Can you retire off of dividend income?

[Booper]

Most of the research that I've seen on retirement strategies is based on the trinity study (i.e. save/invest a lot of money during your working years, then start selling/withdrawing 4% a year during your retirement).

I'm curious: is it possible to retire based on income from dividends? Can anyone point me in the direction of any links to academic studies about this?

The most obvious problems I can see with this strategy are that companies are not contractually obligated to give (or increase) dividends, and that companies can go broke. But presumably investing for dividend income via a mutual fund that tries to track an index like the "Divident Aristocrats" would help to mitigate these issues.

Also, it's not clear to me how one's initial investment in such a fund would fare if you do not reinvest the dividends and capital gains. I.e. How has it historically compared with inflation?

[Cut-Throat]

Most of the research that I've seen on retirement strategies is based on the trinity study (i.e. save/invest a lot of money during your working years, then start selling/withdrawing 4% a year during your retirement).

I'm curious: is it possible to retire based on income from dividends? Can anyone point me in the direction of any links to academic studies about this?

The most obvious problems I can see with this strategy are that companies are not contractually obligated to give (or increase) dividends, and that companies can go broke. But presumably investing for dividend income via a mutual fund that tries to track an index like the "Divident Aristocrats" would help to mitigate these issues.

Also, it's not clear to me how one's initial investment in such a fund would fare if you do not reinvest the dividends and capital gains. I.e. How has it historically compared with inflation?

If you have north of $100 Million, retiring on Dividends alone should be no problem.

[retiredjg]

I'm curious: is it possible to retire based on income from dividends?

Sure. If you have a LOT of money.

Most folks use a combination of dividends, capital gains, increases in net asset value, interest, and tapping into the principal. And SS.

[cheesepep]

Sure, you can.

I'm relatively young and I'm already making more than $14,000 a year in what I consider as being a diversified portfolio of mostly dividend growth stocks.

Look here for more details:

http://seekingalpha.com/dashboard/investing_income

[Karamatsu]

On the inflation question some studies seem to indicate that there is a good positive correlation. This paper has some argument and references to earlier work:

Inflation and Stock Prices: No Illusion

But of course you're right that there are never guarantees, and there could be corner cases, "perfect storms" where the correlation doesn't hold up in the mid-term. I suppose if I had enough capital to attempt something like that I'd use bonds, especially TIPS, to provide a reliable base, then add the dividend stocks on top if that still seemed like a good idea. I wonder what kind of real yield margin a dividend index has historically offered over TIPS? Might not be very much...

[Oicuryy]

Here is a quick graph of Shiller's inflation adjusted dividend data for the S&P 500. You can download the data from here.
http://www.econ.yale.edu/~shiller/data.htm

The dividend is currently about 2% of the price. So you would need about 50 times your annual spending. Or maybe 67 times to allow for the occasional 25% drop in dividends like the one from 1966 to 1976.

Ron

[Toons]

I'm curious: is it possible to retire based on income from dividends?

Sure. If you have a LOT of money.

Most folks use a combination of dividends, capital gains, increases in net asset value, interest, and tapping into the principal. And SS.

Perfectly Said

[Booper]

Here is a quick graph of Shiller's inflation adjusted dividend data for the S&P 500. You can download the data from here.
http://www.econ.yale.edu/~shiller/data.htm

The dividend is currently about 2% of the price. So you would need about 50 times your annual spending. Or maybe 67 times to allow for the occasional 25% drop in dividends like the one from 1966 to 1976.

Ron

Thanks Ron. Can you explain what the y axis is in your chart? Also, how did share price change over that time? I'm particularly interested in how share price alone compared with inflation.

[dailybagel]

I'm curious: is it possible to retire based on income from dividends?

Sure. If you have a LOT of money.

Most folks use a combination of dividends, capital gains, increases in net asset value, interest, and tapping into the principal. And SS.

To be more specific, the dividend yield of the S&P 500 is currently 2.0%. So, if you retired with double the amount recommended by a 4% SWR, you'd be all set to live off dividends.

Or at least, to live off the yield for the next quarter. No telling how that yield would change going further, or how the price would change.

But my hunch would be, if you keep a constant number of shares, as long as companies are growing in profitability, and not decreasing, the absolute dividends per share won't decrease.

[555]

My question is, why would you want to do this? Sure, it can be done (possibly) if you have enough. But why would you ever even want to get into the mindset of having to live off just dividends? That's boxing yourself in. Just look at total return.

