Dividends and Withdrawal Rate

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retire57
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Dividends and Withdrawal Rate

Post by retire57 » Wed Sep 06, 2017 12:24 pm

Suppose one spends only dividends during retirement. Is there technically a withdrawal rate? If so, what is the best way to calculate the rate?

alex_686
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Re: Dividends and Withdrawal Rate

Post by alex_686 » Wed Sep 06, 2017 12:32 pm

No. Spending the income thrown off by dividends while retaining the principle is a deceptively simply plan. So deceptively simple and so wrong. Well, mostly right but fails when you need it work type of wrong. Use the "total return" framework, it is the only valid framework out there.

avalpert
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Re: Dividends and Withdrawal Rate

Post by avalpert » Wed Sep 06, 2017 1:09 pm

Yes and you calculate it the same way - amount withdrawn from the portfolio divided by the portfolio value (including the non-reinvested dividends).

It doesn't matter (other than possible tax reasons) how you generate the money you withdraw - whether via distributions or sales - it is still a withdrawal.

mega317
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Re: Dividends and Withdrawal Rate

Post by mega317 » Wed Sep 06, 2017 1:31 pm

Aw yeah another dividend thread. If you plan to spend only dividends you are
1. Spending less than you could and/or saving too much and/or taking too much risk in order to get a higher dividend yield
2. Subjecting yourself to unpredictably fluctuating distributions and therefore retirement income for no reason
3. Starting a multi-page thread on bogleheads.org

retiredjg
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Re: Dividends and Withdrawal Rate

Post by retiredjg » Wed Sep 06, 2017 1:48 pm

retire57 wrote:
Wed Sep 06, 2017 12:24 pm
Suppose one spends only dividends during retirement. Is there technically a withdrawal rate? If so, what is the best way to calculate the rate?
Yes. Dividends are part of the total return of an investment. Spending that money requires a withdrawal. If you are getting 2% in dividends, that is a 2% withdrawal rate. So the rate will vary from time to time.

Edited for clarity: If you are taking and spending 2% of your portfolio in dividends, that's a 2% withdrawal. This might be different from 2% of the portfolio when you retired. That's a different measurement.

Trying to design and manipulate a portfolio to pay adequate dividends for all your expenses can be a bad idea. If you have a good portfolio that happens to pay enough in dividends for your expenses, that's a different matter.
Last edited by retiredjg on Thu Sep 07, 2017 8:51 am, edited 1 time in total.

retire57
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Re: Dividends and Withdrawal Rate

Post by retire57 » Wed Sep 06, 2017 3:59 pm

OP here. We are invested 50/50, have pensions, and our expenses are low. No SS yet. So far, almost 2 years in to retirement, we don't need a lot from our portfolio. The dividends come from our taxable stock funds only. I don't see why this is a bad strategy in our circumstances. (Folks assume an awful lot).

For the folks who are bored with the dividend topics- perhaps you should just scroll past.

Anyway, so far the responses are mixed on whether dividends are categorized as withdrawals.

retiredjg
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Re: Dividends and Withdrawal Rate

Post by retiredjg » Wed Sep 06, 2017 4:16 pm

retire57 wrote: OP here. We are invested 50/50, have pensions, and our expenses are low. No SS yet. So far, almost 2 years in to retirement, we don't need a lot from our portfolio. The dividends come from our taxable stock funds only. I don't see why this is a bad strategy in our circumstances. (Folks assume an awful lot).
A bad strategy could be having too much in bonds in order to get more dividends (obviously not a problem in you case) or concentrating so heavily on dividend paying stocks that the portfolio is not well diversified.

A well balanced portfolio that happens to produce dividends that you use is not a bad strategy.
Anyway, so far the responses are mixed on whether dividends are categorized as withdrawals.
I don't think it is mixed. The one answer that starts with "no" seems to mean something else (at least to me).

