Bogle: retirees should focus on dividends

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Bogle: retirees should focus on dividends

Post by Browser » Tue Aug 18, 2015 4:41 pm

This will stir up the debate over whether dividends are important. Here's John Bogle's take for retirees living off their nesteggs:
Oversimplifying, what you want to do when you retire is walk out to the mailbox on Social Security day and on dividend payment day for the funds—assuming they’re the same day—and make sure you have two envelopes out there. One is your fund dividend and the other is your Social Security check. The Social Security will keep up with inflation year after year, and dividends are likely to increase year after year.

Bet on the dividends, and not on the market price. You’ve got those two envelopes and that’s your retirement. If you have a pension plan (one that is not likely to go bankrupt—and a lot of them are likely to) that is a third envelope. You want to be concerned about whether you have enough income to pay utility bills, pay for your food, pay your rent or your mortgage, whatever it might be, every month. You want income to help you pay those bills. And in the retirement stage, that’s what investing should be about—regular checks from dividends and/or from Social Security and/or from a pension account.
But he goes on to say that he wouldn't overdo investing in high-dividend stock funds:
If you really need the dividend income, I see nothing wrong with overweighting high-dividend stocks, knowing you’re taking a small risk of falling significantly behind the total market. But you can own blue chip stocks, and you’re going to get a higher dividend, a situation I think would be attractive to an awful lot of investors. But once you depart from the market portfolio, you’re taking on extra risk.
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Re: Bogle: retirees should focus on dividends

Post by cheapskate » Tue Aug 18, 2015 5:01 pm

Brilliant interview. Thanks for sharing.

Rather than stir up the Dividend debate again, Bogle's extremely well reasoned points should help settle the issue.

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Re: Bogle: retirees should focus on dividends

Post by rca1824 » Tue Aug 18, 2015 5:09 pm

I think it certainly simplifies retirement planning for an ultra passive investor. No rebalancing. No liquidating shares. No calculating SWR with cfiresim. Just collect checks. We know it's not optimal from a total return point of view, but not everyone wants maximum optimality, but just simplicity.

Even for those don't dividend tilt, I also think there's wisdom to the simple heuristic of "eat the dividends". You get a good balance of growth + income. It's probably close to "optimal". Those following total return and a constant SWR may run the risk of over- or under-consuming their wealth.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Bogle: retirees should focus on dividends

Post by BahamaMan » Tue Aug 18, 2015 5:22 pm

Just understand that Bogle has a lot more money than anyone here on these forums. And he probably does not intend to spend any of his principal and leave it to his 'Legacy'.

With that said, One of the major legs of the average investors stool, is eating into his principal.

So, Yes, You have Social Security, A Pension (Whatever the last 30 years has not gotten rid of), and some Paltry Dividends and Interest, and a MAJOR part of of the Average Investors income will be eating in to Principal.

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Re: Bogle: retirees should focus on dividends

Post by tennisplyr » Tue Aug 18, 2015 5:28 pm

So here's where I get confused. I thought that where dividends get declared, the price of the stock goes down. So if you cash out the dividends you are actually drawing down your portfolio, no? Isn't it virtually the same to withdraw from your portfolio?
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Re: Bogle: retirees should focus on dividends

Post by Clive » Tue Aug 18, 2015 5:38 pm

Dividend values tends to correlate to share prices. If you spend rather than reinvest dividends then the inflation adjusted value of stock tends to be volatile

Image
http://www.multpl.com/inflation-adjusted-s-p-500

Rather than spending dividends holding enough in safe tax efficient bonds to provide income/drawdown is more stable/safer. Lending to the State for instance has the benefit that the State can always print more money or raise taxes rather than default.

A two basket of initial 20 years of spending in bonds for drawdown, and some in stocks for accumulation, with a view that in 20 years when all of bonds have been spent the 20 years of accumulation of stock would generally have built up a nice pension pot to cover a second round of 'retirement'.

No worries about variable dividends and hence income/spending, just a regular amount of bonds being drawn/spent week after week, year after year. Better than having to rush out to the mailbox to see just how much you've got to spend that week/month/year and the variability in the amounts over time.

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Re: Bogle: retirees should focus on dividends

Post by tibbitts » Tue Aug 18, 2015 5:54 pm

I don't understand this:
But you can own blue chip stocks, and you’re going to get a higher dividend
Higher than what?

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Re: Bogle: retirees should focus on dividends

Post by Clive » Tue Aug 18, 2015 6:00 pm

A two basket of initial 20 years of spending in bonds for drawdown, and some in stocks for accumulation, with a view that in 20 years when all of bonds have been spent the 20 years of accumulation of stock would generally have built up a nice pension pot to cover a second round of 'retirement'.
Retire with $200,000 initially in bonds, $100,000 in stocks and draw-down bonds at $10,000/year for 20 years (which if the bonds achieve a inflation pacing reward will maintain the purchase power of disposable income), and on average $100,000 initially invested in stocks with dividends reinvested will grow to $300,000 in inflation adjusted terms over 20 years. End 20 years with the same inflation adjusted amount as at the start whilst having enjoyed a 3.3% SWR.

A relatively poor 20 year stock accumulation and the $100,000 initial stock value might have only doubled in real terms. Started with $300,000 ended with $200,000 after 20 years of retirement - and typically after such a relatively poor 20 year outcome the subsequent years compensate with above average rewards.

