role of dividends in retirement withdrawal strategy

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loukycpa
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role of dividends in retirement withdrawal strategy

Post by loukycpa »

Thinking about withdrawal rates during retirement and the old rule of thumb of 4% being a safe annual withdrawal rate. I know there is concern the 4% is too high because bond yields are so much lower, but for now assume I wanted to use it as a guidepost.

Biggest concern I have always had is the possibility of retiring before a significant correction in the stock market followed by a lost decade for stocks (mid 1960s through early 80's for example).If this happens and assuming you either can't or don't want to reduce your annual withdrawals, I am presuming you are withdrawing heavily from the bond side of your portfolio, waiting on a recovery on the equity side. Maybe even exclusively from the bond side of a portfolio.

Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.

Not looking to recreate any of the discussions on total return versus dividend strategies. I understand that investors should generally be agnostic on where their return comes from (cap gain versus dividends) and focus should be on total return. I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market. (I say long run because IMO in short run market is a voting machine versus in long run a weighing machine, but digressing now).

VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.

Interested in hearing from those deep into retirement who may have lived through various cycles and how they weathered it, particularly the impact of dividends on their annual withdrawals throughout.
rkhusky
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

loukycpa wrote: Wed Oct 07, 2020 5:18 pm I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market.
Actually over the very short term, as in the same day. When stocks distribute dividends the stock price goes down at the same time, such that you have the same amount of money as before the dividend. 99 shares at $100/sh is the same as 100 shares at $99/sh. So, getting dividends is the same as selling stocks, apart from tax issues and qualified vs unqualified dividends.

If stocks drop, you should sell bonds and buy stocks to rebalance. Thereafter, your withdrawals should be part stocks and part bonds according to your asset allocation.
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loukycpa
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Re: role of dividends in retirement withdrawal strategy

Post by loukycpa »

The market value of stock is the last price a buyer was willing to pay for it and a seller was willing to part with it for. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.

But again, not looking to recreate that debate. The reality is dividends are paid in cash, which assuming you don't reinvest, represent part of any annual withdrawal you need to get from your portfolio.
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

loukycpa wrote: Wed Oct 07, 2020 5:33 pm The market value of stock is the last price a buyer was willing to pay for it. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.
It is a very well known fact that as soon as a stock issues a dividend its stock price goes down by an amount equivalent to the dividend. There may be other things going on that also affect the price, but this is a well known phenomena.

Look at all the posts around the end of the quarter, and especially the end of the year, that ask "Why did my fund go down?" There is even a wiki article about it:
https://www.bogleheads.org/wiki/Why_did ... p_in_value

And, why would an investor pay the same price for a stock after the dividend is issued compared to before the dividend? After all, the value of the company just dropped by the total amount of the dividend.
Last edited by rkhusky on Wed Oct 07, 2020 5:42 pm, edited 1 time in total.
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loukycpa
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Re: role of dividends in retirement withdrawal strategy

Post by loukycpa »

Mutual fund repricing yes. Stock values no.
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

loukycpa wrote: Wed Oct 07, 2020 5:42 pm Mutual fund repricing yes. Stock values no.
Mutual fund pricing is simply the sum of all the stock values that it holds. The mutual fund share price will only drop if all the stock prices drop too.

There is a lag between the stock price drops and the mutual fund price drop because the mutual fund holds the stock dividends in cash (or some other investment) until they are distributed.
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Re: role of dividends in retirement withdrawal strategy

Post by MathIsMyWayr »

rkhusky wrote: Wed Oct 07, 2020 5:24 pm When stocks distribute dividends the stock price goes down, such that you have the same amount of money as before the dividend. So, getting dividends is the same as selling stocks, apart from tax issues and qualified vs unqualified dividends.

If stocks drop, you should sell bonds and buy stocks to rebalance. Thereafter, your withdrawals should be part stocks and part bonds according to your asset allocation.
Here we go again, dividends and stock price ad nauseam.
There is no magic about dividends, but limiting withdrawals to the amount of dividends payment might be quite safe if we can trust the managemens of broad companies, e.g., S&P 500, will not run down the companies. If we don't have such confidence, why do we invest in the first place rather than keeping all the money under the bed?
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loukycpa
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Re: role of dividends in retirement withdrawal strategy

Post by loukycpa »

I promise you you aren't telling me anything I don't already know.

