What is total return vs. dividend investing?

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Miriam2
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What is total return vs. dividend investing?

Post by Miriam2 »

I know I should know better than to post a Q about the "D" word, but these last several forum threads (you know the ones I'm talking about!) leave me in the dust.

What is the difference between total return investing and dividend - ooops I said it :oops: - investing?
Is it different than the 3-fund/4-fund portfolio investing?
Do we simple investors need to worry about the difference? Or is this advanced Boglehead intellectual discussion?
Last edited by Miriam2 on Sun Jun 07, 2015 2:48 am, edited 1 time in total.
retiredjg
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Re: What is total return vs. dividend investing?

Post by retiredjg »

Here is how I see it on a very basic scale and in a not very sophisticated manner. People who know the intimate details may be offended. :happy

Think of a publicly owned company that is making money. It can either pay out "dividends" to its stock holders or it can reinvest the money in the company in which case the stock prices go up because the company is worth more. Or a company can do some of both.

Bonds also pay dividends although technically, it may be interest.

You can build a portfolio that will pay out a lot in dividends. This portfolio may have a lot of bonds and a lot of dividend paying stocks.

Or you can ignore the whole dividend thing and just build a portfolio that resembles the market - such as what we call the 3 fund portfolio. In this type of portfolio the bonds are there to stabilize things, not mostly to pay out a lot of dividends.

When you take money from your portfolio, you can take dividends or you can sell stock/bonds that have gone up in net asset value or you can do both.

If you have the three fund portfolio and are retired, you can go ahead and spend all your dividends - you are going to pay tax on them anyway, so you might as well spend that money. You can also harvest some of the increases in net asset value - stocks that have gone up in price while you've held them. Doing this is taking from the the "total return" of the portfolio.

If you want to live on dividends only, you may need to have a lot of bonds and a lot of dividend paying stocks. Vanguard's point is that this is not as stable a portfolio as a total stock market portfolio. For example, if you have 90% bonds to pay out all the dividends you want, you may not have enough in stocks to keep the portfolio growing.

Obviously, if you have a very large portfolio of any kind, you can live on just the dividends regardless of whether it is your intention to build a dividend paying portfolio or a total return type of portfolio.

Does that help you understand?
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Re: What is total return vs. dividend investing?

Post by nedsaid »

Yes, dividend investing is different than the 3-4 fund investing.

You could tilt a portfolio towards dividends by adding Dividend Growth, High Dividend, or both. My best guess is that dividend growth works because of the quality factor. Dividends grow because earnings grow, Wall Street puts a premium on stocks that have consistently growing earnings. High Dividend works because of the value characteristics of those stocks. Vanguard has both Dividend Growth and High Dividend funds.

If you have a very large portfolio, you could elect for the "income" approach. That is that you would draw from the dividends from your stocks and the interest from your bonds to live on. A "total return" approach focuses more on capital appreciation though dividends and interest are part of the returns. Most of us will have to harvest capital gains as well as dividends and interest in retirement because our portfolios will not be large enough. Very low interest rates make this problematic as well.

The recent dividend threads should be pretty easy to understand. I have posted in a bunch of these in defense of dividends. There is also a pretty interesting thread about stock buybacks.
Rather than rehash everything I posted, you could go through those threads again. That is if you can get past the heated disagreements. I am a nice guy but if fired upon, I will shoot back!!

Best wishes,

Ned
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Re: What is total return vs. dividend investing?

Post by retiredjg »

One other thing. Dividend investing is somewhat suspect around here because much of the general public naively believes that dividends are some kind of magical free money. Dividends are not free money. It is just one way a company can dispose of profits.

What makes things worse is that many dividend paying companies will continue to pay the dividends when the market is crashed. It really does seem magical. But it is more than some companies can do and bankruptcy can occur and then the stock holder is left holding a pile of worthless stuff. At that point, all that dividend income they used to have is not worth much.

People here want folks to understand that you can also make money another way - by holding your stocks as the value increases and then selling something to harvest the profit.

Both are good ways to make money. It's all about risk and the people who believe the dividends are magic may not realize they are investing in a riskier portfolio just to get those increased dividends. When things go badly, these can be the people who are hurt.
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

retiredjg wrote:If you want to live on dividends only, you may need to have a lot of bonds and a lot of dividend paying stocks. Vanguard's point is that this is not as stable a portfolio as a total stock market portfolio. For example, if you have 90% bonds to pay out all the dividends you want, you may not have enough in stocks to keep the portfolio growing.
Obviously, if you have a very large portfolio of any kind, you can live on just the dividends regardless of whether it is your intention to build a dividend paying portfolio or a total return type of portfolio.
Does that help you understand?
Yes, thank you, nice clear explanation.
Would it be correct to say that total return investing is looking at the big picture with all your funds, calculating their performance as earning dividends, interest, and capital gains (I think that means growth in the NAV value), but dividend investing is focusing on those dividends perhaps to the exclusion of, or at least with less concern about the capital gains or growth of the fund?
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Re: What is total return vs. dividend investing?

