Do Dividends track inflation?

[SweetFire]

S&P was yielding 2% in dividends in 2018 and it is currently yielding 1.23%.
Suppose one wanted to live off dividends and their annual spending is 100k, then they would need 5M to achieve this.
5M in S&P in 2018 would be 10M today without reinvesting dividends and it would yield 123k which is pretty close to inflation from 2018-2014.
Is this a coincidence or dividends track inflation as in the example above. So a dividend only retirement scheme would work without selling any stocks.

This would imply that it is better to set a retirement goal in terms of number of stocks rather than the value itself (assuming you account for splits etc).

[avalpert1]

It is coincidence. Dividends track the aggregate policy decisions of corporate executives and their boards - whether that aligns with your spending needs is 100% happenstance.

[djm2001]

I think living off your dividends is a good aspirational goal. Most fall short and need to sell to supplement dividends, but if you can pull off living off just your dividends then you've won the game. I wouldn't think dividend payout (including buybacks) tracks inflation in the short term but it seems plausible that it would keep up over the long run.

[alex_686]

Here we go again.

There is a long running debate on Bogleheads on dividends. Having worked in both accounting, investments, and investment accounting let me say that the relationship between dividends and portfolio performance is nonexistent from a theory viewpoint and tenuous from a practical historical viewpoint.

Personally, knowing that my foundation was built on sand I wouldn’t but any more weight by asking if it kept up with inflation.

[delamer]

Here are S&P500 real dividends per share: https://www.multpl.com/s-p-500-dividend/table/by-year

Take a look at what happened during the Great Recession.

[Impatience]

Both stock prices and dividends should track inflation over long periods of time. As companies raise their prices in response to inflation, this is eventually passed through to their share prices and dividends.

This feature of equities is one reason it’s a good idea to have some assets allocated to stocks even in a very conservative portfolio.

The exception is extreme inflation which would have a destructive impact and more uncertain outcome.

Because both asset prices and dividends track inflation over long periods of time, this doesn’t make dividends any more attractive. Dividend-oriented investing is (correctly) discouraged whether or not inflation is considered.

[rkhusky]

The stock price drops when a dividend is paid, such that you have the same amount of money after the dividend as before. If you want real income, you will want bond dividends.

[TipsQuestions]

With this strategy, I'm allowed a 1.23% withdrawal rate, which means I'll live like a pauper in retirement and die with a huge estate. Not optimal for most.

[FactualFran]

Here is a graph of what the inflation-adjusted balance and income of an account in the Vanguard 500 Index Fund. The account had an initial balance of $10,000 at the end of 1976, income distributions were taken in cash and capital gain distributions were reinvested.

[Caduceus]

There's no reason why they have to. In the aggregate, the nominal returns of companies will be influenced by inflation since their revenues and net income and taxes and most of what matters will be measured in present dollars, with the exception of things like long-lived inventories/assets, or companies with huge undeployed cash reserves.

But the company can buy back shares instead of issuing more dividends, or pay down debt or invest in new enterprises, etc. So there's no logical connection between the level of inflation and dividends.

[firebirdparts]

If you want to hold the S&P500 and live off dividends then you'll just have to change your mind.

Having worked my whole life for a big corporation, I am pretty convinced that dividends don't track, they just are.

[rockstar]

S&P 500 dividends typically grow faster than inflation YoY, so if you’re living off of dividends, your spending will go up over time.

https://www.multpl.com/s-p-500-dividend ... le/by-year

[Hacksawdave]

As dividend distributions fluctuate, it is a yes and no answer. I’ll use VFIAX Vanguard S&P 500 index that I own as an example. In 2022 and 2023 the amount per share increased by 9.44% and 6.92% respectively. However, 2020 saw a drop of -4.83% when the Covid crisis hit and companies reduced, suspended, or eliminated their dividends. As the former amount was not recaptured until 2022, one needs to question what portion was the resumption of prior curtailed distributions versus what were true increases.

On the question of if dividends keep track over the long haul with inflation, I will say no. Looking at the prior post with a historical link, the S&P 500 collective dividend paid out $23.31 by the end of 1972 before the 73-74 bear market and inflation. The value of a 1973 Dollar today is at $7.09. To break even with inflation, the 2024 collective divided would have to be at $165.27 and it is listed at $72.06. Other non-inflation related events have affected the dividends to where it would take reading all of the annual report to go back and figure it out.

