Dividend Buffer

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skime
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Dividend Buffer

Post by skime » Fri Jun 08, 2018 10:06 am

There are a number of opinions as to whether living on dividends/interest is a good idea or not. For those that are comfortable with living on dividends/interest, what is a margin of safety between annual expenses and annual dividends/interest that you are comfortable with?

For instance double the amount of expenses or 40% more than expenses, etc.

JakeyLee
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Re: Dividend Buffer

Post by JakeyLee » Fri Jun 08, 2018 10:16 am

I can't answer your "margin of safety" question, as it's a subjective question based on countless factors that varies from person to person. But "living off dividends"? I always thought this was another way of saying you've decided on a 2% withdraw rate. No need to over complicate the question. The bad news, should you decide on such a number... You're probably going to need a much bigger pile of assets before you retire (possibly extending employment for a decade or more). I'm talking at least 50x expenses. The good news?? Your investments should have a 100 % chance of outliving you. This should make your heirs happy. Nothing wrong that.

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Re: Dividend Buffer

Post by z3r0c00l » Fri Jun 08, 2018 10:27 am

Dividends have fallen considerably in the last few decades, due to some extent on tax policy that makes buybacks more attractive. SP500 dividend yield is actually below the rate of inflation. This withdrawal rate is so conservative that even a conservative like myself thinks you will deprive yourself of happy and fulfilling experiences and more years of freedom after retirement. I wouldn't agree with the supposition that there are equal arguments on both sides of this question; one side can be right.

NoblesvilleIN
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Re: Dividend Buffer

Post by NoblesvilleIN » Fri Jun 08, 2018 10:47 am

My margin of safety is a bit different. I have the equivalent of 2 years worth of dividends invested in 8 CD's. One CD matures each quarter that represents 1/4 of my estimated annual dividend. My dividends come from about 40 individual stocks that I have purchased over the years, not from index funds. My thought with the CD's is that if several of the companies cut or eliminate their dividend due to a major recession, I can use the CD's to get by on for at least 2 years (more likely several years as I doubt that all would eliminate their dividends). If the money is not needed to replace dividends, then I will roll it into another 2 year CD. Note: I have not retired yet. This is in preparation for retiring later this year. My yield has averaged 3.33% over the last 4 years (2013 - 2017). This is not meant to argue whether dividends/interest is the way to go, only to show what I am planning on using as my "plan B".

dbr
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Re: Dividend Buffer

Post by dbr » Fri Jun 08, 2018 11:00 am

Rather arbitarily I like having a 25% contingency around expenses, so, for example, if half of one's income is from pensions and SS and the other half is from dividends, then one would need a buffer of an additional 50% on the dividend income to cover a 25% overall contingency. Other situations would use different arithmetic. Repeat that 25% is quite arbitrary, but my experience so far is that has been a good number to use to stay out of trouble.

Naturally my own idea is that "living off dividends" is nonsense, but that is not what you wanted to discuss.

AlohaJoe
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Re: Dividend Buffer

Post by AlohaJoe » Fri Jun 08, 2018 11:03 am

skime wrote:
Fri Jun 08, 2018 10:06 am
There are a number of opinions as to whether living on dividends/interest is a good idea or not. For those that are comfortable with living on dividends/interest, what is a margin of safety between annual expenses and annual dividends/interest that you are comfortable with?

For instance double the amount of expenses or 40% more than expenses, etc.
In Japan the dividend yield was as low as 1.08% for long periods of time. There is no reason US equities couldn't drop to same level. So if you are going to rely solely on dividends & interest for decades then your expenses, including tax, have to be under 1.08% of your total portfolio to be safe, otherwise you'll be eating into principal. And if you worry that qualified dividend rates go away -- remember they are only, what?, 15 years old so they aren't exactly a law of nature -- then you want a 10-15% buffer just for the tax drag.

livesoft
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Re: Dividend Buffer

Post by livesoft » Fri Jun 08, 2018 11:06 am

I think there is nothing wrong with living on dividends and interest. It just means that one has to have a larger portfolio than they otherwise would if they were a total return investor. Since the portfolio is larger, that then means it already has a margin built in and probably nothing else needs to be done.
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dbr
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Re: Dividend Buffer

Post by dbr » Fri Jun 08, 2018 11:08 am

livesoft wrote:
Fri Jun 08, 2018 11:06 am
I think there is nothing wrong with living on dividends and interest. It just means that one has to have a larger portfolio than they otherwise would if they were a total return investor. Since the portfolio is larger, that then means it already has a margin built in and probably nothing else needs to be done.
But the margin means selling shares to make up the difference and since that was the mortal sin, I don't see your reassurance as being helpful.

