Relationship between Living Off of Dividends and Maximizing Yield

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delrinson
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Relationship between Living Off of Dividends and Maximizing Yield

Post by delrinson » Thu May 31, 2018 5:59 am

I wonder if you fellow Bogleheads could help clarify something for me...

I understand that, for any investment, the main consideration is TOTAL RETURN. I further understand that there's nothing magical or even inherently desirable about dividends...whether earnings are entirely retained or to some degree distributed is neither here nor there. Indeed, the former is more tax efficient.

HOWEVER, we all own assets that produce dividends...it's simply a fact of our investing lives. When I retire in eight years or so, I'm assuming that my dividends from all sources will constitute my first "layer" of income. The rest will come from assets I sell and, at age 70, social security.

Given the above set of assumptions, cannot a case be made for tilting toward higher yield at least in bond portion of my portfolio? In other words, if I need to hold bonds, and if any broadly diversified bond portfolio will fulfill the purpose of having bonds in the first place (an assumption I make but not all would make), what's wrong with chasing yield to some degree? With this in mind I have a substantial tilt toward intermediate corporate, representing about 25% of my fixed income portfolio.

An underlying assumption of my inquiry is that there's no point reinvesting dividends during retirement...that I should just take them as income.

Thanks.

AlohaJoe
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by AlohaJoe » Thu May 31, 2018 6:10 am

delrinson wrote:
Thu May 31, 2018 5:59 am
Given the above set of assumptions, cannot a case be made for tilting toward higher yield at least in bond portion of my portfolio?
You haven't made any real case. Just because dividends are the "first layer" doesn't mean you should tilt towards them. The one has nothing to do with the other. Why does it matter if your "first layer" is $1,000 a year instead of $1,200 a year? What difference does it make to anything?
what's wrong with chasing yield to some degree?
Because it adds risk and you can possibly get the same return with less risk elsewhere.

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Tamarind
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by Tamarind » Thu May 31, 2018 6:16 am

Yes, that is your underlying assumption. But I don't think it's a good one. Why would you let the funds determine where your income is coming from rather than choosing it yourself?

I would think when tailoring retirement income I'd want to control:

1) whether it came from a taxable, tax-deferred, or tax-free account

2) whether it came from a bond or stock fund

3) if taxable, whether it came from a holding with a gain or a loss

4) how much I take and when

The only account I might be inclined not to have automatically reinvest would be a taxable brokerage account, since I'll owe taxes on them even if I reinvest. But I would also be investing to reduce dividends from that account precisely to aid in tax planning.

delrinson
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by delrinson » Thu May 31, 2018 6:38 am

Of course I'm happy to have a bit of a corporate tilt anyway...in agreement with Mr. Bogle.

livesoft
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by livesoft » Thu May 31, 2018 6:55 am

People do many things from a behavioral standpoint or in other words they play mental games. It just the way humans are.

It seems that you would not care if your corporate bond fund had a drop in NAV at all as long as the monthly dividend didn't drop. That's basically what you wrote. In other words, you would not mind losing money as long as the dividends from the bond fund kept rolling in. There's really nothing wrong with that.
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delrinson
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by delrinson » Thu May 31, 2018 6:59 am

livesoft wrote:
Thu May 31, 2018 6:55 am
People do many things from a behavioral standpoint or in other words they play mental games. It just the way humans are.

It seems that you would not care if your corporate bond fund had a drop in NAV at all as long as the monthly dividend didn't drop. That's basically what you wrote. In other words, you would not mind losing money as long as the dividends from the bond fund kept rolling in. There's really nothing wrong with that.
That's correct...wouldn't bother me one bit...especially since the majority of my fixed income holdings wouldn't have the same degree of risk.

I think one dimension of my "mental game" is that, for whatever reasons, I have an aversion to low yields.

livesoft
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by livesoft » Thu May 31, 2018 7:07 am

Here's a mental game: You can have bond fund dividends go into a money market fund. You will see the MMfund getting money every month. If you want the MMfund to get even more money every month (i.e. more effective yield), then set up automatic sales/withdrawals from the bund fund every month, too. You just wrote that it wouldn't bother you one bit if your bond fund total value was decreasing, right?
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Dandy
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by Dandy » Thu May 31, 2018 7:28 am

My understanding is that you are looking for higher fixed income dividends vs stock dividends. If that is true and you are looking for those higher dividends in a taxable account, the major concerns are taxes and reaching for yields can tempt you to buy riskier assets. Risks might be in default or going longer term and experiencing asset declines due to rising rates/inflation. Even if there is no default you might tie up assets at one rate and have to take a loss to move up to a higher rate or hold on and experience buyer's regret.

That being said there are often mild opportunities to chase rates a bit but not to a large extent. Bank products don't seem to have the same market type efficiency as bonds. i.e. some banks offer a 5 year CD at 1% others at 3% for basically the same product (some differences such as early withdrawal penalty, minimum purchase etc).

