What if you only live off dividends?

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Captain kangaroo
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Re: What if you only live off dividends?

Post by Captain kangaroo » Thu Feb 22, 2018 3:27 pm

If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.

Da5id
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Re: What if you only live off dividends?

Post by Da5id » Thu Feb 22, 2018 3:30 pm

Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
That is currently a 5 million dollar portfolio more or less. If you can accumulate 5 million dollars before you want to retire, great. But even with 3% spending you could retire at $3.3M. The difference in years retired is noticeable, and odds of succeeding aren't presumably much greater spending only dividends (with the ~2% withdrawal rate).

CantPassAgain
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Re: What if you only live off dividends?

Post by CantPassAgain » Thu Feb 22, 2018 4:44 pm

Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
When you buy stock, you have "basis" for tax purposes, but there is no principal. There is simply the market value of your holdings. People need to get around this kind of thinking regarding stocks as it leads to all manner of assumptions that are mistaken. How many times have we seen comments about not wanting to "sell off your capital" in this very thread? It's all capital. Not reinvesting a dividend is "selling off capital" so what exactly are people trying to accomplish?

CantPassAgain
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Re: What if you only live off dividends?

Post by CantPassAgain » Thu Feb 22, 2018 4:55 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.
You can look at the total return of broadly diversified funds like a total market index fund versus dividend index funds and find that they are remarkably similar, with the differences very likely due to factor exposure rather than the dividends themselves:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

RAchip
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Re: What if you only live off dividends?

Post by RAchip » Thu Feb 22, 2018 5:17 pm

If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.

MrPotatoHead
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Re: What if you only live off dividends?

Post by MrPotatoHead » Thu Feb 22, 2018 8:12 pm

RAchip wrote:
Thu Feb 22, 2018 5:17 pm
If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
A couple things to think about. Average household income last year was 59,600 so call it 60K. Given dividend yield around 2% that equates to a 3 million dollar stock portfolio. But at some point most folks will have social security also which drops that 3 million figure handsomely. Also consider that 60K included SS deducations and likely 401K or IRA deductions. meaning that most households are living on a "net" far less that 60K. Just SS chews that down to 55K, take out some taxes etc...and I would not be surprised to see them netting more like 45-50k or less (likely someone else knows in this forum knows the real number), so all of a sudden when you consider SS living off dividends can happen for a large number of people.

Just a thought...

mega317
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Re: What if you only live off dividends?

Post by mega317 » Thu Feb 22, 2018 11:26 pm

MrPotatoHead wrote:
Thu Feb 22, 2018 8:12 pm
RAchip wrote:
Thu Feb 22, 2018 5:17 pm
If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
A couple things to think about. Average household income last year was 59,600 so call it 60K. Given dividend yield around 2% that equates to a 3 million dollar stock portfolio. But at some point most folks will have social security also which drops that 3 million figure handsomely. Also consider that 60K included SS deducations and likely 401K or IRA deductions. meaning that most households are living on a "net" far less that 60K. Just SS chews that down to 55K, take out some taxes etc...and I would not be surprised to see them netting more like 45-50k or less (likely someone else knows in this forum knows the real number), so all of a sudden when you consider SS living off dividends can happen for a large number of people.

Just a thought...
Absolute numbers and additional income streams are distractions that don't add to the discussion.
Replace
Given dividend yield around 2% that equates to a 3 million dollar stock portfolio.
with "given SWR of 4% that equates to a 1.5 million dollar stock portfolio." Then the whole rest of your post can remain the same except "a large number of people" becomes much larger.

JustinR
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Re: What if you only live off dividends?

Post by JustinR » Fri Feb 23, 2018 3:42 am

Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
Selling off your principal is exactly the same thing as a dividend though.

So dividends are not a "far better idea"...it's the same thing except that it's a forced taxable event instead of your choice.

So dividends are actually worse...

david1082b
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Re: What if you only live off dividends?

Post by david1082b » Fri Feb 23, 2018 6:40 am

RAchip wrote:
Thu Feb 22, 2018 5:17 pm
If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
Someone with ten million in total market index who wants a lifestyle of 300k a year will sell some stock in retirement. Income levels and savings rates are just as important for end balances as not selling stock is. Most smaller portfolio Bogleheads probably don't sell stock before retirement either, they just didn't have the income levels or savings rates as others perhaps.

Da5id
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Re: What if you only live off dividends?

Post by Da5id » Fri Feb 23, 2018 9:10 am

RAchip wrote:
Thu Feb 22, 2018 5:17 pm
My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
My guess is that 87.2% of statistics are made up.

I've not seen many here who "don't like" dividends. I've seen many who don't distinguish between dividends and price appreciation -- i.e. invest for total return and don't consider dividends qua dividends as special. Some of us wish they could have buybacks in taxable accounts instead of dividends, but are indifferent to dividends in tax deferred or tax free accounts, but that preference doesn't make us invest to avoid dividends. A number of us don't think dividends are a particularly useful measure of "SWR". Are those the people who you say "don't like dividends"?

dbr
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Re: What if you only live off dividends?

Post by dbr » Fri Feb 23, 2018 9:44 am

A broad opinion here is not about anti-dividends. It is anti-pro-dividends based on reacting to badly thought out ideas that one fears will not serve investors well. There is always acknowledgement that when something does make sense, then it makes sense.

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MossySF
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Re: What if you only live off dividends?

Post by MossySF » Fri Feb 23, 2018 11:35 am

If it's ok that dividends get cut from $50K to $25K during bad markets in a dividend-only approach ... then what's the difference from a $50K SWR approach where you decide to only sell $25K when the market is bad?

Or instead of using a 2.5% dividend AA ... you use a 0% dividend AA and you sell 2.5% per year?

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 11:46 am

JustinR wrote:
Fri Feb 23, 2018 3:42 am
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
Selling off your principal is exactly the same thing as a dividend though.

So dividends are not a "far better idea"...it's the same thing except that it's a forced taxable event instead of your choice.

So dividends are actually worse...
Remember that your capital (not principal, different term) should be viewed in terms of dollars, not shares. I believe this confusion is the primary reason that the 'spend only dividends' argument makes sense to some. Shares are irrelevant; dollars are what it's all about.

