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

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

Post by JackoC »

rossington wrote: Tue Aug 06, 2019 5:31 am 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.
And the significance of never selling a share is? As you can see from historical results provided in recent posts and anywhere else, there has been very little difference in total return between high dividend stocks and the index. And selling shares in a taxable account is generally slightly more tax efficient than receiving qualified dividends*. But aside from tax, there would have been hardly any difference in bottom line outcome if the stock portion of your portfolio had been the index.

Again, if somebody withdraws a very low % of their assets ever year they have a low probability of exhausting their assets within only a few decades. But there's no real logical connection from that obvious observation to stock dividends. Let's assume even a high dividend fund pays out 3.2% (current yield of Vanguard VHDYX). If a person is 60/40 stock/bond, reinvesting all bond interest but 'living off dividends' they are only withdrawing 1.9% a year. The reason they will likely be in really good shape is that 1.9% is a low withdrawal rate. It's nothing directly to do with the virtue of dividends.

*selling shares gives a combination of non taxable return of principal and long term capital gains (assuming management of the sale to be long term); qualified dividends are 100% taxable at the same rate as long term capital gains. If a high and low div stock have the same total return and you eventually completely liquidate both, the total gain recognized would be the same for both, but more back loaded for the low div stock, so via time value of money more tax efficient. If both are left to heirs and the tax basis steps up to market value at death, the relative tax efficiency advantage of the low dividend payer increases further.
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CyclingDuo
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by CyclingDuo »

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?
How do dividends act in recessions and bear markets?

Image

The 2008-2009 S&P Dividend cut was hit rather hard due to the dividend cuts and companies that eliminated their dividends within the financial sector.

Note, that when building a dividend income portfolio, financial stocks rank much lower on the list for consideration (along with IT and industrials), where the top dividend stability payers comes from staples, utilities, health care, and telecommunications.

Image

A well diversified portfolio of dividend growers & initiators have done well over the years...

Image

Image

If interested in creating a portfolio of dividend income, or utilizing a portion of one's portfolio dedicated to an income strategy, I highly recommend fellow BH member Bruce Miller's book entitled "Retirement Investing for Income ONLY: How to Invest for Reliable Income in Retirement ONLY from Dividends". It's available on Amazon. The strategy is designed around building an income stream of dividends where - as your friend suggests - the underlying share price is not a factor through the cycles of the market.

Excellent source for companies that have years of higher dividends both domestic and international is here:

https://www.dripinvesting.org/tools/tools.asp
"Save like a pessimist, invest like an optimist." - Morgan Housel
delamer
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

CyclingDuo wrote: Tue Aug 06, 2019 9:14 am
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?
How do dividends act in recessions and bear markets?


The 2008-2009 S&P Dividend cut was hit rather hard due to the dividend cuts and companies that eliminated their dividends within the financial sector.

Note, that when building a dividend income portfolio, financial stocks rank much lower on the list for consideration (along with IT and industrials), where the top dividend stability payers comes from staples, utilities, health care, and telecommunications.



A well diversified portfolio of dividend growers & initiators have done well over the years...


If interested in creating a portfolio of dividend income, or utilizing a portion of one's portfolio dedicated to an income strategy, I highly recommend fellow BH member Bruce Miller's book entitled "Retirement Investing for Income ONLY: How to Invest for Reliable Income in Retirement ONLY from Dividends". It's available on Amazon. The strategy is designed around building an income stream of dividends where - as your friend suggests - the underlying share price is not a factor through the cycles of the market.

Excellent source for companies that have years of higher dividends both domestic and international is here:

https://www.dripinvesting.org/tools/tools.asp
You talk about building a diversified portfolio of dividend stocks but then say that the “top dividend stability” is in 4 sectors of the S&P 500.

Diversification doesn’t come from buying a bunch of companies in the same few industries. You can’t be well-diversified if you are ignoring (or underweighting) a big chunk of the economy.
delamer
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

naha66 wrote: Tue Aug 06, 2019 2:49 am 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.
The lowest figure above is 19% less than the highest.

If someone was pre-Social Security and living solely off of dividends, that kind of drop very well might not be manageable.

If half of income comes from Social Security and half comes from dividends, then someone might be able to handle it.

So, as others have noted, a lot comes down to how dependent a retiree is on their portfolio for covering expenses.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by RAchip »

CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
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CyclingDuo
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by CyclingDuo »

delamer wrote: Tue Aug 06, 2019 9:54 am
CyclingDuo wrote: Tue Aug 06, 2019 9:14 am
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?
How do dividends act in recessions and bear markets?


The 2008-2009 S&P Dividend cut was hit rather hard due to the dividend cuts and companies that eliminated their dividends within the financial sector.

Note, that when building a dividend income portfolio, financial stocks rank much lower on the list for consideration (along with IT and industrials), where the top dividend stability payers comes from staples, utilities, health care, and telecommunications.



A well diversified portfolio of dividend growers & initiators have done well over the years...


If interested in creating a portfolio of dividend income, or utilizing a portion of one's portfolio dedicated to an income strategy, I highly recommend fellow BH member Bruce Miller's book entitled "Retirement Investing for Income ONLY: How to Invest for Reliable Income in Retirement ONLY from Dividends". It's available on Amazon. The strategy is designed around building an income stream of dividends where - as your friend suggests - the underlying share price is not a factor through the cycles of the market.

Excellent source for companies that have years of higher dividends both domestic and international is here:

https://www.dripinvesting.org/tools/tools.asp
You talk about building a diversified portfolio of dividend stocks but then say that the “top dividend stability” is in 4 sectors of the S&P 500.