A rational investor I think should be willing to accept a higher allocation to equities following a significant market correction than before it IMO.
Last edited by loukycpa on Wed Oct 07, 2020 5:51 pm, edited 1 time in total.
rkhusky
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

MathIsMyWayr wrote: Wed Oct 07, 2020 5:45 pm There is no magic about dividends, but limiting withdrawals to the amount of dividends payment might be quite safe if we can trust the managemens of broad companies, e.g., S&P 500, will not run down the companies. If we don't have such confidence, why do we invest in the first place rather than keeping all the money under the bed?
That is a completely different topic than the fact that the stock price goes down when a dividend is issued.
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Steve Reading
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Re: role of dividends in retirement withdrawal strategy

Post by Steve Reading »

loukycpa wrote: Wed Oct 07, 2020 5:18 pm VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.
More or less but the above is a bit misleading. Rkhusky is right, the dividend represents a loss in value as soon as paid off. So if you opt for funds with 2%+ dividends then, all else equal, these funds will spend longer in "bear market" territory.

Think of a dividend as a forced sale of stock. If you used higher-dividend funds, you're right that you'll ride out longer periods of time without personally having to click the sell button on your website. But it's only because the dividends is already akin to a sale of stock.

Personally, I'd rather my funds had no dividends and, if a Bear market came, I can then choose when to "pay myself a dividend" and how big of a dividend by selling as required instead of having some management decide it for me.
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Re: role of dividends in retirement withdrawal strategy

Post by KlangFool »

OP,


1) How much is the retirement expense?


2) How much taxes will the person pay in retirement?


In my opinion, there are two distinct groups of people in retirement.

(A) Those with retirement expenses in the 60K and below.

(B) Those that are at 60K and above.


For (A), taxes are not a big issue/expense. For (B), taxes are a significant expense. Conversely, for (B), the dividend just adds more fuel (taxes) to the expenses.

I keep 2 years of expense in CASH. I do not need to withdraw for my annual expense. I can tax manage and time-shift my withdrawal.

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Re: role of dividends in retirement withdrawal strategy

Post by marcopolo »

loukycpa wrote: Wed Oct 07, 2020 5:46 pm I promise you you aren't telling me anything I don't already know.
If you know the answer already, then what is the question?

Yes, if you take your 2% dividend (and assume it does not change your equity exposure, this seems to be the disagreement above you don't want to discuss), then yes, you only need to take 2% from the bond side. Are you looking for confirmation that 2 + 2 = 4?
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Re: role of dividends in retirement withdrawal strategy

Post by loukycpa »

I personally believe a stock can be overvalued or undervalued (versus another asset) for a long period of time. I don't believe stocks are perfectly priced by investors every minute of every day. And I don't like to sell an asset when it becomes cheaper than the price I was willing to pay for it yesterday when I still have faith in the business and its future cash flows just because of another investor may want or needs to liquidate their position. Therefore I don't buy the idea that every stock is immediately and neatly repriced the moment a dividend is paid.

I am also willing to tolerate a higher allocation to equities after a correction than I was before it. I believe that's rational.

Dividends become more relevant in the withdrawal phase I think.
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Re: role of dividends in retirement withdrawal strategy

Post by marcopolo »

loukycpa wrote: Wed Oct 07, 2020 6:07 pm I personally believe a stock can be overvalued or undervalued (versus another asset) for a long period of time. I don't believe stocks are perfectly priced by investors every minute of every day. And I don't like to sell an asset when it becomes cheaper than the price I was willing to pay for it yesterday when I still have faith in the business and its future cash flows just because of another investor may want or needs to liquidate their position. Therefore I don't buy the idea that every stock is immediately and neatly repriced the moment a dividend is paid.

