Dividend stock investing or Total Return?

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LateStarter1975
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Dividend stock investing or Total Return?

Post by LateStarter1975 »

I have not seen this topic addressed often in this forum. I have seen a lot of people who invest using dividend growth stock investing, especially among the early retirement crowd. They will swear that it is the best method to invest in order to retire early. While I subscribe to the Total return investing method as it's simpler and with less hassle (I am nowhere near being skilled enough to pick the 'best' growth stocks for dividend investing), I am often fascinated by the claims of this group of investors. So I would like to get opinions of bogleheads on this topic. So do you think dividend stock investing is better than total return? If so, why? Thanks for your input
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Riprap
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Re: Dividend stock investing or Total Return?

Post by Riprap »

LateStarter1975 wrote:I have not seen this topic addressed often in this forum.
Please tell me you're joking.
bogle2013
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Re: Dividend stock investing or Total Return?

Post by bogle2013 »

viewtopic.php?f=1&t=122734

that is a good start. but there are a few hundred more threads on it.
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Re: Dividend stock investing or Total Return?

Post by kolea »

OK, I will bite.

I think total return is the way to go for accumulation but I am tilting toward high dividend funds for retirement. Reason is, my main concern now is not maximizing return but creating the lowest risk source for withdrawals. Dividends have less volatility than equity price so I am favoring dividends over realized capital gains. Yes, I know dividends are shrinking and are not guaranteed but harvesting dividends is as old as investing. There is something immensely satisfying in seeing money just appear in your account once a quarter or so, regardless of what the market is doing. Sleeping well at night is important and I find this approach allows me to have a higher equity allocation and still sleep well.
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ogd
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Re: Dividend stock investing or Total Return?

Post by ogd »

The "contrast" between dividend-oriented investing as a strategy for preparing for retirement, and "total return investing" is one that doesn't make sense to me.

Suppose I was willing to grant you that the dividends you receive in retirement are all that matters (which I'm not, but let's go with it).

Suppose you spent your time before retirement building up your dividends with a div-growth approach, and I went for total return instead.

Suppose that as a result, you have higher dividends and I have higher total return.

Guess what: I can now turn around and buy your portfolio, except buy more of it using my larger capital. So I will get more dividends than you. I beat you at your own game, despite not having made that a goal in the preceding period.

This is a real asymmetry between strategies, and in this simple way a higher total return beats everything else. So much so that "total return investing" should simply be called investing, hence the quotes.

Now it's still possible that dividend growth could be a good strategy to get higher total return. That is, you're still investing for "total return" (like we all should be), but selecting stocks for dividend growth to maximize that. However, in practice the idea doesn't appear to work with any consistency, in contrast with someting like Fama-French factors like value & size. The crowd of (usually amateur) supporters of this notion is usually guilty of one of these pitfalls:

1) Looking at past returns for current dividend growers. This is investing in the rear view mirror and it conveniently forgets what the past selection would have looked like. That is, it's simply a way of saying "companies that did well, did well". The fact that dividends move relatively slowly makes the results less egregious than if one was to do the same with "price growth" -- the past returns of recent "price growth leaders" would be so incredible as to immediately expose the problem.

This is also the reason why "funds" can't get nearly as good results as "newsletters" claim to. An audited performance record, which requires taking a loss to get rid of a company like BP as opposed to simply erasing it from a list, can be quite sobering.

2) Extrapolating these returns into the future. You calculate how much XYZ will grow dividends based on how quickly it's been doing that; having already selected XYZ for maximum recent growth. Can you imagine doing that with Apple's price growth? This quickly runs into a quantum-mechanics-like effect, where after selection for performance the company stops performing as well. The act of observation appearing to destroy the observed.

3) The smallest offender on this list is reading too much into the recent period. I do actually believe that dividend growth did above average during the 2008 crisis because the kinds of companies that do this were not the kinds of companies that crashed the worst. However, the next crash might be very different and it might be centered on manufacturing or telecom or energy. Who knows? one shouldn't be fighting the last war. Saying that dividend growth is better on that account is like saying that one should always avoid financials and real estate because of how poorly they did that time.

The other reason that this #3 is the least offensive is that there is, I believe, some overlap between "dividend growth" and the "profitability factor", if you're into such things. I'm a lot more inclined to believe that there was a sound, widespread advantage from a stock selection criterion if there is academic research behind it that doesn't conveniently ignore any contradicting data. As always, going forward it's anybody's guess whether such an advantage will persist especially if widely known.

Hope this helps.
IlliniDave
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Re: Dividend stock investing or Total Return?

Post by IlliniDave »

IMO it depends on a person's psychological/emotional makeup. Either route can be successful when executed prudently and matched with the right investor situation and temperament.

In the broadest sense maximizing total return should provide the maximum wealth over time. The problem is that no one knows ahead of time what particular combination of equity assets will provide the greatest total return, and more specifically how much or how little dividends might figure into that maximum total return. It may well be that over a given time period the so-called "dividend stocks" provide the highest total return.

In some situations higher dividend yields pose a tax disadvantage during accumulation when the dividends are presumably reinvested somehow.

