Vanguard advisor on dividends

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jainn
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Vanguard advisor on dividends

Post by jainn » Wed Sep 13, 2017 1:44 pm

https://advisors.vanguard.com/iwe/pdf/FA775916.pdf

Todd Schlanger: Yeah, so if you’re adding dividend strategies to the portfolio, you’re going to need to essentially put them in a part of the portfolio. You would either allocate to them as part of the equity portfolio, so essentially substituting what’s already there for these strategies, or as part of the fixed income sleeve. But, again, that entails certain risks.

Parker: Okay, so, Todd, one of the points that you make in the paper that I found really fascinating was that higher dividend yields don’t necessarily equate into higher returns. And you said that dividend-oriented equities are best viewed from a total-return perspective. Can you talk about what you mean by that?

Todd Schlanger: It’s interesting when you think about it, that dividends are different in terms of, let’s say, the interest you would receive from a bond in that they’re not a source of wealth creation. They’re really a distribution of capital. So when a dividend is essentially paid, it’s distributing part of the capital of an equity out to an investor.

Akweli Parker: So the stock itself doesn’t become more valuable?

Todd Schlanger: Exactly. The price of the stock will fall by the same amount of the dividend on the ex-dividend date. So what that means is that if you think about stocks with high dividend yields and stocks with low dividend yields, they shouldn’t really be positively or negatively impacted by the higher or lower dividend. And, actually, if you look over long periods of time, they tend to have pretty similar returns.

Akweli Parker: All right, so what is the appeal, then, of these dividend-oriented equity strategies that you write about?

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Re: Vanguard advisor on dividends

Post by pkcrafter » Wed Sep 13, 2017 2:23 pm

Akweli Parker: All right, so what is the appeal, then, of these dividend-oriented equity strategies that you write about?
That is the question. Not a very impressive discussion.

Paul
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Re: Vanguard advisor on dividends

Post by dbr » Wed Sep 13, 2017 2:31 pm

Well, it comes back to the point of why on earth is what you withdraw from a portfolio constrained to be the interest and dividends paid from the holdings. Historically there is a precedent that selling bonds or selling shares of stock was expensive and difficult to do in titrated amounts. Today selling any dollar amount of a mutual fund is simple and cost free. Receiving distributions that are not wanted actually creates a tax problem. Trusts often distribute at least the dividends and interest because the beneficiary will likely pay taxes at a lower rate than the trust would, but that does not prevent the trust from distributing more than dividends and interest.

snarlyjack
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Re: Vanguard advisor on dividends

Post by snarlyjack » Wed Sep 13, 2017 2:53 pm

I want to tell you a true story.

In the past 4 years my Grandfather & Mother died.
My grandfather had AL timers & my Mom had diabetes.
I helped take care of both of them, way before they died.

What I noticed was both my Grandfather & Mom were
always checking their checkbook register for their balance.
If the money wasn't in the check book register, they didn't
have it. Even though they had $thousands in savings. (For some
reason the checkbook register was a obsession to them?)

When my Mom died, I started studying the "Trinity Study,
4% rule" of selling off shares of the portfolio to fund themselves.
My Grandfather & Mother would not have been able to sell
off shares. But what they could do is have Vanguard distribute
the dividends into their checking account.

***I know, I know, someone is going to say that Vanguard would sell
off a % of the portfolio & send it to your checking account. But I' am
here to tell you it isn't that easy, mentally or psychologically.***

So I started studying dividend portfolios. In all my studies & I can
show you all kinds of reports a dividend strategy can & will perform
as well (if not better) than most of the strategy's out their. In my mind
(watching my Grandfather & Mother die & how they acted) a dividend
strategy makes a lot of sense for the long term investor like me.

I went into the study with a different mindset than most people. I went
into investing (from day #1) how am I going to get the money out
& support myself over the very long term. I try to learn from
other people's experiences. My Grandfather & Mother taught me a lot.

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Uncle Pennybags
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Re: Vanguard advisor on dividends

Post by Uncle Pennybags » Wed Sep 13, 2017 3:07 pm

Widows and orphans like dividends, old people too.
Widow-And-Orphan Stock Verizon is down 9% YTD; they still increased the dividend paying over 5%.
I know that is so last century, so am I.

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nedsaid
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Re: Vanguard advisor on dividends

Post by nedsaid » Wed Sep 13, 2017 3:11 pm

I don't know, I guess I cannot resist the dividend threads.

First of all, dividends are not free money. Though stocks are traded primarily as a multiple of earnings, assets on the balance sheet are taken into consideration. Higher levels of cash on the balance sheet tend towards higher P/E ratios. So if dividends are not paid, and the cash stacks up on the balance sheet, the market takes that into account. All other things being equal, if a company goes ex-dividend 50 cents a share, the share price will drop 50 cents a share that day.

Second, most of us will not have large enough portfolios to just live off the dividends and interest. So that will necessitate a total return strategy, relying on capital gains as well as portfolio income. The reason seniors prefer an income strategy is that while income is pretty steady and predictable, you never know when the capital gains will come. So this approach entails accepting the risk of volatile markets, crossing your fingers and hoping for the best.

Third, very low interest rates have complicated withdrawal strategies in retirement. If your bonds yield 6%, a 4% withdrawal rate is a cinch. All you have to do is harvest 2/3 of the interest, reinvest the rest, and not touch your principal. You could, in theory, increase your withdrawals each year because of compounding. Of course, you also had to pay attention to inflation rates as well and your purchasing power. The weakness of this approach is that higher interest rates imply higher inflation rates, long bonds historically yield 3% above inflation. So the reality is, the purchasing power of the portfolio decreases even though your principal is "growing." Even in this environment, you will have to have some stocks to (hopefully) stay ahead of inflation, and will need some capital gains.

Conversely, in a very low interest rate environment, inflation is also very low. So this helps. 2% yields aren't so bad with 1% inflation. But if you need 4% sustainable withdrawals from your portfolio, you won't have any interest to reinvest and you are 100% dependent upon stocks to keep you ahead of inflation. You are also more dependent upon capital gains. So this suggests perhaps that retirees take more chances and take a more equity heavy portfolio into retirement. Problem is that very low interest rates tend to make both stocks and bonds more expensive.

So really, investors should consider taking a portion of their nest egg and purchasing a Single Premium Immediate Annuity with it. With that portion of your portfolio, you have an effective sustainable withdrawal rate of more like 5% to 7% depending on age and depending on whether you have a single life or joint annuity. If you want inflation protection, it seems like your sustainable withdrawal rate is more like 4% with an annuity, somewhat lower for joint life.

I remember teasing other posters about why anyone should care about bond yields. If you are a bond fund investor, just create your own dividend. I teased about this, because even the most staunch total return investor knows in their heart of hearts that income from their portfolio is an important factor. Pretty much, your return from your bonds is your yield. So if both bond and dividend yields are low, that puts more pressure on the portfolio to create capital gains. Again, capital gains are not regular and predictable. The ultimate nightmare is a big, bad bear market just before or just after retirement.

My point is that interest payments and dividend payments are (mostly) predictable and reliable. Capital gains are neither predictable or reliable. Thus seniors would like to have a larger proportion of their withdrawals from their portfolio in retirement to come from income and a smaller proportion to come from capital gains. The higher of a proportion of your withdrawals that have to come from capital gains, the more risky your withdrawal strategy.