Diversification doesn’t come from buying a bunch of companies in the same few industries. You can’t be well-diversified if you are ignoring (or underweighting) a big chunk of the economy.
I don't recall saying that you ignore other sectors in my above post. Rather, I pointed out that due to cyclicality of interest rates and the business cycle, some segments of the economy may have their dividends ebb and flow more than others. Obviously, the financial crisis caused a hit to that sector during the financial crisis. Having all - or too many - of one's dividend paying eggs in that particular basket would have been best avoided. In spite of that, there are indeed financial stocks that make the dividend champions list and have consistently raised dividends through thick and thin. You can view the champions list here:

https://www.dripinvesting.org/tools/U.S ... mpions.pdf

In addition to covering all sectors, regions (domestic/international), REITS, MLP's, etc... a well diversified portfolio of dividend payers means that if you own a company or sector that cuts or temporarily eliminates their dividend - the overall portfolio still performs by providing one's income. Obviously, that means spreading one's capital through the equivalent of one's own DIY index fund to provide appropriate diversity.
"Save like a pessimist, invest like an optimist." - Morgan Housel
delamer
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

RAchip wrote: Tue Aug 06, 2019 10:18 am CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
People are going to differ on what “a successful strategy” is. What’s your definition?
Valuethinker
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Valuethinker »

[edited]

Suffice it to say no sector is reliably a producer of free cash flow.

The world is being disrupted too much by too many factors - digital but not only, also demographic & environmental (to name 2 obvious tidal waves).
Last edited by Valuethinker on Tue Aug 06, 2019 10:55 am, edited 1 time in total.
dbr
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by dbr »

The simple answer to this kind of quip is that it is true by circular argument. By definition if you live off whatever dividends are produced then you live off whatever dividends are produced. The other part of the reasoning is the implicit assumption from living off dividends that you don't care what the market value of your investments is, so, by circular argument, stock prices don't matter (whether in a crash or not).

That is about all the comment this kind of quip deserves.
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nisiprius
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by nisiprius »

CyclingDuo wrote: Tue Aug 06, 2019 9:14 amA... well diversified portfolio of dividend growers & initiators have done well over the years...
These numbers don't look right.
Image

Image
According to the Moneychimp calculator, from 1972 through 2017, the S&P 500 CAGR return was 10.62%, higher than the highest number shown ("dividend growers and initiators.") It shows $1 growing to $103.85, hence $100 to $10,385--again, more than the $8,267 shown for "dividend growers and initiators."

We can confirm this by having Morningstar plot MITTX, in order to get the S&P 500 total return plotted as a benchmark; in the S&P 500, $10,000 would have grown to $1,031,297.89 between the exact dates 1/31/1972 - 12/31/2017, hence $100 to $10,313.

Image

I'm thinking that the numbers in those tables might reflect dividends only, and are simply showing that dividend-paying stocks paid more in dividends than non-dividend-paying stocks.
Last edited by nisiprius on Tue Aug 06, 2019 10:42 am, edited 5 times in total.
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delamer
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

CyclingDuo wrote: Tue Aug 06, 2019 10:22 am
delamer wrote: Tue Aug 06, 2019 9:54 am
CyclingDuo wrote: Tue Aug 06, 2019 9:14 am
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?
How do dividends act in recessions and bear markets?


The 2008-2009 S&P Dividend cut was hit rather hard due to the dividend cuts and companies that eliminated their dividends within the financial sector.

Note, that when building a dividend income portfolio, financial stocks rank much lower on the list for consideration (along with IT and industrials), where the top dividend stability payers comes from staples, utilities, health care, and telecommunications.



A well diversified portfolio of dividend growers & initiators have done well over the years...


If interested in creating a portfolio of dividend income, or utilizing a portion of one's portfolio dedicated to an income strategy, I highly recommend fellow BH member Bruce Miller's book entitled "Retirement Investing for Income ONLY: How to Invest for Reliable Income in Retirement ONLY from Dividends". It's available on Amazon. The strategy is designed around building an income stream of dividends where - as your friend suggests - the underlying share price is not a factor through the cycles of the market.

Excellent source for companies that have years of higher dividends both domestic and international is here:

https://www.dripinvesting.org/tools/tools.asp
You talk about building a diversified portfolio of dividend stocks but then say that the “top dividend stability” is in 4 sectors of the S&P 500.

Diversification doesn’t come from buying a bunch of companies in the same few industries. You can’t be well-diversified if you are ignoring (or underweighting) a big chunk of the economy.
I don't recall saying that you ignore other sectors in my above post. Rather, I pointed out that due to cyclicality of interest rates and the business cycle, some segments of the economy may have their dividends ebb and flow more than others. Obviously, the financial crisis caused a hit to that sector during the financial crisis. Having all - or too many - of one's dividend paying eggs in that particular basket would have been best avoided. In spite of that, there are indeed financial stocks that make the dividend champions list and have consistently raised dividends through thick and thin. You can view the champions list here:

https://www.dripinvesting.org/tools/U.S ... mpions.pdf

In addition to covering all sectors, regions (domestic/international), REITS, MLP's, etc... a well diversified portfolio of dividend payers means that if you own a company or sector that cuts or temporarily eliminates their dividend - the overall portfolio still performs by providing one's income. Obviously, that means spreading one's capital through the equivalent of one's own DIY index fund to provide appropriate diversity.
My understanding is that the point of a dividend portfolio is two-fold: 1) to avoid drawing down principal and 2) to provide a steady (or increasing) income via dividends-only. Is that correct?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Longdog »

HomeStretch wrote: Sun Aug 04, 2019 4:32 pm
YRT70 wrote: Sun Aug 04, 2019 1:54 pm I'm just curious about the dividend approach, what are the specific pros can cons.
I prefer to determine the timing of my income rather than having a company I invest in determine it by declaring a dividend.
How do you do this? By calling the CFOs of all of the companies you own stock in and instructing them to refrain from declaring a dividend on the shares you own?
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vineviz
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by vineviz »

RAchip wrote: Tue Aug 06, 2019 10:18 am CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
I don't see anyone fighting the idea that so-call "dividend investing" strategies can be effective and/or successful.