[Clever_Username]

S&P was yielding 2% in dividends in 2018 and it is currently yielding 1.23%.
Suppose one wanted to live off dividends and their annual spending is 100k, then they would need 5M to achieve this.

Or a reasonable portfolio with a balance a little under 3M if you wanted a 3.5% withdrawal rate, with the added bonus that then you aren't relying on corporate board decisions to pay your bills. That alternative is independent of whether or not living off dividends is a good strategy in 2024 and beyond.

[delamer]

As dividend distributions fluctuate, it is a yes and no answer. I’ll use VFIAX Vanguard S&P 500 index that I own as an example. In 2022 and 2023 the amount per share increased by 9.44% and 6.92% respectively. However, 2020 saw a drop of -4.83% when the Covid crisis hit and companies reduced, suspended, or eliminated their dividends. As the former amount was not recaptured until 2022, one needs to question what portion was the resumption of prior curtailed distributions versus what were true increases.

On the question of if dividends keep track over the long haul with inflation, I will say no. Looking at the prior post with a historical link, the S&P 500 collective dividend paid out $23.31 by the end of 1972 before the 73-74 bear market and inflation. The value of a 1973 Dollar today is at $7.09. To break even with inflation, the 2024 collective divided would have to be at $165.27 and it is listed at $72.06. Other non-inflation related events have affected the dividends to where it would take reading all of the annual report to go back and figure it out.

That table is in real July 2024 dollars.

[Hacksawdave]

That table is in real July 2024 dollars.

Oh, I didn’t see that. When it said ‘current Dollars’ I thought that meant unadjusted for inflation.

Okay, let us say the 1972 end-of-year S&P 500 dividend figure of $23.31 listed in the link is in 2024 Dollars. The current figure for 2024 lists $72.06, or a multiplier of 3.09 times. The value of a 1973 Dollar requires 7.09 Dollars in 2024 value, or a multiplier of 7.09 times.

https://www.in2013dollars.com/us/inflat ... 3?amount=1

Seven times of Dollar inflation is over twice the amount of three times of dividend increase so dividends alone did not meet or beat inflation. The unrealized capital appreciation is what made the difference.

[djm2001]

Do index funds (e.g., VTI) pay out buybacks as dividends? Or do they use the excess shares to rebalance when there is a buyback? (They must get rid of the excess shares in some way or else they would drift from market cap.) I searched the VTI prospectus for "buyback" and "repurchase" and didn't find the answer.

[Geologist]

Do index funds (e.g., VTI) pay out buybacks as dividends? Or do they use the excess shares to rebalance when there is a buyback? (They must get rid of the excess shares in some way or else they would drift from market cap.) I searched the VTI prospectus for "buyback" and "repurchase" and didn't find the answer.

Index funds wouldn't pay out buybacks as dividends because that would turn a non-taxable action into a taxable activity for their shareholders. Index funds have to engage in trading to match the market cap, I suppose, plus they trade to deal with shareholder redemptions/purchases. The prospectus generally doesn't give details of how a fund will match its index (and the SAI probably doesn't either).

[alex_686]

Index funds wouldn't pay out buybacks as dividends because that would turn a non-taxable action into a taxable activity for their shareholders.

They might, as capital gains.

If a company were to buy back 5% of their shares then their market cap would drop by 5% so the index would reduce their weight by 5% so the index fund would need to sell 5%.

If this sale resulted in capital gains then capital gains would be triggered.

Most corporate actions have a impact of their index weights and thus funds need to adjust.

This is one of the reasons why “living on dividends” is problematic. From an accounting viewpoint a dividend and a buyback are equivalent. In short, there is a disconnect between performance, cash flows, and taxable events (i.e. distributions).

[DoctorE]

That table is in real July 2024 dollars.

Oh, I didn’t see that. When it said ‘current Dollars’ I thought that meant unadjusted for inflation.