[Oicuryy]

Thanks Ron. Can you explain what the y axis is in your chart? Also, how did share price change over that time? I'm particularly interested in how share price alone compared with inflation.

Shiller describes his data at the link in my post. I graphed column I of his spreadsheet which is labeled "Real Dividend". It is the dollar amount of the dividend in today's dollars.

Shiller says the dividends are monthly data. But they look like annual dividends to me. For example, $27.47 per year seems about right for the $1395.30 index value shown for March 2012. $27.47 per month would be way too high.

Inflation-adjusted price data is in column H of his spreadsheet. The March 2012 price is about 17 times the inflation-adjusted January 1871 price.

Ron

[leo383]

Pardon my unfamiliarity with dividends, but why would you need a lot of money?

The Vanguard Utility fund is yielding almost 4%; a million in that would throw off almost $40,000, correct? Isn't that how they did it in the old days, pre-mutual funds? You held a bunch of high dividend stocks and lived off of the cash they paid. ?

[abuss368]

Yes. I had grandparents that did it that way, and made a very nice retirement living off the dividends.

It can be done.

[Toons]

Yes. I had grandparents that did it that way, and made a very nice retirement living off the dividends.

It can be done.

+1
My Mother did it that way with a growth and income mutual fund she owned,not only did it pay a dividend but some years it would pay out a year end capital gain of .50 to $1.00 per share which she would take in cash.She owned 40,000 shares in her mutual fund,

[tibbitts]

Yes. I had grandparents that did it that way, and made a very nice retirement living off the dividends.

It can be done.

I don't know when that was, but consider the 1950s and 1960s. In the '50s, inflation was only about half of the 5%-ish dividend yield alone of the S&P, not counting price appreciation. Only toward the very end of the '60s did inflation begin to substantially outpace dividends. So "my parents did it that way" might have applied much more in another era than now.

Obviously if you have enough in equities, you can live off .001% dividends. But for the typical person, there have been times when it's been more possible to live off dividends than others.

On the other hand, it's likely that a bigger chunk of those 5% yields went to brokerage expenses back in the day.

Paul

[tibbitts]

Pardon my unfamiliarity with dividends, but why would you need a lot of money?

The Vanguard Utility fund is yielding almost 4%; a million in that would throw off almost $40,000, correct? Isn't that how they did it in the old days, pre-mutual funds? You held a bunch of high dividend stocks and lived off of the cash they paid. ?

You may be forgetting that just a few years ago, a number of financials and other companies that don't exist any more were considered relatively safe dividend plays. I'm not saying that utilities will suffer the same fate as some other previously-considered-safe stocks, but it would be unwise to assume that putting all your eggs in the utilities basket is substantially more secure than buying some of those previously-reliable dividend payers was in the past.

Paul

[abuss368]

I have written on other posts, I have clients and friends that have diversified index funds, including REITs, in taxable and tax advantaged accounts, and are living from the dividends, retired early, and enjoying life. I look at this as a goal.

Here it comes, the typical, REITs pay ordinary income, and belong in a tax advantaged account. Sell those shares, stop living off the income, un-retire, and go back to work. Great advice to a client and friend.

And yes, I realize the REIT dividends breaks down into dividends, capital gains, and return of capital.

So there is living proof for me it can be done. Takes discipline, a few of the right funds, constant saving and investing, and over time, the benefits of increased dividend income should start to become reality.

[pkcrafter]

Last time I checked, dividends were part of total return. The problem I see with taking dividends is you may not want to withdraw from equities due to market conditions. You don't have the option if you take the divvys. I do think 40-50% of large-cap equity should be in dividend-paying funds, but I reinvest them.




Paul

[Booper]

My question is, why would you want to do this? Sure, it can be done (possibly) if you have enough. But why would you ever even want to get into the mindset of having to live off just dividends? That's boxing yourself in. Just look at total return.

Because I am researching various strategies of financing early retirement. I read a few books on it, and wanted to examine how one might want to go about it. A few people in the early retirement community have made blanket statements to the effect of "once you can live off of 4% of your nest egg, you are set for life." But this is not true, because the 4% rule comes from the Trinity study, which was only conducted over 30 time spans (http://arilamstein.hubpages.com/hub/The ... Retirement).