Contrast that with $300,000 in stocks and living off (spending) dividends. How secure/consistent/safe is a 3.3% inflation adjusted SWR in that case?

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Re: Bogle: retirees should focus on dividends

Post by Clive » Tue Aug 18, 2015 6:01 pm

tibbitts wrote:I don't understand this:
But you can own blue chip stocks, and you’re going to get a higher dividend
Higher than what?
Red chip stocks :)

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Re: Bogle: retirees should focus on dividends

Post by dbr » Tue Aug 18, 2015 6:02 pm

tennisplyr wrote:So here's where I get confused. I thought that where dividends get declared, the price of the stock goes down. So if you cash out the dividends you are actually drawing down your portfolio, no? Isn't it virtually the same to withdraw from your portfolio?
Yes, cashing out dividends is taking a withdrawal from your portfolio. You are definitely not confused.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Tue Aug 18, 2015 6:12 pm

The accompanying article is interesting. The quote comes from section discussing asset allocation, stocks vs. bonds. The commentary proceeds through an age-in-bonds concept, which then segues into the SS-as-a-bond comment. Eventually Mr. Bogle actually comments that one should not actually consider SS to be a bond but it is a question of understanding one's financial situation with respect to sources of income. At that point, for no logical reason, the commentary devolves to almost a rant about going to the mailbox to pickup Social Security checks and also dividend checks. It is a kind of shift of ground that leaves one without a context to interpret what is really to be meant about dividends. One reference is to thinking about price of assets, or rather that one should not think about the price of assets. I don't follow any logical connection between that admonition and what one's asset allocation should be or to some sort of recommendation that the plan in retirement should be to live by spending just what one receives in SS, pensions, and dividends.

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Re: Bogle: retirees should focus on dividends

Post by mickeyd » Tue Aug 18, 2015 6:18 pm

walk out to the mailbox on Social Security day and on dividend payment day for the funds—assuming they’re the same day—and make sure you have two envelopes out there.

Hmmm. My TSM dividends are paid quarterly and my SS rolls in monthly. Are there equity mutual funds that pay dividends monthly? I like that two envelope idea. Kinda like Dave Ramsey.
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Re: Bogle: retirees should focus on dividends

Post by tennisplyr » Wed Aug 19, 2015 7:06 am

dbr wrote:
tennisplyr wrote:So here's where I get confused. I thought that where dividends get declared, the price of the stock goes down. So if you cash out the dividends you are actually drawing down your portfolio, no? Isn't it virtually the same to withdraw from your portfolio?
Yes, cashing out dividends is taking a withdrawal from your portfolio. You are definitely not confused.
So why is this thought to be such a great idea? What am I missing?
Those who move forward with a happy spirit will find that things always work out.

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Re: Bogle: retirees should focus on dividends

Post by indexonlyplease » Wed Aug 19, 2015 7:29 am

In another post we talked about the same thing. Its about income in retirement. In the book the Lazy Guide to Investing. He talks about Play all Four Quarters of the Game. To gain income at retirement.

So the most important thing at retirment is the steady checks that come in the mail every month for you to live on (Income).

These days they come in direct deposit to the bank.


Cliff

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 8:45 am

tennisplyr wrote:
dbr wrote:
tennisplyr wrote:So here's where I get confused. I thought that where dividends get declared, the price of the stock goes down. So if you cash out the dividends you are actually drawing down your portfolio, no? Isn't it virtually the same to withdraw from your portfolio?
Yes, cashing out dividends is taking a withdrawal from your portfolio. You are definitely not confused.
So why is this thought to be such a great idea? What am I missing?
You are missing that a lot of other people, not you, are confused.

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Re: Bogle: retirees should focus on dividends

Post by kdub » Wed Aug 19, 2015 9:12 am

"Living off the dividends" amounts to little more than a very conservative SWR (currently ~2%). Most people don't have enough saved to live off 2% annually. If you do, you will almost certainly die with a large amount left over, just like you would if you took a total return approach and sold off 2% per year.

Terminology such as "not touching the principal" is downright silly when applied to stocks and dividends. Dividends come out of your "principal."

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Re: Bogle: retirees should focus on dividends

Post by SGM » Wed Aug 19, 2015 9:19 am

Jack has said in the past that dividends are real and returns are illusory or words to that effect. In retirement you want multiple income streams. If you have enough income you can live off of pensions, SS, dividends or some other income stream. Spending dividends is in fact spending principal, however you do have the same number of shares that you started out with. So you are tending to spend less principal in this environment of low dividend payouts. Unless you get dividend cuts or dividends are not raised above the inflation rate then you are losing purchasing power.

For those who have been in the savings mode for many years it is much more palatable to spend just the dividends. Maybe it is a psychological crutch, but a lot of people are comfortable with spending only the dividends. It is not just the very wealthy, but includes many who want to leave a legacy or want to have a large sum left as a contingency in case they become fully dependent on others.


If you are going the total return route and taking out more than dividends then you will need to sell some stock. Your dividends will go down and the following years you will need to sell more stock. If you find that you need to spend more than what you consider a safe withdrawal rate then consider an SPIA and continue to follow your total return strategy with a lower withdrawal rate.

I feel no cognitive dissonance regarding a dividend vs. a total return approach. Just call me Alfred E. Neuman. :wink:
"What me worry?"

