What if you only live off dividends?

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skime
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Re: What if you only live off dividends?

Post by skime » Tue Feb 13, 2018 7:51 pm

Use SDY. It destroys SPY long term.

AlohaJoe
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Re: What if you only live off dividends?

Post by AlohaJoe » Tue Feb 13, 2018 8:26 pm

skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image



They look nearly identical to me.

naha66
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Re: What if you only live off dividends?

Post by naha66 » Tue Feb 13, 2018 11:47 pm

Chuck wrote:
Tue Feb 13, 2018 10:28 am
It's even worse than that.

SEC yield on VTSAX (Total Stock Market Admiral) is 1.68%. Try saving up 59x expenses.
How many people retire 100% VTSX, a 40/60 4 fund of VTI,VEU,BND,and VCIT returns about 2.5% which is what some posters(the sky is falling) here advocate as the new SWR. I take my dividends and sell enough to get to my SWR of about 3.75

Da5id
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Re: What if you only live off dividends?

Post by Da5id » Wed Feb 14, 2018 8:21 am

naha66 wrote:
Tue Feb 13, 2018 11:47 pm
How many people retire 100% VTSX, a 40/60 4 fund of VTI,VEU,BND,and VCIT returns about 2.5% which is what some posters(the sky is falling) here advocate as the new SWR. I take my dividends and sell enough to get to my SWR of about 3.75
I think 2.5% advocates are rare. Some may have that amount, but I don't think many are suggesting it as guideline. 3-3.5% for long retirements many of us are thinking isn't a bad idea if you can reasonably do it though...

MrPotatoHead
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Re: What if you only live off dividends?

Post by MrPotatoHead » Wed Feb 14, 2018 9:49 am

There is nothing inherently wrong with the strategy especially if you are simply taking the dividend yield of the S&P500 or total stock market. The issue comes in when you reach for dividends.

I prefer to use a CD ladder that covers at least 10 years of expenses, with the plan to replenish each CD on an annual basis from dividends and income and then reinvest any residual for growth. The logic is, it acts as as a smoothing agent for budgeting purposes.

Be aware with the afore mentioned indexes yield can drop to 1.6 or so, therefore you are really targeting a fairly high expense multiple. Since valuations are historically high I am contemplating (at least this week) 75x expenses myself or about a 1.33% withdraw rate.

I suspect a lot of the negatively you see surrounding such strategies come from people born into first world countries who also have never known actual hunger or lived without heat, electric, or seen firsthand situations where the elderly sacrifice their self for the betterment or even survival of the younger generation. To such people an enormous amount of psychic income may accrue from seeming excessive security.

Cheers..
Last edited by MrPotatoHead on Thu Feb 15, 2018 8:44 pm, edited 1 time in total.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 11:40 am

onourway wrote:
Tue Feb 13, 2018 2:53 pm
getrichslowly wrote:
Tue Feb 13, 2018 2:37 pm
What I am mostly trying to correct for is speculative price movements. If the market's PE ratio doubles, most people just consider this a doubling in their wealth, and that means if they hit their retirement goal, they can now consume their same SWR as before of the inflated balance. Then if the market either (a) corrects itself, or (b) stagnates, their previously calculated SWR could fail. This is easiest to imagine if taken to extremes. Imagine CAPE is 100, or 1000. Would you still feel comfortable with 4%, or even 2% SWR? Obviously not. You would probably want to base your withdrawal on some sort of yield figure.
The 4% number already accounts for the possibility of high valuations. In other words, for all past rolling periods, including starting withdrawals at previously inflated peaks, 4% was sustainable. YMMV for the future.
Past rolling periods are not great predictors of future periods with different structural parameters.You have to understand the underlying structure and then use current parameters to make an informed prediction.

Returns don't just come out of a hat. They can be broken down into (1) Changes in valuation + (2) EPS Growth + (3) Dividends.

