- $240,000 starting amount invested in a non-registered taxable account
- $13,000 annual cash to spend as retirement income must be generated
- fictitious one year market price changes - Global rises to $258,000; arbitrarily chosen to demonstrate how the asset allocation method would work
- recent actual cash yields of the various ETFs to bring out the differences between the two methods.
High-Yield Couch Potato
This minimalist collection of four securities, all ETFs, consists of:
- a Canadian dividend fund (TSX: XDV)
- a US dividend fund (NYSE: VYM),
- a Canadian income trust fund (TSX: XTR) and
- a Canadian bond fund (TSX: XBB),
Riskiness - The big question - will the yields be sustained? Note the Income Trust holding XTR, which has a very high yield of over 12%. The recession and lower oil prices are causing many Income Trusts to cut distributions. Yields are relatively high because prices have fallen so much. The next chart from Google Finance shows how much of a drop there has been for three of the four securities - XDV, XTR and VYM have declined anywhere from 26 to 42% since 2006. That wouldn't be very comforting to the investor who started out in 2006.
Taxes - High-Yield does ok but not great on taxes with a weighted average tax rate of 25% due to the 70% of cash that comes from highest taxed interest / ordinary income, which includes all the US dividends since they do not benefit from the preferential lower rate on Canadian dividends.
Time and Effort to Maintain - initial set up would be dead easy, taking a few minutes to buy equal amounts of four ETFs with really no on-going maintenance to do. Cash would come automatically into the account four times a year based on the distribution frequency of these ETFs.
Inflation - three of the funds are equities and should be able to adjust for inflation by raising distributions / dividends. The bond fund XBB is not inflation-indexed and would suffer.
The next post covers the Global Portfolio and compares it with the High-Yield.