In my view, neither approach is universally superior to the other.
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poker27
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Re: Dividend stock investing or Total Return?

Post by poker27 »

I had the same mindset early on, and purchased dividend yielding stocks and funds. I am 20+ years from retirement, so I have shifted my mindset since and not sure I would even prefer dividends if I was retired.

I will say, it is nice to add up your dividends throughout the year, and think about what you could 'buy' with them. Its all psychological, but fun to think about, and it keeps me motivated.
FinancialDave
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Re: Dividend stock investing or Total Return?

Post by FinancialDave »

There are a couple issues that I have written about on other sites, but basically it boils down to two key issues:

1. In the accumulation stage young investors should embrace the volatility that total return investing in equities can bring. You can also "tilt" your index funds toward value investing, which proponents such as Paul Merriman and others claim can add to your returns.

2. In retirement the situation is quite different because that volatility turns in to "sequence of return" risk, so if your savings is on the ragged edge of say the 4% rule you have to be careful of more volatile portfolios. The right asset allocation (more bonds) can help with a total return strategy. With a strict dividend income strategy where you want to only spend the income it is also very tuff to expect you can do better than the 4% rule and still offer 40 years of inflation beating growth, but this implies you are essentially 100% in equities to get this 4% which is risky in itself. If you submit to the fact that you can sell some of your dividend stocks along the way and use that income then you are in a better situation than trying to preserve all your capital.

My situation in retirement is really where you want to be, and that is to have saved enough with your total return strategy to be in the world of the 2% rule, if you understand the meaning (only withdrawing 2% of my total retirement savings.) I use 100% equities in this strategy, but my perpetual income bucket is less than half of my retirement savings. The rest is parked in total return index growth and value.

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Riprap
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Re: Dividend stock investing or Total Return?

Post by Riprap »

FinancialDave wrote:I use 100% equities in this strategy, but my perpetual income bucket is less than half of my retirement savings. The rest is parked in total return index growth and value.
I'm confused by this. If you have 100% equities, where do the buckets come in? Cash you're spending doesn't know where it comes from. Could you please elaborate?
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Re: Dividend stock investing or Total Return?

Post by magneto »

The argument mostly put forward is that you shouldn’t go for income per se at all, but rather you should go for total return from broad market cap index funds and sell down your holdings to generate income as required.

Nothing new to add here, but to remind readers that dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.

The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.
Have no particular axe to grind one way or the other, so in retirement we run a mix of whole market trackers and income growth focused closed end (active) funds, sufficient to meet income needs. Interesting to compare how the two perform over the years, and to watch out for the rebalancing opportunities which arise from time to time.

We do not however hold, and will never hold again Income ETFs; having been sadly disappointed in this area by the naive methods used to select stocks, the resultant lack-lustre performance, and the unreliable income generated.
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Re: Dividend stock investing or Total Return?

Post by ogd »

magneto wrote:The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.
This is on the surface a compelling argument, but it turns out not to matter in practice. Here's why: total return is computed with dividends reinvested. If you don't do that, you end up losing out on the very same "stocks at distressed prices". As a consequence, whenever you assume that it was an advantage to spend from stock A's dividends rather than selling shares of stock B, it inevitably means that A had a higher return with dividends reinvested than stock B. This can be easily verified, unlike the spending scenarios, and incorporated into total return analyses. It turns out that high dividends have no particular impact beyond what you'd expect from the factor analysis.

For example, holding the vanguard high dividend fund during the crisis was worse than holding the stock market, whether or not you spent dividends. The dividend growth fund did much better, but that was because of its composition not the dividends (which are only slightly larger than average).
rca1824
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Re: Dividend stock investing or Total Return?

Post by rca1824 »

My goal is to hold the total stock market, but to try to only live off dividends, even reinvest some. To achieve this I want to have 50-100x my expenses in equities. I will also have some bonds and a cash reserve. If you only live off dividends and never tap into principle, then indeed price movements don't really matter, except when you buy. Never sell.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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ogd
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Re: Dividend stock investing or Total Return?

Post by ogd »

rca1824 wrote:My goal is to hold the total stock market, but to try to only live off dividends, even reinvest some. To achieve this I want to have 50-100x my expenses in equities. I will also have some bonds and a cash reserve. If you only live off dividends and never tap into principle, then indeed price movements don't really matter, except when you buy. Never sell.
Except that a price crash is often a harbinger of your dividends going down, maybe to zero, or at the very least not growing as expected. Not always, but often enough.

This isn't a forest fire you see on TV, it's one you can smell from your porch. The price and future earnings / dividends are intimately related and no strategy can separate them to the point of not caring.

Also see my point above about the equivalence of dividend spending and selling of shares under a same-total-return assumption.
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galeno
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Re: Dividend stock investing or Total Return?

Post by galeno »

Total return. The other is lots of work for an inferior return.
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Re: Dividend stock investing or Total Return?

Post by FillorKill »

rca1824 wrote:To achieve this I want to have 50-100x my expenses in equities... then indeed price movements don't really matter, except when you buy. Never sell.
If the market turns your 100X expenses in equity into 45X expenses in equity you may feel differently about price movements. On the bright side you could TLH a lifetime supply of loss carryforwards which will make rebalancing easier....
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Re: Dividend stock investing or Total Return?

