The Case for Dividend Stocks in Retirement (article)

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The Case for Dividend Stocks in Retirement (article)

Postby RNJ » Sun Apr 13, 2014 9:39 pm

By none other than Jonathan Clements in the WSJ:

"It's OK to spend your income, but never, ever dip into capital. Remember that old financial commandment? It was discarded long ago as a fuddy-duddy rule that doesn't work in our low-yield world. But as I ponder retirement, focusing on dividend-paying stocks, so you don't have to dip so often into capital, looks better and better— for seven reasons."

http://online.wsj.com/news/articles/SB10001424052702304640104579487552023485062?mod=Your_Money_newsreel_2

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Re: The Case for Dividend Stocks in Retirement (article)

Postby Leeraar » Sun Apr 13, 2014 10:06 pm

Unbelievable.

Yes, Virginia, dividends are magic. They pay you money while not affecting your investments at all.

It's free money!

L.
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Re: The Case for Dividend Stocks in Retirement (article)

Postby RNJ » Sun Apr 13, 2014 10:11 pm

To be clear - I'm not an advocate of this strategy. Rather, I posted the article as the issue is one that comes up quite a bit here and JC brings a different point of view to the discussion.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby ogd » Sun Apr 13, 2014 11:19 pm

He makes one common, but bad argument:

Jonathan Clemens / WSJ wrote:Less risk. Instead of investing for dividends, investors have been encouraged in recent decades to create their own dividends by occasionally selling shares. But recall those two huge bear markets we've had over the past 14 years. If you needed to create your own dividends, you could have found yourself selling stocks at deeply depressed prices.

The problem is this: you take a dividend focused fund, look at its total return on Morningstar and what you see is returns with dividends reinvested. Meaning those stable dividends were being used to buy shares at precisely the depressed prices that he was complaining about. The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same. Which, in practice, turns out to be the case. If dividends had been an advantage, we'd see it in total returns. We don't, which means they didn't help.

The rest of the arguments are decent, but this is the only one that deals with dividend stocks explicitly. The rest apply equally to total stock market, except the one about value. In his defense, some of his audience might be much more comforted by dividends than the total return arguments and this doesn't read like a very sophisticated / theoretical article.
Last edited by ogd on Sun Apr 13, 2014 11:36 pm, edited 1 time in total.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby Sidney » Sun Apr 13, 2014 11:22 pm

In bear markets I buy stocks. I take my dividends plus what I get from selling bonds and re-balance to equity. I have never understood the "selling stocks in a down market" meme except for people who hold all equity.
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Re: The Case for Dividend Stocks in Retirement (article)

Postby midareff » Mon Apr 14, 2014 7:21 am

"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby dbr » Mon Apr 14, 2014 7:43 am

That article is probably more in the category of "not even wrong" than it is erroneous.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby Professor Emeritus » Mon Apr 14, 2014 7:52 am

The distinction between capital and income was largely created by lawyers who decided what use could be made of land by a life tenant or tenant for years.
You could grow crops on the land but could you cut trees? Trees were of course the original "growth stock" yielding no dividends until sold 50-100 years after planting.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby nisiprius » Mon Apr 14, 2014 8:01 am

The obvious bedrock point is this. In real life, if the two growth charts almost coincide, then it doesn't matter which fund you are using. In real life, when you overlay the price charts of dividend focussed funds with total market funds, they are so different that it is almost a joke plotting them on the same scale. If you overlay the growth charts they are so similar that any differences it fall in the can't-tell-for-sure, let's-argue-forever-about-it category.

Also sorts of broad claims about "less risky in a bear market" turn out to be awfully tenuous when you look at them. You can of course make a big deal about "dropped only 44% instead of 48% during a bear market," but fixed income is such a powerful and reliable lever and fiddling with flavors of stocks is not. In fact I once looked at several ETFs mentioned by name in an article that promoted them as having less downside risk in a bear market, and two of the three actually fell more than Total Stock during 2008-2009.

I've plotted Vanguard Equity-Income against Total Stock several times--using Equity-Income because it was implicitly recommended by Malkiel and Ellis as half of an alleged "bond surrogate" profile--so let me try something else.

Fidelity Strategic Dividend and Income, FSDIX, for one. And T. Rowe Price Equity Income (PRFDX), praised by Kiplinger's as one of 10 Great Mutual Funds That Deliver High Income.

