Living on Dividends and Interest

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skime
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Living on Dividends and Interest

Post by skime » Mon Jan 08, 2018 12:51 pm

What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.

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warowits
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Re: Living on Dividends and Interest

Post by warowits » Mon Jan 08, 2018 12:56 pm

skime wrote:
Mon Jan 08, 2018 12:51 pm
For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.
Dividends, if not reinvested, consume capital. Nothing wrong with living off them, just don't make the mental mistake of thinking it is any safer than someone else with a similarly low withdrawal rate.
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

aristotelian
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Re: Living on Dividends and Interest

Post by aristotelian » Mon Jan 08, 2018 1:00 pm

Nothing wrong with it. Nothing wrong with reinvesting dividends and living off of principal, either. Money is fungible so it does not matter where it comes from. What matters is the amount and living within your means. Do keep an eye on tax efficiency, since bond dividends are taxed as ordinary income.
Last edited by aristotelian on Mon Jan 08, 2018 2:26 pm, edited 1 time in total.

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XdUzHa3NtSeIkBkIGPVn
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Re: Living on Dividends and Interest

Post by XdUzHa3NtSeIkBkIGPVn » Mon Jan 08, 2018 1:04 pm

I'd say that's probably a too-conservative approach.

Dividends and interest are no different than creating a self-made dividend by selling capital. You're just letting the individual companies' dividend policy dictate your withdrawal rate, rather than set it yourself. And lately, US companies have been reducing dividends, because of growth ambitions, or returning money through share repurchases rather than dividends, which are more tax-efficient.

A 60/40 stock/fixed income portfolio can likely sustain a 3% annual withdrawal rate for a long time, but will likely have less than that as a dividend/interest yield. Why shortchange yourself by looking at the dividend yield only?

alex_686
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Re: Living on Dividends and Interest

Post by alex_686 » Mon Jan 08, 2018 1:05 pm

It would be incorrect. One should focus on the "Total Return" of the portfolio and just not focus on one narrow area of return. I understand the appeal but the problem with this approach is that it is a intellectual shortcut. There are 2 problems here.

First, it tends to be overall conservative. Profits may be reinvested in the firm or used for stock buy backs, not for dividends. The percentage of profits being kicked out varies over time, depending on tax low or investor's preference.

Second, when it fails it fails hard. Being overly conservative gives many people a false sense confidence. In 2008 dividends and bond yields were slashed.

Sorry, this is a false safety net. The best thing to do is realize that there is no safety net and actively monitor your portfolio.

NotWhoYouThink
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Re: Living on Dividends and Interest

Post by NotWhoYouThink » Mon Jan 08, 2018 1:10 pm

The "wrong" thing would be that you were being overly conservative. Saving too much, spending too little, or working too long. If you spend only dividends your withdrawal rate is going to be about 2-2.5%. You could spend more and still be very safe. If your goal is to let your estate grow so your heirs get a bigger pile of money when you are gone this is fine. If your goal is to enjoy your life as you live it you may be limiting yourself with this plan.

It's not really "bad" or "wrong", just extremely conservative. If that fits your needs no one else needs to have an opinion about it.

retiredjg
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Re: Living on Dividends and Interest

Post by retiredjg » Mon Jan 08, 2018 1:12 pm

skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
It could be wrong if you have to have a skewed portfolio to achieve the income you want. Examples would be holding too many bonds, too much high risk bonds, only dividend stocks, etc. For example....
  • A portfolio that depends largely on bond income results in higher taxes because bond income is taxed at a higher rate. Better to sell stocks and pay less (or nothing) in tax.

    A portfolio that depends largely on very risky bonds is not only paying higher taxes but is riskier than a portfolio with a healthy balanced stock component.

    A portfolio that depends on a handful (say 10) of dividend paying stocks is riskier than a hundreds of stocks of different sectors.
Keep in mind that income from a portfolio can come from dividends, interest, and growth (increase in value of individual shares). To "harvest" the growth, you need to sell some shares. This does not hurt the portfolio. There is no need to avoid selling shares and your taxes cold be lower if you do.

What matters is how much you take out, not which bucket of income it comes from.

A Vanguard paper that discusses this. https://personal.vanguard.com/pdf/icrsp.pdf

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Leif
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Re: Living on Dividends and Interest

Post by Leif » Mon Jan 08, 2018 1:13 pm

No problem with living on dividends and interest. A problem can occur, however, if you reach for additional dividends through stocks that pay high dividends. They may be doing that at the expense of growth opportunities. Or if you invest in high yield (junk bonds) to reach for additional interest. These can distort your Asset Allocation for your risk tolerance and age.

If you can live off of 2% (before taxes) of your portfolio then you can have a very reasonable, sustainable portfolio of broad based index funds, bond funds, and money market or CDs (in today's environment).