For more information, check out this latest post from philosophicaleconomics; http://www.philosophicaleconomics.com/2 ... per-limit/

He's predicting about 4% future real equity returns based on expected changes to the above components.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 11:51 am

nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
People who were doing this during the Great Depression were inconvenienced when the companies whose dividends they were living off stopped paying them.
I consider that a feature, not a bug. During the Great Depression, dividends fell by less than half, and had really just reverted to their pre-bubble level a decade prior. I find it prudent to reduce your consumption by half if dividends fall by half. This is actually more stable than basing your withdrawal off total wealth, which had fallen by a much greater factor. I can't imagine consuming the exact same level pre- and post- market crash under any circumstance, unless I was already withdrawing a ridiculously small fraction of my total wealth in the first place.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
"Living off dividends" has the same problem as many variable withdrawal systems. It is quite true that you will never literally run out of money, but the amount of money you are allowed to spend may not be enough to live on without wrenching dislocations in your lifestyle.
But any other strategy risks depleting capital. Unless you just want to die with exactly $0, but I like to see my capital grow.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
During the year 2006, if you had invested $1 million investment in the Vanguard 500 index fund you would have received 7,692 shares. They would have paid you a total of (0.58 + 0.60 + 0.65 + 0.78) * 7,692 = $20,076. During the year 2009, (0.54 + 0.45 + 0.51 + 0.69) = $16,845. That's the equivalent of a 16% "pay cut."
Probably a wise paycut, considering we were now in a recession. During a recession it is generally prudent to make some cuts.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm
Note, too, that the decision that "trusting what the market choose to provide" meant 1.7% to 2%, not the often-mentioned 4%.
This is mixing time periods though. Historically the dividend yield was closer to 4%, so a dividend rule and a 4%-SWR rule were the same. Only now are dividends half their historical value. But maybe that also implies that 4% SWR, which was backtested over historical data only (we don't have access to future data unfortunately, or this would be easy!) may not hold up on the future. There are some people like this guy who think we are looking at a future 4% real equity return: http://www.philosophicaleconomics.com/2 ... per-limit/
If we are, then my dividend strategy or 2%-SWR strategy is prudent.
nisiprius wrote:
Tue Feb 13, 2018 3:19 pm

In the dividend-oriented Vanguard Equity-Income fund, VEIPX, that $1 million invested at the start of 2005 = 39,077 shares, which would have provided (0.17 + 0.16 + 0.17 + 0.21) = $27,745 during 2006, and (0.17 + 0.13 + 0.11 + .14) * 39,077 = $21,492.35. Although the dividends are considerably higher than those of the 500 index, they still fall far short of 4%, and you would have been faced by a 22% "pay cut."
I don't advise deviating from the market cap weight.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Wed Feb 14, 2018 12:07 pm

randomguy wrote:
Tue Feb 13, 2018 6:38 pm

For example you would have gone from making 15k/year in 1930 to 8.2k year in 1932 in real dollars. Or if you want something more recent, 33k/year in 2008 to 25k/year in 2009.
I think this is good because 1932 was in a recession and its usually prudent to spend less during recessions, even if you're still in the accumulation phase, so that you can buy stocks while they're on sale.

Also, choosing 1930 as a startpoint is cherrypicking. In 1932 the dividend per share simply reverted back to its 1926 level. So actually, any excess dividend income received between 1927-1931 was just a bonus. If you weren't able to retire in 1926 but had only retired in say 1929 because of recent runup in valuations, then it was probably foolish to assume high valuations reflected your true wealth. Personally I try to focus on the fundamentals of my investments and not their price. CAPE is currently double the historical average, so I do not predict 7% real equity returns or a 4% SWR will succeed in the future. I know that my paper wealth is inflated by abnormal CAPE. I think a better predictor of future returns and future successful SWR is to base it off CAPE. If CAPE doubles, SWR falls by half. This way speculative price movements are ignored as the noise they are, and you only consume the actual earnings of your portfolio.

I realize pure dividends is flawed because of the equivalency with buybacks, so maybe a better measure should just be based on raw earnings.

ValueInvestor99
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Re: What if you only live off dividends?

Post by ValueInvestor99 » Wed Feb 14, 2018 2:02 pm

I use covered calls to "live on".

