Living on Dividends

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David Foster
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Living on Dividends

Post by David Foster »

Let me start by saying that I'm 17 years old, and I have a lengthy investing horizon in front of me. I plan on pursuing an MBA in Finance and then breaking into the finance world, where I will work my butt off to get into a bulge bracket firm, so I will pull in a decent salary. My end goal is to have such a large dividend payout on my investments that I will never have to worry about my energy needs, although I will most likely continue working and improving myself. I'm thinking for the long-term, as in 40+ years.

I'm not really interested in bonds, as stocks have a higher historical return, which is what matters to me in my situation. I'm saving as much as I can at present, and I expect a future windfall left by my dad to assist me. I currently have a Roth IRA and will attempt to fill the contribution limit every year. I'm investing in small-cap value stock indices at the moment, but I may diversify in the future.

There's my plan, so please critique it. What can I do to improve it? What should I do with any extra funds after filling the Roth IRA annual contribution limit? Does it even matter with residual dividends as my goal?
jbreittling
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Re: Living on Dividends

Post by jbreittling »

I'm not qualified to offer advice. But I'll say this - if this is how you are thinking about your future at age 17 *and* all that you stated happens, you are going to be fine - whether it's dividends or other income streams.

Congratulations in advance young man.
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Ged
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Re: Living on Dividends

Post by Ged »

At this point is your life two things are important:

1. Savings Rate.
2. Avoid Large Mistakes i.e. engaging in a Ponzi scheme.

Details on things like how you will realize your income - you have a LONG time to figure out how to do best do that.
Rob Bertram
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Re: Living on Dividends

Post by Rob Bertram »

The three most important factors in growing your retirement are
1) Savings rate
2) Time in the market
3) Keeping costs (fees, taxes) low

You'll notice that asset allocation did not make the top 3. (It is #4 however.)

There's nothing wrong with going 100% SV as long as you can stay the course. If you ever get to the point where you are investing in a taxable account, you definitely need to consider taxes. There are some assets like REITS that are terribly inefficient.

There are some heavy debates on SV in the forum. You should read through them.
Crow Hunter
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Re: Living on Dividends

Post by Crow Hunter »

David Foster wrote:Let me start by saying that I'm 17 years old, and I have a lengthy investing horizon in front of me. I plan on pursuing an MBA in Finance and then breaking into the finance world, where I will work my butt off to get into a bulge bracket firm, so I will pull in a decent salary. My end goal is to have such a large dividend payout on my investments that I will never have to worry about my energy needs, although I will most likely continue working and improving myself. I'm thinking for the long-term, as in 40+ years.

I'm not really interested in bonds, as stocks have a higher historical return, which is what matters to me in my situation. I'm saving as much as I can at present, and I expect a future windfall left by my dad to assist me. I currently have a Roth IRA and will attempt to fill the contribution limit every year. I'm investing in small-cap value stock indices at the moment, but I may diversify in the future.

There's my plan, so please critique it. What can I do to improve it? What should I do with any extra funds after filling the Roth IRA annual contribution limit? Does it even matter with residual dividends as my goal?
I am impressed that you are able to earn $5,500/year to contribute to a Roth IRA while in high school.

At $7.50/hr you are working at least 17+ hours per week, every week and don't spend it on anything else at all.

Not many high school kids have that type of determination or the ability to do well and be involved in school while working that many hours.

That being said. You have many earning years ahead of you to become rich but only one year at age 17 in high school.

Make sure you don't regret missing out on being 17 when you are early retired at 45. No matter how much you save, you won't be able to buy back being 17.
john94549
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Re: Living on Dividends

Post by john94549 »

I'm still pondering the term "bulge bracket firm". Although, at my age, it would be nice to . . . never mind.
Dandy
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Re: Living on Dividends

Post by Dandy »

I'm assuming you are bright not by your own assessment but by more objective measures like your grades etc. You are forward thinking and aggressive which are good qualities for a bright young person. So, you should have much success but that is not guaranteed. I think of bright, aggressive people I have known and try to think of what their weakness might be -- so they can keep that in mind.