The thing I haven't covered yet is that for most of us, we will have to draw down on our portfolio balances in order to pay bills. A paradox is that a more stock heavy portfolio in most circumstances will have less of a "running out of money" problem than a more bond heavy portfolio. In other words, a more stock heavy portfolio might be more volatile but actually safer in the long term. If you do this however, you cross your fingers, and pray that you don't retire into a 1929-1942 or a 1968-1984 or a 2000-2012 secular bear market. 50% drops or more in stock prices are not good for stock heavy portfolios, particularly if you are having to take withdrawals. Hence the appeal of annuities.
A fool and his money are good for business.

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Re: Vanguard advisor on dividends

Post by RAchip » Wed Sep 13, 2017 3:12 pm

The first thing that occurs to me about this article is that Vanguard offers (and actively "sells") a number of dividend oriented funds. Since a representative of Vanguard seems to be saying that a dividend oriented investment strategy is pointless, I think Vanguard has created a problem for itself.

CantPassAgain
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Re: Vanguard advisor on dividends

Post by CantPassAgain » Wed Sep 13, 2017 3:15 pm

RAchip wrote:
Wed Sep 13, 2017 3:12 pm
The first thing that occurs to me about this article is that Vanguard offers (and actively "sells") a number of dividend oriented funds. Since a representative of Vanguard seems to be saying that a dividend oriented investment strategy is pointless, I think Vanguard has created a problem for itself.
Do you believe that dividends and price appreciation are completely independent, one having nothing to do with the other?

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Phineas J. Whoopee
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Re: Vanguard advisor on dividends

Post by Phineas J. Whoopee » Wed Sep 13, 2017 3:26 pm

dbr wrote:
Wed Sep 13, 2017 2:31 pm
Well, it comes back to the point of why on earth is what you withdraw from a portfolio constrained to be the interest and dividends paid from the holdings. ...
snarlyjack, in his post just below yours, first answers, then either misunderstands or obfuscates.

The answer from his anecdote is fear and ignorance. I would say those are reasonable, and even when or if a person learns the details, removing ignorance, fear may well remain.

Then comes the part that's problematic: a claim that the reasonable fear and ignorance decision is also mathematically superior in terms of total expected return.

If somebody wants to pursue a dividend strategy for purely emotional reasons I can't argue with them. If they want to conflate fear with math they can't be stopped, but it's important to point out to others the facts, so people don't get seduced by a fear-based technique because they think it's also reliably better for total return.

That, at least, is my answer to dbr's observation, based on snarlyjack's post.

snarlyjack, you don't need our permission to invest in whatever you like. On the other hand, you will have trouble getting posters to remain silent about claims of dividend superiority. I am not trying to convince you personally.

PJW

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Re: Vanguard advisor on dividends

Post by denovo » Wed Sep 13, 2017 3:34 pm

There's a very good argument in favor of dividends, which is nuanced.

When a company is doing well in its sector and making profits, there are two very common options.

1. Pay out or increase dividend to shareholders.

2. Use that money to acquire competitors or branch out into new fields and opportunities.

I'd say, on average, the second option has been value-destroying for investors, and most new acquisitions and expansions into new sectors have not panned out.

A most famous example is Microsoft, which has a cash cow in the form of its software and enterprise divisions. Microsoft has spent a lot of money getting into search engines (Bing) and video game systems (XBox), but they seem have to been money-losing propositions.

The shareholder would have been better if MSFT just kept on pumping up their dividends.

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Re: Vanguard advisor on dividends

Post by CantPassAgain » Wed Sep 13, 2017 3:41 pm

denovo wrote:
Wed Sep 13, 2017 3:34 pm
There's a very good argument in favor of dividends, which is nuanced.

When a company is doing well in its sector and making profits, there are two very common options.

1. Pay out or increase dividend to shareholders.

2. Use that money to acquire competitors or branch out into new fields and opportunities.

I'd say, on average, the second option has been value-destroying for investors, and most new acquisitions and expansions into new sectors have not panned out.

A most famous example is Microsoft, which has a cash cow in the form of its software and enterprise divisions. Microsoft has spent a lot of money getting into search engines (Bing) and video game systems (XBox), but they seem have to been money-losing propositions.

The shareholder would have been better if MSFT just kept on pumping up their dividends.
This is an argument for dividends that is at least plausible. But it still doesn't speak to a strictly dividend vs total return approach to investing. Ie individual companies might have good reasons for paying dividends versus reinvesting excess profits back into the company, and those reasons probably shouldn't have anything to do with an investors approach to wealth accumulation/decumulation.

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Re: Vanguard advisor on dividends

Post by patrick013 » Wed Sep 13, 2017 5:35 pm

CantPassAgain wrote:
Wed Sep 13, 2017 3:15 pm
RAchip wrote:
Wed Sep 13, 2017 3:12 pm
The first thing that occurs to me about this article is that Vanguard offers (and actively "sells") a number of dividend oriented funds. Since a representative of Vanguard seems to be saying that a dividend oriented investment strategy is pointless, I think Vanguard has created a problem for itself.
Do you believe that dividends and price appreciation are completely independent, one having nothing to do with the other?
Even the Phd's are undecided which theory to use. Not independent to me. If you
value the dividend like a BBB bond you have one value. If you value strictly
according to EPS using the PE method (equity value of production) you have the
other value. Happiness would seem to be a part of each value to arrive at
the desired market price you would want to pay. Better companies receive better
prices as well.
age in bonds, buy-and-hold, 10 year business cycle

RAchip
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Re: Vanguard advisor on dividends

Post by RAchip » Wed Sep 13, 2017 6:21 pm

So what am i supposed to do? If I buy an S&P index fund I get 2% dividends. If I buy the Vanguard high dividend index I get 3% dividends. I can build my own portfolio of 25 or so dividend aristocrats and get 3.5% or so dividends.

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Artsdoctor
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Re: Vanguard advisor on dividends

Post by Artsdoctor » Wed Sep 13, 2017 6:34 pm

Phineas J. Whoopee wrote:
Wed Sep 13, 2017 3:26 pm
dbr wrote:
Wed Sep 13, 2017 2:31 pm
Well, it comes back to the point of why on earth is what you withdraw from a portfolio constrained to be the interest and dividends paid from the holdings. ...
snarlyjack, in his post just below yours, first answers, then either misunderstands or obfuscates.

The answer from his anecdote is fear and ignorance. I would say those are reasonable, and even when or if a person learns the details, removing ignorance, fear may well remain.

Then comes the part that's problematic: a claim that the reasonable fear and ignorance decision is also mathematically superior in terms of total expected return.

If somebody wants to pursue a dividend strategy for purely emotional reasons I can't argue with them. If they want to conflate fear with math they can't be stopped, but it's important to point out to others the facts, so people don't get seduced by a fear-based technique because they think it's also reliably better for total return.

That, at least, is my answer to dbr's observation, based on snarlyjack's post.

snarlyjack, you don't need our permission to invest in whatever you like. On the other hand, you will have trouble getting posters to remain silent about claims of dividend superiority. I am not trying to convince you personally.

PJW
Extremely well put.

High-dividend funds do not perform better than their average-dividend counterparts, and most studies will argue they perform worse.

Vanguard offers these funds because of demand. They also offer plenty of other funds which most of us would never own. At the end of the day, it's a business and since we're all owners of the business, the more customers, the better we have it.