If the money is taken out of the portfolio and spent, how could it not be a withdrawal?

retiredjg
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Re: Dividends and Withdrawal Rate

Post by retiredjg » Wed Sep 06, 2017 4:19 pm

Maybe if we knew the importance of whether the spent dividends are a withdrawal or not, you'd get answers closer to what you really want to know.

retire57
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Re: Dividends and Withdrawal Rate

Post by retire57 » Wed Sep 06, 2017 4:24 pm

retiredjg wrote:
Wed Sep 06, 2017 4:19 pm
Maybe if we knew the importance of whether the spent dividends are a withdrawal or not, you'd get answers closer to what you really want to know.
Not sure I follow.

If you mean why am I asking?, the answer is that I want to track our withdrawal rate.

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Re: Dividends and Withdrawal Rate

Post by tennisplyr » Wed Sep 06, 2017 4:26 pm

Dividends taken are funds taken from your investable assets....hence withdrawals.
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dbr
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Re: Dividends and Withdrawal Rate

Post by dbr » Wed Sep 06, 2017 4:34 pm

retire57 wrote:
Wed Sep 06, 2017 12:24 pm
Suppose one spends only dividends during retirement. Is there technically a withdrawal rate? If so, what is the best way to calculate the rate?
Yes that is a withdrawal.* In many retirement planning scenarios the withdrawal rate is defined as the number of dollars removed from investments in a year divided by the the number of dollars in the portfolio at the beginning of retirement. So just get those numbers and do the math. Withdrawal rate could also be referred to current value of the portfolio, in which case use those numbers.

*It is a withdrawal because when one models this problem the question to be solved is how is the portfolio going to evolve from year to year. The answer to that is

new portfolio value = old portfolio value + capital gains in the portfolio + dividends paid + contributions - withdrawals.

If you spend the dividends but don't account for that by including that spending in the withdrawals, then you will predict that your portfolio is going to grow more or shrink less than it really will.

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arcticpineapplecorp.
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Re: Dividends and Withdrawal Rate

Post by arcticpineapplecorp. » Wed Sep 06, 2017 4:45 pm

retire57 wrote:
Wed Sep 06, 2017 4:24 pm
If you mean why am I asking?, the answer is that I want to track our withdrawal rate.

What's the purpose of tracking your withdrawal rate? The only reason is because you're withdrawing MORE than just the dividends, right? But if you're just withdrawing (yes I called it that) the dividends, then it doesn't matter because you won't be touching ANY of the principal. Still, as long as your withdrawal rate is less than the investments earn (say you withdraw 5% but your investments grow at 6%) then the fund should survive in perpetuity (or your heirs spend it all :oops: )

Now if you're planning on withdrawing MORE than just the dividends, it might be important to understand your withdrawal rate. That being said, you compute the total withdrawal as a whole (don't need to separate out dividends/principal, etc.) relative to the portfolio as a whole. If you want to think of it as you're taking 2% in dividends/interest and 2% principal (for a 4% withdrawal rate), so be it. But that's not what you're asking.

You're asking what you consider the withdrawal if you're only taking dividends. I think what you're asking is, "Is it 2% or 0%".
So, is it 2% because that's what the fund is paying in dividends (what you can count on, you can't count on appreciation every year).
Or is it 0% because you're not withdrawing principal, just some of the earnings paid out as dividends.


Is that the basis of your question?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

retiredjg
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Re: Dividends and Withdrawal Rate

Post by retiredjg » Wed Sep 06, 2017 4:54 pm

retire57 wrote: If you mean why am I asking?, the answer is that I want to track our withdrawal rate.
Yes, that's what I mean.

But looking at it that way, it is not as simple as what I said above.

Withdrawal rate usually refers a percentage of your portfolio's value on the day you retired. So if you had $1 million dollars on retirement day, a 4% withdrawal rate would be $40k the first year. In year 2, you'd take that same $40k plus inflation. So if there had been 1% inflation, you'd take $40,400 the second year. This is how I understand the 4% safe withdrawal rate to be defined.

But you could also calculate "how much of my portfolio did I spend this year?" So you record the amount on January 1st and add up what you spend during the year and find that it is ___% of the portfolio you had at the beginning of the year. This will give you a withdrawal rate, but it is not the same withdrawal rate I described above.