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bertilak
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Re: Living on Dividends and Interest

Post by bertilak » Mon Jan 08, 2018 1:33 pm

skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
Well, if your investments are throwing off dividends and you need some of that for livings expenses there is nothing wrong with putting those dividends towards expenses. It seems to make more sense than reinvesting them then turning around and selling the investments to pay expenses. Reinvest what you don't need.

Perhaps I didn't understand the question.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

skime
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Re: Living on Dividends and Interest

Post by skime » Mon Jan 08, 2018 2:46 pm

Very thoughtful responses. I appreciate the feedback. It's always a lively, insightful group here.

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aj76er
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Re: Living on Dividends and Interest

Post by aj76er » Mon Jan 08, 2018 2:47 pm

This would be equivalent to a very low withdrawal rate from the portfolio. At today's rates, something between 2% and 2.5% (depending on ratios held of stocks/bonds and US/Intl).

Nothing wrong with that, except it is a bit overly conservative.

Most here would recommend a 3% or 3.5% safe withdrawal rate (SWR) as conservative - taken from a combination of dividends and selling shares.

With less expected longevity or a large portfolio, the SWR can be higher. Historically, 4% to 4.5% has worked over time spans of 30yrs (without running out of money).
"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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dwickenh
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Re: Living on Dividends and Interest

Post by dwickenh » Mon Jan 08, 2018 3:10 pm

I would not change my investments to get more yield so I could live off of the yield. However, I think living off of the dividends and interest is a comforting thought for many people. Make sure you don't limit your retirement enjoyment by under spending with this process. Money is fungible, but the human mind is not. What works for you and helps you "sleep at night" is the most important part of the retirement withdrawal plan.

Best wishes and good luck to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

dbr
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Re: Living on Dividends and Interest

Post by dbr » Mon Jan 08, 2018 6:10 pm

As you can see there is nothing wrong with this except the things that are wrong with it.

Perhaps a way of summing up the above replies would be to say the idea is "not even wrong." That is a reference to this: https://en.wikipedia.org/wiki/Not_even_wrong My comment, however, is not intended to be derogatory.

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Pajamas
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Re: Living on Dividends and Interest

Post by Pajamas » Mon Jan 08, 2018 6:48 pm

skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
I think that is fine as long as it just happens that your spending needs are met that way.

The problems usually arise when a portfolio is structured to enable living off the dividends and interest. Often the tail ends up wagging the dog by chasing yield. I have seen people buy odd lots of dozens or even hundreds of high-yielding stocks, sometimes obscure and thinly-traded issues, to create a "diversified" portfolio that would be very time-consuming to manage if they actually managed it, assuming that they were capable of doing so in the first place. Then a company cuts the dividend or maybe just doesn't raise it one year and they sell immediately, often for a loss. Then they start trying to trade to capture dividends but screw up the timing or similar. Then they start trading options to juice returns. The portfolio usually ends up severely underperforming almost everything.

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Re: Living on Dividends and Interest

Post by snarlyjack » Mon Jan 08, 2018 8:32 pm

Skime,

Hello & welcome to Bogleheads.

When I started investing, I did a study of
the most successful investors I could find on the internet.
(The idea being what are super successful investors doing)?

Most (not all) of the most successful investors I could find
($Millionaires) were all invested with dividend paying stocks.
(Ronald Read The Janitor Next Door, Warren Buffett, Kevin O'Leary,
+ lot's of other investors).

The super successful investors that I read about had no problem
living on dividends & interest.

texasdiver
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Re: Living on Dividends and Interest

Post by texasdiver » Mon Jan 08, 2018 8:47 pm

retiredjg wrote:
Mon Jan 08, 2018 1:12 pm
skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
It could be wrong if you have to have a skewed portfolio to achieve the income you want. Examples would be holding too many bonds, too much high risk bonds, only dividend stocks, etc. For example....
  • A portfolio that depends largely on bond income results in higher taxes because bond income is taxed at a higher rate. Better to sell stocks and pay less (or nothing) in tax.
I'm a long ways from the withdrawal phase so correct me if I'm wrong. But this statement only applies to taxable accounts, correct? If you are withdrawing from a 401(k) or traditional IRA you pay the same ordinary income tax rate on any withdrawals regardless of the type of funds, correct? And if you are withdrawing from a Roth you pay no tax regardless of what type of assets you had invested. Correct?

retiredjg
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Re: Living on Dividends and Interest

Post by retiredjg » Mon Jan 08, 2018 9:13 pm

texasdiver wrote:
Mon Jan 08, 2018 8:47 pm
retiredjg wrote:
Mon Jan 08, 2018 1:12 pm
skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
It could be wrong if you have to have a skewed portfolio to achieve the income you want. Examples would be holding too many bonds, too much high risk bonds, only dividend stocks, etc. For example....
  • A portfolio that depends largely on bond income results in higher taxes because bond income is taxed at a higher rate. Better to sell stocks and pay less (or nothing) in tax.
I'm a long ways from the withdrawal phase so correct me if I'm wrong. But this statement only applies to taxable accounts, correct? If you are withdrawing from a 401(k) or traditional IRA you pay the same ordinary income tax rate on any withdrawals regardless of the type of funds, correct? And if you are withdrawing from a Roth you pay no tax regardless of what type of assets you had invested. Correct?
You are correct.

