Sharing a couple of funds I’ve been investing in, as recent conversations have included this discussion.
I’m currently investing in a couple of funds focused on dividend yield. The funds are shown below, but I agree with the many articles that point out chasing dividend yield is dumb. In general I prefer a “total market” fund – like Vanguard Total World Stock Index Fund Admiral Shares (VTWAX) – as long-term growth / appreciation is likely to be better than dividend funds that lean toward mature or potentially declining companies. I like the below dividend funds because of a personal preference for accessible dividend payouts, though this likely reduces the overall long-term return. I also enjoyed the perspective by Jeremy Jacobson of Go Curry Cracker on Episode 169 of the Meb Faber podcast – highlighting that absolute dividend payouts per share typically don’t fluctuate in the same way that stock values do. Essentially, values influence the stated yield on a percentage basis but the dollar amount dividends don’t usually change, at least for healthy companies.
1. Vanguard Total World Stock Index Fund Admiral Shares (VTWAX). Current yield is 5.19%, included in chart below. I have a bent toward international investments in general, given that most of our income and assets are tied to the U.S.
2. Vanguard High Dividend Yield ETF (VYM). Current yield is 2.96%, included in chart below.
With investing in general, a huge part of the equation is simply taking funds and putting them to work. Whether you invest in the above options, or other funds, or start a business, or other productive use matters far less that simply taking dollars away from spending and directing to investing. I like Vanguard in general for investing but also put money into real estate, businesses, private loans, and a variety of other productive uses. Take whatever path(s) suit you best, just make sure you are regularly making investments.
Raising children entails a lot of trial and error, and hoping that you aren’t screwing things up too much along the way. As our kids have gotten older we are moving into new subject areas, one of which is money. We want to expose our kids to good money habits while also giving them agency and discretion. Investing has been an area that has been going well so far so I wanted to share our experience with others in the same boat.
We set up an investment account at Betterment for each of the kids when they were born and have put in $25 a month since then. Now that the kids are old enough to be involved there is an account history and returns that we can go over together and learn together about expenses, how returns from appreciation and dividends work, and that there is risk involved in investing. Although we primarily use Vanguard for our own investments I like the aesthetics and diversification into multiple index funds / ETFs that Betterment makes more automatic – it seems to connect with the kids better and is more straightforward for them to understand.
[Note: We have chosen to hold the investment accounts for each of our children in our name so that we have control of the funds until we decide to give over full control. We’ve done this for reasons related to age and maturity, impact on college scholarships, and other considerations.]
Now when the kids receive some money for a birthday or we cash in the coins in their artisanal hand-crafted wooden banks we let them decide what to do with it – spend it, give it away, put in the bank, or invest in their Betterment account. It’s been fun and over the past year they’ve mostly chosen to invest their money, roughly 80% of their “earnings” going into their respective Betterment accounts. We sit with them at the computer but let them use the mouse, type in the contribution and notes, etc.
We’ll see how it goes in the future when there are more dollars at stake and more competing options vying for their attention and funds. From the early returns it’s been a simple and effective way to introduce investing for our family.
Employees often have the ability to contribute to an employer sponsored retirement plan (typically a 401(k) plan) – also known as a Traditional IRA. To contribute to this plan, the employee selects a percentage of income to contribute each pay period and this amount is taken out of their paycheck and sent directly to the plan administrator to be deposited in the individual’s IRA account. When contributing to a Traditional IRA no taxes are due at contribution. When the funds are distributed in the future, typically during retirement, income taxes will be due on the full amount distributed – both the earnings growth and the initial contributions.
Separately from a Traditional IRA, workers can on their own open and contribute to a Roth IRA (subject to income limitations). In 2019 an individual earning less than $122,000 can contribute up to $6,000 to a Roth IRA. With a Roth the individual pays taxes up front, when the money is earned, and then contributes the money after taxes have been paid. When funds are distributed in the future, typically during retirement, there are no taxes on the distributions.
Deciding between contributing to a Traditional IRA or a Roth IRA, or the relative amounts to each, is a frequent topic on personal finance blogs and talk shows. An important bit that doesn’t get enough coverage is this:
** Income Tax Rate Changes Are What Really Matters **
The are other factors to consider between these types of IRAs outside of tax treatment. A couple of factors, among others, include:
Employer contributions – Traditional IRAs often include employer-matching of employee contributions.
Liquidity – Ability to access contributions differ, with Roth contributions being accessible without penalty in some situations.
However, the biggest impact is made by the change in income tax rates between contribution and distribution. If tax rates are higher in the future at distribution, a Roth IRA is better – you paid at a lower rate when contributing and get to withdraw and avoid taxes at a higher rate. The converse is also true – lower rates at distribution favor a Traditional IRA. You avoid higher taxes at contribution and then they are applied at lower rates at distribution. Let’s repeat and then look at a few simple example calculations.
Higher income tax rates in future = Roth IRA better
Lower income tax rates in future = Traditional IRA better
If there are no changes in income tax rates, there’s no difference between the two types of IRA. Here’s a calculation example showing the net total distribution is the same if there are no changes in tax rates.
If tax rates are lower in the future than now (lower at distribution) then the Traditional IRA is better and yields a higher total distribution. Here’s the same example, with only the future tax rates decreasing.
If tax rates are higher in the future than now (higher at distribution) then the Roth IRA is better and yields a higher total distribution. Here’s the same scenario again, but with higher future tax rates.
There are two primary reasons for a change in income tax rates, both of which are difficult to predict over a long-term period.
Changes in Tax Law – changes to the rates and brackets in the IRS Code enacted by Congress
Changes in Income – changes in individual earnings resulting in a change in the applicable tax bracket (whether or not the tax brackets are changed by law)
Planning for the long-term is difficult but remember the impact that tax rate changes can have should be a prominent consideration.
Note: The content of this post is for informational and discussion purposes and is not financial or tax advice. Consult with an advisor before relying on this or any information.