## Dividends vs Total Return

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Ketawa
Posts: 2309
Joined: Mon Aug 22, 2011 1:11 am
Location: DC

### Re: Dividends vs Total Return

Iridium wrote: Mon Mar 25, 2019 3:26 am
sixtyforty wrote: Sat Mar 23, 2019 8:18 am Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.
This is the error. If you are selling 3% of shares per year, that means each year you are keeping 97% of shares. So, after several years, you have:
.97 * .97 * ... * .97 * .97 shares. So long as the number of years is finite, then you will have a non-zero number of shares. Meanwhile, each of those shares keeps increasing in value, exactly counteracting the reduction in shares.

If you are worried about an infinite number of years, then we should change the question to what is the value after an infinite period of time:

Value = shares * price

Assume first year, you had 1 share with price of \$1

shares = 0.97 * ... * 0.97
price = 1.03 * ... * 1.03

Value = 0.97 * ... * 0.97 * 1.03 * ... * 1.03
Value = (0.97 * 1.03) * ... * (0.97 * 1.03)
Value = 1 * ... * 1
Value = \$1

So, even taking the limit as time goes to infinity, you would still have the same amount of money. Note, that I cheated a bit in stating that 1.03 * 0.97 is equal to 1. It isn't of course, but under your plan, if you had growth of 3%, you should really only sell 2.912...% rather than 3% in order to collect 3% of your original investment (as each share is worth 3% more, the value of the sale is worth 3% of the original investment even though you sell slightly fewer than 3% of shares). If you were to plug in the exact number of shares you are supposed to sell rather than 3%, then 1.03 * [1 - percent you sell] would equal exactly 1.

So, forever and ever, your investment will be remain worth the same amount (with your given assumptions). Now, you might argue that mutual fund shares and ETFs can't be split into infinitely small units. However, if the NAV/share price was to get high enough, then a split would almost certainly occur. So, in practice, the quantization doesn't really change anything.
The investor in the example actually doesn't need to continually sell shares. Eventually, the share price is high enough that 3% dividend yield covers more than 6% of the original investment.

I screwed that up. You are correct. Editing my previous post.
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 6:18 pm

### Re: Dividends vs Total Return

abuss368 wrote: Sun Mar 24, 2019 11:08 am In my opinion the debate is often too polarized. That is one or the other. I have friends and family that accumulated "enough" and have a portfolio that is balanced with total market index funds. The needs are such that the average yield of 3.00% from dividends (i.e. Total Stock funds, US & International REITs, and bond funds) is more than enough to support cash flow needs.
Three percent of what?

PJW
Rondo
Posts: 49
Joined: Tue Sep 10, 2013 4:49 pm

### Re: Dividends vs Total Return

I agree that this seems like more of a religious thing. It’s all about how it makes you feel. I understand the logic of both scenarios, but for some reason I enjoy seeing that monthly or quarterly income and knowing I haven’t sold any shares. I understand the shares may be worth less but I still own them. It’s kind of like if I own a rental property and it’s producing monthly income and I own it, I don’t care what the value of the property is I just care about the monthly income I am receiving. The only time I care about the value of the property is if I should happen to decide to sell it. But I may never decide to sell it.

You might liken it to the mortgage versus no mortgage argument. There are definitely times when you should keep a mortgage. But even if you lose some benefit, some people just feel better not having a mortgage. I was one of those people. It just felt so amazing the day I no longer had a mortgage.

Just philosophizing...
Taylor Larimore
Advisory Board
Posts: 30020
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

### "A Total-Return Approach for Retirement Income"

SixtyForty:

Schwab has a good article about the difference between a "dividend" approach for income vs. a "total return" approach:

A Total-Return Approach for Retirement Income

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Favor low-turnover funds, but not only because these costs are lower. They also provide substantial tax advantages."
"Simplicity is the master key to financial success." -- Jack Bogle
Schlabba
Posts: 645
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

### Re: Dividends vs Total Return

sixtyforty wrote: Sat Mar 23, 2019 8:18 am I've read on a number of threads in this forum that one should pay more attention to total returns and not dividends by themselves. To understand this better, I would like to give an example and then maybe get some feedback..

