copie:

As you can tell from my questions I do not know very much about these funds, but I am going to ask anyway. Is anyone beting on a time limit the funds will last as far as paying out your money? I know it is not a smart question, but if an investor can get around 4% on his money just in Wellesley why put it in something that is going to pay out 3%? Are the payouts monthly or quarterly? Do you set your own payout or can you take less and let rest go back in to build up more payout?

These new products may really help the retired investors that is geting killed with bank cd's.

I am interested in seeing these new funds discussed and hope others like Bill will dive in. Thanks for bringing it up.

Copie

First, these three new Vanguard funds all implement a managed distribution policy, exactly the same, in concept, as several closed ended funds that I own.  What they do is guarantee a certain PER SHARE distribution each month, come hell or high water.

For the two funds mentioned in my original post, the amount of that distribution is 3% (for the payout growth focus fund VPGFX) and 7% (for the payout distribution focus fund VPDFX).  A third new fund pays 5%.

Those numbers are a percent of the average NAV for each fund over the last 3 years.  At least they will be, once each fund has been around for 3 year.  The initial NAV for each fund was $20, so the 7% fund distributes 11.67 cents per share, and will do so each month for the next year.  Just like a stock, there are record, reinvest, and receive dates for this distribution (the 15th, 16th, and 19th. of the month).

The minimum investment of all three funds is $25,000, so if you bought in at initial offering, you own 1250 shares, received $145.88 in the middle of May, and will receive $145.88 for the next 11 months.  If you hold the 5% fund, you receive $104.17 each month, and the 3% fund $62.50.

I did not follow the NAV for these funds around those three dates above (to see if the NAV decreased, by the amount of the distribution.  That is, do these new funds behave like traditional OEFs, CEFs, or individual stocks?

Now, how does Vanguard generate these amounts of money, to fund the distributions?  Just like you and I do.  They collect yield (bond interest and stock dividends) and realize capital, if the collected yield doesn't cover the distribution.  How much of each (yield/income or capital) makes up each distribution?  Vanguard will eventually tell you.  That's the way closed end funds work.

Now, what will these distributions do, over time?  Well, if the NAV of each fund rises, over time, the distributions will also rise.  If NAVs fall, so will the distributions.  Remember, the NAV determines the per share size of the distribution, NOT the source of that cash.  With a 3 year 'cushion' built into the calculation of the distribution, it may vary drastically from one year to the next, but at least you can count on it for a 12 month period of time.

Note that some CEFs specify a distribution amount for each month in a quarter, so that distribution could be more volatile then the Vanguard funds.

But think now what would happen if Vanguard used the current, mid-month NAV to determine the amount of the distribution?  Paying 7% each month (actually, 7% divided by 12), the distribution would simply be more volatile, since it probably would vary from one month to the next (depends on NAV behavior).  But assume that's what they did.

As a retiree, you could take all of those distributions, in cash, and have a 7% rate of withdrawal!  This would NOT be a real, inflation adjusted, 7% rate of withdrawal unless, of course, the NAV rose, with inflation, over time.  Ditto for the 5% and 3% funds.  In fact, this 'limitation' or 'condition' also applies to the 3 year cushion.  That is, if the 3 year average NAV of the fund rises, with inflation, so will the distribution, and so will your spending withdrawal.

Of course, if the NAV falls, so will the distribution, and you spending will NOT be real, inflation adjusted.

The point is that, by spending the 3%, 5%, or 7% distribution, you have what I have previously referred to as a Period Certain withdrawal strategy, as opposed to an Income Certain strategy.

Remember, the characteristic of period certain is that your income lasts forever!  That is, as long as the fund exists (has an NAV), you will receive 7/12% of that amount for each share that you own.  So, if you believe that the NAV of a fund can go to zero, that is the 'risk' that you are assuming whenever you invest in these funds!

Now, 3%, 5%, or even 7% may not be enough to live on.  That is, you may need more then $145.88 to live on.  Say you need $200 each month.  Well, you need to take another $54.12 from your portfolio each month, and the only source for THAT cash is the sale of a bit under 3 shares.  That is, at a NAV of $20.26 on May 16, you needed to sell 2.67 shares of the fund, so you now own only 1247.33 shares.  In June, those shares will now generate only $145.66, 22 cents, less then in May.

Of course, if you withdraw/spend only 5% (from the two funds in my initial post), you will continually sell a bit of the 3% fund each month, and purchase a bit more of the 7% fund each month, with corresponding increases, or decreases, in the future amounts of the monthly distributions.

Anyhow, that's how these funds work, with regard to retirement withdrawals.

Think now how ADVDX works.  It pays a certain amount, per share, of dividend yield income each month, NOT a certain percentage.  That is, it's 7 cents/share distribution is 5.6% of a $15 fund NAV, but 8.4% of a $10 fund NAV.  And the fund makes quarterly distributions considerably higher then that (25 cents/share or so).

Now, the comments above, regarding withdrawal/spending requirements, still hold.  That is, if you hold $25,000 of ADVDX, you hold, say, 2500 shares (assumes a $10 NAV at purchase.)  So, the fund makes approximately 39 cents/share distribution per quarter, or $975 for the 2500 shares owned.  Each month, this fund distributes, on average, $325.

Now, if you need your $200/month for spending, you are reinvesting $125/month in new shares.  You are not selling shares (unless the amount of the quarterly distribution decreases below 24 cents/share.  Likewise, per Alpine, all of it's distributions, so far, have been classified as yield.

Anyhow, enough for now.