I am also willing to tolerate a higher allocation to equities after a correction than I was before it. I believe that's rational.

Dividends become more relevant in the withdrawal phase I think.
If that is true, then it would seem you would want to re-invest the dividends rather than spend them during market downturns. Other wise you are reducing your equity exposure when prices are down instead of increasing them like you say you would want to do.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: role of dividends in retirement withdrawal strategy

Post by MathIsMyWayr »

marcopolo wrote: Wed Oct 07, 2020 6:21 pm
loukycpa wrote: Wed Oct 07, 2020 6:07 pm I personally believe a stock can be overvalued or undervalued (versus another asset) for a long period of time. I don't believe stocks are perfectly priced by investors every minute of every day. And I don't like to sell an asset when it becomes cheaper than the price I was willing to pay for it yesterday when I still have faith in the business and its future cash flows just because of another investor may want or needs to liquidate their position. Therefore I don't buy the idea that every stock is immediately and neatly repriced the moment a dividend is paid.

I am also willing to tolerate a higher allocation to equities after a correction than I was before it. I believe that's rational.

Dividends become more relevant in the withdrawal phase I think.
If that is true, then it would seem you would want to re-invest the dividends rather than spend them during market downturns. Other wise you are reducing your equity exposure when prices are down instead of increasing them like you say you would want to do.
There is a thing called moderation. Things are not black and white in the real life. OP stressed a withdrawal phase. If you need $10k and just received $10k in dividends, would you recommend throwing $10k into equity in a long stretch of a down market and withdraw $10K from bonds? It is a conflict between a retirement life and an investment life.
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Re: role of dividends in retirement withdrawal strategy

Post by abuss368 »

loukycpa wrote: Wed Oct 07, 2020 5:33 pm The market value of stock is the last price a buyer was willing to pay for it and a seller was willing to part with it for. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.

But again, not looking to recreate that debate. The reality is dividends are paid in cash, which assuming you don't reinvest, represent part of any annual withdrawal you need to get from your portfolio.
I can offer a real life strategy with a long time period. I have family retired with a simple approach of Total Market index funds. The dividends from the taxable account are deposited into the checking account. Nothing more is needed. Thus the withdrawal rate is under 2%. It works and can be done. The family is debt free which also makes a big difference.

Any RMDs for IRAs are simply reinvested into the taxable account and thus pushes up the dividends deposited to the checking account.

Honestly it does not impact me one bit in terms of any alternatives. The strategy works, and well, and it will just keep moving forward.
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Re: role of dividends in retirement withdrawal strategy

Post by abuss368 »

If you would like additional dividends or if you are building a passive income stream, you could add to your portfolio High Dividend (approx. 3.35% - 3.65%) and International High Dividend (4.00% - 4.50%).
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Re: role of dividends in retirement withdrawal strategy

Post by marcopolo »

MathIsMyWayr wrote: Wed Oct 07, 2020 6:34 pm
marcopolo wrote: Wed Oct 07, 2020 6:21 pm
loukycpa wrote: Wed Oct 07, 2020 6:07 pm I personally believe a stock can be overvalued or undervalued (versus another asset) for a long period of time. I don't believe stocks are perfectly priced by investors every minute of every day. And I don't like to sell an asset when it becomes cheaper than the price I was willing to pay for it yesterday when I still have faith in the business and its future cash flows just because of another investor may want or needs to liquidate their position. Therefore I don't buy the idea that every stock is immediately and neatly repriced the moment a dividend is paid.

I am also willing to tolerate a higher allocation to equities after a correction than I was before it. I believe that's rational.

Dividends become more relevant in the withdrawal phase I think.
If that is true, then it would seem you would want to re-invest the dividends rather than spend them during market downturns. Other wise you are reducing your equity exposure when prices are down instead of increasing them like you say you would want to do.
There is a thing called moderation. Things are not black and white in the real life. OP stressed a withdrawal phase. If you need $10k and just received $10k in dividends, would you recommend throwing $10k into equity in a long stretch of a down market and withdraw $10K from bonds? It is a conflict between a retirement life and an investment life.
Well, I am in retirement now and drawing from my portfolio.
And that is essentially what I do. No conflict here, my retirement life and investment life are one and the same.

