What is total return vs. dividend investing?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
InvestorNewb
Posts: 1663
Joined: Mon Sep 03, 2012 11:27 am

Re: What is total return vs. dividend investing?

Post by InvestorNewb »

nedsaid wrote:Vanguard has both a High Dividend fund and a Dividend Growth fund. These are good alternatives to those who don't want to maintain an individual stock portfolio and yet pursue a dividend strategy. As I have posted many times, this isn't the best time to be chasing dividend yields.
I looked at those funds in the past, but the yields aren't that great:

Vanguard Dividend Appreciation ETF (VIG) - 2.12
Vanguard High Dividend Yield ETF (VYM) - 2.83

Compared to the 3-fund portfolio:

Vanguard Total Stock Market ETF (VTI) - 1.79
Vanguard Total International Stock ETF (VXUS) - 2.75

... not worth the switch.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
toto238
Posts: 1914
Joined: Wed Feb 05, 2014 1:39 am

Re: What is total return vs. dividend investing?

Post by toto238 »

nedsaid wrote:
archii wrote:This thread is of particular interest to me because of our current situation. A few years ago I inherited a substantial portfolio from my DF, that pays upwards of $120K in dividends annually. The portfolio is a collection of stocks, MF's and MLP's that on average, yield a total of about 3.7%. So, they're not super high yielding securities, but the amount of dividend income is way beyond what we require to live on (no mortgage or debt). My father was deep into retirement and had set up his portfolio for dividends primarily. Since I have taken ownership of the portfolio, I have started to look more closely at the other idea of 'total return'. I am only 56, my DW is 8 years younger, so we wish to continue to grow the portfolio for another 10 years or so before we transition into a less risky allocation. I have often wondered if instead of simply reinvesting the dividends we don't use ( approx $60K year) we instead looked at shifting holdings away from dividends and into more growth oriented holdings that pay less dividends? I can look at this two ways - keep our current allocation of quality dividend yielding stocks/funds and reinvest the excess cash, or start to reallocate out of dividend payers and into growth funds? Obviously capital gains are a factor, since we came into this windfall in 2011. So it would be a slow transition, at best.
Wow, what a blessing to inherit this from your father. If I were in your situation, I would evaluate each security in the portfolio to determine what should be kept. My thinking is that you would want to keep most of the positions. The problem is that prospects of individual companies do change, you will want to prune from time to time so that everything you own has good prospects going forward. The clunkers would be replaced with something better. This will take a bit of work. My gosh, if I inherited a portfolio that gave me $120K a year in income I would make maintaining this a minor part time job. A subscription to Morningstar might be helpful in this regard.

If this portfolio was good enough for your father in retirement, an updated and tuned up version of this portfolio would be good enough for you too. I suppose you could take the dividends and buy bond funds with them.

Did he do this himself or did he work with a broker?
Perhaps I'm the crazy one... But as soon as I inherited it I would liquidate the entire thing as soon as possible so I don't end up with huge capital gains. Then I'd put the money in a 3-fund portfolio appropriate for my age group, risk tolerance and time horizon.
User avatar
Uncle Pennybags
Posts: 1835
Joined: Tue Oct 28, 2014 2:05 am

Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

nedsaid wrote:anguard has both a High Dividend fund and a Dividend Growth fund. These are good alternatives to those who don't want to maintain an individual stock portfolio and yet pursue a dividend strategy. As I have posted many times, this isn't the best time to be chasing dividend yields.
True; when bond interest goes up dividend paying stocks decline. Income investors chase income. This is why buy and hold a total stock index fund is the best way to invest.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

toto238 wrote:
Perhaps I'm the crazy one... But as soon as I inherited it I would liquidate the entire thing as soon as possible so I don't end up with huge capital gains. Then I'd put the money in a 3-fund portfolio appropriate for my age group, risk tolerance and time horizon.
Not crazy at all, it is a matter of preference. You are right, the beneficiary got a step up in basis upon his father's death. The three fund portfolio is a great way to invest particularly if you don't want the work of maintaining a portfolio of individual issues.
A fool and his money are good for business.
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: What is total return vs. dividend investing?

Post by bertilak »

nedsaid wrote:The problem is that prospects of individual companies do change, you will want to prune from time to time so that everything you own has good prospects going forward. The clunkers would be replaced with something better. This will take a bit of work. My gosh, if I inherited a portfolio that gave me $120K a year in income I would make maintaining this a minor part time job.
Isn't that the job dividend funds do for you? At a very low cost, too.

Perhaps ascii's father was better at it than the fund managers, but that doesn't mean ascii can match his father's performance. Probably can't match the funds' performance either.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

bertilak wrote:
nedsaid wrote:The problem is that prospects of individual companies do change, you will want to prune from time to time so that everything you own has good prospects going forward. The clunkers would be replaced with something better. This will take a bit of work. My gosh, if I inherited a portfolio that gave me $120K a year in income I would make maintaining this a minor part time job.
Isn't that the job dividend funds do for you? At a very low cost, too.

Perhaps ascii's father was better at it than the fund managers, but that doesn't mean ascii can match his father's performance. Probably can't match the funds' performance either.
Yes, Vanguard has a High Dividend and a Dividend Growth product with very low fees. If you want a dividend fund, you want to be sure that the fees don't eat up a lot of your income which defeats the purpose of having such a fund!

Vanguard Hi-Yield is yielding 2.75% and Vanguard Dividend Growth 1.82%. The US Total Market yields 1.67% now. I can see the appeal of a 3.7% yield from the father's portfolio. Gosh, if I inherited something that threw off $120,000 a year I would be reluctant to fiddle with it too much.

My guess is that ascii could monitor the portfolio and maintain it with one or two trades a year. Just make sure that every position in the portfolio has good prospects for the future. Subscribe to Morningstar and read up every quarter on how everything is doing. To me, this would be fun. Most people would not want to make the effort. Ascii doesn't need the money for 10 years and in the mean time he will have $1,200,000 to invest any way that he and his spouse want to.

There are drawbacks to everything. There are Master Limited Partnerships in there which can create complication at tax time. But it doesn't sound like his dad went wild reaching for yield. My guess is that the father did a good job putting this together. My guess is that it could be maintained with not too much effort.
A fool and his money are good for business.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: What is total return vs. dividend investing?

Post by dbr »

nedsaid wrote:
Vanguard Hi-Yield is yielding 2.75% and Vanguard Dividend Growth 1.82%. The US Total Market yields 1.67% now. I can see the appeal of a 3.7% yield from the father's portfolio. Gosh, if I inherited something that threw off $120,000 a year I would be reluctant to fiddle with it too much.

With all due respect this sure sounds like a "dividends are free money" sentiment, but I am pretty sure you don't really think that. What is the actual appeal of investing at a 3.7% dividend that would recommend it? --- or, even investing at dividend payouts higher than TSM? (Maybe it is the use of that term "throw off" that people use all the time that raises this impression that the payment of a dividend is some kind of windfall, but I don't know.) There is nothing wrong with good reasons how someone might benefit from such payouts, if there are such good reasons. It could be there actually are, but it would be good to be explicit what those are.

My guess is that ascii could monitor the portfolio and maintain it with one or two trades a year. Just make sure that every position in the portfolio has good prospects for the future. Subscribe to Morningstar and read up every quarter on how everything is doing. To me, this would be fun. Most people would not want to make the effort. Ascii doesn't need the money for 10 years and in the mean time he will have $1,200,000 to invest any way that he and his spouse want to.

I think the key question is in that "good prospects for the future." The situation does not remain good unless the total return of the investments is maintained by the asset value keeping pace with the dividend payouts. Otherwise the investment is by necessity in declining companies paying high yields in a failing enterprise that is going to crash. I think it is naive to think that M* is going to tell anyone what they need to know to get out of a bad investment. It takes more than effort to avoid trouble with single stock risk. Also, if ascii wants to invest in something else, he can do that any time by selling some existing shares at a lower tax cost than taking dividends.
archii
Posts: 140
Joined: Wed Aug 07, 2013 8:33 am

Re: What is total return vs. dividend investing?

Post by archii »

nedsaid wrote:
Wow, what a blessing to inherit this from your father. If I were in your situation, I would evaluate each security in the portfolio to determine what should be kept. My thinking is that you would want to keep most of the positions. The problem is that prospects of individual companies do change, you will want to prune from time to time so that everything you own has good prospects going forward. The clunkers would be replaced with something better. This will take a bit of work. My gosh, if I inherited a portfolio that gave me $120K a year in income I would make maintaining this a minor part time job. A subscription to Morningstar might be helpful in this regard.

If this portfolio was good enough for your father in retirement, an updated and tuned up version of this portfolio would be good enough for you too. I suppose you could take the dividends and buy bond funds with them.

