Living Off Dividends

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Stormbringer
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Living Off Dividends

Post by Stormbringer » Mon Jul 24, 2017 12:33 pm

If an investor had say three years of living expenses in a money market account, and could live off the dividend yield (say 2.5%) of a dividend-oriented index fund, is there any reason to own bonds?

The logic being that in aggregate, dividends rarely get cut, and when they do, they tend to be restored as quickly as possible. The cash would be there as a shock-absorber in those cases. Also, the dividend growth-rate of the S&P 500 has historically been comfortably above the rate of inflation, so real purchasing power should increase over time.
"Compound interest is the most powerful force in the universe." - Albert Einstein

mcraepat9
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Re: Living Off Dividends

Post by mcraepat9 » Mon Jul 24, 2017 12:40 pm

I would much prefer the bonds than relying on dividends. They get cut at precisely the time you are most vulnerable.

General Electric announced a substantial cut in its dividends in the summer of 2008 and it has still not yet returned to its previous level.

I am a "total return" believer - so I don't see much difference is relying on cash dividends vs. selling a portion of equities to get the same amount of cash.
Amateur investors are not cool-headed logicians.

snarlyjack
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Location: Montana

Re: Living Off Dividends

Post by snarlyjack » Mon Jul 24, 2017 1:02 pm

I've spent the last 3 years studying this.

You will find different answers here in Bogleheads
(pro's & con's). Which is better is open to debate?

I think the optimum is a 70/30 or 80/20 portfolio (stock/bond ratio)
with lot's of cash put aside for a down market or emergency.
All Boglehead principles would apply. Long term buy & hold,
low ER & grow the portfolio as much as possible, no debt,
low expenses, etc.

Here is a video of 1 of my favorite investors.

Enjoy...

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

Thesaints
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Re: Living Off Dividends

Post by Thesaints » Mon Jul 24, 2017 1:07 pm

Dividends on bonds are more or less fixed, until maturity.
Dividends on stocks are not.

retiredjg
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Re: Living Off Dividends

Post by retiredjg » Mon Jul 24, 2017 1:09 pm

The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.

Thesaints
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Re: Living Off Dividends

Post by Thesaints » Mon Jul 24, 2017 1:14 pm

retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.

bigred77
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Re: Living Off Dividends

Post by bigred77 » Mon Jul 24, 2017 1:21 pm

Thesaints wrote:
retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
Thats not quite how it works. stocks drop 50%, but the dividends that are paid out stay exactly the same. The dividend yield doubles, but the dividends companies pay stays unchanged.

Companies don't declare a 2% dividend. They declare a $1 annual dividend and their share price just happens to be $50.

mcraepat9
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Re: Living Off Dividends

Post by mcraepat9 » Mon Jul 24, 2017 1:24 pm

bigred77 wrote:
Thesaints wrote:
retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
Thats not quite how it works. stocks drop 50%, but the dividends that are paid out stay exactly the same. The dividend yield doubles, but the dividends companies pay stays unchanged.

Companies don't declare a 2% dividend. They declare a $1 annual dividend and their share price just happens to be $50.
In theory this is correct, but in practice, if a company's stock drops 50%, it's not likely to continue its $X dividend. See, e.g. GE from 2007-09
Amateur investors are not cool-headed logicians.

bigred77
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Re: Living Off Dividends

Post by bigred77 » Mon Jul 24, 2017 1:30 pm

mcraepat9 wrote:
bigred77 wrote:
Thesaints wrote:
retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
Thats not quite how it works. stocks drop 50%, but the dividends that are paid out stay exactly the same. The dividend yield doubles, but the dividends companies pay stays unchanged.

Companies don't declare a 2% dividend. They declare a $1 annual dividend and their share price just happens to be $50.
In theory this is correct, but in practice, if a company's stock drops 50%, it's not likely to continue its $X dividend. See, e.g. GE from 2007-09
I agree dividend payouts are at risk in any big recession/depression but my post was only trying to demonstrate (probably poorly) that if an equity index drops 50%, the underlying companies do not need to "double their dividends" in order to keep the cashflow stream constant. If dividend payments remain unchanged, stocks decline in value by 50%, the dividend yield will double and the investor will receive the exact same dollar amount in dividend income.