For ease of implementation, I have all distributions from taxable accounts go to my cash management account.

But, I do rebalance periodically and at thresholds. So, if equities are down I will indeed sell bonds and buy equities, which amounts to the same as re-investing your dividends and withdrawing from bonds.

Isn't that what you want to do, buy (or sell less) when equities are down?
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Re: role of dividends in retirement withdrawal strategy

Post by Ferdinand2014 »

loukycpa wrote: Wed Oct 07, 2020 5:18 pm Thinking about withdrawal rates during retirement and the old rule of thumb of 4% being a safe annual withdrawal rate. I know there is concern the 4% is too high because bond yields are so much lower, but for now assume I wanted to use it as a guidepost.

Biggest concern I have always had is the possibility of retiring before a significant correction in the stock market followed by a lost decade for stocks (mid 1960s through early 80's for example).If this happens and assuming you either can't or don't want to reduce your annual withdrawals, I am presuming you are withdrawing heavily from the bond side of your portfolio, waiting on a recovery on the equity side. Maybe even exclusively from the bond side of a portfolio.

Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.

Not looking to recreate any of the discussions on total return versus dividend strategies. I understand that investors should generally be agnostic on where their return comes from (cap gain versus dividends) and focus should be on total return. I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market. (I say long run because IMO in short run market is a voting machine versus in long run a weighing machine, but digressing now).

VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.

Interested in hearing from those deep into retirement who may have lived through various cycles and how they weathered it, particularly the impact of dividends on their annual withdrawals throughout.
“If you’ve counted on your stock holdings to see you through retirement, you’re likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the “safe dividend flow” from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S. stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily. You can thus reasonably add into your retirement permanent income flow about half of the dividends from your stocks or stock funds.“ William Bernstein ‘A Critical Look at LifecycleInvesting’.

Also remember the dividend yield is a ratio of stock price to dividend. A yield can go down, but the dividend can still rise if the stock price rises faster than the dividend. In my case, for example, I am working towards a withdrawal of about 2-3% depending on market conditions and my saving rate by retirement. If I add in anticipated social security and a dividend yield of about 2%, under most circumstances I won’t need to bite into fixed income or equity shares. Keeping 5 years of safe assets when I retire and 10 years when both my wife and I are retired, should give us a solid cushion.
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

I am in retirement and I spend dividends from my taxable account, which is all stock. I also withdraw from my stock funds to fund living expenses. That will not change no matter what happens in the market.

I reinvest dividends in tax advantaged accounts and do all rebalancing there. I maintain a fixed asset allocation no matter what happens with the market.

Stock dividends are simply a minor annoyance, since they mean additional small transactions to enter into my financial software, without adding any value.
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Re: role of dividends in retirement withdrawal strategy

Post by abuss368 »

Ferdinand2014 wrote: Wed Oct 07, 2020 7:11 pm
loukycpa wrote: Wed Oct 07, 2020 5:18 pm Thinking about withdrawal rates during retirement and the old rule of thumb of 4% being a safe annual withdrawal rate. I know there is concern the 4% is too high because bond yields are so much lower, but for now assume I wanted to use it as a guidepost.

Biggest concern I have always had is the possibility of retiring before a significant correction in the stock market followed by a lost decade for stocks (mid 1960s through early 80's for example).If this happens and assuming you either can't or don't want to reduce your annual withdrawals, I am presuming you are withdrawing heavily from the bond side of your portfolio, waiting on a recovery on the equity side. Maybe even exclusively from the bond side of a portfolio.

Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.

Not looking to recreate any of the discussions on total return versus dividend strategies. I understand that investors should generally be agnostic on where their return comes from (cap gain versus dividends) and focus should be on total return. I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market. (I say long run because IMO in short run market is a voting machine versus in long run a weighing machine, but digressing now).

VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.