Re-read the article until it's clear: the fund's NAV decreases by the amount of the dividend. The dividend is not bonus money.

Getting dividends deposited into your checkbook is fine. If you choose to use this technique, no problem. But you have to acknowledge that it's an emotionally driven decision. We all do that to some degree in various areas throughout our lifetimes, and hopefully we know when we're doing it. If you don't realize that it's an emotionally-driven investment plan, then that's when it's a problem.

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Artsdoctor
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Re: Vanguard advisor on dividends

Post by Artsdoctor » Wed Sep 13, 2017 6:39 pm

RAchip wrote:
Wed Sep 13, 2017 6:21 pm
So what am i supposed to do? If I buy an S&P index fund I get 2% dividends. If I buy the Vanguard high dividend index I get 3% dividends. I can build my own portfolio of 25 or so dividend aristocrats and get 3.5% or so dividends.
The NAV of any of those equity funds will decrease by the same amount of the dividend. You're not making "more" with the high-dividend index and, in fact, you may be making less after taxes.

Investors have no control over when dividends are paid. In the best of situations, you'll be taxed at a favorable capital gains rate, but there are plenty of dividends which are not qualified.

If you sell appreciated assets, you do it when it's convenient for you. You're the one in control. You may even be able to offset the gain against other losses and pay nothing.

CantPassAgain
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Re: Vanguard advisor on dividends

Post by CantPassAgain » Wed Sep 13, 2017 6:43 pm

RAchip wrote:
Wed Sep 13, 2017 6:21 pm
So what am i supposed to do? If I buy an S&P index fund I get 2% dividends. If I buy the Vanguard high dividend index I get 3% dividends. I can build my own portfolio of 25 or so dividend aristocrats and get 3.5% or so dividends.
You could decide how much you want to withdraw regardless of dividend yield (a total return approach), and buy either fund. It wont make much of a difference:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Edited to add, for those that don't know: This is a total return "growth of $10,000" chart. It represents the value of a $10,000 lump sum investment, with dividends reinvested.

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nedsaid
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Re: Vanguard advisor on dividends

Post by nedsaid » Wed Sep 13, 2017 8:07 pm

In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
A fool and his money are good for business.

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Re: Vanguard advisor on dividends

Post by avalpert » Wed Sep 13, 2017 8:21 pm

nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
I get the increasing interest and concern for 'income' (whether rational or irrational isn't really relevant - we aren't particularly rational animals anyway). The thing is, we now have easy ways to mimic the income receiving nature of dividends while using a total return approach - so why wouldn't we encourage those people to set up a system of automatic withdrawals from mutual funds to give them the comfort of income without indulging the fantasy of 'dividend strategies'?

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Re: Vanguard advisor on dividends

Post by docbrown » Wed Sep 13, 2017 8:32 pm

snarlyjack wrote:
Wed Sep 13, 2017 2:53 pm
What I noticed was both my Grandfather & Mom were
always checking their checkbook register for their balance.
If the money wasn't in the check book register, they didn't
have it. Even though they had $thousands in savings. (For some
reason the checkbook register was a obsession to them?)
What you describe is a psychological deficiency that can be overcome with education and rational thinking. There is no inherent advantage to owning dividend stocks and there is probably a disadvantage, because you no longer own the whole market. It's better to tame one's irrational emotions about having to sell shares so that you can capture the return of the entire market, rather than choose an irrational, feel-good dividend strategy.

It's just like the inefficient snowball method of paying off debt. Disregarding interest rates and paying off the small balances first will nearly always result in you spending more money and taking more time until you pay off all your debts. The cheapest and quickest way to pay off all of one's debts is to start with the highest interest rates first. Full stop.
Roth was a Senator, not an acronym. Please, stop writing it in all caps.

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nedsaid
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Re: Vanguard advisor on dividends

Post by nedsaid » Wed Sep 13, 2017 8:40 pm

avalpert wrote:
Wed Sep 13, 2017 8:21 pm
nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
I get the increasing interest and concern for 'income' (whether rational or irrational isn't really relevant - we aren't particularly rational animals anyway). The thing is, we now have easy ways to mimic the income receiving nature of dividends while using a total return approach - so why wouldn't we encourage those people to set up a system of automatic withdrawals from mutual funds to give them the comfort of income without indulging the fantasy of 'dividend strategies'?
As I have posted before many times, despite my preference for an income based withdrawal strategy, I will have to use a total return approach because of the size of the portfolio. Even if all my withdrawals came from income, I would still have to rely on stocks to sustain the purchasing power of the portfolio. With a total return strategy I need stocks to help minimize the risk of running out of money. No matter how you slice it, low interest rates and higher valuations for stocks and bonds has greatly complicated sustainable withdrawal strategies and increased risks to retirees.
A fool and his money are good for business.

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Phineas J. Whoopee
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Re: Vanguard advisor on dividends

Post by Phineas J. Whoopee » Wed Sep 13, 2017 9:01 pm

nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio.
Yes, he has, many times. If he's explained his reasoning for it then I've never come across the explanation. I like paying attention to experts, but in subjects in which I'm reasonably competent they have to convince me, not just tell me. I don't mind quoting somebody if they express an idea and the reasons for it better than I can.
nedsaid wrote:He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?
I don't know, but I observe he dismisses the idea that dividends aren't important, without mentioning the part about stock prices going down by the same amount, which is often obscured by other reasons for prices to move that day. Dividends are a very important part of total return.

The fact that many of us dispute the idea that dividends are superior to other types of total return does not imply we believe they are inferior.

This is not a matter of either you're with us or you're against us. Many of us who post in these threads are neutral about dividends, unless discussing specific placement of assets or the risks of concentration into particular types of stocks.
nedsaid wrote:Also, as I have rather teasingly suggested, why should we be concerned about bond yields?
Yes, you were teasing, which is why I never responded to it before. Interest from bonds and dividends from stocks are completely different from each other. The first increases your wealth, and the second doesn't. The words used about bond funds may make it a little confusing, because formally they're corporations, but a mutual fund is nothing more nor less than a vehicle by which to own its underlying holdings. Stock fund returns come from stocks. Bond fund returns come from bonds. Owning a profit-seeking corporation is one thing. Lending money to be paid back with interest later is another.
nedsaid wrote:It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
If one wishes to learn Jack Bogle's motivations for saying particular things then thankfully there's still time to ask him directly.

PJW

snarlyjack
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Re: Vanguard advisor on dividends

Post by snarlyjack » Wed Sep 13, 2017 10:44 pm

Hello everyone,

If you were to go through all of my old posts when we
were discussing dividends in numerous forum's, I have
admitted that my preference for dividends is psychological
& emotional based.

That said, I believe a dividend strategy is not
a bad strategy. I think if a person believes in a strategy &
does not deviate from the strategy in good & bad times
(In other words long term buy & hold, & dca into it each
month) I think a person could do quite well with a strategy.

The Total Return approach (Total Stock Market Index Fund) is
a excellent fund. It is very hard to beat the TSM fund. The 4%
rule (Trinity Study) is a very sophisticated method of getting
money out of the funds. The variable method is even more
sophisticated. Index funds are the "cat's meow".

I think you guy's are great & your financial knowledge is way
above anyone else I know. I appreciate all of the communication
& advice.