Post by nedsaid »

I love dividends but I have to repeat my caution. Don't chase performance, don't chase yield, and don't chase investment strategies. Dividend investing is very popular right now with low interest rates and all the yield chasing. Plowing into very popular investment strategies is not a prescription for investing success. When the financial press is trashing dividends, that is a better time to execute the strategy.
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

nedsaid wrote:The recent dividend threads should be pretty easy to understand. I have posted in a bunch of these in defense of dividends. There is also a pretty interesting thread about stock buybacks. . . . Rather than rehash everything I posted, you could go through those threads again.
Thank you. I have activated the Nedsaid-bot to search the forum for that information :D
nedsaid wrote:A "total return" approach focuses more on capital appreciation though dividends and interest are part of the returns.
So would it be accurate to say that when Bogleheads discuss the "total return approach," they mean a focus on "growth," on growth of capital, of the NAV of a fund, the share price of a stock, which could also, secondarily, include growth through dividends?
nedsaid wrote:Rather than rehash everything I posted, you could go through those threads again. That is if you can get past the heated disagreements. I am a nice guy but if fired upon, I will shoot back!!
That's why I didn't ask any Qs in those fist-fights! It was over my head anyway!
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

Miriam2 wrote:Do we simple investors need to worry about the difference? Or is this advanced Boglehead intellectual discussion?
The true Boglehead "intellectual" keeps it simple. IMHO even the "three fund" portfolio is approaching needless complication.

Ignore the verbose pontificating; keep it simple, keep it low cost.
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Re: What is total return vs. dividend investing?

Post by retiredjg »

Miriam2 wrote:Would it be correct to say that total return investing is looking at the big picture with all your funds, calculating their performance as earning dividends, interest, and capital gains (I think that means growth in the NAV value), but dividend investing is focusing on those dividends perhaps to the exclusion of, or at least with less concern about the capital gains or growth of the fund?
Yes, that's a pretty good summary. One small point of terminology. If a share increases in value, in a taxable account, that would be "capital gains". In a 401k/IRA/Roth IRA, capital gains don't exist - the increase is just "earnings".
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Re: What is total return vs. dividend investing?

Post by retiredjg »

Miriam2 wrote:So would it be accurate to say that when Bogleheads discuss the "total return approach," they mean a focus on "growth," on growth of capital, of the NAV of a fund, the share price of a stock, which could also, secondarily, include growth through dividends?
Not quite. Total return would be all the different types of return - some might be interest, some might be dividends, some might be capital appreciation (increase in share value).
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Re: What is total return vs. dividend investing?

Post by dbr »

Miriam2 wrote:
retiredjg wrote:If you want to live on dividends only, you may need to have a lot of bonds and a lot of dividend paying stocks. Vanguard's point is that this is not as stable a portfolio as a total stock market portfolio. For example, if you have 90% bonds to pay out all the dividends you want, you may not have enough in stocks to keep the portfolio growing.
Obviously, if you have a very large portfolio of any kind, you can live on just the dividends regardless of whether it is your intention to build a dividend paying portfolio or a total return type of portfolio.
Does that help you understand?
Yes, thank you, nice clear explanation.
Would it be correct to say that total return investing is looking at the big picture with all your funds, calculating their performance as earning dividends, interest, and capital gains (I think that means growth in the NAV value), but dividend investing is focusing on those dividends perhaps to the exclusion of, or at least with less concern about the capital gains or growth of the fund?
It is absolutely the case that "total return" investing is as you describe it. I would say that total return investing is just investing and should be called nothing more than that.

Any investor can certainly choose to have his withdrawals determined by what is paid out in dividends. Possibly the reasonable argument for doing that is that the process then becomes simple to execute and automatic. A reason that it is not logical is that it distorts the investment plan and it is complicated to select investments so that the dividends paid actually match what is wanted for withdrawal, without unwanted variation over time.

To the extent that dividend investing looks only at part of the investment picture and actually ignores, or pretends to ignore, capital change in the market, such an approach would seem to be foolish. It never makes sense to ignore part of what is going on. Mr. Bogle notwithstanding, a person should be "peeking" at all times. I do suspect that there really are naive investors who do think dividends are free money. Most discussions here are a little above that level, although sometimes there are comments that make one wonder.

But, I think "dividend" investing in its truest form involves more than that. The essence is that selecting one's investments, concentrating them, if you will, according to criteria having to do with the size of the dividend yield, or the history of dividend reliability, or the record of growth of dividends, is believed to result in a superior portfolio with respect to some properties or another. What might be hoped for is that the risk and return properties of such a portfolio are more desirable, such as producing greater return for similar risk, or having less downside tail risk, or some other benefit. To establish that any of these things are true to a meaningful degree is a difficult task, but it is a discussion. I tend to line up with Larry Swedroe's extended comments on the subject, which anyone can read for further elucidation. Other people argue differently based on various chains of reasoning.
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Re: What is total return vs. dividend investing?

