What if you only live off dividends?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
skime
Posts: 54
Joined: Fri Nov 10, 2017 6:24 pm

Re: What if you only live off dividends?

Post by skime » Tue Feb 13, 2018 7:51 pm

Use SDY. It destroys SPY long term.

AlohaJoe
Posts: 3681
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: What if you only live off dividends?

Post by AlohaJoe » Tue Feb 13, 2018 8:26 pm

skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image

They look nearly identical to me.

naha66
Posts: 180
Joined: Sun Jul 14, 2013 6:02 pm

Re: What if you only live off dividends?

Post by naha66 » Tue Feb 13, 2018 11:47 pm

Chuck wrote:
Tue Feb 13, 2018 10:28 am
It's even worse than that.

SEC yield on VTSAX (Total Stock Market Admiral) is 1.68%. Try saving up 59x expenses.
How many people retire 100% VTSX, a 40/60 4 fund of VTI,VEU,BND,and VCIT returns about 2.5% which is what some posters(the sky is falling) here advocate as the new SWR. I take my dividends and sell enough to get to my SWR of about 3.75

Da5id
Posts: 2035
Joined: Fri Feb 26, 2016 8:20 am

Re: What if you only live off dividends?

Post by Da5id » Wed Feb 14, 2018 8:21 am

naha66 wrote:
Tue Feb 13, 2018 11:47 pm
How many people retire 100% VTSX, a 40/60 4 fund of VTI,VEU,BND,and VCIT returns about 2.5% which is what some posters(the sky is falling) here advocate as the new SWR. I take my dividends and sell enough to get to my SWR of about 3.75
I think 2.5% advocates are rare. Some may have that amount, but I don't think many are suggesting it as guideline. 3-3.5% for long retirements many of us are thinking isn't a bad idea if you can reasonably do it though...

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: What if you only live off dividends?

Post by MrPotatoHead » Wed Feb 14, 2018 9:49 am

There is nothing inherently wrong with the strategy especially if you are simply taking the dividend yield of the S&P500 or total stock market. The issue comes in when you reach for dividends.

I prefer to use a CD ladder that covers at least 10 years of expenses, with the plan to replenish each CD on an annual basis from dividends and income and then reinvest any residual for growth. The logic is, it acts as as a smoothing agent for budgeting purposes.

Be aware with the afore mentioned indexes yield can drop to 1.6 or so, therefore you are really targeting a fairly high expense multiple. Since valuations are historically high I am contemplating (at least this week) 75x expenses myself or about a 1.33% withdraw rate.

I suspect a lot of the negatively you see surrounding such strategies come from people born into first world countries who also have never known actual hunger or lived without heat, electric, or seen firsthand situations where the elderly sacrifice their self for the betterment or even survival of the younger generation. To such people an enormous amount of psychic income may accrue from seeming excessive security.

Cheers..
Last edited by MrPotatoHead on Thu Feb 15, 2018 8:44 pm, edited 1 time in total.

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 11:40 am

onourway wrote:
Tue Feb 13, 2018 2:53 pm
getrichslowly wrote:
Tue Feb 13, 2018 2:37 pm
What I am mostly trying to correct for is speculative price movements. If the market's PE ratio doubles, most people just consider this a doubling in their wealth, and that means if they hit their retirement goal, they can now consume their same SWR as before of the inflated balance. Then if the market either (a) corrects itself, or (b) stagnates, their previously calculated SWR could fail. This is easiest to imagine if taken to extremes. Imagine CAPE is 100, or 1000. Would you still feel comfortable with 4%, or even 2% SWR? Obviously not. You would probably want to base your withdrawal on some sort of yield figure.
The 4% number already accounts for the possibility of high valuations. In other words, for all past rolling periods, including starting withdrawals at previously inflated peaks, 4% was sustainable. YMMV for the future.
Past rolling periods are not great predictors of future periods with different structural parameters.You have to understand the underlying structure and then use current parameters to make an informed prediction.

Returns don't just come out of a hat. They can be broken down into (1) Changes in valuation + (2) EPS Growth + (3) Dividends.

For more information, check out this latest post from philosophicaleconomics; http://www.philosophicaleconomics.com/2 ... per-limit/

He's predicting about 4% future real equity returns based on expected changes to the above components.

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 11:51 am

nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
People who were doing this during the Great Depression were inconvenienced when the companies whose dividends they were living off stopped paying them.
I consider that a feature, not a bug. During the Great Depression, dividends fell by less than half, and had really just reverted to their pre-bubble level a decade prior. I find it prudent to reduce your consumption by half if dividends fall by half. This is actually more stable than basing your withdrawal off total wealth, which had fallen by a much greater factor. I can't imagine consuming the exact same level pre- and post- market crash under any circumstance, unless I was already withdrawing a ridiculously small fraction of my total wealth in the first place.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
"Living off dividends" has the same problem as many variable withdrawal systems. It is quite true that you will never literally run out of money, but the amount of money you are allowed to spend may not be enough to live on without wrenching dislocations in your lifestyle.
But any other strategy risks depleting capital. Unless you just want to die with exactly $0, but I like to see my capital grow.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
During the year 2006, if you had invested $1 million investment in the Vanguard 500 index fund you would have received 7,692 shares. They would have paid you a total of (0.58 + 0.60 + 0.65 + 0.78) * 7,692 = $20,076. During the year 2009, (0.54 + 0.45 + 0.51 + 0.69) = $16,845. That's the equivalent of a 16% "pay cut."
Probably a wise paycut, considering we were now in a recession. During a recession it is generally prudent to make some cuts.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
Note, too, that the decision that "trusting what the market choose to provide" meant 1.7% to 2%, not the often-mentioned 4%.
This is mixing time periods though. Historically the dividend yield was closer to 4%, so a dividend rule and a 4%-SWR rule were the same. Only now are dividends half their historical value. But maybe that also implies that 4% SWR, which was backtested over historical data only (we don't have access to future data unfortunately, or this would be easy!) may not hold up on the future. There are some people like this guy who think we are looking at a future 4% real equity return: http://www.philosophicaleconomics.com/2 ... per-limit/
If we are, then my dividend strategy or 2%-SWR strategy is prudent.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm

In the dividend-oriented Vanguard Equity-Income fund, VEIPX, that $1 million invested at the start of 2005 = 39,077 shares, which would have provided (0.17 + 0.16 + 0.17 + 0.21) = $27,745 during 2006, and (0.17 + 0.13 + 0.11 + .14) * 39,077 = $21,492.35. Although the dividends are considerably higher than those of the 500 index, they still fall far short of 4%, and you would have been faced by a 22% "pay cut."
I don't advise deviating from the market cap weight.