Okay, let us say the 1972 end-of-year S&P 500 dividend figure of $23.31 listed in the link is in 2024 Dollars. The current figure for 2024 lists $72.06, or a multiplier of 3.09 times. The value of a 1973 Dollar requires 7.09 Dollars in 2024 value, or a multiplier of 7.09 times.

https://www.in2013dollars.com/us/inflat ... 3?amount=1

Seven times of Dollar inflation is over twice the amount of three times of dividend increase so dividends alone did not meet or beat inflation. The unrealized capital appreciation is what made the difference.

This is incorrect. Dividends more than kept up with inflation.

Dividend yield in 1972 was 2.70%, S&P was 118.05 and the dividend was 3.19.
2023. S&P at 4769 with dividend 1.46% at 69.69.
20x nominal increase.
$3.19 of buying power in 1972 (Average) equals $24.02 in Aug. 2024

https://pages.stern.nyu.edu/~adamodar/N ... timpl.html

[SweetFire]

This is incorrect. Dividends more than kept up with inflation.

Dividend yield in 1972 was 2.70%, S&P was 118.05 and the dividend was 3.19.
2023. S&P at 4769 with dividend 1.46% at 69.69.
20x nominal increase.
$3.19 of buying power in 1972 (Average) equals $24.02 in Aug. 2024

https://pages.stern.nyu.edu/~adamodar/N ... timpl.html

Thank you this table is exactly what I was looking for.

[rossington]

This is incorrect. Dividends more than kept up with inflation.

Dividend yield in 1972 was 2.70%, S&P was 118.05 and the dividend was 3.19.
2023. S&P at 4769 with dividend 1.46% at 69.69.
20x nominal increase.
$3.19 of buying power in 1972 (Average) equals $24.02 in Aug. 2024

https://pages.stern.nyu.edu/~adamodar/N ... timpl.html

Thank you this table is exactly what I was looking for.

Hello SweetFire,
You can do your strategy without needing 5-10M. But you would have to not use the S&P 500 as the investment.

[dbr]

This is incorrect. Dividends more than kept up with inflation.

Dividend yield in 1972 was 2.70%, S&P was 118.05 and the dividend was 3.19.
2023. S&P at 4769 with dividend 1.46% at 69.69.
20x nominal increase.
$3.19 of buying power in 1972 (Average) equals $24.02 in Aug. 2024

Right. Thanks for this observation.

So just to summarize for that period of time
S&P 500 multiplied by 40.4
Dividend multiplied by 21.8
Yield multiplied by 0.54
Prices multiplied by 7.53

But, the lesson for this time period is that if you want to hold stocks and be able to fund withdrawals for spending then invest in something that has humongous capital growth and withdraw what you will. It is irrelevant that dividends more than met the need. One has the option to withdraw money from a stock portfolio by any variety of means not limited to cashing dividends. In actual fact in this case limiting withdrawals to dividends taken leaves a tremendous amount of wealth unspent -- not that there is anything wrong with that -- if that is what a person wants.

[DoctorE]

This is incorrect. Dividends more than kept up with inflation.

Dividend yield in 1972 was 2.70%, S&P was 118.05 and the dividend was 3.19.
2023. S&P at 4769 with dividend 1.46% at 69.69.
20x nominal increase.
$3.19 of buying power in 1972 (Average) equals $24.02 in Aug. 2024

Right. Thanks for this observation.

So just to summarize for that period of time
S&P 500 multiplied by 40.4
Dividend multiplied by 21.8
Yield multiplied by 0.54
Prices multiplied by 7.53

But, the lesson for this time period is that if you want to hold stocks and be able to fund withdrawals for spending then invest in something that has humongous capital growth and withdraw what you will. It is irrelevant that dividends more than met the need. One has the option to withdraw money from a stock portfolio by any variety of means not limited to cashing dividends. In actual fact in this case limiting withdrawals to dividends taken leaves a tremendous amount of wealth unspent -- not that there is anything wrong with that -- if that is what a person wants.

Well said, agree 100%. For those extremely fortunate to have their dividends (and coupons) cover all spending, there is a very strange psychological comfort even if it's not the ideal measure of withdrawal. The likelihood of a large inheritance is high. Selling appreciating shares (due to earnings, buybacks, multiple expansion) can generate even more distributions for charity, gifts, donations to heirs, extra frivolous spending and what not.