So you have to decide what kind of "withdrawal rate" you are wanting to track.

SGM
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Re: Dividends and Withdrawal Rate

Post by SGM » Wed Sep 06, 2017 5:11 pm

If you are only withdrawing dividends from the 50% of your portfolio that is in stocks you are in good shape. If you dividend rate is 2% and you are not spending anything from the other 50% in bonds then your withdrawal rate is 1%.

The preference for spending only dividends over selling stock for capital gains has been called " the dividend puzzle" by Merton Miller. Homemade dividends made by selling stock have a tax advantage over company paid dividends. Company paid dividends have an advantage over homemade dividends because they make it easier to exert self control over spending. Choose your poison. :wink:

22twain
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Re: Dividends and Withdrawal Rate

Post by 22twain » Wed Sep 06, 2017 5:23 pm

If you want to compare your withdrawal rate with the values that are often bandied about here (the famous 4%, or other people's 3% or 2% or even the 1.4% that someone just today or yesterday wrote that he was aiming for), then you should include "harvested" dividends in that rate. As far as I know, all the WR studies assume a total-return model for portfolio growth. Withdrawals come after reinvesting dividends, at least from a mental-accounting point of view.
Last edited by 22twain on Wed Sep 06, 2017 9:31 pm, edited 1 time in total.

retire57
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Re: Dividends and Withdrawal Rate

Post by retire57 » Wed Sep 06, 2017 7:39 pm

arcticpineapplecorp. wrote:
Wed Sep 06, 2017 4:45 pm
retire57 wrote:
Wed Sep 06, 2017 4:24 pm
If you mean why am I asking?, the answer is that I want to track our withdrawal rate.

What's the purpose of tracking your withdrawal rate? The only reason is because you're withdrawing MORE than just the dividends, right? But if you're just withdrawing (yes I called it that) the dividends, then it doesn't matter because you won't be touching ANY of the principal. Still, as long as your withdrawal rate is less than the investments earn (say you withdraw 5% but your investments grow at 6%) then the fund should survive in perpetuity (or your heirs spend it all :oops: )

Now if you're planning on withdrawing MORE than just the dividends, it might be important to understand your withdrawal rate. That being said, you compute the total withdrawal as a whole (don't need to separate out dividends/principal, etc.) relative to the portfolio as a whole. If you want to think of it as you're taking 2% in dividends/interest and 2% principal (for a 4% withdrawal rate), so be it. But that's not what you're asking.

You're asking what you consider the withdrawal if you're only taking dividends. I think what you're asking is, "Is it 2% or 0%".
So, is it 2% because that's what the fund is paying in dividends (what you can count on, you can't count on appreciation every year).
Or is it 0% because you're not withdrawing principal, just some of the earnings paid out as dividends.


Is that the basis of your question?
Exactly. Thanks for expressing it so well!

dbr
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Re: Dividends and Withdrawal Rate

Post by dbr » Thu Sep 07, 2017 8:33 am

retire57 wrote:
Wed Sep 06, 2017 7:39 pm
arcticpineapplecorp. wrote:
Wed Sep 06, 2017 4:45 pm
retire57 wrote:
Wed Sep 06, 2017 4:24 pm
If you mean why am I asking?, the answer is that I want to track our withdrawal rate.

What's the purpose of tracking your withdrawal rate? The only reason is because you're withdrawing MORE than just the dividends, right? But if you're just withdrawing (yes I called it that) the dividends, then it doesn't matter because you won't be touching ANY of the principal. Still, as long as your withdrawal rate is less than the investments earn (say you withdraw 5% but your investments grow at 6%) then the fund should survive in perpetuity (or your heirs spend it all :oops: )

Now if you're planning on withdrawing MORE than just the dividends, it might be important to understand your withdrawal rate. That being said, you compute the total withdrawal as a whole (don't need to separate out dividends/principal, etc.) relative to the portfolio as a whole. If you want to think of it as you're taking 2% in dividends/interest and 2% principal (for a 4% withdrawal rate), so be it. But that's not what you're asking.