Post by rca1824 »

ogd wrote:Except that a price crash is often a harbinger of your dividends going down, maybe to zero, or at the very least not growing as expected. Not always, but often enough.
I don't think we've ever seen the decade-average of dividends go anywhere near zero. Even the 1930s wasn't that bad.
The price and future earnings / dividends are intimately related and no strategy can separate them to the point of not caring.
Price and earnings/dividend are not so intimately related, that's why the PE ratio is so volatile. Price is far less volatile than decade-average of dividends or earnings.
Also see my point above about the equivalence of dividend spending and selling of shares under a same-total-return assumption.
I agree if a company retains earnings those earnings get added to book value and you ought to be to liquidate shares to access those earnings. For this reason I care more about earnings than dividends.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Dividend stock investing or Total Return?

Post by Toons »

I own a handful of stocks that pay quarterly dividends.
I have no clue as to what is better.
The dividend usually increases every year.
I like it when that happens.
I get the dividends,I spend the money :happy
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ogd
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Re: Dividend stock investing or Total Return?

Post by ogd »

rca1824 wrote:
ogd wrote:Except that a price crash is often a harbinger of your dividends going down, maybe to zero, or at the very least not growing as expected. Not always, but often enough.
I don't think we've ever seen the decade-average of dividends go anywhere near zero. Even the 1930s wasn't that bad.
I was talking about a single stock. This happens quite often. For a diversified portfolio, it will simply be a decline -- just like the price movements of single stocks are similarly dampened.
rca1824 wrote:
The price and future earnings / dividends are intimately related and no strategy can separate them to the point of not caring.
Price and earnings/dividend are not so intimately related, that's why the PE ratio is so volatile. Price is far less volatile than decade-average of dividends or earnings.
Yes, they are. We aren't talking about current earnings/dividends, but the market's assessment of their future, and it's better at it than you. You could convince yourself that the market doesn't know what it's doing, but that's a one way road into market timing and stock picking.

[Perhaps over-]Extending my forest fire and smoke analogy, it's definitely the case that the smoke will get to places that the fire won't reach, perhaps because of timely rainfall. But that smoke is intimately related to the fire and the upcoming dangers.
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Re: Dividend stock investing or Total Return?

Post by rca1824 »

ogd wrote:Yes, they are. We aren't talking about current earnings/dividends, but the market's assessment of their future, and it's better at it than you. You could convince yourself that the market doesn't know what it's doing, but that's a one way road into market timing and stock picking.
I don't believe the market price is a truthful predictor of expected earnings. Price is far more volatile than present discounted earnings. Much of it has to do with animal spirits and relative supply/demand of assets. If market price alone was the sole predictor of expected earnings, we wouldn't have the moderately strongly negative correlation between PE10 and subsequent earnings. The truth is that price can change for any reasons, and those price changes are "speculative returns" as Bogle calls them.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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LateStarter1975
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Re: Dividend stock investing or Total Return?

Post by LateStarter1975 »

galeno wrote:Total return. The other is lots of work for an inferior return.
I kind of have similar sentiments, though I have no idea if dividend stock investing will yield inferior return. To me, total return is a lot simpler.....my mind keeps going back to Taylor Larrimore's signature: "The majesty of simplicity". With picking tons of individual stocks for dividend investing, I feel I'll be more prone to mess something up. But again, like somebody said above, this may be more psychological than anything else.
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kontango
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Re: Dividend stock investing or Total Return?

Post by kontango »

The problem with the dividend investors' story is that dividend return is only a part of total return. In other words:

Total return = return from dividends + return from capital gains

Total return will be higher than the dividend return unless the economy has a long series of negative surprises over the long run, which isn't likely. In other words, total return > dividend return.

To me, "dividend investing" means investing in low risk stocks....stocks where the dividend component of total return is higher than that for higher risk stocks. But that's a risk story, not a return story. Total return will always be higher over the long run.
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Re: Dividend stock investing or Total Return?

Post by lack_ey »

The historical data across a number of countries is pretty clear that selecting high dividend payers produced higher total returns than the broad market (pre tax). Whether you interpret that as the magic of dividends, a value loading in a 3-factor model, or whatever else, that's up to you. There's also the question of persistence in the future and whether or not such outperformance or any different characteristics can be captured by a different screen than simply dividends (e.g. value, or perhaps dividend+buybacks+debt reduction).

In any case, the focus on the dividends themselves doesn't make much sense to me.
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Re: Dividend stock investing or Total Return?

Post by grayfox »

LateStarter1975 wrote:I have not seen this topic addressed often in this forum. I have seen a lot of people who invest using dividend growth stock investing, especially among the early retirement crowd. They will swear that it is the best method to invest in order to retire early. While I subscribe to the Total return investing method as it's simpler and with less hassle (I am nowhere near being skilled enough to pick the 'best' growth stocks for dividend investing), I am often fascinated by the claims of this group of investors. So I would like to get opinions of bogleheads on this topic. So do you think dividend stock investing is better than total return? If so, why? Thanks for your input
Suppose you save and invest for retirement over a 40-year accumulation period and then retire and withdraw for the next 40-year withdrawal period. If the exact same amount of money was invested using A) a Dividend Growth DG Strategy or B) a Total Return TR Strategy, the DG strategy would be expected to have more money both at the end of the accumulation period and at the terminus, because the DG has a a higher expected total return than the TR.