The growth chart shows that it just wouldn't have made much difference which of these funds you invested in. If you extracted the same number of dollars each month from each of them--regardless of whether it was by taking what the dividends happened to pay out, or by selling shares--you'd have had about the same results. And, there was no dramatic difference in safety in 2008-2009.

Image

Yet, plot price and you see a big difference. Total Stock got most of its total return from capital appreciation, the others got it through dividends, and overall it didn't matter much.

Image

(The usual response from dividend fans is an appeal to stock-picking--"You have to pick the right ones from among the dividend stocks." But both of these funds are actively managed, so the fund managers had the opportunity to do that.)
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Re: The Case for Dividend Stocks in Retirement (article)

Postby Grt2bOutdoors » Mon Apr 14, 2014 8:06 am

I think you're comparing apples to oranges - dividend paying focused funds typically purchased large cap value equities, they may delve into the mid cap space but you're likely to find by and large those holdings don't make up more than 10% of the fund assets. Also, TRP EI holds international large cap equities as well. The biggest bang provided by VTSAX fund performance is the low er and diversity of fund holdings - small cap and blend/growth tilts not found in dividend paying equities.
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Re: The Case for Dividend Stocks in Retirement (article)

Postby Aptenodytes » Mon Apr 14, 2014 9:16 am

dbr wrote:That article is probably more in the category of "not even wrong" than it is erroneous.

I had the same reaction. I saw the headline and read through to the end, waiting to see what the argument was. There was no argument, just mindless rambling, superstitions, half-truths and factoids.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby LRonHalfelven » Mon Apr 14, 2014 9:43 am

The single worst thing: advising people to dump their bonds for stocks (point 1), then telling them they're reducing their risk (point 2).

This points up the most pernicious thing about the dividend strategy in today's low-interest-rate environment: it encourages people to take on extra risk so they can maintain a reasonable withdrawal rate in the face of this arbitrary and unnecessary restriction they've saddled themselves with.
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Re: The Case for Dividend Stocks in Retirement (article)

Postby Grt2bOutdoors » Mon Apr 14, 2014 9:51 am

I used to like Jonathan Clement's writing style, but this article if you could call it that was just pitiful. What's worse is those reading the Sunday journal are not likely to be all that savvy when it comes to asset allocation. He's banging a pretty worn out drum.
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Re: The Case for Dividend Stocks in Retirement (article)

Postby freddie » Mon Apr 14, 2014 10:01 am

If the cow is growing at 2lbs/yr and your eating 1 lb/yr, how many years will it take to consume the cow?

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby pkcrafter » Mon Apr 14, 2014 10:28 am

Taking dividends is a withdrawal of total return, but it removes the option of the investor deciding on when to make the withdrawal. For instance, you will get a withdrawal during a bear market when you should not be withdrawing from equity.

If you needed to create your own dividends, you could have found yourself selling stocks at deeply depressed prices.

Two points: You shouldn't sell in a bear market. Reinvesting dividends buys more shares that will benefit from growth.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby dr.j » Mon Apr 14, 2014 11:06 am

I think nisiprius makes the most powerful argument. How do you explain the SAME growth from dividend fund versus the total stock fund for the past 10 years? Is there someone from the dividend crowd that can chime in here?

When you collect these dividend checks at retirement, people are acting like it's free money/income at retirement. Can't you achieve a safe withdrawal rate from a taxable account to achieve the same purpose?

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Re: The Case for Dividend Stocks in Retirement (article)

Postby House Blend » Mon Apr 14, 2014 11:10 am

nisiprius wrote:The obvious bedrock point is this. In real life, if the two growth charts almost coincide, then it doesn't matter which fund you are using.

Not when income taxes are involved. (Is income tax part of real life?)

Take the example of a decades-long accumulation of a stock fund, followed by decades-long decumulation. First issue is whether the dividends are 100% qualified (and whether the preferred tax rates on those dividends will continue). Many are less than 100% qualified.

Second, when selling shares in decumulation mode, you will owe LT capital gains tax on the ...umm... gains, not the principal.

Now for a retiree following the siren song of dividend stocks, presumably this retiree has the fantasy that he will never need to dip into principal, and his children will inherit that principal.