[djm2001]

Well said, agree 100%. For those extremely fortunate to have their dividends (and coupons) cover all spending, there is a very strange psychological comfort even if it's not the ideal measure of withdrawal.

It's not just psychological. There's a concrete mathematical reason to prefer it: it doesn't change the number of shares held. Standard index investing, although typically described as holding market cap weighted proportions of shares, can also be equivalently described in terms of number of shares rather than value of shares -- namely, holding a fixed proportion (across all companies) of each company's shares. I.e., x% of all GOOG shares, x% of all MSFT shares, x% of all WMT shares, etc. for some x that you can afford. Dividends don't change the number of shares held or total shares outstanding, and so doesn't change the target index portfolio. Consuming exactly the dividend (without reinvesting it, and without selling further shares) doesn't change the number of shares in your portfolio. And so your held portfolio matches the target index portfolio before and after the dividend without any further transaction cost and without exposing yourself to market prices (where you as an individual investor are more likely than not to be on the losing side of information asymmetry).

tl;dr: Information asymmetry works against you whenever you trade. Most investors trade at least twice -- once to buy and once to sell. However, consuming exactly your dividends allows you to avoid the second trade (the sale) while still maintaining index weighting.

[rkhusky]

Well said, agree 100%. For those extremely fortunate to have their dividends (and coupons) cover all spending, there is a very strange psychological comfort even if it's not the ideal measure of withdrawal.

It's not just psychological. There's a concrete mathematical reason to prefer it: it doesn't change the number of shares held. Standard index investing, although typically described as holding market cap weighted proportions of shares, can also be equivalently described in terms of number of shares rather than value of shares -- namely, holding a fixed proportion (across all companies) of each company's shares. I.e., x% of all GOOG shares, x% of all MSFT shares, x% of all WMT shares, etc. for some x that you can afford. Dividends don't change the number of shares held or total shares outstanding, and so doesn't change the target index portfolio. Consuming exactly the dividend (without reinvesting it, and without selling further shares) doesn't change the number of shares in your portfolio. And so your held portfolio matches the target index portfolio before and after the dividend without any further transaction cost and without exposing yourself to market prices (where you as an individual investor are more likely than not to be on the losing side of information asymmetry).

tl;dr: Information asymmetry works against you whenever you trade. Most investors trade at least twice -- once to buy and once to sell. However, consuming exactly your dividends allows you to avoid the second trade (the sale) while still maintaining index weighting.

Number of shares is meaningless without the price per share. It doesn’t matter whether you own 99 shares at $100/sh or 100 shares at $99/sh.

The share price drops when a dividend is paid, such that you have the same amount of money after the dividend as before.

If you own a market cap fund, it will maintain the proper proportion of individual stocks that represents market cap. You don’t need to do anything in that regard and fund dividends do not change that, whether you spend the dividends or reinvest them.

[djm2001]

Well said, agree 100%. For those extremely fortunate to have their dividends (and coupons) cover all spending, there is a very strange psychological comfort even if it's not the ideal measure of withdrawal.

It's not just psychological. There's a concrete mathematical reason to prefer it: it doesn't change the number of shares held. Standard index investing, although typically described as holding market cap weighted proportions of shares, can also be equivalently described in terms of number of shares rather than value of shares -- namely, holding a fixed proportion (across all companies) of each company's shares. I.e., x% of all GOOG shares, x% of all MSFT shares, x% of all WMT shares, etc. for some x that you can afford. Dividends don't change the number of shares held or total shares outstanding, and so doesn't change the target index portfolio. Consuming exactly the dividend (without reinvesting it, and without selling further shares) doesn't change the number of shares in your portfolio. And so your held portfolio matches the target index portfolio before and after the dividend without any further transaction cost and without exposing yourself to market prices (where you as an individual investor are more likely than not to be on the losing side of information asymmetry).

tl;dr: Information asymmetry works against you whenever you trade. Most investors trade at least twice -- once to buy and once to sell. However, consuming exactly your dividends allows you to avoid the second trade (the sale) while still maintaining index weighting.

Number of shares is meaningless without the price per share. It doesn’t matter whether you own 99 shares at $100/sh or 100 shares at $99/sh.

If you own a market cap fund, it will maintain the proper proportion of individual stocks that represents market cap. You don’t need to do anything in that regard and fund dividends do not change that, whether you spend the dividends or reinvest them.