Assume you have two accounts.

Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
Account (B) has a fund that yields 3% but the total return (with cap appreciation) yields also about 6%. For the owner to get their 6% they must SELL shares in this account.

Here is the way I see it;
Account (A) always has the same number of shares and assuming the ETF's don't go to ZERO, they will continually produce returns month in and month out, year in and year out.
Account (B) The owner has to continually sell shares to get an equivalent 6% cash, which not only leads to lower returns (fewer shares), but at some point in the future the shares will go to ZERO.

Why in this scenario would one consider total returns over dividends ?
In the end both dividends and share price rely on corporate profits. If the profits cannot sustain a 6% withdrawal rate situation A would suffer reduced dividends and situation B would suffer with lower share prices.
I don't think you can have the situation where A continues yielding 6% and B is out of money, or the other way around.

I'm invested in a high dividend yield ETF which has a roughly 4% yield, I believe this will pay me until the day I die and I'll never have to sell.
Clearly there will be dividend cuts along the way, so it should be considered a variable withdrawal rate. If I would apply a variable withdrawal rate scheme on a total market index I also won't run out of money.
tibbitts
Posts: 12237
Joined: Tue Feb 27, 2007 6:50 pm

### Re: Dividends vs Total Return

sixtyforty wrote: Sat Mar 23, 2019 8:18 am Account (A) has ETF's that collectively yield about a 6% return. Those returns are paid out and used as cash.
6% in today's market is nearly double what a typical high-dividend mutual fund returns, so I don't think you can assume that share prices won't decline or go to zero, otherwise all those funds would yield 6% (less expenses.) Normally I would think of this debate as more like (1.8% yield plus selling shares worth 4.2%) vs. a (3.6% yield plus selling shares worth 2.4%.)
Nowizard
Posts: 3057
Joined: Tue Oct 23, 2007 5:33 pm

### Re: Dividends vs Total Return

One consideration is related to the selling issue. If one is living off dividends and has sufficient portfolio size to avoid selling shares, then the issue can still remain total return with stock or fund selection. There are many stocks and funds that pay reasonable dividends that also experience increases in their stock price.

Tim
burritoLover
Posts: 368
Joined: Sun Jul 05, 2020 12:13 pm

### Re: Dividends vs Total Return

This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
tibbitts
Posts: 12237
Joined: Tue Feb 27, 2007 6:50 pm

### Re: Dividends vs Total Return

burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
I don't think it's "garbage"; nothing wrong with it when you have sufficient investments to live of 1-2%, which probably many Bogleheads do. The problem comes when people assume that equities paying above-average dividends will continue to do so indefinitely.
MathIsMyWayr
Posts: 2476
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

### Re: Dividends vs Total Return

burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
"A dividend is exactly the same as selling the same amount in stock" is probably the first mantra picked up on this board.
If you happen to be able to live off dividends comfortably, it cannot be better. If somebody has over \$10 MM in VTSAX, I wouldn't call it garbage. Many people will be green with envy. I wonder who understand how the market works.
burritoLover
Posts: 368
Joined: Sun Jul 05, 2020 12:13 pm

### Re: Dividends vs Total Return

MathIsMyWayr wrote: Sat Nov 21, 2020 9:54 am "A dividend is exactly the same as selling the same amount in stock" is probably the first mantra picked up on this board.
If you happen to be able to live off dividends comfortably, it cannot be better. If somebody has over \$10 MM in VTSAX, I wouldn't call it garbage. Many people will be green with envy.
Yeah, that "mantra", which, by the way, is well known by millions of professional investors but apparently flies over the heads of dividend lovers. I don't really blame anyone for this - there's is a ton of garbage out there on dividend investing that if, you put your blinders on, you can sit within your dividend bubble and no one will challenge you.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
Schlabba
Posts: 645
Joined: Sat May 11, 2019 9:14 am
Location: Netherlands

