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For some people, especially those drawn to the charm of tech stocks and speculative plays, the investing journey begins with high-risk, high-reward strategies.
However, as their financial goals change, many shift their focus to more stable, income-generating holdings. High-yield dividend stocks, in particular, have become a favorite for those seeking both growth and a reliable passive income.
For many, dividend stocks represent the best of both worlds, namely, the potential for capital appreciation and the safety of regular payouts. Still, transitioning from a high-risk portfolio to a dividend-focused approach asks for careful planning, especially when dealing with larger sums of money.
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Enter an investor with $700,000 tied up in risky stocks. After suffering significant losses, the individual is looking to pivot toward safer, dividend-paying investments. His goal is to build a $1 million portfolio that yields 10% in dividends annually.
As he puts it in a Reddit post, âI have taken a lot of losses. I haven’t made any profits yet. I just kept adding most of my income to my portfolio. I’m currently at -$60,000 so I am deciding to move toward safer investments.â
The investorâs post has sparked a lively discussion in the comments, with Reddit members of the r/Dividends community offering a mix of practical advice, cautionary tales and specific investment recommendations.
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Letâs dive deep into Redditorsâ suggestions.
Consider a Balanced Portfolio
Many commenters recommended a diversified ETF approach to achieve both long-term growth and reliable income.
âIf growth is more important than dividends, you could just roll over to a simple 3-ETF portfolio like 60% [Vanguard S&P 500 ETF (NYSE: VOO)], 30% [Schwab U.S. Dividend Equity ETF (NYSE: SCHD)], 10% [Vanguard Growth ETF (NYSE: VUG)]… Lower yield but solid growth. If you want more yield, increase SCHD, for more growth increase VUG, etc.,â a Redditor suggested.
Another Reddit user also recommended the investor stick to a portfolio of three funds, and based on his goals, increase the sum in one or the other.
âI would stick with a simple 3-fund portfolio VOO/SCHD/[Schwab U.S. Large-Cap Growth ETF (NYSE: SCHG)] and depending on what you want more between growth and dividends you push one or the other up. 65% SCHD, 25% VOO, 10% [Invesco Nasdaq 100 ETF (NYSE: QQQM)] would give you about $26,000 a year with a yield of 2.59% dividend [compound annual growth rate] of 12% and still have a $10.99 CAGR for price appreciation,â the Redditor wrote.
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One comment listed a few dividend-forward holdings and what the investor can earn by putting his money in them.
âSCHD, [iShares Core Dividend Growth ETF (NYSE: DGRO)], [Vanguard Dividend Appreciation ETF (NYSE: VIG)], [WisdomTree U.S. Dividend Growth ETF (NYSE: DGRW)]. These are your dividend growth ETFs. The only cover call ETF you should look at is [Amplify CWP Enhanced Dividend Income ETF (NYSE: DIVO)] and compare it to [Global X NASDAQ 100 Covered Call ETF (NASDAQ: QYLD)]. $30,000 is about what you’ll get from this mix,â he said.
Be Mindful of Taxes and Capital Gains
Several commenters touched on taxes and capital gains since transitioning from a high-risk portfolio to a dividend-focused one means managing all the tax implications.
One Redditor simply wrote, âConsider capital gains.â
Another Reddit member expanded on this issue, offering the poster a tip on how to mitigate this.
âYou may be able to sell off a lot and lose 15% to Uncle Sam and a chunk more at 18.8% (15%+3.8%). The idea is not to hit the 20% bracket but to move fast enough that the 3.8% hit on [net investment income tax] is acceptable compared to the cost of another big drop,â he said.
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This article From High-Risk To High-Yield: Investor With $700,000 Wants To Build A $1 Million Dividend Portfolioâ’How Much Can I Really Earn Monthly?’ originally appeared on Benzinga.com
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