Why is that?

:arrow: Because the canonical DG Strategy is 100% equities for the whole 80 years. The TR may start at 80/20 and glide to 20/80 with an average of 50/50. Clearly 100/0 has higher expected return than 50/50.

DG invests in stocks, and when retired only the dividends are withdrawn. At the terminus, there should be a fully-intact stock portfolio left over to leave to heirs.

By contrast, the TR starts withdrawing 4% + inflation from a 60/40 portfolio, and the portfolio may be greatly depleted after 40 years. There might be a 5% chance that the portfolio runs out of money after 30 years.

:annoyed The only fly in the ointment with DG strategy is that dividends are currently out of favor by corporate management. They are doing more and more buybacks and payout ratio has been falling. Today, for S&P500, I think it is about 40%. I saw a chart that shows payout ratio was 80% 100 years ago, and steadily fell.
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LateStarter1975
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Re: Dividend stock investing or Total Return?

Post by LateStarter1975 »

grayfox wrote:
LateStarter1975 wrote:I have not seen this topic addressed often in this forum. I have seen a lot of people who invest using dividend growth stock investing, especially among the early retirement crowd. They will swear that it is the best method to invest in order to retire early. While I subscribe to the Total return investing method as it's simpler and with less hassle (I am nowhere near being skilled enough to pick the 'best' growth stocks for dividend investing), I am often fascinated by the claims of this group of investors. So I would like to get opinions of bogleheads on this topic. So do you think dividend stock investing is better than total return? If so, why? Thanks for your input
Suppose you save and invest for retirement over a 40-year accumulation period and then retire and withdraw for the next 40-year withdrawal period. If the exact same amount of money was invested using A) a Dividend Growth DG Strategy or B) a Total Return TR Strategy, the DG strategy would be expected to have more money both at the end of the accumulation period and at the terminus, because the DG has a a higher expected total return than the TR.

Why is that?

:arrow: Because the canonical DG Strategy is 100% equities for the whole 80 years. The TR may start at 80/20 and glide to 20/80 with an average of 50/50. Clearly 100/0 has higher expected return than 50/50.

DG invests in stocks, and when retired only the dividends are withdrawn. At the terminus, there should be a fully-intact stock portfolio left over to leave to heirs.

By contrast, the TR starts withdrawing 4% + inflation from a 60/40 portfolio, and the portfolio may be greatly depleted after 40 years. There might be a 5% chance that the portfolio runs out of money after 30 years.

:annoyed The only fly in the ointment with DG strategy is that dividends are currently out of favor by corporate management. They are doing more and more buybacks and payout ratio has been falling. Today, for S&P500, I think it is about 40%. I saw a chart that shows payout ratio was 80% 100 years ago, and steadily fell.
That's a very interesting analysis. Thanks for your comment
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Re: Dividend stock investing or Total Return?

Post by longinvest »

grayfox wrote:
LateStarter1975 wrote:I have not seen this topic addressed often in this forum. I have seen a lot of people who invest using dividend growth stock investing, especially among the early retirement crowd. They will swear that it is the best method to invest in order to retire early. While I subscribe to the Total return investing method as it's simpler and with less hassle (I am nowhere near being skilled enough to pick the 'best' growth stocks for dividend investing), I am often fascinated by the claims of this group of investors. So I would like to get opinions of bogleheads on this topic. So do you think dividend stock investing is better than total return? If so, why? Thanks for your input
Suppose you save and invest for retirement over a 40-year accumulation period and then retire and withdraw for the next 40-year withdrawal period. If the exact same amount of money was invested using A) a Dividend Growth DG Strategy or B) a Total Return TR Strategy, the DG strategy would be expected to have more money both at the end of the accumulation period and at the terminus, because the DG has a a higher expected total return than the TR.

Why is that?

:arrow: Because the canonical DG Strategy is 100% equities for the whole 80 years. The TR may start at 80/20 and glide to 20/80 with an average of 50/50. Clearly 100/0 has higher expected return than 50/50.

DG invests in stocks, and when retired only the dividends are withdrawn. At the terminus, there should be a fully-intact stock portfolio left over to leave to heirs.

By contrast, the TR starts withdrawing 4% + inflation from a 60/40 portfolio, and the portfolio may be greatly depleted after 40 years. There might be a 5% chance that the portfolio runs out of money after 30 years.

:annoyed The only fly in the ointment with DG strategy is that dividends are currently out of favor by corporate management. They are doing more and more buybacks and payout ratio has been falling. Today, for S&P500, I think it is about 40%. I saw a chart that shows payout ratio was 80% 100 years ago, and steadily fell.
Bogus! This supposes that:
A) a total return investor can't invest into a 100/0 portfolio,
B) a total return investor can't withdraw a constant 4% or 5% percentage of annual portfolio balance during retirement, and
C) a 100/0 portfolio is not risky; it always beats a 50/50 portfolio (both numerically and emotionally).