Interested in hearing from those deep into retirement who may have lived through various cycles and how they weathered it, particularly the impact of dividends on their annual withdrawals throughout.
“If you’ve counted on your stock holdings to see you through retirement, you’re likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the “safe dividend flow” from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S. stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily. You can thus reasonably add into your retirement permanent income flow about half of the dividends from your stocks or stock funds.“ William Bernstein ‘A Critical Look at LifecycleInvesting’.

Also remember the dividend yield is a ratio of stock price to dividend. A yield can go down, but the dividend can still rise if the stock price rises faster than the dividend. In my case, for example, I am working towards a withdrawal of about 2-3% depending on market conditions and my saving rate by retirement. If I add in anticipated social security and a dividend yield of about 2%, under most circumstances I won’t need to bite into fixed income or equity shares. Keeping 5 years of safe assets when I retire and 10 years when both my wife and I are retired, should give us a solid cushion.
That makes a lot of sense.
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Re: role of dividends in retirement withdrawal strategy

Post by pkcrafter »

Dividends - reinvest or not?

http://www.simplestockinvesting.com/SP5 ... eturns.htm

https://gfmasset.com/2019/07/75-of-sp-5 ... 1980-2019/

The problem with taking dividends is you don't get to choose when to and when NOT to take withdrawals.




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Re: role of dividends in retirement withdrawal strategy

Post by CyclingDuo »

pkcrafter wrote: Wed Oct 07, 2020 8:08 pm Dividends - reinvest or not?

The problem with taking dividends is you don't get to choose when to and when NOT to take withdrawals.
Sure you do.

You either click on "reinvest dividends" or you don't. The former puts the dividend right back into the same investment just as if you did not take any kind of withdrawal, the latter puts it in a pool of cash that you can spend, or you can use the dividend to purchase more shares of whatever fund, ETF or investment you would like to spend it on.

We all get to deal with dividends whether we want to or not. But stop with the hyperbole.... :oops:

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Re: role of dividends in retirement withdrawal strategy

Post by burritoLover »

Dividends are effectively the same as if the government forced you to sell a portion of your stock every quarter. If in a taxable account, you then get the privilege of paying taxes on that forced sale. Reinvestment of dividends is like forcing you to sell stock and then immediately buy it back. It is all pointless yet many still think that somehow a stock dividend is the same as bond dividend.

You have a pile of cash on a table. I walk up and hand you $10 of your own money and call it a dividend. You exclaim - “wow! dividends are awesome!”.
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Re: role of dividends in retirement withdrawal strategy

Post by Ferdinand2014 »

abuss368 wrote: Wed Oct 07, 2020 7:47 pm
Ferdinand2014 wrote: Wed Oct 07, 2020 7:11 pm
loukycpa wrote: Wed Oct 07, 2020 5:18 pm Thinking about withdrawal rates during retirement and the old rule of thumb of 4% being a safe annual withdrawal rate. I know there is concern the 4% is too high because bond yields are so much lower, but for now assume I wanted to use it as a guidepost.

Biggest concern I have always had is the possibility of retiring before a significant correction in the stock market followed by a lost decade for stocks (mid 1960s through early 80's for example).If this happens and assuming you either can't or don't want to reduce your annual withdrawals, I am presuming you are withdrawing heavily from the bond side of your portfolio, waiting on a recovery on the equity side. Maybe even exclusively from the bond side of a portfolio.

Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.

Not looking to recreate any of the discussions on total return versus dividend strategies. I understand that investors should generally be agnostic on where their return comes from (cap gain versus dividends) and focus should be on total return. I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market. (I say long run because IMO in short run market is a voting machine versus in long run a weighing machine, but digressing now).

VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.

Interested in hearing from those deep into retirement who may have lived through various cycles and how they weathered it, particularly the impact of dividends on their annual withdrawals throughout.
“If you’ve counted on your stock holdings to see you through retirement, you’re likely to be seriously disappointed. Yet, there is a small part of the equity portfolio that can be considered in the funding of retirement: the “safe dividend flow” from stock holdings. Although the value of stocks can fluctuate wildly, their stream of income is much more stable. At no point in the history of the U.S. stock market has its real dividend stream fallen by more than half, even during the Great Depression. During the most recent financial crisis, for example, although stock prices fell by more than 50%, dividends also dropped, but by only 23% from their peak, and only temporarily. You can thus reasonably add into your retirement permanent income flow about half of the dividends from your stocks or stock funds.“ William Bernstein ‘A Critical Look at LifecycleInvesting’.

