Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

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YRT70
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Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by southerndoc »

If you aren't selling the stock and the dividend remains the same, then no, it doesn't matter.

Stock X pays $1.25/share per quarter. It's price is $90. The stock drops to $50, but they continue to pay $1.25/share per quarter. You make the same money, but the dividend yield is higher. If you sell, then you sell at a loss.

However, if a stock price drops drastically, it usually does so for a reason. Their profits may have suffered and they may scale back their dividend.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by White Coat Investor »

The problem is dividends tend to be cut when stock prices are going down.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by martint »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
Technically correct. For an example in practice, lookup the dividend history of GE.

A bonus of this investing theory, if a company decides to suspend or reduce their dividend (again, see GE), the stock price takes quite a beating.

I used to follow the theory of “Dividend Growth Investing” and while I was technically able to on average beat the market (well, the S&P500) since 2009, the research took too much time and I kept a lot of cash out of the market as a result. I now pretty much follow a 3 fund portfolio approach...
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by White Coat Investor »

YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
That's true. Some companies will. Others will not. 606 companies lowered their dividends in 2008 according to the Motley Fool.

https://www.fool.com/investing/general/ ... divid.aspx

There were even more in 2009:

https://latimesblogs.latimes.com/money_ ... den-1.html
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by reln »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
No. You're friend is wrong. Dividends do not matter.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

White Coat Investor wrote: Sun Aug 04, 2019 1:19 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
That's true. Some companies will. Others will not. 606 companies lowered their dividends in 2008 according to the Motley Fool.

https://www.fool.com/investing/general/ ... divid.aspx

There were even more in 2009:

https://latimesblogs.latimes.com/money_ ... den-1.html
Thanks. Very interesting.

So the question I'm looking at now: say one has a million and needs $30.000 per year to live off. Instead of the total return approach, why not invest all the money in dividend paying companies and just live off dividend?

I think the answer is: the total return approach will likely perform better and the dividends aren't guaranteed in the future. So you may end up with less money to spend.

Is my answer correct?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by sonosoldi3112 »

https://www.fastgraphs.com/why-accompli ... olatility/

See about one third way down .. " original investment of $100000 .. sample companies 2007 to 2012.

According to this limited study ..... it worked out great plus it stopped you from selling in a panic.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by livesoft »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.
As noted, that is true. But if you live off dividends, then a dividend cut matters a lot.

Ask your friend what happened to the dividend paid by GE.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by KlangFool »

YRT70 wrote: Sun Aug 04, 2019 1:28 pm
So the question I'm looking at now: say one has a million and needs $30.000 per year to live off. Instead of the total return approach,
YRT70,

In that case, why won't a simple 60/40 portfolio works? It works because the portfolio is big enough ( 33X annual expense).

There is no magic in the dividend.

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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by MNGopher »

I would think that if a company continued to pay the same dividend through rough financial times, then the share price would drop more than it otherwise would have if the dividend was decreased or eliminated. So, no, there is nothing special about dividends to the individual investor, other than possibly increasing taxes.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

KlangFool wrote: Sun Aug 04, 2019 1:32 pm
YRT70 wrote: Sun Aug 04, 2019 1:28 pm
So the question I'm looking at now: say one has a million and needs $30.000 per year to live off. Instead of the total return approach,
YRT70,

In that case, why won't a simple 60/40 portfolio works? It works because the portfolio is big enough ( 33X annual expense).

There is no magic in the dividend.

KlangFool
Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.

I'm just curious about the dividend approach, what are the specific pros can cons.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

YRT70 wrote: Sun Aug 04, 2019 1:17 pm That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
He’s right. Companies usually wallow in very bad financial mojo for a while before dividends are cut. Stock price doesn’t harm the company‘s ability to pay the dividend. A recession will affect earnings. A lot of recent recessions have been short.

Pick 20 companies at random are look at the history.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

YRT70 wrote: Sun Aug 04, 2019 1:54 pm

I'm just curious about the dividend approach, what are the specific pros can cons.
You’ll have to define the dividend approach to get meaningful answers. For example, let’s say the dividend approach is a portfolio of 100% SP500 index today with a withdrawal rate of 2%.

You can easily see the pros and cons of that. The withdrawal rate is low compared to norms, but then you’d die with 100 million dollars.

That’s a definition example. You don’t have to use it. Your example was a 3% withdrawal rate, and that is still lower than what the crowd is shooting for.

Make sense? If you invest smart with low withdrawal rates, of course it’ll work. No problem. I have not compared dividend volatility to stock price volatility. It would be interesting.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

firebirdparts wrote: Sun Aug 04, 2019 1:56 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
He’s right. Companies usually wallow in very bad financial mojo for a while before dividends are cut. Stock price doesn’t harm the company‘s ability to pay the dividend. A recession will affect earnings. A lot of recent recessions have been short.