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 12:07 pm

randomguy wrote:
Tue Feb 13, 2018 6:38 pm

For example you would have gone from making 15k/year in 1930 to 8.2k year in 1932 in real dollars. Or if you want something more recent, 33k/year in 2008 to 25k/year in 2009.
I think this is good because 1932 was in a recession and its usually prudent to spend less during recessions, even if you're still in the accumulation phase, so that you can buy stocks while they're on sale.

Also, choosing 1930 as a startpoint is cherrypicking. In 1932 the dividend per share simply reverted back to its 1926 level. So actually, any excess dividend income received between 1927-1931 was just a bonus. If you weren't able to retire in 1926 but had only retired in say 1929 because of recent runup in valuations, then it was probably foolish to assume high valuations reflected your true wealth. Personally I try to focus on the fundamentals of my investments and not their price. CAPE is currently double the historical average, so I do not predict 7% real equity returns or a 4% SWR will succeed in the future. I know that my paper wealth is inflated by abnormal CAPE. I think a better predictor of future returns and future successful SWR is to base it off CAPE. If CAPE doubles, SWR falls by half. This way speculative price movements are ignored as the noise they are, and you only consume the actual earnings of your portfolio.

I realize pure dividends is flawed because of the equivalency with buybacks, so maybe a better measure should just be based on raw earnings.

ValueInvestor99
Posts: 57
Joined: Thu Dec 23, 2010 2:25 pm

Re: What if you only live off dividends?

Post by ValueInvestor99 » Wed Feb 14, 2018 2:02 pm

I use covered calls to "live on".

For example, VLO is currently at $89.48, the Mar $95 covered calls are at $0.78 corresponding to a 10% return, if the stock price doesn't change.
If the stock price goes over 95.78, then there will be a loss to buy back the options. And if the stock price drops to below $88.70, I would have been better off selling the stock.

Wakefield1
Posts: 815
Joined: Mon Nov 14, 2016 10:10 pm

Re: What if you only live off dividends?

Post by Wakefield1 » Wed Feb 14, 2018 2:16 pm

I am pretty sure that in 1930 buying a diverse list of stocks,dividend paying or not, was a lot harder than today. I'm sure there wasn't anything like "IDX 500 ADM" mutual fund available.
Ancestor of Wellington Fund :P :moneybag :P Front end load? :confused
Ancestor of Pioneer Fund-would those have supported annual withdrawal rates of 4% ?

And you couldn't easily check your 4:00 PM closing balance on the phone!
Last edited by Wakefield1 on Wed Feb 14, 2018 2:18 pm, edited 1 time in total.

User avatar
patrick013
Posts: 2329
Joined: Mon Jul 13, 2015 7:49 pm

Re: What if you only live off dividends?

Post by patrick013 » Wed Feb 14, 2018 2:18 pm

Consider this. If you bought Verizon for a 4.7% yield on cost for
the foreseeable future or a dividend fund which yields over 4%
excluding special dividends would that be more reliable than buying
TSM today (VTI) which could correct another 10% or more in the
foreseeable future ?

I wouldn't buy a yield weighted dividend fund with interest rates
rising and the market correcting at the same time so just consider
it.
age in bonds, buy-and-hold, 10 year business cycle

skime
Posts: 54
Joined: Fri Nov 10, 2017 6:24 pm

Re: What if you only live off dividends?

Post by skime » Wed Feb 14, 2018 2:40 pm

AlohaJoe wrote:
Tue Feb 13, 2018 8:26 pm
skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image

They look nearly identical to me.
I'm not sure where your data came from, but here are two links to M*.

http://performance.morningstar.com/fund ... ture=en_US

http://performance.morningstar.com/fund ... tion?t=SPY

Look at the 10Y return. 9.93 v 9.17.

CppCoder
Posts: 827
Joined: Sat Jan 23, 2016 9:16 pm

Re: What if you only live off dividends?

Post by CppCoder » Wed Feb 14, 2018 2:57 pm

I suspect that I'll be able to live off dividends or less in retirement. It's not the goal, it's just that I have moderate expenses and don't want to retire in my 40s. Maybe my family will better figure out how to spend more money :).

Someone once told me that rich is defined as living off your interest's interest. So the new definition of rich is 2500x (2% of 2%) expenses :). The corollary, of course, is that by this definition, no one is likely to ever be rich since if you had that much money, you'd likely just spend more.

CantPassAgain
Posts: 577
Joined: Fri Mar 15, 2013 8:49 pm

Re: What if you only live off dividends?

Post by CantPassAgain » Wed Feb 14, 2018 3:40 pm

getrichslowly wrote:
Wed Feb 14, 2018 11:51 am
But any other strategy risks depleting capital. Unless you just want to die with exactly $0, but I like to see my capital grow.
Your capital is what the market says it is and it does not care how many shares you have.

randomguy
Posts: 6171
Joined: Wed Sep 17, 2014 9:00 am

Re: What if you only live off dividends?

Post by randomguy » Wed Feb 14, 2018 4:06 pm

getrichslowly wrote:
Wed Feb 14, 2018 12:07 pm
randomguy wrote:
Tue Feb 13, 2018 6:38 pm

For example you would have gone from making 15k/year in 1930 to 8.2k year in 1932 in real dollars. Or if you want something more recent, 33k/year in 2008 to 25k/year in 2009.
I think this is good because 1932 was in a recession and its usually prudent to spend less during recessions, even if you're still in the accumulation phase, so that you can buy stocks while they're on sale.

Also, choosing 1930 as a startpoint is cherrypicking. In 1932 the dividend per share simply reverted back to its 1926 level. So actually, any excess dividend income received between 1927-1931 was just a bonus. If you weren't able to retire in 1926 but had only retired in say 1929 because of recent runup in valuations, then it was probably foolish to assume high valuations reflected your true wealth. Personally I try to focus on the fundamentals of my investments and not their price. CAPE is currently double the historical average, so I do not predict 7% real equity returns or a 4% SWR will succeed in the future. I know that my paper wealth is inflated by abnormal CAPE. I think a better predictor of future returns and future successful SWR is to base it off CAPE. If CAPE doubles, SWR falls by half. This way speculative price movements are ignored as the noise they are, and you only consume the actual earnings of your portfolio.