Did he do this himself or did he work with a broker?
Yes it was a blessing, and I am grateful every day to have a level of FI we did not enjoy before. It was also a huge responsibility, since the number of individual positions were north of 50. He liked stocks and MF's and with the help of a broker, put together a portfolio of about $9M by the time he passed in 2011. Since I took ownership of my half of that, evaluating the asset allocation was an early goal, since my wife and I are younger and needed to tweak things more to our long term goals. Last year I moved all the accounts over to a low cost brokerage (fido) to lower costs and have more control. The commissions alone for moving in and out of positions at the former brokerage house were significant, and I realized that even though I can't control the markets, I can control the costs. I have also had to be careful in liquidating positions since the cap gains are pretty high since 2011, a lesson I learned well in 2014 when I liquidated a couple of MLP positions. When I first took over the accounts I spoke to several broker 'advisors', most of whom were pushing me to manage this under a wrap fee, but I have not done so for a couple of reasons. One reason is that the portfolio is (suprisingly) well diversified, with the exception of being overweight in energy. The other is that I did not want to pay someone to manage something that I felt I could do with a reasonable amount of effort in educating myself (which is why I'm here) on the fundamentals of portfolio management. Even though my father put this together with stock and fund picking, I am finding myself (through the reading lists and forum posts) coming around to more of a boglehead philosophy. However, it will take a while to get there, since the overall costs of liquidating positions would be a HUGE tax hit at this point. I did not liquidate much at the time because I really did not know enough at the time, and it took over 18 months to settle the estate. However, our goal over the next few years is to get it down to a simpler, less complicated portfolio that still generates income, but is also in line with a goal of total growth.
Last edited by archii on Sat Jun 06, 2015 10:54 am, edited 3 times in total.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

Dbr said,
"There is nothing wrong with good reasons how someone might benefit from such payouts, if there are such good reasons. It could be there actually are, but it would be good to be explicit what those are."


If you are a retiree, what you want is a reliable stream of income. If you can get a reliable stream of income that grows with inflation, that is nirvana. This is why I don't dismiss off hand a portfolio of dividend paying stocks. You have a pretty good chance of an income stream that beats inflation along with capital appreciation. Evidently, the father amassed a big portfolio and was able to tolerate the volatility.

Most pensions are not inflation indexed. Most Single Premium Immediate Annuities are not inflation indexed. Social Security has inflation protection as do many government pensions.

Dbr said,
"I think the key question is in that "good prospects for the future." The situation does not remain good unless the total return of the investments is maintained by the asset value keeping pace with the dividend payouts. Otherwise the investment is by necessity in declining companies paying high yields in a failing enterprise that is going to crash. I think it is naive to think that M* is going to tell anyone what they need to know to get out of a bad investment. It takes more than effort to avoid trouble with single stock risk. Also, if ascii wants to invest in something else, he can do that any time by selling some existing shares at a lower tax cost than taking dividends."


First of all, you check the payout ratio. For dividend growth, you would expect a relatively lower but increasing payout ratio. You would also expect to see growing earnings over time. For high dividend, you check the payout ratio and look to see that the earnings are regular and consistent. In other words, can the dividend be sustained? Occidental Petroleum for example was issuing new stock to pay its large dividend, so I sold my shares. What they were doing was not sustainable.

You make it sound like owning individual stocks is an impossible task. And no, Morningstar isn't going to tell you when to sell. But if you see that earnings are starting to drop and that the underlying business is running into difficulties, you can do some checking. If it looks like the problems are more than just temporary, it might be time to sell. Morningstar puts out nice .pdf files that you can read. You can eyeball the numbers and see the trend. We are in the age of Google where research is pretty easy. If you can type in a search box and click a mouse, accessing research is pretty easy.

You might not be aware that qualified dividends receive capital gains treatment.

It is really a question of whether arcii wants to be bothered with this.
Last edited by nedsaid on Sat Jun 06, 2015 11:09 am, edited 1 time in total.
A fool and his money are good for business.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

archii wrote: Yes it was a blessing, and I am grateful every day to have a level of FI we did not enjoy before. It was also a huge responsibility, since the number of individual positions were north of 50. He liked stocks and with the help of a broker, put together a portfolio of about $9M by the time he passed in 2011. Since I took ownership of my half of that, evaluating the asset allocation was an early goal, since my wife and I are younger and needed to tweak things more to our long term goals. Last year I moved all the accounts over to a low cost brokerage (fido) to lower costs and have more control. The commissions alone for moving in and out of positions at the former brokerage house were significant, and I realized that even though I can't control the markets, I can control the costs. I have also had to be careful in liquidating positions since the cap gains are pretty high since 2011, a lesson I learned well in 2014 when I liquidated a couple of MLP positions. When I first took over the accounts I spoke to several broker 'advisors', most of whom were pushing me to manage this under a wrap fee, but I have not done so for a couple of reasons. One reason is that the portfolio is (suprisingly) well diversified, with the exception of being overweight in energy. The other is that I did not want to pay someone to manage something that I felt I could do with a reasonable amount of effort in educating myself (which is why I'm here) on the fundamentals of portfolio management. Even though my father put this together with stock and fund picking, I am finding myself (through the reading lists and forum posts) coming around to more of a boglehead philosophy. However, it will take a while to get there, since the overall costs of liquidating positions would be a HUGE tax hit at this point. I am aiming over the next few years to get down to a simpler, less complicated 'hybrid' type portfolio of holdings that still generates income, but is also in line with the idea of total growth.
I got started with individual stocks when a friend went into the brokerage business and I took my bank IRA account to him. He learned from a couple of brokers who were well-known in my area and were both featured in Money magazine as "All-Star Brokers." They were both value type of investors and liked dividends. "Get paid while you wait," was one of their sayings. What was really instructive was that these brokers did their own research and they followed a universe of about 30 companies at any one time. They also had people that helped them.

If these "All-Star" brokers followed a universe of 30 companies they were following pretty closely at any one time that is a pretty good clue to me. That is why I tell people that if they just have to own individual stocks to start out with a bare minimum of five stocks diversified over different industries. An ideal sized individual stock portfolio is probably 15-25 stocks and 30 at the maximum. The reason being is that a person only has so much time and interest.

If your dad had 50 holdings in the portfolio, that tells me he was spending a lot of time on this and had a huge interest in doing this. My guess is that this was his part-time job and he loved doing it. My suspicion is that you and your wife are working and aren't going to devote this kind of time. Your plan is a very sound one.

Over time, you probably want to get this down from 50 holdings down to something like 20-25 holdings while broadening out your diversification. It sounds like you are putting freed up money into the broad index funds which is a very good idea. No muss, no fuss. There is no reason that you couldn't eventually go to all index funds. I just find it really hard to pass up a nice income stream that will likely grow faster than inflation. It is up to you and it sounds like you know how to proceed from here.

Best wishes,

Ned
A fool and his money are good for business.
User avatar
CyclingDuo
Posts: 5989
Joined: Fri Jan 06, 2017 8:07 am

Re: What is total return vs. dividend investing?

Post by CyclingDuo »

nedsaid wrote: Sat Jun 06, 2015 11:03 am
archii wrote: Yes it was a blessing, and I am grateful every day to have a level of FI we did not enjoy before. It was also a huge responsibility, since the number of individual positions were north of 50. He liked stocks and with the help of a broker, put together a portfolio of about $9M by the time he passed in 2011. Since I took ownership of my half of that, evaluating the asset allocation was an early goal, since my wife and I are younger and needed to tweak things more to our long term goals. Last year I moved all the accounts over to a low cost brokerage (fido) to lower costs and have more control. The commissions alone for moving in and out of positions at the former brokerage house were significant, and I realized that even though I can't control the markets, I can control the costs. I have also had to be careful in liquidating positions since the cap gains are pretty high since 2011, a lesson I learned well in 2014 when I liquidated a couple of MLP positions. When I first took over the accounts I spoke to several broker 'advisors', most of whom were pushing me to manage this under a wrap fee, but I have not done so for a couple of reasons. One reason is that the portfolio is (suprisingly) well diversified, with the exception of being overweight in energy. The other is that I did not want to pay someone to manage something that I felt I could do with a reasonable amount of effort in educating myself (which is why I'm here) on the fundamentals of portfolio management. Even though my father put this together with stock and fund picking, I am finding myself (through the reading lists and forum posts) coming around to more of a boglehead philosophy. However, it will take a while to get there, since the overall costs of liquidating positions would be a HUGE tax hit at this point. I am aiming over the next few years to get down to a simpler, less complicated 'hybrid' type portfolio of holdings that still generates income, but is also in line with the idea of total growth.
I got started with individual stocks when a friend went into the brokerage business and I took my bank IRA account to him. He learned from a couple of brokers who were well-known in my area and were both featured in Money magazine as "All-Star Brokers." They were both value type of investors and liked dividends. "Get paid while you wait," was one of their sayings. What was really instructive was that these brokers did their own research and they followed a universe of about 30 companies at any one time. They also had people that helped them.

If these "All-Star" brokers followed a universe of 30 companies they were following pretty closely at any one time that is a pretty good clue to me. That is why I tell people that if they just have to own individual stocks to start out with a bare minimum of five stocks diversified over different industries. An ideal sized individual stock portfolio is probably 15-25 stocks and 30 at the maximum. The reason being is that a person only has so much time and interest.

If your dad had 50 holdings in the portfolio, that tells me he was spending a lot of time on this and had a huge interest in doing this. My guess is that this was his part-time job and he loved doing it. My suspicion is that you and your wife are working and aren't going to devote this kind of time. Your plan is a very sound one.

Over time, you probably want to get this down from 50 holdings down to something like 20-25 holdings while broadening out your diversification. It sounds like you are putting freed up money into the broad index funds which is a very good idea. No muss, no fuss. There is no reason that you couldn't eventually go to all index funds. I just find it really hard to pass up a nice income stream that will likely grow faster than inflation. It is up to you and it sounds like you know how to proceed from here.

