4% Withdrawal vs Yield as Income

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dangermouse
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4% Withdrawal vs Yield as Income

Post by dangermouse » Fri Jan 12, 2018 10:42 am

Hi All,
I want to just tease through something, and get challenged on this thinking, as I am sure I will be!

A lot of forums talk about taking 4% a year from your entire portfolio to fund retirement. This has been bugging me a little as I think it is possible if you have a large enough $ portfolio to live of dividends, say a $3,000,000 portfolio in just total market index would pay on avg 2%, thus $60,000 pre-tax income. In a down-turn portfolio value could go down by as much as 50%, but dividends yields have historically remained pretty level (https://www.bogleheads.org/wiki/Vanguar ... tributions), so giving you roughly $30,000. Not great obviously but with cash in a money market you could whether the storm to make up the difference.

On the plus side, this portfolio as it is invested in the Vanguard Total Market Index will gain in value over the years (say to $6mm over 10 years, this is from firecalc as an avg) as will the dividend income.

It seems there is a turning point in overall wealth where this strategy would work, and where it wouldn't. I personally like the idea of my portfolio working for me like this and only needing to sell equity when needed, and just wanted to bounce the idea around the Boggleheads.

Thanks all, looking for to the discussion.

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warowits
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Re: 4% Withdrawal vs Yield as Income

Post by warowits » Fri Jan 12, 2018 10:50 am

:annoyed Dividends aren't magic. They cost the companies you own money, and make those companies worth less. If they didn't pay them to you, your shares would be worth more. You can make your own 'Dividends' by selling some of your shares. Spending dividends instead of reinvesting them hurts future returns the most during a market downturn. The reason just spending the dividends is a safe strategy is any very low withdrawal percentage strategy is safe. Another way of looking at your just spend the dividends strategy vs 4% withdrawal strategy is you just plan on saving twice as much!

Feel challenged enough?

If dividends really are magical free money that don't take away from your equity, as you seem to think they are, why doesn't vanguard's high dividend yield index VHDYX trounce its total stock market fund VTSMX?
Last edited by warowits on Fri Jan 12, 2018 11:04 am, edited 1 time in total.
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onourway
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Re: 4% Withdrawal vs Yield as Income

Post by onourway » Fri Jan 12, 2018 10:52 am

Please see the many threads here discussing dividends vs. total return strategy.

What you are thinking of has really nothing to do at all with dividends, but rather everything to do with the fact you are suggesting a 2% withdrawal rate. Nearly any portfolio large enough to sustain a 2% withdrawal will weather any crisis.

What you are talking about regarding selling equity vs. taking dividends is really just a mental trick. Dividends paid to you are simply cash taken out of the value of your investments and returned to you on a schedule that you have no control over. There is no difference whether you take the dividends or sell shares to generate equal payments.

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Re: 4% Withdrawal vs Yield as Income

Post by jebmke » Fri Jan 12, 2018 10:52 am

Well, the simple answer is that taking only 2% means you have to work/save longer to retire compared to taking 4%. Either that or decide that you want the remaining pile to be bigger when you croak. It is simple math. The trap is the mental accounting of looking at the dividends as somehow different than the rest of the money. It is all money.
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willthrill81
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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 11:03 am

Here's a little thought experiment that illustrates what dividends really do. Let's say that I own a business that's worth $100k. If I transfer $5k of cash from that business to my checking account, the business is worth $5k less, and my checking account is worth $5k more; my net worth has not changed. All I've done is shifted the money from one account to another.

This is what dividends do. They take cash from a business that you own, thereby reducing its value, and transfer that money to another account (e.g. brokerage, checking, etc.). You haven't gained anything from the dividends. Consequently, withdrawal strategies built on dividends are just smoke and mirrors; there's literally nothing there.

Part of the reason that 'living on dividends' makes people think they are safer is because they view their capital as the number of shares they owned. As a result, if they ever sell shares, they think that they are 'eating into their capital' and will eventually run out of money. This is patently false. Your capital is represented by the dollar value of your investments. If I sell 5% of my shares to withdraw for spending, but the other 95% of my shares go up in value by 5.26%, then I'm right back to where I was when I started in terms of capital.

Total returns matter; dividends do not.
Last edited by willthrill81 on Fri Jan 12, 2018 11:09 am, edited 1 time in total.
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Re: 4% Withdrawal vs Yield as Income

Post by dangermouse » Fri Jan 12, 2018 11:06 am

Thanks for the quick replies.

Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.

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Re: 4% Withdrawal vs Yield as Income

Post by jebmke » Fri Jan 12, 2018 11:10 am

dangermouse wrote:
Fri Jan 12, 2018 11:06 am
Thanks for the quick replies.

Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.
The dividend is simply part of the total return. It does simplify cash management in some cases but that isn't an investment issue.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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willthrill81
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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 11:11 am

dangermouse wrote:
Fri Jan 12, 2018 11:06 am
Thanks for the quick replies.

Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.
The dividend yield is just part of the total return; there's nothing special about it. And while dividend yields are usually more stable than prices, they have been cut dramatically in times of reduced corporate earnings.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% Withdrawal vs Yield as Income

Post by onourway » Fri Jan 12, 2018 11:13 am

dangermouse wrote:
Fri Jan 12, 2018 11:06 am
Thanks for the quick replies.

Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.
Still makes no difference. What you are suggesting is basically living off a 2% withdrawal rate. Yes, such a portfolio will be resistant to virtually any crisis. However most people will have to work significantly longer to get to that point.

dangermouse
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Re: 4% Withdrawal vs Yield as Income

Post by dangermouse » Fri Jan 12, 2018 11:18 am

Thanks everyone for the lively debate, this is why I like this forum so much, really informed people with great opinions.

I think this is really a mindset thing in-terms of investment styles. It all adds up to the same thing, just depends on how you see it. I have always been from the accumulation school of thought, good for my kids I guess!

Just to make sure that I haven't got a fundamental wrong in this, the dividend received from the likes of a VTSAX can either be withdrawn as cash or reinvested into the index. Correct?

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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 11:21 am

dangermouse wrote:
Fri Jan 12, 2018 11:18 am
Just to make sure that I haven't got a fundamental wrong in this, the dividend received from the likes of a VTSAX can either be withdrawn as cash or reinvested into the index. Correct?
Apart from the complications of withdrawing dividends from tax-advantage accounts (e.g. 401k, IRA), yes, you can either take the cash, reinvest it in the fund, or invest it elsewhere.
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Re: 4% Withdrawal vs Yield as Income

Post by RAchip » Fri Jan 12, 2018 1:47 pm

"If they didn't pay them to you, your shares would be worth more."

This cannot be proven. Nobody knows what JNJ's market value would be today if it had never paid any dividends. The stock price the day before and day after an ex-dividend date mean nothing to me. The issue is what the price would be over the long term if no dividends had been paid. Nobody can know what the company would have done with that excess cash so who knows what the stock price would be. MSFT, for example, has wasted BILLIONS on failed acquisitions so shareholders would clearly have had more value if those billions had been paid out in dividends.

Rather than speculating on what would happen if no dividends are paid, i will take the dividends -- guaranteed money. But there is no point in arguning about it because comapnies pay dividends. There is no index fund of non-dividend payers as far as I know. So its not like you can choose to be paid dividends or not. You get them. If you can live off of your dividends, that is fantastic. You are virtually guaranteed to never run out of money.
Last edited by RAchip on Fri Jan 12, 2018 1:50 pm, edited 1 time in total.

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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 1:49 pm

RAchip wrote:
Fri Jan 12, 2018 1:47 pm
"If they didn't pay them to you, your shares would be worth more."

This cannot be proven.
It's simple math. Look back to my example above. If move cash from my business into my checking account, my net worth has not changed. The business is worth less than it was before because it no longer has that cash. With publicly traded securities, this can become difficult to see in real time because many other factors are also at work. But literal volumes of research have consistently found that dividend stocks are not more profitable than others, apart from a potential value tilt.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% Withdrawal vs Yield as Income

Post by RAchip » Fri Jan 12, 2018 1:56 pm

"It's simple math."

No its not. You are assuming that instead of paying dividends, a company just lets the excess cash accumulate in an account in perpetuity AND that the market values that excess cash dollar-for-dollar.

Neither assumption is valid companies inevitably end up wasting excess cash -- that is the definition of excess cash -- cash not needed to produce future anticipated cash flows. And who knows how "the market" will value cash sitting in an account that will, by definition, NEVER BE PAID OUT. I would argue that excess cash that will never be paid out is worthless to stockholders.

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Re: 4% Withdrawal vs Yield as Income

Post by aristotelian » Fri Jan 12, 2018 2:03 pm

dangermouse wrote:
Fri Jan 12, 2018 11:06 am
Thanks for the quick replies.

Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.
The % yield goes up but the absolute yield goes down as companies cut their absolute dividends. If the stock market drops 50% from $1000, and yield climbs from 2% to 3%, your dividend drops from $20 to $15 even though yield % has gone up. Look at the actual distribution numbers for the S&P 2008 vs 2009 vs 2010. It's not stable.

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Fri Jan 12, 2018 2:11 pm

dangermouse wrote:
Fri Jan 12, 2018 10:42 am
Hi All,

A lot of forums talk about taking 4% a year from your entire portfolio to fund retirement. This has been bugging me a little as I think it is possible if you have a large enough $ portfolio to live of dividends, say a $3,000,000 portfolio in just total market index would pay on avg 2%, thus $60,000 pre-tax income. In a down-turn portfolio value could go down by as much as 50%, but dividends yields have historically remained pretty level (https://www.bogleheads.org/wiki/Vanguar ... tributions), so giving you roughly $30,000. Not great obviously but with cash in a money market you could whether the storm to make up the difference.

Thanks all, looking for to the discussion.
Like others have said - you will easily win in most any case where you can live off 2% of your portfolio.

I believe your assumptions are wrong (and the Boglehead link is misleading) in suggesting your income would go from $60k to $30k because dividend yields remained constant. In the 2007 to 2008 transition your income would have gone down less than 5% from $.602 to $.586 because the distribution yield went from 1.7% to 2.7%.

It is not that difficult however to build an income portfolio of Vanguard funds with a higher income profile. Something like VEIRX, Equity Income, could be a solid addition.

Dave
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dangermouse
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Re: 4% Withdrawal vs Yield as Income

Post by dangermouse » Fri Jan 12, 2018 2:26 pm

@finacialdave

How is the bogglehead link misleading? Using the link, let's say you had 1mm in 2007. Come 2008 with a -37% return that 1m is now $630,000. The div yield in 2007 was 1.79% of $1,000,000 (so $17,000), then come 2008 the div yield was 2.12% of $630,000 (so $13,356), about a -21% change in dividend income. I am relatively new here, so maybe I am making a mistake in my calculations?

This is a great discussion thanks @RaChip that is what I was trying to get to. Dividends are either due to a company having excess $ or trying to attract investors (according to what I have read from Buffet).

@financialdave thanks for the tip on VEIRX, will have a look into it.

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Re: 4% Withdrawal vs Yield as Income

Post by pastel » Fri Jan 12, 2018 3:17 pm

RAchip wrote:
Fri Jan 12, 2018 1:56 pm
"It's simple math."

No its not. You are assuming that instead of paying dividends, a company just lets the excess cash accumulate in an account in perpetuity AND that the market values that excess cash dollar-for-dollar.

Neither assumption is valid companies inevitably end up wasting excess cash -- that is the definition of excess cash -- cash not needed to produce future anticipated cash flows. And who knows how "the market" will value cash sitting in an account that will, by definition, NEVER BE PAID OUT. I would argue that excess cash that will never be paid out is worthless to stockholders.
Under balance sheet accounting, it is indeed basic math. Assets = Liabilities + Shareholder Equity.

If dividends are not paid, they are part of shareholder's equity. All equity valuation calculations should value cash on hand at face value. It doesn't matter whether or not the cash is paid out - by owning a share of the stock, you own a share of the company and therefore, its cash balance. You might not be able to decide what happens to it, but it's technically yours.

There are generally two ways firms use this cash on hand - distribute it to investors, or put it to use in the firm. A firm that does not primarily focus on growth (JNJ) pays out dividends. A firm that is still growing plows the cash back into the company, into let's say R&D (FB, pharma). If that research is patented, then it is then an asset, increasing both asset and shareholder equity value.

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Re: 4% Withdrawal vs Yield as Income

Post by RAchip » Fri Jan 12, 2018 3:20 pm

As a long term investor who prefers to live off of dividends, I am not concerned what the market value of my portfolio is now or in a year or two. I care what it will be in 10 or 20 years when I might want to sell and spend. For now, my concern is whether the actual dollar amount of my dividend cash is sufficient to cover my expenses and whether I can expect my dividends to grow annually. If stock prices drop (or rise) and my "yield" percentage goes up or down that doesn't change anything for me. I want x dollars in cash dividends per year and i want it to grow every year.