If I buy an investment for $100 and it is now worth $150, then my capital is now $150. It doesn't matter how many shares I own, and it doesn't matter why the investment is now worth $150 (i.e. dividends or capital appreciation). If I take some of that $50 as income, it doesn't matter whether I take it as a dividend or by selling an equal amount of shares to reach the same dollar amount.

Many who were invested in non-traded REITs discovered the hard way that the 'spend only dividends' idea is inherently flawed. They were promised 8% yields, which they indeed received for years, but when they wanted to cash out their investment, they discovered that their capital was now worth 50% (or less) of what it originally was. Part of their dividends had been a mere return of their capital to them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 11:49 am

Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
If you use a 3-4% withdrawal rate, then you are extremely likely to leave behind a pile of cash when you're gone. Whether that 3-4% comes from dividends or from capital appreciation is irrelevant.

Remember that your capital should be viewed in terms of dollars, not shares. Consequently, you're reducing your capital if you're spending dividends or selling shares.
“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

Captain kangaroo
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Re: What if you only live off dividends?

Post by Captain kangaroo » Fri Feb 23, 2018 12:21 pm

willthrill81 wrote:
Fri Feb 23, 2018 11:49 am
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
If you use a 3-4% withdrawal rate, then you are extremely likely to leave behind a pile of cash when you're gone. Whether that 3-4% comes from dividends or from capital appreciation is irrelevant.

Remember that your capital should be viewed in terms of dollars, not shares. Consequently, you're reducing your capital if you're spending dividends or selling shares.
Looking at it as dollars and not shares is a good way to view it. But, what if two individuals have a million dollar portfolio. One that is invested in say a high dividend fund such as HDV and one invested in a lower dividend yield growth fund.

The high dividend fund yields hypothetically 50k a year, while the lower yield only gives off 10k. The owner wants to live off 50k a year so sells 40 worth of capital every year, while the other doesn't sell at all. Will either portfolio eventually deplete itself? Or both or neither?

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 12:25 pm

Captain kangaroo wrote:
Fri Feb 23, 2018 12:21 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:49 am
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
If you use a 3-4% withdrawal rate, then you are extremely likely to leave behind a pile of cash when you're gone. Whether that 3-4% comes from dividends or from capital appreciation is irrelevant.

Remember that your capital should be viewed in terms of dollars, not shares. Consequently, you're reducing your capital if you're spending dividends or selling shares.
Looking at it as dollars and not shares is a good way to view it. But, what if two individuals have a million dollar portfolio. One that is invested in say a high dividend fund such as HDV and one invested in a lower dividend yield growth fund.

The high dividend fund yields hypothetically 50k a year, while the lower yield only gives off 10k. The owner wants to live off 50k a year so sells 40 worth of capital every year, while the other doesn't sell at all. Will either portfolio eventually deplete itself? Or both or neither?
As long as the two have an equivalent total return, they will both perform the same. Mountains of research have found that high yield funds do not produce a higher total return than low yield funds. Remember that part of the yield you are receiving may simply be a return of your capital; as I noted above, this happens extensively with non-traded REITs.

Portfolios comprised of high yield funds are at no less risk whatsoever of being depleted than others.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Phineas J. Whoopee
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Re: What if you only live off dividends?

Post by Phineas J. Whoopee » Fri Feb 23, 2018 2:35 pm

RAchip wrote:
Thu Feb 22, 2018 5:17 pm
... My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
To chime in, we are not against dividends. We are only against misunderstandings about dividends.

To the extent it becomes an emotionally-laden issue, with posters speculating about others' situations and motivations, there's little information to be exchanged.

PJW

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 2:55 pm

Da5id wrote:
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.
I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.

My logic was more aim at someone who would achieve 4% SWR by their 40s, in a future decade. Their expected remaining lifespan is so great, and so much can happen in that time, and their savings rate is much higher to have hit their goal as early as 40, that it makes sense to target 3% SWR instead. If you achieved 25x expenses by 40 with a 54% savings rate over 15 years, then it only takes another 3 years to get to 33x expenses for 3% SWR. Alternatively if you don't want to work those extra 3 years you could just live frugally and cut expenses further. But I think its very risky to start consuming 4% of your wealth beginning from an age before 50. There is just so much uncertainty ahead from that age.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 2:58 pm

willthrill81 wrote:
Fri Feb 23, 2018 11:46 am
Remember that your capital (not principal, different term) should be viewed in terms of dollars, not shares. I believe this confusion is the primary reason that the 'spend only dividends' argument makes sense to some. Shares are irrelevant; dollars are what it's all about.

If I buy an investment for $100 and it is now worth $150, then my capital is now $150. It doesn't matter how many shares I own, and it doesn't matter why the investment is now worth $150 (i.e. dividends or capital appreciation). If I take some of that $50 as income, it doesn't matter whether I take it as a dividend or by selling an equal amount of shares to reach the same dollar amount.

This is the opposite of the value- and cash flow oriented thinking I learned from reading Warren Buffet's writings. If you focus on value and cash flow, fluctuations in the price become irrelevant. If you have an asset that provides enough dividends to live off of such that you never have to sell the asset, then the price movements and total return are irrelevant.
willthrill81 wrote:
Fri Feb 23, 2018 11:46 am
Many who were invested in non-traded REITs discovered the hard way that the 'spend only dividends' idea is inherently flawed. They were promised 8% yields, which they indeed received for years, but when they wanted to cash out their investment, they discovered that their capital was now worth 50% (or less) of what it originally was. Part of their dividends had been a mere return of their capital to them.
This is a contradiction in investment philosophy. You can't simultaneously only focus on the cash flows and expect stable principal at the same time. If you follow a dividend or cash flow approach, you do not sell.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 3:03 pm

MossySF wrote:
Fri Feb 23, 2018 11:35 am
If it's ok that dividends get cut from $50K to $25K during bad markets in a dividend-only approach ... then what's the difference from a $50K SWR approach where you decide to only sell $25K when the market is bad?