We know that all three, A, B, and C, are false.

There are many valid approaches to investing and portfolio withdrawal. The total return investor could also cheat by building an income floor using delayed Social Security and a bridge CD ladder, and boosting his withdrawals by gradually depleting his portfolio on a pre-determined schedule using VPW.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
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Re: Dividend stock investing or Total Return?

Post by dbr »

The comparison is also bogus because "withdrawing the dividends" does not specify the rate of withdrawal. It also has the inconvenient feature that to determine the rate of withdrawal requires configuring the portfolio according to the dividend offered, which is also a moving target. If the proposed withdrawal is the current dividend paid by, for example, the Dividend Appreciation Index of 2.24%, then that withdrawal is extremely conservative and should hardly be compared to a plan pulling 4%, or to VPW, or to an investor deriving income by purchasing an SPIA. There is no trick to being very safe and ending up with lots of wealth due to not spending one's money, but then the whole purpose of saving for retirement has been thrown out the window for most people. Alternatively, it is possible to withdraw at a dangerous and unsustainable rate by selecting excessively high paying but risky or failing assets.

The real problem with the question and the discussion is that DS and TR are not really opposites on one axis but actually two thought processes that are orthogonal. "Total Return" thinking does not exclude anything offered by "Dividend Investing" but the latter ignores important factors that are included in the TR understanding of how investing works. A total return investor can still select a portfolio design tilted to assets selected by dividend criteria, including a 100% stock portfilio, and a TR investor can still follow a withdrawal plan of spending only the dividends actually paid. A TR investor might actually select such a portfolio tilt, though more likely by going directly to a value rather than a dividend criterion. It is unlikely a TR investor would saddle himself with the awkwardness of setting up withdrawals through investment selection.
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Re: Dividend stock investing or Total Return?

Post by grayfox »

longinvest wrote: Bogus! This supposes that:
A) a total return investor can't invest into a 100/0 portfolio,
B) a total return investor can't withdraw a constant 4% or 5% percentage of annual portfolio balance during retirement, and
C) a 100/0 portfolio is not risky; it always beats a 50/50 portfolio (both numerically and emotionally).

We know that all three, A, B, and C, are false.

There are many valid approaches to investing and portfolio withdrawal. The total return investor could also cheat by building an income floor using delayed Social Security and a bridge CD ladder, and boosting his withdrawals by gradually depleting his portfolio on a pre-determined schedule using VPW.
A) I am trying to stick with strategies that someone actually uses. No one that follows Boglehead principles would be 100/0 for entire accumulation and withdrawal period. Boglehead philosophy is to to choose an asset allocation with some percentage in stocks and some in bonds and to rebalance.

So objection A is just theoretical. There is no such investor here that would say they are TR investor and 100/0 from start to finish.

On the other hand, if you were to visit some Income Investing message boards, you will find dividend growth investors that started investing 100% in stocks back in the 1960's, and have been retired for decades and are still 100/0.

C) Who said that 100/0 always beats a 50/50? It's all probabilities, there is no always. Objection C knocks down a straw man.

But the expected return of a 100/0 is almost always going to be much greater than a 50/50. Is your argument that that a 50/50 has higher expected return than 100/0? I wouldn't want to take that side in a debate.

For example, if you accumulated from 6/1980 to 10/2014, each monthly VFINX investment grew to the black dots while each monthly 50/50 VFINX/VFIIX grew to the green dots. If you add up all the black dots, that is the the total accumulation of VFINX which far exceeds the sum of all the green dots the 50/50.

Image

I would be surprised if there was any 40-year period in history where monthly investments in S&P500 did not accumulate much more than 50/50. Maybe during the Great Depression, but I would be surprised.
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Re: Dividend stock investing or Total Return?

Post by dbr »

I think the point about a distinctly different choice in asset allocation here is a valid one. I am not so sure that has anything to do with dividends though. Selecting stocks according to a dividend criterion does not somehow make equity risk evaporate. It does mean that such investors have inured themselves to the volatility of asset value. You can do the same thing while simply investing in the total market or tilting away from dividend stocks if you want to. If "not peeking" is the key to this, isn't that one of the "premier Boglehead values." Anyway lots of investors, if they follow age in bond/income streams as bonds have all their liquid assets in stocks anyway.
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Re: Dividend stock investing or Total Return?

Post by longinvest »

Grayfox,

As I said, there are many valid approaches to investing and portfolio withdrawal. If dividend investing helps you stick to your plan and stay the course, then that's probably the right approach for you.

There's nothing worse than a perfect plan that is abandoned at the wrong time for behavioral reasons.

:sharebeer
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW
grayfox
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Re: Dividend stock investing or Total Return?

Post by grayfox »

longinvest wrote:Grayfox,

As I said, there are many valid approaches to investing and portfolio withdrawal. If dividend investing helps you stick to your plan and stay the course, then that's probably the right approach for you.

There's nothing worse than a perfect plan that is abandoned at the wrong time for behavioral reasons.