I understand that many say this approach is misguided and that dividends are pretty much irrelevant and that I can sell bits of stock to make my own dividends. In reality, that is very difficult if you have a large portfolio. Deciding exactly when and what to sell many times per year involves a lot of work. I prefer just getting a (nearly) guaranteed dividend payment automatically deposited in my account quarterly. And those dividend payments rarely go down regardless of what the stock market does.

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Fri Jan 12, 2018 3:36 pm

dangermouse wrote:
Fri Jan 12, 2018 2:26 pm
@finacialdave

How is the bogglehead link misleading? Using the link, let's say you had 1mm in 2007. Come 2008 with a -37% return that 1m is now $630,000. The div yield in 2007 was 1.79% of $1,000,000 (so $17,000), then come 2008 the div yield was 2.12% of $630,000 (so $13,356), about a -21% change in dividend income. I am relatively new here, so maybe I am making a mistake in my calculations?

This is a great discussion thanks @RaChip that is what I was trying to get to. Dividends are either due to a company having excess $ or trying to attract investors (according to what I have read from Buffet).

@financialdave thanks for the tip on VEIRX, will have a look into it.
@dangermouse
The Boglehead link is misleading because you can't use percentages to convert to dividend real income without knowing the average price base they were calculated on. In the "Independent Guide to Vanguard Funds" you have the data right at hand in 2007 the total distribution was $.586 per share. So let's do a quick calculation here:

1/1/2007 you spent $1m @ share price $34.09 = 29,334 shares.

In 2007 those shares paid .602 per share for $17,659. The yield on that based on 12/31/2007 price $35.36 is 1.7%
In 2008 those same shares paid $.586 for $17,189. The yield on that based on 12/31/2008 price of $21.80 is 2.7%

Can you see any of that information in the Boglehead link or figure out what your real income was. Only if you know the price basis the yield is calculated on, as thier numbers are some type of average yield and not the distribution yield based on the year end price of the fund.

Note: data is from VTSMX from "2016 Independent Guide to the Vanguard Funds."

Dave
Last edited by FinancialDave on Fri Jan 12, 2018 3:44 pm, edited 1 time in total.
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Re: 4% Withdrawal vs Yield as Income

Post by delamer » Fri Jan 12, 2018 3:43 pm

RAchip wrote:
Fri Jan 12, 2018 3:20 pm
As a long term investor who prefers to live off of dividends, I am not concerned what the market value of my portfolio is now or in a year or two. I care what it will be in 10 or 20 years when I might want to sell and spend. For now, my concern is whether the actual dollar amount of my dividend cash is sufficient to cover my expenses and whether I can expect my dividends to grow annually. If stock prices drop (or rise) and my "yield" percentage goes up or down that doesn't change anything for me. I want x dollars in cash dividends per year and i want it to grow every year.

I understand that many say this approach is misguided and that dividends are pretty much irrelevant and that I can sell bits of stock to make my own dividends. In reality, that is very difficult if you have a large portfolio. Deciding exactly when and what to sell many times per year involves a lot of work. I prefer just getting a (nearly) guaranteed dividend payment automatically deposited in my account quarterly. And those dividend payments rarely go down regardless of what the stock market does.
Looking at the S&P 500 in the linked chart, there has been a wide variation in dividends over the last 12 years. Undoubtedly, some individual stocks have more stable payouts.

But it seems that stability of dividends in a Boglehead-recommended portfolio cannot be relied on.

https://ycharts.com/indicators/sp_500_d ... _per_share

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Re: 4% Withdrawal vs Yield as Income

Post by onourway » Fri Jan 12, 2018 3:46 pm

RAchip wrote:
Fri Jan 12, 2018 3:20 pm
As a long term investor who prefers to live off of dividends, I am not concerned what the market value of my portfolio is now or in a year or two. I care what it will be in 10 or 20 years when I might want to sell and spend. For now, my concern is whether the actual dollar amount of my dividend cash is sufficient to cover my expenses and whether I can expect my dividends to grow annually. If stock prices drop (or rise) and my "yield" percentage goes up or down that doesn't change anything for me. I want x dollars in cash dividends per year and i want it to grow every year.