Thesaints
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Re: Living Off Dividends

Post by Thesaints » Mon Jul 24, 2017 1:31 pm

Just look a plot of the S&P500 dividends. Except for a spike at the end of 2008, when prices suddenly dropped but dividends had already been declared, the payout reverted very quickly to ~2%. Yet the market regained its pre-drop value only several years later.

Besides...
http://www.multpl.com/s-p-500-dividend/
Last edited by Thesaints on Mon Jul 24, 2017 1:32 pm, edited 1 time in total.

mcraepat9
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Re: Living Off Dividends

Post by mcraepat9 » Mon Jul 24, 2017 1:31 pm

bigred77 wrote:
mcraepat9 wrote:
bigred77 wrote:
Thesaints wrote:
retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
Thats not quite how it works. stocks drop 50%, but the dividends that are paid out stay exactly the same. The dividend yield doubles, but the dividends companies pay stays unchanged.

Companies don't declare a 2% dividend. They declare a $1 annual dividend and their share price just happens to be $50.
In theory this is correct, but in practice, if a company's stock drops 50%, it's not likely to continue its $X dividend. See, e.g. GE from 2007-09
I agree dividend payouts are at risk in any big recession/depression but my post was only trying to demonstrate (probably poorly) that if an equity index drops 50%, the underlying companies do not need to "double their dividends" in order to keep the cashflow stream constant. If dividend payments remain unchanged, stocks decline in value by 50%, the dividend yield will double and the investor will receive the exact same dollar amount in dividend income.
agree - sorry for confusion.
Amateur investors are not cool-headed logicians.

mega317
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Re: Living Off Dividends

Post by mega317 » Mon Jul 24, 2017 2:13 pm

Stormbringer wrote:If an investor had say three years of living expenses in a money market account, and could live off the dividend yield (say 2.5%) of a dividend-oriented index fund, is there any reason to own bonds?
In addition to the points made above, if you can live off 2.5% of your portfolio, you have a very conservative withdrawal rate and you're investing for your heirs. They probably want you stock-heavy. Adding bonds will, as it does for everyone else, reduce volatility. My feeling is that I probably don't want to work until I have 40x expenses. This is a good example of potentially making bad decisions by treating dividends as separate from total return.

Didn't we just get a dividend thread locked yesterday?

Wakefield1
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Re: Living Off Dividends

Post by Wakefield1 » Mon Jul 24, 2017 3:57 pm

The expectation is,if something bad happens to the economy-perhaps something worse than has happened during my lifetime and certainly something much much worse than the 2000,1987,or 2008 Bears,that stocks could decline catastrophically and their dividends get cut severely,however Bonds would largely continue to pay their dividends,therefor their prices would hold up much better than stock prices. At least high quality and Government Bonds.
Somewhere Mr. Bogle has written of the experience of the early predecessor of Wellington Fund,the manager had the genius or good luck to have foreseen the coming problems as of 1928 or 1929 and moved largely into (if I remember) U.S. Government Bonds. However they did it,call it prescience or market timing,they (Future Employers of Mr. Bogle) got it right.
Bonds can fail theoretically. No one expects U.S. Government Bonds to fail. Bondholders are supposed to come before common stockholders in such things as bankruptcy liquidations. At least that is what I was taught.

Thesaints
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Re: Living Off Dividends

Post by Thesaints » Mon Jul 24, 2017 4:15 pm

The big safety advantage of bonds compared to stocks is not to be found in their superior rights in bankruptcy. In such an event both are royally screwed: stockholders AND bondholders.