### Re: Dividends vs Total Return

burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
How does that work? Lets say you hold an index fund such as the Vanguard High Dividend Yield ETF, how would you run out of money without a market crash occurring?
MathIsMyWayr
Posts: 2476
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

### Re: Dividends vs Total Return

burritoLover wrote: Sat Nov 21, 2020 10:02 am
MathIsMyWayr wrote: Sat Nov 21, 2020 9:54 am "A dividend is exactly the same as selling the same amount in stock" is probably the first mantra picked up on this board.
If you happen to be able to live off dividends comfortably, it cannot be better. If somebody has over \$10 MM in VTSAX, I wouldn't call it garbage. Many people will be green with envy.
Yeah, that "mantra", which, by the way, is well known by millions of professional investors but apparently flies over the heads of dividend lovers. I don't really blame anyone for this - there's is a ton of garbage out there on dividend investing that if, you put your blinders on, you can sit within your dividend bubble and no one will challenge you.
Just repeat the first learning until you reach the point.
burritoLover
Posts: 368
Joined: Sun Jul 05, 2020 12:13 pm

### Re: Dividends vs Total Return

Schlabba wrote: Sat Nov 21, 2020 10:04 am
burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
How does that work? Lets say you hold an index fund such as the Vanguard High Dividend Yield ETF, how would you run out of money without a market crash occurring?
If the market is at a low point when you start withdrawing for retirement - the sequence of returns. For example, let's say I rolled-over my 401k in total stock market to a high dividend yield at retirement at that time (after the market drop) with the thinking that, well, I can't spend down my prinicipal, so I don't have to worry about sequence of returns if I only spend the dividend. It doesn't work that way. Even if you never experience a crash while holding that high dividend fund from then on, you can still run out of money. In reality though, in a down market, companies cut dividends and you might not be able to meet your expenses anyway but the point is, dividends are not a free lunch. They are not a substitution for bond interest in a down market or when a market moves sideways.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
CyclingDuo
Posts: 3727
Joined: Fri Jan 06, 2017 9:07 am

### Re: Dividends vs Total Return

burritoLover wrote: Sat Nov 21, 2020 10:20 am
Schlabba wrote: Sat Nov 21, 2020 10:04 am
burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
How does that work? Lets say you hold an index fund such as the Vanguard High Dividend Yield ETF, how would you run out of money without a market crash occurring?
If the market is at a low point when you start withdrawing for retirement - the sequence of returns. For example, let's say I rolled-over my 401k in total stock market to a high dividend yield at retirement at that time (after the market drop) with the thinking that, well, I can't spend down my prinicipal, so I don't have to worry about sequence of returns if I only spend the dividend. It doesn't work that way. Even if you never experience a crash while holding that high dividend fund from then on, you can still run out of money. In reality though, in a down market, companies cut dividends and you might not be able to meet your expenses anyway but the point is, dividends are not a free lunch. They are not a substitution for bond interest in a down market or when a market moves sideways.
We all have to deal with dividends - be it from ETF's, mutual funds, individual stocks. What do you do with yours? What do you do with rent money collected? What do you do with interest collected? What do you do with royalties collected? What do you do with your W-2/1099 income? What do you do with any other types of income collected?

I would opt for the discussion being more important with question(s) that should revolve around using the tax code to minimize the taxation on the dividends that we all do have to deal with from our investments.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
tibbitts
Posts: 12237
Joined: Tue Feb 27, 2007 6:50 pm

### Re: Dividends vs Total Return

Schlabba wrote: Sat Nov 21, 2020 10:04 am
burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
How does that work? Lets say you hold an index fund such as the Vanguard High Dividend Yield ETF, how would you run out of money without a market crash occurring?
You probably won't run out of money, but you have to assume some less growth in share prices than with a total market fund. So, you take your 3.4% from your high dividend fund, put 1.4% back into your fund to compensate for the lower capital appreciation... and you've got the same result as you do taking 2% from your total market fund. Basically we're saying that you're good with a 2% SWR, we're just taking different approaches to it.
tibbitts
Posts: 12237
Joined: Tue Feb 27, 2007 6:50 pm

### Re: Dividends vs Total Return

CyclingDuo wrote: Sat Nov 21, 2020 10:50 am I would opt for the discussion being more important with question(s) that should revolve around using the tax code to minimize the taxation on the dividends that we all do have to deal with from our investments.