I understand that many say this approach is misguided and that dividends are pretty much irrelevant and that I can sell bits of stock to make my own dividends. In reality, that is very difficult if you have a large portfolio. Deciding exactly when and what to sell many times per year involves a lot of work. I prefer just getting a (nearly) guaranteed dividend payment automatically deposited in my account quarterly. And those dividend payments rarely go down regardless of what the stock market does.
Setting up an automatic, ongoing withdrawal from my Vanguard account takes less than 5 minutes. I'm not sure why the difficulty is dependent on the size of your portfolio.

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Re: 4% Withdrawal vs Yield as Income

Post by dangermouse » Fri Jan 12, 2018 4:12 pm

@financialdave Thanks that makes sense, that wiki is misleading. I put a $1,000,000 hypothetical into portfoliovisualizer in VTSMX. You can see that the portfolio income is pretty resilient to a crash. The rise in income afterwards is due to only price increase, without dividends reinvested. Thought I would share, this is really interesting stuff.

https://imgur.com/IjDTkm4

@RAChip. I can completely see your point of view on withdrawals. I really think it is just a personal thing, some people are happy taking from an overall portfolio and others like dividends. It also massively comes down to whether you have enough wealth that your dividends pay a sufficient income, like you say. Out of interest RAChip what does your portfolio look like right now in-terms of indexes etc?

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Re: 4% Withdrawal vs Yield as Income

Post by Broken Man 1999 » Fri Jan 12, 2018 4:47 pm

Dividends can rise, fall, stop, restart.... I wouldn't hang my hat on them.

We reinvest all dividends even though we could just about get enough of our expenses via dividends. However, dividend "harvesting" for expenses is just too much effort to me. I'd rather examine all my accounts and decide where I pull our expenses from, via selling shares.

Broken Man 1999
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Re: 4% Withdrawal vs Yield as Income

Post by mega317 » Fri Jan 12, 2018 5:12 pm

RAchip wrote:
Fri Jan 12, 2018 3:20 pm
Deciding exactly when and what to sell many times per year involves a lot of work.
How much work did it take to accumulate a large enough portfolio for dividends to cover your spending?

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Re: 4% Withdrawal vs Yield as Income

Post by RAchip » Fri Jan 12, 2018 5:21 pm

"RAChip what does your portfolio look like right now in-terms of indexes etc"

The majority of my stock portfolio is individual blue chip dividend stocks. Some is in the vanguard s&p 500 index fund, but I bought most of my individual holdings when stock prices were lower and yields were higher. I acknowledge that it would be easier to sell bits if it was all in an index fund. Most of my portfolio was acquired after and as a result of a large one time financial transaction event.

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Re: 4% Withdrawal vs Yield as Income

Post by Abe » Fri Jan 12, 2018 5:25 pm

RAchip wrote:
Fri Jan 12, 2018 3:20 pm

I understand that many say this approach is misguided and that dividends are pretty much irrelevant and that I can sell bits of stock to make my own dividends. In reality, that is very difficult if you have a large portfolio. Deciding exactly when and what to sell many times per year involves a lot of work. I prefer just getting a (nearly) guaranteed dividend payment automatically deposited in my account quarterly. And those dividend payments rarely go down regardless of what the stock market does.
Also, you have to pay tax on the dividends regardless, if you spend them or if you reinvest them, so if dividends produce enough income for you, you might as well spend them. I don't see any point in reinvesting dividends and then selling shares to live on.
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Re: 4% Withdrawal vs Yield as Income

Post by pkcrafter » Fri Jan 12, 2018 5:44 pm

Taking Dividends vs reinvesting dividends

Image

In addition to the obvious, if you take dividends you lose control of when to make withdrawals. You would not want to take dividends when the market is down. You would want to reinvest them and buy at the lower price.


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Re: 4% Withdrawal vs Yield as Income

Post by HomerJ » Fri Jan 12, 2018 5:55 pm

People are making this way too hard.

Look, the 4% withdrawals include dividends. If I was 100% Total Stock Market Index in retirement (I wouldn't be), I'll get the 2% dividends from it, and then sell another 2% each year.

If you don't want to sell any of your shares ever, then you'll only get the 2% from dividends. Which is fine.

But dangermouse, all you are saying is that you want to save TWICE as much money so can live on 2% instead of 4%. That's fine, if you can manage it. But that's years of your life you'll be giving up to double your money one last time at the end.