Post by dbr »

retiredjg wrote:
Miriam2 wrote:So would it be accurate to say that when Bogleheads discuss the "total return approach," they mean a focus on "growth," on growth of capital, of the NAV of a fund, the share price of a stock, which could also, secondarily, include growth through dividends?
Not quite. Total return would be all the different types of return - some might be interest, some might be dividends, some might be capital appreciation (increase in share value).
Yes, exactly right. It would be a misunderstanding to think anyone focuses on growth of capital, per se. (It is true that one could tilt a portfolio to "growth" stocks, that generally pay little in dividends, but that is not a common approach.) In fact, if one starts from the point of view that the neutral point is investing with all distributions reinvested, dividends also are part of growth of capital. I find it very helpful to realize that when a dividend is spent rather than reinvested, that it is in fact a withdrawal from the portfolio. A lot of people don't like that idea, but not liking it verges very closely on the idea that dividends are now free money.
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

retiredjg wrote:. In a 401k/IRA/Roth IRA, capital gains don't exist - the increase is just "earnings".
Tax deferment is not tax free. When the time comes to pay the piper one will be double taxed on tax deferred money; the forced withdraws at age 70 make more Social Security payments taxable. IRAs are still a good but the tax man is waiting.
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Re: What is total return vs. dividend investing?

Post by bigred77 »

To try and put it simply:

Total Return Investing is using a 3-Fund portfolio like we commonly discuss on this board.

Dividend (also referred to as Income) Investing is investing in things that juice up your portfolio's yield. It's debatable what that can include but I would suggest adding a higher percentage of any fixed income, using high yield corporate bond funds, using REITs (if the reason behind it is too juice the portfolio yield), Using Dividend focused mutual funds and ETFs, maybe MLPs, etc.

Dividend (Income) Investors stray away from the Market Portfolio in search of a higher portfolio yield.
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

Thank you all for the very helpful education!
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Re: What is total return vs. dividend investing?

Post by Taylor Larimore »

miriam2:

If you are still there, this Vanguard Study should answer your question:

Spending From a Portfolio: Implications of a Total-Return Approach Versus
an Income Approach for Taxable Investors


Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

Thank you Taylor!
Yes I'm still here!
How do you whip up these articles so quickly? 8-)
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Re: What is total return vs. dividend investing?

Post by TdF fan »

If I could chime in and ask a question: Is the total vs. dividend debate mostly concerning taxable accounts and not really an issue for tax-advantaged accounts, or does it apply to both?
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Re: What is total return vs. dividend investing?

Post by toto238 »

My definition for a Total Return investing is as follows:

Being completely neutral as to the source of where a return comes from, and only measuring return in after-tax, after-expense figures.

So my goal is to maximize my after-tax, after-expense return given my level of risk tolerance. That's what makes me Total Return.

So if a company is returning 5% of their market cap to their shareholders as cash, and they have two methods to do it, I would prefer they do it in whichever method is more tax efficient.

A dividend focused of income focused investor isn't as concerned about what his return is per year. He or she may not even be too concerned about their balance on a year to year basis. What matters to them is the income their portfolio produces. So if they were getting $10,000 a year in dividends, but the stock market drops by 50%, but they're still getting $10,000 a year in dividends, they don't really care. But if the stock market and their portfolio doubles but their dividend income goes down to $8,000 a year, they're going to be upset.

In that many company managers are using money they previously used for dividends to do stock repurchases, a dividend-focused investor could see their income drop even though the company is still distributing the same amount of money to investors. Their Total Return is just fine, but they view themselves as being in hard times because they have less income than previously.
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Re: What is total return vs. dividend investing?

Post by Bfwolf »

One of the really important concepts that retiredjg brought up is that their is nothing magical about a dividend. I will try to illustrate this with a quick example.

Let's say you own 100 shares of company XYZ and those shares are each worth $1.00. So in total, you have $100 worth of XYZ stock.

Now let's suppose that company XYZ issues a dividend of $0.01 per share. Since you own 100 shares, you will receive a $1.00 cash dividend from them.

When XYZ pays that $0.01 per share dividend, the share price for XYZ automatically goes down by $0.01. This is because company XYZ now has $0.01 per share less cash in its coffers, so the company is worth $0.01 per share less. So XYZ stock drops from $1.00 to $0.99 when the dividend is paid.

This means that after the dividend is paid, you now have $99 worth of XYZ stock (100 shares at $0.99/share) and $1 in cash. So $100 total still. Paying the dividend had no effect on your net worth.

If XYZ had not paid the dividend, and you wanted $1 in cash, you could have just sold a single share of XYZ and gotten your $1. Your remaining 99 shares would have been valued at $99 (99 shares at $1.00/share). So still no impact on net worth.

So as you can see, no magic. Value can't be created from nothing.

I would strongly recommend you ignore the dividend noise and keep things simple with a 3-fund portfolio, which focuses on total returns.
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Re: What is total return vs. dividend investing?

Post by grayfox »

Miriam2 wrote:I know I should know better than to post a Q about the "D" word, but these last several forum threads (you know the ones I'm talking about!) leave me in the dust.