Or instead of using a 2.5% dividend AA ... you use a 0% dividend AA and you sell 2.5% per year?
The difference is how you define the market being bad and how you define your withdrawal rule. If you were in say the Great Depression where the market drew down 84% and dividends were cut 45%, the dividend withdrawal strategy would reduce withdrawals by 45% whereas the person consuming a constant fraction of their wealth would be overreacting and cutting their withdrawal 84%. The person who doesn't budge and continues to withdraw the same amount year after year, depending on their age and withdrawal rate, runs a very high risk of depleting their capital entirely. The dividend approach is a middle ground between the SWR and VWR strategies. It uses a natural rule to define the optimal withdrawal amount while preserving modest growth.

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 3:03 pm

getrichslowly wrote:
Fri Feb 23, 2018 2:58 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:46 am
Remember that your capital (not principal, different term) should be viewed in terms of dollars, not shares. I believe this confusion is the primary reason that the 'spend only dividends' argument makes sense to some. Shares are irrelevant; dollars are what it's all about.

If I buy an investment for $100 and it is now worth $150, then my capital is now $150. It doesn't matter how many shares I own, and it doesn't matter why the investment is now worth $150 (i.e. dividends or capital appreciation). If I take some of that $50 as income, it doesn't matter whether I take it as a dividend or by selling an equal amount of shares to reach the same dollar amount.

Many who were invested in non-traded REITs discovered the hard way that the 'spend only dividends' idea is inherently flawed. They were promised 8% yields, which they indeed received for years, but when they wanted to cash out their investment, they discovered that their capital was now worth 50% (or less) of what it originally was. Part of their dividends had been a mere return of their capital to them.
This is the opposite of the value- and cash flow oriented thinking I learned from reading Warren Buffet's writings. If you focus on value and cash flow, fluctuations in the price become irrelevant. If you have an asset that provides enough dividends to live off of such that you never have to sell the asset, then the price movements and total return are irrelevant.
The above example of non-traded REITs demonstrates why this is false. It is entirely possible for your dividends to be partially funded by a return of your capital.

And this line of thinking also suggests that if you experience capital appreciation, that's irrelevant if your dividends don't change, which is also false.
getrichslowly wrote:
Fri Feb 23, 2018 2:58 pm
If you follow a dividend or cash flow approach, you do not sell.
The point was that once their initial capital was depleted, they would no longer receive the same dividends.

Dividends are irrelevant; total return is what matters.
“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

Da5id
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Re: What if you only live off dividends?

Post by Da5id » Fri Feb 23, 2018 3:05 pm

getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm
I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.

My logic was more aim at someone who would achieve 4% SWR by their 40s, in a future decade. Their expected remaining lifespan is so great, and so much can happen in that time, and their savings rate is much higher to have hit their goal as early as 40, that it makes sense to target 3% SWR instead. If you achieved 25x expenses by 40 with a 54% savings rate over 15 years, then it only takes another 3 years to get to 33x expenses for 3% SWR. Alternatively if you don't want to work those extra 3 years you could just live frugally and cut expenses further. But I think its very risky to start consuming 4% of your wealth beginning from an age before 50. There is just so much uncertainty ahead from that age.
My numbers weren't intended to be precise in the least. It was to point out there there are costs/tradeoffs to be considered in advocating working significantly longer for a small incremental gain in financial security.

And in the context of the thread, linking SWR to dividends remains a choice that, IMHO, makes little sense.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 3:06 pm

CantPassAgain wrote:
Thu Feb 22, 2018 4:44 pm
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
When you buy stock, you have "basis" for tax purposes, but there is no principal. There is simply the market value of your holdings. People need to get around this kind of thinking regarding stocks as it leads to all manner of assumptions that are mistaken. How many times have we seen comments about not wanting to "sell off your capital" in this very thread? It's all capital. Not reinvesting a dividend is "selling off capital" so what exactly are people trying to accomplish?
Not reinvesting dividends is not selling off capital. Those dividends came from new earnings. You still own the same number of shares of the business as before. If there were buybacks, then you even own a greater fraction of the business than before. In theory you could also consider buybacks the same as dividends and manually liquidate them, restoring your original share of capital.

It's probably simpler to think about a rental property. If you own a rental property and you consume the profits, after paying for maintenance expenses, then you have not touched your capital. You still own the rental property in its entirety. The physical asset doesn't change.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 3:06 pm

Da5id wrote:
Fri Feb 23, 2018 3:05 pm
getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm
I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.

My logic was more aim at someone who would achieve 4% SWR by their 40s, in a future decade. Their expected remaining lifespan is so great, and so much can happen in that time, and their savings rate is much higher to have hit their goal as early as 40, that it makes sense to target 3% SWR instead. If you achieved 25x expenses by 40 with a 54% savings rate over 15 years, then it only takes another 3 years to get to 33x expenses for 3% SWR. Alternatively if you don't want to work those extra 3 years you could just live frugally and cut expenses further. But I think its very risky to start consuming 4% of your wealth beginning from an age before 50. There is just so much uncertainty ahead from that age.
My numbers weren't intended to be precise in the least. It was to point out there there are costs/tradeoffs to be considered in advocating working significantly longer for a small incremental gain in financial security.

And in the context of the thread, linking SWR to dividends remains a choice that, IMHO, makes little sense.
The advantage of linking SWR to dividends is that it's a naturally safe withdrawal rate, and it responses intelligently to changes in market conditions. A dividend is a signal by the business of sustainable cash flows. Other SWR methods risk withdrawing too much or too litt.e

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 3:08 pm

getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
Da5id wrote:
Fri Feb 23, 2018 3:05 pm
getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm
I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.

My logic was more aim at someone who would achieve 4% SWR by their 40s, in a future decade. Their expected remaining lifespan is so great, and so much can happen in that time, and their savings rate is much higher to have hit their goal as early as 40, that it makes sense to target 3% SWR instead. If you achieved 25x expenses by 40 with a 54% savings rate over 15 years, then it only takes another 3 years to get to 33x expenses for 3% SWR. Alternatively if you don't want to work those extra 3 years you could just live frugally and cut expenses further. But I think its very risky to start consuming 4% of your wealth beginning from an age before 50. There is just so much uncertainty ahead from that age.
My numbers weren't intended to be precise in the least. It was to point out there there are costs/tradeoffs to be considered in advocating working significantly longer for a small incremental gain in financial security.