Best wishes,

Ned
Two year old thread, I know. However, it came up in a search I just did - and I liked what you contributed in the thread, Ned.

I notice that archii has not posted here at BH since 2015. We'd be sort of curious knowing what he ended up doing with the inherited $120K dividend producing $4.5M portfolio, and how it has been doing since. Our guess is it has grown to $6M by now with dividend reinvestment, and the capital appreciation the bull market has provided.

There are so many excellent threads with regard to DI vs TR investing here at BH. I only chose this one as the discussion was civil, and some good ideas were included.

We had inherited a large dividend producing portfolio last year from a deceased parent that was perfect for them in producing plenty of retirement income to sustain him into his 90's. We followed the advice on the Wiki to take our time studying it all and making informed decisions. We've had Vanguard funds for 27 years, plus a lot of individual stocks, plus our Vanguard funds in our 403b plans. So we were a mix of strategies going into inheritance, and still remain in that mix. In no way was our inheritance the size of what archii and his wife inherited, but it was equally significant for us and our financial picture (had 57 different individual stocks from one parent, and about a dozen from another parent, and a bunch of high cost mutual funds from yet another - all that we have been trying to absorb the past two years).

We have managed to trim it all down throughout this year to the point that our portfolio is only producing about $25k in annual dividends now (which we have been reinvesting), and only about $15K of that is in taxable at this point which we are utilizing every possible tax strategy to absorb this year (maxing out tax advantaged accounts, itemizing deductions, using our last year of being able to claim both kids, giving to charity, etc...). We moved a huge chunk of the individual stocks we didn't understand (a lot of MLP's, gold/silver/mining stocks, etc...) into Vanguard Index Funds, and into growth investments (stocks) that don't pay dividends in the taxable account, while letting all the dividends from the individual stocks funnel into more shares of the Vanguard/Fidelity/iShares index funds we have. We couldn't afford to absorb the capital gains all in one year since we waited to make any decisions for quite a few months during a bull market. Now that it has been long enough from the stepped up basis that the second half of 2016 and all of this year has taken place, the more appreciation has occurred. But plenty was sold in tax advantaged, and TLH in the taxable has been ongoing throughout this year to offset gains.

The tenor of my tone has probably changed now that I have had a chance to take a deeper look at the issues of dividend investing vs. total return - and staring at both strategies in the face as our overall portfolio still remains a mix of the two (as well as a mix of individual stocks and Index/Bond Funds). Part of me says: "Heck, just set up a Dividend Aristocrat Portfolio that pays out $40K now mainly in tax advantaged accounts, and keep reinvesting the dividends the next 10-11 years so the number of shares grow to the point that it throws off enough to meet all of our retirement needs come 2028. Leave the rest, or other half in total return investments with the Index Funds, and growth stocks so they can be used for any additional needs or shortfalls come retirement." The other part of me says: "Just put it all in the Three Fund Approach and forget about it for now."

The Dividend Aristocrats we did not trim, and still own include Abbott Labs, Chevron, AT & T, Walmart along with high yield Blue Chip Verizon, and some other typical dividend names like Rio Tinto, Wells Fargo, Apple, Altria, Home Depot, Qualcomm, Amgen, DTE Energy, Exelon and plenty more that still total over 30 stocks (down from the inherited 57 - so we've made progress throughout this year 8-) ). We still have plenty of progress to make, and decisions to make as we learn and focus. I enjoyed reading the Vanguard PDF that Taylor linked comparing the distribution phase in retirement of dividend vs. total return, taxable and tax advantaged accounts, and really illustrative information.

Sorry to have dug up an old thread, but Ned - it's your fault because of your responses in the thread. :beer
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: What is total return vs. dividend investing?

Post by snarlyjack »

CyclingDuo,

Nice meeting you.

I inherited a life insurance policy from my Mom when she died.
My first thought was what do I do now? Then the studying began.
In my studies I started studying the "Millionaire Next Door" types.
It was a very interesting study of how did these millionaire investors
do it...what was their secrets? Like Taylor says "their are many roads
to Dublin"...

Here is a example: Ronald Read is one of my favorite investors
we could learn a lot from him. Their are a lot more on the internet.

Enjoy the process of learning...I know I did.

https://www.cnbc.com/2015/02/09/heres-h ... rtune.html
User avatar
CyclingDuo
Posts: 5989
Joined: Fri Jan 06, 2017 8:07 am

Re: What is total return vs. dividend investing?

Post by CyclingDuo »

snarlyjack wrote: Wed Dec 13, 2017 1:57 pm CyclingDuo,

Nice meeting you.

I inherited a life insurance policy from my Mom when she died.
My first thought was what do I do now? Then the studying began.
In my studies I started studying the "Millionaire Next Door" types.
It was a very interesting study of how did these millionaire investors
do it...what was their secrets? Like Taylor says "their are many roads
to Dublin"...

Here is a example: Ronald Read is one of my favorite investors
we could learn a lot from him. Their are a lot more on the internet.

Enjoy the process of learning...I know I did.

https://www.cnbc.com/2015/02/09/heres-h ... rtune.html
Glad to meet you as well, snarlyjack. I see you are from Montana. I used to live about 18 miles or so from the Montana border (on the ND side) way back in the 70's. I haven't been back to Montana since 1982-3 or so, but my wife and I are always looking for places to ride our bikes (as in mountain bikes or road bikes).

That's a good link about Ronald Read. I think I have heard about him before, or at least was aware of hearing his story in passing with regard to "a janitor who died with $8M". $300 a month for 65 years at 8%. Sounds so easy, doesn't it. :wink:

We both read the Stanley book many years ago and really enjoyed it. A few things stuck with me from that book. One was with regard to the importance of education - not only for ourselves - but for our children as well. Another was driving practical car(s) cost-wise. Another was to invest 15-20% per year. Another was not to buy the most expensive house in a neighborhood, and live in the one you do buy for a good long time. Something like at least 20 years if not more, wasn't it? We're in year 15 in our modest house which is not one of the flashier homes in our neighborhood, and the PITI costs us only 11% of our gross income. That has really helped our cash flow the past 15 years. And the other was to rarely sell equity investments.

I think that last point certainly pertains to the janitor, Ronald Read, you linked in that article. We've been investing since the late 80's, but certainly are still always learning. At the very least, we've learned not to take any one strategy as "a religion".
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
nick7297
Posts: 4
Joined: Thu Dec 14, 2017 9:44 am

Re: What is total return vs. dividend investing?

Post by nick7297 »

Does anyone know of a good broker/site to do monthly recurring inventing in Stocks and avoid a $5 transaction charge?
I am looking to start DRIP but the stocks I am looking for are not offered by computershare

Any insight would be appreciated.
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: What is total return vs. dividend investing?

Post by LadyGeek »

New member nick7297 is asking in the same question in this thread: Monthly stock investments Please answer in that thread.

nick7297, Welcome!
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

CyclingDuo wrote: Wed Dec 13, 2017 9:35 am
nedsaid wrote: Sat Jun 06, 2015 11:03 am
archii wrote: Yes it was a blessing, and I am grateful every day to have a level of FI we did not enjoy before. It was also a huge responsibility, since the number of individual positions were north of 50. He liked stocks and with the help of a broker, put together a portfolio of about $9M by the time he passed in 2011. Since I took ownership of my half of that, evaluating the asset allocation was an early goal, since my wife and I are younger and needed to tweak things more to our long term goals. Last year I moved all the accounts over to a low cost brokerage (fido) to lower costs and have more control. The commissions alone for moving in and out of positions at the former brokerage house were significant, and I realized that even though I can't control the markets, I can control the costs. I have also had to be careful in liquidating positions since the cap gains are pretty high since 2011, a lesson I learned well in 2014 when I liquidated a couple of MLP positions. When I first took over the accounts I spoke to several broker 'advisors', most of whom were pushing me to manage this under a wrap fee, but I have not done so for a couple of reasons. One reason is that the portfolio is (suprisingly) well diversified, with the exception of being overweight in energy. The other is that I did not want to pay someone to manage something that I felt I could do with a reasonable amount of effort in educating myself (which is why I'm here) on the fundamentals of portfolio management. Even though my father put this together with stock and fund picking, I am finding myself (through the reading lists and forum posts) coming around to more of a boglehead philosophy. However, it will take a while to get there, since the overall costs of liquidating positions would be a HUGE tax hit at this point. I am aiming over the next few years to get down to a simpler, less complicated 'hybrid' type portfolio of holdings that still generates income, but is also in line with the idea of total growth.
I got started with individual stocks when a friend went into the brokerage business and I took my bank IRA account to him. He learned from a couple of brokers who were well-known in my area and were both featured in Money magazine as "All-Star Brokers." They were both value type of investors and liked dividends. "Get paid while you wait," was one of their sayings. What was really instructive was that these brokers did their own research and they followed a universe of about 30 companies at any one time. They also had people that helped them.

If these "All-Star" brokers followed a universe of 30 companies they were following pretty closely at any one time that is a pretty good clue to me. That is why I tell people that if they just have to own individual stocks to start out with a bare minimum of five stocks diversified over different industries. An ideal sized individual stock portfolio is probably 15-25 stocks and 30 at the maximum. The reason being is that a person only has so much time and interest.