Mostly I see folks trying to explain why "dividend investing" strategies are, as a rule, less effective and/or successful than total return strategies.

B+ is a good grade on a school assignment, but there's no denying that A+ is a better grade.
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MichCPA
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by MichCPA »

delamer wrote: Tue Aug 06, 2019 10:26 am
RAchip wrote: Tue Aug 06, 2019 10:18 am CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
People are going to differ on what “a successful strategy” is. What’s your definition?
Also "is" needs to be "was". I don't know if steering away from Netflix, Amazon, Google, and Facebook will be a great strategy moving forward. The analysis started in 1972 after all. Anybody want to take a 5 year bet that those companies would beat the performance of Exxon Mobile or AT&T?

And how does the analysis above treat Apple which grew the most before it started offering a dividend in 2012? .
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by HomeStretch »

Longdog wrote: Tue Aug 06, 2019 10:47 am
HomeStretch wrote: Sun Aug 04, 2019 4:32 pm
YRT70 wrote: Sun Aug 04, 2019 1:54 pm I'm just curious about the dividend approach, what are the specific pros can cons.
I prefer to determine the timing of my income rather than having a company I invest in determine it by declaring a dividend.
How do you do this? By calling the CFOs of all of the companies you own stock in and instructing them to refrain from declaring a dividend on the shares you own?
Yes I do call the Board of Directors (as the Board declares dividends), doesn’t everyone? 8-) /jk

Perhaps I should have said “I prefer to minimize the amount of my investment income, to the extent possible, ...”. My point was that I’d prefer more tax efficient holdings with lower dividends and to choose if/when I take additional investment income in the form of capital gains from sales.
Last edited by HomeStretch on Tue Aug 06, 2019 12:01 pm, edited 2 times in total.
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vineviz
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by vineviz »

delamer wrote: Tue Aug 06, 2019 10:38 am My understanding is that the point of a dividend portfolio is two-fold: 1) to avoid drawing down principal and 2) to provide a steady (or increasing) income via dividends-only. Is that correct?
I see these as frequently stated goals for a dividend portfolio.

However, it seems difficult to uncover any rational reasons WHY these should be investment goals or what actual advantages dividend investing is supposed to provide in terms of not "drawing down principal" or providing "a steady (or increasing) income" relative to total return strategies.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
TN_Boy
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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 »

RAchip wrote: Tue Aug 06, 2019 10:18 am CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
The problem - I believe - is that this all comes down to withdrawal rates. Let's assume you are a dividend kinda guy or gal. You plan to live off dividends in retirement. There are two scenarios I see:

1) Your dividend rate is something like 3%, maybe a bit more or less (and growth of dividends matching inflation .....). You can accept some volatility and live off those dividends without selling any shares. And all the total return people yawn and say "Yep, and I can use a total return approach for that kind of withdrawal rate, with potentially better tax management."

2) You believe you can achieve a higher withdrawal rate than you can otherwise - maybe 4.5%? Pick a number. Anyway, the point is you think you can do better in some way than using broad market indexes and a total return approach. In which case the total return folks disagree because they do not believe there is a magic money machine associated with dividends.

The key point is that if the withdrawal rate is low, regardless of whether you are a true believer in dividends, most approaches will work.

I do think there is splendid simplicity in dividends. You do nothing and they appear. But, I don't think dividend approaches are optimal.
delamer
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by delamer »

vineviz wrote: Tue Aug 06, 2019 10:58 am
delamer wrote: Tue Aug 06, 2019 10:38 am My understanding is that the point of a dividend portfolio is two-fold: 1) to avoid drawing down principal and 2) to provide a steady (or increasing) income via dividends-only. Is that correct?
I see these as frequently stated goals for a dividend portfolio.

However, it seems difficult to uncover any rational reasons WHY these should be investment goals or what actual advantages dividend investing is supposed to provide in terms of not "drawing down principal" or providing "a steady (or increasing) income" relative to total return strategies.
I agree.

My argument with CycleDuo is that s/he said “well diversified portfolio of dividend payers means that if you own a company or sector that cuts or temporarily eliminates their dividend - the overall portfolio still performs by providing one's income.”

Well, if one of the main goals/expectations of the dividend portfolio is to provide steady income then that goal is not being met in that situation. Income has gone down.

How is that an improvement over choosing a low withdrawal rate with a total return portfolio?

My perception is that many dividend-adherents think that it is a foolproof and recession-proof method of guaranteeing income. And that is not true.
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CyclingDuo
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by CyclingDuo »

RAchip wrote: Tue Aug 06, 2019 10:18 amCyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this. All I can say is that this is a successful strategy employed by people with a lot of money.
I am somewhat agnostic about it all.