The advantage instead is that as a bondholder I'm substantially decoupled from the fortunes of the issuer. They can do very weel, so-so, even badly, and I still I get paid the very same interests and capital. I've only to be worried about the issuer doing so badly that they cannot service their debt.
Compare to a stockholder, whose returns are not only very much dependent on how the issuer is doing, but also on how their competitors are doing, and even the economy in general.

indexonlyplease
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Re: Living Off Dividends

Post by indexonlyplease » Mon Jul 24, 2017 4:23 pm

I am not sure how it works but my wife's friend lives of of dividends that are from her husbands trust fund the family set up over 25 yrs ago when they got married. The husbands is slow in the mind so works as a bag boy, she is a substitute teacher. Yes set up marriage of some sort. She told my wife years ago the sister sends them the money monthly and lump sum when needed. She also told her that the sister said its money from dividends and not principle. They have 2 adult kids that will receive the dividends one day.

So, I am not sure what size portfolio they have but my wife states there lifestyle is no less than $100000 a year. Can dividend portfolio do this??? Must be really large portfolio.

I guess that also keeps them in the low 15% tax bracket. Warren Buffet tax 15%

Thesaints
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Re: Living Off Dividends

Post by Thesaints » Mon Jul 24, 2017 4:25 pm

A 5 million portfolio, to be sure.

tesuzuki2002
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Re: Living Off Dividends

Post by tesuzuki2002 » Mon Jul 24, 2017 4:28 pm

mcraepat9 wrote:I would much prefer the bonds than relying on dividends. They get cut at precisely the time you are most vulnerable.

General Electric announced a substantial cut in its dividends in the summer of 2008 and it has still not yet returned to its previous level.

I am a "total return" believer - so I don't see much difference is relying on cash dividends vs. selling a portion of equities to get the same amount of cash.

The GE dividend cut is almost fully restored..

Nate79
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Re: Living Off Dividends

Post by Nate79 » Mon Jul 24, 2017 4:45 pm

Thesaints wrote:Just look a plot of the S&P500 dividends. Except for a spike at the end of 2008, when prices suddenly dropped but dividends had already been declared, the payout reverted very quickly to ~2%. Yet the market regained its pre-drop value only several years later.

Besides...
http://www.multpl.com/s-p-500-dividend/
That is a great graph. It shows that there have been times in history where your dividend income could be cut by 50% and not recover for a decade. That should caution any dividend income investor.

jebmke
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Re: Living Off Dividends

Post by jebmke » Mon Jul 24, 2017 4:47 pm

indexonlyplease wrote: She also told her that the sister said its money from dividends and not principle.
Even some pension plans are set up such that they are legally only able to distribute "income." One of my siblings was a beneficiary of one such plan and the trustees had to skew investments to throw off income because they were not permitted to distribute gains.
When you discover that you are riding a dead horse, the best strategy is to dismount.

pkcrafter
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Re: Living Off Dividends

Post by pkcrafter » Mon Jul 24, 2017 6:00 pm

Stormbringer wrote:If an investor had say three years of living expenses in a money market account, and could live off the dividend yield (say 2.5%) of a dividend-oriented index fund, is there any reason to own bonds?

The logic being that in aggregate, dividends rarely get cut, and when they do, they tend to be restored as quickly as possible. The cash would be there as a shock-absorber in those cases. Also, the dividend growth-rate of the S&P 500 has historically been comfortably above the rate of inflation, so real purchasing power should increase over time.
Not a good idea to make withdrawals when a stock fund is down, and if you are taking dividends, you are making withdrawals even when the fund has dropped 30-40%. Much better to let the divy's buy additional shares at a low price.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Stormbringer
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Re: Living Off Dividends

Post by Stormbringer » Mon Jul 24, 2017 6:31 pm

pkcrafter wrote:Not a good idea to make withdrawals when a stock fund is down, and if you are taking dividends, you are making withdrawals even when the fund has dropped 30-40%. Much better to let the divy's buy additional shares at a low price.
What I'm suggesting is living off the stream of dividend payments, not living off selling shares. With dividends, the ups and downs of the market (share prices) are irrelevant. The three years expenses in cash is there to fall back on during a deep recession where dividends might get reduced.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Senorwc
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Re: Living Off Dividends