If your dad had 50 holdings in the portfolio, that tells me he was spending a lot of time on this and had a huge interest in doing this. My guess is that this was his part-time job and he loved doing it. My suspicion is that you and your wife are working and aren't going to devote this kind of time. Your plan is a very sound one.

Over time, you probably want to get this down from 50 holdings down to something like 20-25 holdings while broadening out your diversification. It sounds like you are putting freed up money into the broad index funds which is a very good idea. No muss, no fuss. There is no reason that you couldn't eventually go to all index funds. I just find it really hard to pass up a nice income stream that will likely grow faster than inflation. It is up to you and it sounds like you know how to proceed from here.

Best wishes,

Ned
Two year old thread, I know. However, it came up in a search I just did - and I liked what you contributed in the thread, Ned.

I notice that archii has not posted here at BH since 2015. We'd be sort of curious knowing what he ended up doing with the inherited $120K dividend producing $4.5M portfolio, and how it has been doing since. Our guess is it has grown to $6M by now with dividend reinvestment, and the capital appreciation the bull market has provided.

There are so many excellent threads with regard to DI vs TR investing here at BH. I only chose this one as the discussion was civil, and some good ideas were included.

We had inherited a large dividend producing portfolio last year from a deceased parent that was perfect for them in producing plenty of retirement income to sustain him into his 90's. We followed the advice on the Wiki to take our time studying it all and making informed decisions. We've had Vanguard funds for 27 years, plus a lot of individual stocks, plus our Vanguard funds in our 403b plans. So we were a mix of strategies going into inheritance, and still remain in that mix. In no way was our inheritance the size of what archii and his wife inherited, but it was equally significant for us and our financial picture (had 57 different individual stocks from one parent, and about a dozen from another parent, and a bunch of high cost mutual funds from yet another - all that we have been trying to absorb the past two years).

We have managed to trim it all down throughout this year to the point that our portfolio is only producing about $25k in annual dividends now (which we have been reinvesting), and only about $15K of that is in taxable at this point which we are utilizing every possible tax strategy to absorb this year (maxing out tax advantaged accounts, itemizing deductions, using our last year of being able to claim both kids, giving to charity, etc...). We moved a huge chunk of the individual stocks we didn't understand (a lot of MLP's, gold/silver/mining stocks, etc...) into Vanguard Index Funds, and into growth investments (stocks) that don't pay dividends in the taxable account, while letting all the dividends from the individual stocks funnel into more shares of the Vanguard/Fidelity/iShares index funds we have. We couldn't afford to absorb the capital gains all in one year since we waited to make any decisions for quite a few months during a bull market. Now that it has been long enough from the stepped up basis that the second half of 2016 and all of this year has taken place, the more appreciation has occurred. But plenty was sold in tax advantaged, and TLH in the taxable has been ongoing throughout this year to offset gains.

The tenor of my tone has probably changed now that I have had a chance to take a deeper look at the issues of dividend investing vs. total return - and staring at both strategies in the face as our overall portfolio still remains a mix of the two (as well as a mix of individual stocks and Index/Bond Funds). Part of me says: "Heck, just set up a Dividend Aristocrat Portfolio that pays out $40K now mainly in tax advantaged accounts, and keep reinvesting the dividends the next 10-11 years so the number of shares grow to the point that it throws off enough to meet all of our retirement needs come 2028. Leave the rest, or other half in total return investments with the Index Funds, and growth stocks so they can be used for any additional needs or shortfalls come retirement." The other part of me says: "Just put it all in the Three Fund Approach and forget about it for now."

The Dividend Aristocrats we did not trim, and still own include Abbott Labs, Chevron, AT & T, Walmart along with high yield Blue Chip Verizon, and some other typical dividend names like Rio Tinto, Wells Fargo, Apple, Altria, Home Depot, Qualcomm, Amgen, DTE Energy, Exelon and plenty more that still total over 30 stocks (down from the inherited 57 - so we've made progress throughout this year 8-) ). We still have plenty of progress to make, and decisions to make as we learn and focus. I enjoyed reading the Vanguard PDF that Taylor linked comparing the distribution phase in retirement of dividend vs. total return, taxable and tax advantaged accounts, and really illustrative information.

Sorry to have dug up an old thread, but Ned - it's your fault because of your responses in the thread. :beer
I really appreciate your comments. Hard to believe that anyone really reads my stuff much less dredge up old posts of mine. Sort of a reminder that whatever I post can come back to haunt me. :wink:

I do own 18 individual stocks in a Brokerage IRA account and 4 in DRIP plans. The 18 stocks are about 12.5% of my retirement portfolio. I am noticing that those stocks complicates the task of rebalancing my portfolio, if I want to sell stocks, selling shares in a fund is so much easier. No brokerage fees for one thing. Secondly, I have been trying to de-emphasize my individual stocks, so selling stock funds in effect increases the role of individual stocks in my portfolio.

I have really enjoyed owning individual stocks as I really feel like a business owner. Plus it gives me something to talk about with my broker and at the Bogleheads. If I had the Taylor Larimore 3-fund portfolio, there just wouldn't be much for me to say. :D :D :D No "Four Horsemen of Underperformance" or anything like that. Plus it is a lot better way to have a mid-life crisis than buying a sports car or dating floozies.

But things have changed. First, I have aged and am preparing for retirement in (hopefully) a few years. What used to be fun is now a complicating factor anytime I want to make a change.
It used to be I had many years of retirement contributions and many years of rising markets to look forward to. I have a few years of contributions yet but mostly the concrete has set, the portfolio has grown large enough that new contributions are mostly like peeing in a river. The emphasis has gone from just growing the portfolio for growth's sake to turning into a source of reliable income. Part of making the future income more reliable is de-risking the portfolio. We all know that individual stocks are riskier than the broad index funds plus it is more work to make certain that the individual stocks are properly diversified.

Pretty much, I need to free up the time spent managing my portfolio for more important things like hanging out in coffee shops and complaining about my property taxes. Or combing the beach with a metal detector. I am starting to think more about simplicity.

But I don't know, maybe I have moved on from a mid-life crisis to an old man crisis. 58 isn't exactly middle-aged, don't think I will last until 116. My father is still living, at age 88, so that gives me some hope.
A fool and his money are good for business.
User avatar
CyclingDuo
Posts: 5989
Joined: Fri Jan 06, 2017 8:07 am

Re: What is total return vs. dividend investing?

Post by CyclingDuo »

nedsaid wrote: Thu Dec 14, 2017 8:23 pmI really appreciate your comments. Hard to believe that anyone really reads my stuff much less dredge up old posts of mine. Sort of a reminder that whatever I post can come back to haunt me. :wink:

I do own 18 individual stocks in a Brokerage IRA account and 4 in DRIP plans. The 18 stocks are about 12.5% of my retirement portfolio. I am noticing that those stocks complicates the task of rebalancing my portfolio, if I want to sell stocks, selling shares in a fund is so much easier. No brokerage fees for one thing. Secondly, I have been trying to de-emphasize my individual stocks, so selling stock funds in effect increases the role of individual stocks in my portfolio.

I have really enjoyed owning individual stocks as I really feel like a business owner. Plus it gives me something to talk about with my broker and at the Bogleheads. If I had the Taylor Larimore 3-fund portfolio, there just wouldn't be much for me to say. :D :D :D No "Four Horsemen of Underperformance" or anything like that. Plus it is a lot better way to have a mid-life crisis than buying a sports car or dating floozies.

But things have changed. First, I have aged and am preparing for retirement in (hopefully) a few years. What used to be fun is now a complicating factor anytime I want to make a change.
It used to be I had many years of retirement contributions and many years of rising markets to look forward to. I have a few years of contributions yet but mostly the concrete has set, the portfolio has grown large enough that new contributions are mostly like peeing in a river. The emphasis has gone from just growing the portfolio for growth's sake to turning into a source of reliable income. Part of making the future income more reliable is de-risking the portfolio. We all know that individual stocks are riskier than the broad index funds plus it is more work to make certain that the individual stocks are properly diversified.

Pretty much, I need to free up the time spent managing my portfolio for more important things like hanging out in coffee shops and complaining about my property taxes. Or combing the beach with a metal detector. I am starting to think more about simplicity.

But I don't know, maybe I have moved on from a mid-life crisis to an old man crisis. 58 isn't exactly middle-aged, don't think I will last until 116. My father is still living, at age 88, so that gives me some hope.
56 and 59 in this household, so certainly not considering 58 old or certainly doesn't qualify as an "old man" yet. We just lost 3 parents at ages 88, 91 and 92 - so we'd consider that as old age. Not being in your 50's or 60's. Those are still prime bicycling years!

So here we are two years later from your posts in this thread. Has the dividend stream from your 18 stocks done well the past two years, and been reinvested into more shares? Are you planning on the 12.5% you have in them as being a portion of your reliable income stream going forward?