I realize pure dividends is flawed because of the equivalency with buybacks, so maybe a better measure should just be based on raw earnings.
It isn't cherry picking. It is just a simple example of showing the potential for loss of income when choosing to live off the dividends. Given that the 4% rule worked in 1929, I am not sure how foolish the person retiring then with their inflated stock market values really was.:) Buybacks isn't going to make your scheme better. If you want to argue that cutting spending by 40%+ is the way to go, pretty much any scheme works. Retire with a 5% SWR and reduce it to 3% when the porfolio's real value is below the starting one is also incrediably safe. There isn't anything magical about dividends. They go in and out of style based on investor preferences and tax laws. If the market is returing 10%, if you are getting paid a 2% dividend or an 8% doesn't change what you can spend.

We have had this conversation before. Lets say real returns for the next 30 years are 1/3rd of historical values (call it 2%). Will the 4% rule fail? Maybe. Maybe not. 2% is twice what the 4% rule to work depending on the sequence of returns. If you are going to say you cut the SWR in half when CAPE is double (ignore the fact that 2018 CAPE10 isn't calculated the same as 1990 CAPE10 or 1920 CAPE10 so who knows how comparable the average are or the fact that we haven't been at average historical CAPE10 levels for 25 years not which either means one big bubble or the world has changed), you need to use the SWR for "average" CAPE10s which is up in the ~6% range. If you then realize that stocks are only half the equation and bonds are the other (depending on AA) you get back to ~4% SWR. And don't forgot today that you can buy real bonds so the disaster that was 1966-1981 on your bond porfolio can be mitigated against. Getting a .5%-.8% real return doesn't sound like much but it is pretty huge compared to the negative real returns that historical investors got.

david1082b
Posts: 371
Joined: Fri Jun 09, 2017 12:35 pm

Re: What if you only live off dividends?

Post by david1082b » Wed Feb 14, 2018 4:58 pm

skime wrote:
Wed Feb 14, 2018 2:40 pm
AlohaJoe wrote:
Tue Feb 13, 2018 8:26 pm
skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image

They look nearly identical to me.
I'm not sure where your data came from, but here are two links to M*.

http://performance.morningstar.com/fund ... ture=en_US

http://performance.morningstar.com/fund ... tion?t=SPY

Look at the 10Y return. 9.93 v 9.17.
SDY didn't start ten years ago, it started in 2006. The original chart showed SDY from its beginning versus S&P 500, with very similar returns for both, from as far back as is possible. Do you only use the last ten years when deciding whether something "destroys" the S&P 500 "long-term"? The Nasdaq Biotech ETF $IBB had better returns in the last ten years than $SDY, so why not go for that instead? Is it common practice to decide one's portfolio based on what happened to beat S&P 500 in the last ten years? Using present tense to describe historical returns is an odd way to go about things imo.

Only using the last ten years ignores the decline SDY had from the summer of 2007 ahead of the S&P 500, so this starts the return chart at a more advantageous point for SDY than otherwise might have been the case. Most investors have more than a ten-year horizon as well, I really don't get the obsession with 10-year cycles of performance, it's everywhere.

retiredjg
Posts: 33547
Joined: Thu Jan 10, 2008 12:56 pm

Re: What if you only live off dividends?

Post by retiredjg » Wed Feb 14, 2018 5:13 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
You have forgotten that the market also provides increases in net asset value. To use it, you have to sell something. :happy And it costs less in taxes than the dividends so there is an incentive there. Total return approach is more efficient.

Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.

hoops777
Posts: 2304
Joined: Sun Apr 10, 2011 12:23 pm

Re: What if you only live off dividends?

Post by hoops777 » Wed Feb 14, 2018 6:01 pm

It is very obvious that one can easily live off of just dividends or interest or both,combined with SS and any other pension if you have one.It simply depends on what your spending is and how much money you have invested.No need to make an issue out of what is common sense.
K.I.S.S........so easy to say so difficult to do.

afan
Posts: 3770
Joined: Sun Jul 25, 2010 4:01 pm

Re: What if you only live off dividends?

Post by afan » Wed Feb 14, 2018 6:20 pm

As others have noted, the problem with living off dividends is that they can drop. You have to be willing to cut spending when that happens. For this reason, you should not spend all of the dividends in good years because saving some of them helps sustain the value of the portfolio when you have to sell shares to maintain spending during times of low dividends.

If you use total stock market for stocks and BND or intermediate term muni, depending on your tax bracket, for bonds, you would have to resist any urge to tilt towards a lot of bonds to generate higher dividends.

A more rational approach would be to pick a withdrawal rate equal to about the stock dividend rate, if that is what you wanted to use, and draw that using dividends and capital gains as needed. Not exceeding that in good years and selling shares to support spending in low dividend years.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
Toons
Posts: 12929
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: What if you only live off dividends?

Post by Toons » Wed Feb 14, 2018 6:31 pm

Dividends
Cap Gains
Interest.
Yes It Can Be Done. :wink:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:12 am

afan wrote:
Wed Feb 14, 2018 6:20 pm
As others have noted, the problem with living off dividends is that they can drop. You have to be willing to cut spending when that happens.
I think this is a feature not a bug. If dividends fall, that often signals a decline in the future longrun earnings potential of the market, and hence the maximum feasible SWR.
afan wrote:
Wed Feb 14, 2018 6:20 pm
For this reason, you should not spend all of the dividends in good years because saving some of them helps sustain the value of the portfolio when you have to sell shares to maintain spending during times of low dividends.
You could smooth dividends, but dividends are already a smoothed measure of total return, so this might be excessive smoothing. The dividend is already supposed to reflect the long run sustainable payout of the market.
afan wrote:
Wed Feb 14, 2018 6:20 pm
A more rational approach would be to pick a withdrawal rate equal to about the stock dividend rate, if that is what you wanted to use, and draw that using dividends and capital gains as needed. Not exceeding that in good years and selling shares to support spending in low dividend years.
But what if there is a structural shift in the longrun future earnings potential of the stock market? Converting the current dividend yield into a static SWR would ignore any future profitability signals sent by changes in dividends.

If dividends were to suddenly fall 50% in a single year, I would be alarmed that that indicates a real shift in the longrun earnings potential of the market, and I should probably adjust my withdrawal strategy accordingly.