Also remember the dividend yield is a ratio of stock price to dividend. A yield can go down, but the dividend can still rise if the stock price rises faster than the dividend. In my case, for example, I am working towards a withdrawal of about 2-3% depending on market conditions and my saving rate by retirement. If I add in anticipated social security and a dividend yield of about 2%, under most circumstances I won’t need to bite into fixed income or equity shares. Keeping 5 years of safe assets when I retire and 10 years when both my wife and I are retired, should give us a solid cushion.
That makes a lot of sense.
I look at my withdrawal investment risk from riskiest to least risky:

1.) Stocks
2.) Stock dividends
3.) Short term treasury’s
4.) Social Security

To calculate my 10 years of expenses that I wish to have in safe assets (short term treasury’s) at retirement, I take my estimated yearly expenses - ((1.5% of my retirement equity goal number to approximate dividends) - (estimated annual social security)) and X by 10. That number is what I want to have in treasury bills when both my wife and I are retired. As it turns out by chance, if I reach my goal number at retirement, that 10 years of safe assets as calculated will be about 10% short term treasury’s which is also what Warren Buffett suggested.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
dml130
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Re: role of dividends in retirement withdrawal strategy

Post by dml130 »

loukycpa wrote: Wed Oct 07, 2020 5:33 pm The market value of stock is the last price a buyer was willing to pay for it and a seller was willing to part with it for. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.
This is my understanding as well. The dividend payout should affect the book value, but not necessarily the market value (price of the stock), at least not right away. If we lived in a world where the market was 100% rational and efficient, and the book value always translated to the market value, then it makes sense that the market price would drop immediately and proportionally, but I don't think that's the case. I'm open to being incorrect though - If I'm wrong on this, I'd be curious to hear why.
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Schlabba
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Location: Netherlands

Re: role of dividends in retirement withdrawal strategy

Post by Schlabba »

loukycpa wrote: Wed Oct 07, 2020 5:18 pm ...
Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.
...
You're absolutely right. You don't need to spend your bonds when dividends are coming in from the equity side. The more dividends received the less bonds you spend, and therefore the longer your bonds will last you.

Dividends are a bit more stable compared to share prices: https://www.simplysafedividends.com/int ... ar-markets
I really like that trait, therefore I hold a large portion of my portfolio in the "FTSE All-World High Dividend Yield UCITS ETF", just like you suggested.

Because bonds last longer this way you could consider reducing your bonds allocation.

Also note that simply "paying yourself a dividend by selling stock" is not the same. Stock prices can be overly pessimistic or optimistic depending on the market sentiment. Dividends are simply a transfer from the company's bank account to yours.
mnugent512
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Re: role of dividends in retirement withdrawal strategy

Post by mnugent512 »

Fundamentally, a stock's value is realized when you buy or sell. The market value of a stock may fluctuate to reflect a dividend payout, but you have not "lost" that money unless you were to sell the stock the same day. There are many differences between dividends and capital gains, and whether they are in taxable or tax advantaged accounts. While most investors use mental systems or rules, the fundamentals of the investment don't change (e.g. an automatic dividend reinvestment is not the same as an equivalent asset appreciation, even though we may mentally account for them in the same way). Dividends are a source of income stream and realized cash, while stock appreciation is not. If that works best to meet your 4% annual plan, then it is a good plan. The tax implications of your withdrawals, and your peace of mind, are probably the two most important factors. Especially considering you aren't tilting your portfolio into any drastic yield-chasing strategies.
rkhusky
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Re: role of dividends in retirement withdrawal strategy