:sharebeer
I am not advocating for either DG or TR strategies. I'm simply comparing what the likely outcome of the two strategies might be. If I advocated for anything, it would be LMP/SPIA for guaranteed retirement income. Then the remaining is the RP where you could do any strategy that you fancied.

However some years ago I did spend time reading Income Investing message boards, so I understand their basic philosophy, which I think is sound, if not guaranteed. Where BH has "Stay the course", they have "Don't eat you seed corn." BH look at Total Return, they look at Yield-on-Cost.

Many income investors also invest in individual stocks which is a bit iof an anachronism. Income investors can fall victim to yield chasing, i.e. picking stocks because the dividend yield is high. I recall one fund Alpine Dynamic Dividend Fund ADVDX that yielded something like 15% that crashed and burned.

They are also fans of active funds, rather than Index Funds. Many swear by funds like American Capital Income Builder CAIBX, . I don't advocate stock picking; definitely not high yielding stocks. However I see no reason that you couldn't use Index funds with a DG strategy. Or maybe use Vanguard ETFs that focus on dividend growth.
Last edited by grayfox on Wed Jul 15, 2015 11:40 am, edited 1 time in total.
FinancialDave
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Re: Dividend stock investing or Total Return?

Post by FinancialDave »

Riprap wrote:
FinancialDave wrote:I use 100% equities in this strategy, but my perpetual income bucket is less than half of my retirement savings. The rest is parked in total return index growth and value.
I'm confused by this. If you have 100% equities, where do the buckets come in? Cash you're spending doesn't know where it comes from. Could you please elaborate?
I suppose I use "buckets" in a looser sense than some.

I have one account where none of the income is reinvested, it is spent. It doesn't mean I don't occasionally sell some stocks and buy others - but it is the "bucket" or source of what could be called my income paycheck - so the strategy and goals of this account are different than the second account.

In the second account all the income is reinvested so the goal is growth and not income. Occasionally, this account can sell some of the growth for larger lump sum needs, much like a traditional bucket approach would replenish the first bucket.

In this case the buckets are more aligned with a strategy and goal rather than the duration of the need, which is what most bucket approaches do.

fd
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FinancialDave
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Re: Dividend stock investing or Total Return?

Post by FinancialDave »

magneto wrote:The argument mostly put forward is that you shouldn’t go for income per se at all, but rather you should go for total return from broad market cap index funds and sell down your holdings to generate income as required.

Nothing new to add here, but to remind readers that dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.

The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.
Have no particular axe to grind one way or the other, so in retirement we run a mix of whole market trackers and income growth focused closed end (active) funds, sufficient to meet income needs. Interesting to compare how the two perform over the years, and to watch out for the rebalancing opportunities which arise from time to time.

We do not however hold, and will never hold again Income ETFs; having been sadly disappointed in this area by the naive methods used to select stocks, the resultant lack-lustre performance, and the unreliable income generated.
Magneto,
My impression is your reply is coming from the place of the retiree, while I believe the OP is coming from the place of wanting to grow the nest egg during a working career.

In the Op's case the sequence of returns risk that you allude to does not exist -- in fact stock downturns are his friend provided he embraces that and stays in the market.

And for the retiree, his worst case scenario certainly is not a down market, it comes well before that in understanding how much money must be saved for retirement.

fd
I love simulated data. It turns the impossible into the possible!
FinancialDave
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Re: Dividend stock investing or Total Return?

Post by FinancialDave »

FinancialDave wrote:
magneto wrote:The argument mostly put forward is that you shouldn’t go for income per se at all, but rather you should go for total return from broad market cap index funds and sell down your holdings to generate income as required.

Nothing new to add here, but to remind readers that dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.

The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.
Have no particular axe to grind one way or the other, so in retirement we run a mix of whole market trackers and income growth focused closed end (active) funds, sufficient to meet income needs. Interesting to compare how the two perform over the years, and to watch out for the rebalancing opportunities which arise from time to time.

We do not however hold, and will never hold again Income ETFs; having been sadly disappointed in this area by the naive methods used to select stocks, the resultant lack-lustre performance, and the unreliable income generated.
Magneto,
My impression is your reply is coming from the place of the retiree, while I believe the OP is coming from the place of wanting to grow the nest egg during a working career. During a working career I do believe it is appropriate to consider the fact that the short-term income that turns out to be reinvested is irrelavent.

In the Op's case the sequence of returns risk that you allude to does not exist -- in fact stock downturns are his friend provided he embraces that and stays in the market.

And for the retiree, his worst case scenario certainly is not a down market, it comes well before that in understanding how much money must be saved for retirement.

fd
I love simulated data. It turns the impossible into the possible!
EnjoyIt
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Re: Dividend stock investing or Total Return?

Post by EnjoyIt »

grayfox wrote:
Suppose you save and invest for retirement over a 40-year accumulation period and then retire and withdraw for the next 40-year withdrawal period. If the exact same amount of money was invested using A) a Dividend Growth DG Strategy or B) a Total Return TR Strategy, the DG strategy would be expected to have more money both at the end of the accumulation period and at the terminus, because the DG has a a higher expected total return than the TR.