I was giving some quick and general examples of how people can ruin a portfolio by trying to make it produce a lot of dividends. There is more to it than I outlined in my comments and what you have pointed out is a good example.

skime
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Re: Living on Dividends and Interest

Post by skime » Mon Jan 08, 2018 10:41 pm

If one wasn't reaching for yield, what would be your thoughts be if the interest was CD & Muni bond income and dividends were coming from SPY or SDY?

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willthrill81
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Re: Living on Dividends and Interest

Post by willthrill81 » Tue Jan 09, 2018 12:09 am

skime wrote:
Mon Jan 08, 2018 10:41 pm
If one wasn't reaching for yield, what would be your thoughts be if the interest was CD & Muni bond income and dividends were coming from SPY or SDY?
The situation is the same.

A real problem with the notion of "living on dividends and interest" is that proponents of the idea believe that their capital is represented in shares owned. This is false. The capital is represented in dollars. If I pay $100 for a fund that goes up in value to $110, that $110 is now my capital even if I have not bought or sold anything.

Many think that if they ever sell any shares that they have committed some type of mistake and are irrevocably depleting their capital. This is false. If the rest of your shares are appreciating in value faster than the rate that you're selling them off, your capital will actually increase even though the number of shares you own is decreasing.
“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

Dandy
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Re: Living on Dividends and Interest

Post by Dandy » Tue Jan 09, 2018 7:41 am

Living well off of just dividends can be great. Now if the dividends were because you had everything tied up in a few individual stocks that would not be great. If the dividends were from a well diversified, low cost, passive mutual fund portfolio that would be ideal.

katon
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Re: Living on Dividends and Interest

Post by katon » Wed Jan 31, 2018 2:00 am

Dandy wrote:
Tue Jan 09, 2018 7:41 am
Living well off of just dividends can be great. Now if the dividends were because you had everything tied up in a few individual stocks that would not be great. If the dividends were from a well diversified, low cost, passive mutual fund portfolio that would be ideal.
until now i invest in individual stocks , i am building a portfolio that consists in both US and NON US stocks, primarily that pay growing dividends.
i agree with your opinion that is better to be diversified. I use mutual funds to look for best quality companies. Then i invest individually.
Maybe in the future i will add some funds (ETFs).

Longtermgrowth
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Re: Living on Dividends and Interest

Post by Longtermgrowth » Wed Jan 31, 2018 3:15 am

I'm curious what the stock to bond percentage is. I expect dividend income from stocks to easily drop over 30% in a depression...

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Toons
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Re: Living on Dividends and Interest

Post by Toons » Wed Jan 31, 2018 8:33 am

Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

alfaspider
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Re: Living on Dividends and Interest

Post by alfaspider » Wed Jan 31, 2018 8:57 am

skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
The obsession with dividends that some people have makes little sense to me. If a given company had two classes of stock identical in all ways except for the fact that one paid a dividend and one did not, you'd end up with an equivalent amount pre-tax at the end of the day because the non-dividend stock should have more share appreciation equal to the amount of the dividend. But the payment of a dividend is less tax efficient, because you don't get to control when it is paid.

Suppose you've decided you want to spend 4% of your portfolio per year in retirement, so you invest in high dividend stocks that pay 4%. That means 4% of your portfolio comes in as taxable income per year whether you need the money or not. Suppose your expenses come it a bit low and you actually only spend 3%. In the dividend situation, 4% has already been taxably distributed to you. In an otherwise identical portfolio but no dividends, you would only liquidate 3% and only pay tax on the 3% distribution. It's even better in a down year. The dividend stock in the down year is still going to be generating taxable income for you. But if you can sell high-basis stock in the down year instead, you will not only not pay tax that year on the sale, but be able to carry over those losses to future years. Of course, all this is merely deferral rather than bottom line tax savings (though deferral carries a positive value due to the time-value of money), but it can be true cash savings to your heirs, who will inherit your holdings with stepped-up basis to fair market value.

RAchip
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Re: Living on Dividends and Interest

Post by RAchip » Wed Jan 31, 2018 11:04 am

alfaspider wrote:
Wed Jan 31, 2018 8:57 am
skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
The obsession with dividends that some people have makes little sense to me. If a given company had two classes of stock identical in all ways except for the fact that one paid a dividend and one did not, you'd end up with an equivalent amount pre-tax at the end of the day because the non-dividend stock should have more share appreciation equal to the amount of the dividend. But the payment of a dividend is less tax efficient, because you don't get to control when it is paid.