If I don't my withdrawal to match dividends, then I should supplement my portfolio with bonds, since those are more stable. So if my portfolio is 60/40 I would only be reacting to 60% of the change in dividend yields rather than 100%.

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:18 am

retiredjg wrote:
Wed Feb 14, 2018 5:13 pm
Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.
Correct, this is intentionally a more conservative strategy, aimed at longrun capital preservation, a balance between spending and growth. It is not for people who want to completely deplete their capital.

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:27 am

randomguy wrote:
Wed Feb 14, 2018 4:06 pm
It isn't cherry picking. It is just a simple example of showing the potential for loss of income when choosing to live off the dividends.
It's not really a loss though, as I said. It's only a loss if you are comparing it to 1930. If you compare to 1926, it's simply parity.
randomguy wrote:
Wed Feb 14, 2018 4:06 pm
If the market is returning 10%, if you are getting paid a 2% dividend or an 8% doesn't change what you can spend.
If the market is returning a 2% dividend, 4% total earnings, and 6% speculative price appreciation, then it matters. An 8% dividend in this case would be unlikely since it would exceed total earnings, and the market on average generally only pays out sustainable dividends from profits. So the 2% dividend is a signal of the real earning potential of the stock.

mega317
Posts: 2554
Joined: Tue Apr 19, 2016 10:55 am

Re: What if you only live off dividends?

Post by mega317 » Tue Feb 20, 2018 12:54 pm

getrichslowly wrote:
Tue Feb 20, 2018 11:18 am
retiredjg wrote:
Wed Feb 14, 2018 5:13 pm
Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.
Correct, this is intentionally a more conservative strategy, aimed at longrun capital preservation, a balance between spending and growth. It is not for people who want to completely deplete their capital.
It's also a more conservative strategy to withdraw less than 4% from a portfolio that's not focused on dividends. What's the difference?
But what if there is a structural shift in the longrun future earnings potential of the stock market?
Then we have bigger problems. But it still won't matter which way you get your spending money.

Da5id
Posts: 2035
Joined: Fri Feb 26, 2016 8:20 am

Re: What if you only live off dividends?

Post by Da5id » Tue Feb 20, 2018 12:56 pm

getrichslowly wrote:
Tue Feb 20, 2018 11:18 am
retiredjg wrote:
Wed Feb 14, 2018 5:13 pm
Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.
Correct, this is intentionally a more conservative strategy, aimed at longrun capital preservation, a balance between spending and growth. It is not for people who want to completely deplete their capital.
You are moving goalposts as the thread progresses seems to me. Re-read your starting post, which refers to a "4% SWR". 4% SWR includes several assumptions, namely "30 year retirement" and "depletion of assets is success if you deplete at 30 years and a day". What precisely is your goal here, a perpetual portfolio? And if stocks move towards buybacks (currently more earnings in S&P 500 are spent on buybacks than on dividends, which has been the case for some number of years), what does that mean for your usage of the dividend yield specifically? Why are dividends so special here, why not use CAPE or other metrics if you want to take heed of valuations?

There are risks under-saving, namely that you don't have the retirement you want (and may have trouble keeping a roof overhead and cat food on the table). But there are also risks to over-saving, namely that you work longer than needed for most foreseeable scenarios and have fewer healthy years to enjoy the fruits of your labor. If you take the S&P 500 yield (1.79% today) as your target withdrawal rate at retirement you are IMHO almost guaranteed to hit the over-saving category, and in fact most people in the US will not retire but work until they die. 4% with room to cut is still probably fine. I'm personally going for 3% as I'm cautious/conservative/don't want to have to go back to work if things go badly. Each to their own, if you believe dividends are the way to go and can save down to a sub 2% SWR go to it.
Last edited by Da5id on Tue Feb 20, 2018 1:14 pm, edited 1 time in total.

JustinR
Posts: 685
Joined: Tue Apr 27, 2010 11:43 pm

Re: What if you only live off dividends?

Post by JustinR » Tue Feb 20, 2018 1:08 pm

Living off of dividends is exactly the same as selling off your stocks though.

So you could rephrase your question as, "What if you only live off selling off your stocks?"

deikel
Posts: 551
Joined: Sat Jan 25, 2014 7:13 pm

Re: What if you only live off dividends?

Post by deikel » Tue Feb 20, 2018 3:44 pm

getrichslowly wrote:
Tue Feb 13, 2018 2:27 pm
3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
You could try to set up your portfolio so that you mostly hold higher yielding dividend stocks. People used that argument at one time to justify concentrated positions in stocks like GE, Coca Cola or IBM. The problem with that approach is that you are concentrating your risk with certain kinds of companies... typically those have been large established companies that may or may not be on a downward trend.
I don't want to deviate from the 3-fund portfolio. I would just live off whatever dividends the total market provides.
3CT_Paddler wrote:
Tue Feb 13, 2018 10:58 am
If GE gives you a 4% dividend, but the stock price goes down 20% over a 5 year period, did you actually gain an extra return vs going with the company that increased its stock price with no dividend? Total return is what matters in the end.
Actually, GE's stock price went down after they cut their dividend. So their dividend yield remain pegged at the same value. This is further evidence that the dividend is a signal of what distributions are sustainable.
In a 'dividend only' strategy, why would you choose a three fund portfolio ? A three fund portfolio implies an asset allocation between stock, bond and international stock....usually chosen to balance risk and return with emphasis on return under inflationary conditions (hence the 4 % rule)

I think you would be better off to change your asset allocation to 100 %bond only (or maybe something like 80/20 bond stock if you want to protect against inflation) - that would bring you more return for a reduction in assets that you pass on to the next generation.

In fact, you might get to the age where you can reasonably deduce your rest of living days and start drawing down the principle as well in order to leave nothing behind.

'dividend only' is usually a thinking that is centered on the misunderstanding of equities and their return on investment, e.g. why would you than not pick only stocks that actually pay out dividends and ignore the Berkshire Heathaway's of the world ? equities are not a savings account and inflation risk is real...for what it helps....
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

libralibra
Posts: 197
Joined: Sat Jul 30, 2011 2:01 pm

Re: What if you only live off dividends?

Post by libralibra » Tue Feb 20, 2018 8:15 pm

mega317 wrote:
Tue Feb 13, 2018 10:26 am
No, the assumption is the assets will not completely run out in less than 30 years.

If you want to live off dividends you will either unnecessarily delay retirement or take too much risk to generate high dividends. Which cannot be relied on to stay consistent.