Post by rkhusky »

dml130 wrote: Wed Oct 07, 2020 9:37 pm
loukycpa wrote: Wed Oct 07, 2020 5:33 pm The market value of stock is the last price a buyer was willing to pay for it and a seller was willing to part with it for. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.
This is my understanding as well. The dividend payout should affect the book value, but not necessarily the market value (price of the stock), at least not right away. If we lived in a world where the market was 100% rational and efficient, and the book value always translated to the market value, then it makes sense that the market price would drop immediately and proportionally, but I don't think that's the case. I'm open to being incorrect though - If I'm wrong on this, I'd be curious to hear why.
Here are a few sites that explain the phenomena:

https://www.bogleheads.org/wiki/Why_did ... p_in_value

https://www.investopedia.com/articles/i ... prices.asp

https://www.mymoneyblog.com/explanation ... alues.html

https://www.investopedia.com/ask/answer ... -funds.asp

https://alignfinancial.com.au/2018/07/0 ... d-payment/

https://www.fool.com/knowledge-center/h ... idend.aspx

https://finance.zacks.com/stock-price-c ... -3571.html

With brokerages having systems that trade within microseconds of new information hitting the street, why would there be any lag in stock prices reacting to dividend payouts? And the date of the dividend payment is known long in advance of the actual payment. Absent any other new information, why would anyone pay the same price before and after a dividend payout, when the value of the company has clearly dropped?
aristotelian
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Re: role of dividends in retirement withdrawal strategy

Post by aristotelian »

rkhusky wrote: Thu Oct 08, 2020 7:09 am
dml130 wrote: Wed Oct 07, 2020 9:37 pm
loukycpa wrote: Wed Oct 07, 2020 5:33 pm The market value of stock is the last price a buyer was willing to pay for it and a seller was willing to part with it for. Period.

In the long run, yes dividends reduce eventual market value.

In the short run, I don't agree.
This is my understanding as well. The dividend payout should affect the book value, but not necessarily the market value (price of the stock), at least not right away. If we lived in a world where the market was 100% rational and efficient, and the book value always translated to the market value, then it makes sense that the market price would drop immediately and proportionally, but I don't think that's the case. I'm open to being incorrect though - If I'm wrong on this, I'd be curious to hear why.
Here are a few sites that explain the phenomena:

https://www.bogleheads.org/wiki/Why_did ... p_in_value

https://www.investopedia.com/articles/i ... prices.asp

https://www.mymoneyblog.com/explanation ... alues.html

https://www.investopedia.com/ask/answer ... -funds.asp

https://alignfinancial.com.au/2018/07/0 ... d-payment/

https://www.fool.com/knowledge-center/h ... idend.aspx

https://finance.zacks.com/stock-price-c ... -3571.html

With brokerages having systems that trade within microseconds of new information hitting the street, why would there be any lag in stock prices reacting to dividend payouts? And the date of the dividend payment is known long in advance of the actual payment. Absent any other new information, why would anyone pay the same price before and after a dividend payout, when the value of the company has clearly dropped?
Exactly. And if it were not true that the market adjusts instantly, then that delay could be exploited. Someone would invent an algorithm to exploit it, and then the price would adjust. If you think the market does not price in dividends, you could trade it and get very wealthy.
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loukycpa
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Re: role of dividends in retirement withdrawal strategy

Post by loukycpa »

Maybe in the end what is really more important is asset allocation (versus dividends).

If you set aside tax issues and anything won or lost by the timing of your withdrawals and rebalancing, assuming you are going to be rebalancing to a static asset allocation, total return is all that matters. Components don't. Your investment result will be the same. Is that a true statement?
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Schlabba
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Location: Netherlands

Re: role of dividends in retirement withdrawal strategy

Post by Schlabba »

loukycpa wrote: Thu Oct 08, 2020 1:26 pm Maybe in the end what is really more important is asset allocation (versus dividends).

If you set aside tax issues and anything won or lost by the timing of your withdrawals and rebalancing, assuming you are going to be rebalancing to a static asset allocation, total return is all that matters. Components don't. Your investment result will be the same. Is that a true statement?
In my post I was arguing there is a difference; They are more stable and they are like a variable withdrawal rate based on corporate profits, independent of P/E growth or shrinkage.