Suppose you've decided you want to spend 4% of your portfolio per year in retirement, so you invest in high dividend stocks that pay 4%. That means 4% of your portfolio comes in as taxable income per year whether you need the money or not. Suppose your expenses come it a bit low and you actually only spend 3%. In the dividend situation, 4% has already been taxably distributed to you. In an otherwise identical portfolio but no dividends, you would only liquidate 3% and only pay tax on the 3% distribution. It's even better in a down year. The dividend stock in the down year is still going to be generating taxable income for you. But if you can sell high-basis stock in the down year instead, you will not only not pay tax that year on the sale, but be able to carry over those losses to future years. Of course, all this is merely deferral rather than bottom line tax savings (though deferral carries a positive value due to the time-value of money), but it can be true cash savings to your heirs, who will inherit your holdings with stepped-up basis to fair market value.
There is a lot wrong in this post. But the whole thing is pointless. If you are a boglehead, you invest in index funds. Index funds pay dividends. They are unavoidable. You can think it would be better not to receive dividends but that simply is not an option. Since you don't have the choice to receive dividends or not, if you can live off them that is fantastic. But since dividends are only about a 2% withdrawal rate, you can live a higher standard of living if you want by selling 1% per year to bump up to a 3% withdrawal rate which is extremely safe.

alfaspider
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Re: Living on Dividends and Interest

Post by alfaspider » Wed Jan 31, 2018 11:11 am

RAchip wrote:
Wed Jan 31, 2018 11:04 am
alfaspider wrote:
Wed Jan 31, 2018 8:57 am
skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
The obsession with dividends that some people have makes little sense to me. If a given company had two classes of stock identical in all ways except for the fact that one paid a dividend and one did not, you'd end up with an equivalent amount pre-tax at the end of the day because the non-dividend stock should have more share appreciation equal to the amount of the dividend. But the payment of a dividend is less tax efficient, because you don't get to control when it is paid.

Suppose you've decided you want to spend 4% of your portfolio per year in retirement, so you invest in high dividend stocks that pay 4%. That means 4% of your portfolio comes in as taxable income per year whether you need the money or not. Suppose your expenses come it a bit low and you actually only spend 3%. In the dividend situation, 4% has already been taxably distributed to you. In an otherwise identical portfolio but no dividends, you would only liquidate 3% and only pay tax on the 3% distribution. It's even better in a down year. The dividend stock in the down year is still going to be generating taxable income for you. But if you can sell high-basis stock in the down year instead, you will not only not pay tax that year on the sale, but be able to carry over those losses to future years. Of course, all this is merely deferral rather than bottom line tax savings (though deferral carries a positive value due to the time-value of money), but it can be true cash savings to your heirs, who will inherit your holdings with stepped-up basis to fair market value.
There is a lot wrong in this post. But the whole thing is pointless. If you are a boglehead, you invest in index funds. Index funds pay dividends. They are unavoidable. You can think it would be better not to receive dividends but that simply is not an option. Since you don't have the choice to receive dividends or not, if you can live off them that is fantastic. But since dividends are only about a 2% withdrawal rate, you can live a higher standard of living if you want by selling 1% per year to bump up to a 3% withdrawal rate which is extremely safe.
If I've said something wrong, I'd like to hear what that is.

I agree that all this is moot if you are just buying broad-based index funds (which I do). I was simply critiquing the preference I've seen investors have for dividend stocks.

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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 12:01 pm

skime wrote:
Mon Jan 08, 2018 12:51 pm
What would be correct or wrong about living on the dividends and interest of your portfolio if you were able to do so with a 30% surplus or more? For this exercise, consuming capital by selling shares/individual bonds/cd's would be prohibited.

I'd be curious as to what this group thinks about it.
I'm not sure I understand your question. Are you asking (making up some numbers) if you have a portfolio that throws off $100,000 in dividends AND you only need about $75,000 or so, is there a problem? Is that the question? It's the 30% surplus bit that I'm unclear on.

The answer to that question, assuming I understand it, is no, there is absolutely nothing wrong about that. You would have a very low withdrawal rate.

A caveat is that many (most?) of the posters on this board would council against a portfolio where the equity portion of that portfolio is mostly/all stocks/funds/ETFs with a dividend slant. Because there is nothing magic about dividend oriented stocks, and skewing to them results in a less diversified (and riskier) portfolio than using something like a total market index fund. Plus, in a taxable account, a focus on dividend stocks versus a total return approach results in higher taxes and most likely less money in your pocket.

Other posts have answered the post about the same way I do above, I'm asking for clarification on exactly what you meant.

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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 12:04 pm

Toons wrote:
Wed Jan 31, 2018 8:33 am
Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

RAchip
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Re: Living on Dividends and Interest

Post by RAchip » Wed Jan 31, 2018 12:11 pm

"If a given company had two classes of stock identical in all ways except for the fact that one paid a dividend and one did not, you'd end up with an equivalent amount pre-tax at the end of the day because the non-dividend stock should have more share appreciation equal to the amount of the dividend."