Post by Senorwc » Mon Jul 24, 2017 6:31 pm

These posts are always interesting to me. The OP appears to be talking about a fixed dollar amount of dividends and a lot of the replys come in the form of yield (feels apples to oranges). Additionally, while individual stocks have cut their dividends, feels like the right measure for this forum is the S&P 500 dividend dollars. It is comparing apples to oranges if you talk about individual dividend cuts (people have mentioned GE) but not default rate for bonds (understand this is moot if you on invest only in gov securities but that feels like a minority on this forum). Happy to get the contrary opinions/facts but (again focusing on absolute dollars) when the market 'crashes' by 50%, dividends in the s&P were only cut 21% (2009). Going back almost 30yrs, only 3yrs where absolute dividends growth has been negative (-2.5 in 2001, and -3.2% in 2002.....again using only the S&P index as the proxy and realize people will want to go back further....).

At the end of the day, if you run the math (would love the contrary) this strategy works (may not be optimal buts works)

ThrustVectoring
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Re: Living Off Dividends

Post by ThrustVectoring » Mon Jul 24, 2017 7:39 pm

The relevant variable for stock vs bond allocation is when you expect to spend the money. Kind of a secondary point is how willing you are to cut expenses if your portfolio does badly (or splurge if it does well).

Are you willing to cut your expenses by whatever percentage the stock market goes down by? If not, you need to have enough safe assets so that your equity holdings can ride out a market downturn.

Stormbringer
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Re: Living Off Dividends

Post by Stormbringer » Mon Jul 24, 2017 7:43 pm

ThrustVectoring wrote:Are you willing to cut your expenses by whatever percentage the stock market goes down by?
If all you are living off is your dividend checks and never selling shares, how is the stock price relevant?
"Compound interest is the most powerful force in the universe." - Albert Einstein

Longtermgrowth
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Re: Living Off Dividends

Post by Longtermgrowth » Tue Jul 25, 2017 1:23 am

I suppose if nothing happens that hasn't already happened in the last 90 years, it could work alright. I seem to remember reading somewhere on here about a study showing that to be 100% sure of success, to plan for somewhere around a 50% cut in dividends. Seems a bit extreme, but who knows what the future could bring.
How much did the S&P 500 dividends drop in the 2008-2009ish time frame? Mid to upper 20% reduction? What if that was a mid 30% reduction for a decade? May not have happened in the past, but never out of the range of possibilities in the future.

I keep my fingers crossed that it will never be more than a third reduction for more than a decade, because it seems like things would have to be pretty bad for that to happen.

mega317
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Re: Living Off Dividends

Post by mega317 » Tue Jul 25, 2017 1:44 am

So you to want to save, let's assume 50k expenses, 2M if dividends are 2.5%. And if you want to plan for dividends to be cut by 1/3 so you need 3M? Whereas if you use 4% withdrawal that includes selling shares,you need less than half that. Of course it will work. If you live long enough to build that portfolio.
The GE dividend cut is almost fully restored.
Emphasis mine.
You're ok with spending less than you planned for at least the first 9 years of retirement?

Stryker
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Re: Living Off Dividends

Post by Stryker » Tue Jul 25, 2017 3:40 am

I wouldn't know of you can live off dividends since even in retirement I'm still in the process of rebuilding our portfolio of individual dividend growth stocks. The first portfolio was sold to put a substantial down payment on our house in the late 90's. The second portfolio of Canadian dividend growth stocks got started in 2003 once the mortgage was paid off. The assets and the income from this portfolio keeps growing each year. We keep re-investing into this portfolio. On a middle class lifestyle we tend to do our yearly spending from pensions and even from that we seem to have a small amount of savings each year that we use for re-investment.