And in the context of the thread, linking SWR to dividends remains a choice that, IMHO, makes little sense.
The advantage of linking SWR to dividends is that it's a naturally safe withdrawal rate, and it responses intelligently to changes in market conditions. A dividend is a signal by the business of sustainable cash flows. Other SWR methods risk withdrawing too much or too litt.e
That's little different from a percentage-of-portfolio approach, where withdrawals change in direct proportion to the value of the portfolio.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What if you only live off dividends?

Post by mega317 » Fri Feb 23, 2018 3:14 pm

getrichslowly wrote:
Fri Feb 23, 2018 3:03 pm
If you were in say the Great Depression where the market drew down 84% and dividends were cut 45%, the dividend withdrawal strategy would reduce withdrawals by 45% whereas the person consuming a constant fraction of their wealth would be overreacting and cutting their withdrawal 84%.
No. The principle behind 4% SWR is not that you cut your withdrawal by the amount of a decline in the market or your portfolio.

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Re: What if you only live off dividends?

Post by CantPassAgain » Fri Feb 23, 2018 3:19 pm

getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
CantPassAgain wrote:
Thu Feb 22, 2018 4:44 pm
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
When you buy stock, you have "basis" for tax purposes, but there is no principal. There is simply the market value of your holdings. People need to get around this kind of thinking regarding stocks as it leads to all manner of assumptions that are mistaken. How many times have we seen comments about not wanting to "sell off your capital" in this very thread? It's all capital. Not reinvesting a dividend is "selling off capital" so what exactly are people trying to accomplish?
Not reinvesting dividends is not selling off capital. Those dividends came from new earnings. You still own the same number of shares of the business as before. If there were buybacks, then you even own a greater fraction of the business than before. In theory you could also consider buybacks the same as dividends and manually liquidate them, restoring your original share of capital.

It's probably simpler to think about a rental property. If you own a rental property and you consume the profits, after paying for maintenance expenses, then you have not touched your capital. You still own the rental property in its entirety. The physical asset doesn't change.
In a reasonably efficient and highly liquid market, it is the same. The number of shares is irrelevant. To say otherwise is to suggest that the market doesn't know how to value business enterprises, and that the market doesn't understand that a company that has a billion dollars in the bank is worth more than a company with a million in the bank, all else being equal.

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Re: What if you only live off dividends?

Post by CantPassAgain » Fri Feb 23, 2018 3:26 pm

RAchip wrote:
Thu Feb 22, 2018 5:17 pm
If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
If a company wants to pay a dividend, great. If a company can find a better return by redeploying the cash to grow the business, great. That's not the issue. The issue is chasing dividends because you think you're getting a free lunch, and that is just plain wrong as has been pointed out repeatedly.

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Re: What if you only live off dividends?

Post by Phineas J. Whoopee » Fri Feb 23, 2018 3:38 pm

getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
...
Not reinvesting dividends is not selling off capital. Those dividends came from new earnings.
Hi getrichslowly. You seem to have joined recently, so I don't mind rehashing facts we've stated in countless prior threads. Whether or not spending dividends is selling off capital, it has the same mathematical effect on total wealth. That's a fact.
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
You still own the same number of shares of the business as before.
The number of shares is true, but without so much cash in its checking account the business itself is worth less. You own the same number of slices, but the pie is smaller.
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
If there were buybacks, then you even own a greater fraction of the business than before.
Again what you write is true, but ignores the fact that the corporation has expended money, therefore has less on its balance sheet, so you own a greater fraction of the business than before, but the business is worth less.
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
In theory you could also consider buybacks the same as dividends
That's true, because share buybacks work the same as dividends, but with different tax consequences.
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
and manually liquidate them, restoring your original share of capital.
So you have fewer shares in a company that is worth less than before, by the amount of money it had to pay to buy back shares. Do you see how the company spending money without acquiring new assets in return has gone down in value? Whether on a buyback or as a dividend the company's assets are lower than before.
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
It's probably simpler to think about a rental property. If you own a rental property and you consume the profits, after paying for maintenance expenses, then you have not touched your capital. You still own the rental property in its entirety. The physical asset doesn't change.
It's probably accurate to view owning a rental property as a business, which has some assets, the property and some cash, and some liabilities (like property taxes and insurance). When one takes money out of that business, the asset side of its balance sheet shrinks, so on the other side shareholders equity shrinks, so the rental business one owns and operates is in fact worth less, even if the value of the land and improvements is not.

I'll repeat what I wrote upthread in response to RAchip: We are not against dividends. We are only against misunderstandings about dividends.

PJW

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Re: What if you only live off dividends?

Post by not4me » Fri Feb 23, 2018 3:42 pm

getrichslowly wrote:
Fri Feb 23, 2018 2:58 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:46 am
Remember that your capital (not principal, different term) should be viewed in terms of dollars, not shares. I believe this confusion is the primary reason that the 'spend only dividends' argument makes sense to some. Shares are irrelevant; dollars are what it's all about.

If I buy an investment for $100 and it is now worth $150, then my capital is now $150. It doesn't matter how many shares I own, and it doesn't matter why the investment is now worth $150 (i.e. dividends or capital appreciation). If I take some of that $50 as income, it doesn't matter whether I take it as a dividend or by selling an equal amount of shares to reach the same dollar amount.