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Svensk Anga
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Re: Dividend Buffer

Post by Svensk Anga » Fri Jun 08, 2018 11:43 am

Bill Bernstein investigated this and reports in "Ages of The investor" that the worst case historically was that the purchasing power of dividends fell by half during the Great Depression. Nominal dividends fell by more than half, but deflation lifted the purchasing power of what remained. One can easily check this out for one's self using the Excel data file used for CAPE calculation at Prof Robert Shillers site. While there, it would be good to see how quickly dividends rebound after a recession.

There are some issues with relying on the historical record. For one, companies return more cash via share buybacks rather than dividends now. My guess is that in a cash crunch, the buybacks would be cut first, so the dividends might now be safer. On the other hand, if the buyback trend accelerates, there could eventually be very little dividend to worry about.

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Re: Dividend Buffer

Post by engineerartist » Fri Jun 08, 2018 11:46 am

I am in fact "living off dividends" in retirement, but I had not considered a margin of safety as part of my strategy. Thus the calculation of my margin of safety is the percentage with which my income exceeds my expenses (currently ~70%) rather than based on the market value of my portfolios.

The bogleheads who disagree with (and often disparage) this concept cite the current SP500 dividend yield to support their arguments. This would certainly be useful for someone considering investing in a dividend-focused fund today. I have no issue with anyone's personal investment/retirement plans - to each his own.

When I retired in 2014, I rolled my 401k over into an IRA and converted the mutual funds into a carefully selected diverse group of stocks with 15 or more years of continuous dividend growth - and Yield on Cost (YoC) greater than 3.5%. This mirrored what I had already done with our taxable portfolio.

While the Yield to Market (YtM) on my IRA is now 5.1%, the YoC is 5.4%. By comparison, the YtM on my (older) Taxable portfolio is now 3.0%, but the YoC is 6.8%. Thanks to Social Security, the dividend output allows me to take my RMD without selling anything and reinvest the excess from both portfolios into more dividend-producing stocks.

My perspective is that I have created my own "Dividend Growth Funds" and since my transaction fees are minuscule, the expense ratios (0.02% in IRA, 0.002% in Taxable) are well below what I paid for mutual funds previously (0.28% for VWNAX, 0.67% for FCNTX).
Retired - dividend growth investor

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Earl Lemongrab
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Re: Dividend Buffer

Post by Earl Lemongrab » Fri Jun 08, 2018 12:49 pm

As mentioned, a lot depends on what the base is. I'm not living on dividends early in retirement. That's because I have a (non-COLA) pension that covers my needs for now. In fact, I doubt that I'm spending all of that. It so happens that the pretax value of the pension is about 2% of my investment portfolio.

Now, I don't budget. So I'm not "missing out" on anything because I haven't identified anything that I want to spend money on that I'm not currently. I don't enjoy travel, for instance.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

emlowe
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Re: Dividend Buffer

Post by emlowe » Fri Jun 08, 2018 12:56 pm

Most bogleheads likely aren't fans of stock picking, which is what engineerartist is doing. Sure you can pick great stocks. Most people are more likely to pick bad ones.

But I am curious why you did your own stock picking, and not say use one of the numerous dividend ETFs, such as :

iShares Select Dividend (DVY) (0.39)
Vanguard High Dividend Yield ETF (VYM) (0.08)
SPDR S&P International Dividend ETF (DWX) (0.45)
Invesco PowerShares High Yield Dividend Achievers (PEY) (0.54)

For a few examples.

-Earle

marcopolo
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Re: Dividend Buffer

Post by marcopolo » Fri Jun 08, 2018 1:10 pm

skime wrote:
Fri Jun 08, 2018 10:06 am
There are a number of opinions as to whether living on dividends/interest is a good idea or not. For those that are comfortable with living on dividends/interest, what is a margin of safety between annual expenses and annual dividends/interest that you are comfortable with?

For instance double the amount of expenses or 40% more than expenses, etc.
I think we may have a new benchmark in the perpetual race to the lowest withdrawal rate.

"Living on Dividends" equates to roughly a 2% withdrawal rate, which is the way it should be thought of. Adding a margin to double the amount relative to expenses would make the withdrawal rate around 1%.