Pick 20 companies at random are look at the history.
Look at what happened to dividends paid by the S&P500 during the Great Recession: https://www.multpl.com/s-p-500-dividend/table/by-year

It took 4 years for dividends to return to their 2008 level, and that was in nominal terms.

EDIT: Turns out the numbers in the table are inflation adjusted already, so I am deleting the rest of my post.
Last edited by delamer on Mon Aug 05, 2019 10:27 am, edited 1 time in total.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Shallowpockets »

Could you just do oil and gas MLPs paying greater than 10% and make some good money?
Sounds so easy. You may never need the principal.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by arcticpineapplecorp. »

also depends whether you're talking individual stocks or the market as a whole. For those who own individual stocks (for living off the dividends) what do you think happens when the business goes out of business? (no more dividend).
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Broken Man 1999 »

Shallowpockets wrote: Sun Aug 04, 2019 4:02 pm Could you just do oil and gas MLPs paying greater than 10% and make some good money?
Sounds so easy. You may never need the principal.
Not sure I would hang my hat on oil and gas MLPs, sometimes the oil patch takes a real beating.

A few years ago a lot of fracking companies went bust. And other, better capitalized companies feasted on their carcasses. There is a great deal of volatility in that sector.

10% is a great return, until it isnt.

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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by tibbitts »

"Crash" is a little vague, although we've taken that word to mean everything from what happened during the depression to much milder downturns.

But I think the point is similar to "If you're living on a 2% SWR you don't have to worry about crashes", and in the case of "normal" crashes that's probably true. Roughly the domestic market is yielding 2% so that's where the 2% comes from.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by nisiprius »

No, it's wrong. Dividends aren't guaranteed, and when times get tough, companies cut or skip dividends. When they get very tough, they stop paying them altogether.

What's true is that traditionally, by custom, dividends are more stable than stock prices--if the price gets cut in half, the company probably doesn't cut the dividend in half, and probably doesn't do it immediately.

But to a good first approximation, dividends are simply money that comes out of the stock price. That may not be precisely true because of tax considerations, and because as a group companies that pay dividends may have characteristics that differ somewhat from the market as a whole, but it's close.

You could own a total market stock fund, and arrange to sell a dividend-sized amount every month. During a stock market crash, you could choose to keep selling and spending the same amount for a while, hoping that you would get a recovery before your constant withdrawals had done too much damage.

Dividends are just a sort of leakage of money out of the stock. It may be convenient if the leak happens to match what you want to withdraw anyway. It also has the feature that someone who is not you has made a judgement that the dividends are more or less sustainable, so "spend only the dividends" is a reasonable rule to prevent overspending.

Think of it this way. Why does a stock price crash? It crashes because investors feel sure that the company's earnings prospects are bleak. Dividends come out of earnings. If a company doesn't have earnings, it can't go on paying dividends indefinitely.

In the days of fixed commissions--before 1975, and in the days when investors tended to own portfolios of individual stocks instead of mutual funds--every stock transaction cost in the ballpark of $100. (And there was a nasty extra hidden fee on "odd lot" sales, sales of less than 100 shares of stock. So it wasn't feasible to create income through systematic regular sales of small amounts of stock. The only feasible way to get income from stocks was to select dividend stocks (and even ladder them according to dividend payment schedule). Nowadays, it is trivial and costs very little--quite possibly nothing--to sell $100.00 worth of a mutual fund, or a single share of an ETF.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Grt2bOutdoors »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
Sure, it doesn't matter, just look at what happened to the holders of the following after the great stock crash of 2009/financial crisis:
Annual Dividend: Prior to crash 2019
Bank of America - $2.56 $0.66
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by HomeStretch »

YRT70 wrote: Sun Aug 04, 2019 1:54 pm I'm just curious about the dividend approach, what are the specific pros can cons.
If the “dividend approach” means investors who invest in high dividend yielding stocks then based on comments by such investors I have talked to, they view the dividend as income produced by their stocks without impacting their stock holdings. While it’s true that one owns the same # of shares before and after a cash dividend, the investors aren’t taking into account that the stock price per share is (usually) affected by the dividend distribution.

I prefer to determine the timing of my income rather than having a company I invest in determine it by declaring a dividend. Especially if it’s a tax year where my adjusted gross income (AGI) or modified AGI will determine the cost I pay for healthcare coverage on the ACA exchange or through Medicare.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Jack FFR1846 »

If invested in a taxable account, don't forget that if you're paid a dividend and don't need the money, you still pay tax on it. If a stock pays no dividend, you can go as long as you want and pay no tax. When you sell either stock, sure, you'll pay cap gains tax.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Ferdinand2014 »

YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
Dividends as a whole tend to decline less and for shorter periods of time the market declines.