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Re: Bogle: retirees should focus on dividends

Post by goingup » Wed Aug 19, 2015 9:39 am

The older I get the greater the appeal of this idea of passive income streams. But with 2/3 of our portfolio in taxable right now, and being in a high tax bracket, the last thing we want is a High Dividend Yield fund throwing off dividends.

I don't follow how retirees, who have built a tax-efficient portfolio (with large capital gains) can dismount that horse and hop onto a high dividend yielding one.

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Re: Bogle: retirees should focus on dividends

Post by rca1824 » Wed Aug 19, 2015 9:53 am

goingup wrote:The older I get the greater the appeal of this idea of passive income streams. But with 2/3 of our portfolio in taxable right now, and being in a high tax bracket, the last thing we want is a High Dividend Yield fund throwing off dividends.

I don't follow how retirees, who have built a tax-efficient portfolio (with large capital gains) can dismount that horse and hop onto a high dividend yielding one.
It's for ultra passive retirees who don't want to manage liquidating shares. It's not mathematically optimal, it's just for simplicity.

I also think the idea is that you would try to match the dividend yield to your income needs, so there would be little to no dividends reinvested, therefore little to no tax waste.

You can also choose to just live off the dividends of the Total Stock Market and NOT tilt towards High Dividend stocks. This would give combined growth + income.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Bogle: retirees should focus on dividends

Post by nukewerker » Wed Aug 19, 2015 10:06 am

dbr wrote:
tennisplyr wrote:
dbr wrote:
tennisplyr wrote:So here's where I get confused. I thought that where dividends get declared, the price of the stock goes down. So if you cash out the dividends you are actually drawing down your portfolio, no? Isn't it virtually the same to withdraw from your portfolio?
Yes, cashing out dividends is taking a withdrawal from your portfolio. You are definitely not confused.
So why is this thought to be such a great idea? What am I missing?
You are missing that a lot of other people, not you, are confused.
The idea that a stocks price permanently tracks a dividend payment is true by definition but in most cases not what happens particularly in the short term. Most quarterly dividend payments are less than 1% and therefore end up being noise in a stocks price for the daily fluctuation, particularly for large caps. Make no mistake, the money companies spend on it is real. This is why Buffett prefers companies to use cash for growth instead of dividends unless they can make no other use of the cash. Apple for example.

REIT stocks are different. Because their dividends can be 10-15% per yr, there is often a corresponding drop in share price the day of issuance.

Its smart for a company to issue a dividend when spending the cash may not speed up growth.

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Re: Bogle: retirees should focus on dividends

Post by goingup » Wed Aug 19, 2015 10:10 am

rca1824 wrote:
goingup wrote:The older I get the greater the appeal of this idea of passive income streams. But with 2/3 of our portfolio in taxable right now, and being in a high tax bracket, the last thing we want is a High Dividend Yield fund throwing off dividends.

I don't follow how retirees, who have built a tax-efficient portfolio (with large capital gains) can dismount that horse and hop onto a high dividend yielding one.
It's for ultra passive retirees who don't want to manage liquidating shares. It's not mathematically optimal, it's just for simplicity.

I also think the idea is that you would try to match the dividend yield to your income needs, so there would be little to no dividends reinvested, therefore little to no tax waste.

You can also choose to just live off the dividends of the Total Stock Market and NOT tilt towards High Dividend stocks. This would give combined growth + income.
Thanks rca1824-
I probably didn't explain the dilemma very succinctly. The problem is if you've built a large tax-efficient portfolio, with TSM as the core, you can't just swap it out for the High Dividend Yield fund in order to gain a larger dividend stream in retirement. Logistically it doesn't make sense.

When you're in the final throes of accumulation, and have been tax-efficient throughout, you're wedded to the Total Return model unless 2% of your portfolio is a robust income stream for you. This is fine for us, and has always been the plan. I'm just not sure who John Bogle's likely audience is for such a strategy.

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Re: Bogle: retirees should focus on dividends

Post by TJSI » Wed Aug 19, 2015 10:23 am

tennisplyer, you are confused by the constant repetition of incorrect and incomplete information. The price of a stock increases before the dividend is paid and then decreases after it is paid. Most studies show that the increase is slightly more than the decrease. If a company is making the correct capital budgeting decision, dividends are paid out of excess or idle cash. The payment of the dividend gives the value of the stock to the stockholder. Try to ignore the misinformation.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 10:30 am

TJSI wrote:tennisplyer, you are confused by the constant repetition of incorrect and incomplete information. The price of a stock increases before the dividend is paid and then decreases after it is paid. Most studies show that the increase is slightly more than the decrease. If a company is making the correct capital budgeting decision, dividends are paid out of excess or idle cash. The payment of the dividend gives the value of the stock to the stockholder. Try to ignore the misinformation.

This is all true except maybe the concept of "idle" cash (but that is a different discussion). It is still true that taking a dividend is a withdrawal from assets. There is simply no way around that and, tax issues aside, whether that withdrawal is by the mechanics of cashing a dividend check or reinvesting the dividends and selling shares at some point is exactly equivalent.

What is affected by choosing any particular dividend "strategy" is what is the asset allocation and what is the cost in taxes. Asset allocation means what kind of risk and return characteristics does the portfolio have and taxes means what is the tax cost. If the investor is happy with those things, then he has done his job.

