Micro Blog Post #30: Taking Advantage of High Yielding Dividend Stocks to Pay for Healthcare

For dividend investors like myself, our primary goal is to increase cash flow through dividends. The capital gain is a secondary objective and in many cases we use capital gains as a means to increase dividends through reinvesting.

So, if you are a dividend investor then you should be rejoicing on the prospects of having so many great companies offering 5% plus dividend yield and it's hard to sit back and not take advantage of such a great opportunity.

Keeping this opportunity in mind, I converted my entire HSA investment from a Vanguard VYM ETF to a group of blue-chip high yielding stocks.

The VYM ETF has been earning about 2.9% in dividend yield, not too bad but not that great given the 10 Year Govt. T-bill is now yielding about 3%. Also, since I'm not contributing into my HSA account anymore (I'm retired), the only way to increase my dividend cash flow is by reinvesting capital gains or through organic dividend growth.

The higher dividend yields offered by many blue-chip stocks was too hard to pass, and therefore, I decided to take capital gains and liquidated my VYM position in my HSA account. I used the sale proceeds (about 40K in total) and reinvested equally between eight stocks:


The total yield on original investment (or cost) is about 5.12% which gives us about $2052 per year in dividend income that we could use towards paying for healthcare, tax-free. This is a 71% increase from $1200 I was originally getting in dividends when invested in VYM. This dividend cash flow increase is the result of HSA tax-free capital gains harvesting and reinvesting in higher yielding stocks.

I know $2000 doesn't sound much, but when you think about it in terms of paying for out-of-pocket medical costs, this money is tax free and can cover about 80% of our current medical deductible or out-of-pocket expenses.

It is also enough to cover most doctor visits in a year for our family of two, and once the deductible is met, insurance covers 85% of our medical cost there on. Therefore, the dividends in HSA helps close the gap between our out-of-pocket medical expenses and what insurance pays.

Now, if we stay healthy and continue to reinvest this dividend every year, instead of using it to pay for medical expenses, we could grow it to cover 100% of our out-of-pocket medical expenses before insurance kicks-in.

With the conservative 3 - 5% annual dividend growth rate, here is how the dividend growth looks like for this account with an starting amount of 40K:

https://sugar.mhinvest.com/highcharts/investment.php

In about three years, the dividends generated in this HSA account should be covering 100% of our medical deductible and anything over that can simply be used to pay for anything that the insurance doesn't cover.

So there it is. I just showed you how I'm investing my HSA account in dividend paying stocks to pay for out-of-pocket medical expenses without touching the principal amount. You can do the same, but you need to start investing and take advantage of all the tax benefits that HSA account provides.

Thanks for reading and hope you got something out of this post. Also check out my previous post on HSA account benefits here. As always, I appreciate thoughtful comments from my readers.

Disclaimer: I'm not an investment or financial professional, so don't take anything I write as an investment advice. Always consult a professional financial adviser or do your own due diligence before investing. All information presented in this article or website is for informational purpose only.

Comments

  1. Love the approach on this. Funny your HSA is larger than my whole portfolio on my blog. Using the dividends to cover the deductible is a a great idea. It is important for those who retire early to realize you can't really add any more into it when you stop working. So make sure to try and start one at an earlier age and build it up as much as you can before deciding to make that switch to retirement.

    ReplyDelete
    Replies
    1. Well you are still very young and have lot of time to grow your portfolio, so don't worry about the size. Normally, I don't share portfolio value but I decided to do it for HSA to give a real example of how one can use it to self-subsidize their healthcare cost over time. It's like having a cake and eat it too.

      You also made an excellent point about contributing in earlier age to build up HSA while you still have a paycheck coming, so yes start early and reap the benefits later.

      My ex-employer only offered HDHP starting in 2011, so I didn't have a long runway but I made the best out of the years I had and contributed in HSA to the max amount while investing every dollar.

      Delete
  2. Thanks for the visuals, Mr. ATM. Taking notes over here! I like your decision to split between the 8 stocks vs an ETF. We need to get this setup asap. Look forward to catching up with you on Twitter now that we are back from vacation!

    ReplyDelete
    Replies
    1. Yes, I was hoping I could get you excited about opening a HSA by sharing my portfolio and the potential for tax-free dividend income from it. Looking forward to seeing you get started on it. Take care!

      Delete
  3. Interesting strategy Mr. ATM, and glad you were able to effectively increase your yield be transitioning out of VYM into selective stocks. Although I'm in a transition period right now, I'm looking at adding D, SO, and VZ to my portfolio which will increase the effective yield.

    Right now, my healthcare costs are under control, but that may change in the future. The yield the portfolio generates today is not as important as what it generates when retirement comes, but I prefer a higher yield than a lower one.

    The strategy you've laid out seems like a good one for your situation. I hope it works out as planned.

    ReplyDelete

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