This is the opposite of the value- and cash flow oriented thinking I learned from reading Warren Buffet's writings. If you focus on value and cash flow, fluctuations in the price become irrelevant. If you have an asset that provides enough dividends to live off of such that you never have to sell the asset, then the price movements and total return are irrelevant.
willthrill81 wrote:
Fri Feb 23, 2018 11:46 am
Many who were invested in non-traded REITs discovered the hard way that the 'spend only dividends' idea is inherently flawed. They were promised 8% yields, which they indeed received for years, but when they wanted to cash out their investment, they discovered that their capital was now worth 50% (or less) of what it originally was. Part of their dividends had been a mere return of their capital to them.
This is a contradiction in investment philosophy. You can't simultaneously only focus on the cash flows and expect stable principal at the same time. If you follow a dividend or cash flow approach, you do not sell.
getrichslowly, I noticed you've recently joined the forum...I'm relatively new myself, but I've seen several of these threads. Note that some of the confusion arises when posters are not clear as to whether they are talking about individual stocks or open end mutual funds and/or they think the 2 work the same way. If you re-read some of the posts, you'll likely see my point.

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Re: What if you only live off dividends?

Post by Da5id » Fri Feb 23, 2018 3:46 pm

getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
The advantage of linking SWR to dividends is that it's a naturally safe withdrawal rate, and it responses intelligently to changes in market conditions. A dividend is a signal by the business of sustainable cash flows. Other SWR methods risk withdrawing too much or too litt.e
So to be clear, you are asserting current SWR is today's S&P 500's 1.79% dividend yield in your scheme (+ say 2.9% of your bond holdings. which is present BND SEC yield), giving a 2.2% composite yield for a 60/40 asset allocation? Good luck with that plan if it works out for you.

Do you have any substantial basis for your theory that your proposed 2.2% (if that is what you advocate) is a good target SWR? Bearing in mind that it probably results it many working many extra years beyond what is actually necessary?

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Phineas J. Whoopee
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Re: What if you only live off dividends?

Post by Phineas J. Whoopee » Fri Feb 23, 2018 3:48 pm

not4me wrote:
Fri Feb 23, 2018 3:42 pm
...
getrichslowly, I noticed you've recently joined the forum...I'm relatively new myself, but I've seen several of these threads. Note that some of the confusion arises when posters are not clear as to whether they are talking about individual stocks or open end mutual funds and/or they think the 2 work the same way. If you re-read some of the posts, you'll likely see my point.
With respect to dividends they do work the same way, as they must. A mutual fund is nothing more nor less than a vehicle by which to own its underlying holdings. If you directly held the same assets your portfolio's performance would be the same.

PJW

dbr
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Re: What if you only live off dividends?

Post by dbr » Fri Feb 23, 2018 3:49 pm

Da5id wrote:
Fri Feb 23, 2018 3:46 pm
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
The advantage of linking SWR to dividends is that it's a naturally safe withdrawal rate, and it responses intelligently to changes in market conditions. A dividend is a signal by the business of sustainable cash flows. Other SWR methods risk withdrawing too much or too litt.e
So to be clear, you are asserting current SWR is today's S&P 500's 1.79% dividend yield in your scheme (+ say 2.9% of your bond holdings. which is present BND SEC yield), giving a 2.2% composite yield for a 60/40 asset allocation? Good luck with that plan if it works out for you.

Do you have any substantial basis for your theory that your proposed 2.2% (if that is what you advocate) is a good target SWR? Bearing in mind that it probably results it many working many extra years beyond what is actually necessary?
It would be setting withdrawals equal to dividends that results in naturally withdrawing too much or too little.

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Re: What if you only live off dividends?

Post by marcopolo » Fri Feb 23, 2018 3:54 pm

getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm

I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.
That seems like an odd assumption when the larger argument you seem to be making is that 4% WR is way to risky....
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: What if you only live off dividends?

Post by Da5id » Fri Feb 23, 2018 3:56 pm

dbr wrote:
Fri Feb 23, 2018 3:49 pm
Da5id wrote:
Fri Feb 23, 2018 3:46 pm
getrichslowly wrote:
Fri Feb 23, 2018 3:06 pm
The advantage of linking SWR to dividends is that it's a naturally safe withdrawal rate, and it responses intelligently to changes in market conditions. A dividend is a signal by the business of sustainable cash flows. Other SWR methods risk withdrawing too much or too litt.e
So to be clear, you are asserting current SWR is today's S&P 500's 1.79% dividend yield in your scheme (+ say 2.9% of your bond holdings. which is present BND SEC yield), giving a 2.2% composite yield for a 60/40 asset allocation? Good luck with that plan if it works out for you.

Do you have any substantial basis for your theory that your proposed 2.2% (if that is what you advocate) is a good target SWR? Bearing in mind that it probably results it many working many extra years beyond what is actually necessary?
It would be setting withdrawals equal to dividends that results in naturally withdrawing too much or too little.
Well, sure. I'm not arguing for it myself.

JustinR
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Re: What if you only live off dividends?

Post by JustinR » Fri Feb 23, 2018 4:01 pm

Captain kangaroo wrote:
Fri Feb 23, 2018 12:21 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:49 am
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
If you use a 3-4% withdrawal rate, then you are extremely likely to leave behind a pile of cash when you're gone. Whether that 3-4% comes from dividends or from capital appreciation is irrelevant.

Remember that your capital should be viewed in terms of dollars, not shares. Consequently, you're reducing your capital if you're spending dividends or selling shares.
Looking at it as dollars and not shares is a good way to view it. But, what if two individuals have a million dollar portfolio. One that is invested in say a high dividend fund such as HDV and one invested in a lower dividend yield growth fund.

The high dividend fund yields hypothetically 50k a year, while the lower yield only gives off 10k. The owner wants to live off 50k a year so sells 40 worth of capital every year, while the other doesn't sell at all. Will either portfolio eventually deplete itself? Or both or neither?
They would be equivalent.

There's a huge misconception by beginner investors (not saying I'm an expert) that dividends are a magical free lunch. I would even go as far as to say that it's the #1 biggest misconception in investing.

When a company pays a dividend, the value of the company goes down by that exact amount (think about it, the company gave away a bunch of money so it doesn't have it anymore). So yes, you got $50k in dividends, but your shares are now worth that much less.

"But with dividends you get to keep all your shares!" This is meaningless. Index funds have fractional shares so there's an infinite number of "shares" you can sell. You won't "run out" of shares by selling what you need. 5 shares of $90 (after a $10 dividend) is the same as 4.5 shares of $100 (selling 0.5 shares yourself). Either way, you received $50.