“The stability of the annual dividends per share of the S& P 500 is truly remarkable (Exhibit 6.2). Over the 90-year span beginning in 1926, there were only three significant drops: (1) a 55 percent decline during the first years of the Great Depression (1929–1933); (2) a 36 percent decline in the Depression’s aftermath in 1938; and (3) a 21 percent decline during the global financial crisis of 2008–2009. This most recent decline occurred largely because banks were forced to eliminate their dividends. Dividends per share on the 500 Index fell from $ 28.39 in 2008 to $ 22.41 in 2009, but reached a new high of $ 45.70 in 2016, 60 percent above the earlier peak in 2008.”

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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by David Jay »

Ferdinand2014 wrote: Sun Aug 04, 2019 4:45 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
Dividends as a whole tend to decline less and for shorter periods of time the market declines.

“The stability of the annual dividends per share of the S& P 500 is truly remarkable (Exhibit 6.2). Over the 90-year span beginning in 1926, there were only three significant drops: (1) a 55 percent decline during the first years of the Great Depression (1929–1933); (2) a 36 percent decline in the Depression’s aftermath in 1938; and (3) a 21 percent decline during the global financial crisis of 2008–2009. This most recent decline occurred largely because banks were forced to eliminate their dividends. Dividends per share on the 500 Index fell from $ 28.39 in 2008 to $ 22.41 in 2009, but reached a new high of $ 45.70 in 2016, 60 percent above the earlier peak in 2008.”

Jack Bogle - The Little Book of Common Sense Investing.
That is true against the stock market, but a bond-heavy, conservative AA will show much lower volatility. With a 3% withdrawal rate, a 30/70 allocation is sustainable.

How does the drop in a 30/70 portfolio compare to a 100% stock (dividend strategy) portfolio? In 2009, the dividend dropped 21% (1 - 22.41/28.39), a 30/70 would have likely dropped 15%-18%. The 21% drop is a drop in income - $30,000 becomes $24,300. The 30/70 has some 20 years (depending on inflation) of living expenses in bonds before we have to touch stocks.
Last edited by David Jay on Mon Aug 05, 2019 11:51 am, edited 1 time in total.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by David Jay »

YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
In a smart-alec response, one could use a variation on Mark Twain’s analysis: Only purchase companies who won’t cut their dividend in a crash. If they might cut their dividend, don’t buy them.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by RAchip »

David Jay wrote: Sun Aug 04, 2019 6:49 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
In a smart-alec response, one could use a variation on Mark Twain’s analysis: Only purchase companies who won’t cut their dividend in a crash. If they might cut their dividend, don’t buy them.
Nothing is guaranteed, but you can find plenty of companies that have a LONG history of NOT cutting their dividend. Many have actually raised it every year for decades through thick and thin. You can easily assemble a portfolio of 15 or 20 of those companies that yields 3%. So, you actually can put together a portfolio that probably will never suffer a reduction in dividends
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by patrick013 »

YRT70 wrote: Sun Aug 04, 2019 1:28 pm
So the question I'm looking at now: say one has a million and needs $30.000 per year to live off. Instead of the total return approach, why not invest all the money in dividend paying companies and just live off dividend?

I think the answer is: the total return approach will likely perform better and the dividends aren't guaranteed in the future. So you may end up with less money to spend.

Is my answer correct?
Yes and no. Yes companies could lower payouts but total return funds will crash as well. So the real answer is wide diversification. Reinvest your dividends while the economy is good. Make withdrawals for LTCG's as needed from stock index funds. Have enough TRSY's for withdrawals during market crashes at elevated NAV's as they are now. Hopefully any big correction/crash won't last forever.

Is your AA aggressive or moderate ?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by tibbitts »

RAchip wrote: Sun Aug 04, 2019 7:30 pm
David Jay wrote: Sun Aug 04, 2019 6:49 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
In a smart-alec response, one could use a variation on Mark Twain’s analysis: Only purchase companies who won’t cut their dividend in a crash. If they might cut their dividend, don’t buy them.
Nothing is guaranteed, but you can find plenty of companies that have a LONG history of NOT cutting their dividend. Many have actually raised it every year for decades through thick and thin. You can easily assemble a portfolio of 15 or 20 of those companies that yields 3%. So, you actually can put together a portfolio that probably will never suffer a reduction in dividends
I would not say "easily", for example GE remained on the Dividend Achievers list for a while even after cutting its dividend in 2009. So you have to constantly monitor your choices.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by venkman »

I did some limited backtesting on this question a year or so ago.

Assuming the SEC yield on the S&P 500 at the beginning of the year would result in your portfolio throwing off dividends that exactly matched your spending needs, and that your spending needs increased by the amount of inflation each year, you would generally be okay living off the dividends of a 100% S&P portfolio. If you started in a bad year (i.e. the year before a big drop in dividends), your dividend income could drop below what you needed, but you could guard against that by keeping a small (2%) amount of your portfolio in cash.