To be honest, our dividend portfolio is a portion of our overall portfolio that includes index funds, growth stocks (stocks that pay no dividends), cash, managed funds, bonds, CD's, rental income, and dividend payers/growers via individual stocks. I've written about it before, but due to some inherited dividend stocks (70+ of them) several years ago - I am required to manage them as my spouse did not want to sell the family's divvy payers due to her valid emotional connection and her desire to pass them on to our own children when we are gone, so I backed off and honored her wishes. Not to do so would have been rather stressful on our marriage, so it is what it is. At the same time, the Wiki here at BH regarding a windfall had me step back and accept the "do nothing" for a while suggestion, rather than make quick decisions and changes. That was simply our reality at the time and the process back then involved meeting with several potential AUM firms/advisors - all of whom wanted to make immediate changes by selling everything we had and moving things around which in the end, had us make the decision to DIY it. Plenty of support on these forums and others encouraged me that it could be done. The Wiki on a passively managed DIY index fund made up of individual stocks also helped enlighten me that life was not going to be over due to holding so many individual stocks. :D

I did talk my spouse into dumping all of the gold/silver related stocks and some MLP's (stuff I didn't really understand at the time) and getting the dividends in taxable cut down to an amount we could absorb without impacting our income taxes too much. It forced me to take a really hard look at what it was she inherited and why the portfolio was designed in the way it was designed by her parents. They had been living off of the dividends and SS for about three decades before they passed. I did sell what I had inherited from my parents and get them into low cost index funds as their smaller pot was all in load funds via their Morgan Stanley broker. I had no qualms doing that.

Meanwhile, everything we invest from our paychecks goes directly into the three fund portfolio in all of our retirement plans. We have made great strides over the past 4 years in increasing the amount of our portfolio that is in passive index funds to where it has grown or will grow to be nearly the same size or larger than that of our dividend and growth stocks portfolio over the next few years by the time we retire. And our dividend and growth individual stock portfolio is also passive (a la the Wiki on passively managing individual stocks).

The other hand I was personally dealt last year, was being laid off which led me to a thorough study of Miller's book, and engage in much back and forth with him as well as others in designing a "What if?" scenario of me not being able to find replacement income and how to best utilize the dividends we did have coming in each quarter. When faced with a potential reality of coming up with enough gap income to make it to SS was not something I would wish upon anyone with one child still in college, but B. Miller's expertise and experience in having faced that himself was comforting and helped me engage in some planning.

Fortunately, after the initial panic of losing a job I had held for 15 years, and me finally settling down a few months later about it all, I was able to find enough replacement income to not have to dig into our dividends or index funds as an income stream as of yet. In spite of that, I did feel the need to investigate, learn and prepare for my reality at the time last year. The dividends have all simply been reinvested since 2016 - to purchase index ETF's in our taxable and using DRIP's ever since to acquire more shares of each position. This could all be turned on for dividend income at some point in the future if needed for replacement income, and certainly in retirement. I'm only 57 and there is no guarantee the current replacement income I have been able to find will continue from now until my early to mid 60's - or whenever it is retirement happens. Having the option of turning on the dividend spigot from that portion of our portfolio is what it is - a potential diversity of income stream that is there if need be.

I completely understand that a dividend is nothing but a return of capital and is only one part of a total return portfolio. The only way we have been able to keep the portion we hold in our taxable account somewhat tax efficient in the growth stage the past few years is by maxing out three employer plans with our pre-tax deductions, and then cutting back on our expenses. In other words, shifting more money into tax advantaged accounts during our final 5-10 years of working and increasing the amount of passively managed index funds that we own. It is what it is, and as outlined above - 'tis the hand I have been dealt.

I made a graphic last year when I got laid off and entitled it appropriately for how I felt at the time of being terminated and after having read Bruce Miller's book....

Image

FIRE...D!

Since making that graph a little over a year ago, we will have dumped another $150K into the passive index funds by the end of this year, as my goal is to have the index funds surpass the percentage of the individual stocks in our portfolio over the next few years as we continue our contributions and work towards increasing our odds of honoring the goal of passing on some sort of a family legacy to our children.

Not sure that helps, but just wanting to clarify.
"Save like a pessimist, invest like an optimist." - Morgan Housel
Tommy
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Tommy »

what bring another question - if one interested in dividends why not long term bonds or even high yield? Sure, price fluctuate a lot but dividends stays.
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BeBH65
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by BeBH65 »

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
Dividend aristocrats is a grouping of stocks that attempt this. For instance see:
https://en.m.wikipedia.org/wiki/S%26P_5 ... ristocrats
One can note that 19 out of the 51 stocks were dropped over 2 consecutive years 10 years ago. Is this sufficient?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
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Leif
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Leif »

If dividends are cut, like in 2008, then yes it matters. Also, if you don't have a large enough stockpile of safe assets to handle an emergency then yes it matters. If the stock market remains down for 30 years, like the Japanese market, then yes it matters. Otherwise, no it does 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 jminv »

nisiprius wrote: Tue Aug 06, 2019 10:37 am
CyclingDuo wrote: Tue Aug 06, 2019 9:14 amA... well diversified portfolio of dividend growers & initiators have done well over the years...
These numbers don't look right.
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According to the Moneychimp calculator, from 1972 through 2017, the S&P 500 CAGR return was 10.62%, higher than the highest number shown ("dividend growers and initiators.") It shows $1 growing to $103.85, hence $100 to $10,385--again, more than the $8,267 shown for "dividend growers and initiators."