CyclingDuo
For a lot of us we've been (maybe overly) diligent about reducing taxes during our accumulation phase, so assuming we're taking this money from deferred accounts, and some of us have some exempt (Roth) accumulations as well, so dividends vs. capital gains becomes a non-issue. Currently of course the tax code favors certain types of dividends, and essentially any type of capital gains, for the often much smaller balances we have in taxable accounts.
MathIsMyWayr
Posts: 2476
Joined: Mon Mar 27, 2017 10:47 pm
Location: CA

### Re: Dividends vs Total Return

tibbitts wrote: Sat Nov 21, 2020 11:05 am
Schlabba wrote: Sat Nov 21, 2020 10:04 am
burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
How does that work? Lets say you hold an index fund such as the Vanguard High Dividend Yield ETF, how would you run out of money without a market crash occurring?
You probably won't run out of money, but you have to assume some less growth in share prices than with a total market fund. So, you take your 3.4% from your high dividend fund, put 1.4% back into your fund to compensate for the lower capital appreciation... and you've got the same result as you do taking 2% from your total market fund. Basically we're saying that you're good with a 2% SWR, we're just taking different approaches to it.
+1
The key is diversification. If your holding is well diversified, dividend is not an issue. Whenever dividend is on the table, some go ballistic.
inittowinit
Posts: 154
Joined: Thu Jul 05, 2012 6:37 pm

### Re: Dividends vs Total Return

Phineas J. Whoopee wrote: Sat Mar 23, 2019 5:00 pm A withdrawal from a portfolio is a withdrawal from a portfolio.

Stocks go down in price by the amount of the dividend they paid. Sometimes it can be hard to see because of other market movements.

Withdrawing dividends and withdrawing funds from sold shares are exactly equivalent, outside tax considerations.

The important number in your holdings is their overall market value, not the total number of shares.

PJW
Why the thread didn't end here, I will never understand.
kimura king
Posts: 133
Joined: Tue Dec 31, 2019 4:59 pm

### Re: Dividends vs Total Return

tibbitts wrote: Sat Nov 21, 2020 9:53 am
burritoLover wrote: Sat Nov 21, 2020 9:41 am This idea that you can live off the dividends without touching the "principal" is garbage - a myth propagated by those who romanticize dividends and don't understand how the market works. A dividend is exactly the same as selling the same amount in stock. It is not wealth. It is not a payment like bond interest. You can run out of money with a high dividend fund, even if you only spend the dividend and even if you don't experience a market crash.
I don't think it's "garbage"; nothing wrong with it when you have sufficient investments to live of 1-2%, which probably many Bogleheads do. The problem comes when people assume that equities paying above-average dividends will continue to do so indefinitely.
If you can live off of 1% of your investments you have it made in the shade regardless of how you invest. Up until a few months ago, even money market accounts paid 1%.
abuss368
Posts: 22030
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

### Re: "A Total-Return Approach for Retirement Income"

Taylor Larimore wrote: Fri Nov 20, 2020 6:04 pm SixtyForty:

Schwab has a good article about the difference between a "dividend" approach for income vs. a "total return" approach:

A Total-Return Approach for Retirement Income

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "Favor low-turnover funds, but not only because these costs are lower. They also provide substantial tax advantages."