This led me to explore other options. One such option is the role of dividend income. That is what led me to this post. I suppose my thinking was "if your portfolio made enough in dividens for you to live off of, then you would not be withdrawing anything, because you would not be selling stocks."

[retiredjg]

Maybe this paper from Vanguard will have information that you will find useful.

https://institutional.vanguard.com/VGAp ... etvsTotInc

[BigFoot48]

We have been largely living off investment distributions since retiring, and prior to SS kicking in to help. For the years 2000-2011, the average distribution of dividends, interest and capital gains has been 3.7%, with a low of 3.0% in 2011, and a high of 4.7% in 2007. (Based on the average end of month investment balances of a diversified Boglehead-ish portfolio.)

So, it has been doable, assuming one can fit their living expenses into similar such distributions from one's own portfolio, and the future is similar to the past.

[dbr]

Your ability to live off your portfolio is determined by the withdrawal rate and the sequence of total returns of the assets. The constraint is how tolerant you want to be of where the asset value goes. In some studies the only constraint is that assets remain above zero for a minimum number of years, arbitrarily specified. It is also possible to set the constraint that the portfolio value will never fall below a certain amount, nominal or inflation adjusted, and so on. Unless you can prove that a sector investment such as utilities provides a more effective sequence of total returns than some other investment, then you can't prove that said sector investment can sustain a higher withdrawal rate, given any particular constraint. So far as I am aware the only likely candidate for playing that game is that it is conceivable that small and value tilted portfolios could sustain higher withdrawal rates than total market portfolios, blended with some low volatility investment. There might be a miniscule liklihood that a 4% dividend payer portfolio could outlast a 2% dividend payer portfolio. It is more likely that risk in a concentrated portfolio would contribute a higher likelihood of failure than would be found in a more diversified portfolio. In any case relying on typical dividends and setting the withdrawal rate lower than 4% to preserve portfolio value simply means that a person needs a larger asset base.

[Booper]

Maybe this paper from Vanguard will have information that you will find useful.

https://institutional.vanguard.com/VGAp ... etvsTotInc

Thanks. I just started reading this and it's very helpful.

Just to clarify: when people talk about "withdrawing" from a portfolio, is taking dividends considered "withdrawing"?

[Tuxx]

Pardon my unfamiliarity with dividends, but why would you need a lot of money?

The Vanguard Utility fund is yielding almost 4%; a million in that would throw off almost $40,000, correct? Isn't that how they did it in the old days, pre-mutual funds? You held a bunch of high dividend stocks and lived off of the cash they paid. ?

I love the irony. Pre mutual funds....when you are talking about an ETF. Which are post mutual funds.

[dbr]

Maybe this paper from Vanguard will have information that you will find useful.

https://institutional.vanguard.com/VGAp ... etvsTotInc

Thanks. I just started reading this and it's very helpful.

Just to clarify: when people talk about "withdrawing" from a portfolio, is taking dividends considered "withdrawing"?

That depends on what you mean by "taking dividends." Withdrawing from a portfolio means removing any asset from the portfolio and putting it not in the portfolio. In practice that would usually mean writing a check against a mutual fund or transferring money from a money market to a checking account or something of that nature, where it would probably mostly be spent. A person might withdraw shares by transferring them as a gift, for example, and that would be a withdrawal. Otherwise, assets are usually converted to cash in order to be moved from the accounts that would be counted as "in" the portfolio. These days people don't often literally receive dividend checks in the mail that they cash at the bank for currency to spend on groceries. Maybe more do than one thinks. More likely, if dividends are not reinvested, they are swept into a sweep account at the brokerage or fund company and accumulate as a cash holding in the portfolio. I suppose in this sense taking dividends is not withdrawing. Now some people might very exactly actually transfer those dividends to a checking account or write checks on the money market account exactly up to the amount of the dividends placed and then could be said to have withdrawn the dividends. That also might be what is meant by "taking" the dividends. In fact, money is fungible, and the statement that one has "withdrawn" the dividends as distinct from anything else is just mental accounting. "Taking dividends" actually doesn't mean anything at all to me. After all, the investor cannot choose whether or not a specific investment pays dividends, so there is no choice to not "take" a dividend.

[celia]

I think a more relevant question would be: "Is my projected retirement income more than my projected retirement expenses." Don't forget that you can make this happen not only by increasing your income (from any source available) but also by reducing your expenses. For example, live in a property that is paid off. Wait until you no longer have expenses for raising kids. Stay healthy so you save on medical expenses.