I think you missed my point.

[rkhusky]

Well said, agree 100%. For those extremely fortunate to have their dividends (and coupons) cover all spending, there is a very strange psychological comfort even if it's not the ideal measure of withdrawal.

It's not just psychological. There's a concrete mathematical reason to prefer it: it doesn't change the number of shares held. Standard index investing, although typically described as holding market cap weighted proportions of shares, can also be equivalently described in terms of number of shares rather than value of shares -- namely, holding a fixed proportion (across all companies) of each company's shares. I.e., x% of all GOOG shares, x% of all MSFT shares, x% of all WMT shares, etc. for some x that you can afford. Dividends don't change the number of shares held or total shares outstanding, and so doesn't change the target index portfolio. Consuming exactly the dividend (without reinvesting it, and without selling further shares) doesn't change the number of shares in your portfolio. And so your held portfolio matches the target index portfolio before and after the dividend without any further transaction cost and without exposing yourself to market prices (where you as an individual investor are more likely than not to be on the losing side of information asymmetry).

tl;dr: Information asymmetry works against you whenever you trade. Most investors trade at least twice -- once to buy and once to sell. However, consuming exactly your dividends allows you to avoid the second trade (the sale) while still maintaining index weighting.

Number of shares is meaningless without the price per share. It doesn’t matter whether you own 99 shares at $100/sh or 100 shares at $99/sh.

If you own a market cap fund, it will maintain the proper proportion of individual stocks that represents market cap. You don’t need to do anything in that regard and fund dividends do not change that, whether you spend the dividends or reinvest them.

I think you missed my point.

And what was the point, if not that dividends are more than a psychological crutch?

[hudson]

S&P was yielding 2% in dividends in 2018 and it is currently yielding 1.23%.
Suppose one wanted to live off dividends and their annual spending is 100k, then they would need 5M to achieve this.
5M in S&P in 2018 would be 10M today without reinvesting dividends and it would yield 123k which is pretty close to inflation from 2018-2014.
Is this a coincidence or dividends track inflation as in the example above. So a dividend only retirement scheme would work without selling any stocks.

This would imply that it is better to set a retirement goal in terms of number of stocks rather than the value itself (assuming you account for splits etc).

Dividends track inflation? Most probably not

Coincidence that dividends have tracked inflation? If that happened, yes a coincidence.

Set retirement by number of stocks rather than the value? One can only know that in the future. I wouldn't count on that.

Only product that tracks inflation? TIPS

Best dividend/interest creator? Highest quality/low expense fixed income

What do past results tell us about the future? I vote nothing.

Live off of dividends or interest? Great plan if possible!

[rogue_economist]

Here are S&P500 real dividends per share: https://www.multpl.com/s-p-500-dividend/table/by-year

Take a look at what happened during the Great Recession.

The Great Recession was also a period of very low inflation (brief deflation) so there is little difference between nominal and real. There were 3 years of lower dividends, at least relative to 2008. But notice that even the bottom of the recession was paying a dividend comparable to what 2004 had.

The record of the Great Recession shows that dividends are a very good income source, as any regression to lower levels really just represented a loss of some dividend growth, provided that you were not just entering in 2008 (in which case you would be ruined anyway).

This is even more clear if you use a rolling average of quarterly dividends and assume you have some bucket that buffers this to match. The result is closer to a flat line in income rather than a real drop.

[rogue_economist]

There's no reason why they have to. In the aggregate, the nominal returns of companies will be influenced by inflation since their revenues and net income and taxes and most of what matters will be measured in present dollars, with the exception of things like long-lived inventories/assets, or companies with huge undeployed cash reserves.

But the company can buy back shares instead of issuing more dividends, or pay down debt or invest in new enterprises, etc. So there's no logical connection between the level of inflation and dividends.

This is not true. In the long run dividends must keep up with inflation because the change in the value of the dollar affects everything. The S&P 500 is not going to say let's pay a nickel dividend per share today because that is what we paid in 1945. Its not going to happen. It would be like telling your employees that they are going to make the same wage they made 30 years ago, it won't fly. Dividends must adjust to reflect reality. There is a reason you can't get a coke for a dime anymore. So it is with dividends. The argument about doing other things with the money to keep dividends from going up is spurious. Its like saying coke could still be a dime if it was sold in one of those mini Tabasco bottles. Sure, theoretically that works, but in the real world it doesn't happen.