IMHO, "Living on Dividends" is already very conservative. There is no need to add an additional buffer.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Tyler Aspect
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Re: Dividend Buffer

Post by Tyler Aspect » Fri Jun 08, 2018 7:42 pm

You can think equity dividend as a withdrawal that the fund makes by itself. There is obvious no magical protection deriving from withdrawals. If you take the money out of the fund then it is gone; if you reinvest it the situation is a wash.
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JoMoney
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Re: Dividend Buffer

Post by JoMoney » Fri Jun 08, 2018 10:09 pm

emlowe wrote:
Fri Jun 08, 2018 12:56 pm
Most bogleheads likely aren't fans of stock picking, which is what engineerartist is doing. Sure you can pick great stocks. Most people are more likely to pick bad ones....
A minor quibble, but I don't believe it's the case that "most people are more likely to pick bad ones", I don't think they're likely to pick good stocks either. If it was the case that people were able to largely do one or the other, there could be some sort of winning strategy formulated around it. I think people with modest sensibilities probably can filter out some of the extreme ends and find something roughly around "average", but why go through the effort, expense, and to some degree the risk that your individual bias or luck skews to something less than 'average', when you can guarantee a result that matches the weighted average. The SPIVA scorecard shows the results of active mutual funds over time relative to the index. I think it's notable, that while the broad average results of active management underperform the index there is a tight relationship between that underperformance and the expenses being charged. It's not so much that the broad average of active managers fail to beat themselves (they can't), it's that they charge hefty fees for that average performance.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

dbr
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Re: Dividend Buffer

Post by dbr » Sun Jun 10, 2018 5:49 pm

marcopolo wrote:
Fri Jun 08, 2018 1:10 pm
skime wrote:
Fri Jun 08, 2018 10:06 am
There are a number of opinions as to whether living on dividends/interest is a good idea or not. For those that are comfortable with living on dividends/interest, what is a margin of safety between annual expenses and annual dividends/interest that you are comfortable with?

For instance double the amount of expenses or 40% more than expenses, etc.
I think we may have a new benchmark in the perpetual race to the lowest withdrawal rate.

"Living on Dividends" equates to roughly a 2% withdrawal rate, which is the way it should be thought of. Adding a margin to double the amount relative to expenses would make the withdrawal rate around 1%.

IMHO, "Living on Dividends" is already very conservative. There is no need to add an additional buffer.
That depends on what dividends. Total stock market is paying about 2% right now, which would be your example. However, a person can look around and find dividend payments that are very high and do not result in sustainable withdrawals. A problem with living on dividends is that nowhere in the idea is there a clue whether or not the resulting withdrawal is too low or too high. By accident it can be about right.

skime
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Re: Dividend Buffer

Post by skime » Sun Jun 10, 2018 7:47 pm

Interesting responses. I'll set forth a guideline. Let's say for instance that the s&p 500 dividend is the one you're using exclusively for withdrawals.

What buffer would you be comfortable with having to protect from eating cat food if s&p 500 dividends were cut?

venkman
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Re: Dividend Buffer

Post by venkman » Sun Jun 10, 2018 11:25 pm

skime wrote:
Sun Jun 10, 2018 7:47 pm
Interesting responses. I'll set forth a guideline. Let's say for instance that the s&p 500 dividend is the one you're using exclusively for withdrawals.

What buffer would you be comfortable with having to protect from eating cat food if s&p 500 dividends were cut?
I did a sort of back test for this situation for a different thread a month or so ago (though I think I used total market instead of S&P 500).

I assumed the starting balance of the portfolio times the SEC yield at the given start point would exactly equal the income requirements, and that those requirements would be adjusted yearly for inflation. Any dividends received over the required amount were held in a separate account to cover any shortfalls that might occur in the future.

Bottom line is that it worked pretty well. If you started at the wrong time, you could have had some early shortfalls, but those could have been prevented by having a cash buffer equal to less than 1% of the starting portfolio value. Usually, whenever the yield started going down, it was because the price had been going up; so you were getting a smaller slice of a bigger pie, and your income didn't drop.

not4me
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Re: Dividend Buffer

Post by not4me » Mon Jun 11, 2018 1:08 pm

venkman wrote:
Sun Jun 10, 2018 11:25 pm

Usually, whenever the yield started going down, it was because the price had been going up; so you were getting a smaller slice of a bigger pie, and your income didn't drop.
I'm curious about this backtest -- specifically in subsequent years, were you looking at the dollars distributed or using the yield? I see many that reference all the cuts to dividends, but the discussion is around the yield fluctuating & not the $s. I did a quick eyeball look a few months ago & didn't see decreases since 2008 in $s. I was mainly trying to see the size & frequency of cuts & may have missed one. Wasn't looking to compare to how it stood up to inflation (which I agree is appropriate). I just find it amusing that it is often mentioned that dividends "can" go down, but scarcely mention they "can" go up!

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Riprap
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Re: Dividend Buffer

Post by Riprap » Mon Jun 11, 2018 1:45 pm

z3r0c00l wrote:
Fri Jun 08, 2018 10:27 am
SP500 dividend yield is actually below the rate of inflation.
While that statement might be true, what matters is whether the rate of increase in dividends exceeds the rate of inflation. Historically speaking, it has. Though I haven't seen any studies, I would suspect the dividend growth rate is highly correlated with earnings growth rates.
engineerartist wrote:
Fri Jun 08, 2018 11:46 am
- and Yield on Cost (YoC) greater than 3.5%. This mirrored what I had already done with our taxable portfolio.