[Stryker]

Dividend stocks aren't fail-safe (but buy them anyway)

Norman Rothery, PhD, CFA

"Dividend investing has many sterling qualities but protection against downturns is not one of them. With few exceptions, dividend stocks fall just as hard as other stocks when the market crashes.

Yet despite that failing, you should still own dividend stocks. Let me explain why, with the help of Dartmouth professor Kenneth French."

[scrabbler1]

I am an early retiree living off the dividends of a bond fund I own. I own 46,000 shares of this fund which pays about 4.5 cents per share every month, enough to cover my expenses. The fund has paid some cap gains distributions which I have reinvested. I also own many (but not as many as the "big" bond fund) shares in other bond funds and a stock fund, all of which get reinvested. Then there is an IRA which has stock and bond funds, all of which get reinvested until the time comes when I need to tap into them.

I consider the reinvestments a minor inflation guard because it keeps the share balance growing. I started with 39,000 shares about 3 1/2 years ago and the rising share balance has offset the slight decline in monthly dividends per share.

[cjking]

These days the dividend yield is about half the earnings yield. The smoothed earnings yield is an approximate upper bound on what you can take if planning for a very long retirement. By smoothed earnings yield I mean 1/PE10 in the Shiller data.

You could divide the earnings yield into quartiles.
Quartiles 1 and 2. If you take the dividend yield, you're taking the first two quartiles as income.
Quartile 4. My analysis of Shiller data indicates that to preserve your capital in the long term you would have needed to take 83% of the smoothed earnings yield, so as a safety precaution you need to give up the option of taking the fourth quartile as income.
Quartile 3. Over a very long period, it might actually be sensible to plan for an income that rises in real terms, as you will want to maintain your relative standard of living. (Happiness depends on relative wealth. Also you want to be able to afford new things that become possible.) So leave third quartile alone, and your dividends will grow as a result of reinvested capital.

So to sum up, taking only dividends looks quite reasonable.

Don't undiversify by selecting only high-dividend companies. People who did that in the past ended up owning lots of financial companies, which didn't work out well. (Also it would invalidate the above analysis, which was base on broad indices.)

[Grt2bOutdoors]

Most of the research that I've seen on retirement strategies is based on the trinity study (i.e. save/invest a lot of money during your working years, then start selling/withdrawing 4% a year during your retirement).

I'm curious: is it possible to retire based on income from dividends? Can anyone point me in the direction of any links to academic studies about this?

The most obvious problems I can see with this strategy are that companies are not contractually obligated to give (or increase) dividends, and that companies can go broke. But presumably investing for dividend income via a mutual fund that tries to track an index like the "Divident Aristocrats" would help to mitigate these issues.

Also, it's not clear to me how one's initial investment in such a fund would fare if you do not reinvest the dividends and capital gains. I.e. How has it historically compared with inflation?

If you have north of $100 Million, retiring on Dividends alone should be no problem.

Don't be ridiculous - I have numerous family relatives who before the word "mutual fund" became popular, created their own by owning many different up and coming businesses that today are household global powerhouse names - think Coke, Pepsi, GE, JnJ, Merck, Pfizer, Colgate, P&G, Nestle, ExxonMobil, Chevron and the list can go on and on. Some have assets exceeding your number and are fabulously wealthy though you wouldn't know it - they truly are the Millionaire Next Door. The value of their dividends annually exceeds the overall purchase totals. They truly are buy and hold investors. Some of them have a lot less than your number above and still reap dividends that allow them a very comfortable retirement with plenty left over. So it is possible, you just need to have the intestinal fortitude to stay the course you've chosen.

Characteristics of a successful dividend investment strategy:
1) Own companies whose products are essential
2) A steady growing stream of earnings usually translates into a steady increasing stream of dividends
3) Low debt - don't buy overleveraged black boxes (think financials or GE back in 2000)
4) Don't be overly dependend on any one holding to provide more than 1-2% of overall income stream

[amfox1]

Maybe this paper from Vanguard will have information that you will find useful.

https://institutional.vanguard.com/VGAp ... etvsTotInc

While the paper is useful (and I agree with its conclusion recommending the total-return approach over the income-only approach), I note that the foundation for the conclusions in the paper are based on an environment where (as of 6/30/07) a 100% bond portfolio yielded approx 3.4 times the amount of a 100% stock portfolio (5.67% vs. 1.67%).