We can confirm this by having Morningstar plot MITTX, in order to get the S&P 500 total return plotted as a benchmark; in the S&P 500, $10,000 would have grown to $1,031,297.89 between the exact dates 1/31/1972 - 12/31/2017, hence $100 to $10,313.

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I'm thinking that the numbers in those tables might reflect dividends only, and are simply showing that dividend-paying stocks paid more in dividends than non-dividend-paying stocks.
The key is how they chose the comparison benchmark since if they had chosen a common s&p500 benchmark they would not have the same story. If they had used the appropriate benchmark it wouldn’t have been a story at all, actually. They chose equal weighted s&p500, rather than market weight, and then further rebalanced it monthly rather than quarterly like many equal weight etfs. There’s a clear reason they didn’t choose market weight since they’re selling a story.

There are also issues with survivorship in how the growers and initiators is constructed (Business encounters difficulties and it is removed) and that the period examined includes a period where dividends were more important followed by a period where stock buybacks became increasingly important.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Longdog »

HomeStretch wrote: Tue Aug 06, 2019 10:58 am
Longdog wrote: Tue Aug 06, 2019 10:47 am
HomeStretch wrote: Sun Aug 04, 2019 4:32 pm
YRT70 wrote: Sun Aug 04, 2019 1:54 pm I'm just curious about the dividend approach, what are the specific pros can cons.
I prefer to determine the timing of my income rather than having a company I invest in determine it by declaring a dividend.
How do you do this? By calling the CFOs of all of the companies you own stock in and instructing them to refrain from declaring a dividend on the shares you own?
Yes I do call the Board of Directors (as the Board declares dividends), doesn’t everyone? 8-) /jk

Perhaps I should have said “I prefer to minimize the amount of my investment income, to the extent possible, ...”. My point was that I’d prefer more tax efficient holdings with lower dividends and to choose if/when I take additional investment income in the form of capital gains from sales.
Ah yes, that makes sense. Now I get it. Just as I prefer to board the airplane first and sit in first class every time I fly, while still paying the non-refundable coach airfare... to the extent possible. :happy

Now if you’ll excuse me, I have some calls to make to a number of boards of directors, since earnings season is right around the corner and I want to avoid taxes on dividends I don’t need... :wink:
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JustinR »

YRT70 wrote: Sun Aug 04, 2019 1:54 pm 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.
There are no pros to dividends. Only cons.

Dividends are widely misunderstood by basic investors.

I'm gonna simplify this as much as possible, so some details will be left out.

Receiving a dividend is mathematically the same as manually selling off the stock yourself. It's like a guy named Mr. Vanguard force-sells some of your stocks every three months and sends you the money.

So you're receiving money "out of nowhere" and it feels good right? <-- This is as far as most investors see.

Except now you have less money in your Vanguard account. And you have to pay taxes on the money he sent you.

If that sounds familiar, that's because it's the same as what happens when you sell the stock yourself.

BUT WAIT, dividends are actually taxed more than selling it yourself. So actually, dividends are worse than selling stocks yourself for income.

That's even ignoring the fact that you have no control over the timing or amount of dividends received.

So you can see that total return is the only thing that matters. Dividends actually make you poorer.

Tell that to your friend.
Last edited by JustinR on Tue Aug 06, 2019 10:02 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 patrick013 »

Image

My little chart tells me that these specific indexes are behaving expectedly based on 2 old 40 year studies whereby current 10 year total returns are marginally better than the market portfolio.

Will the market crash. Sure. Look at past drawdowns. Equity risk is equity risk.

Will the dividend factor perform. In some selection methods I'd say yes.

Will momentum beat growth. Don't know.

Will quality beat value. There's some evidence it will.

In a new business cycle dividends should pay as in the past with some equity exposure and equity return as well. Dividends are part of total return. They don't decrease total return, maybe liquidation value but who's going bankrupt. Every one knows that. :)
age in bonds, buy-and-hold, 10 year business cycle
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by sharukh »

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
I
The crazy thing is some companies borrow money to pay dividend, so as to give the feeling of not cutting 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 CyclingDuo »

JustinR wrote: Tue Aug 06, 2019 1:12 pm
YRT70 wrote: Sun Aug 04, 2019 1:54 pm 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.
There are no pros to dividends. Only cons.

Dividends are widely misunderstood by basic investors.

I'm gonna simplify this as much as possible, so I'm gonna leave out some of the details.

Receiving a dividend is mathematically the same as manually selling off the stock yourself. It's like a guy named Mr. Vanguard force-sells some of your stocks every three months and sends you the money.

So you're receiving money "out of nowhere" and it feels good right? <-- This is as far as most investors see.

Except now you have less money in your Vanguard account. And you have to pay taxes on the money he sent you.

If that sounds familiar, that's because it's the same as what happens when you sell the stock yourself.

BUT WAIT, dividends are actually taxed more than selling it yourself. So actually, dividends are worse than selling stocks yourself for income.

So you can see that total return is the way to go. Dividends actually make you poorer.
Location of the individual stocks are key as is the income level of the owners of the dividend paying assets. If held in tax advantaged accounts and reinvesting dividends - it's a total return strategy. We keep REITs and some others in Roth IRA space to avoid paying any taxes on the dividends. If dividend paying stocks are held in taxable (like a chunk of ours are) utilizing everything possible to keep tax costs down can be an effective strategy (our dividends are taxed at 0%) and we have been reinvesting the dividends, so again the total return strategy is being utilized.