But the retiree who has stuffed his ears with cotton, and cannot hear the siren song, he may occasionally sell shares, but obviously will do so in a way that minimizes gains. If he needs $1000 and realizes gains of $500 to meet this need, he will pay 50% less income tax than the chump who got his $1000 via dividends. (Of course, if the tax rate is 0%, it is 50% of zero....)

If I were a retiree and you gave me the choice of two funds with identical growth-of-$10,000 charts, but Fund A has a dividend yield of 1%, and Fund B has a dividend yield of 2% (all dividends 100% qualified), I would take Fund A every time.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby ogd » Mon Apr 14, 2014 11:47 am

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.

midareff: it would seem so superficially, but the math is unforgiving: same total return throughout with dividends reinvested - same withdrawal amounts on same dates = same final results. Try finding a counterexample.

It turns out that the milk is just another form of bite, to which vegans shake their head disapprovingly and say, "I told you so".

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Re: The Case for Dividend Stocks in Retirement (article)

Postby Clearly_Irrational » Mon Apr 14, 2014 1:41 pm

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.


Intuitively it seems like it should work that way yes, sadly it's not that simple. Pull out a spreadsheet, build your own model and test it for yourself. You'll find exactly what I did, they're the same. (excluding taxes)

That said, I see two benefits to a dividend strategy:

1) It may allow you to hold higher stock allocation than you could otherwise since knowing that "my 1000 shares of Caterpillar are still there" may be more reassuring than "My mutual fund has dropped 50% in value"

2) If you choose companies with reasonable dividend policies it makes for a sort of natural safe withdrawal method that doesn't take much user input

This was a pretty tough one for me to wrap my head around when I first encountered it. I wasn't used to the idea that wealth and income were interchangeable.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby curveball » Mon Apr 14, 2014 2:33 pm

I believe Vang Equity and Income has outperformed the market the past ten years.What it means I do not know.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby freddie » Mon Apr 14, 2014 3:04 pm

Sure but it has under performed large cap growth (Primecap was 10.2% veruse 8.6) and small cap (9.9 for the index). Good luck on guess what the next 10 year cycle will be:)


curveball wrote:I believe Vang Equity and Income has outperformed the market the past ten years.What it means I do not know.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby SecretAsianMan » Mon Apr 14, 2014 3:25 pm

ogd wrote:It turns out that the milk is just another form of bite, to which vegans shake their head disapprovingly and say, "I told you so".

Nice :D

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Re: The Case for Dividend Stocks in Retirement (article)

Postby IlliniDave » Mon Apr 14, 2014 3:28 pm

dr.j wrote:I think nisiprius makes the most powerful argument. How do you explain the SAME growth from dividend fund versus the total stock fund for the past 10 years? Is there someone from the dividend crowd that can chime in here?

When you collect these dividend checks at retirement, people are acting like it's free money/income at retirement. Can't you achieve a safe withdrawal rate from a taxable account to achieve the same purpose?


I'm not sure why anyone would expect anything other than roughly the same total return. That seems to follow from an efficient market. I'm indifferent when it comes to dividends--they seem to be inextricably part of a value tilt, which I like, but I don't seek them out. It is odd to see young investors putting together dividend portfolios, but maybe they're piling it all in Roth accounts and planning on retiring way early ala MMM. As much as I can, I keep my value stuff in a Roth account. Dividends seem to be no harm, no foul there. It's really only in taxable accounts that dividends seem to be a distinct disadvantage during accumulation (less so during distribution).
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Re: The Case for Dividend Stocks in Retirement (article)

Postby 3504PIR » Mon Apr 14, 2014 4:26 pm

None of us know what the future returns on equities will be, pretty much everyone agrees with that fact here. Yet every time this topic comes up the case made against dividend investing rests on two theories. One is that total return will suffer based on comparing a few funds "focused" on dividends with the total market. The other is that when selling shares is compared with taking dividends as the market plays out there is no difference - but the assumption is always that total returns will be positive over time.

How can it be true that we don't know what the future will bring and at the same time be so sure one strategy is so superior to the other based on the assumption that the market will, over time, only move in one of three possible directions (up, sideways or down)? Further, only one of the two strategies is concerned with comparison of total return to the other strategy, because they've staked their entire future on it.