The ones that get into trouble are the ones who:
1. Were too confident/aggressive - not only invested all in with equities but used leverage, exotic investments etc. Had a disdain for anything like bonds, CDs, even insurance. With the feeling that those products were for the masses not for me. Now being all in in equities at an early stage is very acceptable in many eyes but the going beyond those "normal" risks is the issue as is the attitude.
2. Success and smarts tended to make them less likely to take or ask for advice -- even on things that weren't in their area of expertise. They went from know a lot to a know it all.
3. They ran with a like crowd which usually reinforced their bias and added to peer pressure. e.g what you drive, where you live, how you spend/invest your money. Hard to be an investment banker and drive a Camry, live in a nice 4 bedroom house and invest in index funds when your peers drive a Beemer, live in the Hamptons and invest in aggressive hedge funds.

So, I guess I'm saying good luck but stay grounded. Having such ambitious plans and asking for feedback is a great sign.
yb
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Re: Living on Dividends

Post by yb »

Congratulations on getting an early start on a good savings habit! In the next five years, if you keep up your savings, keep things in low cost index funds, you will be in great shape financially!

>What should I do with any extra funds after filling the Roth IRA annual contribution limit?

Start an emergency fund (that is a little difficult for you to access). You will have a couple of expenses coming up once you move out of your parents' house and when you graduate.

Honestly, I think if you've managed to find your way here at your age, your finances will be on a good course, because you will eventually realize that there isn't much to do, but stick to a good plan. Just don't get too confident or risky.

What you can spend more time on now is school. One thing that I wished I realized when I was your age was that putting in a little more effort than was required to get by results in much better grades and better grades help with applications to schools and scholarships then applications to grad schools and recommendations and other opportunities. At the time, I didn't care about grades because I understood the material enough to get A's and B's without studying or doing the reading. If I had just put in an hour a day studying and reviewing the material in high school, I would have had outstanding grades instead of good grades and it would have probably been easier than not doing the work. Our valedictorian was not the smartest kid in my class by a long shot, but she did study and was rewarded with scholarships. It wasn't until later in college that I realized the practical ways that grades matter in terms of scholarships and future opportunities. Also, eventually you get to a point where you have to study a lot just to get by and the habits you develop now will help when you need them later.

Good luck and congratulations again!
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nisiprius
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Re: Living on Dividends

Post by nisiprius »

Two criticisms.
David Foster wrote:...I plan on pursuing an MBA in Finance and then breaking into the finance world, where I will work my butt off to get into a bulge bracket firm, so I will pull in a decent salary...
That's not a "plan," that's a "daydream."
David Foster wrote:...I'm not really interested in bonds, as stocks have a higher historical return, which is what matters to me in my situation.
No, what matters is not the historical return, but the future return. Not the "expected return," not the estimated future return for all of eternity going forward, the actual future return between two particular endpoints, both in the future, only a few decades apart.

Get in the habit of saying "have had," not "have." Don't get lazy about it. I make that same sloppy mistake all the time myself and if you catch me making it please slap my wrists.
john94549 wrote:I'm still pondering the term "bulge bracket firm". Although, at my age, it would be nice to . . . never mind.
I didn't know, either. http://en.wikipedia.org/wiki/Bulge_bracket "The name comes from the way investment banks are listed on the "tombstone", or public notification of a financial transaction or deal. The bank responsible for control of allocation of securities to investors, known as the bookrunning manager is listed above the others and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may "bulge" out."
Last edited by nisiprius on Thu Jul 17, 2014 10:35 am, edited 2 times in total.
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bloom2708
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Re: Living on Dividends

Post by bloom2708 »

Make plans and if they change, go with the flow. When I was 17 I wanted to be an Ophthalmologist. After 1 year of Chemistry and Biology and thinking about 8-10 more years of "school" and "massive debt" I changed quickly.

Business and Math majors. Finished in 4 years. Started in banking (not for me), joined a software company that was purchased by Microsoft. 18 years later..etc etc.

My point is your career plans might change, but if you invest with "boglehead-ish" values, you will be in good shape. There are a lot of threads about 100% stocks. What if you got all wild and crazy and did 90/10 or 80/20? Your returns are not that far off 100/0 and you flatten out some highs and lows.