What is the difference between total return investing and dividend - ooops I said it :oops: - investing?
Is it different than the 3-fund/4-fund portfolio investing?
Do we simple investors need to worry about the difference? Or is this advanced Boglehead intellectual discussion?

Disclaimer - my first forum Q post was about dividends :happy
I don't know exactly what people mean when they say DIvidend Investing. For many, it implies picking stocks with high yields. IMO this is the road to perdition. Stocks with a very high yield, like 10%, are priced low for a reason--the future dividends are very uncertain. 20% yield? Probably out of business in a few years.

It is also a mathematical fact (which I can show in a spreadsheet) that Maximum Withdrawal Rate (MWR) in retirement depends only on the Total Return. Whether the TR comes from dividends or capital gains is irrelevant.

But there is an investment strategy called Dividend-Groth Investing. I wrote about it back in 2013: Dividend Growth Investing Explained
In essence, it is pure Buy-and-Hold investing. During the accumulation phase, while the investor is working and saving for retirement, stocks are purchased and held. The worker saves some of his monthly paycheck. When enough money has accumulated, say every month or year, he buys additional stock. Quarterly dividends are re-invested in more stock. With this strategy, stocks are only bought and never sold.

During the withdrawal phase, only the dividend is withdrawn and spent. Again, no stocks are sold. When the investor’s time runs out, the shares are passed on to heirs.
The big difference between a Boglehead-type strategy and a Dividend-Growth Stratgey is that, while the BH holds something like age-in-bonds, DG is 100% stock all the time. (Bonds? We have no bonds. We don't need no stinkin' bonds.**) You only buy stocks--there is no rebalancing. At retirement, DG should end up with a bigger portfolio. And while the BH takes out inflation-adjusted 4% per year depleting the portfolio, DG only spends only the dividend and the portfolio is intact.

If I were going to use a DG strategy, I would not pick dividend stocks, but would use some broad index like Total World. Maybe I would consider leaning toward consumer-staples type stocks, but not necessary. Ignore the market value of your portfolio and watch your dividend income grow over time.

The only monkey wrench in the works with DG is that, because of taxes and executive stock options, companies have been reducing dividends payout rates.

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**Trivia question: What movie does this reference?
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

Interesting article grayfox - thank you for posting it and explaining the Dividend Growth Strategy.

(The quote is "We don't need no stinkin' badges." - from the western movie Blazing Saddles with Mel Brooks. I never saw it, but I like the quote!)
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Re: What is total return vs. dividend investing?

Post by SGM »

Miriam2 wrote:Interesting article grayfox - thank you for posting it and explaining the Dividend Growth Strategy.

(The quote is "We don't need no stinkin' badges." - from the western movie Blazing Saddles with Mel Brooks. I never saw it, but I like the quote!)
Actually the original quote is from The Treasure of the Sierra Madre when the bandido Gold Hat tries to convince the Bogie character they are federales: Fred Dobbs: "If you're the police, then where are your badges?"
Gold Hat: "Badges? We ain't got no badges. We don't need no badges. I don't have to show you any stinkin' badges!" Mel Brooks misquoted it in 1974.
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Re: What is total return vs. dividend investing?

Post by Taylor Larimore »

3Factor wrote:If I could chime in and ask a question: Is the total vs. dividend debate mostly concerning taxable accounts and not really an issue for tax-advantaged accounts, or does it apply to both?
3Factor:

It applies to both.

Best wishes.
Taylor
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Taylor Larimore
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A to V

Post by Taylor Larimore »

Miriam2 wrote: How do you whip up these articles so quickly? 8-)
Miriam2:

For more than 30 years I have saved the best articles about investing and put them in binders from A to V ("Annuities" to "Vanguard").

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: What is total return vs. dividend investing?

Post by retiredjg »

3Factor wrote:If I could chime in and ask a question: Is the total vs. dividend debate mostly concerning taxable accounts and not really an issue for tax-advantaged accounts, or does it apply to both?
Although I think people are mostly talking about a taxable account or Roth IRA, I think it could apply to 401k/IRA balances too, but in different ways.

When you are talking about picking stocks for a dividend paying portfolio, that mostly applies to the taxable account in my opinion. This is because of how things are taxed. In taxable, you would pay the lower capital gains rates on your dividends. In a 401k/IRA, you would pay the higher "ordinary rate" of taxes on the earnings (dividends). I realize this does not make perfect sense, but it does affect the effectiveness of dividend investing.

Picking dividend paying stocks in a Roth IRA would make a lot of sense because you'd get income with no tax (assuming time and age requirements are met).

In a time much different from today, people have invested heavily in bonds for the specific purpose of having safe investments that pay out enough dividends to be worthwhile. Yes, bonds have paid quite nicely at different times in history. This could be done in 401k or IRA accounts without any loss to excess tax because the earnings would be taxed the same either way.

The trouble with this approach is that you might swing so heavily into bonds, to get the income you need, that your portfolio does not have enough stock to really make it sustainable. This is one of the points of the Vanguard paper that Taylor posted a link for.
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Re: What is total return vs. dividend investing?