Back in the early 90's Edmund Faltermayer had a series of articles in Fortune magazine where he was planning to live off growing dividends in retirement. He had started the portfolio in the late 70's at a time when many investors had given up on stocks. Unfortunately, for Edmund he passed away about a decade after his articles came out after retiring in 1994. He died of Lou Gehrig's disease in 2003 at the age of 75. I miss him. He was one of my mentor's in the early stages of my investing at the time and I kept the original magazines and still re-read his articles.

LESSONS FROM A LAZY AMATEUR THE NO-SWEAT WAY TO WIN WITH STOCKS: HOLD SHARES IN GOOD COMPANIES THAT PAY RISING DIVIDENDS.

By EDMUND FALTERMAYER REPORTER ASSOCIATE Ricardo Sookdeo
October 29, 1990

BIG RETURNS MY WAY

By Edmund Faltermayer
October 26, 1992

STOCKS A RETIREE CAN STICK WITH Here's how one investor is able to reap growing dividends from safe companies that can be largely -- although not entirely -- ignored.

By Edmund Faltermayer
October 25, 1993

SGM
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Re: Living Off Dividends

Post by SGM » Tue Jul 25, 2017 4:22 am

It is entirely possible to retire and live off of dividends. This means something like a 2.5% withdrawal rate which would likely last a lifetime as a 4% withdrawal rate is often considered safe in retirement. The portfolio would need to be large or living expenses low. The total return may be less than a portfolio that does not focus on dividends, but it is doable. Dividends could be cut so there may be a need for belt tightening for an unknown period of time.

Individual stocks add risk over a diverse mutual fund portfolio, but that should be obvious to anyone who has spent much time on this website. If one has a smaller portfolio 2.5% may not be enough without other income streams. If the portfolio is larger there may be enough for a significant bequest.

The main danger I see in a spending dividends only approach is that one may be tempted to purchase riskier investments with a higher yield. Having a lower total return may be acceptable to those that opt for a safer lower withdrawal rate.

minimalistmarc
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Re: Living Off Dividends

Post by minimalistmarc » Tue Jul 25, 2017 5:12 am

The "living off dividends" idea just makes me bang my head off a brick wall.

I have a well diversified P2P loan portfolio (asset backed loans only), that pays around 12% - 13% annually, in monthly installments.

I have not had any losses in 3 years.

If you were obsessed with living off dividends relating to dividends for shares, which is just the same as selling down your capital, whyg not switch to a high income portfolio based on something similar to above, and then you would need save much less money to retire.

Main disadvantage, requires a bit more time and effort than boglehead share investing, which is why most of my money still goes into boglehead equity portfolio. When I am > 70 I don't think I will have the inclination to manage my P2P portfolio anymore.

rkhusky
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Re: Living Off Dividends

Post by rkhusky » Tue Jul 25, 2017 7:02 am

You should first figure out what stock/bond ratio that you want in retirement. Vanguard suggests 30/70 (although their TR funds start at 50/50 at the target date and then transition to 30/70 over the next 7 years). Once you've figured out how much stock you want, then estimate the amount of stock dividends and bond dividends you expect to receive each year. If that is sufficient for your spending needs, you are golden.

Personally, I would not go 100% stocks and expect to live off stock dividends, because I am somewhat risk averse. I expect to be at 30/70 at retirement and may transition up to 40/60 later in retirement.

ThrustVectoring
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Re: Living Off Dividends

Post by ThrustVectoring » Tue Jul 25, 2017 1:57 pm

Stormbringer wrote:
ThrustVectoring wrote:Are you willing to cut your expenses by whatever percentage the stock market goes down by?
If all you are living off is your dividend checks and never selling shares, how is the stock price relevant?
In an extended bear market, stock prices are lower for a reason - specifically, because the underlying businesses are genuinely weaker, and less able to support growth and/or paying dividends. If stock prices fall and dividends don't, rational market participants would buy the under-priced assets, and it would be a temporary dip rather than an extended bear market.