So dividends are equivalent to selling shares. Only difference is dividends are forced on you...a forced taxable event. So again...dividends are actually worse.

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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 4:38 pm

JustinR wrote:
Fri Feb 23, 2018 4:01 pm
Captain kangaroo wrote:
Fri Feb 23, 2018 12:21 pm
willthrill81 wrote:
Fri Feb 23, 2018 11:49 am
Captain kangaroo wrote:
Thu Feb 22, 2018 3:27 pm
If my portfolio can give off 100,000 a year in dividends, I don't see the point in selling off my principal. If you have a sizeable portfolio, living off dividends and muni bond interest in retirement seems to be a far better idea then selling off principal. I want to leave money when I die.
If you use a 3-4% withdrawal rate, then you are extremely likely to leave behind a pile of cash when you're gone. Whether that 3-4% comes from dividends or from capital appreciation is irrelevant.

Remember that your capital should be viewed in terms of dollars, not shares. Consequently, you're reducing your capital if you're spending dividends or selling shares.
Looking at it as dollars and not shares is a good way to view it. But, what if two individuals have a million dollar portfolio. One that is invested in say a high dividend fund such as HDV and one invested in a lower dividend yield growth fund.

The high dividend fund yields hypothetically 50k a year, while the lower yield only gives off 10k. The owner wants to live off 50k a year so sells 40 worth of capital every year, while the other doesn't sell at all. Will either portfolio eventually deplete itself? Or both or neither?
They would be equivalent.

There's a huge misconception by beginner investors (not saying I'm an expert) that dividends are a magical free lunch. I would even go as far as to say that it's the #1 biggest misconception in investing.

When a company pays a dividend, the value of the company goes down by that exact amount (think about it, the company gave away a bunch of money so it doesn't have it anymore). So yes, you got $50k in dividends, but your shares are now worth that much less.

"But with dividends you get to keep all your shares!" This is meaningless. Index funds have fractional shares so there's an infinite number of "shares" you can sell. You won't "run out" of shares by selling what you need. 5 shares of $90 (after a $10 dividend) is the same as 4.5 shares of $100 (selling 0.5 shares yourself). Either way, you received $50.

So dividends are equivalent to selling shares. Only difference is dividends are forced on you...a forced taxable event. So again...dividends are actually worse.
+1

This is the inherent fear of many investors who view their capital in terms of shares. They think that selling shares is liquidating their capital and that spending dividends is qualitatively different. But when capital is correctly viewed in terms of dollars, you see that not reinvesting dividends is equivalent to selling appreciated shares.

Further, if your investment appreciates in value by 5% each year but paid no dividends, you could sell 3% of your shares every year and still see your capital investment increase every year. You'll never run out of shares.*

*Unless it's Berkshire Hathaway class A stock and you only own a few shares (trading at $304k per share right now).
“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

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 6:25 pm

CantPassAgain wrote:
Fri Feb 23, 2018 3:19 pm
In a reasonably efficient and highly liquid market, it is the same. The number of shares is irrelevant. To say otherwise is to suggest that the market doesn't know how to value business enterprises, and that the market doesn't understand that a company that has a billion dollars in the bank is worth more than a company with a million in the bank, all else being equal.
I don't think so. Market prices change all the time based on the investor preferences and other variables, without any change in fundamental value. That's why prices are always more volatile than dividends or earnings. That's why Warren Buffet advises to ignore price movements and focus on fundamental value.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 6:31 pm

Phineas J. Whoopee wrote:
Fri Feb 23, 2018 3:38 pm
The number of shares is true, but without so much cash in its checking account the business itself is worth less. You own the same number of slices, but the pie is smaller.
This is the opposite of Warren Buffet's investment philosophy. He focuses on earnings and cash flows and ignores price movements. Just because the market arbitrarily marks down an asset doesn't mean the fundamental value or its cash flows has changed. Jack Bogle calls these speculative price movements, and they are separate from fundamental returns. Price only matters when or if you sell.
Phineas J. Whoopee wrote:
Fri Feb 23, 2018 3:38 pm
If there were buybacks, then you even own a greater fraction of the business than before.
Dividends are generally paid from new profits, not retained earnings. So the business is usually worth more or at least the same.
Phineas J. Whoopee wrote:
Fri Feb 23, 2018 3:38 pm
When one takes money out of that business, the asset side of its balance sheet shrinks, so on the other side shareholders equity shrinks, so the rental business one owns and operates is in fact worth less, even if the value of the land and improvements is not.
The assets increase or at least remain the same as before, because the dividends are paid from new profits. If there were no profits or the profit stream was in question, the dividend would generally be withheld.

For example, if I have a rental property paying me $1000/month in net profit, I can use it to pay myself a $1000/month dividend. If the market arbitrarily reduces the price of my rental property 50% but my rental cash flows are the same, I am indifferent. Actually, my cash flows go up, because now my property tax has just been reduced. :)

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 6:37 pm

Da5id wrote:
Fri Feb 23, 2018 3:46 pm
So to be clear, you are asserting current SWR is today's S&P 500's 1.79% dividend yield in your scheme (+ say 2.9% of your bond holdings. which is present BND SEC yield), giving a 2.2% composite yield for a 60/40 asset allocation? Good luck with that plan if it works out for you.