Why is that?

:arrow: Because the canonical DG Strategy is 100% equities for the whole 80 years. The TR may start at 80/20 and glide to 20/80 with an average of 50/50. Clearly 100/0 has higher expected return than 50/50.

DG invests in stocks, and when retired only the dividends are withdrawn. At the terminus, there should be a fully-intact stock portfolio left over to leave to heirs.

By contrast, the TR starts withdrawing 4% + inflation from a 60/40 portfolio, and the portfolio may be greatly depleted after 40 years. There might be a 5% chance that the portfolio runs out of money after 30 years.

:annoyed The only fly in the ointment with DG strategy is that dividends are currently out of favor by corporate management. They are doing more and more buybacks and payout ratio has been falling. Today, for S&P500, I think it is about 40%. I saw a chart that shows payout ratio was 80% 100 years ago, and steadily fell.

I posted this exact argument about a year ago and got beat down just like you have been. I used to be a DG investor. It was much more time consuming than indexing, and also much more stressful living through 2 bear markets although I stayed the coarse while being 100/0. DG investing also has tax consequences for those who have a large portion of their investments in a taxable account as well as in a high tax bracket. Today DG investing has a very heavy tax drag since I have to pay 23.8% tax on all dividend gains. About 60% of my portfolio is in a taxable account and DG investing at 100/0 should underperform a 70/30 portfolio due to that tax drag.
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galeno
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Re: Dividend stock investing or Total Return?

Post by galeno »

Exactly.

Investing for dividends is so pre-1970s. In those days commissions, spreads, and taxes were so expensive that picking and holding a small basket of blue chip dividend yielding stocks was the best way to invest in equities.

If you choose DGI, you'll do more work, suffer more stress, and realize a lower CAGR vs buying and holding an all world all cap equity index.
EnjoyIt wrote:I posted this exact argument about a year ago and got beat down just like you have been. I used to be a DG investor. It was much more time consuming than indexing, and also much more stressful living through 2 bear markets although I stayed the coarse while being 100/0. DG investing also has tax consequences for those who have a large portion of their investments in a taxable account as well as in a high tax bracket. Today DG investing has a very heavy tax drag since I have to pay 23.8% tax on all dividend gains. About 60% of my portfolio is in a taxable account and DG investing at 100/0 should underperform a 70/30 portfolio due to that tax drag.
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ogd
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Re: Dividend stock investing or Total Return?

Post by ogd »

grayfox wrote:Suppose you save and invest for retirement over a 40-year accumulation period and then retire and withdraw for the next 40-year withdrawal period. If the exact same amount of money was invested using A) a Dividend Growth DG Strategy or B) a Total Return TR Strategy, the DG strategy would be expected to have more money both at the end of the accumulation period and at the terminus, because the DG has a a higher expected total return than the TR.
This is not a good argument as presented, though it can be salvaged to some degree.

The 100% DG strategy had higher returns with higher risk. This is no big feat of investing. A "total return investor" (who I argue should just be called "investor") can easily accomplish such returns with 100% equity. Moreover, I can turn this around and say that "an investor" can do even better by leveraging up some 20%, without ever being margin called, if they have a stomach for it. The equity percentage is a choice that the stock selection criterion cannot be blamed for.

Now the way you can salvage the argument is to make it about psychology. Saying that a focus on growing their dividends can help some investors who not withstand big bear markets at 100% equity do just that. To which I would say, fine, whatever floats your boat.

But it has to be about investor psychology and not any fundamentals. 100% equities is 100% equities, and risky whether they grow dividends or oranges. There are very few stocks that are legitimally more bond-like, such as utilities, and I don't think they overlap that well with dividend growth. In any even, if bond-like is what you want there's a simpler way to do that than stock picking.
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JoMoney
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Re: Dividend stock investing or Total Return?

Post by JoMoney »

galeno wrote:... If you choose DGI, you'll do more work, suffer more stress, and realize a lower CAGR vs buying and holding an all world all cap equity index. ...
That's a pretty bold statement that I don't think is backed by reality. Vanguard (and others) have offered mutual funds that focus on a dividend growth strategy for a long time (such as VDIGX), I don't think anyone following that strategy suffered a calamity much worse than any other equity strategy (and in some cases it even held up a little better in the bad times). Outside of mutual funds, someone picking stocks based on a long history of 'dividend growth' is probably a reasonable way to go about picking higher quality companies. I don't think it's the best way, or the only way to look for 'quality', and I don't think it's necessarily going to lead to any out-performance compared to some other basket of stocks, but I don't think anyone can say definitively that it 'will' under-perform something else.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
EnjoyIt
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Re: Dividend stock investing or Total Return?

Post by EnjoyIt »

galeno wrote:Exactly.

Investing for dividends is so pre-1970s. In those days commissions, spreads, and taxes were so expensive that picking and holding a small basket of blue chip dividend yielding stocks was the best way to invest in equities.