You're asking what you consider the withdrawal if you're only taking dividends. I think what you're asking is, "Is it 2% or 0%".
So, is it 2% because that's what the fund is paying in dividends (what you can count on, you can't count on appreciation every year).
Or is it 0% because you're not withdrawing principal, just some of the earnings paid out as dividends.


Is that the basis of your question?
Exactly. Thanks for expressing it so well!
And the answer is not 0% because taking the dividends is a withdrawal, and the answer is not 2% because the ratio is gotten by dividing by the value of the whole portfolio and not just the value of the particular investment paying the dividend. We have already mentioned that in some (most) withdrawal models the withdrawal rate is related to the initial portfolio value. Generally if someone is spending dividends that are paid on some part of the whole portfolio, then a dividend yield of 2% amounts to a withdrawal rate much less than 2%.

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Re: Dividends and Withdrawal Rate

Post by Wakefield1 » Thu Sep 07, 2017 9:58 am

I think another thread around here just got a chart posted of S&P 500 returns over the last several years,not counting dividends.
I think it has tended to go up with time except for some bad dips and bears,but would have gone up more with dividends reinvested-I think there is a chart for that too
I think harvesting only dividends from a diversified portfolio of stocks is unlikely to run the portfolio into the ground-what would that be: a variable withdrawal rate of between about 1 and a half percent up to about 2 and a half percent per year depending on the year and market valuation? (A bad recession could actually cause the raw dividend yield from a portfolio of a holding in an "S&P 500 Index Fund" or "Total Stock Market Fund" to drop)
of course the real life total return and/or dividend yield of a good index fund is expected to be infinitesimally less than the listed yield of the raw index

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Re: Dividends and Withdrawal Rate

Post by Admiral » Thu Sep 07, 2017 11:24 am

retire57 wrote:
Wed Sep 06, 2017 12:24 pm
Suppose one spends only dividends during retirement. Is there technically a withdrawal rate? If so, what is the best way to calculate the rate?
Just for clarification: are you talking about STOCK dividends only, or (since you appear to have 50% bonds) bond distributions? This makes a difference in the calculation.

One of the points that was perhaps lost (or not posted explicitly) is that a total return strategy is typically more advantageous than a dividend-based strategy when it comes to taxes. That's why, on this board, you mostly see a bias toward total return versus dividend yield. Stocks and mutual funds that pay high dividends are not particularly tax efficient.

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Kevin M
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Re: Dividends and Withdrawal Rate

Post by Kevin M » Thu Sep 07, 2017 12:19 pm

If you reinvested the dividends, and then sold shares equal to the dividend amount to cover expenses, would that "count" as a withdrawal? Perhaps it's more obvious to you that this is a withdrawal, but other than possible tax differences in a taxable account (none in a tax-advantaged account), these are essentially the same. This is why many of us think in terms of total return when thinking about these things.

Another example. Let's say my portfolio dividend return is 2%, but half of my portfolio is in tax-advantaged accounts from which I'm not yet taking distributions. So I get my 2% spending from a combination of dividends and share sales in taxable accounts. As in the first example, my spending as a percentage of portfolio is equal to my dividend rate, but I'm not actually spending the dividends in the tax-advantaged account. Again, easier to just think about it from a total return perspective.

Kevin
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Re: Dividends and Withdrawal Rate

Post by RAchip » Thu Sep 07, 2017 1:23 pm

I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.

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Re: Dividends and Withdrawal Rate

Post by Admiral » Thu Sep 07, 2017 1:28 pm

RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
That may be how you feel emotionally, but it's not the reality. It's the portfolio size that matters, not how many shares you have in it. Dividends may feel like free money, but they're not. They reduce the value of your shares, and hence the overall value of the portfolio. Just making sure you understand that.

And I'm no expert! :mrgreen:

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Re: Dividends and Withdrawal Rate

Post by Kevin M » Thu Sep 07, 2017 1:50 pm

RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
So how is it different, other than perhaps a small convenience, to "take" the dividend rather than to reinvest the dividend and then immediately sell the shares you just bought with the dividend? It may feel different, but there is no economic difference (other than perhaps a small loss or gain between the time you reinvest the dividend and sell the shares).