0.04 X portfolio is not fancy math.
A lot of people seem to oversimplify the "4% rule". It is not 4% of portfolio balance annually, but is rather 4% of initial portfolio, then adjusted for inflation each year after that, i.e.

(.04 x InitialBalance) x (1+inflation)^N
where
P(N>=30) = 95%
P(N<30) = 5%

So there is no guarantee or "assumption" that the assets will not completely run out in less than 30 years.

The other flaw is that it does not compensate for taxes. So if you saved 25x in a Roth, you are good to go, but if in a TIRA, then 25x is not enough.

User avatar
willthrill81
Posts: 5369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: What if you only live off dividends?

Post by willthrill81 » Tue Feb 20, 2018 8:44 pm

libralibra wrote:
Tue Feb 20, 2018 8:15 pm
mega317 wrote:
Tue Feb 13, 2018 10:26 am
No, the assumption is the assets will not completely run out in less than 30 years.

If you want to live off dividends you will either unnecessarily delay retirement or take too much risk to generate high dividends. Which cannot be relied on to stay consistent.

0.04 X portfolio is not fancy math.
A lot of people seem to oversimplify the "4% rule". It is not 4% of portfolio balance annually, but is rather 4% of initial portfolio, then adjusted for inflation each year after that, i.e.

(.04 x InitialBalance) x (1+inflation)^N
where
P(N>=30) = 95%
P(N<30) = 5%

So there is no guarantee or "assumption" that the assets will not completely run out in less than 30 years.

The other flaw is that it does not compensate for taxes. So if you saved 25x in a Roth, you are good to go, but if in a TIRA, then 25x is not enough.
There is no guarantee that any withdrawal or income strategy will succeed over the long-term. But the historical success rate of this strategy is very high. That being said, no one is actually using it in the rigid way it is tested. Any sane person will reduce their withdrawals if/when their portfolio suffers, which adds another layer of security to this approach. Another is that for those retiring at age 65, it is unlikely that they will survive for 30 years, even if it is married couple, so that adds yet another layer of security.

Michael Kitces has justly said that the "odds of failure" of a withdrawal strategy, be it the '4% rule' or something else, should be referred instead as the "odds of making a change in your withdrawal strategy."

The '4% rule' doesn't "compensate for taxes" because those are just another expense like housing, health care, etc. The 4% is what you can withdraw from your portfolio; where the money goes after that is a different matter entirely.
“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

User avatar
willthrill81
Posts: 5369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: What if you only live off dividends?

Post by willthrill81 » Tue Feb 20, 2018 8:49 pm

randomguy wrote:
Wed Feb 14, 2018 4:06 pm

We have had this conversation before. Lets say real returns for the next 30 years are 1/3rd of historical values (call it 2%). Will the 4% rule fail? Maybe. Maybe not. 2% is twice what the 4% rule to work depending on the sequence of returns. If you are going to say you cut the SWR in half when CAPE is double (ignore the fact that 2018 CAPE10 isn't calculated the same as 1990 CAPE10 or 1920 CAPE10 so who knows how comparable the average are or the fact that we haven't been at average historical CAPE10 levels for 25 years not which either means one big bubble or the world has changed), you need to use the SWR for "average" CAPE10s which is up in the ~6% range. If you then realize that stocks are only half the equation and bonds are the other (depending on AA) you get back to ~4% SWR. And don't forgot today that you can buy real bonds so the disaster that was 1966-1981 on your bond porfolio can be mitigated against. Getting a .5%-.8% real return doesn't sound like much but it is pretty huge compared to the negative real returns that historical investors got.
There have actually been three periods I believe where a 4.5% fixed plus inflation withdrawal method would have survived over a 30 year period when the annualized portfolio real return was just 3%.
“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

NibbanaBanana
Posts: 222
Joined: Sun Jan 22, 2017 10:34 pm

Re: What if you only live off dividends?

Post by NibbanaBanana » Tue Feb 20, 2018 11:06 pm

MrPotatoHead wrote:
Wed Feb 14, 2018 9:49 am
There is nothing inherently wrong with the strategy especially if you are simply taking the dividend yield of the S&P500 or total stock market. The issue comes in when you reach for dividends.

I prefer to use a CD ladder that covers at least 10 years of expenses, with the plan to replenish each CD on an annual basis from dividends and income and then reinvest any residual for growth. The logic is, it acts as as a smoothing agent for budgeting purposes.

Be aware with the afore mentioned indexes yield can drop to 1.6 or so, therefore you are really targeting a fairly high expense multiple. Since valuations are historically high I am contemplating (at least this week) 75x expenses myself or about a 1.33% withdraw rate.

I suspect a lot of the negatively you see surrounding such strategies come from people born into first world countries who also have never known actual hunger or lived without heat, electric, or seen firsthand situations where the elderly sacrifice their self for the betterment or even survival of the younger generation. To such people an enormous amount of psychic income may accrue from seeming excessive security.

Cheers..
Wow! A 1.33% SWR. Holy Cow! How long are you planning on living? Or maybe just retiring at age 25?

John Bogle says dividends matter. Bull markets breed a lot of courage. Go back and read the "Sheepdog" thread. In the GFC, dividends were cut by 20%. Stock prices fell by 50%. Which would you rather sell?

User avatar
CyclingDuo
Posts: 1676
Joined: Fri Jan 06, 2017 9:07 am

Re: What if you only live off dividends?

Post by CyclingDuo » Wed Feb 21, 2018 9:35 am

Wakefield1 wrote:
Wed Feb 14, 2018 2:16 pm
I am pretty sure that in 1930 buying a diverse list of stocks,dividend paying or not, was a lot harder than today. I'm sure there wasn't anything like "IDX 500 ADM" mutual fund available.
Ancestor of Wellington Fund :P :moneybag :P Front end load? :confused
Ancestor of Pioneer Fund-would those have supported annual withdrawal rates of 4% ?

And you couldn't easily check your 4:00 PM closing balance on the phone!
Percentage of Americans who owned stock at time of 1929 Crash: less than 1%

Depending on the source, data shows less than 1%, less than 2%, less than 3% owned stocks then. Either way, it was a small percentage of the population invested in the stock market at the time. Investment trusts (version of today's mutual funds) were popular. Leverage was allowed to the tune of up to 50-75%.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

fposte
Posts: 1170
Joined: Mon Sep 02, 2013 1:32 pm

Re: What if you only live off dividends?