I've spent the past few weeks reading until I am cross-eyed about dividend income investing (due to the inherited dividend paying stocks). I never knew the subject created so much ire in investing discussion circles until this year. In terms of the portfolios we inherited, they worked out well for all of our parents who were living off of the dividends to supplement their SS, and none of them outlived their money. I'm not as worried about the complexity at this point as setting them up as DRIP's ends up being a hands off approach. I did mention in another thread earlier this year, that my spouse has an emotional connection to her inheritance, so even if that is a mistake in terms of behavioral finance - it remains a reality for decision making that I have to respect for obvious reasons. I carefully was able to make a case for trimming down the number of positions and managed to move what was trimmed (about 1/3rd of her inherited portfolio) into Vanguard ETF's (VTI/VXUS/VTEB) without her emotions being upsot.

At the very least, even talking about it brings up this saying in my mind...

"You think that's a problem? You don't know what problems are." 
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: What is total return vs. dividend investing?

Post by snarlyjack »

I love you guy's...

Age 100 - age 58 = 42 more years to go.

In my reading of the "Millionaire Next Door" types.
Think of the Janitor Next Door types & Warren Buffett.
Most of their wealth came in the second half of their life.
That's when the compounding really starts to kick in.

Strategy: What would happen if you didn't derisk the portfolio
and converted it to a income producing portfolio (dividend paying
stocks & funds like vhdyx)? You both still have about 40 years to go
& you need income. At 7% growth the funds would double another
3-4 times. Also, Social Security kicks in at age 62, which will help.

Just kicking around some ideas & thoughts for you to consider.
I think I read somewhere that most of Warren Buffett wealth happened
after he turned 60 years old. I know that the Janitor Next Door &
Warren Buffet (were/are) 100% invested in stocks & they never
derisked their portfolio's...Just trying to think outside the box.

Maybe the (Bogleheads) can help come up with a really good plan &
analyze the heck out of it. That is what we do best...
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: What is total return vs. dividend investing?

Post by JustinR »

Is a dividend basically just a "forced sale" of your stock?

What's the mathematical difference between dividends and manually selling your stock?

It seems like dividends are worse in every way, since some percentage of it could be taxed as normal income. What's the benefit of dividends over manually selling for income?
snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: What is total return vs. dividend investing?

Post by snarlyjack »

Justin,

Think of it this way.

You & I are retired. We both have a portfolio of $1 Million.
I' am living off of the dividends/interest. Your selling off
your portfolio. Which portfolio do you think is going to
last longer?

The Trinity Study 4% rule was all about a 30 year sell off
of the portfolio. After 30 years how much money (if any)
is left over? Dividends are different, they can & will take
you out 30, 40, 50 years without depleting the portfolio.

That is why they are saying (new studies) that the Trinity Study
(mathematically) needs to be reduced/adjusted to 3.25%.
With dividends I have not "sold" anything. I have just used
the dividend/interest without ever touching the principal. I still have
my $1 Million. Now the growth of the portfolio might not be as
much (because I 'am using the dividends & not reinvesting them)
but the portfolio is still in tact.

Their is a huge difference between the accumulation stage &
the de-accumulation stage of a portfolio.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

CyclingDuo wrote: Thu Dec 14, 2017 10:01 pm

56 and 59 in this household, so certainly not considering 58 old or certainly doesn't qualify as an "old man" yet. We just lost 3 parents at ages 88, 91 and 92 - so we'd consider that as old age. Not being in your 50's or 60's. Those are still prime bicycling years!

Nedsaid: I don't feel old, I can still do most everything I have always done but still there are those little signs like needing stronger glasses for eyesight. I also notice that I have less enthusiasm for freeway driving, pretty much I am more aware of what can go wrong and there are some pretty aggressive drivers out there. During my fifties, I took five trips to Europe and a US East Coast trip. Still have the wanderlust.

So here we are two years later from your posts in this thread. Has the dividend stream from your 18 stocks done well the past two years, and been reinvested into more shares? Are you planning on the 12.5% you have in them as being a portion of your reliable income stream going forward?

Nedsaid: You can follow my portfolio progress in "My New "Doo" thread. Pretty much, dividends and profits from sale have been mostly invested into bond funds over the last eight or nine years. Some has gone into stock ETFs or stock mutual funds. A much smaller portion has been reinvested back into individual stocks. I have noticed that the income stream from my IRA Brokerage Account which holds the individual stocks, ETFs, and loaded funds has been increasing over the years. More monies to reinvest. The individual stock portfolio has grown in value too though I have trimmed it here and there over the last 10 years or so. I was down to 15 stocks at one point in the IRA and it is up to 18 stocks now and I will probably keep it there.

I've spent the past few weeks reading until I am cross-eyed about dividend income investing (due to the inherited dividend paying stocks). I never knew the subject created so much ire in investing discussion circles until this year. In terms of the portfolios we inherited, they worked out well for all of our parents who were living off of the dividends to supplement their SS, and none of them outlived their money. I'm not as worried about the complexity at this point as setting them up as DRIP's ends up being a hands off approach. I did mention in another thread earlier this year, that my spouse has an emotional connection to her inheritance, so even if that is a mistake in terms of behavioral finance - it remains a reality for decision making that I have to respect for obvious reasons. I carefully was able to make a case for trimming down the number of positions and managed to move what was trimmed (about 1/3rd of her inherited portfolio) into Vanguard ETF's (VTI/VXUS/VTEB) without her emotions being upsot.

Nedsaid: You have acted rationally. You got rid of the precious metals stocks, which give you a diversification benefit but their returns over time are low and they can be quite volatile. They can act as portfolio insurance but over time are most likely a drag on returns. The Master Limited Partnerships give good yields but the K-1's can be a pain in the keyster at tax time and sometimes these can come late, forcing an extension. Even in an IRA has to file a return, the custodian will do this, if Unrelated Business Income from MLP's get to be more than a combined $1,000, and the IRA has to pay a tax. The other issue is that MLP's are pretty heavy in the energy sector, these got stung pretty badly when oil and natural gas prices fell. Sounds to me like you kept the good stuff.

At the very least, even talking about it brings up this saying in my mind...

"You think that's a problem? You don't know what problems are." 
A fool and his money are good for business.
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

JustinR wrote: Fri Dec 15, 2017 4:40 am Is a dividend basically just a "forced sale" of your stock?

What's the mathematical difference between dividends and manually selling your stock?

It seems like dividends are worse in every way, since some percentage of it could be taxed as normal income. What's the benefit of dividends over manually selling for income?
Not really. While it is true that the stock would be worth more if it had retained the cash, dividends represent a return of cash to the business owner. You are taking a portion of the excess cash to live on, which is the whole reason someone goes into business in the first place. It is also why people buy investment real estate, they want those cash flows.

I don't know, the "create your own dividend" argument is a bit overblown. You could just as well say the company is liquidating its own stock to pay bills or to pay employees. Payments to company owners is just another bill the company has to pay. Why would I go into business if all I did was reinvest the profits and not taking any cash for myself? Why would a business owner just in effect donate his time and capital? He expects not only an increase in value of the business itself but also a portion of the excess cash flow. Why would a stock holder of a publicly traded company have different expectations than a small business owner?
A fool and his money are good for business.
User avatar
CyclingDuo
Posts: 5989
Joined: Fri Jan 06, 2017 8:07 am

Re: What is total return vs. dividend investing?

Post by CyclingDuo »

nedsaid wrote: Fri Dec 15, 2017 9:55 am Nedsaid: You have acted rationally. You got rid of the precious metals stocks, which give you a diversification benefit but their returns over time are low and they can be quite volatile. They can act as portfolio insurance but over time are most likely a drag on returns. The Master Limited Partnerships give good yields but the K-1's can be a pain in the keyster at tax time and sometimes these can come late, forcing an extension. Even in an IRA has to file a return, the custodian will do this, if Unrelated Business Income from MLP's get to be more than a combined $1,000, and the IRA has to pay a tax. The other issue is that MLP's are pretty heavy in the energy sector, these got stung pretty badly when oil and natural gas prices fell. Sounds to me like you kept the good stuff.
Yes, we tried to keep what looked like the good stuff. We just got a letter from Fidelity in the past week that said, starting next year, Fidelity will be charging $300 per MLP/LP to do the paperwork for the taxes. :shock:

I used that letter to convince my wife to jettison the final one we had been holding onto in her inherited IRA with the excuse that the increase in fees was going to dampen the return enough that it no longer was as attractive of an investment. She agreed.
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
User avatar
spdoublebass
Posts: 889
Joined: Thu Apr 27, 2017 10:04 pm
Location: NY

Re: What is total return vs. dividend investing?

Post by spdoublebass »

snarlyjack wrote: Fri Dec 15, 2017 5:53 am Justin,

Think of it this way.

You & I are retired. We both have a portfolio of $1 Million.
I' am living off of the dividends/interest. Your selling off
your portfolio. Which portfolio do you think is going to
last longer?
Snarlyjack I've been lurking on this thread. I have questions about this and other threads I've read on this topic.

What if the person "selling off" their portfolio does it in the same amount as your dividend amount? wouldn't them your overall amount be the same? That's the way I understood it. When you compare ones dividends amount to someone selling a certain percentage off their portfolio, usually the percentage isn't the same, which to me is apples to oranges.
To be clear, I do not see a difference if you sell the same amount as another portfolio's dividend.


Also, I hear this all the time, that accumulation investing is different from de-accumulation, which I understand, but how do you go from one to the other? Am I to add Dividend Index funds later on?
If I read the other threads correctly, they say that High Dividend or Dividend Growth index funds are not ideal for investors just starting out in the accumulation stage.