This is wrong. If cash goes out of the company as a $1 per share dividend but it is only paid to half of the shares, then all shares decrease in value by 50 cents, including the class of shares that didn't get the dividend so they are much worse off.

TN_Boy
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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 12:15 pm

snarlyjack wrote:
Mon Jan 08, 2018 8:32 pm
Skime,

Hello & welcome to Bogleheads.

When I started investing, I did a study of
the most successful investors I could find on the internet.
(The idea being what are super successful investors doing)?

Most (not all) of the most successful investors I could find
($Millionaires) were all invested with dividend paying stocks.
(Ronald Read The Janitor Next Door, Warren Buffett, Kevin O'Leary,
+ lot's of other investors).

The super successful investors that I read about had no problem
living on dividends & interest.
I don't think Warren Buffett got rich off the dividends thrown off by the stocks he bought :D.

So Buffett thinks dividends are a sign of a good company, hmm, what is Berkshire Hathway's dividend yield ....... :oops:

dkturner
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Re: Living on Dividends and Interest

Post by dkturner » Wed Jan 31, 2018 12:22 pm

I’m surprised that nobody has brought up the old saw that, although dividends rise and fall, they are more stable than principal values. True, but largely irrelevant. If one receives a dividend when the value of the underlying stock has declined in value by say 30%, she is effectively selling some of her stock after it has fallen 30% in value. The better practice would be to reinvest all dividends and interest. When funds are needed, sell bonds if the market is down or sell equities if the market is up. The investor who relies solely on dividends and interest payments to fund expenses is foregoing this option.

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BL
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Re: Living on Dividends and Interest

Post by BL » Wed Jan 31, 2018 1:05 pm

If you asked about taking dividends first before selling, I would say Sure, why not? You are already paying tax on it, no matter what you do with it, so you might as well. Re-investing dividends and then selling when you need money should be no different as you are taking out capital either way.

If you choose stocks based on the dividends they give off, or select junk bonds for high dividends, I would say that is a bad policy.

If you refuse to sell (even if you have a lot) when you need more, I don't believe that is a good policy. It might be a way to spend less, but that is another issue.

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Toons
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Re: Living on Dividends and Interest

Post by Toons » Wed Jan 31, 2018 1:33 pm

TN_Boy wrote:
Wed Jan 31, 2018 12:04 pm
Toons wrote:
Wed Jan 31, 2018 8:33 am
Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

You don't need to "sell" to "withdraw" if your capital gains ,dividends from share acquisition over the decades,covers expenses for the year.
:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

mptfan
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Re: Living on Dividends and Interest

Post by mptfan » Wed Jan 31, 2018 1:43 pm

NotWhoYouThink wrote:
Mon Jan 08, 2018 1:10 pm
If you spend only dividends your withdrawal rate is going to be about 2-2.5%.
Not necessarily. The Vanguard Long Term Investment Grade Bond Fund has a current dividend distribution yield of 3.92%, and the High Yield Corporate Bond Fund as a distribution yield of 5.22%.

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Abe
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Re: Living on Dividends and Interest

Post by Abe » Wed Jan 31, 2018 2:03 pm

BL wrote:
Wed Jan 31, 2018 1:05 pm
If you asked about taking dividends first before selling, I would say Sure, why not? You are already paying tax on it, no matter what you do with it, so you might as well. Re-investing dividends and then selling when you need money should be no different as you are taking out capital either way.
I understand the first two sentences above. I don't understand the third sentence:
"Re-investing dividends and then selling when you need money should be no different as you are taking out capital either way."
If I reinvest my dividends and then sell some shares when I need money, wouldn't I have to pay more tax since I would be paying tax on the dividends plus tax on any capital gain when I sell?
Slow and steady wins the race.

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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 2:23 pm

Toons wrote:
Wed Jan 31, 2018 1:33 pm
TN_Boy wrote:
Wed Jan 31, 2018 12:04 pm
Toons wrote:
Wed Jan 31, 2018 8:33 am
Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

You don't need to "sell" to "withdraw" if your capital gains ,dividends from share acquisition over the decades,covers expenses for the year.
:happy
I'm sorry, what is your point?

We save over the decades. Just about all of us saving for retirement are reinvesting dividends in our tax-sheltered accounts. The combination of savings, capital gains, and dividends gives us X dollars at retirement. If you have enough saved so that you can live off only the dividends that is splendid for you, but it means you have a very low withdrawal rate, and you saved so much you can live off that. Perhaps you could have retired sooner. What % of your portfolio do you withdraw every year?

I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.

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Abe
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Re: Living on Dividends and Interest

Post by Abe » Wed Jan 31, 2018 2:43 pm

TN_Boy wrote:
Wed Jan 31, 2018 2:23 pm
I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.
Again, I don't understand this. How would I pay more taxes with a dividend oriented approach in a taxable account then I would using a total return strategy?
Slow and steady wins the race.