If you choose DGI, you'll do more work, suffer more stress, and realize a lower CAGR vs buying and holding an all world all cap equity index.
EnjoyIt wrote:I posted this exact argument about a year ago and got beat down just like you have been. I used to be a DG investor. It was much more time consuming than indexing, and also much more stressful living through 2 bear markets although I stayed the coarse while being 100/0. DG investing also has tax consequences for those who have a large portion of their investments in a taxable account as well as in a high tax bracket. Today DG investing has a very heavy tax drag since I have to pay 23.8% tax on all dividend gains. About 60% of my portfolio is in a taxable account and DG investing at 100/0 should underperform a 70/30 portfolio due to that tax drag.
But, if we compared the following two investors
A) Maximizes work 401K and invests everything in a target date fund for 40 years
B) Maximizes work 401K but picks from a basket of 30 dividend paying blue chip stocks for 40 years.

Theoretically investor B should do better as they are investing 100% in equities and may have much lower fees. I completely understand that investor B is taking on more risk and therefor this is not a fair comparison. And although I agree with you somewhat, investor B by being a dividend growth investor has trained him/herself to be comfortable with 100% equities and don't see it as taking on more risk. A dividend growth investor ideally sleeps well at night even if equities have dropped 50%. Ideally those equities are still paying dividends and nothing has changed.

I know I am creating ideal scenarios, and anything can happen in the future, and a 100% dividend growth investor may panic and sell in a bear market, or one of several of their basket of stocks can go bankrupt or stop paying dividends. All I am saying is that a 100% DG investor is more likely to have better returns than a TR investor that has a glide path for holding bonds and or CDs.
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magneto
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Re: Dividend stock investing or Total Return?

Post by magneto »

FinancialDave wrote:
FinancialDave wrote:
magneto wrote:The argument mostly put forward is that you shouldn’t go for income per se at all, but rather you should go for total return from broad market cap index funds and sell down your holdings to generate income as required.

Nothing new to add here, but to remind readers that dividends come along almost regularly, but the other half of total return, the capital gains do not arrive on a regular calendar basis. This is unfortunate in retirement.

The worst case scenario for the retiree is to be forced to sell stocks at distressed prices merely to generate needed income.
Have no particular axe to grind one way or the other, so in retirement we run a mix of whole market trackers and income growth focused closed end (active) funds, sufficient to meet income needs. Interesting to compare how the two perform over the years, and to watch out for the rebalancing opportunities which arise from time to time.

We do not however hold, and will never hold again Income ETFs; having been sadly disappointed in this area by the naive methods used to select stocks, the resultant lack-lustre performance, and the unreliable income generated.
Magneto,
My impression is your reply is coming from the place of the retiree, while I believe the OP is coming from the place of wanting to grow the nest egg during a working career. During a working career I do believe it is appropriate to consider the fact that the short-term income that turns out to be reinvested is irrelavent.

In the Op's case the sequence of returns risk that you allude to does not exist -- in fact stock downturns are his friend provided he embraces that and stays in the market.

And for the retiree, his worst case scenario certainly is not a down market, it comes well before that in understanding how much money must be saved for retirement.

fd
Yes thanks fd, absolutely correct, agree wholeheartedly.
If the OP is accumulating, which on rechecking he does seem to be, but we are uncertain of his age, then the points made about retirees/near retirees would be a red herring. :)
Thanks again.
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galeno
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Re: Dividend stock investing or Total Return?

Post by galeno »

Reality check. I used to have a premium account at Morningstar. Last time I checked the expected return for SCHD was almost 2% lower vs SCHB.
JoMoney wrote:
galeno wrote:... If you choose DGI, you'll do more work, suffer more stress, and realize a lower CAGR vs buying and holding an all world all cap equity index. ...
That's a pretty bold statement that I don't think is backed by reality.<snip>
KISS & STC.
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Re: Dividend stock investing or Total Return?

Post by kolea »

FinancialDave wrote: In the Op's case the sequence of returns risk that you allude to does not exist -- in fact stock downturns are his friend provided he embraces that and stays in the market.

fd
Sequence of returns is only a risk if the investor is adding to, or subtracting from, his/her portfolio. People with 401k accounts are typically making annual contributions and of course retirees are making withdrawals. So both of those will be affected by sequence of return risk. If a portfolio is static, you are right, there is no risk by sequence of returns.
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dbr
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Re: Dividend stock investing or Total Return?

Post by dbr »

TwoByFour wrote:
FinancialDave wrote: In the Op's case the sequence of returns risk that you allude to does not exist -- in fact stock downturns are his friend provided he embraces that and stays in the market.

fd
Sequence of returns is only a risk if the investor is adding to, or subtracting from, his/her portfolio. People with 401k accounts are typically making annual contributions and of course retirees are making withdrawals. So both of those will be affected by sequence of return risk. If a portfolio is static, you are right, there is no risk by sequence of returns.
Exactly. It is a missperception that sequence of returns has no effect on accumulators. Just as poor returns early on penalize a person withdrawing money, poor returns later on penalize a person accumulating money but are helpful early on. Just to be clear, we mean by sequence of returns effect a case where the CAGR over a period is given, but the sequence and size of the annual returns that contribute to that result varies between one scenario and a different one. This is only an effect if money is being contributed and/or withdrawn as the investor goes along.
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