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Re: Bogle: retirees should focus on dividends

Post by rca1824 » Wed Aug 19, 2015 10:33 am

goingup wrote:
rca1824 wrote:
goingup wrote:The older I get the greater the appeal of this idea of passive income streams. But with 2/3 of our portfolio in taxable right now, and being in a high tax bracket, the last thing we want is a High Dividend Yield fund throwing off dividends.

I don't follow how retirees, who have built a tax-efficient portfolio (with large capital gains) can dismount that horse and hop onto a high dividend yielding one.
It's for ultra passive retirees who don't want to manage liquidating shares. It's not mathematically optimal, it's just for simplicity.

I also think the idea is that you would try to match the dividend yield to your income needs, so there would be little to no dividends reinvested, therefore little to no tax waste.

You can also choose to just live off the dividends of the Total Stock Market and NOT tilt towards High Dividend stocks. This would give combined growth + income.
Thanks rca1824-
I probably didn't explain the dilemma very succinctly. The problem is if you've built a large tax-efficient portfolio, with TSM as the core, you can't just swap it out for the High Dividend Yield fund in order to gain a larger dividend stream in retirement. Logistically it doesn't make sense.

When you're in the final throes of accumulation, and have been tax-efficient throughout, you're wedded to the Total Return model unless 2% of your portfolio is a robust income stream for you. This is fine for us, and has always been the plan. I'm just not sure who John Bogle's likely audience is for such a strategy.
That is a great point. Ideally all but the highest net worth retirees will have most of their assets in 401ks and IRAs. Even if one contributions the max to these, that can be several million dollars alone. So it takes quite some time for someone to exceed those limits and invest in taxable. If you have gotten to your taxable space, you probably have several million net worth. In that scenario you can probably safely live off the 2% dividend yield of the total stock market. Or just use tilt to dividends in your retirement accounts.

In general, tax bills are a good problem to have, because it implies you have enough wealth to qualify for taxes.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Bogle: retirees should focus on dividends

Post by itstoomuch » Wed Aug 19, 2015 10:38 am

indexonlyplease wrote:In another post we talked about the same thing. Its about income in retirement. In the book the Lazy Guide to Investing. He talks about Play all Four Quarters of the Game. To gain income at retirement.

So the most important thing at retirment is the steady checks that come in the mail every month for you to live on (Income).

These days they come in direct deposit to the bank.

Cliff
In 2008, just after the elections, we (currently 65/68) started the proccess to an Income and Dividend portfolio. Moved large amounts to deferred GLWB laddered income annuities (~5.5% guaranteed income with legacy considerations) and now close to taking the Incomes. The 75% of trading accounts are now dividend, quality, payors (4%+)with good chance of stock price appreciation (low inflation). The remaining amounts are Index funds which I don't track and are currently not entirely necessary for our future income needs. :mrgreen:

In the beginning, 30 years ago, We used a top -> down approach : What portfolio value would give us an acceptable income. :?:
I modified the approach in 2008, to : What steps, approaches, lifestyle adjustments do we need to make, to live on $Income/yr; :?: A Bottom-to-Top thinking. :greedy
GL :sharebeer
Last edited by itstoomuch on Wed Aug 19, 2015 11:11 am, edited 4 times in total.
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Re: Bogle: retirees should focus on dividends

Post by Dandy » Wed Aug 19, 2015 10:40 am

It is a great situation in retirement to have all or almost all of your core expenses covered by income. Whether that is pension, Social Security, Annuities, part time job or dividends. I wouldn't take much extra risk to get higher dividends but if it was a moderate tilt - it might be a path I would take. Most offer a bit more than 2% vs Total Stock's 1.88%, S&P 500 2.02% -- I have a small tilt to Value Index offering a 2.52% in our Roth.

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Re: Bogle: retirees should focus on dividends

Post by magneto » Wed Aug 19, 2015 11:02 am

JB's comment unexpected. Sure we will here much more on these comments. :shock:

Just to remind readers that for us retirees :-
1. Dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.
2. The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.

HOWEVER it is dangerous to tilt unduly to yield in a strenuous effort to maximise income.
Prefer only a slight tilt, but do monitor closely and record yields at buy and sell points, i.e. buy at higher yields, sell at lower yields.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 11:04 am

Dandy wrote:It is a great situation in retirement to have all or almost all of your core expenses covered by income. Whether that is pension, Social Security, Annuities, part time job or withdrawals from portfolio. I wouldn't take much extra risk to get higher dividends but if it was a moderate tilt - it might be a path I would take. Most offer a bit more than 2% vs Total Stock's 1.88%, S&P 500 2.02% -- I have a small tilt to Value Index offering a 2.52% in our Roth.
Your post should have been written as corrected above. In that case I would agree with it. I also agree that I would not take higher risk to try to take higher withdrawals from the portfolio. That is exactly what happens if one does chase risky investments for dividends that are too high. Most people relying on dividends from a portfolio are actually taking less than they could from their assets. That is ultra-safe, and has that going for it, unless it means becoming victim of working too long and enjoying life too little.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 11:08 am

magneto wrote:JB's comment unexpected. Sure we will here much more on these comments. :shock:

Just to remind readers that for us retirees :-
1. Dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.