We are fortunate to be able to keep our taxable income under the threshold (by maxing out the age 50+ levels in three plans - two for my spouse and one for myself) which has been shielding the dividends which we can or could use as income replacement if need be, or reinvest the dividends into additional purchases for total return investing. If we get over the threshold, we'll have to pay 15% taxes on the dividends. Suffice it to say, we are managing our income levels, expenses, as well as our dividend flow as a result. In other words, what works or doesn't work for one investor, may indeed work or not work for another investor.

:sharebeer

https://www.thebalance.com/how-to-pay-n ... ins-357399
Last edited by CyclingDuo on Tue Aug 06, 2019 3:08 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 willthrill81 »

RAchip wrote: Tue Aug 06, 2019 10:18 am CyclingDuo makes a convincing argument as to why dividend investing for stable income and capital appreciation is effective. Yet people here continue to fight this.
Because the data are not convincing, as nisiprius has pointed out.
RAchip wrote: Tue Aug 06, 2019 10:18 amAll I can say is that this is a successful strategy employed by people with a lot of money.
It's inappropriate to judge a strategy based on who's engaged in it or how many are engaged in it. That is basically an 'appeal to the majority'. A lot of people have made a lot of money trading commodities, for instance, but even more people have lost a lot of money doing the same.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

vineviz wrote: Tue Aug 06, 2019 10:58 am
delamer wrote: Tue Aug 06, 2019 10:38 am My understanding is that the point of a dividend portfolio is two-fold: 1) to avoid drawing down principal and 2) to provide a steady (or increasing) income via dividends-only. Is that correct?
I see these as frequently stated goals for a dividend portfolio.

However, it seems difficult to uncover any rational reasons WHY these should be investment goals or what actual advantages dividend investing is supposed to provide in terms of not "drawing down principal" or providing "a steady (or increasing) income" relative to total return strategies.
I agree. How could an investor rationally believe that they are not 'drawing down principal' when stocks are down by 20-50%? The only way I can see such a conclusion being reached is if one believes that wealth in stocks is represented by shares owned and not the dollar value of one's shares, a common fallacy but a fallacy nonetheless. Certainly they don't believe that their wealth in a company doubles because the stock splits 1 to 2. And certainly they cannot believe that retaining shares means that their wealth has not gone down; Enron stock certificates aren't worth anything except perhaps as a novelty collectible.

Wealth in stocks is represented by the monetary value of one's shares and not the number of shares owned. So-called 'paper losses' are actually very real losses, even if they are not 'realized losses' yet, which is only potentially meaningful for tax purposes.
“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: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by nedsaid »

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?
Though companies are loathe to cut dividends, in a crisis dividends can and will be cut. We saw this in the aftermath of the 2008-2009 financial crisis and bear market. Lots of financial companies cut their dividends and often in dramatic fashion.
A fool and his money are good for business.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Riprap »

JustinR wrote: Tue Aug 06, 2019 1:12 pm
There are no pros to dividends. Only cons.

Dividends are widely misunderstood by basic investors.

BUT WAIT, dividends are actually taxed more than selling it yourself. So actually, dividends are worse than selling stocks yourself for income.

So you can see that total return is the way to go. Dividends actually make you poorer.

Tell that to your friend.
"Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquistion or two might make sense. That's like asking your interior decorator whether you need a $50,000 rug" -Warren Buffett (1994 annual letter)

As Mr. Buffett explains, a dividend permanently removes money from management who might otherwise squander it. In those frequent cases, dividends preserve wealth.

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

Post by willthrill81 »

Riprap wrote: Tue Aug 06, 2019 4:24 pm
JustinR wrote: Tue Aug 06, 2019 1:12 pm
There are no pros to dividends. Only cons.

Dividends are widely misunderstood by basic investors.

BUT WAIT, dividends are actually taxed more than selling it yourself. So actually, dividends are worse than selling stocks yourself for income.

So you can see that total return is the way to go. Dividends actually make you poorer.

Tell that to your friend.
"Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquistion or two might make sense. That's like asking your interior decorator whether you need a $50,000 rug" -Warren Buffett (1994 annual letter)

As Mr. Buffett explains, a dividend permanently removes money from management who might otherwise squander it. In those frequent cases, dividends preserve wealth.

Is that not a pro to paying dividends?
It's true that if management cannot find a good use for their cash, they should consider distributing it to shareholders, but dividends are not the only way nor even necessarily the best way to do this. Stock buybacks have become increasingly popular and increase value to shareholders through capital appreciation, which is more beneficial than dividends from a tax perspective. It also doesn't leave investors with a taste for more and more buybacks the way that dividends often do.

However, Buffett's statement that a good business generates more money than it can use is plain false when it comes to companies that are good at growth. Look at Amazon, who has never declared a dividend and has plowed everything they've made back into the business to grow it. They've been pretty darned successful with this strategy, and their stockholders are not crying about the absence of dividends.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Trader Joe »

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?
Yes I do believe that your friend is right. I have first hand experience with this scenario.
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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 »

Riprap wrote: Tue Aug 06, 2019 4:24 pm "Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquistion or two might make sense. That's like asking your interior decorator whether you need a $50,000 rug" -Warren Buffett (1994 annual letter)

As Mr. Buffett explains, a dividend permanently removes money from management who might otherwise squander it. In those frequent cases, dividends preserve wealth.
You do realize that you are supporting dividends with quotes from a man who’s own company never pays dividends.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by unclescrooge »

YRT70 wrote: Sun Aug 04, 2019 1:28 pm
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?
Correct. Cashflows from stocks are very volatile.