This might be an imperfect process, moving in steps and jumps, but it will happen. Data shows that in aggregate dividends do track inflation and have some growth on top of that.

[rkhusky]

Stock dividends are not extra money, they are equivalent to a forced sale with subsequent taxes. But there is nothing you can do about it, so if your spending matches the dividends, then great, you don’t need to set up your own equivalent withdrawal plan.

Dividends aren’t enough for my spending and they are too erratic and dispersed as well, so I have my own monthly automated withdrawal from one of my funds to my bank. I much prefer that to getting multiple dividend transfers, some quarterly and some monthly.

Almost all my money is in tax-advantaged, so the taxable aspect is a non-issue, as is the tracking of cost basis for reinvested dividends.

[rossington]

The share price drops when a dividend is paid, such that you have the same amount of money after the dividend as before.

I don’t know why people keep stating this point as if it is some permanent loss of stock value.
It’s meaningless.
The price drop usually lasts 5 minutes.

[rkhusky]

The share price drops when a dividend is paid, such that you have the same amount of money after the dividend as before.

I don’t know why people keep stating this point as if it is some permanent loss of stock value.
It’s meaningless.
The price drop usually lasts 5 minutes.

And all subsequent price movements use the lower price as the baseline. Or are you suggesting that the price always goes up after a dividend payment? Or that subsequent price movements are somehow influenced by the dividend and not on other information or factors?

And why wouldn’t it be permanent? The company has less money in the bank and is therefore worth less than it was before the dividend. Or do you think that investors don’t care about company cash holdings?

[delamer]

Here are S&P500 real dividends per share: https://www.multpl.com/s-p-500-dividend/table/by-year

Take a look at what happened during the Great Recession.

The Great Recession was also a period of very low inflation (brief deflation) so there is little difference between nominal and real. There were 3 years of lower dividends, at least relative to 2008. But notice that even the bottom of the recession was paying a dividend comparable to what 2004 had.

The record of the Great Recession shows that dividends are a very good income source, as any regression to lower levels really just represented a loss of some dividend growth, provided that you were not just entering in 2008 (in which case you would be ruined anyway).

This is even more clear if you use a rolling average of quarterly dividends and assume you have some bucket that buffers this to match. The result is closer to a flat line in income rather than a real drop.

If my income was totally from S&P 500 dividends in 2008, in 2009 I had about 23% less money to spend in real terms.

If I believed at that time that my dividends were a constant, or rising, source of purchasing power then I was in for a rude awakening. I couldn’t buy what I’d purchased in 2008 again until 2012.

Sorry, “some bucket that buffer this to match?” Is that a way to say other income sources?

[rossington]

The share price drops when a dividend is paid, such that you have the same amount of money after the dividend as before.

I don’t know why people keep stating this point as if it is some permanent loss of stock value.
It’s meaningless.
The price drop usually lasts 5 minutes.

And all subsequent price movements use the lower price as the baseline. Or are you suggesting that the price always goes up after a dividend payment? Or that subsequent price movements are somehow influenced by the dividend and not on other information or factors?

And why wouldn’t it be permanent? The company has less money in the bank and is therefore worth less than it was before the dividend. Or do you think that investors don’t care about company cash holdings?

Just reiterating it's not a permanent loss of stock value. Stocks go up and down daily due to a multitude of factors of which the dividend payment price drop becomes irrelevant quickly. If the payout was a very large percentage of the share value then yes, it would have a relevant effect. But most of the the the payout is a very small fraction of share value.

[rogue_economist]

Here are S&P500 real dividends per share: https://www.multpl.com/s-p-500-dividend/table/by-year

Take a look at what happened during the Great Recession.

The Great Recession was also a period of very low inflation (brief deflation) so there is little difference between nominal and real. There were 3 years of lower dividends, at least relative to 2008. But notice that even the bottom of the recession was paying a dividend comparable to what 2004 had.

The record of the Great Recession shows that dividends are a very good income source, as any regression to lower levels really just represented a loss of some dividend growth, provided that you were not just entering in 2008 (in which case you would be ruined anyway).