Just curious. People discuss this stuff a lot, but sometimes they don't just lay it out for the average Joe.
I'm trying to think, but nothing happens
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: What is total return vs. dividend investing?

Post by bertilak »

nedsaid wrote: Fri Dec 15, 2017 10:04 am
JustinR wrote: Fri Dec 15, 2017 4:40 am Is a dividend basically just a "forced sale" of your stock?

What's the mathematical difference between dividends and manually selling your stock?

It seems like dividends are worse in every way, since some percentage of it could be taxed as normal income. What's the benefit of dividends over manually selling for income?
Not really. While it is true that the stock would be worth more if it had retained the cash, dividends represent a return of cash to the business owner. You are taking a portion of the excess cash to live on, which is the whole reason someone goes into business in the first place. It is also why people buy investment real estate, they want those cash flows.

I don't know, the "create your own dividend" argument is a bit overblown. You could just as well say the company is liquidating its own stock to pay bills or to pay employees. Payments to company owners is just another bill the company has to pay. Why would I go into business if all I did was reinvest the profits and not taking any cash for myself? Why would a business owner just in effect donate his time and capital? He expects not only an increase in value of the business itself but also a portion of the excess cash flow. Why would a stock holder of a publicly traded company have different expectations than a small business owner?
+1

I think the way I look at it is essentially the same, but in different words ...
My thought is that "making your own dividend" by selling stock is just a form of a "spend down" procedure. I want my investments to grow faster than I spend them. To me that means you are limited to spending income WITHOUT reducing your share of the company.

The owners of (investors in) a gold mine can afford to spend some of the gold the mine produces but they can't keep selling off parts of the mine, even if the mine becomes more valuable. Eventually other people will own the whole thing.

That's not to say a company can't be mismanaged and do the same thing "behind the scenes."
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: What is total return vs. dividend investing?

Post by snarlyjack »

(lunch time)

spdoublebass,

In the accumulation stage most people like to use the TSM
for a couple of reasons. It is more diversified & more tax friendly,
in the accumulation stage (it's a growth fund).

The High Dividend Yield Index fund in the accumulation stage
is not as diversfied (405 stocks vs. 3000 stocks) and because it is
paying out a larger dividend it is not as tax friendly as the TSM,
(it's a income fund).

(But the capital gains tax is higher than the qualified dividend tax rate
for most people). One of the problems is switching from one type of
fund (growth) to another type of fund (income) due to the taxes
of switching funds. If your money is in a IRA or 401K it's not a problem
but if it's in a taxable account it can be a tax problem. So it depends
on where the money is located.

Question #1: where is the money located (taxable account or IRA/401k)?
Once we know where the money is located then we can make a plan
& go from there. We want to use the philosophy of "do no harm" like
a doctor. Taxes can be a harm so we want to be careful.

#2: We would want a fully researched plan before we did anything,
(we are not "winging" anything). This would be a highly researched
plan that would put the investor in a better position.
User avatar
spdoublebass
Posts: 889
Joined: Thu Apr 27, 2017 10:04 pm
Location: NY

Re: What is total return vs. dividend investing?

Post by spdoublebass »

snarlyjack wrote: Fri Dec 15, 2017 2:15 pm (lunch time)

spdoublebass,

In the accumulation stage most people like to use the TSM
for a couple of reasons. It is more diversified & more tax friendly,
in the accumulation stage (it's a growth fund).

The High Dividend Yield Index fund in the accumulation stage
is not as diversfied (405 stocks vs. 3000 stocks) and because it is
paying out a larger dividend it is not as tax friendly as the TSM,
(it's a income fund).

(But the capital gains tax is higher than the qualified dividend tax rate
for most people). One of the problems is switching from one type of
fund (growth) to another type of fund (income) due to the taxes
of switching funds. If your money is in a IRA or 401K it's not a problem
but if it's in a taxable account it can be a tax problem. So it depends
on where the money is located.

Question #1: where is the money located (taxable account or IRA/401k)?
Once we know where the money is located then we can make a plan
& go from there. We want to use the philosophy of "do no harm" like
a doctor. Taxes can be a harm so we want to be careful.

#2: We would want a fully researched plan before we did anything,
(we are not "winging" anything). This would be a highly researched
plan that would put the investor in a better position.
I am not asking for myself, but some of this stuff doesn't add up.

You said
"You & I are retired. We both have a portfolio of $1 Million.
I' am living off of the dividends/interest. Your selling off
your portfolio. Which portfolio do you think is going to
last longer?"

I think it depends on many things. If I was an average person with a smaller portfolio, I'd say the person who sells off their equity would last longer. Because they aren't requires to take such a large dividend. But that doesn't really matter

You also said:
"I have just used the dividend/interest without ever touching the principal"

This is not true. Your principle can go up and down. In a crash, you could be taking a dividend larger than you'd want. Your fund would be down compared to where you started. A total return investor would have some control. My point is that we are splitting hairs, but to hold an index fund just with companies that kick out a high dividend, I don't see it.
But you are touching the principle, you just aren't selling any shares, theres a big difference between that.
I'm trying to think, but nothing happens
User avatar
Topic Author
Miriam2
Posts: 4383
Joined: Fri Nov 14, 2014 10:51 am

Re: What is total return vs. dividend investing?

Post by Miriam2 »

bertilak wrote: ... My thought is that "making your own dividend" by selling stock is just a form of a "spend down" procedure. I want my investments to grow faster than I spend them. To me that means you are limited to spending income WITHOUT reducing your share of the company.
Sounds like the advice from Grayfox's farmer up-thread: "Don't eat your seed corn!"

ps - thanks Bertilak, for bringing back your Santa hat for your posts - we all look for your nice cheerful spirit this time of year :D
snarlyjack
Posts: 780
Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: What is total return vs. dividend investing?

Post by snarlyjack »

(lunch time)

spdoublebass,

Nice meeting you by the way.

We have had lot's of discussions on Bogleheads concerning dividends.
Some people like them some people don't. It can be a pretty
contentions conversation. I can show you academic studies
on both sides of the debate, on why their side is correct.

In my mind it all comes back to the Trinity Study 4% guideline.
Which means I've been putting money into my portfolio all these
years & how do I get my money out? And, will it last my lifetime?

The larger the portfolio the better. If you only have a $50,000
portfolio it going to be a problem. If you have a $2 Million dollar
portfolio that is a different subject.

In other words it all comes down to your portfolio size & your age
(mortality rate). Some people in the FIRE community (financial independence
retire early) want to retire early (in their 30's or 40's) & need the portfolio
to last 30, 40, 50 years. Other people who retire at 65 need their portfolio's
to last 30 years.

So they have different goals & objectives. You need to know your goals &
objectives. Then it becomes a mathematical formula/problem. All in all
the larger the portfolio the better.
User avatar
bertilak
Posts: 10711
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: What is total return vs. dividend investing?

Post by bertilak »

spdoublebass wrote: Fri Dec 15, 2017 2:51 pm I think it depends on many things. If I was an average person with a smaller portfolio, I'd say the person who sells off their equity would last longer. Because they aren't requires to take such a large dividend.
The amount of dividend is not under your control, other than what you chose to invest in, so the concept of what dividend you are required to take does not affect what's available to take. If what you get isn't enough than do what you gotta do; eat the seed corn and hope for a better season next year. The less of that you do, the better. Perhaps it is better to go hungry for a season (and still hope for a better season next year).

You can only turn equity into income at the expense of equity and therefore future income.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

CyclingDuo wrote: Fri Dec 15, 2017 11:47 am
nedsaid wrote: Fri Dec 15, 2017 9:55 am Nedsaid: You have acted rationally. You got rid of the precious metals stocks, which give you a diversification benefit but their returns over time are low and they can be quite volatile. They can act as portfolio insurance but over time are most likely a drag on returns. The Master Limited Partnerships give good yields but the K-1's can be a pain in the keyster at tax time and sometimes these can come late, forcing an extension. Even in an IRA has to file a return, the custodian will do this, if Unrelated Business Income from MLP's get to be more than a combined $1,000, and the IRA has to pay a tax. The other issue is that MLP's are pretty heavy in the energy sector, these got stung pretty badly when oil and natural gas prices fell. Sounds to me like you kept the good stuff.
Yes, we tried to keep what looked like the good stuff. We just got a letter from Fidelity in the past week that said, starting next year, Fidelity will be charging $300 per MLP/LP to do the paperwork for the taxes. :shock:

I used that letter to convince my wife to jettison the final one we had been holding onto in her inherited IRA with the excuse that the increase in fees was going to dampen the return enough that it no longer was as attractive of an investment. She agreed.
Ouch!! I but the $300 charge kicks in when Fidelity has to prepare a Tax Return for the IRA when Unrelated Business Income is a combined $1,000 for the IRA. The K-1's from the MLP's do not come from Fidelity.
A fool and his money are good for business.
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: What is total return vs. dividend investing?

Post by JustinR »

snarlyjack wrote: Fri Dec 15, 2017 5:53 am Justin,

Think of it this way.

You & I are retired. We both have a portfolio of $1 Million.
I' am living off of the dividends/interest. Your selling off
your portfolio. Which portfolio do you think is going to
last longer?