Post by fposte » Wed Feb 21, 2018 9:57 am

NibbanaBanana wrote:
Tue Feb 20, 2018 11:06 pm
In the GFC, dividends were cut by 20%. Stock prices fell by 50%. Which would you rather sell?
But the dividends came from the stocks; it's not an either/or. You still drew down on stocks.

RAchip
Posts: 260
Joined: Sat May 07, 2016 7:31 pm

Re: What if you only live off dividends?

Post by RAchip » Wed Feb 21, 2018 10:33 am

JustinR wrote:
Tue Feb 20, 2018 1:08 pm
Living off of dividends is exactly the same as selling off your stocks though.

So you could rephrase your question as, "What if you only live off selling off your stocks?"

I dont agree. Receiving dividends is not “exactly the same” as selling your stock. Nobody can say for sure what would happen to a given company’s stock price OVER TIME if it retaned all its earnings rather than paying some out as dividends. If you can live off of dividends I think that is a far far superior strategy to having to sell bits of your portfolio regularly regardless of market conditions to produce income.

randomguy
Posts: 6171
Joined: Wed Sep 17, 2014 9:00 am

Re: What if you only live off dividends?

Post by randomguy » Wed Feb 21, 2018 10:58 am

getrichslowly wrote:
Tue Feb 20, 2018 11:27 am
randomguy wrote:
Wed Feb 14, 2018 4:06 pm
It isn't cherry picking. It is just a simple example of showing the potential for loss of income when choosing to live off the dividends.
It's not really a loss though, as I said. It's only a loss if you are comparing it to 1930. If you compare to 1926, it's simply parity.
randomguy wrote:
Wed Feb 14, 2018 4:06 pm
If the market is returning 10%, if you are getting paid a 2% dividend or an 8% doesn't change what you can spend.
If the market is returning a 2% dividend, 4% total earnings, and 6% speculative price appreciation, then it matters. An 8% dividend in this case would be unlikely since it would exceed total earnings, and the market on average generally only pays out sustainable dividends from profits. So the 2% dividend is a signal of the real earning potential of the stock.
No. 2% is sign of the current fashion for dividends and stock prices. We could easily go back to the 5-8% dividends (with some double digit years of the past).

The other issue is that dividends are a trailing indicator so you will be depleting your portfolio when is down. For example
1929 4.53%
1930 6.32%
1931 9.72%
1932 7.33%
1933 4.41%

Sure you can take out 9% of a portfolio and never run out of money but odds are the real amount of money you take out wll be dropping over time.

randomguy
Posts: 6171
Joined: Wed Sep 17, 2014 9:00 am

Re: What if you only live off dividends?

Post by randomguy » Wed Feb 21, 2018 11:15 am

willthrill81 wrote:
Tue Feb 20, 2018 8:49 pm
randomguy wrote:
Wed Feb 14, 2018 4:06 pm

We have had this conversation before. Lets say real returns for the next 30 years are 1/3rd of historical values (call it 2%). Will the 4% rule fail? Maybe. Maybe not. 2% is twice what the 4% rule to work depending on the sequence of returns. If you are going to say you cut the SWR in half when CAPE is double (ignore the fact that 2018 CAPE10 isn't calculated the same as 1990 CAPE10 or 1920 CAPE10 so who knows how comparable the average are or the fact that we haven't been at average historical CAPE10 levels for 25 years not which either means one big bubble or the world has changed), you need to use the SWR for "average" CAPE10s which is up in the ~6% range. If you then realize that stocks are only half the equation and bonds are the other (depending on AA) you get back to ~4% SWR. And don't forgot today that you can buy real bonds so the disaster that was 1966-1981 on your bond porfolio can be mitigated against. Getting a .5%-.8% real return doesn't sound like much but it is pretty huge compared to the negative real returns that historical investors got.
There have actually been three periods I believe where a 4.5% fixed plus inflation withdrawal method would have survived over a 30 year period when the annualized portfolio real return was just 3%.
A steady 3% real gives you around a 5% SWR. Getting a good sequence of returns (we tend not to talk about them:)) would allow you to go even higher.`

If the current dividend rate was 6-8% (and yes they have been that high for extended periods in US history) would anyone be suggesting this strategy as one that is likely to work?

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: What if you only live off dividends?

Post by MrPotatoHead » Wed Feb 21, 2018 11:23 am

NibbanaBanana wrote:
Tue Feb 20, 2018 11:06 pm
MrPotatoHead wrote:
Wed Feb 14, 2018 9:49 am
There is nothing inherently wrong with the strategy especially if you are simply taking the dividend yield of the S&P500 or total stock market. The issue comes in when you reach for dividends.

I prefer to use a CD ladder that covers at least 10 years of expenses, with the plan to replenish each CD on an annual basis from dividends and income and then reinvest any residual for growth. The logic is, it acts as as a smoothing agent for budgeting purposes.

Be aware with the afore mentioned indexes yield can drop to 1.6 or so, therefore you are really targeting a fairly high expense multiple. Since valuations are historically high I am contemplating (at least this week) 75x expenses myself or about a 1.33% withdraw rate.

I suspect a lot of the negatively you see surrounding such strategies come from people born into first world countries who also have never known actual hunger or lived without heat, electric, or seen firsthand situations where the elderly sacrifice their self for the betterment or even survival of the younger generation. To such people an enormous amount of psychic income may accrue from seeming excessive security.

Cheers..
Wow! A 1.33% SWR. Holy Cow! How long are you planning on living? Or maybe just retiring at age 25?

John Bogle says dividends matter. Bull markets breed a lot of courage. Go back and read the "Sheepdog" thread. In the GFC, dividends were cut by 20%. Stock prices fell by 50%. Which would you rather sell?
As many mention, sequence of events matters greatly in terms of long term portfolio viability. Given current valuations, I do not think it it unreasonable to expect my 75X expenses to devolve in 40 or 50X in short order. Also I feel the need to plan for a 45 to 50 years for the wife in retirement. If she just matches her grandmother and mothers age she will have been in retirement 40-43 years(her mother is still living alone and drives in her late mid-late 90s with no real health issues). And then there is the desire to leave a substantial legacy. I am getting off easier as the wife is actually a few years older than I. Imagine if I had to fund for a younger model : )

MrPotatoHead
Posts: 429
Joined: Sat Oct 14, 2017 10:41 pm

Re: What if you only live off dividends?