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Toons
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Re: Living on Dividends and Interest

Post by Toons » Wed Jan 31, 2018 3:48 pm

TN_Boy wrote:
Wed Jan 31, 2018 2:23 pm
Toons wrote:
Wed Jan 31, 2018 1:33 pm
TN_Boy wrote:
Wed Jan 31, 2018 12:04 pm
Toons wrote:
Wed Jan 31, 2018 8:33 am
Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

You don't need to "sell" to "withdraw" if your capital gains ,dividends from share acquisition over the decades,covers expenses for the year.
:happy
I'm sorry, what is your point?

We save over the decades. Just about all of us saving for retirement are reinvesting dividends in our tax-sheltered accounts. The combination of savings, capital gains, and dividends gives us X dollars at retirement. If you have enough saved so that you can live off only the dividends that is splendid for you, but it means you have a very low withdrawal rate, and you saved so much you can live off that. Perhaps you could have retired sooner. What % of your portfolio do you withdraw every year?

I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.
I am retired age 67(semi retired before that for 15 years)
The dividends and capital gains that I receive from my mutual funds and equities in taxable account covers expenses.
I haven't touched the IRA's.
For example I had one mutual fund that paid out a total capital gain of 18,000 dollars in Dec.2017.
The mutual fund NAV price dropped according to the gain "per share".
Rather than reinvest the capital gain as I used to do,I now take it in cash.
It is an easy way for me to get cash without selling shares.( At this point in time,,selling shares is not a necessity in my life)
Since that time ,the mutual fund itself has recouped 75% its value prior to payout.Growth and Income..
Mutual funds are pass through entities when it comes to taxes,,,,shareholder.
I have no control over what the payouts will be.
I guess my point would be,the payout on that one fund paid for a lot more than yearly utilities,insurance,cell phones,travel etc.

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Pigeye Brewster
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Re: Living on Dividends and Interest

Post by Pigeye Brewster » Wed Jan 31, 2018 4:07 pm

Abe wrote:
Wed Jan 31, 2018 2:03 pm
I understand the first two sentences above. I don't understand the third sentence:
"Re-investing dividends and then selling when you need money should be no different as you are taking out capital either way."
If I reinvest my dividends and then sell some shares when I need money, wouldn't I have to pay more tax since I would be paying tax on the dividends plus tax on any capital gain when I sell?
The amount of the reinvested dividends is added to your cost basis, so the capital gain would be less.

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Toons
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Re: Living on Dividends and Interest

Post by Toons » Wed Jan 31, 2018 4:12 pm

Pigeye Brewster wrote:
Wed Jan 31, 2018 4:07 pm
Abe wrote:
Wed Jan 31, 2018 2:03 pm
I understand the first two sentences above. I don't understand the third sentence:
"Re-investing dividends and then selling when you need money should be no different as you are taking out capital either way."
If I reinvest my dividends and then sell some shares when I need money, wouldn't I have to pay more tax since I would be paying tax on the dividends plus tax on any capital gain when I sell?

The amount of the reinvested dividends is added to your cost basis, so the capital gain would be less.

+1
Exactly

https://www.bankrate.com/finance/money- ... basis.aspx
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

alfaspider
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Re: Living on Dividends and Interest

Post by alfaspider » Wed Jan 31, 2018 5:05 pm

RAchip wrote:
Wed Jan 31, 2018 12:11 pm
"If a given company had two classes of stock identical in all ways except for the fact that one paid a dividend and one did not, you'd end up with an equivalent amount pre-tax at the end of the day because the non-dividend stock should have more share appreciation equal to the amount of the dividend."

This is wrong. If cash goes out of the company as a $1 per share dividend but it is only paid to half of the shares, then all shares decrease in value by 50 cents, including the class of shares that didn't get the dividend so they are much worse off.
Perhaps I wasn't clear in my hypothetical. I did not mean a situation where one company has two different classes the same time. I meant an "either/or" situation.

TN_Boy
Posts: 567
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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 5:38 pm

Abe wrote:
Wed Jan 31, 2018 2:43 pm
TN_Boy wrote:
Wed Jan 31, 2018 2:23 pm
I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.
Again, I don't understand this. How would I pay more taxes with a dividend oriented approach in a taxable account then I would using a total return strategy?
Right now, qualified dividends are taxed at the same rate as long term capital gains. Dividends from things like preferred stocks or REITs are taxed at ordinary income rates, but lets stick with qualified dividends.

So how can it matter? Here is how I think it matters. Generally, I assume that someone using a dividend strategy is holding all their stocks and reaping the dividends.

But I'm using a total return strategy. So I get some dividends. And also sell shares. But I also tax loss harvest when I can. So some/many of those stock sells *trigger no taxes at all because of the tax loss harvesting as I have carryover losses to offset the capital gain on the sale*. Plus, as I have capital loss carryovers, I cheerfully deduct $3,000 from my income every year.