Its a different withdrawal strategy compared to others such as described here: https://www.bogleheads.org/wiki/Withdrawal_methods
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CyclingDuo
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Re: role of dividends in retirement withdrawal strategy

Post by CyclingDuo »

loukycpa wrote: Wed Oct 07, 2020 5:18 pm Thinking about withdrawal rates during retirement and the old rule of thumb of 4% being a safe annual withdrawal rate. I know there is concern the 4% is too high because bond yields are so much lower, but for now assume I wanted to use it as a guidepost.

Biggest concern I have always had is the possibility of retiring before a significant correction in the stock market followed by a lost decade for stocks (mid 1960s through early 80's for example).If this happens and assuming you either can't or don't want to reduce your annual withdrawals, I am presuming you are withdrawing heavily from the bond side of your portfolio, waiting on a recovery on the equity side. Maybe even exclusively from the bond side of a portfolio.

Assume that you started out 2/3 equities and 1/3 bonds. How long could you wait for an eventual recovery without having to sell stocks in that scenario, assuming you withdrawal exclusively from the bond side? I think it is good to think about this kind of what if scenario and how you would respond. Leaving out dividends, you would think maybe 8 to 9 years in simple high level math, right? But it really should be longer because you are getting some income from both sides of the portfolio. I know yields on both stocks and bonds are really low right now, and dividends are often cut during a prolonged recession, but still there is no question you can count on getting at least some part of your annual withdrawal from dividends.

Not looking to recreate any of the discussions on total return versus dividend strategies. I understand that investors should generally be agnostic on where their return comes from (cap gain versus dividends) and focus should be on total return. I know dividends represent capital leaving the companies you are invested and over the long run reduces the equity value assuming an efficient market. (I say long run because IMO in short run market is a voting machine versus in long run a weighing machine, but digressing now).

VTI yields about 1.5 to 1.6% right now. If you have an allocation to international this pushes things a bit higher though. And if one wanted to tilt value a bit and replace a portion of VTI with VTV or VYM, I can envision a portfolio that overall yields 2% or so overall. In other words getting a least half of your 4% nut from the portfolio income alone, so you really only need to get half of the 4% from withdrawals (on the bond side exclusively again if you retire followed by a big correction). So it seems to me you could really ride it out significantly longer than 8 to 9 years without having to sell any equities.

Interested in hearing from those deep into retirement who may have lived through various cycles and how they weathered it, particularly the impact of dividends on their annual withdrawals throughout.
Ignore the far left column of the graphic below that lists portfolio size in terms of amount needed to be invested. How many of us will have no other streams of income in retirement beyond our portfolio? Most of us will have other streams as well which means we don't need to focus solely on the left hand column. If you will have no other streams of retirement income, then you absolutely can focus on that far left column.

However, for most of us, focus on the three right hand columns of daily spending needs, monthly spending needs, and annual spending needs. What combination of income streams will provide for you to meet your needed numbers? Pension, SS, dividends, LTCG, rental income, royalties, part-time work, consulting, RMD's, annuities, etc...?

Image

We know under our current tax law, that qualified dividends in a taxable account are taxed the same as LTCG...

Image
Focus on the column above that fits your household definition for filing taxes, and you see how much you will pay in taxes on qualified dividends and or LTCG in a taxable account after other streams of income and adjustments to that income including the standard deduction are applied. In our own household situation, we can have up to $80K in taxable income (standard deduction goes up to $24,800 this year) before we would pay any tax on qualified dividends and or LTCG in our taxable account.

Sweeten the deal with your Roth IRA's where dividends are not a taxable issue which is a prime location for dividends that are not of the qualified version. Using the decade(s) leading up to retirement to organize what investments are where, control the amount of dividends in terms of their location and tax implications, understand the other income streams, and how much one will need daily/monthly/annually to meet the retirement household's income needs seems to be the answer to What role will dividends play in a retirement withdrawal strategy?

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
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