Based on the same indices (as of 3/31/12), a 100% bond portfolio yielded approx 1.8 times the amount of a 100% stock portfolio (3.10% vs. 1.74%).

Query how this fact, if it continues for some time, impacts on the conclusion reached in the paper.

[Leesbro63]

I think Rick Ferri has a real world solution that's the best: Live off dividends and interest from a diversified portfolio that has an asset allocation that is right for you. In the real world today this would be about a 3-4% cash flow for a 60/40 to 40/60 portfolio. If you need occaisonal additional money (new car, trip), the do it as your withdrawal rate will still be under 4% (assuming selling stuff to fund big-ticket purchases is very occasional).

[happymob]

If retiring on yield, why dividends rather than bonds (possibly munis depending on tax bracket)? If you need the growth that equities provide, you probably aren't really ready to retire purely based on dividend yield anyway as you are taking on risk - most big banks cut their dividends when they accepting TARP money. GE cut their dividend. Several big utilities cut their dividends.

Not that bonds are completely safe by any stretch, but if I had enough money to retire and live off of incomes from investments, direct ownership of bonds seems like a safer choice than direct ownership of dividend stocks.

[hq38sq43]

Some of the essays in Professor Lawrence Cunningham's Essays of Warren Buffett are very illuminating on dividends: why paid or not paid and when they should be paid or withheld. Particularly interesting is the discussion at pp. 131-135.

In a nutshell, "Unrestricted earnings [earnings not required to maintain unit volume of sales, long-term competitive position, and/or financial strength] should be retained {not paid out as dividends] only when there is a reasonable prospect--backed preferably by historical evidence, or, when appropriate, by a thoughtful analysis of the future--that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to or above, those generally available to investors." p.132

As Professor Cunningham well states in his introduction of the essays, "readers of Warren Buffett's letters to the shareholders of Berkshire Hathaway Inc. [the essays] have gained an enormously valuable informal education." They are also entertained from time to time by Buffett's wry humor.

[3CT_Paddler]

Don't be ridiculous - I have numerous family relatives who before the word "mutual fund" became popular, created their own by owning many different up and coming businesses that today are household global powerhouse names - think Coke, Pepsi, GE, JnJ, Merck, Pfizer, Colgate, P&G, Nestle, ExxonMobil, Chevron and the list can go on and on.
...
3) Low debt - don't buy overleveraged black boxes (think financials or GE back in 2000)

In hindsight its easy to see which companies are destined for future growth and which are not (and one of the company names you mentioned is on your do not pick list as well as your up and coming list). The other reality is that you are sticking to companies that likely have limited growth prospects by picking only dividend paying companies (otherwise they would be using that capital to grow the business). Nothing wrong with those types of companies, but why not just own the entire market and have a reasonable withdrawal rate (2-4%)?

[Grt2bOutdoors]

Don't be ridiculous - I have numerous family relatives who before the word "mutual fund" became popular, created their own by owning many different up and coming businesses that today are household global powerhouse names - think Coke, Pepsi, GE, JnJ, Merck, Pfizer, Colgate, P&G, Nestle, ExxonMobil, Chevron and the list can go on and on.
...
3) Low debt - don't buy overleveraged black boxes (think financials or GE back in 2000)

In hindsight its easy to see which companies are destined for future growth and which are not (and one of the company names you mentioned is on your do not pick list as well as your up and coming list). The other reality is that you are sticking to companies that likely have limited growth prospects by picking only dividend paying companies (otherwise they would be using that capital to grow the business). Nothing wrong with those types of companies, but why not just own the entire market and have a reasonable withdrawal rate (2-4%)?

If you bought GE in 1956, are you ahead or below cost? What multiple of purchase price are you receiving in cash dividends accounting for the dividend cut? In 1956, most individual investors did not have the benefit of a Vanguard mutual fund company - if you wanted a mutual fund you needed to be an instituion or pension fund with hundreds of millions in assets to get anyone to do business with you. Hence, the individual investor was really on their own. The people I speak of don't cash out or sell shares, they just take a portion of annual cash dividend income to meet living needs, everything else after taxes is reinvested according to their asset allocation.