For example, VLO is currently at $89.48, the Mar $95 covered calls are at $0.78 corresponding to a 10% return, if the stock price doesn't change.
If the stock price goes over 95.78, then there will be a loss to buy back the options. And if the stock price drops to below $88.70, I would have been better off selling the stock.

Wakefield1
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Re: What if you only live off dividends?

Post by Wakefield1 » Wed Feb 14, 2018 2:16 pm

I am pretty sure that in 1930 buying a diverse list of stocks,dividend paying or not, was a lot harder than today. I'm sure there wasn't anything like "IDX 500 ADM" mutual fund available.
Ancestor of Wellington Fund :P :moneybag :P Front end load? :confused
Ancestor of Pioneer Fund-would those have supported annual withdrawal rates of 4% ?

And you couldn't easily check your 4:00 PM closing balance on the phone!
Last edited by Wakefield1 on Wed Feb 14, 2018 2:18 pm, edited 1 time in total.

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patrick013
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Re: What if you only live off dividends?

Post by patrick013 » Wed Feb 14, 2018 2:18 pm

Consider this. If you bought Verizon for a 4.7% yield on cost for
the foreseeable future or a dividend fund which yields over 4%
excluding special dividends would that be more reliable than buying
TSM today (VTI) which could correct another 10% or more in the
foreseeable future ?

I wouldn't buy a yield weighted dividend fund with interest rates
rising and the market correcting at the same time so just consider
it.
age in bonds, buy-and-hold, 10 year business cycle

skime
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Re: What if you only live off dividends?

Post by skime » Wed Feb 14, 2018 2:40 pm

AlohaJoe wrote:
Tue Feb 13, 2018 8:26 pm
skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image



They look nearly identical to me.
I'm not sure where your data came from, but here are two links to M*.



http://performance.morningstar.com/fund ... ture=en_US



http://performance.morningstar.com/fund ... tion?t=SPY



Look at the 10Y return. 9.93 v 9.17.

CppCoder
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Re: What if you only live off dividends?

Post by CppCoder » Wed Feb 14, 2018 2:57 pm

I suspect that I'll be able to live off dividends or less in retirement. It's not the goal, it's just that I have moderate expenses and don't want to retire in my 40s. Maybe my family will better figure out how to spend more money :).

Someone once told me that rich is defined as living off your interest's interest. So the new definition of rich is 2500x (2% of 2%) expenses :). The corollary, of course, is that by this definition, no one is likely to ever be rich since if you had that much money, you'd likely just spend more.

CantPassAgain
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Re: What if you only live off dividends?

Post by CantPassAgain » Wed Feb 14, 2018 3:40 pm

getrichslowly wrote:
Wed Feb 14, 2018 11:51 am
But any other strategy risks depleting capital. Unless you just want to die with exactly $0, but I like to see my capital grow.
Your capital is what the market says it is and it does not care how many shares you have.

randomguy
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Re: What if you only live off dividends?

Post by randomguy » Wed Feb 14, 2018 4:06 pm

getrichslowly wrote:
Wed Feb 14, 2018 12:07 pm
randomguy wrote:
Tue Feb 13, 2018 6:38 pm

For example you would have gone from making 15k/year in 1930 to 8.2k year in 1932 in real dollars. Or if you want something more recent, 33k/year in 2008 to 25k/year in 2009.
I think this is good because 1932 was in a recession and its usually prudent to spend less during recessions, even if you're still in the accumulation phase, so that you can buy stocks while they're on sale.

Also, choosing 1930 as a startpoint is cherrypicking. In 1932 the dividend per share simply reverted back to its 1926 level. So actually, any excess dividend income received between 1927-1931 was just a bonus. If you weren't able to retire in 1926 but had only retired in say 1929 because of recent runup in valuations, then it was probably foolish to assume high valuations reflected your true wealth. Personally I try to focus on the fundamentals of my investments and not their price. CAPE is currently double the historical average, so I do not predict 7% real equity returns or a 4% SWR will succeed in the future. I know that my paper wealth is inflated by abnormal CAPE. I think a better predictor of future returns and future successful SWR is to base it off CAPE. If CAPE doubles, SWR falls by half. This way speculative price movements are ignored as the noise they are, and you only consume the actual earnings of your portfolio.