It isn't very compicated to manage money appropriately. For those who really want to have no interaction with their accounts it is possible to invest in a balanced fund and arrange with the fund company to issue withdrawals on a regular basis. Another option is to invest in an annuity that makes regular guaranteed payments and the guarantee is for life. I think a lot of people are hung up on issues that just aren't issues.

2. The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.

One time that happens is when one fails to reinvest the dividends at distressed prices and instead spends the money. A person with a balanced portfolio of stocks and bonds sells bonds to withdraw and to invest in the distressed stocks.

HOWEVER it is dangerous to tilt unduly to yield in a strenuous effort to maximise income.
Prefer only a slight tilt, but do monitor closely and record yields at buy and sell points, i.e. buy at higher yields, sell at lower yields.

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Re: Bogle: retirees should focus on dividends

Post by Caboose » Wed Aug 19, 2015 11:22 am

And while on this topic of dividend income, can the Forum clarify for me - those who use Dividend Growth Investing with individual stocks (so-called Aristocrats, etc) claim the advantage is that in a down market while stock value may fall, dividends - and therefore the income - are still paid. Doesn't the same apply to Three Fund Portfolio, that although the fund value has fallen, the companies (which would include the Aristocrats, etc) and therefore the fund (TSM, i.e.) would continue to pay the dividends. If that is the case, Three Fund Portfolio makes all the more sense.

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Re: Bogle: retirees should focus on dividends

Post by cjking » Wed Aug 19, 2015 11:31 am

kdub wrote:Terminology such as "not touching the principal" is downright silly when applied to stocks and dividends. Dividends come out of your "principal."
I double-checked the definition of principal, and apparently it means the original loan/investment that generates income. So people who don't sell shares are correct to say they are not touching their principal. This is true even if they own shares that distribute an amount greater than profits, so that the portfolio will be run down.

I suppose though that people mean it metaphorically rather than literally, in which case taking full dividends from a depreciating portfolio wouldn't count as not touching principal. As a corollary of that, I would say taking a bit more than the dividend yield from a typical stock index, but less than the earnings yield, by selling a small amount of shares, would still leave you with a portfolio that should last forever, while throwing off income. In that case you are in a sense preserving the original investment, so I'd say you can sell shares and still be preserving principal, as long as the amount you sell is small enough.

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Re: Bogle: retirees should focus on dividends

Post by 3504PIR » Wed Aug 19, 2015 11:32 am

I can't believe Mr. Bogle would disagree with common thinking on these boards, but I guess he did. :shock:

The dividend investor newsletter on Morningstar recently celebrated its 10th anniversary. Looking at its performance it has crushed the S&P 500, but I only mention that because total return is so important to many in the total return vs dividend discussions. So with the TR out of the way,sample size and all that, this is what was really interesting about the dividend side of TR in the newsletters portfolio. The newsletter has a portfolio in real $ that began with $200,000 ten years ago. The portfolio focused on equities that pay dividends which 1. maintain a safe payout ratio, 2. have a solid sustainable growth rate (or in simple language the company's fundamentals maintain a sound growth rate) and 3. grow their dividends at a reasonable rate based on #2.

The punchline is that 10 years ago with 200k and income of ~$8000 per year and not adding any funds, that today the income is over $17,500 per year. Too good to be true right? Not really if you re-read 1 through 3 above. The average blue chip dividend grower raises it's dividend around 8% annually, much higher than average inflation. Ah, but how much is that 200k now worth you ask? It isn't relevant, but the portfolio value is just over $440,000.

So if you look at how much your retirement portfolio is or how much you expect it to be, and how much of your allocation is in LC and put that into dividend growth blue chips, you don't really need $30,000.000 to retire on dividends or do you have to go to 100% equities or any of that to make it work. Plus you can put the rest into index funds and capture the market...

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SpringMan
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Re: Bogle: retirees should focus on dividends

Post by SpringMan » Wed Aug 19, 2015 11:41 am

I hear about so called "mailbox money", be it social security or dividends. This seem like a yesteryear concept in this day and age. Does anybody get these checks in their mailbox, then drive to their bank to physically deposit them? Makes no sense to me. We get our checks directly deposited. I do appreciate the Bogle article.
Best Wishes, SpringMan

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Re: Bogle: retirees should focus on dividends

Post by cjking » Wed Aug 19, 2015 11:46 am

I sold some shares for income recently. I found it annoying that I had to login again a few days later when the funds had cleared, in order to actually move the cash. My broker offers automatic purchases with cash that happens to be in the account, I wonder why they don't offer automated sales for people who want to generate cash to take out.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 11:54 am

cjking wrote:I sold some shares for income recently. I found it annoying that I had to login again a few days later after the sale had cleared, in order to actually move the cash. My broker offers automatic purchases with cash that happens to be in the account, I wonder why they don't offer automated sales for people who want to generate cash to take out.
Most brokers do, as far as I know. Did you ask and they actually said they would not do it?

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 12:14 pm

cjking wrote:
kdub wrote:Terminology such as "not touching the principal" is downright silly when applied to stocks and dividends. Dividends come out of your "principal."
I double-checked the definition of principal, and apparently it means the original loan/investment that generates income. So people who don't sell shares are correct to say they are not touching their principal. This is true even if they own shares that distribute an amount greater than profits, so that the portfolio will be run down.