Kevin
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RAchip
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Re: Dividends and Withdrawal Rate

Post by RAchip » Thu Sep 07, 2017 2:09 pm

Everyone says that "dividends reduce the value of your shares." I don't agree that its as simple as that. I believe that "the market" should value a company at the net present value of its expected future free cash flows (ie, money that would be available to pay out as dividends). But nobody really knows why the market values particular stocks the way it does. Tesla has never made a penny (and indeed has lost boat loads of money) yet its market value is more than Ford which produces large profits. I just don't believe that buyers of stock are precise enough to correctly factor in the consequences of dividend payments. I think the better strategy is to build a portfolio of established dividend paying stocks rather than to have a portfolio of non-dividend payers and sell bits of the portfolio to produce income. Not everyone believes that dividends are precisely the same as selling shares.

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Re: Dividends and Withdrawal Rate

Post by FactualFran » Thu Sep 07, 2017 2:13 pm

RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
I suspect the "experts" would state it more carefully: dividends from an investment in a portfolio that are directed to an account outside of a portfolio are categorized as withdrawals from the portfolio. Dividends from an investment in a portfolio that remain in the portfolio are not withdrawals from the portfolio.

I consider mutual fund distributions that I have directed to a bank account as withdrawals from the portfolio that includes those mutual funds but not the bank account. Taking those distributions in cash certainly reduces the dollar balance of the mutual funds accounts.

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Re: Dividends and Withdrawal Rate

Post by tennisplyr » Thu Sep 07, 2017 2:25 pm

Admiral wrote:
Thu Sep 07, 2017 1:28 pm
RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
That may be how you feel emotionally, but it's not the reality. It's the portfolio size that matters, not how many shares you have in it. Dividends may feel like free money, but they're not. They reduce the value of your shares, and hence the overall value of the portfolio. Just making sure you understand that.

And I'm no expert! :mrgreen:
My guess is that many think a dividend is equivalent to a CD interest payment where the principal remains intake.
Those who move forward with a happy spirit will find that things always work out.

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Re: Dividends and Withdrawal Rate

Post by ThereAreNoGurus » Thu Sep 07, 2017 3:05 pm

My guess is that many think a dividend is equivalent to a CD interest payment where the principal remains intake.
Finally it was stated clearly. A dividend payment is not the same as an interest payment. This has been stated over and over, yet there seem to be doubters still out there. However....

The day a dividend is distributed the stock opens lower by the amount of the dividend. It is so easy to verify this. This link, http://www.dividend.com/ex-dividend-dates.php lists stocks and their payouts and the payout date. All one needs to do is look at a stock's opening price and compare it to the previous close. Unless there was some unusual overnight news, the difference is reconcilable by the payout. Or you can go to a site that posts net change for each day. On the day of the dividend payout you have to add the payout plus the previous closing price to reconcile with the net change posted for the day (for those sites that calculate net change correctly).

For those sites that don't post net change correctly, it's funny how we get new posters on this thread wondering why their index fund took a dump the day the market closed up.

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Re: Dividends and Withdrawal Rate

Post by Admiral » Thu Sep 07, 2017 3:12 pm

RAchip wrote:
Thu Sep 07, 2017 2:09 pm
Not everyone believes that dividends are precisely the same as selling shares.
That is exactly what it is, it's just that it's pieces of shares, not entire shares. If you sell shares equal to the value of the dividends, it's exactly the same thing. Money is money. Dividends are not interest on your shares: they are small slices of earnings. In addition, there's another downside: dividends are fully taxable. Shares are only taxable on the gain, and can be offset with losses.


I encourage you to read this article:

http://www.investopedia.com/articles/in ... stocks.asp

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Re: Dividends and Withdrawal Rate

Post by ThereAreNoGurus » Thu Sep 07, 2017 3:13 pm

RAchip wrote:
I believe that "the market" should value a company at the net present value of its expected future free cash flows (ie, money that would be available to pay out as dividends).
Although many folks believe this, I thinks it's incorrect.