One strategy has made a calculated guess that based on what we know from the past will ensure success in the future (monte Carlo, firecalc, chart x, etc). The other strategy is based on the calculated guess that the dividends and income will maintain or increase over time. Both strategies will likely work and for me I use some of both with an eye to leaving the most I can to my family. I don't recall seeing many, if any posts from dividend investors stating that total return/withdrawl strategy is wrong. But every one of these threads has defensive and dismissive posts against dividend investing as if it was some threat to national security, when in truth, the fact remains all those dismissive posts are based on an unknown (the future) and an irrelevant comparison which one strategy must have and the other doesn't.

So plug your AA into a spreadsheet and look at it if the market goes up, down and sideways over a meaningful time period to you and then make a decision rather than just when it turns out in your favor.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby Leeraar » Mon Apr 14, 2014 4:40 pm

I don't know, but I find this thread very discouraging.

The belief in dividends as a magic sauce is a belief that markets are inefficient. Even in the face of all the yelling and shouting about dividends as a superior strategy. And now, from someone like Mr. Clements. It's sad.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby midareff » Mon Apr 14, 2014 5:04 pm

freddie wrote:If the cow is growing at 2lbs/yr and your eating 1 lb/yr, how many years will it take to consume the cow?

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided given that the total returns of the two portfolios are exactly the same."

It would seem that a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.


Wasn't that longago we had near 12 years of nothing. Bull markets tend to make convient memories.

Black Swan comes and lingers..... you are selling more shares than planned. Everything is equal in a controlled experiment. Lots less so in the real world,

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Re: The Case for Dividend Stocks in Retirement (article)

Postby tibbitts » Mon Apr 14, 2014 6:43 pm

Leeraar wrote:I don't know, but I find this thread very discouraging.

The belief in dividends as a magic sauce is a belief that markets are inefficient. Even in the face of all the yelling and shouting about dividends as a superior strategy. And now, from someone like Mr. Clements. It's sad.

L.

It seems like even experts who have stuck with the same investing philosophies for decades are floundering in the recent economic conditions. They're searching for a solution to low rates that have hung on much longer than anticipated, really with no end in sight, and nothing in their experience has prepared them for what they're seeing now. So we get various reactions: they're dropping what were previously thought to be safe withdrawal rates, telling us we have to tweak previously simple investing plans... and then telling us that quite possibly none of that will work, and we'll end up failing anyway.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby freddie » Mon Apr 14, 2014 7:34 pm

As you as you start with a big enough cow, short periods of underperformance aren't an issue. The point was that the amount of meat on your cow is not the number of shares. It is the market value of your holdings. That can go up even if your taking stuff out.


midareff wrote:
freddie wrote:If the cow is growing at 2lbs/yr and your eating 1 lb/yr, how many years will it take to consume the cow?

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided given that the total returns of the two portfolios are exactly the same."

It would seem that a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.


Wasn't that longago we had near 12 years of nothing. Bull markets tend to make convient memories.

Black Swan comes and lingers..... you are selling more shares than planned. Everything is equal in a controlled experiment. Lots less so in the real world,

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Re: The Case for Dividend Stocks in Retirement (article)

Postby ulladulla28 » Mon May 08, 2017 4:15 pm

I have been reading a bit on this subject and instead of starting a new thread, thought I would jump into the most recent one I could find. I like the portfolio visualizer website because it can show portfolios, backing out the dividend reinvestment.

Here is the link, but summary below.
https://www.portfoliovisualizer.com/bac ... tion3_3=25

I HOPE THE LINK WORKS!!!!


I back tested three portfolios without reinvesting dividends. The portfolio with only total stock market and bond market, certainly appreciates the most in value, but adding dividend fund component to your equity position certainly generates more income and also seems to reduce risk. (See 2002 and 2008 draw downs) Additionally, if you had truly been selling shares from portfolio one to make up the income gap between it and portfolio 3, I suspect that the final value of portfolio 1 may be a good bit closer to that of portfolio 3.

Just looking for some thoughts on this...

Thanks!

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Re: The Case for Dividend Stocks in Retirement (article)

Postby ogd » Wed May 17, 2017 7:58 pm

ulladulla28 wrote:I back tested three portfolios without reinvesting dividends. The portfolio with only total stock market and bond market, certainly appreciates the most in value, but adding dividend fund component to your equity position certainly generates more income and also seems to reduce risk. (See 2002 and 2008 draw downs) Additionally, if you had truly been selling shares from portfolio one to make up the income gap between it and portfolio 3, I suspect that the final value of portfolio 1 may be a good bit closer to that of portfolio 3.