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Re: 4% Withdrawal vs Yield as Income

Post by Phineas J. Whoopee » Fri Jan 12, 2018 6:26 pm

dangermouse wrote:
Fri Jan 12, 2018 11:06 am
...
Yes I get all of the above, but what I am talking about and is often overlooked on the forum is that an index like VTSAX also offers a dividend yield of 1.75% currently. This div yield actually goes up in-times of crisis due to companies wanting to attract investors. So I am not talking about a Dividend specific index, but just the standard total market that has the benefit of a dividends yield.
The dividend yield does not go up in times of crisis due to companies wanting to attract new investors. There are two problems with that idea:

1) Buying stock on the secondary market does not result in the corporation having more money. You exchange your money for some shares somebody else held. Higher stock prices in some ways benefit companies, but secondary market trading usually doesn't involve them at all; and

2) The reason the dividend yield goes up is because the value of the stocks went down. It's simple grade-school arithmetic. Let's imagine a stock selling for $100, which has in the past paid $10 per share in annual dividends. In a market crash its share price drops to $60, but it manages to pay its $10 dividend that year. The dividend yield goes up from 10% to 17%, but it's calculated based on a different price.

10/100 = .10

10/60 = .17

And that's assuming the poor economic conditions that led to the crash do not cause the company to reduce its per-share dividend payout. Depending on how far the share price falls, the dividend yield can go up even if the corporation reduces the dividend it pays. See our wiki article: Percentage gain and loss.

I hope that's helpful.

PJW

FactualFran
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Re: 4% Withdrawal vs Yield as Income

Post by FactualFran » Fri Jan 12, 2018 6:36 pm

dangermouse wrote:
Fri Jan 12, 2018 4:12 pm
@financialdave Thanks that makes sense, that wiki is misleading. I put a $1,000,000 hypothetical into portfoliovisualizer in VTSMX. You can see that the portfolio income is pretty resilient to a crash. The rise in income afterwards is due to only price increase, without dividends reinvested. Thought I would share, this is really interesting stuff.
Whether the dividends of VTSMX were pretty resilient to the circa 2008 crash depends on the definition of pretty resilient. The dividend amount, with them taken in cash, during 2009 was -14% of the amount during 2007.

The rise of income amount afterward was due to increases in dividend per share amounts each year; it had nothing to do with price increase. During 2009 VTSMX distributed a total of $0.515 per share. During 2017 the total was $1.076 per share.

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Fri Jan 12, 2018 7:10 pm

FactualFran wrote:
Fri Jan 12, 2018 6:36 pm
dangermouse wrote:
Fri Jan 12, 2018 4:12 pm
@financialdave Thanks that makes sense, that wiki is misleading. I put a $1,000,000 hypothetical into portfoliovisualizer in VTSMX. You can see that the portfolio income is pretty resilient to a crash. The rise in income afterwards is due to only price increase, without dividends reinvested. Thought I would share, this is really interesting stuff.
Whether the dividends of VTSMX were pretty resilient to the circa 2008 crash depends on the definition of pretty resilient. The dividend amount, with them taken in cash, during 2009 was -14% of the amount during 2007.

The rise of income amount afterward was due to increases in dividend per share amounts each year; it had nothing to do with price increase. During 2009 VTSMX distributed a total of $0.515 per share. During 2017 the total was $1.076 per share.
I believe dividends are pretty resilient if you don't just look at two points in time. If you look at the total distributions 2006 thru 2010 which covers you pretty much equally on both sides of the dip, the total distribution was $2.76 or an average of $.55 per year. If anyone is thinking their individual stock dividends are going to hold up in a 2008 type event with less than 10% deviation I think they are probably dreaming. So in that respect I think the total stock market dividends held up quite well, not anywhere near the OP's proposed 50% drop - more like less than 10%.

Dave
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Re: 4% Withdrawal vs Yield as Income

Post by RAchip » Fri Jan 12, 2018 7:16 pm

"Look, the 4% withdrawals include dividends. If I was 100% Total Stock Market Index in retirement (I wouldn't be), I'll get the 2% dividends from it, and then sell another 2% each year."

Understood and agreed. But you could build your own portfolio of individual stocks (no REITS or MLP's) that pays 4% dividends (or close). It was easy to do this a few years ago but its certainly harder now with the run up in stock prices. But you can get close.

You get dividends no matter how you invest. To me, the issue is whether you should buy the s&p 500 or buy the vanguard high dividend fund or build your own portfolio to get higher dividends.