This is correct but I think it sends investors off down a path that is irrational and not helpful. A more "correct" or at least more useful concept of principle would be the wherewithal to generate future income in perpetuity, and that is just the real value of the actual assets. In other words, if you don't intend to see to it that your assets grow with inflation even while you are taking withdrawals, then you are "invading principal" no matter how much you want to fool yourself otherwise. There are very few people who realistically can or would want to operate this way. In reality most people who save for retirement either explicitly or implicitly intend to spend down those assets, invade principal, or whatever you want to call it. The only issue is which ones have their eyes open about what they are doing and which ones have taken refuge in some sort of false security by closing their eyes to what they are actually doing. In short the notion of "not invading principle" is not honored by most investors and does not apply.

I suppose though that people mean it metaphorically rather than literally, in which case taking full dividends from a depreciating portfolio wouldn't count as not touching principal.

I agree with that. There are investors who see the issue this way. It is easy to reinforce this view by quoting the fact that the number of shares they have has not been reduced. Counting wealth by number of shares is one way to close one's eyes to what is going on.

As a corollary of that, I would say taking a bit more than the dividend yield from a typical stock index, but less than the earnings yield, by selling a small amount of shares, would still leave you with a portfolio that should last forever, while throwing off income.

I don't know if that is true or not. One would have to actually find the data or the analysis that proves that to be true or shows that historically it is true. Keep in mind that the proof has to show that not only would the portfolio not be reduced to zero and still allow for withdrawals but also that the income has been sustained, meaning that it is at least as much as the inflation indexed amount of income originally anticipated. It is not useful to show that a portfolio still exists at 1% of its original value producing 1% of the original income. The analysis that can be and has been done is the SWR work, which actually does pay attention to what happens to the portfolio and what happens to the income. Note that one can run an SWR study under the condition that the inflation indexed value of the assets, aka the principal, has been preserved. That is why the right analysis addresses everything the "dividend investor" wants to know and also addresses the rest of the issues that the "dividend investor" wants to ignore.

In that case you are in a sense preserving the original investment, so I'd say you can sell shares and still be preserving principal, as long as the amount you sell is small enough.

Exactly, but someone has to do the analysis that shows the amount being sold is small enough to "preserve" the original investment, however one wants to define that. When people talk about "total return" investing they are talking about looking at all the information and doing all the analysis that allows them to see as well as they can everything you need to see to know these things.



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Re: Bogle: retirees should focus on dividends

Post by goingup » Wed Aug 19, 2015 1:23 pm

rca1824 wrote:
goingup wrote:
rca1824 wrote:
goingup wrote:The older I get the greater the appeal of this idea of passive income streams. But with 2/3 of our portfolio in taxable right now, and being in a high tax bracket, the last thing we want is a High Dividend Yield fund throwing off dividends.

I don't follow how retirees, who have built a tax-efficient portfolio (with large capital gains) can dismount that horse and hop onto a high dividend yielding one.
It's for ultra passive retirees who don't want to manage liquidating shares. It's not mathematically optimal, it's just for simplicity.

I also think the idea is that you would try to match the dividend yield to your income needs, so there would be little to no dividends reinvested, therefore little to no tax waste.

You can also choose to just live off the dividends of the Total Stock Market and NOT tilt towards High Dividend stocks. This would give combined growth + income.
Thanks rca1824-
I probably didn't explain the dilemma very succinctly. The problem is if you've built a large tax-efficient portfolio, with TSM as the core, you can't just swap it out for the High Dividend Yield fund in order to gain a larger dividend stream in retirement. Logistically it doesn't make sense.

When you're in the final throes of accumulation, and have been tax-efficient throughout, you're wedded to the Total Return model unless 2% of your portfolio is a robust income stream for you. This is fine for us, and has always been the plan. I'm just not sure who John Bogle's likely audience is for such a strategy.
That is a great point. Ideally all but the highest net worth retirees will have most of their assets in 401ks and IRAs. Even if one contributions the max to these, that can be several million dollars alone. So it takes quite some time for someone to exceed those limits and invest in taxable. If you have gotten to your taxable space, you probably have several million net worth. In that scenario you can probably safely live off the 2% dividend yield of the total stock market. Or just use tilt to dividends in your retirement accounts.

In general, tax bills are a good problem to have, because it implies you have enough wealth to qualify for taxes.
Not to sidetrack this dividend discussion, but many BHs (not talking about entire population of savers) have good-sized taxable accounts because:

They are phased out for Roths
They are HCEs and their contributions to 401Ks are limited
They receive stock options and bonuses
They have sold a property or business
They have received an inheritance
They've planned to bridge the years between early retirement and SS with taxable savings

I assume Jack Bogle is talking about a dividend strategy for taxable accounts. I guess I don't see how it would play out in tax-advantaged accounts with RMDs. FWIW, you'll get a much bigger check in your mailbox with a High Dividend Yield fund, than with TSM.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 1:30 pm

The last couple of comments do bring up the issue that people living in retirement from 401K or IRA don't get dividend checks, so ????

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Re: Bogle: retirees should focus on dividends

Post by goingup » Wed Aug 19, 2015 1:34 pm

dbr wrote:The last couple of comments do bring up the issue that people living in retirement from 401K or IRA don't get dividend checks, so ????
Well...exactly. Does Bogle's dividend strategy apply to investors who have their entire portfolio in 401Ks and IRA's? That's a good question.