This is even more clear if you use a rolling average of quarterly dividends and assume you have some bucket that buffers this to match. The result is closer to a flat line in income rather than a real drop.

If my income was totally from S&P 500 dividends in 2008, in 2009 I had about 23% less money to spend in real terms.

If I believed at that time that my dividends were a constant, or rising, source of purchasing power then I was in for a rude awakening. I couldn’t buy what I’d purchased in 2008 again until 2012.

Sorry, “some bucket that buffer this to match?” Is that a way to say other income sources?

No, a bucket is not other income sources.
Think of it this way. Dividends are paid quarterly. They are not the same every quarter. So if you take the amount paid in a year, divide it by 12, and spend thst per month you will actually run out.

A bucket acts like a dam does. It holds money from dividends (floods) and let's you take it out at a regular rate (penstock outflow). It holds enough extra in the bottom to even out the uneven inflow into a steady stream. The dam doesn't generate additional income (water) for this to happen. Although in practice it might generate a bit ie. interest.

Now then, why the 2008 example is wrong. It's looking at single years in isolation, not a rolling average where the bucket helps with dry spells. Also it assumes you start in 2008 with the amount of income in 2008 as your bare minimum. But if you start in 2004 your real income in 2009 and 2010 is the same as you had in 2004.

If you have a bucket to use rolling average to your advantage, and you don't start on the precipice before the largest drop in 80 years, you are fine.

[DoctorE]

While this seems to be turning into a dividends vs. total return discussion... sticking to the original title and question: do dividends track inflation?
The answer since 1960 is a factual "Yes! and then some".

Do dividends drop during recessions? "Yes but not to the amount that the share prices drop". S&P dividend amount around GFC dropped by around -20% while drawdown was around -50% and year was -38% (off the top of my head). -30% to -50% was the drop in the dividend amount inflation adjusted around the Great Depression and WWII.

As far as the price drop during ex-dividend date, there are studies out there that show there is a price recovery aspect and certain companies recover the drop much faster than others. Dividend com has data on this. I do believe there is a recovery to price levels due to psychology, algos and the fact most products out there seem to analyze non dividend adjusted prices. That being said, only building a portfolio with dividend payers and growers would miss out on a lot of stocks that are growing and providing a larger total return or companies that don't have a dividend policy but buy back their shares.

[avalpert1]

The share price drops when a dividend is paid, such that you have the same amount of money after the dividend as before.

I don’t know why people keep stating this point as if it is some permanent loss of stock value.
It’s meaningless.
The price drop usually lasts 5 minutes.

It is a permanent loss of value - if you believe there is any basis in reality for stock valuations you have to believe that is so. It would be completely irrational for a market to value a company with X future earning and $1000 dollars in cash the same as a company with X future earning and no cash...
If you believe the market does do that than you basically believe you are gambling.

[nyejos11]

What do dividends track then? I’ve noticed that VTSAX quarterly dividends if you look back over history, fluctuate. Is this dividend volatility just random? Does it follow valuation?

[sycamore]

What do dividends track then?

Answer: decisions made by a board of directors to initiate, stop, raise, decrease or hold steady the company's dividend rate.

There thousands of those decisions every quarter.

Next question is... What were those decisions based on?

[dbr]

What do dividends track then?

Answer: decisions made by a board of directors to initiate, stop, raise, decrease or hold steady the company's dividend rate.

There thousands of those decisions every quarter.

Next question is... What were those decisions based on?

Yes. I was trying to decide what I would try to say about this and that is expressed above and also the question.

But I think asking what dividends track is a flawed question. Dividends are not set, meaning track, by some other datum in the system. This is distinct from, for example, the indexed face value of a TIPS "tracking" the CPI, meaning the face value is set by the value of the CPI by formula. Another example would be an index stock fund tracking an index, a case where the word makes sense.

[gavinsiu]

So dividend comes from profits, the company can then distribute the profit by:

1. The company reinvest the money back into the company for growth. This may be more R&D, etc. The ultimate goal is to grow the company and thus the stock value.
2. The company decide that the money is better returned to the investor, so they distributed as dividend.
3. The company decide that the money is better returned to the investor, but dividend is taxed at a higher rate so the company institutes a stock buyback program to raise the value of the stock resulting in unrealized capital gain.