This chart shows relative, inflation-adjusted dividend income by year: https://www.multpl.com/s-p-500-dividend/table/by-year
You can see that dividend income tends to rise faster than inflation; so if you exactly match spending needs to dividends in Year 1, you usually end up with more income than you need in subsequent years. By saving or reinvesting that extra income, you can protect against years when the dividend income declines.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by MathIsMyWayr »

Ferdinand2014 wrote: Sun Aug 04, 2019 4:45 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
Dividends as a whole tend to decline less and for shorter periods of time the market declines.

“The stability of the annual dividends per share of the S& P 500 is truly remarkable (Exhibit 6.2). Over the 90-year span beginning in 1926, there were only three significant drops: (1) a 55 percent decline during the first years of the Great Depression (1929–1933); (2) a 36 percent decline in the Depression’s aftermath in 1938; and (3) a 21 percent decline during the global financial crisis of 2008–2009. This most recent decline occurred largely because banks were forced to eliminate their dividends. Dividends per share on the 500 Index fell from $ 28.39 in 2008 to $ 22.41 in 2009, but reached a new high of $ 45.70 in 2016, 60 percent above the earlier peak in 2008.”

Jack Bogle - The Little Book of Common Sense Investing.
Past data show that the dividend is a bit less volatile than stock prices. If we use 25% as a guide for the worst case decline of the dividend based on the past 70 years' data of S&P 500 and may live off 75% of the dividend, then a crash of the market does not matter. Any way, this is similar to a withdrawal rate of about 1.5% which is already widely agreed on.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Valuethinker »

RAchip wrote: Sun Aug 04, 2019 7:30 pm
David Jay wrote: Sun Aug 04, 2019 6:49 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
In a smart-alec response, one could use a variation on Mark Twain’s analysis: Only purchase companies who won’t cut their dividend in a crash. If they might cut their dividend, don’t buy them.
Nothing is guaranteed, but you can find plenty of companies that have a LONG history of NOT cutting their dividend. Many have actually raised it every year for decades through thick and thin. You can easily assemble a portfolio of 15 or 20 of those companies that yields 3%. So, you actually can put together a portfolio that probably will never suffer a reduction in dividends
You mean stocks like IBM Kodak and GE ?

They have held or raised their dividends for decades.

So has Conn Ed from memory.

BP of course paid 25 per cent of all dividends by total value in the UK market. It's not as if as big and global a company as BP could suffer a big enough reverse to force it to cut its dividend.

Royal Dutch Shell now pays 40 per cent by value of all dividends from FTSE index. It is unimaginable that the business of selling oil and gas could ever change in ways that would force them to cut the dividend.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by saveinvestbecomefree »

An important point is what the dividend yield is. As some have mentioned, a diversified set of companies with a low dividend yield like 2% offers a lot of protection. This is because it's like a 2% SWR which is pretty bullet-proof. But this is not as safe as a set of high-yielding companies with say an average yield of 5%. If you can live off the 2% dividend yield, you are pretty safe (i.e. 2% SWR), but if you need 5% and are using high yielding companies to get enough income, you are taking on a relatively high long-term risk (i.e. 5% SWR which historically has been risky). There is no free lunch with dividends. Risk is tied to your total withdrawal rate regardless of where this income come from (dividends or share sales).
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JoMoney »

Chart of S&P 500 dividends
Image
Lots of hits can be seen where one would have to take a big hair-cut on their income. Not necessarily easy to do if that's your only source of income.
Looks to me like that period from 1966 - 1989 would have been especially rough, not only would your income be steadily declining, that was a period of especially high inflation so your cost of living would be skyrocketing.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by bertilak »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm If you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
I would say the following is true:
If you live off dividends, fluctuating stock prices don't matter (much).
Your income is likely to remain fairly steady without affecting your holdings since you won't be selling anything during a dip.

A crash will likely matter because there may be other financial difficulties, including lower dividends.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JackoC »

YRT70 wrote: Sun Aug 04, 2019 1:06 pm I was having a discussion with my friend. He says: if you live off dividends, a crash in stock prices doesn't matter.

This seems like an odd claim to me but I know very little of the topic. Is my friend right?
There are various slogans like this. Another is 'you haven't lost any money till you sell' (I haven't lost money last few trading days because I've made no stock sales? no, sadly I absolutely have lost money :( ). All of us are irrational to some degree sometimes. Those who know what they are talking about but still accept these slogans are arguing that though irrational, the slogans might counter panic selling and thus benefit the investor.

I disagree and at least for my own purposes reject all these psychological devices. I think it's better if I just grow up and recognize I am *at risk* having a substantial allocation to stocks and not rely on psychological devices that imply otherwise.