If a stock never pays a dividend are you going to say it's worthless? Supposing you have a publicly traded company that shut down its operations but is holding valuable property? The company is not worthless.

The value of a stock is generally what it would be worth to own the company. That could be its assets plus its earnings or minus its earnings in the case of losing endeavors.

I suppose if one changes the meaning of dividend to include all eventual distributions, including liquidations, then that might be correct, but that is changing the ordinary meaning of a dividend.

I believe the value of a stock (that has voting rights) represents the value of company ownership, regardless of whether that valuation is rational or not or whether it pays dividends or not.

retire57
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Re: Dividends and Withdrawal Rate

Post by retire57 » Thu Sep 07, 2017 4:02 pm

Admiral wrote:
Thu Sep 07, 2017 11:24 am
retire57 wrote:
Wed Sep 06, 2017 12:24 pm
Suppose one spends only dividends during retirement. Is there technically a withdrawal rate? If so, what is the best way to calculate the rate?
Just for clarification: are you talking about STOCK dividends only, or (since you appear to have 50% bonds) bond distributions? This makes a difference in the calculation.
Yes, stock dividends only.

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Re: Dividends and Withdrawal Rate

Post by retire57 » Thu Sep 07, 2017 4:08 pm

Kevin M wrote:
Thu Sep 07, 2017 1:50 pm
RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
So how is it different, other than perhaps a small convenience, to "take" the dividend rather than to reinvest the dividend and then immediately sell the shares you just bought with the dividend? It may feel different, but there is no economic difference (other than perhaps a small loss or gain between the time you reinvest the dividend and sell the shares).

Kevin
Kevin,

My thinking exactly. In addition, the dividends are taxable whether we spend them or not. Why not spend (if you are in our situation - retired and using the dividends to supplement our pensions? At least until SS begins)?

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Kevin M
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Re: Dividends and Withdrawal Rate

Post by Kevin M » Fri Sep 08, 2017 10:02 am

retire57 wrote:
Thu Sep 07, 2017 4:08 pm
Kevin M wrote:
Thu Sep 07, 2017 1:50 pm
RAchip wrote:
Thu Sep 07, 2017 1:23 pm
I understand that the "experts" categorize dividends as a withdrawal from your portfolio. But it just feels a lot safer than selling shares to fund withdrawals. I personally do not consider taking a 2% dividend as a 2% withdrawal from my portfolio.
So how is it different, other than perhaps a small convenience, to "take" the dividend rather than to reinvest the dividend and then immediately sell the shares you just bought with the dividend? It may feel different, but there is no economic difference (other than perhaps a small loss or gain between the time you reinvest the dividend and sell the shares).

Kevin
Kevin,

My thinking exactly. In addition, the dividends are taxable whether we spend them or not. Why not spend (if you are in our situation - retired and using the dividends to supplement our pensions? At least until SS begins)?
No reason not to spend the dividends if required to meet residual living expenses--as a retiree, that's what I do with my taxable dividends. The point relevant to your OP is that dividends should be included in any sort of withdrawal rate calculation, and if your thinking is exactly like mine, then you agree.

Kevin
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alex_686
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Re: Dividends and Withdrawal Rate

Post by alex_686 » Fri Sep 08, 2017 10:26 am

ThereAreNoGurus wrote:
Thu Sep 07, 2017 3:13 pm
RAchip wrote:
I believe that "the market" should value a company at the net present value of its expected future free cash flows (ie, money that would be available to pay out as dividends).
Although many folks believe this, I thinks it's incorrect.

If a stock never pays a dividend are you going to say it's worthless? Supposing you have a publicly traded company that shut down its operations but is holding valuable property? The company is not worthless.

The value of a stock is generally what it would be worth to own the company. That could be its assets plus its earnings or minus its earnings in the case of losing endeavors.