Post by MrPotatoHead » Wed Feb 21, 2018 11:25 am

RAchip wrote:
Wed Feb 21, 2018 10:33 am
JustinR wrote:
Tue Feb 20, 2018 1:08 pm
Living off of dividends is exactly the same as selling off your stocks though.

So you could rephrase your question as, "What if you only live off selling off your stocks?"

I dont agree. Receiving dividends is not “exactly the same” as selling your stock. Nobody can say for sure what would happen to a given company’s stock price OVER TIME if it retaned all its earnings rather than paying some out as dividends. If you can live off of dividends I think that is a far far superior strategy to having to sell bits of your portfolio regularly regardless of market conditions to produce income.
I am kind of curious about this. If you are in taxable, in general, isn't selling off stock in order to create your own dividend a bit of tax preparation nightmare, especially if you reinvested dividends in your accumulation phase?

User avatar
willthrill81
Posts: 5369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: What if you only live off dividends?

Post by willthrill81 » Wed Feb 21, 2018 11:38 am

MrPotatoHead wrote:
Wed Feb 21, 2018 11:25 am
RAchip wrote:
Wed Feb 21, 2018 10:33 am
JustinR wrote:
Tue Feb 20, 2018 1:08 pm
Living off of dividends is exactly the same as selling off your stocks though.

So you could rephrase your question as, "What if you only live off selling off your stocks?"

I dont agree. Receiving dividends is not “exactly the same” as selling your stock. Nobody can say for sure what would happen to a given company’s stock price OVER TIME if it retaned all its earnings rather than paying some out as dividends. If you can live off of dividends I think that is a far far superior strategy to having to sell bits of your portfolio regularly regardless of market conditions to produce income.
I am kind of curious about this. If you are in taxable, in general, isn't selling off stock in order to create your own dividend a bit of tax preparation nightmare, especially if you reinvested dividends in your accumulation phase?
With any taxable account, you must record your basis (i.e. price you paid) for your equities along the way. You then use this basis to determine how much appreciation has occurred. Whether you bought the equities with invested cash or dividends is irrelevant. It's not a tax preparation nightmare at all, but I would have a friendly accountant do the work.
“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

randomguy
Posts: 6171
Joined: Wed Sep 17, 2014 9:00 am

Re: What if you only live off dividends?

Post by randomguy » Wed Feb 21, 2018 11:40 am

MrPotatoHead wrote:
Wed Feb 21, 2018 11:23 am


As many mention, sequence of events matters greatly in terms of long term portfolio viability. Given current valuations, I do not think it it unreasonable to expect my 75X expenses to devolve in 40 or 50X in short order. Also I feel the need to plan for a 45 to 50 years for the wife in retirement. If she just matches her grandmother and mothers age she will have been in retirement 40-43 years(her mother is still living alone and drives in her late mid-late 90s with no real health issues). And then there is the desire to leave a substantial legacy. I am getting off easier as the wife is actually a few years older than I. Imagine if I had to fund for a younger model : )
Sure but SWR already factor in 30% haircuts at bad times. There are not going to be too many cases where a 2.6% (2x what you are using and one that is 25% or so below historical worst cases) fails but a 1.3% one works.

And no a younger model really doesn't cost more. The difference in SWR between 40 years and 50 is very small.

User avatar
willthrill81
Posts: 5369
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: What if you only live off dividends?

Post by willthrill81 » Wed Feb 21, 2018 11:43 am

randomguy wrote:
Wed Feb 21, 2018 11:40 am
MrPotatoHead wrote:
Wed Feb 21, 2018 11:23 am


As many mention, sequence of events matters greatly in terms of long term portfolio viability. Given current valuations, I do not think it it unreasonable to expect my 75X expenses to devolve in 40 or 50X in short order. Also I feel the need to plan for a 45 to 50 years for the wife in retirement. If she just matches her grandmother and mothers age she will have been in retirement 40-43 years(her mother is still living alone and drives in her late mid-late 90s with no real health issues). And then there is the desire to leave a substantial legacy. I am getting off easier as the wife is actually a few years older than I. Imagine if I had to fund for a younger model : )
Sure but SWR already factor in 30% haircuts at bad times. There are not going to be too many cases where a 2.6% (2x what you are using and one that is 25% or so below historical worst cases) fails but a 1.3% one works.

And no a younger model really doesn't cost more. The difference in SWR between 40 years and 50 is very small.
Based on history and even somewhat on projections of the future (for what they're worth, which is very little IMHO), the only time that a WR below 3% might be truly needed is when one wants to leave behind a large bequest.

And I don't buy the whole 'high valuations argument leads to sub-3% WRs' that comes up here regularly. In the year 2000, valuations were substantially higher than now, but a 3.5% constant-percentage WR would have left retirees with around a 50/50 AA with the same inflation-adjusted portfolio as they started with 18 years ago.
“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

marcopolo
Posts: 1038
Joined: Sat Dec 03, 2016 10:22 am

Re: What if you only live off dividends?

Post by marcopolo » Wed Feb 21, 2018 11:55 am

randomguy wrote:
Wed Feb 21, 2018 11:40 am

There are not going to be too many cases where a 2.6% (2x what you are using and one that is 25% or so below historical worst cases) fails but a 1.3% one works.
I think this is a really important point that many extremely conservative planning scenarios do not consider. I am all for being conservative. But, when you have to think about cases like the US being on the losing side of a world war to come up with scenarios where you think something like 3% would fail, so you better go lower, you need to consider whether even 1% could survive in that case, and what impact that would have on your standard of living. I agree with the above that scenarios that fail at 2.6% but work at 1.3% are really threading the needle. If things get so bad that 2.6% fails, it seems unlikely that 1.3% is somehow going to make things all better.
Once in a while you get shown the light, in the strangest of places if you look at it right.

tibbitts
Posts: 7935
Joined: Tue Feb 27, 2007 6:50 pm

Re: What if you only live off dividends?

Post by tibbitts » Wed Feb 21, 2018 12:09 pm

marcopolo wrote:
Wed Feb 21, 2018 11:55 am
randomguy wrote:
Wed Feb 21, 2018 11:40 am

There are not going to be too many cases where a 2.6% (2x what you are using and one that is 25% or so below historical worst cases) fails but a 1.3% one works.
I think this is a really important point that many extremely conservative planning scenarios do not consider. I am all for being conservative. But, when you have to think about cases like the US being on the losing side of a world war to come up with scenarios where you think something like 3% would fail, so you better go lower, you need to consider whether even 1% could survive in that case, and what impact that would have on your standard of living. I agree with the above that scenarios that fail at 2.6% but work at 1.3% are really threading the needle. If things get so bad that 2.6% fails, it seems unlikely that 1.3% is somehow going to make things all better.
One scenario that could apply is that your personal inflation rate may diverge dramatically from the official rate that's used in SWR calculations.

software
Posts: 110
Joined: Tue Apr 18, 2017 2:02 pm

Re: What if you only live off dividends?