I don't advocate the average working guy today try and emulate this - it can be done, but you run an outsized risk of wearing egg on your face and being in the poor house if you aren't able to develop a diversified portfolio from the outset as you can by simply owning the Total Stock Market Index or S&P 500 or any other index fund. Of course, to obtain meaninful dividends you will need to have a significant value invested. Dividends to live on don't simply appear overnight - unless you win the lottery. If you do win the lottery, you've won so why continue to play?

Fair disclosure: I do hold a portfolio of mainly large cap value equities that do pay dividends (no GE), but my holdings of index funds and other diversified investments are much larger as is my level of annual investment in them.

[3CT_Paddler]

Don't be ridiculous - I have numerous family relatives who before the word "mutual fund" became popular, created their own by owning many different up and coming businesses that today are household global powerhouse names - think Coke, Pepsi, GE, JnJ, Merck, Pfizer, Colgate, P&G, Nestle, ExxonMobil, Chevron and the list can go on and on.
...
3) Low debt - don't buy overleveraged black boxes (think financials or GE back in 2000)

In hindsight its easy to see which companies are destined for future growth and which are not (and one of the company names you mentioned is on your do not pick list as well as your up and coming list). The other reality is that you are sticking to companies that likely have limited growth prospects by picking only dividend paying companies (otherwise they would be using that capital to grow the business). Nothing wrong with those types of companies, but why not just own the entire market and have a reasonable withdrawal rate (2-4%)?

If you bought GE in 1956, are you ahead or below cost? What multiple of purchase price are you receiving in cash dividends accounting for the dividend cut? In 1956, most individual investors did not have the benefit of a Vanguard mutual fund company - if you wanted a mutual fund you needed to be an instituion or pension fund with hundreds of millions in assets to get anyone to do business with you. Hence, the individual investor was really on their own. The people I speak of don't cash out or sell shares, they just take a portion of annual cash dividend income to meet living needs, everything else after taxes is reinvested according to their asset allocation.

I don't advocate the average working guy today try and emulate this - it can be done, but you run an outsized risk of wearing egg on your face and being in the poor house if you aren't able to develop a diversified portfolio from the outset as you can by simply owning the Total Stock Market Index or S&P 500 or any other index fund. Of course, to obtain meaninful dividends you will need to have a significant value invested. Dividends to live on don't simply appear overnight - unless you win the lottery. If you do win the lottery, you've won so why continue to play?

Fair disclosure: I do hold a portfolio of mainly large cap value equities that do pay dividends (no GE), but my holdings of index funds and other diversified investments are much larger as is my level of annual investment in them.

Just to be clear, I am not saying it is an awful strategy, only that you are likely taking on more risk. In hindsight I am sure there were a fair number of companies that looked like the next GE, only to have a poor track record. And then there is determining when a "good" company may have lost its way (GE today?). That is difficult (or impossible) to reliably determine.

[Grt2bOutdoors]

Don't be ridiculous - I have numerous family relatives who before the word "mutual fund" became popular, created their own by owning many different up and coming businesses that today are household global powerhouse names - think Coke, Pepsi, GE, JnJ, Merck, Pfizer, Colgate, P&G, Nestle, ExxonMobil, Chevron and the list can go on and on.
...
3) Low debt - don't buy overleveraged black boxes (think financials or GE back in 2000)

In hindsight its easy to see which companies are destined for future growth and which are not (and one of the company names you mentioned is on your do not pick list as well as your up and coming list). The other reality is that you are sticking to companies that likely have limited growth prospects by picking only dividend paying companies (otherwise they would be using that capital to grow the business). Nothing wrong with those types of companies, but why not just own the entire market and have a reasonable withdrawal rate (2-4%)?

If you bought GE in 1956, are you ahead or below cost? What multiple of purchase price are you receiving in cash dividends accounting for the dividend cut? In 1956, most individual investors did not have the benefit of a Vanguard mutual fund company - if you wanted a mutual fund you needed to be an instituion or pension fund with hundreds of millions in assets to get anyone to do business with you. Hence, the individual investor was really on their own. The people I speak of don't cash out or sell shares, they just take a portion of annual cash dividend income to meet living needs, everything else after taxes is reinvested according to their asset allocation.

I don't advocate the average working guy today try and emulate this - it can be done, but you run an outsized risk of wearing egg on your face and being in the poor house if you aren't able to develop a diversified portfolio from the outset as you can by simply owning the Total Stock Market Index or S&P 500 or any other index fund. Of course, to obtain meaninful dividends you will need to have a significant value invested. Dividends to live on don't simply appear overnight - unless you win the lottery. If you do win the lottery, you've won so why continue to play?