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Fri Jan 12, 2018 7:51 pm

RAchip wrote:
Fri Jan 12, 2018 7:16 pm
"Look, the 4% withdrawals include dividends. If I was 100% Total Stock Market Index in retirement (I wouldn't be), I'll get the 2% dividends from it, and then sell another 2% each year."

Understood and agreed. But you could build your own portfolio of individual stocks (no REITS or MLP's) that pays 4% dividends (or close). It was easy to do this a few years ago but its certainly harder now with the run up in stock prices. But you can get close.

You get dividends no matter how you invest. To me, the issue is whether you should buy the s&p 500 or buy the vanguard high dividend fund or build your own portfolio to get higher dividends.
Depends on your goal. Each of the three ways to invest can satisfy a goal, but they won't all give you the same money through your retirement lifetime. All strategies have a risk profile and a total return and that is what makes investing a challenge. Generally speaking whether an investment returns 2% in dividends or 4% in dividends will not tell you which one is better unless your only goal is to spend only the dividends.

We are batting back and forth two opposing strategies for spending retirement money (preserving capital -- vs maximum spendable income). You need to decide which you are comfortable with because the latter requires a much smaller nest egg than the former.

Dave
I love simulated data. It turns the impossible into the possible!

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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 7:55 pm

FinancialDave wrote:
Fri Jan 12, 2018 7:51 pm
We are batting back and forth two opposing strategies for spending retirement money (preserving capital -- vs maximum spendable income). You need to decide which you are comfortable with because the latter requires a much smaller nest egg than the former.
A dividend strategy is not a "preserving capital" strategy. Capital should not be viewed in terms of shares owned but in dollars invested. Even with a dividend strategy, those dollars go up and down with the movements of the investment. Just because you aren't selling shares doesn't mean that you're preserving your capital. Conversely, just because you're selling shares doesn't mean you're losing capital.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Fri Jan 12, 2018 8:05 pm

@will,

I agree with you - poor choice of terms on my part.

In the long term there is no guarantee you are going to preserve your capital with ANY strategy other than FDIC insured bank account where you only spend the income.

I understand very well that especially if you try and invest in individual stocks there is a very big chance you will underperform the market, but by how much is probably dependend on how far your Beta sways from that of the market.

However, I have pretty high confidence that anyone will preserve their capital by investing in either the S&P500 index or the Total Stock Market index and agreeing to never sell any of those shares and just live off the dividends. In fact with a little more flexibility as I mentioned above I could improve on the sustainable income and still preserve your capital long term. Just because your account goes down for a year or two does not mean you have lost your capital, when you spend it however then you have lost it!

When I buy a house (for cash) and its value drops by half, have I lost anything. Is the house still providing everything I need? If I am later forced to sell at a loss then yes I have lost something.

Dave
I love simulated data. It turns the impossible into the possible!

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Re: 4% Withdrawal vs Yield as Income

Post by randomguy » Fri Jan 12, 2018 11:32 pm

FinancialDave wrote:
Fri Jan 12, 2018 7:10 pm
FactualFran wrote:
Fri Jan 12, 2018 6:36 pm
dangermouse wrote:
Fri Jan 12, 2018 4:12 pm
@financialdave Thanks that makes sense, that wiki is misleading. I put a $1,000,000 hypothetical into portfoliovisualizer in VTSMX. You can see that the portfolio income is pretty resilient to a crash. The rise in income afterwards is due to only price increase, without dividends reinvested. Thought I would share, this is really interesting stuff.
Whether the dividends of VTSMX were pretty resilient to the circa 2008 crash depends on the definition of pretty resilient. The dividend amount, with them taken in cash, during 2009 was -14% of the amount during 2007.

The rise of income amount afterward was due to increases in dividend per share amounts each year; it had nothing to do with price increase. During 2009 VTSMX distributed a total of $0.515 per share. During 2017 the total was $1.076 per share.
I believe dividends are pretty resilient if you don't just look at two points in time. If you look at the total distributions 2006 thru 2010 which covers you pretty much equally on both sides of the dip, the total distribution was $2.76 or an average of $.55 per year. If anyone is thinking their individual stock dividends are going to hold up in a 2008 type event with less than 10% deviation I think they are probably dreaming. So in that respect I think the total stock market dividends held up quite well, not anywhere near the OP's proposed 50% drop - more like less than 10%.