I suppose if one changes the meaning of dividend to include all eventual distributions, including liquidations, then that might be correct, but that is changing the ordinary meaning of a dividend.

I believe the value of a stock (that has voting rights) represents the value of company ownership, regardless of whether that valuation is rational or not or whether it pays dividends or not.
The standard definition of Future Cash Flow to Equity (FCFE) is to count all cash flows to equity. Dividends, stock buy backs, cash from mergers and liquidation, etc.

Berkshire Hathaway is valued on its expected future dividends even though we are not sure exactly when they will come. As a counter argument look at the Green Bay Packers. You can buy stock in the football team but it is more or less worthless - its value is in no way related to the value of the team.

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Phineas J. Whoopee
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Re: Dividends and Withdrawal Rate

Post by Phineas J. Whoopee » Sat Sep 09, 2017 12:00 am

retire57, you're certainly free to believe math is not math, and many investors agree with you. All I can suggest is you read this section from this article from our wiki.

Drawing money from your portfolio is a withdrawal, whether or not you want to think it is. Each dollar is just like every other, and none of them know nor care how they came into your possession.

Stocks do not have principal. You probably should adopt the term capital.

Principal is money somebody owes you, although it's possible they may never pay you.

Nobody owes you capital.

PJW

dbr
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Re: Dividends and Withdrawal Rate

Post by dbr » Sat Sep 09, 2017 9:23 am

If people really want it that way it is certainly possible for dividends to not be a withdrawal. In that case if one wants to track and project the value of the portfolio it will be necessary to adjust the return downward by the amount accounted for by the dividends and proceed from there. If one is asking for the withdrawal rate in order to compare to a withdrawal rate study that does count the dividends as withdrawals, then the withdrawal rates quoted in the study would have to be corrected downwards by the amount accounted for by the dividends. Another possibility is that the retirement plan can be implemented without even looking at what value the portfolio will have, even zero eventually. Nobody can force a person to form an idea of how the plan is going to work out.

What gets me is that this is all about simple arithmetic starting with simple definitions and nothing beyond that. How is it possible for this topic to have to be discussed over and over again?

Longdog
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Re: Dividends and Withdrawal Rate

Post by Longdog » Sat Sep 09, 2017 9:29 am

retire57 wrote:
Wed Sep 06, 2017 3:59 pm
OP here. We are invested 50/50, have pensions, and our expenses are low. No SS yet. So far, almost 2 years in to retirement, we don't need a lot from our portfolio. The dividends come from our taxable stock funds only. I don't see why this is a bad strategy in our circumstances. (Folks assume an awful lot).

For the folks who are bored with the dividend topics- perhaps you should just scroll past.

Anyway, so far the responses are mixed on whether dividends are categorized as withdrawals.
It's not a bad idea. It's perfectly fine in your case. If you don't reinvest them, then sure, it is considered a withdrawal rate. Yes, people do assume quite a bit in their responses!
Steve

dbr
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Re: Dividends and Withdrawal Rate

Post by dbr » Sat Sep 09, 2017 9:40 am

Longdog wrote:
Sat Sep 09, 2017 9:29 am
retire57 wrote:
Wed Sep 06, 2017 3:59 pm
OP here. We are invested 50/50, have pensions, and our expenses are low. No SS yet. So far, almost 2 years in to retirement, we don't need a lot from our portfolio. The dividends come from our taxable stock funds only. I don't see why this is a bad strategy in our circumstances. (Folks assume an awful lot).

For the folks who are bored with the dividend topics- perhaps you should just scroll past.

Anyway, so far the responses are mixed on whether dividends are categorized as withdrawals.
It's not a bad idea. It's perfectly fine in your case. If you don't reinvest them, then sure, it is considered a withdrawal rate. Yes, people do assume quite a bit in their responses!
One is issue is whether or not it is a bad plan to retire spending the dividends. The answer for people withdrawing modest dividends such as 2% from a total stock market fund is that it is a very conservative rate of withdrawal which is quite safe.* That could be a bad plan if this means that someone is forcing himself to live on less than he easily could or that it meant someone worked too hard and saved to much when they would rather have been retired. It really is a bad plan if the investor has set up his investments to pay very large dividends that exceed the ability of his portfolio to sustain those payments.*

A different issue is whether or not the investor understands what he is doing. To know what you are doing takes doing the right arithmetic right. Intenionally setting up wrong computations out of a silly argument over definitions is exactly that -- wrong. So what is the cost of wrong computations? The cost is that you will have formed expectations that will not correspond to reality. That is not a good way to plan.