Do you have any substantial basis for your theory that your proposed 2.2% (if that is what you advocate) is a good target SWR?
The theory is that companies pay dividends that they think are sustainable cash flows. From a practical business perspective, companies typically pay out dividends they think they can afford to pay, and they generally avoid being too aggressive to dividends because it looks bad to reduce dividends later. So dividends are a naturally conservative disbursement of funds. If you look at historical S&P500 data, dividends have always grown over the long run, and are generally less volatile than the market itself. The market price, ex-dividends, also grows steadily outpacing inflation. So the consume-dividends approach is naturally robust to cyclical shocks, while still retaining modest growth. Any other strategy, e.g. the classic 4% SWR, is flawed because if the fundamental return of stocks falls because of a chance in economic parameters, it could overwithdraw and deplete assets. Whereas the dividend approach would prudently reduce consumption as asset returns decline, as they have declined since the 20th century (just look at CAPE metrics.)
Da5id wrote:
Fri Feb 23, 2018 3:46 pm
Bearing in mind that it probably results it many working many extra years beyond what is actually necessary?
Or just living more frugally early in your life so you have a healthier buffer later in life. If I retired with an expected 50+ years left to live, there's no way I'd consume as much as 4% of my current wealth at today's CAPE.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Fri Feb 23, 2018 6:38 pm

marcopolo wrote:
Fri Feb 23, 2018 3:54 pm
getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm

I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.
That seems like an odd assumption when the larger argument you seem to be making is that 4% WR is way to risky....
The SWR is always less than the expected mean real return because of sequence of return risk.

Da5id
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Re: What if you only live off dividends?

Post by Da5id » Fri Feb 23, 2018 7:26 pm

getrichslowly wrote:
Fri Feb 23, 2018 6:37 pm
Da5id wrote:
Fri Feb 23, 2018 3:46 pm
So to be clear, you are asserting current SWR is today's S&P 500's 1.79% dividend yield in your scheme (+ say 2.9% of your bond holdings. which is present BND SEC yield), giving a 2.2% composite yield for a 60/40 asset allocation? Good luck with that plan if it works out for you.

Do you have any substantial basis for your theory that your proposed 2.2% (if that is what you advocate) is a good target SWR?
The theory is that companies pay dividends that they think are sustainable cash flows. From a practical business perspective, companies typically pay out dividends they think they can afford to pay, and they generally avoid being too aggressive to dividends because it looks bad to reduce dividends later. So dividends are a naturally conservative disbursement of funds. If you look at historical S&P500 data, dividends have always grown over the long run, and are generally less volatile than the market itself. The market price, ex-dividends, also grows steadily outpacing inflation. So the consume-dividends approach is naturally robust to cyclical shocks, while still retaining modest growth. Any other strategy, e.g. the classic 4% SWR, is flawed because if the fundamental return of stocks falls because of a chance in economic parameters, it could overwithdraw and deplete assets. Whereas the dividend approach would prudently reduce consumption as asset returns decline, as they have declined since the 20th century (just look at CAPE metrics.)
Da5id wrote:
Fri Feb 23, 2018 3:46 pm
Bearing in mind that it probably results it many working many extra years beyond what is actually necessary?
Or just living more frugally early in your life so you have a healthier buffer later in life. If I retired with an expected 50+ years left to live, there's no way I'd consume as much as 4% of my current wealth at today's CAPE.
I note you didn't answer my question, to be perfectly clear are you asserting 1.79% (or maybe 2.2%) is the current SWR? Note that 4% SWR is largely based on what has historically worked rather than theory. You are also claiming I gather that you feel like current conditions are worse than those leading into the great depression or stagflation? Could be, I'm targetting 3% myself, but more out of a very conservative mindset.

I believe you are fundamentally wrong in your assumptions. You also seem to feel very confident in them. If you want to read a useful series on SWR try the series https://earlyretirementnow.com/category ... wal-rates/. Good luck with your strategy.

MrPotatoHead
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Re: What if you only live off dividends?

Post by MrPotatoHead » Fri Feb 23, 2018 7:38 pm

mega317 wrote:
Thu Feb 22, 2018 11:26 pm
MrPotatoHead wrote:
Thu Feb 22, 2018 8:12 pm
RAchip wrote:
Thu Feb 22, 2018 5:17 pm
If we are really talking about living off of dividends, we are talking about people with very large stock portfolios. If you have a $10+ million stock portfolio, those people don't sell their stock. Most of those people got very rich by following a simple rule: never sell your stock. My guess is that 99.9% of the people that post here and don't like dividends and advocate selling stock instead aren't close to a multi-million dollar stock portfolio.
A couple things to think about. Average household income last year was 59,600 so call it 60K. Given dividend yield around 2% that equates to a 3 million dollar stock portfolio. But at some point most folks will have social security also which drops that 3 million figure handsomely. Also consider that 60K included SS deducations and likely 401K or IRA deductions. meaning that most households are living on a "net" far less that 60K. Just SS chews that down to 55K, take out some taxes etc...and I would not be surprised to see them netting more like 45-50k or less (likely someone else knows in this forum knows the real number), so all of a sudden when you consider SS living off dividends can happen for a large number of people.

Just a thought...
Absolute numbers and additional income streams are distractions that don't add to the discussion.
Replace
Given dividend yield around 2% that equates to a 3 million dollar stock portfolio.
with "given SWR of 4% that equates to a 1.5 million dollar stock portfolio." Then the whole rest of your post can remain the same except "a large number of people" becomes much larger.
Which presumes 4% is actually safe, no one is planning more than 30 years in retirement, and they have no desires to attempt to insure a legacy bequeath. Which is to say the reason many people gravitate toward the spend the dividend philosophy is to remediate the three mentioned points.

Cheers...

marcopolo
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Re: What if you only live off dividends?

Post by marcopolo » Fri Feb 23, 2018 10:48 pm

getrichslowly wrote:
Fri Feb 23, 2018 6:38 pm
marcopolo wrote:
Fri Feb 23, 2018 3:54 pm
getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm

I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.
That seems like an odd assumption when the larger argument you seem to be making is that 4% WR is way to risky....
The SWR is always less than the expected mean real return because of sequence of return risk.
I am well aware of that.

But, it does seem odd to me that in most of your posts you are pointing out reasons why future returns are going to be much lower than the past (i believe you initiated the philosophicaleconomist thread predicting 4% going forward), and you very well might be right, yet when it suits your argument here, you cavalierly assume a "modest 5% real growth rate". Which is it? Is 5% real a modest assumption, or are we in for sub 4%?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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willthrill81
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Re: What if you only live off dividends?