Fair disclosure: I do hold a portfolio of mainly large cap value equities that do pay dividends (no GE), but my holdings of index funds and other diversified investments are much larger as is my level of annual investment in them.

Just to be clear, I am not saying it is an awful strategy, only that you are likely taking on more risk. In hindsight I am sure there were a fair number of companies that looked like the next GE, only to have a poor track record. And then there is determining when a "good" company may have lost its way (GE today?). That is difficult (or impossible) to reliably determine.

Agree on all points. For every proverbial grand-slam, these relatives also had many that were only singles or complete strike-outs.

[KyleAAA]

Seems like a perfectly viable strategy to me so long as you can get the dividend income you need while still remaining diversified i.e. not reaching for yield by piling into financials, REITs, and utilities. If a total stock market and total international stock market fund will yield more than enough income for your needs, I'd say it's quite doable. Of course, I wouldn't recommend going into retirement without any bonds unless your net worth was in the hundreds of millions of dollars, but to each his own.

[3CT_Paddler]

The other dividend related thread with Nisiprius' comments has some valuable insights on why dividend stocks were popular in the 50's and 60's and why they are popular now (which I didn't realize the former)...

viewtopic.php?f=1&t=95186&newpost=1372408#p1372092

In Ye Olde Days, because the commissions were huge by today's standards--this was impractical, and basically if you wanted to withdraw at a faster rate and grow at a slower rate, you looked for "income" stocks that paid high dividends; if you want to withdraw slowly or not at all and grow quickly, you looked for "growth" stocks that paid low or no dividends.

Today, "dividend paying stocks" are just a stock-picking theory. People who like them swear by them, as do devotees of many other stock-picking theories. "Dividend stocks" have become the flavor-of-the-month lately because bond interest rates have dropped to the point where people are trying to kid themselves that they can use stocks instead of bonds, and because the result of dividing stock dividend payments by the price of the stock can now be a higher number than the interest rate on a bond. Of course, the interest rate on a bond is a contract, whereas nothing about stock dividends is promised.

A couple of really great posts from Nisiprius on the other thread and worth anyone's time who is considering taking a dividend income approach.

[Turbo7]

You can retire on the dividends alone. By simple calulations the numbers are estimated in the needs of around $30million so you will not have to need bonds in the portfolio and you can cover a high 50% (guestimated summation future tax rate, state, city, federal, property taxes) tax rate, inflation adjustment of half the dividends to be reinvested and a modest inflation number of 3.4% with a $25k cushion yielding about $125,000 after those expenses listed. This gives you inflation hedge with stock and a modest income with a couple cushions built in for growth in poor economic climates.

[Booper]

If retiring on yield, why dividends rather than bonds (possibly munis depending on tax bracket)? If you need the growth that equities provide, you probably aren't really ready to retire purely based on dividend yield anyway as you are taking on risk - most big banks cut their dividends when they accepting TARP money. GE cut their dividend. Several big utilities cut their dividends.

Not that bonds are completely safe by any stretch, but if I had enough money to retire and live off of incomes from investments, direct ownership of bonds seems like a safer choice than direct ownership of dividend stocks.

The reason that I am exploring this strategy is this: the principal from bonds remains constant and is therefore expected to not keep up with inflation. It is currently unclear to me how the stocks, with dividends not reinvested, have historically fared as an inflation hedge.

[Booper]

The other dividend related thread with Nisiprius' comments has some valuable insights on why dividend stocks were popular in the 50's and 60's and why they are popular now (which I didn't realize the former)...

viewtopic.php?f=1&t=95186&newpost=1372408#p1372092

In Ye Olde Days, because the commissions were huge by today's standards--this was impractical, and basically if you wanted to withdraw at a faster rate and grow at a slower rate, you looked for "income" stocks that paid high dividends; if you want to withdraw slowly or not at all and grow quickly, you looked for "growth" stocks that paid low or no dividends.

Today, "dividend paying stocks" are just a stock-picking theory. People who like them swear by them, as do devotees of many other stock-picking theories. "Dividend stocks" have become the flavor-of-the-month lately because bond interest rates have dropped to the point where people are trying to kid themselves that they can use stocks instead of bonds, and because the result of dividing stock dividend payments by the price of the stock can now be a higher number than the interest rate on a bond. Of course, the interest rate on a bond is a contract, whereas nothing about stock dividends is promised.