If you are looking for stable cash flows, debt-free real estate is usually better. But that comes with it's own risk, so let's not derail your conversation.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Riprap »

David Jay wrote: Tue Aug 06, 2019 4:41 pm You do realize that you are supporting dividends with quotes from a man who’s own company never pays dividends.
I do realize that. Buffett has always been very clear and transparent about why he doesn't pay them.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

Riprap wrote: Tue Aug 06, 2019 4:49 pm
David Jay wrote: Tue Aug 06, 2019 4:41 pm You do realize that you are supporting dividends with quotes from a man who’s own company never pays dividends.
I do realize that. Buffett has always been very clear and transparent about why he doesn't pay them.
And other managers could just as easily claim that they have good reasons for not paying dividends.

Just because Bogle, Buffett, etc. make a statement, it is not automatically completely and universally accurate forevermore.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by rossington »

Dividends are beneficial... either by producing income OR by increasing total return through reinvesting them. Or both.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Riprap »

willthrill81 wrote: Tue Aug 06, 2019 5:01 pm And other managers could just as easily claim that they have good reasons for not paying dividends.

Just because Bogle, Buffett, etc. make a statement, it is not automatically completely and universally accurate forevermore.
Sigh...I simply provided quote from a well known and by most measures a successful investor to a pro to paying a dividend.

I am not advocating that all corporations should or should not pay a dividend. Sometimes it makes sense, other times it doesn't.

I'll stick my neck out even further by saying Mr. Buffett is better judge than me (and perhaps even you) as to when dividends are appropriate and when they're not.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by willthrill81 »

Riprap wrote: Tue Aug 06, 2019 5:20 pm
willthrill81 wrote: Tue Aug 06, 2019 5:01 pm And other managers could just as easily claim that they have good reasons for not paying dividends.

Just because Bogle, Buffett, etc. make a statement, it is not automatically completely and universally accurate forevermore.
Sigh...I simply provided quote from a well known and by most measures a successful investor to a pro to paying a dividend.

I am not advocating that all corporations should or should not pay a dividend. Sometimes it makes sense, other times it doesn't.

I'll stick my neck out even further by saying Mr. Buffett is better judge than me (and perhaps even you) as to when dividends are appropriate and when they're not.
Well, you added commentary and asked a question as well.

However, I agree with your underlined statement. The problem with many investors, especially novices (not saying you at all), is that they view dividends to be special in some way and more valuable than capital appreciation and, in turn, engage in poor behavior as a result.
“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: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by nisiprius »

Riprap wrote: Tue Aug 06, 2019 4:49 pm
David Jay wrote: Tue Aug 06, 2019 4:41 pm You do realize that you are supporting dividends with quotes from a man whose own company never pays dividends.
I do realize that. Buffett has always been very clear and transparent about why he doesn't pay them.
You do realize that you are supporting dividends with quotes from a man whose explicit advice to ordinary investors is "consistently buy an S&P 500 low-cost index fund... I think it's the thing that makes the most sense practically all of the time." Not "buy a dividend-oriented mutual fund."
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by Riprap »

nisiprius wrote: Tue Aug 06, 2019 5:59 pmYou do realize that you are supporting dividends with quotes from a man whose explicit advice to ordinary investors is "consistently buy an S&P 500 low-cost index fund... I think it's the thing that makes the most sense practically all of the time." Not "buy a dividend-oriented mutual fund."
I was simply responding to JustinR's assertion "there are no pros to dividends, only cons."
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by cbeck »

What I notice in this discussion is a sly trick by those who are against the live-off-dividends strategy. The goal of the strategy to provide an adequate income while reducing the very substantial risk of a market crash, particularly early in retirement, that adversely and permanently affects portfolio longevity. The trick that the opponents use is to assert that total return is better. Perhaps it may be, but that is not the goal sought by the proponents, which is to minimize worst case risk, not to maximize return. If your goal is to reduce risk then your strategy should be evaluated only against that goal, not someone else's favorite objective. It might be more appropriate to compare the live-off-income method to buying an annuity than to investing in the S&P 500 Index.

I myself do subscribe to the live-off-income method, but in my opinion the better solution than dividends is bonds. In particular, the best fund for this purpose is the Vanguard High Yield Bond Fund Admiral Shares. Sounds crazy, because everyone knows that junk bonds are the first class to default in a recession, right? Generally true, but VWEAX has been an exception. For one thing, unlike other junk bond funds, it doesn't use leverage to goose up returns and they claim to hold the best of the junk. At the beginning of the Great Recession VWEAX was trading at $5.91/share. It twice hit bottom at $3.91/share before the recession ended in June, 2009. So, the hit to market value was -33%, which compares favorably to the -57% hit to stocks at the time.

During that time the fund never missed a monthly payout, although the amount of the payout did decline from about $0.038/share to $0.026/share. Both the price and the payout subsequently recovered.

The High Yield Fund opened on the heels of the 2001 recession, so the only worst-case experience so far is the Great Recession, which we know we cannot regard as the worst possible case. It must be noted that prevailing interest rates have been declining during the period, but VWEAX still provided a yield higher than dividends, investment grade bonds, or most other options.

So, my opinion is that living-off-income can be realistic in particular to address the deadly market-crash-early-in-retirement problem that retirees face, but with some caveats. It is safer with another income stream such as SS. Inflation is a theoretical risk that is overemphasized by my generation which was scarred by the high inflation of the 70's in the same way that my parents' generation was scarred by the Great Depression. I don't see any basis for a fear of the return of high inflation which we haven't had for 40 years. Quite the opposite. We remain in a period of global capital abundance and consequently persistent low inflation. If inflation were to rise interest rates would rise, although there would certainly be a hit to the market values of bond funds until they were able to catch up to prevailing rate levels.