I realize pure dividends is flawed because of the equivalency with buybacks, so maybe a better measure should just be based on raw earnings.
It isn't cherry picking. It is just a simple example of showing the potential for loss of income when choosing to live off the dividends. Given that the 4% rule worked in 1929, I am not sure how foolish the person retiring then with their inflated stock market values really was.:) Buybacks isn't going to make your scheme better. If you want to argue that cutting spending by 40%+ is the way to go, pretty much any scheme works. Retire with a 5% SWR and reduce it to 3% when the porfolio's real value is below the starting one is also incrediably safe. There isn't anything magical about dividends. They go in and out of style based on investor preferences and tax laws. If the market is returing 10%, if you are getting paid a 2% dividend or an 8% doesn't change what you can spend.

We have had this conversation before. Lets say real returns for the next 30 years are 1/3rd of historical values (call it 2%). Will the 4% rule fail? Maybe. Maybe not. 2% is twice what the 4% rule to work depending on the sequence of returns. If you are going to say you cut the SWR in half when CAPE is double (ignore the fact that 2018 CAPE10 isn't calculated the same as 1990 CAPE10 or 1920 CAPE10 so who knows how comparable the average are or the fact that we haven't been at average historical CAPE10 levels for 25 years not which either means one big bubble or the world has changed), you need to use the SWR for "average" CAPE10s which is up in the ~6% range. If you then realize that stocks are only half the equation and bonds are the other (depending on AA) you get back to ~4% SWR. And don't forgot today that you can buy real bonds so the disaster that was 1966-1981 on your bond porfolio can be mitigated against. Getting a .5%-.8% real return doesn't sound like much but it is pretty huge compared to the negative real returns that historical investors got.

david1082b
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Re: What if you only live off dividends?

Post by david1082b » Wed Feb 14, 2018 4:58 pm

skime wrote:
Wed Feb 14, 2018 2:40 pm
AlohaJoe wrote:
Tue Feb 13, 2018 8:26 pm
skime wrote:
Tue Feb 13, 2018 7:51 pm
Use SDY. It destroys SPY long term.
Image



They look nearly identical to me.
I'm not sure where your data came from, but here are two links to M*.



http://performance.morningstar.com/fund ... ture=en_US



http://performance.morningstar.com/fund ... tion?t=SPY



Look at the 10Y return. 9.93 v 9.17.
SDY didn't start ten years ago, it started in 2006. The original chart showed SDY from its beginning versus S&P 500, with very similar returns for both, from as far back as is possible. Do you only use the last ten years when deciding whether something "destroys" the S&P 500 "long-term"? The Nasdaq Biotech ETF $IBB had better returns in the last ten years than $SDY, so why not go for that instead? Is it common practice to decide one's portfolio based on what happened to beat S&P 500 in the last ten years? Using present tense to describe historical returns is an odd way to go about things imo.



Only using the last ten years ignores the decline SDY had from the summer of 2007 ahead of the S&P 500, so this starts the return chart at a more advantageous point for SDY than otherwise might have been the case. Most investors have more than a ten-year horizon as well, I really don't get the obsession with 10-year cycles of performance, it's everywhere.

retiredjg
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Re: What if you only live off dividends?

Post by retiredjg » Wed Feb 14, 2018 5:13 pm

getrichslowly wrote:
Tue Feb 13, 2018 10:12 am
Many people worry whether a 4% SWR will work in the future. Complicated attempts have been made to calculate a new SWR.

Mainstream strategies use a total return approach and will liquidate a share of principal each year to meet the SWR payment. The assumption is that the assets will grow back. What if you drop this assumption altogether and just withdraw the dividends and bond interest payments? Is the actual reported "income" not a truer estimate of the sustainable income stream? Why not just forego fancy mathematical analysis and just trust what the market chooses to provide?
You have forgotten that the market also provides increases in net asset value. To use it, you have to sell something. :happy And it costs less in taxes than the dividends so there is an incentive there. Total return approach is more efficient.

Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.

hoops777
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Re: What if you only live off dividends?