Post by dbr »

3Factor wrote:If I could chime in and ask a question: Is the total vs. dividend debate mostly concerning taxable accounts and not really an issue for tax-advantaged accounts, or does it apply to both?
I think there is a dichotomy between those for whom dividend investing is really just a device for how to withdraw money from a portfolio and those for whom dividend investing is a strategy for investment selection. The "income" investor would not be interested in dividend investing in a tax deferred account because dividends are neither here nor there when it comes to withdrawing money from such an account. Well, perhaps such an investor might set his plan for what his spending should be based dividends paid in such an account, but that is a step removed. If dividend investing is a strategy for investment selection it applies to all accounts except that tax consequences are explicit in a taxable account and hidden in a tax deferred account.
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Re: What is total return vs. dividend investing?

Post by barnaclebob »

retiredjg wrote: Dividend investing is somewhat suspect around here because much of the general public naively believes that dividends are some kind of magical free money. Dividends are not free money. It is just one way a company can dispose of profits.
This. I've had multiple people argue at length with me that a company's stock price doesn't drop by the amount of the dividend. It does, they just can't see it exactly due to normal market movements. When I ask if what they say was true then why don't all companies issue dividends every day to extract this extra money they never have a good answer and revert to something along the lines of, "I'm not exactly sure how it works but you can't be right".
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Re: What is total return vs. dividend investing?

Post by Dandy »

At one time Blue chips paid a healthy dividend - I believe the Old AT&T paid something like 5-6%. You could see that a retiree with a large Blue Chip stock holdings could essentially live off the dividends - and sometimes the stock even rose to boot. Those days are pretty much gone. But there are still many that like owning stocks or funds that pay larger than average dividends vs going strictly for higher growth. Equity dividends do get better tax treatment than interest from bonds or savings. But stocks aren't nearly as safe. Many retirees would love to just live off their dividends and Social Security -- but it is much harder to do that. Also now many stocks, not all, that pay higher than average dividends are not blue chips.

Total Return approach says basically sell some of your holdings in a diversified portfolio vs just live off the dividends. Over time the portfolio will likely grow enough to support reasonable withdrawal rates. Also, selling some taxable investments can result in a loss which can offset gains/income or may get favorable cap gain tax rates vs ordinary income rates. People have an aversion to selling, I get it, but they need to trust their allocation a bit to grow enough to mostly offset reasonable withdrawal rates -- over time.
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Re: What is total return vs. dividend investing?

Post by TdF fan »

Taylor, retiredjg, dbr - thanks for the replies. That helps to clarify the issue for me.
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Re: What is total return vs. dividend investing?

Post by rustymutt »

Taylor Larimore wrote:miriam2:

If you are still there, this Vanguard Study should answer your question:

Spending From a Portfolio: Implications of a Total-Return Approach Versus
an Income Approach for Taxable Investors


Best wishes.
Taylor

Nice read, and I learned that I'm a total return type investor. Thanks Taylor!
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Re: What is total return vs. dividend investing?

Post by archii »

This thread is of particular interest to me because of our current situation. A few years ago I inherited a substantial portfolio from my DF, that pays upwards of $120K in dividends annually. The portfolio is a collection of stocks, MF's and MLP's that on average, yield a total of about 3.7%. So, they're not super high yielding securities, but the amount of dividend income is way beyond what we require to live on (no mortgage or debt). My father was deep into retirement and had set up his portfolio for dividends primarily. Since I have taken ownership of the portfolio, I have started to look more closely at the other idea of 'total return'. I am only 56, my DW is 8 years younger, so we wish to continue to grow the portfolio for another 10 years or so before we transition into a less risky allocation. I have often wondered if instead of simply reinvesting the dividends we don't use ( approx $60K year) we instead looked at shifting holdings away from dividends and into more growth oriented holdings that pay less dividends? I can look at this two ways - keep our current allocation of quality dividend yielding stocks/funds and reinvest the excess cash, or start to reallocate out of dividend payers and into growth funds? Obviously capital gains are a factor, since we came into this windfall in 2011. So it would be a slow transition, at best.
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Wrong forum

Post by Taylor Larimore »

Archii:

Your post is about improving your personal portfolio. May I suggest you re-post on the Help with Personal Investments Forum where you will get more focused replies.

Thank you and best wishes.
Taylor
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Re: What is total return vs. dividend investing?

Post by retiredjg »

archii wrote:Obviously capital gains are a factor, since we came into this windfall in 2011. So it would be a slow transition, at best.
The best time to have made a change was in 2011 when there was a stepped up cost basis. Or during the next stock market crash when your capital gains disappear. But it does seem you can start small changes now - perhaps by sending the dividends you don't spend to either bonds or to growth stocks or just to a total stock market mutual fund.

On the other hand, with a portfolio that large it may not matter what you do because it does not seem that you need all the income. To a certain extent, this may be a situation that does not need a solution. If you have a preference for a more rounded portfolio, you should probably do that.