Just looking for some thoughts on this...

The problem is your pick of VEIRX. You had the luxury of picking a fund that proves your point, not necessarily for this exercise but simply because it's a fund that's been performing fairly well and has been on people's radars.

When we say "Total Stock Market" is a-priori the best fund to invest in (and I believe it is), we don't have that luxury. Just as we'd expect if fund results were randomly clustered around market results minus expenses, TSM doesn't win every backward looking comparison.

If dividends are such a big deal, one could pick VHDYX, one of the highest yielding funds in Vanguard. The results look worse across the board. Clearly, dividends didn't make a difference. One could say "stock selection did", but one could also say "luck [with stock selection] did".

If I'm allowed to select a good performing fund with a given characteristic that does not greatly limit the differences between the funds (e.g. no substantial difference between S&P 500 index funds, but substantial between income-oriented funds), and show its effect on portfolios with back testing, then I could make all kinds of assertions. For example: that active funds outperform index funds (or "adding active funds can increase the efficiency of a portfolio").

Or, more egregiously, that adding a dose of funds with both Q and G in the name can improve the return/safety of a portfolio. Do you really believe that? But this is what happens if we're allowed to select funds.

ulladulla28 wrote:The portfolio with only total stock market and bond market, certainly appreciates the most in value

ulladulla28 wrote:Additionally, if you had truly been selling shares from portfolio one to make up the income gap between it and portfolio 3, I suspect that the final value

We don't need to make distinctions between final value and income unless we're worried about taxes (which are less favorable to return via income). Total return tells us all we need to know, including what happens if one has to sell shares in a recession to replace the income of a dividend fund, as I was mentioning above.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby wolf359 » Thu May 18, 2017 11:26 am

freddie wrote:If the cow is growing at 2lbs/yr and your eating 1 lb/yr, how many years will it take to consume the cow?

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.


What if while you're eating it, the cow is also being devoured by a bear? :shock:

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Re: The Case for Dividend Stocks in Retirement (article)

Postby dbr » Thu May 18, 2017 2:09 pm

wolf359 wrote:
What if while you're eating it, the cow is also being devoured by a bear? :shock:


Withdrawing money by cashing dividend checks during a bear market is a really bad idea.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby midareff » Thu May 18, 2017 4:04 pm

dbr wrote:
wolf359 wrote:
What if while you're eating it, the cow is also being devoured by a bear? :shock:


Withdrawing money by cashing dividend checks during a bear market is a really bad idea.


and exactly why would selling shares in a bear market be a better idea?

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Re: The Case for Dividend Stocks in Retirement (article)

Postby dbr » Thu May 18, 2017 4:30 pm

midareff wrote:
dbr wrote:
wolf359 wrote:
What if while you're eating it, the cow is also being devoured by a bear? :shock:


Withdrawing money by cashing dividend checks during a bear market is a really bad idea.


and exactly why would selling shares in a bear market be a better idea?


It wouldn't. That is the point.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby selters » Thu May 18, 2017 5:26 pm

I totally get the mathematical point that the distinction between spending dividends and selling shares is an artificial one. But what does the behavioral psychology research say about it? To me it seems easier to stick to a "spend the dividends" plan than to stick to a "sell as much as you'd at any time you'd like to in order to cover your expenses". Unless I'm shown some very good evidence that contradicts my belief, then I will continue to think that a "spend the dividends" mindset has some major behavioral benefits over a "total return" mindset.

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Re: The Case for Dividend Stocks in Retirement (article)

Postby willthrill81 » Thu May 18, 2017 5:50 pm

selters wrote:I totally get the mathematical point that the distinction between spending dividends and selling shares is an artificial one. But what does the behavioral psychology research say about it? To me it seems easier to stick to a "spend the dividends" plan than to stick to a "sell as much as you'd at any time you'd like to in order to cover your expenses". Unless I'm shown some very good evidence that contradicts my belief, then I will continue to think that a "spend the dividends" mindset has some major behavioral benefits over a "total return" mindset.


