VDHG to pay rent via distributions?

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bos1234
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Joined: Thu May 13, 2021 9:28 am

VDHG to pay rent via distributions?

Post by bos1234 »

I am aggressively accumulating $VDHG.

Once I get to say $200k, instead of DRIP, is it a viable strategy to use the distributions to pay for rent on a quarterly basis?

Just wondering what the general thoughts are around this or if anyone does this at the moment - how is it working out for you?
Last edited by bos1234 on Fri May 21, 2021 8:18 am, edited 1 time in total.
Jaymover
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Joined: Wed May 12, 2021 8:19 pm

Re: VDHG to pay rent via distributions?

Post by Jaymover »

I have about $550K in VDHG equivalent. Distributions are about $14K pa before tax and my rent is $27K pa so need way over a $million to pay my rent with dividends.

Just earn as much as happiness allows, spend sensibly, save and invest for the long term and don't liquidate investments unless for a good reason. Housing and transport to work are big parts of any budget, especially if single. You might get cheaper rent somewhere but commuting costs can be high. Obviously share housing and living in the parents basement for free can really help save, or try sleeping in the office. I was able to do that for a while at one place I worked.
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asset_chaos
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Re: VDHG to pay rent via distributions?

Post by asset_chaos »

How are you paying rent now? Out of labor earnings or out of investment earnings? If you're working and investing to accumulate a nest egg to pay for an independent retirement, then spending the dividends instead of reinvesting them just lowers the compound growth rate. That will leave you much less to pay for retirement later.

If you're retired, then dividends, pension, whatever other investment earnings you have are all just money coming in that you can use for expenses. There's no need to put a mental silo around particular investment earnings and say they are solely for this particular expense. Money is money.

Maybe you're thinking of a strategy of spending from a taxable account so that you're able to salary sacrifice that much more to super. That could be an advantageous way to effectively convert part of a taxable account into a tax advantaged account.

It's hard to have useful thoughts on what you're thinking of doing without more information into your current situation and what you're trying to accomplish.
Regards, | | Guy
Topic Author
bos1234
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Joined: Thu May 13, 2021 9:28 am

Re: VDHG to pay rent via distributions?

Post by bos1234 »

Thanks! Both excellent advice.

I'm paying for rent from labour. I just thought it might be nice to pay for rent from passive income and use that extra money as 'disposable cash'
andrew99999
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Re: VDHG to pay rent via distributions?

Post by andrew99999 »

Remember that distributions are literally a movement of capital from the value of the shares. By not reinvesting the dividends, you reduce compounding accordingly.

Open up excel and take a look at your returns with 4% compounding vs 8%. The longer the time period, the more dramatic you see the cost.

I would suggest leaving it alone (by that, I mean reinvesting dividends) until you have accumulated enough to not need to grow it.
Jaymover
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Re: VDHG to pay rent via distributions?

Post by Jaymover »

I'm paying for rent from labour. I just thought it might be nice to pay for rent from passive income and use that extra money as 'disposable cash'
It is much of a muchness paying rent from labour or distributions. It is all income and taxed at the marginal tax rate every year.

The tax efficiency comes from capital gains if you can defer the liquidation until a year or years when you don't earn much. Hence is why growth stocks are good and why VDHG loaded with growth stocks is a good choice for long term investing.
Jaymover
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Re: VDHG to pay rent via distributions?

Post by Jaymover »

I would suggest leaving it alone (by that, I mean reinvesting dividends) until you have accumulated enough to not need to grow it.
Or you could plow the distributions into super as a concessional contribution. Just make sure your super is in the high growth option (equivalent to VDHG).
andrew99999
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Re: VDHG to pay rent via distributions?

Post by andrew99999 »

Jaymover wrote: Sat May 15, 2021 1:11 am
I would suggest leaving it alone (by that, I mean reinvesting dividends) until you have accumulated enough to not need to grow it.
Or you could plow the distributions into super as a concessional contribution. Just make sure your super is in the high growth option (equivalent to VDHG).
Good point!
SR7
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Re: VDHG to pay rent via distributions?

Post by SR7 »

I very much like VDHG (Vanguard Diversified High Growth) as a nice mix of Australian and International shares with 10% bonds. So it’s great that you are accumulating it. Good work !