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Re: Vanguard advisor on dividends

Post by abuss368 » Wed Sep 13, 2017 11:04 pm

nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
Excellent post and very good point about Mr. Bogle.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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TD2626
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Re: Vanguard advisor on dividends

Post by TD2626 » Wed Sep 13, 2017 11:12 pm

I think that there can be another argument for the dividend strategy besides behavioral economics / emotional considerations: convenience.

The income approach allows for one to get income without hassle. Receiving dividends is simple - you just get a regular check. (taxes are the same regardless of reinvestment). To get income from capital gains in taxable can require a lot of work and hassle - you may need to track down cost basis records, decide which shares to sell (spec ID with hundreds of small share lots can be hard) and do a 1099-B on the tax return.

There are other minor effects:
-With a dividend approach, you may get an easy, small, (but weak) proxy for value-tilt.
-A "spend the dividends" withdrawal strategy is also an easy (but weak) proxy for the variable percentage withdrawal strategy.

For those who have the ability to get by on a 2% withdrawal rate, the dividend strategy may be very reasonable for the convenience reasons above. Those who feel this way could consider a small tilt towards higher dividend yield stocks and longer duration/higher yield bonds, while keeping most of the portfolio in Total Stock/Total International/Total bond. The overall stock/bond allocation would need to be adjusted so that the tilt did not unintentionally increase risk.

It is important, though, that everyone understand that (due to the Modigliani-Miller Theorem), it is irrelevant where your total return comes from. That works both ways - dividends aren't free money and dividend stocks aren't expected to magically outperform. However, dividend stocks aren't expected to underperform, so a bit of a tilt toward them if the investor wants convenience may be justified.

However, such an investor would have to be very experienced and knowledgeable.

Someone who needs 4% of their portfolio per year likely shouldn't try to chase dividends because this would require too large a tilt towards high dividend yield stocks or higher-returning bonds. One must avoid unknowingly adding risk (beyond willingness/ability/need) to get higher income.

A total return strategy is probably best for most, in my opinion.

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Re: Vanguard advisor on dividends

Post by JoMoney » Thu Sep 14, 2017 6:14 am

snarlyjack wrote:
Wed Sep 13, 2017 2:53 pm
... I went into investing (from day #1) how am I going to get the money out & support myself over the very long term. ...
I had the same consideration, which is what lead me to giving up my individual stock portfolio and into low cost broad market index fund. Too many opportunities for unforced errors when juggling individual stock portfolio. Trying to decide when to sell, or not to sell, or being forced to sell by a merger/buyout... Being able to average in (and out) of a broad average of stocks simply and inexpensively checked all the boxes.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Vanguard advisor on dividends

Post by dbr » Thu Sep 14, 2017 9:25 am

nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
Yes, I think that is another of Mr. Bogle's statements that seems puzzling or even inexplicable. The history of such things is that we never ever really find out what the context of the statement was and what was really meant.

It is possible, by the way, that one can argue for a shift to a riskier higher returning portfolio when bond returns are historically low. But that argument would be one based on consideration of total return with no relationship to income.

A big part of the conversation involving people talking past each other is what it is a person means by income. In my world view a portfolio has return but the word income does not apply. Income is what a person has in their cash flow accounting. The connection to a portfolio is that one can withdraw money from a portfolio to obtain income. How that withdrawal is actually made is irrelevant. The concept of "income from a portfolio" is a non-existent and meaningless concept. This is a different conversation from an accountant talking about income to the portfolio, a very important difference that is part of the confusion.

An important distinction is that if income from a portfolio is a meaningful concept it is also something that is not under control of the investor, being subject to the whims of interest rates and dividend rates. The investor can only control that by making gross manipulations of his assets to try to engineer "income." I don't think that is good investment management. A person who simply withdraws money by whatever means has independent control of how much income then appears in his cash flow together with control over the fate of his investments. There is lots and lots of analysis regarding how to plan the compromise between withdrawal and portfolio growth. Simply taking dividends means a person is not even looking at the future of the portfolio. This would be irresponsible financial management. The only out is that one is implicitly doing that planning. For example, if withdrawing 2% dividends is the plan, that is safe. In fact it is too safe, but it is safe. If that investor chases dividends to the 3% withdrawal, it is still safe, at least assuming some of the assets are in stocks. It could be an irony that shifting from some bonds to some stocks saves an investor from having too little in stocks, then it might be good. But that is a special case.

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Re: Vanguard advisor on dividends

Post by nedsaid » Thu Sep 14, 2017 2:20 pm

Phineas J. Whoopee wrote:
Wed Sep 13, 2017 9:01 pm
nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio.
Yes, he has, many times. If he's explained his reasoning for it then I've never come across the explanation. I like paying attention to experts, but in subjects in which I'm reasonably competent they have to convince me, not just tell me. I don't mind quoting somebody if they express an idea and the reasons for it better than I can.
nedsaid wrote:He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?
I don't know, but I observe he dismisses the idea that dividends aren't important, without mentioning the part about stock prices going down by the same amount, which is often obscured by other reasons for prices to move that day. Dividends are a very important part of total return.

The fact that many of us dispute the idea that dividends are superior to other types of total return does not imply we believe they are inferior.

This is not a matter of either you're with us or you're against us. Many of us who post in these threads are neutral about dividends, unless discussing specific placement of assets or the risks of concentration into particular types of stocks.
nedsaid wrote:Also, as I have rather teasingly suggested, why should we be concerned about bond yields?
Yes, you were teasing, which is why I never responded to it before. Interest from bonds and dividends from stocks are completely different from each other. The first increases your wealth, and the second doesn't. The words used about bond funds may make it a little confusing, because formally they're corporations, but a mutual fund is nothing more nor less than a vehicle by which to own its underlying holdings. Stock fund returns come from stocks. Bond fund returns come from bonds. Owning a profit-seeking corporation is one thing. Lending money to be paid back with interest later is another.
nedsaid wrote:It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
If one wishes to learn Jack Bogle's motivations for saying particular things then thankfully there's still time to ask him directly.

PJW
Thank you for your thoughtful and detailed response. This would be an excellent issue to raise with Mr. Bogle at the next Bogleheads Conference.

My suspicion is that he will say something like what I have said above. That is that interest and dividends are more reliable and predictable than capital gains. Senior citizens are not irrational in wanting reliable and predictable. That all being said, I will likely use a total return approach in retirement because of portfolio size.
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Re: Vanguard advisor on dividends

Post by nedsaid » Thu Sep 14, 2017 2:30 pm

avalpert wrote:
Wed Sep 13, 2017 8:21 pm
nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
I get the increasing interest and concern for 'income' (whether rational or irrational isn't really relevant - we aren't particularly rational animals anyway). The thing is, we now have easy ways to mimic the income receiving nature of dividends while using a total return approach - so why wouldn't we encourage those people to set up a system of automatic withdrawals from mutual funds to give them the comfort of income without indulging the fantasy of 'dividend strategies'?
The reality is that capital gains don't arrive in predictable chunks on a quarterly basis. I lot of the stock market gains occur in short, violent bursts upward. You never know when this will happen, just as you never know when a bear market will happen. One certainly doesn't want to sell stocks to pay bills at a market bottom. Again, the more reliant you are upon capital gains, the more risky your withdrawal strategy.

