A 71-Year-Old Gets $1200 A Month In Dividends From SCHD. He Could Double His Investment Income By Swapping SCHD For Verizon. There’s Just One Problem

Picture a 71-year-old retiree with $500,000 in the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD). He’s a hypothetical example, but retirees ask his question all the time. If he sold everything and bought Verizon (NYSE:VZ | VZ Price Prediction), the dividend checks from that money would grow from about $1,216 a month to about $2,543.

Here, “income” means the dividends from this one portfolio, before taxes. It assumes dividends stay at recent levels and share prices don’t move. Social Security, pensions and other savings aren’t part of the math.

A Reddit user close to retirement described the same pull: “I understand I can get 3% safely like SCHD. I want to pull as much as possible without losing the principal.” That post sums up the whole problem: more income on one side, a safe principal on the other.

Why Verizon Pays Twice What SCHD Does

Verizon trades near $46 and paid $2.81 per share over its last four dividends. That’s a trailing yield of 6.1%.

SCHD trades near $36 and paid $1.05 per share, for a trailing yield of 2.9%. Verizon’s yield is about 2 times as high.

The two pay out differently, too. Verizon paid $0.71 per share in each of its last three quarters, up from $0.69 before that. SCHD’s quarterly payment ran from $0.25 to $0.28 over the past year, because the fund passes along whatever its holdings pay.

A high yield is how the market prices in slower expected growth and more perceived risk. On an adjusted basis, SCHD gained about 271% over the past decade. Verizon gained roughly 69%. Part of Verizon’s bigger check makes up for that slower growth.

Napkin Math That Settles It

What really determines this is what happens if Verizon ever cuts its dividend. A 50% cut would leave him with about $1,271 a month. That’s barely more than the $1,216 SCHD already pays. Dividend cuts also tend to come with a falling share price, so his principal would probably shrink at the same time (we put the seven warning signs that a big yield is about to be cut in a free report here).

The upside is about $1,327 more a month. The downside is giving most of that back and losing part of his savings at 71, with less time to wait for a recovery. If he has to sell shares in a down market to pay bills, he locks in those losses. That’s sequence-of-returns risk: losses early in retirement do the most damage.

One Company Would Carry the Whole Paycheck

SCHD spreads his money across dividend payers in healthcare, consumer goods, energy, technology and financials. If one company cuts, his income barely changes. With Verizon, every dollar depends on one board’s ability and willingness to keep paying. It also depends on one business that faces wireless competition, heavy network spending and fast-changing technology.

He already owns some Verizon. SCHD held it at about 4% of net assets in late August. The swap would take him from a small piece of Verizon to his entire portfolio.

Verizon’s management sounds confident. On the October earnings call, Chief Financial Officer Tony Skiadas said, “We remain committed to growing the dividend and delivering enhanced returns to our shareholders through share repurchases.” A commitment reflects today’s conditions, though, and boards revisit those promises when conditions change.

Four Questions Worth Answering Before Any Swap

1. How much of his budget depends on this portfolio? If the dividends pay for housing, utilities and Medicare premiums, a cut does far more damage than if they pay for travel and gifts. The more essential the income, the less single-company risk he can afford.
2. Would a middle path work better? He could keep most of the money in a diversified fund and put a smaller piece into higher-yield holdings. That gets him some of the extra income while limiting the damage any one cut could do.
3. What would the switch cost in taxes? In a taxable account, selling SCHD means paying capital gains tax on its growth. Under 26 U.S.C. § 1(h), qualified dividends are taxed at capital gains rates, so bigger dividends also mean a bigger tax bill every year. Inside an IRA, the swap itself creates no tax.
4. Would a fee-only advisor help? A planner paid a flat or hourly fee, with no commission riding on the decision, can estimate the tax bill, look at his whole income picture and test how a dividend cut would affect his spending.

What Matters Most Right Now

The first thing to figure out is how much of his essential spending these dividends cover. That answer sets how much concentration risk he can handle.

A common mistake is comparing yields as if they were interest rates on equally safe accounts. A 6.1% yield from one company and a 2.9% yield from a basket of companies are not equally reliable. Twice the income is real money. So is the risk of one company determines whether that income keeps coming.

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