Agree with Taylor that posting on the other forum might get you more focused replies.
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Re: What is total return vs. dividend investing?

Post by archii »

Yes thanks, did not mean to hijack thread :?
Definitely should have rebalanced in 2011, but it's taken a few years to get up to speed on everything, and to change brokerages (from Wells Fargo to Fido) to prepare for lower cost rebalancing and more self directed portfolio management.
I need to catch up on this a bit more, and then post something when I get a better handle on it.
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House Blend
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Re: What is total return vs. dividend investing?

Post by House Blend »

Dandy wrote:At one time Blue chips paid a healthy dividend - I believe the Old AT&T paid something like 5-6%. You could see that a retiree with a large Blue Chip stock holdings could essentially live off the dividends - and sometimes the stock even rose to boot. Those days are pretty much gone. But there are still many that like owning stocks or funds that pay larger than average dividends vs going strictly for higher growth. Equity dividends do get better tax treatment than interest from bonds or savings. But stocks aren't nearly as safe. Many retirees would love to just live off their dividends and Social Security -- but it is much harder to do that. Also now many stocks, not all, that pay higher than average dividends are not blue chips.

Total Return approach says basically sell some of your holdings in a diversified portfolio vs just live off the dividends. Over time the portfolio will likely grow enough to support reasonable withdrawal rates. Also, selling some taxable investments can result in a loss which can offset gains/income or may get favorable cap gain tax rates vs ordinary income rates. People have an aversion to selling, I get it, but they need to trust their allocation a bit to grow enough to mostly offset reasonable withdrawal rates -- over time.
Agreed.

If you could replicate the total return of (say) TSM with
(a) a fund/basket of stocks with a higher dividend, or
(b) a fund/basket of stocks with a lower dividend,

I would much rather choose (b). In fact I would rather have no dividends at all.

No matter what dividend (a) is paying, I can sustain the same level of income and pay less tax to achieve it: If (a) pays 3%, and (b) pays 1%, I sell the 2% of my portfolio with the the highest cost long term shares. The return of capital from that sale will be tax free, and the limited part representing gains will be taxed at the qualified dividends rate.

The trade off is even better if some of the dividends are non-qualified. And it is interesting to recall that back in the olden days of blue chips that paid 5%, there were no qualified dividends at all.
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Re: What is total return vs. dividend investing?

Post by Miriam2 »

archii wrote:Yes thanks, did not mean to hijack thread
That's ok archii - I'm happy you asked your Q on this thread! Makes it interesting.

Your situation seems to be what grayfox described in his article about the "Dividend Growth Strategy."
You mentioned your father set up his portfolio for dividends. Sounds like my father. It appears that type of strategy is from the old days, as other posters in this thread have mentioned. Not really viable or safe today, certainly too time consuming, just not possible for most of us.

However, I'm not sure the "dividend growth strategy" (arranging an entire portfolio for dividends from stocks from when you start investing all the way to the bitter end) is the same as what is being discussed here as a "dividend investing strategy" (arranging your portfolio to include dividend paying funds to add, ah, some dividends).

Also, bandito Gold Hat and Blazing Saddles aside, I like my "stinkin' bonds." :happy
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

Bfwolf wrote: If XYZ had not paid the dividend, and you wanted $1 in cash, you could have just sold a single share of XYZ and gotten your $1. Your remaining 99 shares would have been valued at $99 (99 shares at $1.00/share). So still no impact on net worth.

So as you can see, no magic. Value can't be created from nothing.
A company that pays dividends means they have cash. That cash is distributed to the owners to do with as they please, many automatically buy more shares, many need it to live on, it is their choice. Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock.
Dandy wrote:At one time Blue chips paid a healthy dividend - I believe the Old AT&T paid something like 5-6%.
The new AT&T still pays 5%, Verizon 4.5%. Ma Bell is dead but her children are trying.

As a "Boglehead" investor in the total stock market this is all academic.
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Re: What is total return vs. dividend investing?

Post by dbr »

barnaclebob wrote:
retiredjg wrote: Dividend investing is somewhat suspect around here because much of the general public naively believes that dividends are some kind of magical free money. Dividends are not free money. It is just one way a company can dispose of profits.
This. I've had multiple people argue at length with me that a company's stock price doesn't drop by the amount of the dividend. It does, they just can't see it exactly due to normal market movements. When I ask if what they say was true then why don't all companies issue dividends every day to extract this extra money they never have a good answer and revert to something along the lines of, "I'm not exactly sure how it works but you can't be right".
Right. I think the standard deviation of daily returns for stocks is on the order of 1%. A stock paying a dividend of 4% paid quarterly pays a quarterly amount that is of the same size as the daily noise in the stock price. I once read an analysis that seemed to show that the average decline in stock prices ex-dividend was the after tax value of the dividend, computed over estimates of all stock holders tax exposure. That would, after all, have to be the rational answer, unless, as you say, there is some massive but unexploited arbitrage opportunity.
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

dbr wrote: I think the standard deviation of daily returns for stocks is on the order of 1%. A stock paying a dividend of 4% paid quarterly pays a quarterly amount that is of the same size as the daily noise in the stock price.
The stock drops on the X-dividend date not the day the dividend is paid. That is part of the confusion.
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Re: What is total return vs. dividend investing?