Dave
Would you say stock prices are also resilent if you just don't look at 2 points of time.
2006 ~1400
2010 ~1250

Thats only a ~10% dip during one of the biggest crashes ever.:)

And it can take a long time for dividends to recover. In 1966 you got 21.33 from the s&p 500. It wasn't until 1989 that you got a higher payout (21.63) despite stocks more than doubling in real value of that time frame. Dividends are partly a fashion statement (sometimes investors and the tax law favors them, sometimes it does) in addition to economic one (i.e. companies having money to distribute).

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Re: 4% Withdrawal vs Yield as Income

Post by randomguy » Fri Jan 12, 2018 11:43 pm

FinancialDave wrote:
Fri Jan 12, 2018 8:05 pm


When I buy a house (for cash) and its value drops by half, have I lost anything. Is the house still providing everything I need? If I am later forced to sell at a loss then yes I have lost something.

Dave
Yes you lose money the instant the house drops in value. You might feel better not knowing that but it doesn't change reality. If I hold a stock that was worth 100 bucks and it goes to 1 dollar, would you say I haven't lost anything if I don't sell? Of course not. You have clearly lost the opportunity to trade that stock for 100 bucks. Your house is the same.

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Re: 4% Withdrawal vs Yield as Income

Post by willthrill81 » Fri Jan 12, 2018 11:45 pm

randomguy wrote:
Fri Jan 12, 2018 11:43 pm
FinancialDave wrote:
Fri Jan 12, 2018 8:05 pm


When I buy a house (for cash) and its value drops by half, have I lost anything. Is the house still providing everything I need? If I am later forced to sell at a loss then yes I have lost something.

Dave
Yes you lose money the instant the house drops in value. You might feel better not knowing that but it doesn't change reality. If I hold a stock that was worth 100 bucks and it goes to 1 dollar, would you say I haven't lost anything if I don't sell? Of course not. You have clearly lost the opportunity to trade that stock for 100 bucks. Your house is the same.
+1

Opportunity costs are very real.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 4% Withdrawal vs Yield as Income

Post by FinancialDave » Sat Jan 13, 2018 10:51 am

randomguy wrote:
Fri Jan 12, 2018 11:43 pm
FinancialDave wrote:
Fri Jan 12, 2018 8:05 pm


When I buy a house (for cash) and its value drops by half, have I lost anything. Is the house still providing everything I need? If I am later forced to sell at a loss then yes I have lost something.

Dave
Yes you lose money the instant the house drops in value. You might feel better not knowing that but it doesn't change reality. If I hold a stock that was worth 100 bucks and it goes to 1 dollar, would you say I haven't lost anything if I don't sell? Of course not. You have clearly lost the opportunity to trade that stock for 100 bucks. Your house is the same.
My house is not a trade. In fact in 2008-2009 the drop in value actually increased my retirement nest egg slightly with lower insurance and property taxes to a small degree.

There is no need to stretch the example to the ridiculous because if either my house or stock dropped to $1 there is a serious issue with the benefit that I am getting from it.

Let me clarify the point. If the benefit of the house or stock to me does not change, then the minute by minute price is not important. Of course there obviously is some point where it could or will become important if that price fluctuation becomes so great as to indicate that my benefit is in jeopardy (my ability to live in the house safely, or say the dividend income from my stock(s) in retirement) or you decide to trade one benefit for something else.

Dave
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heyyou
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Re: 4% Withdrawal vs Yield as Income

Post by heyyou » Sat Jan 13, 2018 11:25 am

Confirmation bias
A tendency to seek information that confirms one’s existing opinions and overlook or ignore information that refutes them. For example, when researching an investment, an investor might inadvertently look for information that supports his or her beliefs and fail to see information that presents different ideas. The resulting one-sided view can result in a poor investment choice. [3] “In short, your own mind acts like a compulsive yes-man who echoes whatever you want to believe,” says Wall Street Journal columnist Jason Zweig.

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Re: 4% Withdrawal vs Yield as Income

Post by FactualFran » Sat Jan 13, 2018 12:50 pm

FinancialDave wrote:
Fri Jan 12, 2018 7:10 pm
I believe dividends are pretty resilient if you don't just look at two points in time.
The annual dividends payed by VTSMX between the 2009 and 2017 end points that I previously poste were.

Code: Select all

2009  0.5150
2010  0.5300
2011  0.5620
2012  0.7200
2013  0.7650
2014  0.8510
2015  0.9470
2016  1.0240
2017  1.0762
I would call them increasing rather than "pretty resilient".

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