The Trinity Study 4% rule was all about a 30 year sell off
of the portfolio. After 30 years how much money (if any)
is left over? Dividends are different, they can & will take
you out 30, 40, 50 years without depleting the portfolio.

That is why they are saying (new studies) that the Trinity Study
(mathematically) needs to be reduced/adjusted to 3.25%.
With dividends I have not "sold" anything. I have just used
the dividend/interest without ever touching the principal. I still have
my $1 Million. Now the growth of the portfolio might not be as
much (because I 'am using the dividends & not reinvesting them)
but the portfolio is still in tact.

Their is a huge difference between the accumulation stage &
the de-accumulation stage of a portfolio.
nedsaid wrote: Fri Dec 15, 2017 10:04 am
JustinR wrote: Fri Dec 15, 2017 4:40 am Is a dividend basically just a "forced sale" of your stock?

What's the mathematical difference between dividends and manually selling your stock?

It seems like dividends are worse in every way, since some percentage of it could be taxed as normal income. What's the benefit of dividends over manually selling for income?
Not really. While it is true that the stock would be worth more if it had retained the cash, dividends represent a return of cash to the business owner. You are taking a portion of the excess cash to live on, which is the whole reason someone goes into business in the first place. It is also why people buy investment real estate, they want those cash flows.

I don't know, the "create your own dividend" argument is a bit overblown. You could just as well say the company is liquidating its own stock to pay bills or to pay employees. Payments to company owners is just another bill the company has to pay. Why would I go into business if all I did was reinvest the profits and not taking any cash for myself? Why would a business owner just in effect donate his time and capital? He expects not only an increase in value of the business itself but also a portion of the excess cash flow. Why would a stock holder of a publicly traded company have different expectations than a small business owner?
Thanks for the replies. You answered my question in theory, but not mathematically.

From what I understand, when a dividend is issued, doesn't the stock price drop that exact amount? So mathematically the dividend is exactly the same as selling your stock, except it's forced and you pay more taxes on it.

What am I missing?
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

JustinR wrote: Fri Dec 15, 2017 9:29 pm
Thanks for the replies. You answered my question in theory, but not mathematically.

From what I understand, when a dividend is issued, doesn't the stock price drop that exact amount? So mathematically the dividend is exactly the same as selling your stock, except it's forced and you pay more taxes on it.

What am I missing?
All other things being equal, when a dividend is issued, the stock price will drop by the exact amount of the dividend. The markets value companies as a multiple of earnings but also takes into account assets on the balance sheet. We know that high cash levels tend towards higher price/earnings ratios, lower cash levels tend towards lower price earnings ratios. We also know that high debt tends towards lower P/E ratios.
A fool and his money are good for business.
JustinR
Posts: 1451
Joined: Tue Apr 27, 2010 11:43 pm

Re: What is total return vs. dividend investing?

Post by JustinR »

nedsaid wrote: Fri Dec 15, 2017 9:38 pm
JustinR wrote: Fri Dec 15, 2017 9:29 pm
Thanks for the replies. You answered my question in theory, but not mathematically.

From what I understand, when a dividend is issued, doesn't the stock price drop that exact amount? So mathematically the dividend is exactly the same as selling your stock, except it's forced and you pay more taxes on it.

What am I missing?
All other things being equal, when a dividend is issued, the stock price will drop by the exact amount of the dividend. The markets value companies as a multiple of earnings but also takes into account assets on the balance sheet. We know that high cash levels tend towards higher price/earnings ratios, lower cash levels tend towards lower price earnings ratios. We also know that high debt tends towards lower P/E ratios.
So you're saying I'm right, that they're the same thing and the premise of the "living off dividends" strategy is flawed?
LRonHalfelven
Posts: 87
Joined: Tue Sep 29, 2009 7:55 am

Re: What is total return vs. dividend investing?

Post by LRonHalfelven »

Miriam2 wrote: Fri Dec 15, 2017 2:58 pm Sounds like the advice from Grayfox's farmer up-thread: "Don't eat your seed corn!"
Better to invest in a dividend fund: every quarter they'll send you a sack of your own seed corn, labeled "TOTALLY NOT SEED CORN" in large, friendly letters.
"If you change your strategy frequently you don't really have one." --Garry Kasparov
User avatar
nedsaid
Posts: 19249
Joined: Fri Nov 23, 2012 11:33 am

Re: What is total return vs. dividend investing?

Post by nedsaid »

JustinR wrote: Fri Dec 15, 2017 10:03 pm
nedsaid wrote: Fri Dec 15, 2017 9:38 pm
JustinR wrote: Fri Dec 15, 2017 9:29 pm
Thanks for the replies. You answered my question in theory, but not mathematically.

From what I understand, when a dividend is issued, doesn't the stock price drop that exact amount? So mathematically the dividend is exactly the same as selling your stock, except it's forced and you pay more taxes on it.

What am I missing?
All other things being equal, when a dividend is issued, the stock price will drop by the exact amount of the dividend. The markets value companies as a multiple of earnings but also takes into account assets on the balance sheet. We know that high cash levels tend towards higher price/earnings ratios, lower cash levels tend towards lower price earnings ratios. We also know that high debt tends towards lower P/E ratios.
So you're saying I'm right, that they're the same thing and the premise of the "living off dividends" strategy is flawed?
Most people do not have portfolios large enough to generate enough dividend and interest income to live on, they will have to harvest capital gains too. Likely, they will have to spend down their portfolios. People have an aversion to touching their principal but they will likely have to.

The problem is with investing, everything is flawed. It is just that some approaches have fewer flaws than others. There are potential problems with about any approach you can take.

A big problem that retirees face is the potential running out of money problem, no one wants to outlive their money. Problem is you can't get growth without exposure to stocks and stocks expose you to market volatility. The market dropped over 50% three times during my lifetime: 1973-1974 (I was a teenager then with no money to invest), 2000-2002, and 2008-2009. During the 2008-2009 bear market, my losses were about two years of take home pay. On the other hand, if you invest too conservatively, your returns will be less and this increases the risk of exhausting a portfolio in retirement.

There are a number of solutions out there but they all have their pitfalls. Probably I will do a combination of things to deal with this. For example, I could take part of my nest egg and buy an annuity with it. A big problem with annuities is that most of them don't adjust for inflation, the ones that do are more expensive probably 30% to 40% more.

The reason I like dividends is that you have a decent shot at an income stream that grows faster than inflation. But as we saw in 2008-2009, dividends can be cut. Nevertheless, they are more stable and predictable than capital gains. Pretty much, people probably will resort to flexible withdrawal strategies. Spend more when markets are good and spend less when markets are bad.
A fool and his money are good for business.
Neus
Posts: 496
Joined: Fri Sep 22, 2017 2:12 am
Location: a Developing country in Asia with Low Cost of Living and Tax Treaty with USA

Re: What is total return vs. dividend investing?

Post by Neus »

Question regarding total return taxation:

If capital gain is taxed at personal income tax bracket (at my case 30%) rate, and my portfolio is up 10% this year, and my SWR is 3%, how much tax should i pay?

If say the initial portfolio is 1.000.000 USD, please correct me if this calculation is wrong:

Say this year my portfolio is UP 10% therefore my ETF value is 1.100.000 USD, i withdraw 3% annually = 33.000 USD

33.000 USD withdrawed is composed of:
30.000 from initial amount
3.000 from capital gain

So my realized capital gain is: $3000

Therefore i should pay 30% from 3000 USD, is this calculation correct?
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: What is total return vs. dividend investing?

Post by dbr »

Neus wrote: Tue Feb 27, 2018 10:41 pm Question regarding total return taxation:

If capital gain is taxed at personal income tax bracket (at my case 30%) rate, and my portfolio is up 10% this year, and my SWR is 3%, how much tax should i pay?

If say the initial portfolio is 1.000.000 USD, please correct me if this calculation is wrong:

Say this year my portfolio is UP 10% therefore my ETF value is 1.100.000 USD, i withdraw 3% annually = 33.000 USD

33.000 USD withdrawed is composed of:
30.000 from initial amount
3.000 from capital gain

So my realized capital gain is: $3000

Therefore i should pay 30% from 3000 USD, is this calculation correct?
No, the capital gain is calculated from the cost basis of your portfolio not from the value of your portfolio at the beginning of this year. However, if you meant to say that you started the year by investing $1M and that is your cost basis, then your example is correct as far as it goes.

It can happen that almost any marginal increment of income has some complex roll down effect in your tax return, but for sake of example you would be correct.
Neus
Posts: 496
Joined: Fri Sep 22, 2017 2:12 am
Location: a Developing country in Asia with Low Cost of Living and Tax Treaty with USA

Re: What is total return vs. dividend investing?

Post by Neus »

dbr wrote: Wed Feb 28, 2018 7:32 am
Neus wrote: Tue Feb 27, 2018 10:41 pm Question regarding total return taxation:

If capital gain is taxed at personal income tax bracket (at my case 30%) rate, and my portfolio is up 10% this year, and my SWR is 3%, how much tax should i pay?

If say the initial portfolio is 1.000.000 USD, please correct me if this calculation is wrong:

Say this year my portfolio is UP 10% therefore my ETF value is 1.100.000 USD, i withdraw 3% annually = 33.000 USD

33.000 USD withdrawed is composed of:
30.000 from initial amount
3.000 from capital gain

So my realized capital gain is: $3000

Therefore i should pay 30% from 3000 USD, is this calculation correct?
No, the capital gain is calculated from the cost basis of your portfolio not from the value of your portfolio at the beginning of this year. However, if you meant to say that you started the year by investing $1M and that is your cost basis, then your example is correct as far as it goes.