But even with low inflation some provision has to be made because of the cumulative effects over a long retirement period. So, I think the method only works if not all the income is withdraw, but some is reinvested to cover inflation.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by randomguy »

cbeck wrote: Tue Aug 06, 2019 9:09 pm What I notice in this discussion is a sly trick by those who are against the live-off-dividends strategy. The goal of the strategy to provide an adequate income while reducing the very substantial risk of a market crash, particularly early in retirement, that adversely and permanently affects portfolio longevity. The trick that the opponents use is to assert that total return is better. Perhaps it may be, but that is not the goal sought by the proponents, which is to minimize worst case risk, not to maximize return. If your goal is to reduce risk then your strategy should be evaluated only against that goal, not someone else's favorite objective. It might be more appropriate to compare the live-off-income method to buying an annuity than to investing in the S&P 500 Index.

Any scheme where you don't place any income restrictions is never going to run out of money. You do always run the risk of not getting enough money. So lets think about how much money I need to get an adequate amount of money (lets call it 40k). Right now I would need something like 2.5 million (2% yield and you have to assume that dividends will be cut by 1/3rd during extended bear markets like we are concerned about. See 2008, 1966, 1929). Are you really that worried that a sub 2% SWR is going to adversely and permanently affect your portfolio longevity using total return investing?
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by YRT70 »

Perhaps there is a psychological advantage?
First of all, let me start this section by saying that it is not true that dividend growth investors do not care at all about capital appreciation (Total Return). In truth, they care very much, and who doesn’t enjoy seeing the value of their stock holdings appreciate over time. However, the competent dividend growth investor attempts to build a dividend paying portfolio that will support their retirement needs without ever having to harvest any of their principal. Therefore, as long as their income is not affected by price volatility, they can calmly and intelligently ignore volatile market actions. This is a great and powerful advantage.
https://www.fastgraphs.com/why-accompli ... olatility/
nedsaid wrote: Tue Aug 06, 2019 3:16 pm Though companies are loathe to cut dividends, in a crisis dividends can and will be cut. We saw this in the aftermath of the 2008-2009 financial crisis and bear market. Lots of financial companies cut their dividends and often in dramatic fashion.
That's what I told my friend. He replied: you should buy dividend Aristocrats, companies that have increased their dividend payouts for 25 consecutive years or more.
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by naha66 »

David Jay wrote: Tue Aug 06, 2019 4:41 pm
Riprap wrote: Tue Aug 06, 2019 4:24 pm "Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally. The company could, of course, distribute the money to shareholders by way of dividends or share repurchases. But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquistion or two might make sense. That's like asking your interior decorator whether you need a $50,000 rug" -Warren Buffett (1994 annual letter)

As Mr. Buffett explains, a dividend permanently removes money from management who might otherwise squander it. In those frequent cases, dividends preserve wealth.
You do realize that you are supporting dividends with quotes from a man who’s own company never pays dividends.
You do realize his many statements to the fact that he loves buying dividend paying co. and collecting dividends. You should read more!
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JoeRetire
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by JoeRetire »

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?
It is both odd and true.

If you live off dividends, then the stock price doesn't matter - only the dividends matter. Of course dividends aren't guaranteed and can be reduced at any time.

It's like saying "if you live off 3% withdrawals, then the size of your nest egg doesn't matter". That's completely true as long as you don't care how many actual dollars are contained in that 3%.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
onourway
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Re: Is this right? "if you live off dividends, a crash in stocks prices doesn't matter"

Post by onourway »

YRT70 wrote: Wed Aug 07, 2019 3:30 am That's what I told my friend. He replied: you should buy dividend Aristocrats, companies that have increased their dividend payouts for 25 consecutive years or more.
This strategy is no different than choosing the best performing mutual funds of the past 25 years. It’s chasing past performance and the future will look nothing like the past. What’s important is which companies will increase their dividend payouts for the next 25 years.
TN_Boy
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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 »

cbeck wrote: Tue Aug 06, 2019 9:09 pm What I notice in this discussion is a sly trick by those who are against the live-off-dividends strategy. The goal of the strategy to provide an adequate income while reducing the very substantial risk of a market crash, particularly early in retirement, that adversely and permanently affects portfolio longevity. The trick that the opponents use is to assert that total return is better. Perhaps it may be, but that is not the goal sought by the proponents, which is to minimize worst case risk, not to maximize return. If your goal is to reduce risk then your strategy should be evaluated only against that goal, not someone else's favorite objective. It might be more appropriate to compare the live-off-income method to buying an annuity than to investing in the S&P 500 Index.

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I think the "sly trick" is the way the live-off-dividends folks obscure their withdrawal rate!

Here is part of what I said upthread:

1) Your dividend rate is something like 3%, maybe a bit more or less (and growth of dividends matching inflation .....). You can accept some volatility and live off those dividends without selling any shares. And all the total return people yawn and say "Yep, and I can use a total return approach for that kind of withdrawal rate, with potentially better tax management."


Living solely off dividends means you accept a relatively low portfolio withdrawal rate, and one that is guaranteed variable to boot. If the dividend supporters would simply acknowledge that, the discussions would be clearer. And we could move on to talking about whether a dividend-focused strategy is better or worse given that low withdrawal rate.

Living off dividends does nothing to reduce your risk of not having enough money to live on.
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