The element of wholly rational truth to this particular calming slogan is that if your consumption in retirement is small enough to equate to the dividend flow from your stock portfolio that means, particularly at today's low dividend yields, that you have a lot of assets relative to your spending. Therefore you are less vulnerable to long term risk asset price declines than somebody with the same stock allocation and less assets relative to their spending. But if you took the slogan to mean you should increase your allocation to stocks for a given asset amount and spending level, to get closer to stock dividends=spending, then it would be downright dangerous. Again just sticking to the facts of the real world and getting used to them is better in the end IMO. Stock risk is real, there is no gtee everything will come out OK if you put a large % of your money into stocks. That's why you can 'expect' (in the statistical sense) a premium return over low risk assets' return. Because it might be disastrous.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

So I hope there is some reasonable agreement that it is possible to hold 100% of a big stock index with a low withdrawal rate close to the dividend rate and yes that will work, and you can see why a person might do that. You can also see why people don't always do it. That is because the crowd is trying to draw off more than the big stock indices pay in dividends. So far so good. There's nothing crazy about either way. I don't agree with Jack above that this is dangerous. Stock "crashes" are short and growth cycles are long. With a 2% withdrawal rate and all your money in a big index fund, you're going to get extremely rich. That's what would really happen. Any effort to study withdrawal rates ever done will confirm this.

What you should *not* do is put all your money in something like MO and have a 6% withdrawal rate. This is quite a lot more risky than what we were contemplating above. if MO survives longer than you, then this might be clever, but we have no way of predicting that.

There is a middle ground where you might find a way to buy a basket of stocks that pay high dividends but don't look like they are in immediate danger of collapse, and certainly not all at once. There are some high dividend managed funds out there that might work at a withdrawal rate above 2%. You can google that. I posted a link the other day to the top 10 S&P stocks by dividend yield. Dividend Indices that I have seen are not really high yielding, I mean enough to be interesting. We all think 4% is a relatively safe withdrawal rate and I've not seen one above that.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by TN_Boy »

firebirdparts wrote: Mon Aug 05, 2019 9:40 am So I hope there is some reasonable agreement that it is possible to hold 100% of a big stock index with a low withdrawal rate close to the dividend rate and yes that will work, and you can see why a person might do that. You can also see why people don't always do it. That is because the crowd is trying to draw off more than the big stock indices pay in dividends. So far so good. There's nothing crazy about either way. I don't agree with Jack above that this is dangerous. Stock "crashes" are short and growth cycles are long. With a 2% withdrawal rate and all your money in a big index fund, you're going to get extremely rich. That's what would really happen. Any effort to study withdrawal rates ever done will confirm this.

What you should *not* do is put all your money in something like MO and have a 6% withdrawal rate. This is quite a lot more risky than what we were contemplating above. if MO survives longer than you, then this might be clever, but we have no way of predicting that.

There is a middle ground where you might find a way to buy a basket of stocks that pay high dividends but don't look like they are in immediate danger of collapse, and certainly not all at once. There are some high dividend managed funds out there that might work at a withdrawal rate above 2%. You can google that. I posted a link the other day to the top 10 S&P stocks by dividend yield. Dividend Indices that I have seen are not really high yielding, I mean enough to be interesting. We all think 4% is a relatively safe withdrawal rate and I've not seen one above that.
I was kinda okay with your first paragraph, until you said "Stock 'crashes' are short and growth cycles are long." This came as a surprise to me (and I suspect others) who were alive from the late 60s to early 80s. The market went pretty much nowhere while inflation was high, for a long time. (Too many people now think of the 2008/2009 crash as the usual case).

I agree with your basic premise -- if you can live off the (variable) dividend income from a broad index like the S&P 500, you can probably go 100% stocks (though I think this a bad idea). I don't particularly like the idea of going to a dividend heavy index in hopes of withdrawing 3% or more using only dividends.

Anyway, things can be painful for a lot longer than a year or two. And dividend only income will fluctuate.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by firebirdparts »

TN_Boy wrote: Mon Aug 05, 2019 10:02 am I was kinda okay with your first paragraph, until you said "Stock 'crashes' are short and growth cycles are long." This came as a surprise to me (and I suspect others) who were alive from the late 60s to early 80s. The market went pretty much nowhere while inflation was high, for a long time. (Too many people now think of the 2008/2009 crash as the usual case).
But think about what dividends were doing then. That the whole idea of the question. I guess it needs to be said that withdrawal rate studies come down to, in the end, imagine you retired in 1966. Your point is very very important. That is exactly what we are all programming for.

PV doesn't go back far enough to see (in 2 or 3 minutes of effort) to see how long your money would last if you started say at 3% and increased withdrawals for inflation through that time period.

P.S. The trinity study says you're okay forever at 3% and 100% "stocks", no matter when you retired in backtesting.