It can happen that almost any marginal increment of income has some complex roll down effect in your tax return, but for sake of example you would be correct.
Great, thank you for the confirmation

Then this total return strategy is indeed a lot more tax friendly than dividend strategy :)
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: What is total return vs. dividend investing?

Post by dbr »

Neus wrote: Wed Feb 28, 2018 8:47 am
Then this total return strategy is indeed a lot more tax friendly than dividend strategy :)
There is no such thing as a total return strategy. Total return just refers to keeping track of everything, including taxes.

What does exist is different procedures for managing portfolio withdrawals and for managing tax costs. What also exists is different criteria for investment selection. Total return accounting applies to all of them and is the recommended way to see for sure what is going on.
JohnDindex
Posts: 184
Joined: Wed Feb 07, 2018 9:59 am

Re: What is total return vs. dividend investing?

Post by JohnDindex »

The funny thing about all of this to me, is that if you use the 4% inflation adjusted withdrawal, eventually you are only spending the dividends.

for the 75/25 portfolio the 2016 withdrawal was 1.99% which is very close to the actual income of the portfolio, this is during a time with two very bad downturns

http://www.retireearlyhomepage.com/reallife17.html


For the balanced fund, 60/40 there was only one year since 1998 where the withdrawal was above 3% of the portfolio and that was during a pretty bad downturn. I'm not sure what the actual income is from these portfolios, rates obviously were much higher then, but even now you are talking about taking a very small amount of "principal" as the div gro people call it. Not to mention taxes.

Another example is this managed account through schwab...the dividend income is much higher than the s&p 500, but the total return through the entire history is slightly behind the s&p 500 (see second chart) this is all before taxes, so the s&p 500 wins again.

https://www.schwab.com/public/schwab/in ... end_growth
User avatar
aj76er
Posts: 1178
Joined: Tue Dec 01, 2015 10:34 pm
Location: Austin, TX

Re: What is total return vs. dividend investing?

Post by aj76er »

JohnDindex wrote: Wed Feb 28, 2018 9:49 am The funny thing about all of this to me, is that if you use the 4% inflation adjusted withdrawal, eventually you are only spending the dividends.

for the 75/25 portfolio the 2016 withdrawal was 1.99% which is very close to the actual income of the portfolio, this is during a time with two very bad downturns

http://www.retireearlyhomepage.com/reallife17.html
That's for a good sequence of returns (starting date of 1994). If you scroll to the bottom, he documents the case of starting in year 2000. That's a very different scenario
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
JohnDindex
Posts: 184
Joined: Wed Feb 07, 2018 9:59 am

Re: What is total return vs. dividend investing?

Post by JohnDindex »

aj76er wrote: Thu Mar 01, 2018 10:38 pm
JohnDindex wrote: Wed Feb 28, 2018 9:49 am The funny thing about all of this to me, is that if you use the 4% inflation adjusted withdrawal, eventually you are only spending the dividends.

for the 75/25 portfolio the 2016 withdrawal was 1.99% which is very close to the actual income of the portfolio, this is during a time with two very bad downturns

http://www.retireearlyhomepage.com/reallife17.html
That's for a good sequence of returns (starting date of 1994). If you scroll to the bottom, he documents the case of starting in year 2000. That's a very different scenario
That is true, but there are far more good starting dates than terrible ones. My larger point is this, over most time periods the actual "dividend" income of the portfolio comes very close to the 4% SWR. In a poor sequence, obviously it does not.

Second point, dividend investors don't start with a 4% yield...a typical starting point for a Div growth portfolio today would be 3%. Change the initial SWR to 3% inflation adjusted and the portfolio is still holding up through 2017. Even if you leave it at 4% the portfolio is still kicking, and might just make the 30 year mark...time will tell.
alex_686
Posts: 13286
Joined: Mon Feb 09, 2015 1:39 pm

Re: What is total return vs. dividend investing?

Post by alex_686 »

dbr wrote: Wed Feb 28, 2018 9:08 am There is no such thing as a total return strategy. Total return just refers to keeping track of everything, including taxes.
To extend a bit, "Total Return" (TR) is the rational way to look at the performance of your portfolio. Based on solid theory, comprehensive, and free from behavioral and cognitive defects. Looking just at dividends leaves holes in your vision, allowing for risk to sneak up behind you.

Once you have got to TR then you can start asking questions about "risk adjusted returns" or, as you mentioned, analyzing the impact of "Tax Drag" from the various components of your return.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
fortyofforty
Posts: 2083
Joined: Wed Mar 31, 2010 12:33 pm

Re: What is total return vs. dividend investing?

Post by fortyofforty »

What the "Never Dividends" crowd seems to forget is that the entire point of owning a piece of a company is to eventually convert your share to cash to be spent on other things. There is really no other reason to own stocks. So, do you want part of it back as dividends today or none of it back now in the hope of selling the share for proportionally more down the road?

If you have a responsible board and company management, the cash not paid out in dividends can and will be wisely used to expand the business and increase the long term value of your share. Many companies follow this strategy, with Berkshire Hathaway being the most widely cited. Berkshire Hathaway holds a stable of dividend-paying companies, though, so when it comes to choosing investments, the board of Berkshire believes in the value of receiving dividends. Companies that fail to pay dividends might squander the money on things like sending automobiles into space or other vanity projects. It's a gamble.

If you have an irresponsible board, or an incompetent management, it would be better to receive at least part of your investment back periodically in the form of cash, rather than waiting and hoping, only to find shares worth nothing. While it's de rigueur to give examples of dividend-paying companies that either cut dividends or went out of business, it is equally easy to cite companies that never paid dividends and folded up their tents. Pets.com, anyone? (Only the sock puppet made any money.)

Are dividend-paying companies truly more "risky" than non-dividend payers? Here are the top ten companies in Vanguard's High Dividend Yield ETF:

1 Microsoft Corp.
2 JPMorgan Chase & Co.
3 Johnson & Johnson
4 Exxon Mobil Corp.
5 Wells Fargo & Co.
6 Chevron Corp.
7 AT&T Inc.
8 Intel Corp.
9 Procter & Gamble Co.
10 Verizon Communications Inc.

Each of them carries the risk of underperforming the overall market, of cutting dividends, or of going out of business, but they are all recognizable names today, for sure. Does the "risk" come from the fact that they are mature, value companies or from paying dividends? Do they pay dividends because they are more mature, value companies?

Tax implications certainly reduce the attractiveness of dividends in taxable accounts, but in tax-deferred accounts or post-tax accounts, the differences are less clear cut.

For the record, I don't advocate investing solely for dividends, but don't judge too harshly those who eye dividend yield as a factor in choosing their stock investments.
User avatar
Topic Author
Miriam2
Posts: 4383
Joined: Fri Nov 14, 2014 10:51 am

Re: What is total return vs. dividend investing?

Post by Miriam2 »

fortyofforty wrote: What the "Never Dividends" crowd seems to forget is that the entire point of owning a piece of a company is to eventually convert your share to cash to be spent on other things. There is really no other reason to own stocks. So, do you want part of it back as dividends today or none of it back now in the hope of selling the share for proportionally more down the road?

If you have a responsible board and company management, the cash not paid out in dividends can and will be wisely used to expand the business and increase the long term value of your share. Many companies follow this strategy, with Berkshire Hathaway being the most widely cited. Berkshire Hathaway holds a stable of dividend-paying companies, though, so when it comes to choosing investments, the board of Berkshire believes in the value of receiving dividends. Companies that fail to pay dividends might squander the money on things like sending automobiles into space or other vanity projects. It's a gamble.

If you have an irresponsible board, or an incompetent management, it would be better to receive at least part of your investment back periodically in the form of cash, rather than waiting and hoping, only to find shares worth nothing. While it's de rigueur to give examples of dividend-paying companies that either cut dividends or went out of business, it is equally easy to cite companies that never paid dividends and folded up their tents. Pets.com, anyone? (Only the sock puppet made any money.)

Are dividend-paying companies truly more "risky" than non-dividend payers? Here are the top ten companies in Vanguard's High Dividend Yield ETF:

1 Microsoft Corp.
2 JPMorgan Chase & Co.
3 Johnson & Johnson
4 Exxon Mobil Corp.
5 Wells Fargo & Co.
6 Chevron Corp.
7 AT&T Inc.
8 Intel Corp.
9 Procter & Gamble Co.
10 Verizon Communications Inc.

Each of them carries the risk of underperforming the overall market, of cutting dividends, or of going out of business, but they are all recognizable names today, for sure. Does the "risk" come from the fact that they are mature, value companies or from paying dividends? Do they pay dividends because they are more mature, value companies?

Tax implications certainly reduce the attractiveness of dividends in taxable accounts, but in tax-deferred accounts or post-tax accounts, the differences are less clear cut.

For the record, I don't advocate investing solely for dividends, but don't judge too harshly those who eye dividend yield as a factor in choosing their stock investments.
Thank you for your Interesting post Forty, much for me (kind of a dividend novice) to think about.
Post Reply