While the Yield to Market (YtM) on my IRA is now 5.1%, the YoC is 5.4%. By comparison, the YtM on my (older) Taxable portfolio is now 3.0%, but the YoC is 6.8%. Thanks to Social Security, the dividend output allows me to take my RMD without selling anything and reinvest the excess from both portfolios into more dividend-producing stocks.
I read about YoC mainly written by dividend investors. What usefulness is there to that metric? Once you've purchased shares in stock, ETFs, mutual funds etc., it seems to me it's a sunk cost. It's like comparing today's income from a farm to it's purchase price 40 or 50 years ago. How is it meaningful?

That aside, I too like the idea of living off dividends regardless of whether it's optimal or not. I know that's Boglehead heresy. :beer

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Re: Dividend Buffer

Post by pkcrafter » Mon Jun 11, 2018 2:46 pm

What is a divided? If a stock is worth $100 and the company gives you a dividend of $2, the stock is now worth $98. Is that a free deal? The biggest problem with taking dividends is you don't get to choose when to make a withdrawal. What happens to that dividend if you don't take it? It is still given to you in the form of buying additional shares, so over time it has a strong compounding effect, and you can make withdrawals when the time is optimal.


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Re: Dividend Buffer

Post by z3r0c00l » Mon Jun 11, 2018 5:49 pm

Riprap wrote:
Mon Jun 11, 2018 1:45 pm
z3r0c00l wrote:
Fri Jun 08, 2018 10:27 am
SP500 dividend yield is actually below the rate of inflation.
While that statement might be true, what matters is whether the rate of increase in dividends exceeds the rate of inflation. Historically speaking, it has. Though I haven't seen any studies, I would suspect the dividend growth rate is highly correlated with earnings growth rates.
I suspect history won't repeat itself because of the tax benefits of stock buybacks and the increasing prominence of tech companies that only pay a pittance in dividends, and only at the end of a sword, e.g. Apple.

Jordan4FI
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Re: Dividend Buffer

Post by Jordan4FI » Mon Jun 11, 2018 6:05 pm

Ill be living in Thailand and only really needing 20-26K a year, but I am building my portfolio to give me 30K+ at 4%)..That will help my very small tax burden, and allow for growth and have some extra $ for fun and travel. So when growth is real good, 10% or more, I will not need to use any of that and will just compound for the next year..

I want to try to make my survival needs covered by dividend payments..

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Riprap
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Re: Dividend Buffer

Post by Riprap » Mon Jun 11, 2018 6:41 pm

z3r0c00l wrote:
Mon Jun 11, 2018 5:49 pm
I suspect history won't repeat itself because of the tax benefits of stock buybacks and the increasing prominence of tech companies that only pay a pittance in dividends, and only at the end of a sword, e.g. Apple.
Well then, let's just look at Apple. I will go back to Aug 2014 when they paid $.47/share. In May they paid $.73/share. I'm not going back further because I don't have time to adjust for stock splits. But...in that time span of 3.75 years, the compounded growth rate of their dividend is 16.38% which exceeds inflation substantially. Even at the end of a sword, they have a healthy dividend growth rate.

Perhaps you're comparing the current yield to inflation, which is meaningless.

I'm not saying Apple is or isn't a decent dividend stock either, just that they've had a very high dividend growth rate. Maybe it will continue, maybe it won't.

venkman
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Re: Dividend Buffer

Post by venkman » Tue Jun 12, 2018 1:21 am

not4me wrote:
Mon Jun 11, 2018 1:08 pm
venkman wrote:
Sun Jun 10, 2018 11:25 pm

Usually, whenever the yield started going down, it was because the price had been going up; so you were getting a smaller slice of a bigger pie, and your income didn't drop.
I'm curious about this backtest -- specifically in subsequent years, were you looking at the dollars distributed or using the yield? I see many that reference all the cuts to dividends, but the discussion is around the yield fluctuating & not the $s. I did a quick eyeball look a few months ago & didn't see decreases since 2008 in $s. I was mainly trying to see the size & frequency of cuts & may have missed one. Wasn't looking to compare to how it stood up to inflation (which I agree is appropriate). I just find it amusing that it is often mentioned that dividends "can" go down, but scarcely mention they "can" go up!
I don't think I kept the spreadsheet, but I was using Vanguard's numbers for the percentage of income return of the fund in each year.

(https://investor.vanguard.com/mutual-fu ... ve-returns)


Ben Carlson has a good article about dividend growth. Since the 1950's, the dividend growth rate has outpaced inflation in every decade expect the 70's. http://awealthofcommonsense.com/2016/01/getting-to-4-2/

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