Stepping up a level, donations to charity are of the highest cost basis shares I own, and sales for income are of the lowest.

I grant you tax loss harvesting is too much trouble for some people. Anyway, the main point is that using a total return approach which includes stock sales allows one to manage some of the tax implications. Dividends cannot be controlled -- they are paid, and you pay taxes on them. If your income is low enough, it doesn't matter.

Does that help any? I invite others to chime in if I've gotten something a bit wrong or was unclear.

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Re: Living on Dividends and Interest

Post by TN_Boy » Wed Jan 31, 2018 5:44 pm

Toons wrote:
Wed Jan 31, 2018 3:48 pm
TN_Boy wrote:
Wed Jan 31, 2018 2:23 pm
Toons wrote:
Wed Jan 31, 2018 1:33 pm
TN_Boy wrote:
Wed Jan 31, 2018 12:04 pm
Toons wrote:
Wed Jan 31, 2018 8:33 am
Superb Idea.
I realized decades ago that
share acquistion was the key via reinvestment and compounding.
Eventually one stops reinvesting and takes the dividends and cap gains in cash(upon retirement)
It works.
No need to sell shares.



:mrgreen:
It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

You don't need to "sell" to "withdraw" if your capital gains ,dividends from share acquisition over the decades,covers expenses for the year.
:happy
I'm sorry, what is your point?

We save over the decades. Just about all of us saving for retirement are reinvesting dividends in our tax-sheltered accounts. The combination of savings, capital gains, and dividends gives us X dollars at retirement. If you have enough saved so that you can live off only the dividends that is splendid for you, but it means you have a very low withdrawal rate, and you saved so much you can live off that. Perhaps you could have retired sooner. What % of your portfolio do you withdraw every year?

I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.
I am retired age 67(semi retired before that for 15 years)
The dividends and capital gains that I receive from my mutual funds and equities in taxable account covers expenses.
I haven't touched the IRA's.
For example I had one mutual fund that paid out a total capital gain of 18,000 dollars in Dec.2017.
The mutual fund NAV price dropped according to the gain "per share".
Rather than reinvest the capital gain as I used to do,I now take it in cash.
It is an easy way for me to get cash without selling shares.( At this point in time,,selling shares is not a necessity in my life)
Since that time ,the mutual fund itself has recouped 75% its value prior to payout.Growth and Income..
Mutual funds are pass through entities when it comes to taxes,,,,shareholder.
I have no control over what the payouts will be.
I guess my point would be,the payout on that one fund paid for a lot more than yearly utilities,insurance,cell phones,travel etc.

:happy
My point is that all you are telling me is that you saved enough so that a very modest withdrawal from your taxable account covers your expenses.

I agree that nothing is easier from a withdrawal standpoint than just cashing dividend checks, but that doesn't mean a dividend focused strategy is superior to a total return strategy. And you can only live off a dividend-only strategy for your equity if you have a very large amount of money saved.

SGM
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Re: Living on Dividends and Interest

Post by SGM » Wed Jan 31, 2018 6:58 pm

Living off dividends and interest is a great thing if you don't reach for yield and you are spending what you need and want. You must have a large portfolio or don't need much from your portfolio to live well.

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Toons
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Re: Living on Dividends and Interest

Post by Toons » Wed Jan 31, 2018 7:08 pm

TN_Boy wrote:
Wed Jan 31, 2018 5:44 pm
Toons wrote:
Wed Jan 31, 2018 3:48 pm
TN_Boy wrote:
Wed Jan 31, 2018 2:23 pm
Toons wrote:
Wed Jan 31, 2018 1:33 pm
TN_Boy wrote:
Wed Jan 31, 2018 12:04 pm


It works if your withdrawal rate is low enough that a dividend-only approach can pay the bills. That is a big if given current dividend yields.

You don't need to "sell" to "withdraw" if your capital gains ,dividends from share acquisition over the decades,covers expenses for the year.
:happy
I'm sorry, what is your point?

We save over the decades. Just about all of us saving for retirement are reinvesting dividends in our tax-sheltered accounts. The combination of savings, capital gains, and dividends gives us X dollars at retirement. If you have enough saved so that you can live off only the dividends that is splendid for you, but it means you have a very low withdrawal rate, and you saved so much you can live off that. Perhaps you could have retired sooner. What % of your portfolio do you withdraw every year?