There are ways to work around market volatility but everything has its drawbacks. For example, many people don't like even the Single Premium Immediate Annuities. A good product but it has its drawbacks. Bucket strategy? Very controversial here and you hear a lot here about mental accounting. If your portfolio is too conservative, you might be increasing the risk of running out of money. Pretty much, even if we know the returns from stocks over the next 30 years, we don't know when that return will arrive. That is the problem.
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Re: Vanguard advisor on dividends

Post by ThrustVectoring » Thu Sep 14, 2017 2:36 pm

CantPassAgain wrote:
Wed Sep 13, 2017 3:15 pm
RAchip wrote:
Wed Sep 13, 2017 3:12 pm
The first thing that occurs to me about this article is that Vanguard offers (and actively "sells") a number of dividend oriented funds. Since a representative of Vanguard seems to be saying that a dividend oriented investment strategy is pointless, I think Vanguard has created a problem for itself.
Do you believe that dividends and price appreciation are completely independent, one having nothing to do with the other?
The value of a birthday card with a twenty dollar bill in it is exactly the same as the value of a birthday card plus the value of a twenty dollar bill. Dividends shouldn't matter from a total return perspective.

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Re: Vanguard advisor on dividends

Post by CantPassAgain » Thu Sep 14, 2017 2:50 pm

ThrustVectoring wrote:
Thu Sep 14, 2017 2:36 pm
CantPassAgain wrote:
Wed Sep 13, 2017 3:15 pm
RAchip wrote:
Wed Sep 13, 2017 3:12 pm
The first thing that occurs to me about this article is that Vanguard offers (and actively "sells") a number of dividend oriented funds. Since a representative of Vanguard seems to be saying that a dividend oriented investment strategy is pointless, I think Vanguard has created a problem for itself.
Do you believe that dividends and price appreciation are completely independent, one having nothing to do with the other?
The value of a birthday card with a twenty dollar bill in it is exactly the same as the value of a birthday card plus the value of a twenty dollar bill. Dividends shouldn't matter from a total return perspective.
I agree. My question was specifically for RAchip who is a notorious total return skeptic.

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Re: Vanguard advisor on dividends

Post by avalpert » Thu Sep 14, 2017 2:57 pm

nedsaid wrote:
Thu Sep 14, 2017 2:30 pm
avalpert wrote:
Wed Sep 13, 2017 8:21 pm
nedsaid wrote:
Wed Sep 13, 2017 8:07 pm
In Snarlyjack's defense, John Bogle has talked about increasing the income from a retirement portfolio. He suggested using a slice of a stock portfolio for higher dividend paying stocks and also coupling US Total Bond Market Index with an investment grade Corporate Bond Fund. If income generated by a portfolio was not important, why would Mr. Bogle discuss this?

Also, as I have rather teasingly suggested, why should we be concerned about bond yields? It would seem that bond yields don't matter as you could create your own dividend by selling shares. I know this is borderline silly, but I am trying to make a point. Pretty much I am saying that income from a portfolio does matter. As I get older, I get more interested in income. Most every older person that I know is concerned about income from their investments. I get the sense here that this is an irrational concern. Are these people, Mr. Bogle included, just off their rocker? I don't think so. This might all be psychology at work but this is an issue that is important to a lot of people for whatever reason.
I get the increasing interest and concern for 'income' (whether rational or irrational isn't really relevant - we aren't particularly rational animals anyway). The thing is, we now have easy ways to mimic the income receiving nature of dividends while using a total return approach - so why wouldn't we encourage those people to set up a system of automatic withdrawals from mutual funds to give them the comfort of income without indulging the fantasy of 'dividend strategies'?
The reality is that capital gains don't arrive in predictable chunks on a quarterly basis. I lot of the stock market gains occur in short, violent bursts upward. You never know when this will happen, just as you never know when a bear market will happen. One certainly doesn't want to sell stocks to pay bills at a market bottom. Again, the more reliant you are upon capital gains, the more risky your withdrawal strategy.
You don't need capital gains to come on a predictable basis in order to withdraw a consistent amount from your portfolio - that is what all the safe withdrawal research is really about. You sell stocks when you need to use the capital - you shouldn't really care whether it is a bottom or a top. You can set up your account to withdraw proportionally from your portfolio $x on a monthly/quarterly/annually basis and transfer that amount to your checking/savings account to fund your cash flow. It can be transparent to you (just like dividends as a withdrawal of capital from your portfolio is transparent). As far as the individual is concerned it would be acting as 'income' in exactly the same way as a dividend.
Very controversial here and you hear a lot here about mental accounting. If your portfolio is too conservative, you might be increasing the risk of running out of money.
Of course it is mental accounting - we are talking in the context of addressing a behavioral need to feel like you have stead income. The question is are they better off doing their mental accounting through a dividend lens or a total return lens - I'd say in every case they would be better off with the latter so those who suggest the reason they are focusing on dividends is to have steady 'income' from their portfolio should be nudged towards an automatic withdrawal system that uses the total portfolio value.
Pretty much, even if we know the returns from stocks over the next 30 years, we don't know when that return will arrive. That is the problem.
Dividends don't address that problem - you might have a good idea of when they will arrive but you don't know what the value will be.

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Re: Vanguard advisor on dividends

Post by snarlyjack » Thu Sep 14, 2017 3:38 pm

I went on the internet & read the "Modiglinni-Miller Theorem"
as suggested by TD2626. It was a very interesting theorem.
(I would suggest everyone google it).

One of the things the Theorem talks about is how a company
operates financially. We have had the conversation in the forum
about what kind of stocks we like to invest in.

To personalize it: If I were to loan you money, I would want
interest paid to me & the principal eventually returned. (Just
like a bank would require). I realize loans & investments are
different. However, as a "person" with money the company who is
selling shares must entice me to invest in them or I'll invest
in another company that will entice me.

In other words what do I get out of the thing. "A bird in the hand
is worth two birds in the bush". What's the enticement? Why should
I invest in them? What's in it for me? Dividends are a small enticement.

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Re: Vanguard advisor on dividends

Post by spdoublebass » Thu Sep 14, 2017 4:21 pm

nedsaid wrote:
Thu Sep 14, 2017 2:20 pm


My suspicion is that he will say something like what I have said above. That is that interest and dividends are more reliable and predictable than capital gains. Senior citizens are not irrational in wanting reliable and predictable. That all being said, I will likely use a total return approach in retirement because of portfolio size.
It has been nice to watch this discussion unfold. I would also like to know more about Mr. Bogle's statement. I have a question about it.

Let me state upfront, I do not ask this for myself, I'm only curious about the answer. I am a new investor following a 3 fund(ish) approach. This question doesn't apply to me.

I understand both the total return and dividend argument. My question is when people mix the two, or as Bogle stated add a slice of something, how does this work? And why?

If you have a large amount and are retired, it doesn't really matter much I guess. If you sell stock or live off of dividends.

If you don't have a huge portfolio, I think you are better off with total return. This "might" give you the best chance for your portfolio to grow.

For myself, if I add a slice of let's say high dividend yield (VYM) to my TSM, what good does it do me?
Let's say I have a portfolio valued at 1 million.... I'll keep this simple, if I am in retirement with a 50/50 AA and have a 10% slice (of equities) of VYM, that's still only $50K. Is that even worth it?

Also, it would seem to me that if you are doing the dividend approach the number of shares matter. To get a slice as MR. Bogle said, should you exchange some TSM closer to retirement? Or should you accumulate it over time? If you always hold a 10% slice, you could be missing out on larger gains by not having that money in TSM.