Post by hoops777 » Wed Feb 14, 2018 6:01 pm

It is very obvious that one can easily live off of just dividends or interest or both,combined with SS and any other pension if you have one.It simply depends on what your spending is and how much money you have invested.No need to make an issue out of what is common sense.
K.I.S.S........so easy to say so difficult to do.

afan
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Re: What if you only live off dividends?

Post by afan » Wed Feb 14, 2018 6:20 pm

As others have noted, the problem with living off dividends is that they can drop. You have to be willing to cut spending when that happens. For this reason, you should not spend all of the dividends in good years because saving some of them helps sustain the value of the portfolio when you have to sell shares to maintain spending during times of low dividends.

If you use total stock market for stocks and BND or intermediate term muni, depending on your tax bracket, for bonds, you would have to resist any urge to tilt towards a lot of bonds to generate higher dividends.

A more rational approach would be to pick a withdrawal rate equal to about the stock dividend rate, if that is what you wanted to use, and draw that using dividends and capital gains as needed. Not exceeding that in good years and selling shares to support spending in low dividend years.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Toons
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Re: What if you only live off dividends?

Post by Toons » Wed Feb 14, 2018 6:31 pm

Dividends
Cap Gains
Interest.
Yes It Can Be Done. :wink:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:12 am

afan wrote:
Wed Feb 14, 2018 6:20 pm
As others have noted, the problem with living off dividends is that they can drop. You have to be willing to cut spending when that happens.
I think this is a feature not a bug. If dividends fall, that often signals a decline in the future longrun earnings potential of the market, and hence the maximum feasible SWR.
afan wrote:
Wed Feb 14, 2018 6:20 pm
For this reason, you should not spend all of the dividends in good years because saving some of them helps sustain the value of the portfolio when you have to sell shares to maintain spending during times of low dividends.
You could smooth dividends, but dividends are already a smoothed measure of total return, so this might be excessive smoothing. The dividend is already supposed to reflect the long run sustainable payout of the market.
afan wrote:
Wed Feb 14, 2018 6:20 pm
A more rational approach would be to pick a withdrawal rate equal to about the stock dividend rate, if that is what you wanted to use, and draw that using dividends and capital gains as needed. Not exceeding that in good years and selling shares to support spending in low dividend years.
But what if there is a structural shift in the longrun future earnings potential of the stock market? Converting the current dividend yield into a static SWR would ignore any future profitability signals sent by changes in dividends.

If dividends were to suddenly fall 50% in a single year, I would be alarmed that that indicates a real shift in the longrun earnings potential of the market, and I should probably adjust my withdrawal strategy accordingly.

If I don't my withdrawal to match dividends, then I should supplement my portfolio with bonds, since those are more stable. So if my portfolio is 60/40 I would only be reacting to 60% of the change in dividend yields rather than 100%.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:18 am

retiredjg wrote:
Wed Feb 14, 2018 5:13 pm
Most people will not have enough savings to live off the dividends of a balanced portfolio anyway. Sometimes they then skew their portfolio to too high a percentage of dividend paying stocks or to too high a percentage of dividend paying bonds. This might provide more income from dividends, but it makes the portfolio less diversified and not as stable.
Correct, this is intentionally a more conservative strategy, aimed at longrun capital preservation, a balance between spending and growth. It is not for people who want to completely deplete their capital.

getrichslowly
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Re: What if you only live off dividends?

Post by getrichslowly » Tue Feb 20, 2018 11:27 am

randomguy wrote:
Wed Feb 14, 2018 4:06 pm
It isn't cherry picking. It is just a simple example of showing the potential for loss of income when choosing to live off the dividends.
It's not really a loss though, as I said. It's only a loss if you are comparing it to 1930. If you compare to 1926, it's simply parity.
randomguy wrote:
Wed Feb 14, 2018 4:06 pm
If the market is returning 10%, if you are getting paid a 2% dividend or an 8% doesn't change what you can spend.
If the market is returning a 2% dividend, 4% total earnings, and 6% speculative price appreciation, then it matters. An 8% dividend in this case would be unlikely since it would exceed total earnings, and the market on average generally only pays out sustainable dividends from profits. So the 2% dividend is a signal of the real earning potential of the stock.

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