I probably simplified it too much due to my lack of investor knowledge. So there is no direct relationship with dividend and inflation, but would there be dividend increase due to competition pressure. For example, if one of the attraction dividend stock is that it pays the bill and if you don't pay enough dividend, people won't buy your stock and will buy someone else's stock due to higher dividend?

[mykesc2022]

"Suppose one wanted to live off dividends...."

*sigh*. Then they wouldn't be investing in the S&P 500, so this discussion is really non sensible.

[rkhusky]

So dividend comes from profits, the company can then distribute the profit by:

1. The company reinvest the money back into the company for growth. This may be more R&D, etc. The ultimate goal is to grow the company and thus the stock value.
2. The company decide that the money is better returned to the investor, so they distributed as dividend.
3. The company decide that the money is better returned to the investor, but dividend is taxed at a higher rate so the company institutes a stock buyback program to raise the value of the stock resulting in unrealized capital gain.

Or the company keeps the money in the bank for a rainy day or for future acquisitions.

[djm2001]

"Suppose one wanted to live off dividends...."

*sigh*. Then they wouldn't be investing in the S&P 500, so this discussion is really non sensible.

There's often conflation between dividends and net cash returned (accounting for dividends, buybacks, new shares issued, and debt repaid, and new debt raised). There's also some conflation between dividend investing (picking stocks that return high dividend) vs consuming dividends (separate to choice of asset allocation). My ideal would be to total-market index invest in both stocks and corporate bonds (weighted at market cap relative to each other in order to correctly handle accounting for corporate debt into equity valuations) and to consume the net cash returned.

Note that net cash returned can sometimes be negative... which means investing rather than consuming. Most can't afford this ideal model, myself included, but it's my aspirational spending model.

[gavinsiu]

Or the company keeps the money in the bank for a rainy day or for future acquisitions.

True, I guess as others have mentioned, dividend growth is not tied to economic condition but whatever management decided to pay or not. However, people who invest in dividend stock tend to want dividend, so I imagine one of the feature is that it tries to increase its dividend if possible since that is its niche. The question is if such a group of company will tried to keep ahead of inflation?

On another note, isn't S&P 500 not the best place to shop for a portfolio of dividend paying stock? The index seems to be dominated by companies that pay little or no dividends. Wouldn't a better choice b something like Schwab SCHD? since dividend seems part of its goal?

[hudson]

"Suppose one wanted to live off dividends...."

*sigh*. Then they wouldn't be investing in the S&P 500, so this discussion is really non sensible.

Treasuries and CDs?

[FactualFran]

"Suppose one wanted to live off dividends...."

*sigh*. Then they wouldn't be investing in the S&P 500, so this discussion is really non sensible.

Treasuries and CDs?

If one wanted to live off dividends, then a good choice would be a fund that invests in both stocks and bonds, such as the Vanguard Wellington fund. It has a longer history than the Vanguard 500 Index fund. Here is a version of a graph from a previous post of what the annual inflation-adjusted income distribution amounts would have been for an account in the Vanguard 500 Index fund augment with the results for an account in the Wellington fund.



The variation in the annual income distributions has been much less for the Wellington fund than for the 500 Index fund. However, after the first few years, the account balances would have diverged with the 500 Index ending up with a much higher balance.

[mykesc2022]

"Suppose one wanted to live off dividends...."

*sigh*. Then they wouldn't be investing in the S&P 500, so this discussion is really non sensible.

Treasuries and CDs?

The issue with T-Bills or CDs is that your income is static and also almost guaranteed to go down especially at the current time. If you got into a 5% CD this year, when it comes do next year its, unlikely there will be 5% CD to replace it.

"Suppose one wanted to live off dividends...."

If one really wanted to do this, then the portfolio would need to possess stocks that paid dividends and increased them each year. A properly diversified portfolio would mitigate the risks of any payer that froze, cut, or even eliminated its dividend. The other thing about this idea is that it's not a "set it and forget it" portfolio, such as the S&P, Total Market, T-bills, CDs and the like which is typically discussed here.

This would have to be actively managed, which would not be too difficult, because "living off the divided" assumes your not working anymore and likely not adding new monies to the portfolio.