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Re: Bogle: retirees should focus on dividends

Post by Wagnerjb » Wed Aug 19, 2015 1:38 pm

rca1824 wrote: If you have gotten to your taxable space, you probably have several million net worth. In that scenario you can probably safely live off the 2% dividend yield of the total stock market.
Why on earth would somebody do that? The savings math is identical for the guy making $30,000 and the guy making $300,000. Both save a certain percentage of their income. Both target a goal of 25x their annual spending at retirement. Both use the 4% rule in retirement.

That guy making $300,000 may be spending $200,000 a year (after taxes and savings). He has finally achieved a nest egg of $5 or $6 million. And he isn't about to downgrade his spending by 50% just to live off a 2% dividend yield.

It doesn't matter how much you make. You save 15% of your income annually. At retirement you have 25x your spending. Then you use the 4% rule.

Best wishes.
Andy

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Re: Bogle: retirees should focus on dividends

Post by AZAttorney11 » Wed Aug 19, 2015 1:47 pm

For those that want simplicity and regular monthly checks that are guaranteed to stay the same or increase with inflation, a SPIA may be a good choice, particularly when interest rates are higher. Dividends get slashed, companies fail, etc. But a SPIA under applicable insurance limits is not subject to those risks.

For those desiring a certain monthly income, SS plus a SPIA can make a powerful combination.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 1:51 pm

goingup wrote:
dbr wrote:The last couple of comments do bring up the issue that people living in retirement from 401K or IRA don't get dividend checks, so ????
Well...exactly. Does Bogle's dividend strategy apply to investors who have their entire portfolio in 401Ks and IRA's? That's a good question.
Sure it can--or rather it might be possible to manage it if one really wanted to do it. You set aside your dividends and withdraw them when they become available. I am not so sure you can find plan managers that will actually send you dividends issued when they issue. You would have to manipulate that by hand. You can do things in an IRA that might not be able to be manipulated in a 401K. For one thing many funds in 401Ks have investment trust structure where the NAV increases rather than that dividends are directed to a cash holding. Obviously Mr. Bogle can't be taken literally because not all investments work that way.

But Mr. Bogle doesn't mean that one should somehow arrange that one depends for income on literally getting an envelope in the mail every month. He probably does mean that in a 401k or IRA that one should tilt one's stock investments to dividend payers. He doesn't explain exactly how that should be done. After all it would be a trick indeed to invest in a fund that did not pay dividends. We also don't mean if by dividends he means the interest paid by bonds in the form of bond mutual funds, called dividends, and whether or not the interest paid by individual bonds or CDs does or does not count. We cannot reconcile age-in-bonds with get all your income from dividends paid by stocks for sure.

Again it is a real puzzle to figure out exactly what the statement was supposed to mean.

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Re: Bogle: retirees should focus on dividends

Post by dbr » Wed Aug 19, 2015 1:53 pm

AZAttorney11 wrote:For those that want simplicity and regular monthly checks that are guaranteed to stay the same or increase with inflation, a SPIA may be a good choice, particularly when interest rates are higher. Dividends get slashed, companies fail, etc. But a SPIA under applicable insurance limits is not subject to those risks.

For those desiring a certain monthly income, SS plus a SPIA can make a powerful combination.
Absolutely, but Mr. Bogle didn't think to include that comment. Should we conclude that he advises people against purchasing SPIAs? Certainly a person advising people to have great concern for their income streams, who starts the conversation by emphasizing the importance of SS and pensions, would bring SPIAs into the conversation before they would bring stock dividends into the conversation.

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Re: Bogle: retirees should focus on dividends

Post by rca1824 » Wed Aug 19, 2015 2:01 pm

Wagnerjb wrote:
rca1824 wrote: If you have gotten to your taxable space, you probably have several million net worth. In that scenario you can probably safely live off the 2% dividend yield of the total stock market.
Why on earth would somebody do that? The savings math is identical for the guy making $30,000 and the guy making $300,000. Both save a certain percentage of their income. Both target a goal of 25x their annual spending at retirement. Both use the 4% rule in retirement.

That guy making $300,000 may be spending $200,000 a year (after taxes and savings). He has finally achieved a nest egg of $5 or $6 million. And he isn't about to downgrade his spending by 50% just to live off a 2% dividend yield.

It doesn't matter how much you make. You save 15% of your income annually. At retirement you have 25x your spending. Then you use the 4% rule.

Best wishes.
Your retirement needs don't arbitrarily scale up with your income while working. That doesn't make any sense, unless you are using a model of extreme 100% hedonic adaptation. The guy making $300,000 doesn't need to spend $200,000 per year in retirement. That's excessive. He can easily downgrade his spending by 50% to live off the 2% dividend. Of course this is all already stacked on top of the assumption that the investor is "ultra passive" and wants the simplicity of living off dividends without the "hassle" of liquidating shares. I think if you've retired with $6 million and you want to avoid a large tax burden switching to HY dividends then you will be willing to accept the "complexity" of liquidating shares in order to save taxes. That one action of spending a couple minutes a year selling shares can save thousands of dollars, so its worth it.

Sorry but I believe you simply cannot simultaneously have enormous wealth, ultra passivity and simplicity, and tax avoidance. You get to pick 2 out of the 3.