This is one of many areas of investing where I believe that truly understanding the situation is key. There is no benefit of any shape, form, or fashion for dividends. This has been demonstrated over and over and over. When you truly understand and believe it, the psychological impact will be far less.

As investors, we cannot let our emotions rule.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

wolf359
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Re: The Case for Dividend Stocks in Retirement (article)

Postby wolf359 » Thu May 18, 2017 6:03 pm

selters wrote:I totally get the mathematical point that the distinction between spending dividends and selling shares is an artificial one. But what does the behavioral psychology research say about it? To me it seems easier to stick to a "spend the dividends" plan than to stick to a "sell as much as you'd at any time you'd like to in order to cover your expenses". Unless I'm shown some very good evidence that contradicts my belief, then I will continue to think that a "spend the dividends" mindset has some major behavioral benefits over a "total return" mindset.

Vanguard white paper that shows that dividend income investing is equivalent to total market return investing, unless the income required exceeds the income produced by the dividends. In that case, total market return is better.
https://personal.vanguard.com/pdf/s557.pdf

I suspect, however, that the opposite is true. Dividend investors feel safe spending the dividend, because "they didn't sell any shares."

However, rich investors actually spend less than 53% of what they could spend, because they're afraid of running out of money. It's possible that they're psychologically afraid to watch their balances drop.
Sources:
https://www.onefpa.org/journal/Pages/FE ... n-Gap.aspx
https://www.bloomberg.com/news/articles ... ut-of-fear

Therefore, dividend investors are probably more likely to spend down more, and total market investors are more likely to not stick to their plan because they won't actually "sell as much as you like any time you'd like." When they're playing it by ear, they're going to instinctively cut back in a market downturn. If a portfolio is going to fail, it's more likely to be the dividend investor, who was lulled into thinking it was safe.

jrbdmb
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Re: The Case for Dividend Stocks in Retirement (article)

Postby jrbdmb » Thu May 18, 2017 6:18 pm

Leeraar wrote:I don't know, but I find this thread very discouraging.

The belief in dividends as a magic sauce is a belief that markets are inefficient. Even in the face of all the yelling and shouting about dividends as a superior strategy. And now, from someone like Mr. Clements. It's sad.

L.


Can't find a link, but I have read recently that one should avoid high-dividend stocks, because unsophisticated investors who like dividends have inflated their prices. So in the end, does all the "noise" cancel out so that it just doesn't matter? :annoyed

avalpert
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Re: The Case for Dividend Stocks in Retirement (article)

Postby avalpert » Thu May 18, 2017 7:30 pm

selters wrote:I totally get the mathematical point that the distinction between spending dividends and selling shares is an artificial one. But what does the behavioral psychology research say about it? To me it seems easier to stick to a "spend the dividends" plan than to stick to a "sell as much as you'd at any time you'd like to in order to cover your expenses". Unless I'm shown some very good evidence that contradicts my belief, then I will continue to think that a "spend the dividends" mindset has some major behavioral benefits over a "total return" mindset.

I truly appreciated the bolded sentence in a post on behavioral psychology.

In any case, one can easily recreate the impact of regular 'dividends' using automatic withdrawals from mutual funds - in fact one can ensure the income is more consistent that way.

snarlyjack
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Re: The Case for Dividend Stocks in Retirement (article)

Postby snarlyjack » Thu May 18, 2017 8:25 pm

Here is what my favorite investor did.

http://www.cnbc.com/2015/02/09/heres-ho ... rtune.html

snarlyjack
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Re: The Case for Dividend Stocks in Retirement (article)

Postby snarlyjack » Thu May 18, 2017 8:53 pm

I just love this guy...I'm super impressed!

http://www.cnbc.com/2015/02/06/janitor- ... pital.html

RAchip
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Re: The Case for Dividend Stocks in Retirement (article)

Postby RAchip » Thu May 18, 2017 8:54 pm

"There is no benefit of any shape, form, or fashion for dividends."

I disagree. And so do the boards of directors of every single company in the DOW (who all pay dividends). Distributing profits to the owners is one of the most important reasons that businesses exist.

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tennisplyr
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Re: The Case for Dividend Stocks in Retirement (article)

Postby tennisplyr » Fri May 19, 2017 6:48 am

midareff wrote:"The math is such that a person living from dividend stocks ends up in the same place as a person selling shares, provided that the total returns of the two portfolios are exactly the same."