*How it is known what would or wouldn't be safe is left as an exercise to the reader, but the answer won't come from doing bad math.

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ThereAreNoGurus
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Re: Dividends and Withdrawal Rate

Post by ThereAreNoGurus » Sat Sep 09, 2017 1:59 pm

The standard definition of Future Cash Flow to Equity (FCFE) is to count all cash flows to equity. Dividends, stock buy backs, cash from mergers and liquidation, etc.
That obviously makes more sense than to claim a generic publicly-traded company is worth its future discounted dividend stream.

aristotelian
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Re: Dividends and Withdrawal Rate

Post by aristotelian » Sat Sep 09, 2017 2:22 pm

If you are only spending dividends, that means you have a very low withdrawal rate. I would say you do not need to calculate it in the sense that only spending dividends means a) you have 40-50x expenses and b) if you never touch principal by policy, you are never going to spend down your portfolio no matter what happens in the market.

That said, you should understand that if the stock market goes down, your yield could drop in absolute terms as companies cut their dividends. Even if the dividend yield % stays the same, it could fluctuate. If you are trying to calculate your withdrawal rate, I would agree with others that dividends absolutely are withdrawals.

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Phineas J. Whoopee
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Re: Dividends and Withdrawal Rate

Post by Phineas J. Whoopee » Mon Sep 11, 2017 11:54 pm

aristotelian wrote:
Sat Sep 09, 2017 2:22 pm
If you are only spending dividends, that means you have a very low withdrawal rate. I would say you do not need to calculate it in the sense that only spending dividends means a) you have 40-50x expenses and b) if you never touch principal by policy, you are never going to spend down your portfolio no matter what happens in the market.

That said, you should understand that if the stock market goes down, your yield could drop in absolute terms as companies cut their dividends. Even if the dividend yield % stays the same, it could fluctuate. If you are trying to calculate your withdrawal rate, I would agree with others that dividends absolutely are withdrawals.
If I may, there is yield, which is a proportion, and there is payout, which is a number of currency units.

Today yields are lower than they have been during most of the past century or so in the US, although they fluctuated wildly. With yields in the vicinity of 2% to 3% it is very likely, the word the original researchers used was sustainable, not the loaded word safe which was a misrepresentation by sensationalists, it is very likely the portfolio withdrawals, whether anybody wants to call them that or not, will result in a portfolio which is not totally depleted prior to thirty years.

It is not safe. It's just a bad historical case limited to the time, not even a century, from which we have reliable figures, and even that's only for the United States.

I wanted to respond to emphasize the distinctions between:

Yield and payout. If the payout stays the same but the stock price went down, the yield, as conventionally defined, went up, but the investor only taking dividends has no more dividend money than before. If the stock price went up, and the payout went down, the yield became lower and the investor has less dividend money than before. They have different names for good reason.

And, I wished to make the distinction between sustainable, in which in past cases where we have good data, and it isn't all that many, what would have worked in a bad situation, and the far more emotionally-laden word safe. That's a was, not an is, and certainly not necessarily a will be.

I fight a lonely and losing battle, but the original researchers were right to use the word sustainable, and the sensationalists who probably sold more Ford F-150s than they would have if they didn't say safe instead, and selling Ford F-150s was their objective, were not right, in the sense of truthiness, to change it.

PJW

P.S. As I wrote earlier in the thread, principal is money somebody owes you, although it's possible they'll never pay. Equities do not have principal. You have capital. I'm not being pedantic. They are completely different financial and economic concepts. Bond funds and stock funds do not work like savings accounts. I already provided links to definitions.

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