3 years of cash is not enough time to wait out extended bear markets, historically speaking.

retire57
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Re: Living Off Dividends

Post by retire57 » Tue Jul 25, 2017 3:22 pm

One theme I've noticed running through all these threads about distribution of one's portfolio after retirement is the very large assumption that you will know how you will feel when the time comes.

"Well, if I were 70, I would do XYZ ... "

As someone 1.5 years into retirement, I can tell you this - you don't know. Things begin to look quite different once you arrive at that 'someday'.

RAchip
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Re: Living Off Dividends

Post by RAchip » Tue Jul 25, 2017 3:32 pm

Living off of dividends works but it requires a multi million dollar portfolio. Anyone suggesting you need to worry about a 50% reduction in dividends is misguided. A portfolio yielding 2.5-3.0% can be built with a very very low chance of an overall dividend cut. There is a much much greater chance of a 100% or more appreciation of your stock value. That is the big bonus in divedend investing. You can live off the dividends and then your net worth doubles before you know it from price appreciation.

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Phineas J. Whoopee
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Re: Living Off Dividends

Post by Phineas J. Whoopee » Tue Jul 25, 2017 3:34 pm

retire57 wrote:One theme I've noticed running through all these threads about distribution of one's portfolio after retirement is the very large assumption that you will know how you will feel when the time comes.

"Well, if I were 70, I would do XYZ ... "

As someone 1.5 years into retirement, I can tell you this - you don't know. Things begin to look quite different once you arrive at that 'someday'.
Affective forecasting is notoriously unreliable.
PJW

The Wizard
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Re: Living Off Dividends

Post by The Wizard » Tue Jul 25, 2017 3:35 pm

Thesaints wrote: I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
Now it's not. Do some homework. Dividends fluctuate very little during the crash of '08...
Attempted new signature...

retire57
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Re: Living Off Dividends

Post by retire57 » Tue Jul 25, 2017 3:41 pm

Phineas J. Whoopee wrote:
retire57 wrote:One theme I've noticed running through all these threads about distribution of one's portfolio after retirement is the very large assumption that you will know how you will feel when the time comes.

"Well, if I were 70, I would do XYZ ... "

As someone 1.5 years into retirement, I can tell you this - you don't know. Things begin to look quite different once you arrive at that 'someday'.
Affective forecasting is notoriously unreliable.
PJW
Exactly, PJW. I am aware of the behavioral studies that support my claims above, but am way too lazy to look for sources. Thanks for not being too lazy!

The Wizard
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Re: Living Off Dividends

Post by The Wizard » Tue Jul 25, 2017 4:12 pm

I think that living off dividends is a fine thing to do if you have enough millions in diversified stocks and want to leave much of your estate to something upon your demise.
With $10M in TSM, you should be able to get close to $200,000 in dividends per year, which is enough for many retirees to scrape by on.
Sadly, my accumulation is way less than that, so I needed a more aggressive approach for retirement income...
:(
Attempted new signature...

jbolden1517
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Re: Living Off Dividends

Post by jbolden1517 » Tue Jul 25, 2017 4:28 pm

Thesaints wrote:
retiredjg wrote:The reason to hold bonds is to stabilize the portfolio.

A 100% stock portfolio may drop 50% in a crash. If the investor would have no feelings about that, there is no problem as long as the dividends continue on. But it would be a rare investor who would have no feelings about that. And you cannot depend on the dividends continuing. They might. They might not.
I see a big problem: when the stock market drops 50% in a crash, companies are not doubling their dividends (likely, they would be reducing them instead).
Suddenly the dividend flow is cut in half, at best.
We had exactly that situation in 2008. Market dropped 56%, dividends fell 21%. Similarly during the depressions stocks were down 90% dividends were down under 80%. Dividend payouts are more stable than stock prices in deflationary bears. And I should mention deflationary recessions since they cut the cost of living aren't the most serious threat to a retirement portfolio. In real terms you get a bit of extra protection as prices fall.