Post by willthrill81 » Fri Feb 23, 2018 11:09 pm

getrichslowly wrote:
Fri Feb 23, 2018 6:38 pm
marcopolo wrote:
Fri Feb 23, 2018 3:54 pm
getrichslowly wrote:
Fri Feb 23, 2018 2:55 pm

I don't think those numbers are right. It doesn't take an additional 10 years to grow your assets by 32%. That assumes a mere 2.8% growth rate, not even counting savings contributions. Assuming you started work at 25 and took 30 years to save to 4% SWR at 55, then assuming you got a modest 5% real growth rate, you must have had a savings rate of 27%. Hence you would actually need to work another 5 years until age 60 to upgrade from 4% SWR to 3% SWR. I agree that if you took that long to retire, at that low of a savings rate, then its better to cut it short at 55 and take chances with 4%. Or convert to an annuity. All this assumes that it is not an option to reduce spending rates.
That seems like an odd assumption when the larger argument you seem to be making is that 4% WR is way to risky....
The SWR is always less than the expected mean real return because of sequence of return risk.
That's mathematically and historically false. There have been at least three historical periods where the average return was 3% but the '4% rule' still survived over a 30 year period. Remember that SWR research allows for depletion of capital over the withdrawal period.

If we were talking about the perpetual withdrawal rate, then your statement would be correct.
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mega317
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Re: What if you only live off dividends?

Post by mega317 » Fri Feb 23, 2018 11:11 pm

MrPotatoHead wrote:
Fri Feb 23, 2018 7:38 pm
Which presumes 4% is actually safe, no one is planning more than 30 years in retirement, and they have no desires to attempt to insure a legacy bequeath. Which is to say the reason many people gravitate toward the spend the dividend philosophy is to remediate the three mentioned points.

Cheers...
Of course if someone wants to do more than what the 4% SWR is predicted to support, they need to spend less. You are moving the goal posts.

RAchip
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Re: What if you only live off dividends?

Post by RAchip » Fri Feb 23, 2018 11:13 pm

"When a company pays a dividend, the value of the company goes down by that exact amount (think about it, the company gave away a bunch of money so it doesn't have it anymore). So yes, you got $50k in dividends, but your shares are now worth that much less."

This is a common misconception [OT comment removed by admin LadyGeek]. The market sets the value of stock. Nobody can really say for sure how the market values cash held by a company. It may be different for different companies. But cash in your pocket is worth more than cash in the company that may never be paid out. Brokers may "reduce" the "opening" price of a stock on the ex div. date by the amount of the dividend but the market quickly takes over and there may well not even be a recorded trade at that reduced price. Paying a consistent and growing dividend is mostly regarded by the market as a positive thing and it tends to drive up the stock price. If dividends were value destroying events as argued here by confused amateur investors it would drive down the stock price and companies would stop paying dividends. Every single company in the DJIA pays a dividend for a reason: it creates value for investors and drives up the stock price.

CantPassAgain
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Re: What if you only live off dividends?

Post by CantPassAgain » Sat Feb 24, 2018 1:47 am

RAchip wrote:
Fri Feb 23, 2018 11:13 pm
If dividends were value destroying events as argued here by confused amateur investors it would drive down the stock price and companies would stop paying dividends. Every single company in the DJIA pays a dividend for a reason: it creates value for investors and drives up the stock price.
I get that your entire investing worldview revolves around dividend payments, but this really is a ridiculous and inflammatory comment....of course dividends are value destroying, IF the company does not have earnings out of which to pay them! And even if they do, you are just trading capital appreciation for a cash disbursement. Obviously. Do you not understand how net income/retained earnings/shareholders equity works? Yeah market values can be opaque but come on RAchip. Market makers are not complete rubes when it comes to this stuff. You might not get it but they sure do.

Where do you think Apple would be if they paid a consistent 3 or 4 % dividend for the last 30 years? Bankrupt? Heck no, they should be trading at $10,000 a share right about now, because dividends are worth more and make the company way betterer and the balance sheet means diddly squat, right?

Anyway, as has been repeated, that's not really the point anyway. Companies can pay dividends or not. They should do what management and their owners feel is prudent. But chasing dividends is a dumb strategy for people who don't know any better.

jpsc
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Re: What if you only live off dividends?

Post by jpsc » Sat Feb 24, 2018 5:20 am

Is there any reason you want to buy SDY - SDY has high maintenance fee (I think 0.3%) than VIG
SDY dividend return is only 2.7%

What's your fav ETF on SP500 Index high dividend income fund ?

1nv35t
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Re: What if you only live off dividends?

Post by 1nv35t » Sat Feb 24, 2018 7:09 am

MrPotatoHead wrote:
Fri Feb 23, 2018 7:38 pm
Which presumes 4% is actually safe, no one is planning more than 30 years in retirement, and they have no desires to attempt to insure a legacy bequeath. Which is to say the reason many people gravitate toward the spend the dividend philosophy is to remediate the three mentioned points.
SWR averages are good enough. 4% SWR has endured historically which includes some pretty bad extremes. Most retiring in their 60's wont see their 90's. 4% SWR in being the lower end often leaves a substantial amount remaining for heirs - in some cases multiples of the inflation adjusted start date value. Its also a more constant value, 4% of the initial portfolio value - uplifted by inflation each year. Dividends are a much wilder ride and can at times have declined to levels where shares have to be sold to provide income due to such dividend value declines, at a time when share prices are also relatively low - and that double-whammy can be terminal. UK historic 120 years has for instance seen drawdowns of 75% in dividends at a time when share price drawdown was 50%.

Another factor is taxation risk. UK post WW2 had one year (1948) when basic rate (most common) taxation spiked to 40% on earned income, 45% on interest and 75% on dividends. In 1968 as another example, top rate taxpayers were levied a 136% tax rate. i.e. state financial stress can lead to targeting the 'rich' (unearned income) policies (Beatles sang taxman '19 for you 1 for me, taxman' in the late 1960's in reflection of their 95% tax rate). Whilst UK SWR also saw a 4% lower end figure similar to the US, that reduced to 3.5% on a net of taxes figure across the 20th century for a basic/most-common tax rate payer, still reasonable. Spending net of tax dividends in contrast would have been more stressful at times, potentially leading to times when selling shares to top up 'income' may have become a necessity.

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