The correct model is to work backwards: Define your retirement needs and bequest motive, work backwards to figure out how much wealth you need to attain those goals, then work until you have that wealth. Readjust your goals as needed if it looks like you are going to severely under- or over-shoot them.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Bogle: retirees should focus on dividends

Post by kdub » Wed Aug 19, 2015 2:08 pm

cjking wrote:
kdub wrote:Terminology such as "not touching the principal" is downright silly when applied to stocks and dividends. Dividends come out of your "principal."
I double-checked the definition of principal, and apparently it means the original loan/investment that generates income. So people who don't sell shares are correct to say they are not touching their principal. This is true even if they own shares that distribute an amount greater than profits, so that the portfolio will be run down.

I suppose though that people mean it metaphorically rather than literally, in which case taking full dividends from a depreciating portfolio wouldn't count as not touching principal. As a corollary of that, I would say taking a bit more than the dividend yield from a typical stock index, but less than the earnings yield, by selling a small amount of shares, would still leave you with a portfolio that should last forever, while throwing off income. In that case you are in a sense preserving the original investment, so I'd say you can sell shares and still be preserving principal, as long as the amount you sell is small enough.
I don't disagree about the definition. My objection is for those who refer to a stock's dividend as analogous to a bond's interest. The former is paid to you out of a cash pile you already own, whereas the latter is paid to you out of some else's cash pile. Thus, a dividend should be viewed as a distribution rather than as income.

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Re: Bogle: retirees should focus on dividends

Post by Wagnerjb » Wed Aug 19, 2015 2:37 pm

rca1824 wrote: Your retirement needs don't arbitrarily scale up with your income while working. That doesn't make any sense, unless you are using a model of extreme 100% hedonic adaptation. The guy making $300,000 doesn't need to spend $200,000 per year in retirement. That's excessive. He can easily downgrade his spending by 50% to live off the 2% dividend.
I know an awful lot of people who make $300,000. Not a single one lives like he makes $100,000. Not a one. Those guys have $1 million homes, they drive a Mercedes and their wife drives a Lexus. They vacation in Europe each summer. They eat at the best restaurants. They have vacation homes at the beach. They have maid service to clean their house, they have a pool cleaning service, they have a lawn mowing service, etc.

That may be "excessive" to you, and you are entitled to an opinion. I just don't think your view is an accurate reflection of how most people in that income category behave.

Best wishes.
Andy

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Re: Bogle: retirees should focus on dividends

Post by AZAttorney11 » Wed Aug 19, 2015 2:53 pm

Wagnerjb wrote:I know an awful lot of people who make $300,000. Not a single one lives like he makes $100,000. Not a one. Those guys have $1 million homes, they drive a Mercedes and their wife drives a Lexus. They vacation in Europe each summer. They eat at the best restaurants. They have vacation homes at the beach. They have maid service to clean their house, they have a pool cleaning service, they have a lawn mowing service, etc.

That may be "excessive" to you, and you are entitled to an opinion. I just don't think your view is an accurate reflection of how most people in that income category behave.

Best wishes.
This. Your experiences mirror mine. Some live like they make $100,000 a year. Others like they make $300,000 a year. And yet others who act like they make $500,000 a year. Most act like they make $300,000 a year. Living below your means is all relative.

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Re: Bogle: retirees should focus on dividends

Post by BahamaMan » Wed Aug 19, 2015 3:09 pm

Wagnerjb wrote:I know an awful lot of people who make $300,000. Not a single one lives like he makes $100,000. Not a one. Those guys have $1 million homes, they drive a Mercedes and their wife drives a Lexus. They vacation in Europe each summer. They eat at the best restaurants. They have vacation homes at the beach. They have maid service to clean their house, they have a pool cleaning service, they have a lawn mowing service, etc.

That may be "excessive" to you, and you are entitled to an opinion. I just don't think your view is an accurate reflection of how most people in that income category behave.

Best wishes.
Yes, I know these people also. And some manage to live this way year after year. I have seem some get a 'Rude Awakening' with a Life changing event. This can be painful. We had a very rich car dealer end up in dire straights a few years ago. http://www.startribune.com/denny-hecker ... /46967952/

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Re: Bogle: retirees should focus on dividends

Post by Wagnerjb » Wed Aug 19, 2015 3:31 pm

BahamaMan wrote: Yes, I know these people also. And some manage to live this way year after year. I have seem some get a 'Rude Awakening' with a Life changing event. This can be painful. We had a very rich car dealer end up in dire straights a few years ago. http://www.startribune.com/denny-hecker ... /46967952/
Fair enough. I did not mean to suggest that the $300,000 earner does not save any money. Let's hope he/she saves 15% ($45,000) and assume they pay another $55,000 in income taxes. That leaves them to spend $200,000 annually. If they have been diligent and consistent at saving, they will reach financial independence at the same time as the folks earning $30,000.

Yes, bad things can certainly happen.....especially if you borrow $1 billion and cannot pay it back. But I am thinking of the local surgeon, the partner in a law firm or accounting firm or engineering firm, the senior manager at a Fortune 500 company, a small business owner.

Best wishes.
Andy

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Re: Bogle: retirees should focus on dividends

Post by Dandy » Wed Aug 19, 2015 3:46 pm

Your post should have been written as corrected above
I'll stick by my post and you can have your preferences. I think core expenses when covered by various income streams is nice in retirement. The withdrawals can then be for special non core expenses, helping children or charity. That would be a good sleep situation where your withdrawals are essentially discretionary.

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