The most serious threat to a retirement portfolio is an inflationary recession. Stock prices fall sharply in real terms, bonds get destroyed. Cash doesn't keep up. Dividends because most dividend companies are carrying lots of fixed cost debt, thrive in those environments generally staying flat inflation adjusted. So for example 73-74 bear inflation was 18% dividends rose 17%.

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Re: Living Off Dividends

Post by jbolden1517 » Tue Jul 25, 2017 4:32 pm

Longtermgrowth wrote:I suppose if nothing happens that hasn't already happened in the last 90 years, it could work alright. I seem to remember reading somewhere on here about a study showing that to be 100% sure of success, to plan for somewhere around a 50% cut in dividends. Seems a bit extreme, but who knows what the future could bring.
How much did the S&P 500 dividends drop in the 2008-2009ish time frame? Mid to upper 20% reduction? What if that was a mid 30% reduction for a decade? May not have happened in the past, but never out of the range of possibilities in the future.
21%. And that was following 2 years of sharp increases. It knocked it back only to 2006 levels. Moreover the dividend stream recovered 18 mo earlier than stock prices.

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Re: Living Off Dividends

Post by willthrill81 » Tue Jul 25, 2017 4:46 pm

mega317 wrote:
Stormbringer wrote:If an investor had say three years of living expenses in a money market account, and could live off the dividend yield (say 2.5%) of a dividend-oriented index fund, is there any reason to own bonds?
In addition to the points made above, if you can live off 2.5% of your portfolio, you have a very conservative withdrawal rate and you're investing for your heirs. They probably want you stock-heavy. Adding bonds will, as it does for everyone else, reduce volatility. My feeling is that I probably don't want to work until I have 40x expenses. This is a good example of potentially making bad decisions by treating dividends as separate from total return.

Didn't we just get a dividend thread locked yesterday?
+1

Anything under a 3% withdrawal rate is extremely conservative if the future looks anything remotely like the past. As such, a portfolio that's all stocks except for a few years spending in cash seems likely to experience significant growth over a typical retirement, leaving behind lots of assets.
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Re: Living Off Dividends

Post by helloeveryone » Tue Jul 25, 2017 5:18 pm

I have a question about dividends that reading this thread raised....

Is the dollar amount of dividends for an S&P 500 Index fund based on the number of shares owned then and not the current value of the fund?

Thank you!

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Re: Living Off Dividends

Post by willthrill81 » Tue Jul 25, 2017 5:20 pm

helloeveryone wrote:I have a question about dividends that reading this thread raised....

Is the dollar amount of dividends for an S&P 500 Index fund based on the number of shares owned then and not the current value of the fund?

Thank you!
Dividends are declared on a per share basis.
“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

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Re: Living Off Dividends

Post by aj76er » Tue Jul 25, 2017 5:20 pm

Why 100% Stocks? If the volatility doesn't bother you, it would be better to do 80/20 or 70/30 along with your 3yrs in cash. Interest from Total Bond Market will compliment the dividends you get from the stock market. You don't get "interest growth" on bond fund shares like the "dividend growth" on stock fund shares, but at least it will be stable income in the event of a downturn and should keep pace with inflation over the long term.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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willthrill81
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Re: Living Off Dividends

Post by willthrill81 » Tue Jul 25, 2017 5:21 pm

aj76er wrote:Why 100% Stocks? If the volatility doesn't bother you, it would be better to do 80/20 or 70/30 along with your 3yrs in cash. Interest from Total Bond Market will compliment the dividends you get from the stock market. You don't get "interest growth" on bond fund shares like the "dividend growth" on stock fund shares, but at least it will be stable income in the event of a downturn and should keep pace with inflation over the long term.
If volatility doesn't bother him and he's withdrawing 2.5% of the portfolio, then 100% stocks is perfectly reasonable. He doesn't need safety in bonds because his withdrawal rate is so low.
“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

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Re: Living Off Dividends

Post by aj76er » Tue Jul 25, 2017 5:29 pm

willthrill81 wrote:then 100% stocks is perfectly reasonable.
Yes, it has a high probability of succeeding. But, historically, it has not been the efficient frontier. Holding 20% of bonds (at least based on historical precedent) seems like cheap insurance to me. It decreases stddev much more than returns (again, historically).