I get that people like dividends; I like them also. But there is no credible evidence that a dividend-oriented investment strategy is better than a total return strategy. And in a taxable account, you are likely to pay more taxes with a dividend oriented approach.
I am retired age 67(semi retired before that for 15 years)
The dividends and capital gains that I receive from my mutual funds and equities in taxable account covers expenses.
I haven't touched the IRA's.
For example I had one mutual fund that paid out a total capital gain of 18,000 dollars in Dec.2017.
The mutual fund NAV price dropped according to the gain "per share".
Rather than reinvest the capital gain as I used to do,I now take it in cash.
It is an easy way for me to get cash without selling shares.( At this point in time,,selling shares is not a necessity in my life)
Since that time ,the mutual fund itself has recouped 75% its value prior to payout.Growth and Income..
Mutual funds are pass through entities when it comes to taxes,,,,shareholder.
I have no control over what the payouts will be.
I guess my point would be,the payout on that one fund paid for a lot more than yearly utilities,insurance,cell phones,travel etc.

:happy
My point is that all you are telling me is that you saved enough so that a very modest withdrawal from your taxable account covers your expenses.

I agree that nothing is easier from a withdrawal standpoint than just cashing dividend checks, but that doesn't mean a dividend focused strategy is superior to a total return strategy." And you can only live off a dividend-only strategy for your equity if you have a very large amount of money saved."
+1 :happy
I think you have the picture now(In bold),,I would substitute the word "invested" for "saved" :happy
My goal ,decades ago was to be able to have enough in capital gains ,int,and dividends to pay for the majority of yearly expenses upon full retirement.
That goal has been attained.I Never gave a thought to which was better or worse,,,dividend or total return,,,I knew nothing about the strategies at that time,I Just stayed focused on the finish line.

:sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Sandtrap
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Re: Living on Dividends and Interest

Post by Sandtrap » Wed Jan 31, 2018 7:15 pm

SGM wrote:
Wed Jan 31, 2018 6:58 pm
Living off dividends and interest is a great thing if you don't reach for yield and you are spending what you need and want. You must have a large portfolio or don't need much from your portfolio to live well.
+1
It depends on one's portfolio size and needs.
I have an elderly friend who has a 50/50 portfolio. HIs annuity and SS covers his base expenses. He has the dividends and interest from his 1 mil portfolio deposited into his savings account and he and DW live off of that as well. It works for him. The portfolio share value continues to grow. All is well. For him.

j :D

Agggm
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Re: Living on Dividends and Interest

Post by Agggm » Wed Jan 31, 2018 7:27 pm

aristotelian wrote:
Mon Jan 08, 2018 1:00 pm
Nothing wrong with it. Nothing wrong with reinvesting dividends and living off of principal, either. Money is fungible so it does not matter where it comes from. What matters is the amount and living within your means. Do keep an eye on tax efficiency, since bond dividends are taxed as ordinary income.
This is true. But some states tax dividends at higher rates than ordinary income. So it may not matter as much after fed and state taxes.

naha66
Posts: 186
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Re: Living on Dividends and Interest

Post by naha66 » Thu Feb 01, 2018 12:22 am

TN_Boy wrote:
Wed Jan 31, 2018 12:15 pm
snarlyjack wrote:
Mon Jan 08, 2018 8:32 pm
Skime,

Hello & welcome to Bogleheads.

When I started investing, I did a study of
the most successful investors I could find on the internet.
(The idea being what are super successful investors doing)?

Most (not all) of the most successful investors I could find
($Millionaires) were all invested with dividend paying stocks.
(Ronald Read The Janitor Next Door, Warren Buffett, Kevin O'Leary,
+ lot's of other investors).

The super successful investors that I read about had no problem
living on dividends & interest.
I don't think Warren Buffett got rich off the dividends thrown off by the stocks he bought :D.

So Buffett thinks dividends are a sign of a good company, hmm, what is Berkshire Hathway's dividend yield ....... :oops:
So I guess you don't read much. He loves buying shares of dividend paying companies. His top ten holdings all pay a higher div than the S&P rate
Last edited by naha66 on Thu Feb 01, 2018 12:35 am, edited 1 time in total.

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Tyler Aspect
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Re: Living on Dividends and Interest

Post by Tyler Aspect » Thu Feb 01, 2018 12:28 am

Dividend Income Outdated for Retirement Investing

I know the traditional attitude is to use bond dividend to finance retirement spending, but the tax laws have changed all that. There is a large income range where capital gains and qualified dividends are taxed at 0%. Modern retirement spending in the early retirement is typically funded by stock sales in the taxable account. Sell stocks two times a year to harvest the 0% capital gains. Unused cash in the taxable account is allocated to purchase a replacement stock index. After a while, you won't care about how much your bonds earn in terms of dividend, other than the fact that bond dividends subtract from the amount of possible 0% capital gains.

Hold bond for their contribution toward stability, not chasing their yields.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Living on Dividends and Interest

Post by itstoomuch » Thu Feb 01, 2018 12:45 am

I've thought about this once. But only with dividends and a buy/sell scenario with my local gas utility. It is my experience that I can add another 2% to the dividend yield by buy low-sell high in my utility which has longterm dividend yield of ~3.5% (currently ~3.2%). Trading profits reduces the total value of this Income account required. Care must be taken to not to have too few shares.

I never really went beyond the imaginary stage.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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