Again I'm just curious as to how one would implement this.
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Re: Vanguard advisor on dividends

Post by dbr » Thu Sep 14, 2017 4:23 pm

snarlyjack wrote:
Thu Sep 14, 2017 3:38 pm
Dividends are a small enticement.
Only if dividends are an enticement. Whether or why dividends would be an enticement is a large part of what these discussions are all about. Certainly if a person wants dividends the choice is there.

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Re: Vanguard advisor on dividends

Post by dbr » Thu Sep 14, 2017 4:35 pm

spdoublebass wrote:
Thu Sep 14, 2017 4:21 pm

I understand both the total return and dividend argument. My question is when people mix the two, or as Bogle stated add a slice of something, how does this work? And why?

The way you can mix the two is by assuming or arguing or hoping that stocks that pay more in dividends also return more. Failing only that dividend paying may be a poor proxy for value factor loading, data says paying more in dividends does not result in higher return. In short, there isn't any mixing to be had. But that is also not what Mr. Bogle was talking about. Mr. Bogle was talking about withdrawing more money from your portfolio when withdrawals are set by dividends by investing in something that pays higher dividends, most especially by replacing poor yields from bonds with better yields from some kinds of stocks. There is no return under discussion in that conversation.

If you have a large amount and are retired, it doesn't really matter much I guess. If you sell stock or live off of dividends.

No matter what the amount if you live off dividends you have to take what is on offer or engineer your portfolio to increase what is on offer. Otherwise you take withdrawals independently of what dividends you do or don't receive and you design your portfolio to meet more meaningful goals. Of course a retiree very likely does take and spend the dividends that exist. One seldom engineers a portfolio to avoid them except in rare cases. The retiree might withdraw and spend more than the dividends or might spend less than the dividends and reinvest the excess.

If you don't have a huge portfolio, I think you are better off with total return. This "might" give you the best chance for your portfolio to grow.

Portfolio growth is determined by return, contributions, and withdrawals. Dividends have nothing to with it unless investing in dividend payers increases return allowing for risk or unless one arbitrarily decide that withdrawals have to be equal to dividends. Some of this amounts to no more than third grade arithmetic.

For myself, if I add a slice of let's say high dividend yield (VYM) to my TSM, what good does it do me?
Let's say I have a portfolio valued at 1 million.... I'll keep this simple, if I am in retirement with a 50/50 AA and have a 10% slice (of equities) of VYM, that's still only $50K. Is that even worth it?

Based on the available data there is no significant benefit. It might be you end up a little higher loaded on the value factor but you also end up a little less diverse relative to market concentration.

Also, it would seem to me that if you are doing the dividend approach the number of shares matter. To get a slice as MR. Bogle said, should you exchange some TSM closer to retirement? Or should you accumulate it over time? If you always hold a 10% slice, you could be missing out on larger gains by not having that money in TSM.

Again I'm just curious as to how one would implement this.

If you want to engineer your portfolio to pay out more in dividends you invest some larger or smaller fraction of it in assets that pay higher dividends. I don't understand why there is a question about how one would implement this.

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Re: Vanguard advisor on dividends

Post by spdoublebass » Thu Sep 14, 2017 5:01 pm

dbr wrote:
Thu Sep 14, 2017 4:35 pm

If you want to engineer your portfolio to pay out more in dividends you invest some larger or smaller fraction of it in assets that pay higher dividends. I don't understand why there is a question about how one would implement this.
[/quote]

You answered my question above. Thanks.

I didn't literally mean How does one do it, I meant more when should one.

If you invest for 30 years for total return, it doesn't seem wise to switch to a dividend approach in retirement. That quote from Bogle has been discussed before on the forums. People talk about what it means but never say what it would make them change.

All I was questioning is whether or not this is something you can choose to do later on or is this something you have to choose to do earlier. Maybe I'm missing something though, which could be the case. I am definitely not an authority on these subjects. Only trying to learn.
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Re: Vanguard advisor on dividends

Post by snarlyjack » Thu Sep 14, 2017 5:32 pm

spdoublepass,

Nice meeting you.

From everything I have read, a investor should stick with
their strategy that they initially started with (Total Return or
Dividend Investing).

If you sold out of the TMS fund to invest in the High Dividend
Yield Index fund you would incur capital gains tax. Which
would not make any sense.

If you had a "income event" and were sitting on $50,000.
in cash, that would be another story. I think the phrase were
looking for is : do no harm. Every situation is different.
I would be reluctant to sell out of TMS & go into VHDYX.
When I started in VHDYX I was a new investor with new cash.
Their was no positioning or taxes due, it was a clean investment.

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Re: Vanguard advisor on dividends

Post by dbr » Thu Sep 14, 2017 5:43 pm

spdoublebass wrote:
Thu Sep 14, 2017 5:01 pm
dbr wrote:
Thu Sep 14, 2017 4:35 pm

If you want to engineer your portfolio to pay out more in dividends you invest some larger or smaller fraction of it in assets that pay higher dividends. I don't understand why there is a question about how one would implement this.
You answered my question above. Thanks.

I didn't literally mean How does one do it, I meant more when should one.

If you invest for 30 years for total return, it doesn't seem wise to switch to a dividend approach in retirement. That quote from Bogle has been discussed before on the forums. People talk about what it means but never say what it would make them change.

All I was questioning is whether or not this is something you can choose to do later on or is this something you have to choose to do earlier. Maybe I'm missing something though, which could be the case. I am definitely not an authority on these subjects. Only trying to learn.
[/quote]

The issue in the context of Mr. Bogle's comment comes when a person wants to take withdrawals from the portfolio rather than making contributions or just leaving it alone. The dividend investor decides at that point that withdrawals have to be dividends paid by the investments in the portfolio and he therefore withdraws whatever is paid in dividends rather than leaving them to accumulate in one investment or another. This implies that everything that is paid is spent and that you can only spend what is paid. As a consequence if the dividend investor wants larger withdrawals he has to find investments that pay larger dividends. An example is Bogle's investor who is not getting enough in dividends from bonds and is being advised to sell the bonds and buy some stocks that pay more. An alternative which is NOT "the" total return approach is that one can take withdrawals by directly cashing some or all of the dividends, by leaving the dividends in the portfolio and selling some shares to take the withdrawal, by reinvesting the dividends in some holdings in the portfolio and then selling some share, or whatever combination a person can imagine because it doesn't matter beyond some tax considerations in taxable accounts.

From my point of view a person would never take a dividend approach. So the question doesn't arise.

But it is more than that. Total return is not an approach. Total return is the basic mathematics of how you account for a portfolio that

new portfolio value = old portfolio value + return +contributions - withdrawals


and

return = capital gain + dividends and interest


The dividend approach seems to be a conscious decision to ignore basic math. Why one would start doing that at some particular point or another is unexplained. In any case the dividend investor does not "not do" total return. Again, the dividend investor that attends to risk and return has to do so based on evidence or a belief that he is selecting a subset of the total market that offers a better combination of risk and return than the total market. If you believe that, then you would do it from the beginning and not change at any point.

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Re: Vanguard advisor on dividends

Post by avalpert » Thu Sep 14, 2017 5:46 pm

snarlyjack wrote:
Thu Sep 14, 2017 5:32 pm
spdoublepass,

Nice meeting you.

From everything I have read, a investor should stick with
their strategy that they initially started with (Total Return or
Dividend Investing).

