What are you Doing with Your Portfolio Income?
Most positions in your portfolio likely pay some form of income, typically through interest and dividends
For example, BNDX (Vanguard Total International Bond Index Fund ETF) is yielding about 4% per year right now. If you hold a $50K position, that is $2,000 per year. Across a diversified, balanced portfolio, a reasonable rule of thumb right now is 2–3% in annual income (depending on the mix of stocks, bonds, and rates). On a $1 million portfolio, that’s approximately $25,000 per year.
What happens to that income?
You have two choices:
Reinvest the income - Automatically buy more shares of the same investment, compounding growth over time.
Pay to Cash - Send the income to cash, where it can be used for spending needs.
Which strategy makes sense for you?
If you are in the accumulation stage, reinvesting is usually best. One of the most common mistakes I see is young investors having their Roth IRA dividends pay to cash unintentionally. We want that money reinvested growing tax-free for decades - not sitting idle.
As you move into retirement, many investors switch to “paid to cash.” This lets you use portfolio income to cover withdrawals (reducing the need to sell investments, especially during market downturns).
Additional Tips
In taxable account: Dividends are taxed as income whether they’re reinvested or paid to cash.
If you are distributing from a taxable account, having the dividends pay to cash helps you avoid unnecessary capital gains.
If you have a concentrated stock position that you are trying to unwind - change the setting to “pay to cash”. Many investors leave this on “re-invest”, making the concentration problem worse without realizing it.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout Virginia Beach, San Diego county, and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in Virginia Beach, San Diego, and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.