Vanguard is offering a 5 year CD at 3.25% (make sure you understand the differences between direct bank CDs and brokerage CDs). The point is you can probably shop around a bit and get a difference in yields for similar fixed income products with similar risks. When you go to bond funds that is much harder to do since the bond market is much more efficient. You can get higher yield mostly by taking more risk of default and/or interest rate/inflation risk. The obviously, the fund's expense ratio can make a meaningful difference.

dbr
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by dbr » Thu May 31, 2018 7:35 am

delrinson wrote:
Thu May 31, 2018 5:59 am
tax efficient.

HOWEVER, we all own assets that produce dividends...it's simply a fact of our investing lives. When I retire in eight years or so, I'm assuming that my dividends from all sources will constitute my first "layer" of income. The rest will come from assets I sell and, at age 70, social security.

Dividends are NOT the first "layer" of income. That is a nonsensical idea from the point of view of managing your investments. For the purpose of withdrawing money from a portfolio there is no point whatsoever in distinguishing cash for withdrawal raised by depositing a dividend check in a settlement account (or otherwise having it distributed to you somehow) from raising cash by selling portions of some asset or another.


An underlying assumption of my inquiry is that there's no point reinvesting dividends during retirement...that I should just take them as income.

In a taxable account it is perfectly reasonable to withdraw dividends as they occur both as convenient money management mechanics and for a possible slight tax advantage. In tax deferred accounts there is no special reason why it would be helpful to immediately withdraw dividends and not reinvest them. There are probably more useful ways to manage RMDs and the like. If a person really must I guess one could call that the first "layer" of income. My vote for first layer of income would probably be Social Security, any pension or annuity payments received, and then any other miscellaneous non-investment income.

Thanks.

dbr
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by dbr » Thu May 31, 2018 7:41 am

delrinson wrote:
Thu May 31, 2018 6:59 am


I think one dimension of my "mental game" is that, for whatever reasons, I have an aversion to low yields.
Which is irrational and contradicts your initial statement that "I understand that, for any investment, the main consideration is TOTAL RETURN. I further understand that there's nothing magical or even inherently desirable about dividends...whether earnings are entirely retained or to some degree distributed is neither here nor there. Indeed, the former is more tax efficient."

Note that for bonds yield is essentially return, so if you want the statement to be that you have an aversion to low return that would make some sense and for some investments that would indeed end up having to do with yields. In the case of equities it is a hard case to prove that dividend yield and return are correlated by enough to affect decisions about what equities to hold. The case also has to consider relative risk, for better or for worse. Nobody is against a valid case that there is a more advantageous combination of risk and return related to yield if such a thing can be usefully established. That, however, is not what you are doing.

mikebee
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by mikebee » Thu May 31, 2018 8:08 am

I am retired and have crossed the finishing line, I take all dividends as income to spend.
The only bond fund I would consider is the Vanguard High Yield Corporate bond fund.
By the tlme you have allowed for inflation and income tax most bond funds are loosers in real terms.
If you are emotionally able to cope with the volatility go for the S&P 500. If you are sanguine about your principal changing go for the High Yield Corporate and keep it until you die.

Peter G
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by Peter G » Thu May 31, 2018 9:58 pm

what's wrong with chasing yield to some degree? With this in mind I have a substantial tilt toward intermediate corporate
If I half understand this bond thing, you get a higher yield with corporate bonds (compared to government) because some of the corporate bonds are expected to default, and you're being rewarded for taking that risk.
Three outcomes seem possible: the market assessed the corporate risk wrongly when it determined your yield, and either: fewer businesses fail than the market predicted (defaulting on their bonds, and you 'win'); or more fail than the market predicted and you 'lose'. The third is that the market assessment was correct, you get the yield you expected but built into that was that some bond issuers would default which they do and the value of your bond holding falls accordingly, which might get you back to:
I understand that, for any investment, the main consideration is TOTAL RETURN.
That suggests a smidgen more of a gamble compared with government bonds,

AlohaJoe
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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by AlohaJoe » Thu May 31, 2018 10:05 pm

livesoft wrote:
Thu May 31, 2018 7:07 am
Here's a mental game: You can have bond fund dividends go into a money market fund. You will see the MMfund getting money every month. If you want the MMfund to get even more money every month (i.e. more effective yield), then set up automatic sales/withdrawals from the bund fund every month, too. You just wrote that it wouldn't bother you one bit if your bond fund total value was decreasing, right?
As another variation on this mental game, put all your money in Vanguard's Managed Payout Fund and just pretend it is a bond fund and the monthly payments are just the yield being paid out.

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Re: Relationship between Living Off of Dividends and Maximizing Yield

Post by ChinchillaWhiplash » Thu May 31, 2018 10:15 pm

To the OP, makes sense to me. You will have more volatility in NAV, but if you only need the dividend, big deal. All types of funds can have NAV go up and down. You are only losing $s if you sell shares when it is down. If you are just collecting dividends, you technically are not losing money. You are gaining passive income. You just need to start out with enough in retirement to create enough income. You also need to make sure you have enough if you have to draw down substantially over time if the dividends dry up and don't provide what is needed. If you are well diversified, hopefully all your asset classes will not be in decline all at once.

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