Bloomberg had a doozy of an article about how Gen-Z investors are seeking out yield in pursuit of FIRE (financial independence/retire early) instead of YOLO asymmetry. Intended or not, the article is a fantastic behavioral palooza. I remembered the gift link!
Just working from top to bottom, the first paragraph labels the idea of a long career with a short retirement before dying as being a ripoff. In those terms, sure, that does not sound like a recipe for a great path through life. The implications are that work sucks, retirement is short and very limiting and then it's over. I think the sentiment really is about capturing a skeptical sentiment held by some portion of younger people. Who knows how many people view things that way but it tracks that plenty do.
It is up to each of us individually to solve this for ourselves. If someone is self aware enough to observe this potentially grim life path, then maybe they are self aware enough to do something about it like trying to find work they actually enjoy and that they find purposeful or add in outside activities that can make life more purposeful.
There was a short bio of a 26 year old who has been influenced by his grandfather having worked in a factory his whole life in more of a traditional work then retire arc. The 26 year old said he didn't want lock away his capital until he's 65. He stopped contributing to retirement accounts to instead build a dividend portfolio to live off the income. He also has a huge YouTube channel so presumably that generates income but the article never mentioned any income.
One component of the FIRE movement is it really is a movement with plenty of Socials (Facebook groups, reddits and other YouTube channels not to mention blogs) that create genuine community support for people at all commitment levels of FIRE.
Bloomberg asserts that "dividends and chill" is much closer to what FIRE is really about than YOLO asymmetry.
The there was a discussion of investors falling for a dividend fallacy that dividends improve returns, the article asserted they don't. In the 15 years since the Schwab Dividend ETF (SCHD) has been trading it has outperformed the S&P 500 on a total return basis five different years. The cumulative total return for SCHD was 411% versus 582%. The Vanguard Dividend Appreciation Fund (VIG) has outperformed the S&P 500 on total return basis six out of 20 years and lagged far behind cumulatively.
Additionally, dividends aren't necessarily tax efficient either. There are of course circumstances where tax efficiency may not be too important, obviously there is no tax implication in qualified accounts and speaking personally, if I was living off a dividend portfolio with a very low effective tax rate I wouldn't be too concerned about the taxes.
If that search result is correct, then on $100,000 in qualified dividend income, 15% tax would be due on $5950 which is $892, an effective tax rate of less than 1%. We are all entitled to our beliefs, and this sort of effective tax rate wouldn't bother me.
A diversified portfolio should probably include traditional dividend payers like staples stocks, certain healthcare and so on. But I have never been a fan of dividend-only portfolios as preached by a lot of Seeking Alphans way back when (I've long ago lost all contact with SA and have no idea what the vibe there is anymore).
You knew it was coming, YieldMax! Parts of the cohort are big on the YieldMax funds as well as the other crazy high yielders.
Looking at MicroStrategy and its corresponding YieldMax. The $463,000 figure is buying the common stock when MSTY listed. The $343,000 number is buying MSTY and reinvesting the distributions. The $72,000 is buying MSTY and taking out the distributions to live on.
The $270,000 was described as above.
I follow YieldMax on Twitter and they post regularly. The comments have turned on them. People are upset about the NAV erosion. The opportunity cost of going heavy into a YieldMax product versus a common stock that does even just decently tends to be enormous. That's clearly the case with MicroStrategy and MSTY.
Mike Venuto (disclosure, I know Mike) from Tidal which is the white label provider for YieldMax was quoted as saying “If you want to just own the underlying stock, own the underlying stock. We’re not trying to beat the underlying — we’re trying to turn the volatility of the stock into income. People who are only trying to get the upside should not buy YieldMax products.” Or as we have said here, they are not proxies for the common stock. YieldMax products and the other crazy high yielders combine the stock with selling the volatility of the stock and that is a different thing.
MSTY has been trading for 18 months and the NAV erosion as been 26% while the common is up 370% (per testfol.io). Contrasting with a stock and corresponding YieldMax that is less volatile and avoids crazy CEO risk, since the inception of the YieldMax Netflix (NFLY) just over two years ago, NFLY has eroded by 13% while the common has gone up 183%.