If you sold out of the TMS fund to invest in the High Dividend
Yield Index fund you would incur capital gains tax. Which
would not make any sense.
If you bought into the high dividend index you are paying taxes every year on the distributions which doesn't make sense either. It makes so little sense that depending on the gains it may very well be worth switching away from that strategy as soon as you can. In other words, an investor should not stick with their strategy just because they started with it - there are some strategies that they should definitely switch from when they see the light.

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Re: Vanguard advisor on dividends

Post by pkcrafter » Thu Sep 14, 2017 6:16 pm

Meir Statman and the Dividend Puzzle

Meir Statman on dividends. From the book: Finance for Normal People

Why then do so many investors care if their money is in their dividend pocket or their capital pocket? This is what economist Fischer Black called “The Dividend Puzzle.”

“Normal-ignorant investors (Statman's term) frame the capital of a stock as a fruit tree and the dividends as it's fruit. In that frame, collecting dividends and spending them does not diminish the capital of the stock any more than picking fruit off the tree diminishes the size of the tree.”

In the correct frame, we consider an alternative to consuming the fruit, i.e., selling the fruit and buying other fruit trees with the proceeds. That would have grown the orchard. Similarly, reinvesting the dividends rather than selling them would have grown our capital.”
Normal-knowledgeable investors view the correct frame for dividends and capital. They know that $1000 in “homemade” dividends from the sale of shares is identical in substance to $1000 from a cashed dividend check.
Substance is the same, only the form is different..

Franco Modigliani won the Nobel Prize in economics (1985), in part for an article on dividends he co-authored with with Merton Miller. The press asked for a one sentence description of the joint work. Miller replied, “Moving money from your left pocket to your right pocket won't make you rich.”

Ok, there are are a lot of behavioral reasons why investors falsely believe dividends provide something extra, but there is another, more sobering problem—taxes.
Consider the case in which the tax rate on dividends is 20%, equal to the rate on capital gains. The $40 current price of your shares is lower than the $100 you paid when you bought them, such that you have a $60 unrealized loss per share.

You create a $1000 homemade dividend by selling 25 shares at $40each. The 20% tax rebate that comes the realizing the loss amounts to $12/share, increasing your wealth by $300. In contrast, the 20% tax on the $1000 company-paid dividend reduces your wealth by $200.

Now consider the case in which the $125 current price of shares is higher that the $100 price you paid when you bought them, such that you realize a $25 gain when you sell them.

You create a $1000 homemade dividend by selling 6 shares at $125 each. The 20% tax that comes with realizing gains amounts to $5/share, reducing your wealth by $40. In contrast, the 20% tax on $1000 company paid dividends reduces your wealth by $200.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Vanguard advisor on dividends

Post by spdoublebass » Thu Sep 14, 2017 6:53 pm

dbr wrote:
Thu Sep 14, 2017 5:43 pm

The issue in the context of Mr. Bogle's comment comes when a person wants to take withdrawals from the portfolio rather than making contributions or just leaving it alone. The dividend investor decides at that point that withdrawals have to be dividends paid by the investments in the portfolio and he therefore withdraws whatever is paid in dividends rather than leaving them to accumulate in one investment or another. This implies that everything that is paid is spent and that you can only spend what is paid. As a consequence if the dividend investor wants larger withdrawals he has to find investments that pay larger dividends. An example is Bogle's investor who is not getting enough in dividends from bonds and is being advised to sell the bonds and buy some stocks that pay more. An alternative which is NOT "the" total return approach is that one can take withdrawals by directly cashing some or all of the dividends, by leaving the dividends in the portfolio and selling some shares to take the withdrawal, by reinvesting the dividends in some holdings in the portfolio and then selling some share, or whatever combination a person can imagine because it doesn't matter beyond some tax considerations in taxable accounts.

From my point of view a person would never take a dividend approach. So the question doesn't arise.

But it is more than that. Total return is not an approach. Total return is the basic mathematics of how you account for a portfolio that

new portfolio value = old portfolio value + return +contributions - withdrawals


and

return = capital gain + dividends and interest


The dividend approach seems to be a conscious decision to ignore basic math. Why one would start doing that at some particular point or another is unexplained. In any case the dividend investor does not "not do" total return. Again, the dividend investor that attends to risk and return has to do so based on evidence or a belief that he is selecting a subset of the total market that offers a better combination of risk and return than the total market. If you believe that, then you would do it from the beginning and not change at any point.
Really well said.
Thank you for taking the time to explain.

I only asked my question because every time I read that quote, I always wondered who exactly he was addressing.

Very grateful towards this forum. Thanks.
Resist much, obey little.

RAchip
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Re: Vanguard advisor on dividends

Post by RAchip » Thu Sep 14, 2017 8:00 pm

If you have $10mm to invest in equities and you need $300k gross income, what is better: (1) vanguard high dividend index (that pays 3% dividends , or the full $300k you need) or (2) vanguard S&P index (that pays a little less than 2% dividends and would require you to sell bits of your fund shares every quarter), or (3) something else?

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Re: Vanguard advisor on dividends

Post by avalpert » Thu Sep 14, 2017 8:26 pm

RAchip wrote:
Thu Sep 14, 2017 8:00 pm
If you have $10mm to invest in equities and you need $300k gross income, what is better: (1) vanguard high dividend index (that pays 3% dividends , or the full $300k you need) or (2) vanguard S&P index (that pays a little less than 2% dividends and would require you to sell bits of your fund shares every quarter), or (3) something else?
If that was the extent of your needs any basic allocation should support it indefinitely. If you were asking was was best I would say some allocation stock/bond mix between 75-25% (depending on your comfort with volatility) using VT and your preferred safe bond fund (or individual Treasuries).

dbr
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Re: Vanguard advisor on dividends

Post by dbr » Fri Sep 15, 2017 9:46 am

avalpert wrote:
Thu Sep 14, 2017 8:26 pm
RAchip wrote:
Thu Sep 14, 2017 8:00 pm
If you have $10mm to invest in equities and you need $300k gross income, what is better: (1) vanguard high dividend index (that pays 3% dividends , or the full $300k you need) or (2) vanguard S&P index (that pays a little less than 2% dividends and would require you to sell bits of your fund shares every quarter), or (3) something else?
If that was the extent of your needs any basic allocation should support it indefinitely. If you were asking was was best I would say some allocation stock/bond mix between 75-25% (depending on your comfort with volatility) using VT and your preferred safe bond fund (or individual Treasuries).
Yes, based on everything we know and can estimate about how investments behave the above would be the ballpark in which a very good plan is to be found. I don't understand the issue about selling fund shares. Most people with blended portfolios would have no problem selling some shares as they also adjust the asset allocation to target as they go. Most people inevitably hold some amount of cash slushing around from the coming and going of this that and the other that selling is not as frequent and in such small bits as you imagine. But that is just a practical question of little consequence anyway. Most brokers offer arrangements to sell and distribute funds on a regular schedule, if the bother is what the concern is. On top of that, it is probably helpful to most retirees to have annuitized income streams that are part of the cash pool anyway. That includes Social Security for most people.

Some people would argue that a better plan would be to concentrate in investments with higher expected return and a different spectrum of risk by loading the portfolio on factors such as size and value. The actual risk and return of the portfolio is still adjusted for market risk by stock/bond ratio. This approach is less clearly established as being worth pursuing. I am not sure I have seen any data that a heavily factor loaded portfolio also generates significantly higher sustainable withdrawal rates.