When it comes to income via distributions, I think there are other funds more set up for this
VAP (Australian Property REIT ETF)
VHY (Aust High Yield Shares ETF)
VAN0018AU (International Property REIT, as a managed fund), with 0019AU the hedged version.

Just taking a quick glance at the last few years data in the Vanguard Australia web page for VAP & VHY, one seems to zig while the other zags, which is nice. But together they both put you heavily in the Australian market with a heavy home country bias.

I personally would just buy VDHG and reinvest the distributions for compounding growth. Saving for the future.

But if I was trying to generate a passive income now, and risk wasn’t a concern (I still have my day job), and my future was being looked after by a good super fund, then I would be looking at VAP, VHY and VAN0018AU.

BTW (full disclosure) I’m very new to this and not an expert, I’ve just been thinking about passive income recently and that’s the way my thoughts went. I believe most people here are about saving and investing to build wealth for their retirement, which translates into diversification and reinvestment of distributions.
I studied Physics not Finance, so best to ignore anything I say about money.
Jaymover
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Re: VDHG to pay rent via distributions?

Post by Jaymover »

When it comes to income via distributions, I think there are other funds more set up for this
I have learnt that better to aim for capital growth than distributions as the distributions often reduce the capital value by that amount. You can see how the share price drops a little after a dividend payout. VDHG has a bit of everything.

Also, if you sell your VDHG now and put it into something else that creates a capital gain event and so could be a costly move. Best to stick with the plan.
SR7
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Location: Down Under

Re: VDHG to pay rent via distributions?

Post by SR7 »

I agree, for the OP I would not sell the VDHG, that would be a step backwards especially with paying tax. VDHG is a good long term keeper.

I have some friends talking about passive income (not growth) for semi-retirement and there is REIT talk, as I believe these are meant to return 90% of their earnings as dividends. As second house as a rental is the most common method with my friends at work, on the plus side you get capital growth and rental income, on the negative side you become a landlord taking care of repairs etc plus it’s a very big capital investment often requiring a second house loan.

Their superannuation is doing well in something similar to VDHG, but that is locked up and can’t be touched. A second house is too much debt for them, so some interest in A-REITs to produce income. They understand it will be seasonal, good years and bad years, but their plan is never to sell, rather have occasion extra income to help out. They will grow the REITs with extra income they have now, while working full time, super is on autopilot regardless. Their plan was to spend 2/3 and reinvest 1/3 to slowly increase their number of REIT ETFs over time, for inflation.

It just sounded a similar situation to what the OP was posting about. He could also grow REITs while holding on to VDHG. With VDHG for the future and REITs for the now. Probably not the best way to grow wealth, nothing beats compounding returns, but you need to live your own life.
I studied Physics not Finance, so best to ignore anything I say about money.
Jaymover
Posts: 90
Joined: Wed May 12, 2021 8:19 pm

Re: VDHG to pay rent via distributions?

Post by Jaymover »

They will grow the REITs with extra income they have now, while working full time, super is on autopilot regardless. Their plan was to spend 2/3 and reinvest 1/3 to slowly increase their number of REIT ETFs over time, for inflation.
I was told that the whole ASX is a form of REIT as the fortunes of the Australian economy are now largely tied to and reflected in real estate. For instance the ASX is dominated by financials (that do well when house prices go up). Also many of the big names eg Harvey Norman are big real estate owners. In other words if you are broadly exposed to the ASX via a low cost etf you might not need to bother with property ETFs etc. Also, REITS reflect residential real estate which have some different dynamics to commercial/industrial real estate.
andrew99999
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Re: VDHG to pay rent via distributions?

Post by andrew99999 »

SR7 wrote: Sat May 15, 2021 6:58 am But if I was trying to generate a passive income now, and risk wasn’t a concern (I still have my day job), and my future was being looked after by a good super fund, then I would be looking at VAP, VHY and VAN0018AU.
Since dividends come out of the value of the shares, high yield just means that more of the value of the shares is transferred to your bank account. If you don't reinvest it, it depletes your portfolio faster.

Understanding this is a sticking point for many people.
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