Thanks for sharing Taylor. I recall many Vanguard interview clips on the website that recommended essentially the same approach. Social Security, Dividends from taxable, RMDs (you may have to take them), and then principle.
John C. Bogle: “Simplicity is the master key to financial success."
mrspock
Posts: 1325
Joined: Tue Feb 13, 2018 2:49 am
Location: Vulcan

### Re: Dividends vs Total Return

I'll throw in my two cents on this topic as well. I recently began building up a position in SCHD after I "won the game" (>50x spending saved) in my account while keeping my "core" portfolio 75/25 (US Total Market/US Intermediate Bonds). Why? Well a few reasons:

1. Human factors - Having to sell shares for income after decades of accumulation & appreciation is likely going to be difficult/uncomfortable for many investors once they begin drawing down. If forced, I would certainly sell shares, but I'd honestly rather not have to do this if i can avoid it. My nest egg is pretty close to being large enough that I could live off just dividends & interest payments (very comfortably) if I add in another \$500-750k of my high yield dividend ETF (SCHD). So why not?

Another way of wording this: I'm probably going to spend more liberally if the money comes in via dividends. I know myself, I'll skimp and live like a (Volcan) monk to avoid having to sell shares -- I just love watching the money grow too much . Having extra cash come in via dividends is a form of "maximizing happiness vs. portfolio returns" .

2. Large Cap Value Tilt - An unintentional side-effect of owning many dividend funds is you get some large cap value tilt out of the deal. Honestly this doesn't matter to me, but this might be useful for some who are less comfortable with the growth tilt of most US equity funds.

3. Diversifying/Running up the score - Now that I've won the game with my "pure" US Equity 75/25 portfolio, at this point I'm just running the score up and solidifying my position even more by adding assets classes and tilts which are marginal in value. Some of which I honestly don't believe in that much (REITs, Large Cap Value.... *gag* maybe one day international), but with the game won, I'll indulge myself a bit.

4. Simplicity - Just spending dividends if you can get there, is simple and easy. The money lands in your account...you spend it. Rinse and repeat. No need to wring your hands on when to sell shares, and do you sell them as you go, or sell them once per year etc.

Now, would I do this if my SWR "just" met my needs? Absolutely not, way too risky -- I would suck it up and stick with the standard approach. To be sure, the math on dividends vs. capital appreciation portfolios is very clear -- dividend focused portfolios will underperform. But if you have a bunch of cushion to your spending, you can begin to optimize for things beyond the straight up math, considering human behavior, your own tendencies, and portfolio tilts or investment classes you find are iffy/questionable/"data light".
CyclingDuo
Posts: 3727
Joined: Fri Jan 06, 2017 9:07 am

### Re: Dividends vs Total Return

tibbitts wrote: Sat Nov 21, 2020 11:16 am
CyclingDuo wrote: Sat Nov 21, 2020 10:50 am I would opt for the discussion being more important with question(s) that should revolve around using the tax code to minimize the taxation on the dividends that we all do have to deal with from our investments.

CyclingDuo
For a lot of us we've been (maybe overly) diligent about reducing taxes during our accumulation phase, so assuming we're taking this money from deferred accounts, and some of us have some exempt (Roth) accumulations as well, so dividends vs. capital gains becomes a non-issue. Currently of course the tax code favors certain types of dividends, and essentially any type of capital gains, for the often much smaller balances we have in taxable accounts.
Not everyone has small balances in taxable accounts.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
FactualFran
Posts: 1168
Joined: Sat Feb 21, 2015 2:29 pm

### Re: Dividends vs Total Return

inittowinit wrote: Sat Nov 21, 2020 11:59 am
Phineas J. Whoopee wrote: Sat Mar 23, 2019 5:00 pm A withdrawal from a portfolio is a withdrawal from a portfolio.

Stocks go down in price by the amount of the dividend they paid. Sometimes it can be hard to see because of other market movements.

Withdrawing dividends and withdrawing funds from sold shares are exactly equivalent, outside tax considerations.

The important number in your holdings is their overall market value, not the total number of shares.

PJW
Why the thread didn't end here, I will never understand.
Because some apparently think it was necessary to make a post to a topic that has not been active for about 20 months.