to my checking account from my cash account. Especially if I sell shares I have to wait a couple of days for the transaction settlement, and then have to wait a couple more days to transfer the funds. Often times I don't even resort to doing that.

Again, just like before, I find other ways to get what I want. Or I simply go without.

The one thing I have learned over the years is that if you make money too easily accessible it gives you far too much freedom to simply give in, and take it. And 90% of the time it is simply something squandered on, on an impulse. Like New Year's resolutions are rarely followed through on, saying in the moment "I will deal with it later" is a sure way to ensure that it never gets dealt with. And time and time again you will simply find yourself going through more and more cash.

Playing broke is sometimes painful and frustrating, I will admit. But at the end of the day it just seems to make sense to me. When I really want the money for something I know it is there. I can enjoy skipping a fish fry today, for example, to better be able to afford a fishing trip I'd rather do tomorrow.

At the end of the day it is about having security and freedom. But not the freedom to frivolously spend. Rather, the freedom to spend wisely.

Besides, the best part is that when you get tired of playing broke and need a break back to the wondrous reality that you actually have money, it's right there, and you can go wild if you want and still not break the bank.

Joyous really. And perhaps, in some ways, quite brilliant, however conceited that may sound.