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Re: Vanguard advisor on dividends

Post by Wakefield1 » Fri Sep 15, 2017 9:57 am

For a given dividend yield: Is it better to have a bigger basket of lower yielding stocks vs. having a smaller basket of higher yielding stocks-is that the question? (Ignoring the presence of bonds-which additional presence might be a good thing),and assuming that the stocks can be in mutual funds)
I am sure that there are people who try to limit themselves to harvesting only their dividends to the exclusion of selling off any of their portfolio as a means of controlling/minimizing the drawdown-I would think that a very conservative strategy for making the portfolio last.

dbr
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Re: Vanguard advisor on dividends

Post by dbr » Fri Sep 15, 2017 10:24 am

Wakefield1 wrote:
Fri Sep 15, 2017 9:57 am
For a given dividend yield: Is it better to have a bigger basket of lower yielding stocks vs. having a smaller basket of higher yielding stocks-is that the question? (Ignoring the presence of bonds-which additional presence might be a good thing),and assuming that the stocks can be in mutual funds)
I am sure that there are people who try to limit themselves to harvesting only their dividends to the exclusion of selling off any of their portfolio as a means of controlling/minimizing the drawdown-I would think that a very conservative strategy for making the portfolio last.
Obviously the less you withdraw the more the portfolio will grow or the less it will shrink. That is third grade arithmetic. If that is the objective of the investor then you just withdraw less. Having to take a big circle out through dividends to do something that is that utterly simple strikes one as either insane or appallingly stupid.

The original conversation, the one quoted between Vanguard and the reporter seems to be incoherent. One can't tell what is being advocated there.

The essence of the overall conversation, which is unending here on the forum, is that somehow it should be advantageous to concentrate one's asset allocation in higher dividend paying stocks in preference to the total market or some other scheme of departing from the total market. In particular, but a different issue entirely, that it should somehow be advantageous to withdraw from a portfolio that and only exactly that which is earned in the portfolio from dividends and interest.

By this time there has been enough conversation that anyone who wants to know can probably decide for themselves what they think.

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Re: Vanguard advisor on dividends

Post by Nate79 » Fri Sep 15, 2017 11:45 am

RAchip wrote:
Thu Sep 14, 2017 8:00 pm
If you have $10mm to invest in equities and you need $300k gross income, what is better: (1) vanguard high dividend index (that pays 3% dividends , or the full $300k you need) or (2) vanguard S&P index (that pays a little less than 2% dividends and would require you to sell bits of your fund shares every quarter), or (3) something else?
What is the guarantee that (1) will pay $300k in dividends for the full term needed every single year and never less?
Assuming $300k is also inflation adjusted every year what is the guarantee that (1) will pay $300k inflation adjusted every year?

I would trust a 3 fund portfolio (TSM, International, bonds) over (1) to get 3% SWR with inflation adjustment.

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Phineas J. Whoopee
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Re: Vanguard advisor on dividends

Post by Phineas J. Whoopee » Fri Sep 15, 2017 1:14 pm

spdoublebass wrote:
Thu Sep 14, 2017 4:21 pm
...
I understand both the total return and dividend argument. My question is when people mix the two, or as Bogle stated add a slice of something, how does this work? And why?
...
Hi spdoublebass. Total return includes dividends. There's no way to mix the two, because there's no way to separate the two.

Capital value changes can happen in either direction. We should say either: capital gains can be negative; or capital losses also occur.

We don't make the point clearly enough: total return includes dividends and capital gains and losses, but withdrawals from a portfolio don't have to be limited to gains. We had a thread about the idea of only spending gains, and how in fact it isn't the right way to think about it. Many posters in this thread contributed to it. Not everybody agreed in the end.

Each dollar is the same as all the others, and neither knows nor cares how it came into your possession.

PJW

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Re: Vanguard advisor on dividends

Post by Artsdoctor » Fri Sep 15, 2017 2:17 pm

snarlyjack wrote:
Thu Sep 14, 2017 5:32 pm
spdoublepass,

Nice meeting you.

From everything I have read, a investor should stick with
their strategy that they initially started with (Total Return or
Dividend Investing).

If you sold out of the TMS fund to invest in the High Dividend
Yield Index fund you would incur capital gains tax. Which
would not make any sense.

If you had a "income event" and were sitting on $50,000.
in cash, that would be another story. I think the phrase were
looking for is : do no harm. Every situation is different.
I would be reluctant to sell out of TMS & go into VHDYX.
When I started in VHDYX I was a new investor with new cash.
Their was no positioning or taxes due, it was a clean investment.
Yes! Sticking to a plan is important. The trick is finding a plan that you won't regret.

A couple of thoughts. You're 23 years old. What this means is that you don't have decades of investing experience so you're going to have to read a bit of history and learn from people who have had a bit more experience.

First, you're going to have to really think long and hard about taxes. After all, "it's not what you earn, it's what you keep." Without considering what sort of taxes your investments will generate, you're going to be in sad shape. Those dividends will be declared on your 1040 and they will always affect your AGI. The rate may vary over the years, but those numbers are always going to be there. Capital gains, on the other hand, may vary tremendously depending on how avidly you're tax-loss harvesting. Make sure you're familiar with tax-loss harvesting if you're investing in a taxable account; you'll need to understand it well.

Second, you're going to have to learn about tax history. Right now, many dividends are eligible for qualified dividend status, so you're going to be paying preferential capital gains rates on those dividends. But that was not always the case and it may not always be the case. In the past, dividends have been taxed as ordinary income. Just bear that in mind.

Third, you have decades of investing in front of you. If you "stick to a plan," you'll amass and awful lot of shares over the next few decades. Just bear in mind that those shares may serve as golden hand cuffs. There are many of us who invested in funds which appreciated beautifully decades ago and are now bloated with gains--but that are performing poorly and/or not tax-efficient. When you're investing in a taxable account, try to invest in funds that "you can hold forever." If you're going to be investing in high-dividend stocks, you're making a bet that tax law will not change. That's quite a bet for someone who's 23 years old.

Fourth, make sure you really understand the difference between dividends distributed from an equity fund and dividends distributed from a bond fund. When your equity distributes a dividend, your NAV is reduced by that same amount; when your bond fundf distributes a dividend, it's an earning. If you've invested in a high-yield equity fund which only pays out dividends once a year, you're accumulating dividends throughout the year and those dividends are reflected in the NAV. Make sure you understand that concept because the most majority of investors do not.

Lastly, you can do your research on value stocks. Take a look at Fama and French. After all, high-dividend paying equities are value equities. You'll see some pretty juicy returns over many decades. But don't forget the context: what were people paying in taxes at the time and were they re-investing those dividends. The devil is in the details.

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Re: Vanguard advisor on dividends

Post by nedsaid » Fri Sep 15, 2017 3:25 pm

avalpert wrote:
Thu Sep 14, 2017 2:57 pm

You don't need capital gains to come on a predictable basis in order to withdraw a consistent amount from your portfolio - that is what all the safe withdrawal research is really about. You sell stocks when you need to use the capital - you shouldn't really care whether it is a bottom or a top.
Really? I mean really? Wouldn't you at least take your withdrawals from bonds when stocks are down? I have big doubts about any approach that has you selling stocks at the bottom. Can't think of many quicker ways to destroy a portfolio. If stocks drop by 50%, wouldn't that affect your safe withdrawal calculation on the remaining portfolio?
A fool and his money are good for business.

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