Post by dbr »

Uncle Pennybags wrote:
dbr wrote: I think the standard deviation of daily returns for stocks is on the order of 1%. A stock paying a dividend of 4% paid quarterly pays a quarterly amount that is of the same size as the daily noise in the stock price.
The stock drops on the X-dividend date not the day the dividend is paid. That is part of the confusion.
It certainly doesn't help if one looks at the wrong day.
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Re: What is total return vs. dividend investing?

Post by Bfwolf »

Uncle Pennybags wrote:]A company that pays dividends means they have cash. That cash is distributed to the owners to do with as they please, many automatically buy more shares, many need it to live on, it is their choice. Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock.
There is no such thing. Stocks are inherently risky. Many dependable, dividend paying businesses from 25 years ago are no longer in business today. Anybody who was counting on them for their income because they paid a dividend misunderstood risk and suffered the consequences. Paying regular dividends does not lower risk.

Having a preference for companies that are profitable and have positive cash-flow is not the same thing as having a preference for dividends. Google is profitable and has 59 billion dollars in cash but does not pay a dividend. If it started paying a dividend, would that make it less risky?

You have the choice paradigm reversed. Companies that issue dividends FORCE their shareholders to take on a taxable event (if the shares are held in a taxable account). Companies that don't issue dividends allow their shareholders the CHOICE of whether they want to take on a taxable event by selling shares.
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

Bfwolf wrote:
Uncle Pennybags wrote: Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock.
There is no such thing.
Strike never and substitute rarely. Do you prefer "Dividend Aristocrats" to Widow-And-Orphan"? "Dividend Aristocrats" has a objective meaning.
DEFINITION of 'S&P 500 Dividend Aristocrats'

Companies in the S&P 500 who have increased their dividends for at least 25 consecutive years. The S&P 500 Dividend Aristocrats index tracks their performance, and is mainly comprised of large, well-known blue-chip companies. Standard & Poors will remove companies from the index if they fail to increase their dividends from the previous year. The index is updated annually in January.

Read more: http://www.investopedia.com/terms/s/sp- ... z3c2KEN2ot
Follow us: @Investopedia on Twitter
DEFINITION of 'Widow-And-Orphan Stock'

A stock that pays high dividends and is generally considered to carry low risk. Widow-and-orphan stocks would most likely be in non-cyclical industries that are less likely to be negatively impacted during economic downturns.

Read more: http://www.investopedia.com/terms/w/wid ... z3c2I26L9x
Follow us: @Investopedia on Twitter
Remember this is all academic as Bogleheads invest in the total stock market using index funds.
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Re: What is total return vs. dividend investing?

Post by Bfwolf »

Uncle Pennybags wrote:
Bfwolf wrote:
Uncle Pennybags wrote: Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock.
There is no such thing.
Strike never and substitute rarely. Do you prefer "Dividend Aristocrats" to Widow-And-Orphan"? "Dividend Aristocrats" has a objective meaning.
DEFINITION of 'S&P 500 Dividend Aristocrats'

Companies in the S&P 500 who have increased their dividends for at least 25 consecutive years. The S&P 500 Dividend Aristocrats index tracks their performance, and is mainly comprised of large, well-known blue-chip companies. Standard & Poors will remove companies from the index if they fail to increase their dividends from the previous year. The index is updated annually in January.

Read more: http://www.investopedia.com/terms/s/sp- ... z3c2KEN2ot
Follow us: @Investopedia on Twitter
DEFINITION of 'Widow-And-Orphan Stock'

A stock that pays high dividends and is generally considered to carry low risk. Widow-and-orphan stocks would most likely be in non-cyclical industries that are less likely to be negatively impacted during economic downturns.

Read more: http://www.investopedia.com/terms/w/wid ... z3c2I26L9x
Follow us: @Investopedia on Twitter
Remember this is all academic as Bogleheads invest in the total stock market using index funds.
This reminds me of one of the favorite sayings on this forum: Past performance is no guarantee of future results. 8-)

When a company hits a very rough patch, and it goes out of business, it won't pay dividends anymore, no matter how consistent its record.

More importantly, when you said previously, "Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock," I interpreted your statement to mean stocks whose price increase. Clearly you meant stocks whose dividends increase. The former (stock always increasing) is a unicorn. The latter (dividend always increasing) provides cold comfort: should a widow or orphan take any comfort in a stock that has plunged 80% in price but keeps paying out the dividend? Said widow/orphan would be better off with a company that increased 80% in price and paid no dividend.