A couple of really great posts from Nisiprius on the other thread and worth anyone's time who is considering taking a dividend income approach.

Yes, nisiprius's posts explicitly comparing share price with and without dividends reinvested is exactly what I was looking for.

[abuss368]

I have seen this happen with a simple portfolio of:

Total Stock Market Index
Total International Index
REIT Index
Global ex-US REIT Index

Total Bond Market Index / Intermediate Tax Exempt Bond
Inflation TIPS Fund

This motivates me to also make it a reality.

[hq38sq43]

Some of the essays in Professor Lawrence Cunningham's Essays of Warren Buffett are very illuminating on dividends: why paid or not paid and when they should be paid or withheld. Particularly interesting is the discussion at pp. 131-135.

In a nutshell, "Unrestricted earnings [earnings not required to maintain unit volume of sales, long-term competitive position, and/or financial strength] should be retained {not paid out as dividends] only when there is a reasonable prospect--backed preferably by historical evidence, or, when appropriate, by a thoughtful analysis of the future--that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to or above, those generally available to investors." p.132

As Professor Cunningham well states in his introduction of the essays, "readers of Warren Buffett's letters to the shareholders of Berkshire Hathaway Inc. [the essays] have gained an enormously valuable informal education." They are also entertained from time to time by Buffett's wry humor.

There is also much useful discussion of dividends in Andrew Tobias's Only Investment Guide You'll Ever Need. Eg., "There are companies that have been able to reinvest . . . accumulated unpaid dividends at returns well above 15% a year. Others have earned less than half as much. And then there are those that have diddled it away altogether. (Does the name Eastern Airlines ring a bell? Pan Am? Braniff?" p.149

[Stryker]

Personally I'd rather re-invest my own dividends into my own portfolio rather than sit back and watch some egotistical management squander it all away in some ill-conceived venture.

[hq38sq43]

Personally I'd rather re-invest my own dividends into my own portfolio rather than sit back and watch some egotistical management squander it all away in some ill-conceived venture.

As Charlie Munger said in another context, Damn Right!

[Grt2bOutdoors]

Some of the essays in Professor Lawrence Cunningham's Essays of Warren Buffett are very illuminating on dividends: why paid or not paid and when they should be paid or withheld. Particularly interesting is the discussion at pp. 131-135.

In a nutshell, "Unrestricted earnings [earnings not required to maintain unit volume of sales, long-term competitive position, and/or financial strength] should be retained {not paid out as dividends] only when there is a reasonable prospect--backed preferably by historical evidence, or, when appropriate, by a thoughtful analysis of the future--that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to or above, those generally available to investors." p.132

As Professor Cunningham well states in his introduction of the essays, "readers of Warren Buffett's letters to the shareholders of Berkshire Hathaway Inc. [the essays] have gained an enormously valuable informal education." They are also entertained from time to time by Buffett's wry humor.

There is also much useful discussion of dividends in Andrew Tobias's Only Investment Guide You'll Ever Need. Eg., "There are companies that have been able to reinvest . . . accumulated unpaid dividends at returns well above 15% a year. Others have earned less than half as much. And then there are those that have diddled it away altogether. (Does the name Eastern Airlines ring a bell? Pan Am? Braniff?" p.149

I see you are a big fan of Frank Lorenzo.

[fmhealth]

Boop, I'm 66 retired at 48. I've been living primarily off div.since then. So yes it can be done.

BTW, I've been a GE investor for 61 years. My mom was the secretary to the President when I was 5 & started buying the stock way back when. Overall it's probably been my worst performer. I hold on now since I like the Div. & intend to leave it for my children (a very bad reason for holding any stock).

Virtually every equity in my diverse portfolio pulls their own weight via selling covered calls. The premiums I generate simply pay for the extras that my family enjoys. Easy to do, easy to monitor & it's actually enjoyable. When stocks get called-away I simply replace them with others & repeat the process.

Investing can be as simple or as difficult as we choose. Simplicity fits me well. Best of luck & good health!

[abuss368]

Glad to hear it.

GE? What ever happened since Jack Welch left? I read his first book "Straight From The Gut" and have his second book "Winning" to read. Of course, he was another example of CEO greed when he left with his "retirement" package.