Copilot says that MSTY's distributions total $45.41 since inception versus a starting price around $20 and now it trades around $15. We've talked a little about a scenario where someone is maybe 65 and retired but wants to wait to take SS and wait to take IRA distributions. If this person has a good sized taxable account they might be able to construct a portfolio that includes some exposure to very high yielders with the willingness to draw the balance down.
As crazy as MSTY is, the erosion has only been 23% in the face of providing a lot of "income" in just a year and half. My example of the 65 year old looking to stretch a portfolio for just five years from MSTY's inception, he's already 18 months in and still has 75% of his MSTY balance left.
The other day we looked at putting 10% of a portfolio into a bunch of different crazy high yielders to minimize idiosyncratic risk while putting the other 90% into a broad index fund. Looking to stretch out a little more income for this 65 year old, there are plenty higher yielding income sectors to also include without going further into crazy high yielders. There's a decent chance that the growth of a 60% allocation to plain vanilla equities can outgrow the erosion of 1% each into ten different crazy high yielders.
The idea is trying to let the balance last longer than taking 10% of mostly principal to cover the five year gap we're working with in this post.
So imagine 60% in plain vanilla equities, 30% in higher yielding fixed income like catastrophe bonds, bank loans and so on with 10% in crazy high yielders as noted above. The question is, would our 65 year old investor be better off just going plain vanilla 60/40. Looking back, the answer is probably yes, that's pretty clear. However looking forward, in a lower return environment, a portfolio with a small allocation to selling volatility might have a better result. It's an additional source of return. Remember, most of the YieldMax products have a positive total return. That positive total return may not come close to the common but they are not the common stock, they combine the common with selling the volatility of the common.
I don't think the YieldMax structure can fail. At a low enough price, the funds will reverse split and carry on. If the company disappeared then yes, the individual YieldMax would fail so to speak. I'm not worried about Netflix any time soon in this context but MicroStrategy might be a different story.
Can't fail? Ok but look at the YieldMax ULTY.
Hedge fund in an ETF? Maybe, but ouch.
The image quoting Venuto was pulled from a Tweet and the comments are brutal.
And the characterization of the distributions for tax purposes. Others have reported real problems on this front. Sometimes they are returns of capital and other times they are ordinary income. Ok, but the reported problem is the recharacterization of the distributions which really is a problem.
Back to Bloomberg and this passage about another personal anecdote.
So far, Arteaga has invested some of the proceeds from the sale of his house and two cars, and about $30,000 in margin loans, taking his portfolio to $160,000. He hopes this nest egg will generate $9,000 of income a month, though that figure doesn’t factor in the payments he’s making on his margin loans or the tax bills he is likely to face.
So $108,000 for the year out of a $160,000 account? Ooof, my guy, no. My example above, I'm thinking maybe 8-10%/yr, maybe taking some principal out to to achieve that level. It could work but would not be riskless but this guy thinks he's going to get more than 50% out. He can take (more than) half out but the account isn't going to last very long.
Another anecdote.
VanWagenen says he cashed out his wife’s retirement account and invested the money in various YieldMax ETFs and other high-yield products (he kept a 401(k) from his employer). He still has a day job as an accountant, but he uses his investment income to pay his mortgage, gas and internet bills and to make the monthly payment on his Plymouth minivan.
Oh boy. Don't do this. What we laid out above is fun theory and I think could work but going all in on YieldMax as implied is a catastrophe waiting to happen. Cashed out his wife's retirement? If you're VanWagenen and wanted to go all in on YieldMax, why would you make it worse paying the tax and the penalty on the 401k? Why wouldn't you do it from a rollover IRA? Honey, how can we make a terrible decision even worse? Wait, I know how we can do it!
One thing I picked up on is that these people in their 20's and 30's don't understand what it is to be in your 50's and 60's. At 25, I certainly did not understand 50. At 50 or 60 you might be old or with a few good habits you might be biologically young. I used to say this more frequently here but being 50, now 59 ahem, with a little money in the bank and still able to get it done physically is a great spot to be in and I don't think the people profiled can see this.
The best thing I can tell someone that age is keep investing simple, pay your dues, live below your means and take care of yourself (diet and exercise). Forty will be here before you know it and following that path, you'll have plenty of optionality when you get there.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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