It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.


+1
Those who move forward with a happy spirit will find that things always work out.

Boglegrappler
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Re: The Case for Dividend Stocks in Retirement (article)

Postby Boglegrappler » Fri May 19, 2017 9:05 am

disagree. And so do the boards of directors of every single company in the DOW (who all pay dividends). Distributing profits to the owners is one of the most important reasons that businesses exist.


Well, that's close, but maybe a tad too specific. Actually the businesses exist, from the shareholders' point of view, to increase the shareholders' future purchasing power relative to what they invested.

The classic case for paying dividends is that the shareholders can earn a greater return on that cash than the company can. In reality, it's often not the case, but the "market" beiieves dividends need to be paid, so they pay them. If the company is in a declining business, its stock will trade higher if it pays out some of its earnings rather than reinvesting it all in the dying/declining business.

Buffett had a very good discussion of dividends in his letter several years ago. Page 19 of his 2012 letter to shareholders begins his discussion.

http://www.berkshirehathaway.com/letters/2012ltr.pdf

Buffett is fairly unique among successful CEOs, in the sense that he never ran a business after he was a very young man. His expertise is identification, selection, timing, and discipline.

RAchip
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Re: The Case for Dividend Stocks in Retirement (article)

Postby RAchip » Fri May 19, 2017 3:18 pm

I'm losing track of what the real issue is as raised in this thread. About 420 of the companies in the S&P 500 pay dividends. So you are going to get paid dividends if you are a boglehead. That is just a fact of life. If you can buy an S&P fund and live off of the dividends that seems great to me. But is the question whether its better to automatically reinvest the dividends and then sell shares of your fund when you need money?

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willthrill81
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Re: The Case for Dividend Stocks in Retirement (article)

Postby willthrill81 » Fri May 19, 2017 3:35 pm

RAchip wrote:I'm losing track of what the real issue is as raised in this thread. About 420 of the companies in the S&P 500 pay dividends. So you are going to get paid dividends if you are a boglehead. That is just a fact of life. If you can buy an S&P fund and live off of the dividends that seems great to me. But is the question whether its better to automatically reinvest the dividends and then sell shares of your fund when you need money?


The problem is that people think dividends are 'free money', when nothing but could be further from the truth. If the company releases cash to stockholders, the company is now worth less money (the value of the dividend). If they retain the cash, they retain their value. Investors can sell a bit of stock to generate the cash they want when they want it, not when the company decides to issue a dividend.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

avalpert
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Re: The Case for Dividend Stocks in Retirement (article)

Postby avalpert » Fri May 19, 2017 4:13 pm

RAchip wrote:I'm losing track of what the real issue is as raised in this thread. About 420 of the companies in the S&P 500 pay dividends. So you are going to get paid dividends if you are a boglehead. That is just a fact of life. If you can buy an S&P fund and live off of the dividends that seems great to me. But is the question whether its better to automatically reinvest the dividends and then sell shares of your fund when you need money?

No, that is definitely not the question.

The question is whether specifically targeting dividends alone to fulfill your income needs from your portfolio is a good strategy.

snarlyjack
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Re: The Case for Dividend Stocks in Retirement (article)

Postby snarlyjack » Fri May 19, 2017 4:44 pm

Keep in mind that I'm a young guy (23 years old).
My Mom died (my parents divorced years ago) & I
inherited quite a bit of money through life insurance.

That said...

In my mind what a young person like me wants to build is
a pyramid. Wide & high. I can do that with a good dividend paying
fund. My choice is Vanguard High Dividend Yield fund (VHDYX). It pay's
approx. 3% dividends & compares very closely to the TSM &
S & P 500. The 420 stocks are huge dividend paying companies.
You guys would call it a value play (tilt to dividends & value).

Why you might ask...Before my Mom died I promised her I would
never touch the principal but I could spend the dividends if needed.
Age 100 - age 23 = 77 years... I could sit on this thing & let it
compound out for 77 more years. (it's already been invested for
over 1 year).

If you look at the "Janitor Next Door" he had 8 million dollars.
8 million x 3% dividend = $240,000. per year in dividends without
ever touching the principal. I can live a nice life on that.
But what about taxes? I don't care...I'll pay my fair share &
get on with life. I think I can be like the "Janitor Next Door"...

