Investment Objective: Income or Growth?

What’s your investment objective?

My ultimate goal is to replace a majority of our pre-retirement income, salaries from our day jobs, by incomes generated from our investments when we retire (we still have 20+ years to go). Since neither of us has a pension plan (my wife used to have one with her employer, but the plan was terminated last year) and the social security system is facing an uncertain future, we may eventually have to rely on our investments to pay the living expenses in our retirement.

To reach that goal, I need to build a portfolio that can produce the income stream, including dividends, interests, and probably capital gain distributions. Though I try to avoid any investment that distributes excessive capital gain in our taxable accounts, I do pay a lot of attention to equities that produce a healthy amount of dividends. Currently, I have the following dividend paying investments in taxable accounts:

Name Dividend
Bank of America (BAC) 4.50 25
Progress Energy (PGN) 5.30 13
Procter & Gamble (PG) 2.30 11
Altria (MO) 4.00 72
PowerShares HighYield Dividend Achievers (PEY) 3.00 502
PowerShares Dividend Achievers (PFM) 1.74 156
PowerShares Intl Dividend Achievers (PID) 2.54 200
Alpine Dynamic Dividend (ADVDX) 12.79 307

In addition, I also have some other mutual funds that distribute both dividends and capital gains, though they are not categorized as dividend paying funds.

So far I consider we are doing quite well in generating passive incomes from our investments. In 2006, we had a total of more than $16,000 in dividends, capital gains, and interests, among them a little over $9,000 are from investments in our taxable accounts.
Conventional wisdom says I should place income generating securities in tax deferred accounts to minimize taxes and hold equities that pay little or no dividend in taxable accounts. While I hate to give back a big chunk of the incomes as taxes, I just don’t have the same flexibility in tax sheltered accounts (due to selection (401(k)) and contribution (IRA) limits) as I do in taxable accounts. I won’t avoid these investments simply because I have to pay taxes. Fortunately, the majority of the incomes qualify for the 15% tax rate for qualified dividend or long term gain.

If you are interested in dividend investment, here’s a post on dividend paying ETFs and stocks.

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15 Responses to “Investment Objective: Income or Growth?”

  1. Curiosity |  Jun 22, 2007 at 11:56 pm


    Just curious: why do you have to focus on generating income when you are not retiring yet? Dividend paying stocks have gained much recognition recently for other various reasons. Usually they are solid reputable companies which will have a nicely appreciating stock price in the long run. But if you really want to have a portfolio that generates income, they probably are not the perfect places to do. Anyway, my biggest question is why you need dividend now?

  2. Sun |  Jun 23, 2007 at 12:54 am

    Curiosity: Actually, I don’t need the dividend now. The investments in dividend paying stocks/ETFs are only a small portion of our total investments. However, I would like to see a much bigger part later that can generate a significant amount of income when we retire. Right now, we are still in the accumulation stage and all the dividend distributions are reinvested. We don’t collect any distributions, except bank interests. By investing in dividend paying stocks/ETFs regularly, we hope to build a larger basis to product income later.

  3. MoneyNing |  Jun 24, 2007 at 7:49 pm

    It’s great to see that you are generating a good chunk of change from your investments. At this point in your life, and especially with your taxable accounts, you should really sign up for DRIPs. I’m not sure whether or not you can do this with the ETFs, but you can definitely do this with your stocks like Bank of America.

    This way, your dividends aren’t taxed until you take them out and you can also keep reinvesting into the company, softening the effects when the stock is not in favor by being able to buy more shares with your dividend when the price is lower. Again, a good example is Bank of America since those banks suck right now (my fiancee’s portfolio has some too so I’m in the same boat).

  4. dong |  Jun 25, 2007 at 1:18 pm

    MoneyNing, I don’t know that much about DRIPS plans, but I was always under the impression even though the dividends are reinvested, they still counted as dividend payments and would still need to pay taxes on the dividends. If this is not the case, I’m curious to how the DRIP plans operate.