But again, to the OP, the trinity study also says you can do better than that during the absolute worst scenario pointed out by TN_Boy. Make sense? That's why most folks don't do it that way.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

Thanks everyone for all the insights. Interesting topic.
nisiprius wrote: Sun Aug 04, 2019 4:17 pm No, it's wrong. Dividends aren't guaranteed, and when times get tough, companies cut or skip dividends. When they get very tough, they stop paying them altogether.

What's true is that traditionally, by custom, dividends are more stable than stock prices--if the price gets cut in half, the company probably doesn't cut the dividend in half, and probably doesn't do it immediately.

But to a good first approximation, dividends are simply money that comes out of the stock price. That may not be precisely true because of tax considerations, and because as a group companies that pay dividends may have characteristics that differ somewhat from the market as a whole, but it's close.

You could own a total market stock fund, and arrange to sell a dividend-sized amount every month. During a stock market crash, you could choose to keep selling and spending the same amount for a while, hoping that you would get a recovery before your constant withdrawals had done too much damage.

Dividends are just a sort of leakage of money out of the stock. It may be convenient if the leak happens to match what you want to withdraw anyway. It also has the feature that someone who is not you has made a judgement that the dividends are more or less sustainable, so "spend only the dividends" is a reasonable rule to prevent overspending.

Think of it this way. Why does a stock price crash? It crashes because investors feel sure that the company's earnings prospects are bleak. Dividends come out of earnings. If a company doesn't have earnings, it can't go on paying dividends indefinitely.

In the days of fixed commissions--before 1975, and in the days when investors tended to own portfolios of individual stocks instead of mutual funds--every stock transaction cost in the ballpark of $100. (And there was a nasty extra hidden fee on "odd lot" sales, sales of less than 100 shares of stock. So it wasn't feasible to create income through systematic regular sales of small amounts of stock. The only feasible way to get income from stocks was to select dividend stocks (and even ladder them according to dividend payment schedule). Nowadays, it is trivial and costs very little--quite possibly nothing--to sell $100.00 worth of a mutual fund, or a single share of an ETF.
Thanks for the detailed answer. This answers my questions.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

There is a widespread misunderstanding that selling shares will eventually result in an investor running out of funds. This is wrong because it ignores the capital appreciation that stocks have experienced over time. It also stems from an irrational desire to never spend any of one's starting capital.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by TN_Boy »

firebirdparts wrote: Mon Aug 05, 2019 10:33 am
TN_Boy wrote: Mon Aug 05, 2019 10:02 am I was kinda okay with your first paragraph, until you said "Stock 'crashes' are short and growth cycles are long." This came as a surprise to me (and I suspect others) who were alive from the late 60s to early 80s. The market went pretty much nowhere while inflation was high, for a long time. (Too many people now think of the 2008/2009 crash as the usual case).
But think about what dividends were doing then. That the whole idea of the question. I guess it needs to be said that withdrawal rate studies come down to, in the end, imagine you retired in 1966. Your point is very very important. That is exactly what we are all programming for.

PV doesn't go back far enough to see (in 2 or 3 minutes of effort) to see how long your money would last if you started say at 3% and increased withdrawals for inflation through that time period.

P.S. The trinity study says you're okay forever at 3% and 100% "stocks", no matter when you retired in backtesting.

But again, to the OP, the trinity study also says you can do better than that during the absolute worst scenario pointed out by TN_Boy. Make sense? That's why most folks don't do it that way.
Well actually, the main point I was making is that anyone thinking that stock crashes are always short-lived and followed by long periods of happy growth is mistaken. One needs to be aware of that.

I think many people are planning on short stock market crashes. I'd prefer them myself :-) but consider other possibilities as well.

I believe the Trinity study used the S&P 500, so one should be careful about substituting dividend payer indexes for all one's equity, as such indexes are much less studied (and I think I'm on solid ground saying these indexes tend to be skewed toward certain sectors, and might have less diversification than S&P 500 or a total US market index).

But aside from the "short crashes" thing, if you can live off 3%, you can do so with a total return approach. We've had many threads on total return versus dividend investing. The OP should refer to them if interested.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JackoC »

firebirdparts wrote: Mon Aug 05, 2019 9:40 am 1. So I hope there is some reasonable agreement that it is possible to hold 100% of a big stock index with a low withdrawal rate close to the dividend rate and yes that will work, and you can see why a person might do that. You can also see why people don't always do it. That is because the crowd is trying to draw off more than the big stock indices pay in dividends. So far so good. There's nothing crazy about either way. I don't agree with Jack above that this is dangerous. Stock "crashes" are short and growth cycles are long. With a 2% withdrawal rate and all your money in a big index fund, you're going to get extremely rich. That's what would really happen. Any effort to study withdrawal rates ever done will confirm this.

