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  1. #1
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    Generating Income

    In a bit of a pickle trying to figure out how to generate around 5.5% to fund obligatory distributions. Long story short, my dad died a few months ago and the terms of the estate planning documents require a distribution to the wife in a fixed amount that essentially equals about 5.5% of the principal. We funded the account with cash and if we simply paid the amount from cash it would last roughly 19 years which may or may not be beyond her life expectancy. Any amount left over would then get split between my brother and myself so there is an incentive, for me at least, to try and generate income to make the distributions. I've spent a few weeks looking at dividend paying stocks but you really have to take a bit of risk to generate that kind of income. I'm trying to do it in such a way as to diversify the stock holdings so we are not concentrated in one sector but at the end of the day its likely going to be made of of MLPS, telecom stocks, utility stocks, a CEF, two REITS, and a few consumer staples and beverage companies. Our financial advisor wants to put all the money in a balanced fund and try to make the distributions in cash and let a part of the portfolio appreciate enough to make up the cash distributions. I feel like that is more risky since I'd prefer to use present income generation to cover most of the distributions instead of relying on capital appreciation.

    I really sympathize with retirees since this exercise has really opened my eyes how hard it is to generate income in this market right now without taking excessive risk. Anybody been through this exercise before that has any suggestions?
    Last edited by NitroZ7; 07-15-2018 at 07:34 PM.

  2. Banned
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    #2
    I have made more than that every year by letting edward jones manage my money. Ive made triple that also some years.

  3. Member
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    #3
    Quote Originally Posted by Travel to fish View Post
    I have made more than that every year by letting edward jones manage my money. Ive made triple that also some years.
    The 5.5 percent I am referring to is annual income generation so it doesn’t include capital appreciation. The distributions start now so I have to generate some income for cash flow.

  4. Banned
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    #4
    The thing is that at this point in time, the money is not yours. And who knows how long the wife is going to live? This is a rather common scenario.

    I agree with the opinion for the funds to go into a balanced fund or other conservative mutual fund. Many are moving to ETFs which are index funds with very, very low expense ratios. And there are hundreds of such funds to choose from.

    We had a rather old and well off aunt that had been very successful playing the stock market. In the Crash of 2008, my ultra conservative cousin had her in liquid investments. But he never reinvested in equities at low prices before her death. Had he gotten back in the market in 2009, I would be ordering a new Vexus bass boat next week.

    Unfortunately, executors have to be rather conservative with handling investments of others. And that doesn't include playing the stock market aggressively.
    Last edited by Bamaman; 07-17-2018 at 01:33 PM.

  5. Member
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    #5
    I ran the numbers and it looks like I can cover about 25 percent of the distribution through dividend stocks and then do a balanced fund for slow capital appreciation and then leave enough liquidity to cover distributions for the near term (i.e9-10 years.). It will lose some principal but that can be made up in the future. Assuming Mr. Market cooperates��

  6. Stocks/Investments Moderator boneil's Avatar
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    #6
    I would prepare for worst case scenario. What happens, if those dividend paying stocks run into trouble? I know you want to preserve as much principal as possible, but that may not be the safest way to go about it. How about paying out that 5% with half of it coming from cash and the other half from short term treasury bills?

    I'm not familiar with treasury bills, but because of your post, I'm thinking they might be a good investment for my current situation. I'm sitting on some cash from my mother, who doesn't want it in the stock market, and some cash being saved for down payment on a house that the wife doesn't want to be risked. I have to do some research.
    Thanos was the hero

  7. Member
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    #7
    Quote Originally Posted by boneil View Post
    I would prepare for worst case scenario. What happens, if those dividend paying stocks run into trouble? I know you want to preserve as much principal as possible, but that may not be the safest way to go about it. How about paying out that 5% with half of it coming from cash and the other half from short term treasury bills?

    I'm not familiar with treasury bills, but because of your post, I'm thinking they might be a good investment for my current situation. I'm sitting on some cash from my mother, who doesn't want it in the stock market, and some cash being saved for down payment on a house that the wife doesn't want to be risked. I have to do some research.
    I think we may go that route. I can generate 5.5 in dividend income but the stocks that generate that income are either overvalued or the dividend doesn’t look that secure based on debt and payout ratios. I may reallocate to a small number of high yielders and go the dividend growth route with better quality companies and then try to get the dividend inncome to grow over time to cover more of the distribution. Then I will leave a larger amount in cash and do short duration bonds for the amount in excess of annual distributions.

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    #8
    Just a quick reminder. As rates begin to rise, bond values go down. Short term bonds will lose less than long term but they will lose value. You may want to look into rising rate funds. They spit off a good yield and will provide some protection in a rising rate environment.

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    #9
    Quote Originally Posted by janky View Post
    Just a quick reminder. As rates begin to rise, bond values go down. Short term bonds will lose less than long term but they will lose value. You may want to look into rising rate funds. They spit off a good yield and will provide some protection in a rising rate environment.
    I talked to the advisor and he was recommending buying the short term bonds themselves and holding them to maturity and then rolling them over. He had the same concern with the bond funds.

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    #10
    Gotcha, so more like a laddered bond portfolio.

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    #11
    Quote Originally Posted by janky View Post
    Gotcha, so more like a laddered bond portfolio.
    Yes mostly with short duration bonds for now. I don’t think we will go out any further than 5 years and if we do it will be a small percentage. Since the funds are in a trust we have to talk to a tax advisor to see if the income from the bonds will be subject to the trust tax rate or if the beneficiary will pay the tax if it is distributed to them. I thinks it’s the beneficiary rate but this area is so technical we want to confirm. Nothing is ever simple

  12. Joe4d
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    #12
    i'm just a smukatelly bob,, but I bout a ton of Ford at 1.87 when GM and Mopar were crying,,, Sold half at 10,,, then half at 16,, poured it into BP, when they had an spill in the gulf,, made about 500% dumped all that, put it into CD's paying basically squat,, but getting an almost free bass boat