Post by software » Wed Feb 21, 2018 12:14 pm

It seems the answer to this is fairly obvious. If you live on only dividends, you will subsist on an income that is far below your means and die with a giant sum of money in all but the scenario of total world financial collapse.

If that is desirable to you then go ahead. I’ll personally be using a strategy that makes a bit more sense.

Wakefield1
Posts: 815
Joined: Mon Nov 14, 2016 10:10 pm

Re: What if you only live off dividends?

Post by Wakefield1 » Wed Feb 21, 2018 1:44 pm

RAchip wrote:
Wed Feb 21, 2018 10:33 am
JustinR wrote:
Tue Feb 20, 2018 1:08 pm
Living off of dividends is exactly the same as selling off your stocks though.

So you could rephrase your question as, "What if you only live off selling off your stocks?"

I dont agree. Receiving dividends is not “exactly the same” as selling your stock. Nobody can say for sure what would happen to a given company’s stock price OVER TIME if it retaned all its earnings rather than paying some out as dividends. If you can live off of dividends I think that is a far far superior strategy to having to sell bits of your portfolio regularly regardless of market conditions to produce income.
How about living on dividends is like eating eggs,living on sold off stock is like eating chicken :mrgreen:
(but watch out for "return of principle")

User avatar
Toons
Posts: 12929
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: What if you only live off dividends?

Post by Toons » Wed Feb 21, 2018 1:53 pm

Walmart,Mcdonalds,Praxair ,Dominion Resources pay me dividends.
I reinvested in additional shares for 22 years.
Started taking dividends in cash the last 3 years.
The dividends keep rising.
No sales.
No trading costs.
My total shares remain the same.
The share price continues to rise "over time" 25 years.
Income/Growth
Fits nicely into the plan.

:happy :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

getrichslowly
Posts: 73
Joined: Mon Feb 12, 2018 11:48 am

Re: What if you only live off dividends?

Post by getrichslowly » Thu Feb 22, 2018 9:58 am

software wrote:
Wed Feb 21, 2018 12:14 pm
It seems the answer to this is fairly obvious. If you live on only dividends, you will subsist on an income that is far below your means and die with a giant sum of money in all but the scenario of total world financial collapse.

If that is desirable to you then go ahead. I’ll personally be using a strategy that makes a bit more sense.
Why is dying with a giant sum of money a bad thing and not make sense?

I can imagine ramping up spending as the death date nears, but being only 29 that is a long way away, so when I retire in my 40s with hopefully 50+ years left to live (assuming lifespans keep extending with medical technology), I don't plan on consuming everything right away. The classic Trinity study only covered historical 30-year periods, but it doesn't get to cover future 50-, 60-, or 70-year periods, so I think its prudent to be conservative. At least until the endpoint becomes clearer.

rixer
Posts: 607
Joined: Tue Sep 11, 2012 4:18 pm

Re: What if you only live off dividends?

Post by rixer » Thu Feb 22, 2018 10:25 am

getrichslowly wrote:
Thu Feb 22, 2018 9:58 am
software wrote:
Wed Feb 21, 2018 12:14 pm
It seems the answer to this is fairly obvious. If you live on only dividends, you will subsist on an income that is far below your means and die with a giant sum of money in all but the scenario of total world financial collapse.

If that is desirable to you then go ahead. I’ll personally be using a strategy that makes a bit more sense.
Why is dying with a giant sum of money a bad thing and not make sense?

I can imagine ramping up spending as the death date nears, but being only 29 that is a long way away, so when I retire in my 40s with hopefully 50+ years left to live (assuming lifespans keep extending with medical technology), I don't plan on consuming everything right away. The classic Trinity study only covered historical 30-year periods, but it doesn't get to cover future 50-, 60-, or 70-year periods, so I think its prudent to be conservative. At least until the endpoint becomes clearer.
Why is dying with a giant sum of money a bad thing and not make sense?

It depends. If you have saved and done without many things in life to fund retirement, you want to be able to eventually enjoy the fruits of your labor. To just die without enjoying the things you could have, would be sad.

Da5id
Posts: 2035
Joined: Fri Feb 26, 2016 8:20 am

Re: What if you only live off dividends?

Post by Da5id » Thu Feb 22, 2018 10:49 am

getrichslowly wrote:
Thu Feb 22, 2018 9:58 am
Why is dying with a giant sum of money a bad thing and not make sense?
I'm quite conservative -- a 3% SWR advocate for myself and those retiring early who can get to 3% without excessive suffering. But still, one must recognize that there are trade-offs. Working too long due to excessively conservative assumptions looks really bad if you end up dropping dead without ever having enjoyed the fruits of your labor. Consider two alternatives:

1) retire at 55 with a 4% SWR
2) retire at 65 with a 3% SWR

Option 1: you might run out of money or have to seriously curtail spending below where you'd like to. But historically you will do fine, and in fact you still have a chance to die with a giant sum of money. And in fact this is vastly more than most American's will achieve, and most do OK.
Option 2: historically will not run out of money (but no guarantees of future of course), and will die with a pile of money. But you might not have enough healthy years to enjoy your retirement. The 10 years of doing what you want that you have foregone are an opportunity cost you can't get back.

There is a tension between the two, and you need to work out where you fall, but it is not a good idea to ignore the fact that the "right" answer isn't as obvious as you seem to think.

randomguy
Posts: 6171
Joined: Wed Sep 17, 2014 9:00 am

Re: What if you only live off dividends?

Post by randomguy » Thu Feb 22, 2018 11:06 am

tibbitts wrote:
Wed Feb 21, 2018 12:09 pm

One scenario that could apply is that your personal inflation rate may diverge dramatically from the official rate that's used in SWR calculations.
Random big expenses for low spenders is what I think is the bigger risk. Get into an accident and have say a 1 million dollar expense for retrofitting the house/home aid. If you are living on 20k/year your in trouble. Living on 150k and you can adjust. Obviously we are talking rare events.

Post Reply