Or go Chuck Norris and go 100% bonds/100% stocks, (100% US, 100% International, 100% Bonds)
shaX
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Re: Living on Dividends

Post by shaX »

Dandy wrote:I'm assuming you are bright not by your own assessment but by more objective measures like your grades etc. You are forward thinking and aggressive which are good qualities for a bright young person. So, you should have much success but that is not guaranteed. I think of bright, aggressive people I have known and try to think of what their weakness might be -- so they can keep that in mind.

The ones that get into trouble are the ones who:
1. Were too confident/aggressive - not only invested all in with equities but used leverage, exotic investments etc. Had a disdain for anything like bonds, CDs, even insurance. With the feeling that those products were for the masses not for me. Now being all in in equities at an early stage is very acceptable in many eyes but the going beyond those "normal" risks is the issue as is the attitude.
2. Success and smarts tended to make them less likely to take or ask for advice -- even on things that weren't in their area of expertise. They went from know a lot to a know it all.
3. They ran with a like crowd which usually reinforced their bias and added to peer pressure. e.g what you drive, where you live, how you spend/invest your money. Hard to be an investment banker and drive a Camry, live in a nice 4 bedroom house and invest in index funds when your peers drive a Beemer, live in the Hamptons and invest in aggressive hedge funds.

So, I guess I'm saying good luck but stay grounded. Having such ambitious plans and asking for feedback is a great sign.
I have to second everything stated here. Sometimes there's a fine line between confidence and arrogance. Staying humble will be important for someone as young as yourself.

I'll also reinforce that you should keep an open mind, especially pertaining to bonds. Sure the stock returns are historically higher, and yes you're very young, but it doesn't mean at some point you shouldn't consider investing in bonds. If you maintain the "bonds aren't for me" mentality, then you leave yourself open to missing the mark on being truly diversified.

Good luck on getting an early start.
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David Foster
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Re: Living on Dividends

Post by David Foster »

Thank you to everyone for your great responses and kind support. I hope I didn't sound arrogant in my OP, but I do like to set my goals high so that, in the event that I fail, I will manage to keep my head above water. :)

@Rob Bertram
Those are the majority of what I read on these forums. :mrgreen:

@Crow Hunter
That's a good point, and I definitely try to have as much fun now as I can.

@Dandy
I definitely know where you're coming from. I try not to be arrogant, and I realize that I'm just another member of the population. As far as peer pressure goes, I'm a social butterfly and extremely selective about my close friends. I only choose very high-caliber, independent personalities to hang around, as I feel like that benefits me the most, both emotionally and financially. I am extremely aggressive, and I always try to channel my aggression to be as productive as I can. My motto is "work smarter, not harder."

@yb
Thank you for the kind words. Basically, I try to study in and out of school and to just devour as much information as I can. I agree that scholarships end up practically being free money, considering the low amount of effort required and high dollar figures, especially considering student loans later on.

@nisiprius
I don't think that getting an MBA with a concentration on finance and getting a decent career is a daydream, although getting into Goldman Sachs or Citigroup might be a challenge.

I understand where you're coming from with the semantics, although I would argue that even John Bogle would not say that, given enough time, bonds will even come close to bringing the returns of stocks, especially small-cap stocks.

And to everyone who recommends bonds, I'll keep looking into them. :sharebeer
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Watty
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Re: Living on Dividends

Post by Watty »

Hi,
Here are a few links that might be of interest if you have not seen them yet.

There are decades until you need to worry about the withdraw methods but here is the wiki that gives an overview of some of the options.

http://www.bogleheads.org/wiki/Withdrawal_methods

Generally speaking if you will retire at around the normal retirement age then a good goal would be to have a portfolio that 25 times your expected expenses so you can have a 4% safe withdrawal rate.

http://www.bogleheads.org/wiki/Safe_withdrawal_rates
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dratkinson
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Re: Living on Dividends

Post by dratkinson »

Ditto the recommendations for boring bonds, as there have been long time periods when they did better then stocks.

Look into the Efficient Frontier concept: asset mixes giving highest risk-adjusted return. Seem to recall a ~30% allocation to intermediate-term bonds giving the best risk/return.

Poke around on the Efficient Frontier website and see what you find. You can start here:
http://www.efficientfrontier.com/ef/997/maturity.htm
Above gives the justification for the "intermediate-term bond" recommendation.
I leave it to you to find the "30% bond allocation" recommendation.