2. There is a middle ground where you might find a way to buy a basket of stocks that pay high dividends but don't look like they are in immediate danger of collapse, and certainly not all at once. There are some high dividend managed funds out there that might work at a withdrawal rate above 2%. You can google that. I posted a link the other day to the top 10 S&P stocks by dividend yield. Dividend Indices that I have seen are not really high yielding, I mean enough to be interesting. We all think 4% is a relatively safe withdrawal rate and I've not seen one above that.
1. It's not necessarily dangerous* to have a 100% stock portfolio from which you withdraw 2%. But that has nothing directly to do with the dividend rate, it's because 2% is a low rate of withdrawal, one at which money lasts for 50 yrs at 0% real after tax return. And for people already living off their investments 50 yrs is typically more than their remaining lifespan, and 0% real after tax over a long time would be a quite poor outcome (though definitely not impossible).

What's dangerous is to increase your % stock holdings *because* you're aiming for getting closer to stock dividends=spending. Assuming there was any rational reason you had a lower than stock allocation, say 50% "getting closer to stock dividends=spending" is not a good reason to change the allocation to 100%. Because 'stock dividends=spending' is not itself meaningful. Raising your stock allocation based on a meaningless indicator can be dangerous.

2. There is no first order reason to prefer stocks that pay high dividends. Total return is what counts. If you withdraw 2% a year from a 100% stock index portfolio or 3% from a selected group of stocks yielding 3% the basic difference between those strategies is still withdrawing 3% rather than 2%, with greater expected terminal value if you withdraw 2%. Any variation from that would be the subject of studies trying to tease out small differences in the risk adjusted return between high and low dividend stocks in the past. Whatever those differences might be they'd be a) nothing like 1%, b) likely subject to debate about the statistical methods used c) there would be no gtee of their future persistence.

*though one might question why anyone would do this. A plausible reason might be a goal of leaving an albeit highly uncertain bequest to heirs. If just doing it for oneself it's a greater challenge to find a rational reason for withdrawing only 2%. One good reason might be to guard against prolonged very poor returns one thinks are possible (contrary to your apparent view, common on this forum, that asset returns can't be any poorer in the future than they happen to have been in last several decades in one country, the US). But if one is worried about possible very poor asset returns, why ramp up that risk by having 100% in stocks? If the reason for a very low withdrawal rate is to give to charity at death, one would have to consider the implicit time value of money of charities: they and their beneficiaries aren't necessarily better off with a decades hence risky return, ie one that could be much lower than past returns, v just getting the money now. Again the issue with 100% stocks, 2% withdrawal is not directly to do with dividends. The two relevant questions are: why withdraw so little? and why have it 100% in stocks?
Last edited by JackoC on Mon Aug 05, 2019 2:34 pm, edited 1 time in total.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by LilyFleur »

YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
I think it some of the volatility also depends on if you are investing in individual stocks or in a dividend-paying stock index fund.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by LilyFleur »

YRT70 wrote: Sun Aug 04, 2019 1:54 pm
KlangFool wrote: Sun Aug 04, 2019 1:32 pm
YRT70 wrote: Sun Aug 04, 2019 1:28 pm
So the question I'm looking at now: say one has a million and needs $30.000 per year to live off. Instead of the total return approach,
YRT70,

In that case, why won't a simple 60/40 portfolio works? It works because the portfolio is big enough ( 33X annual expense).

There is no magic in the dividend.

KlangFool
Yes I know a simple 60/40 portfolio will more than likely work. It's actually what I do.

I'm just curious about the dividend approach, what are the specific pros can cons.
If the stocks are held in a 401k or IRA (pretax), the dividends will be taxed at your regular income tax rate when you withdraw from the account.

If you invest in a stock index fund that produces "qualified" dividends (like SCHB) in a brokerage account, your dividends (after 60 days) will be taxed at the long-term capital gains rate.

This site has good strategy discussions about what types of investments to hold in pre- and post-tax accounts, and I have learned a great deal about tax planning here.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JackoC »

LilyFleur wrote: Mon Aug 05, 2019 2:36 pm

If the stocks are held in a 401k or IRA (pretax), the dividends will be taxed at your regular income tax rate when you withdraw from the account.

If you invest in a stock index fund that produces "qualified" dividends (like SCHB) in a brokerage account, your dividends (after 60 days) will be taxed at the long-term capital gains rate.
One clarification to that which doesn't change the basic point. The net value of 401k/tIRA accounts is nominal balance*(1-ordinary income tax rate). But that net value increases at the *pre-tax* (after expenses) total return of the investments. A wrinkle is that 'ordinary income tax rate' is the one which will prevail when you (or heirs) take Required Minimum Distributions from the account, not necessarily's now's rate, and you don't know the future tax rate. But that's the correct conceptual framework, real account value reduced by (1-tax rate), but that net increases at the pre tax return.