Widows and orphans can sell shares to cover expenses just as easily as they can collect dividends.
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

Bfwolf wrote:
Uncle Pennybags wrote: More importantly, when you said previously, "Stocks that increase and never miss a dividend payment are called Widow-And-Orphan Stock," I interpreted your statement to mean stocks whose price increase. Clearly you meant stocks whose dividends increase. The former (stock always increasing) is a unicorn.
The old AT&T was that unicorn; as a regulated monopoly governments set the price to guarantee a ROI. I think it was only 6% but they had volume and a corner on the market. Widows and orphans didn't watch the price they just collected the dividends. No thinking required as most widows and orphans don't "play" the market.
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Re: What is total return vs. dividend investing?

Post by grayfox »

archii wrote:This thread is of particular interest to me because of our current situation. A few years ago I inherited a substantial portfolio from my DF, that pays upwards of $120K in dividends annually. The portfolio is a collection of stocks, MF's and MLP's that on average, yield a total of about 3.7%. So, they're not super high yielding securities, but the amount of dividend income is way beyond what we require to live on (no mortgage or debt). My father was deep into retirement and had set up his portfolio for dividends primarily. Since I have taken ownership of the portfolio, I have started to look more closely at the other idea of 'total return'. I am only 56, my DW is 8 years younger, so we wish to continue to grow the portfolio for another 10 years or so before we transition into a less risky allocation. I have often wondered if instead of simply reinvesting the dividends we don't use ( approx $60K year) we instead looked at shifting holdings away from dividends and into more growth oriented holdings that pay less dividends? I can look at this two ways - keep our current allocation of quality dividend yielding stocks/funds and reinvest the excess cash, or start to reallocate out of dividend payers and into growth funds? Obviously capital gains are a factor, since we came into this windfall in 2011. So it would be a slow transition, at best.
Awesome story. $120K in dividends. It sounds like your father did very well for himself.

If you visit Income Investing message boards, you often hear old-timers tell about how they bought 100 shares of AT&T or GE or Phillip Morris for $50 per share when they were young whippersnappers and it's grown to tens of thousands of shares paying out a ton of money in dividends each year.

Income investors are an interesting bunch. Instead of dividend yield, they like to talk about Yield-on-Cost which is if you paid $5,000 and decades later it's paying $10,000 per year in dividends, that would be a Yield-on-Cost of 200%. TR investors will ridicule this metric, but the dividend investors are laughing all the way to the bank.

Other guys like to diversify by having Exxon-Mobil dividends pay for their gasoline, Southern Company dividends pay their electric bill, P&G dividends for their soap and toilet paper, etc. :)

Another funny thing about income investors is they use a lot of aphorisms like "Don't eat your seed corn." I always picture some guy like he could be from Hee-Haw saying "Don't eat your seed corn!" :D

Yes, income investing, i.e. Dividend Growth investing, is definitely an old fashioned way to invest. That doesn't mean it doesn't still work. Why, just the other day I saw a guy driving a Ford Model A down the road.

Image
Don't eat you seed corn!
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Re: What is total return vs. dividend investing?

Post by Uncle Pennybags »

grayfox wrote:
archii wrote:If you visit Income Investing message boards, you often hear old-timers tell about how they bought 100 shares of AT&T ...
OUCH!! Way back in the 20th century as an 18 year old I could have purchased AT&T at a discount. This was before 401(K)s. I decided to buy a "muscle car" instead. That long gone car cost me about $500,000. :oops:
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Re: What is total return vs. dividend investing?

Post by nedsaid »

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

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

Did he do this himself or did he work with a broker?
A fool and his money are good for business.
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Re: What is total return vs. dividend investing?

Post by InvestorNewb »

I like the concept of dividend investing but I would not know what companies to invest in. I follow dividend blogs and they always post about how they picked up shares in x, y, and z company because they have a history of raising dividends, good products, management, etc. But there are thousands of great companies, so it seems more logical (and safer) to invest in all of them, which is why I prefer the 3 fund portfolio over dividend investing. Imagine how bad it would suck to have a big position in one company and to see that company go out of business. Investing in only a handful of companies would also stress me out, which is why I would rather have the backing of thousands. I also have no interest in reading financial statements or doing research in the field of picking stocks, as I'm already busy enough with work as it is.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: What is total return vs. dividend investing?

Post by nedsaid »

InvestorNewb wrote:I like the concept of dividend investing but I would not know what companies to invest in. I follow dividend blogs and they always post about how they picked up shares in x, y, and z company because they have a history of raising dividends, good products, management, etc. But there are thousands of great companies, so it seems more logical (and safer) to invest in all of them, which is why I prefer the 3 fund portfolio over dividend investing. Imagine how bad it would suck to have a big position in one company and to see that company go out of business. Investing in only a handful of companies would also stress me out, which is why I would rather have the backing of thousands. I also have no interest in reading financial statements or doing research in the field of picking stocks, as I'm already busy enough with work as it is.
Vanguard has both a High Dividend fund and a Dividend Growth fund. These are good alternatives to those who don't want to maintain an individual stock portfolio and yet pursue a dividend strategy. As I have posted many times, this isn't the best time to be chasing dividend yields.
A fool and his money are good for business.
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