And of course, you don't want to experience a Japanese-style market meltdown when you retire: could really put a hole in your "100% stock dividends" retirement plan. So increasing your bond allocation to prevent this is wise as you age.

As no one can know the future, the best we can do is plan for the worst and hope for the best.



Welcome.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Rich Cape Cod
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Re: Living on Dividends

Post by Rich Cape Cod »

David, just one small word of caution. Not from me, but from brighter fellow named Adlai Stevenson. He once said (and I paraphrase), "What a man knows at age 50 would have been largely unknowable at age 21."

I'm simply suggesting that should you sometime in the future begin to feel that you have a unique grasp on an issue (be it in regard investing or life) and can safely disregard prudent suggestions offered by intelligent, experienced older individuals, it's time to reassess.

Just a thought.

Best of luck,

Rich
Rich Cape Cod/AZ
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Re: Living on Dividends

Post by Traveler »

Always live below your means and you should be fine. No need to keep up with the Joneses.
hafius500
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Re: Living on Dividends

Post by hafius500 »

Rob Arnott:
Climb away from the glide path, says blue-sky thinker, Mike Foste, 16 Jul 2014
In each case, he assumes that an individual is contributing $1,000 a year to a plan in real terms.

The conventional switch from an 80% equity weighting to 20% produces an average retirement pot of $124,460. But an inverse switch from a 20% equity weighting to 80% would generate $152,060.

The worst outcome for conventional DC would be $49,940 against $53,000 for inverse DC. The best would be $211,300 for conventional against $287,000 for inverse.

Arnott says investors using the inverse approach are putting the maximum possible amount of money into return-seeking assets, while conventional DC avoids doing so. Arnott said: “The equity risk premium only works when you have serious money invested.”
...
He argues, however, that younger savers should be more prepared to buy bonds, to save them from small, but painful, losses in their early years
prior username: hafis50
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David Foster
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Re: Living on Dividends

Post by David Foster »

Thank you for the interesting thoughts and the article. I've been doing some research into the Lost Decade of Japan, and I find it interesting how the real GDP of the nation has increased significantly, even in a dis-inflationary environment. I'll continue to look into this.
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Kevin M
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Re: Living on Dividends

Post by Kevin M »

Hi David--welcome to the forum!
David Foster wrote:I'm investing in small-cap value stock indices at the moment, but I may diversify in the future.
Can you be more specific? You can't invest in an index, but you can invest in an index fund. Which funds are you investing in?
David Foster wrote:What should I do with any extra funds after filling the Roth IRA annual contribution limit?
You can invest in a taxable account. Nothing wrong with that.
David Foster wrote:Does it even matter with residual dividends as my goal?
I don't understand this question. Can you elaborate?

Overall, if you are investing in low-cost stock index funds, what you are doing is fine as long as you're sure you won't freak out when the value of your stock funds goes down by 20%, 30%, 40%, 50% or more. From a purely rational perspective, stocks do have higher expected returns than bonds, and at your age your portfolio is puny compared to your "human capital" (lifetime earning/saving potential), so any losses now are insignificant. But emotions are a reality, and it's important to stick with your plan even when the gut-wrenching feeling of having your financial wealth cut in half makes you want to bail out and stop the pain. Thinking about it is a lot different than experiencing it.

For this reason at least one of our highly respected Boglehead authors, Bill Bernstein, recommends no more than a 50% allocation to stocks until you've lived through a gut-wrenching bear market, and have battle-tested your willingness to take risk. On the other hand, I believe Bill also has written that a 100% allocation to small-value stocks can be appropriate for a very young investor.

The small-value thing is a favorite topic of debate on this forum. Some believe that the evidence for a small-value risk premium is compelling, while many others believe that sticking with total market funds is preferable. Apparently you have done some research and decided that that the extreme SV "tilt" makes sense for you. You have plenty of time to participate in the debate, and to change your mind if you decide that it might not be right for you.

Some of us tilt to small-value, but I doubt very many go 100% small value. One of the prominent proponents for doing so is Boglehead author Larry Swedroe. Perhaps you've read some of his writings. Be sure to expose yourself to the arguments for sticking with total market investing as well.

Looking forward to further contributions to the forum from you.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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