(edited to fix quote)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Living Off Dividends

Post by willthrill81 » Tue Jul 25, 2017 5:34 pm

aj76er wrote:
willthrill81 wrote:then 100% stocks is perfectly reasonable.
Yes, it has a high probability of succeeding. But, historically, it has not been the efficient frontier. Holding 20% of bonds (at least based on historical precedent) seems like cheap insurance to me. It decreases stddev much more than returns (again, historically).

(edited to fix quote)
Who cares about the efficient frontier? You can't 'eat' risk-adjusted returns, only real ones. And this is particularly relevant for the OP because he doesn't care about volatility, so he'll almost certainly be better off being 100% stocks with such a low WR.
“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

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Re: Living Off Dividends

Post by blueberry » Tue Jul 25, 2017 5:38 pm

I'm going to ignore the dividends portion of this topic because I think it is a distraction, and just consider this as a discussion about having cash/mm/cds instead of bonds. I think that is a pretty well accepted approach.

I feel comfortable with 5 years in cash/mm/cds, and live off dividends and occasional stock sells. I think 3 years cash is a little scanty.

-bb

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Re: Living Off Dividends

Post by aj76er » Tue Jul 25, 2017 5:44 pm

willthrill81 wrote:
aj76er wrote:
willthrill81 wrote:then 100% stocks is perfectly reasonable.
Yes, it has a high probability of succeeding. But, historically, it has not been the efficient frontier. Holding 20% of bonds (at least based on historical precedent) seems like cheap insurance to me. It decreases stddev much more than returns (again, historically).

(edited to fix quote)
Who cares about the efficient frontier? You can't 'eat' risk-adjusted returns, only real ones. And this is particularly relevant for the OP because he doesn't care about volatility, so he'll almost certainly be better off being 100% stocks with such a low WR.
During portfolio withdrawal, you absolutely eat risk adjusted returns if the extra risk causes your portfolio to fail (a.k.a sequence of returns risk).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Living Off Dividends

Post by willthrill81 » Tue Jul 25, 2017 5:47 pm

aj76er wrote:
willthrill81 wrote:
aj76er wrote:
willthrill81 wrote:then 100% stocks is perfectly reasonable.
Yes, it has a high probability of succeeding. But, historically, it has not been the efficient frontier. Holding 20% of bonds (at least based on historical precedent) seems like cheap insurance to me. It decreases stddev much more than returns (again, historically).

(edited to fix quote)
Who cares about the efficient frontier? You can't 'eat' risk-adjusted returns, only real ones. And this is particularly relevant for the OP because he doesn't care about volatility, so he'll almost certainly be better off being 100% stocks with such a low WR.
During portfolio withdrawal, you absolutely eat risk adjusted returns if the extra risk causes your portfolio to fail (a.k.a sequence of returns risk).
With a 2.5% withdrawal rate, 100% equities has never even come close to failing even over a 40 year period of time. Over the long-run, the portfolio just keeps getting bigger. You need to have a higher withdrawal rate before bonds need to enter the picture in order to address sequence of returns risk.
“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

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Re: Living Off Dividends

Post by Wakefield1 » Tue Jul 25, 2017 5:59 pm

With people discussing withdrawal or harvesting techniques of their investments perhaps it is a good idea to remember that some younger people have a huge proportion of their investments within the 401 K or other deferred comp. tax deferred framework,meaning that they will be forced to take required minimum distributions eventually. I assume that means that stock in the accounts has to be sold. Am I wrong,can stock be taken (or shares of stock containing mutual funds) without selling or liquidating as shares "in kind" moved to taxable accounts to satisfy the RMD obligation? (I believe that stock can be sold into cash within the accounts before taking the RMD but that still involves selling. (Ignoring the case of accounts that are not in stocks or funds that contain stocks)

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