Which is why when splitting asset types between tax deferred and taxable accounts you generally want the investments which throw off the most taxable income to be in the tax deferred account, those are the ones whose after tax return would be reduced the most shifting them to taxable. That could conceivably (not that it's practical necessarily) include splitting the stock index into higher dividend payers in tax deferred and lower dividend payers in taxable to come out to just the index overall. But again it's questionable whether there's any value in an overall weighting toward high dividend stocks in your portfolio. If there is any reason, it's from some hard to detect or prove secondary effects or anomalies in the market which wouldn't be gteed to persist even if they have existed.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by naha66 »

VYM (Vanguard High Dividend Yield ETF) 2007 div on $100k $2649,2008 $2897,2009 $2435, 2010 $2347, 2011 $2937 . So yes they fell but not a amount you can't manage. I bet people with a 3 fund Portfolio in retirement cut back in those year too. A good etf or mutual fund of dividend payers can work. Check out Rick Ferri Income Seeker Core-4 Portfolio.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

RAchip wrote: Sun Aug 04, 2019 7:30 pm
David Jay wrote: Sun Aug 04, 2019 6:49 pm
YRT70 wrote: Sun Aug 04, 2019 1:17 pm Thanks for the answers guys.
White Coat Investor wrote: Sun Aug 04, 2019 1:11 pm The problem is dividends tend to be cut when stock prices are going down.
That's what I was thinking and told my friend. He said some companies will keep paying the same dividend.
In a smart-alec response, one could use a variation on Mark Twain’s analysis: Only purchase companies who won’t cut their dividend in a crash. If they might cut their dividend, don’t buy them.
Nothing is guaranteed, but you can find plenty of companies that have a LONG history of NOT cutting their dividend. Many have actually raised it every year for decades through thick and thin. You can easily assemble a portfolio of 15 or 20 of those companies that yields 3%. So, you actually can put together a portfolio that probably will never suffer a reduction in dividends
Agreed....
This is entirely true...our portfolio is proof of this. Made it through every bear market from 2000 till now and NEVER sold one share of stock. Dividends continued to provide the income needed. Yes (some companies cut the payout) but most did not and did increase on an annual basis providing the hedge against inflation and offsetting those that cut. Those that did cut restored the payouts gradually (and combined with those that continued to increase, balanced out the overall net income). It is completely a fallacy that :
dividends tend to be cut when stock prices are going down
... they are independent of each other (during broad market declines) unless they both reflect a poorly performing company.
Doing the research for companies that historically increase their dividends over time is equal to researching any fund for future performance.There are many solid dividend paying companies out there.You invest wisely and nothing else, it is the best you can do. (I have to admit with today's inflated stock prices this strategy is less cost effective than in the past).
(Not arguing here!!).... but if the markets tanked 50% tomorrow I can SWAN knowing those dividend checks will continue to come as opposed to having the anxiety of how many shares of my depressed portfolio I will need to sell to pay my expenses over a possibly protracted period of time.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by nisiprius »

LilyFleur wrote: Mon Aug 05, 2019 2:32 pm...I think some of the volatility also depends on if you are investing in individual stocks or in a dividend-paying stock index fund...
My perception is that, as a group, dividend stock enthusiasts do not seem to like index funds, or even active mutual funds. Dividend stock investors mostly seem to use portfolios of individual stocks; i.e. dividends are simply used as a pre-screening tool to choose a universe of stocks to look at, but it is assumed that you are then going to engage in stock-picking within that universe.

One possible reason for this is that if you do look at total return, it becomes clear that dividend stocks as a class do not behave very differently from other stocks. They just make their money in a different way. They have less price growth due to dividends constantly leaking out of the fund, but if you add the dividends back in, the growth with reinvested dividends--that is, the total return--is about the same.

Below: blue, the Vanguard High Dividend Yield Index Fund, VHDYX since inception. Orange, the Vanguard Equity-Income Fund, VEIPX. Green, the Vanguard Total Stock Market Index Fund.

(VEIPX is kind of interesting to look at because it, because it goes back to 1988; you can find similar and older funds at other companies if you look for names like "equity income" and "growth & income." They are intended specifically for investors who want to live off dividends).

Source
Image

The differences are small, down in the "argue-forever-about-them" range. Because it is often baldly asserted that dividend stocks "provide downside protection," it is worth noting that the differences during 2008-2009 were small--and that Total Stock declined less than high-dividend-yield.

Ignoring taxes, etc. if the growth charts are the same, then there mathematically cannot be any difference between letting a fund push out whatever dividends it pays out, versus pulling the same amounts out yourself by selling shares. The only difference is that in the first case, the companies control the amount that is pushed out, and take responsibility for it being a sustainable number, while in the second case you have the control and take the responsibility.
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