That why I prefer this particular strategy, for me it all makes
sense in my mind. 100% in VHDYX with some cd's...

Thank you everyone...I enjoyed giving you my reasons.
Please be easy on me :)

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nedsaid
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Re: The Case for Dividend Stocks in Retirement (article)

Postby nedsaid » Fri May 19, 2017 6:43 pm

snarlyjack wrote:Keep in mind that I'm a young guy (23 years old).
My Mom died (my parents divorced years ago) & I
inherited quite a bit of money through life insurance.

That said...

In my mind what a young person like me wants to build is
a pyramid. Wide & high. I can do that with a good dividend paying
fund. My choice is Vanguard High Dividend Yield fund (VHDYX). It pay's
approx. 3% dividends & compares very closely to the TSM &
S & P 500. The 420 stocks are huge dividend paying companies.
You guys would call it a value play (tilt to dividends & value).

Nedsaid: I would not buy High Dividend at this time. We have been in
an 8-9 year period of chasing bond yield and dividend yield. In addition,
people have become aware that low-volatility stocks have outperformed the
market and people have piled into those too. There is a lot of overlap
between dividend strategies and low volatility. I think you are setting yourself
up for a period of underperformance. If you wanted to do a dividend strategy
better to wait until investors no longer care about dividends, then I would split
between High Dividend and Dividend Growth. Not a bad idea but the timing
is really bad.


Why you might ask...Before my Mom died I promised her I would
never touch the principal but I could spend the dividends if needed.
Age 100 - age 23 = 77 years... I could sit on this thing & let it
compound out for 77 more years. (it's already been invested for
over 1 year).

Nedsaid: What I would do is invest in the broad indexes and use those
as the foundation of your investment strategy. As the portfolio grows, and
when valuations of higher dividend stocks look better, you could do some
"dividend tilting." The thing is, the Total US Stock Market has a dividend
yield of 1.76%. A 3% yield on High Dividend doesn't sound "high" to me
and is an indication of how hard these stocks have been chased. With
more normal interest rates, you would expect High Dividend to yield
more like 5%. Again, don't chase yields now and just take what the Total
US and International stock indexes give you.


If you look at the "Janitor Next Door" he had 8 million dollars.
8 million x 3% dividend = $240,000. per year in dividends without
ever touching the principal. I can live a nice life on that.
But what about taxes? I don't care...I'll pay my fair share &
get on with life. I think I can be like the "Janitor Next Door"...

Nedsaid: My guess is that you inherited a lot less that 8 million. You
should see some nice growth over the next 40 or so years. Congratulations
on investing your money. A lot of folks would have had it all spent by
now.


That why I prefer this particular strategy, for me it all makes
sense in my mind. 100% in VHDYX with some cd's...

Thank you everyone...I enjoyed giving you my reasons.
Please be easy on me :)
A fool and his money are good for business.

TropikThunder
Posts: 366
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Re: The Case for Dividend Stocks in Retirement (article)

Postby TropikThunder » Fri May 19, 2017 8:39 pm

snarlyjack wrote:If you look at the "Janitor Next Door" he had 8 million dollars.
8 million x 3% dividend = $240,000. per year in dividends without
ever touching the principal
. I can live a nice life on that.
But what about taxes? I don't care...I'll pay my fair share &
get on with life. I think I can be like the "Janitor Next Door"...

Bu that's the whole fallacy right there. YOU didn't touch the principal, but the COMPANIES did when they generated the dividend and the NAV dropped as a consequence. If you have $100,000 in VHDYX and Vanguard distributes a 3% dividend, you have $97,000 in VHDYX and $3,000 in cash. How is that better/worse/different then selling $3,000 worth of shares? By selling $3,000, you have touched the principal. But by paying the dividend, Vanguard has done the same thing TO you. There is no mathematical difference between selling shares and withdrawing dividends. But there is a tax difference. Now, the counter-argument is that after paying the dividend, the NAV will grow back to it's pre-dividend price as the company continues to generate revenue. Well, that would happen if you sold shares, too. Again, no difference.

midareff wrote:It would seem that given a sufficient time horizon one cow keeps giving milk while the other cow gets consumed bite by bite.

That analogy only works if the cow that is giving milk maintains it's bodyweight while the cow getting consumed doesn't. If neither cow eats/grows, they will both be consumed.


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