Author Topic: Financial Independence On Dividends Alone, am I an Idiot?  (Read 2143 times)

Brendinator

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Financial Independence On Dividends Alone, am I an Idiot?
« on: February 11, 2019, 09:19:24 PM »
The portfolio I have, and am working towards, consist of Vanguards VOO and VNQ stocks(as well as a 10-20% bond allocation to smooth out the rough spots).  These shares have an average yield of 3%, or 2.4% after taxes as far as I can determine.  My plan is to build my portfolio on a 34 times annual expenses so that I and my girlfriend can retire and just live on our dividends.  Market appreciation above the rate of inflation therefore becomes irrelevant and any appreciation that I do get allows for higher expenses later in life and an increase in charitable giving.  Am I being a moron and missing something or am I on track?

shuffler

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #1 on: February 11, 2019, 10:16:37 PM »
Good luck not dying first.
Check out the "Rich, Broke, or Dead" thread for the tool.

BicycleB

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #2 on: February 11, 2019, 10:36:46 PM »
It's probably a bit of overkill. As mentioned above, the biggest result is taking the time to build a bigger stash than you need.

Bear in mind that dividends aren't magic perfect indicators. Yields can change for many reasons. So the "dividends only" plan isn't inherently correct for any fundamental reason.

There's no sin or damage in selling stock instead of drawing a dividend. Either way you receive some distribution of equity that you receive as income. Notice that tax rates for dividends and capital gains are usually the same.

flipboard

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #3 on: February 11, 2019, 10:56:04 PM »
The portfolio I have, and am working towards, consist of Vanguards VOO and VNQ stocks(as well as a 10-20% bond allocation to smooth out the rough spots).  These shares have an average yield of 3%, or 2.4% after taxes as far as I can determine.  My plan is to build my portfolio on a 34 times annual expenses so that I and my girlfriend can retire and just live on our dividends.  Market appreciation above the rate of inflation therefore becomes irrelevant and any appreciation that I do get allows for higher expenses later in life and an increase in charitable giving.  Am I being a moron and missing something or am I on track?
You are on track.

You're essentially aiming for 3% withdrawal ratio, which is quite a good idea for FIRE. Many people are far too agressive with their plans, so having some leeway is good.

Don't assume that your dividend yield will be constant though: especially if bubbles happen it will go down. Or if the market goes down, then absolute dividends might go down. It's probably best to look at overall withdrawal ratio, where you'll find that 3% isn't bad.

patrickza

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #4 on: February 12, 2019, 12:02:26 AM »
You didn't give too many details regarding your age etc, but in my view focusing on just VOO might not be the best in terms of diversification. Sure they're all big companies that operate all over the world, but most here would recommend at least VTSAX. I'm a big fan of absolute maximum diversification, which is why I prefer the all world index, VT.

Telecaster

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #5 on: February 12, 2019, 12:55:21 AM »
The portfolio I have, and am working towards, consist of Vanguards VOO and VNQ stocks(as well as a 10-20% bond allocation to smooth out the rough spots).  These shares have an average yield of 3%, or 2.4% after taxes as far as I can determine.  My plan is to build my portfolio on a 34 times annual expenses so that I and my girlfriend can retire and just live on our dividends.  Market appreciation above the rate of inflation therefore becomes irrelevant and any appreciation that I do get allows for higher expenses later in life and an increase in charitable giving.  Am I being a moron and missing something or am I on track?


One thing to keep in mind is the dividend yield of the S&P 500 has been decreasing steadily for decades.   No one knows for sure, but I think it is very likely that trend will continue, mainly for reasons of tax efficiency.   That 3% might only be 2.7% (or something) in the future, and you'll need a correspondingly larger portfolio to throw off the same amount of dividends. 

Villanelle

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #6 on: February 12, 2019, 01:25:07 AM »
Sure, but why?

You never want to touch the actual investments?  That seems like extreme over-saving. It's just not necessary.  I understand wanting to be cautious, but to me this makes about as much sense as someone who wants a 1.5% withdraw rate. It's years (decades?) of work all to ridiculously over insure your retirement.  Is there some reason you want to leave behind millions of untouched dollars?

Andy R

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #7 on: February 12, 2019, 04:12:15 AM »
Over 100+ years, the Australian market has had an almost identical inflation adjusted return to the US market.

But due to the way dividends are taxed in Australia, there is an incentive to payout more dividends, so in Australia the market pays about 4% dividends compared to 2% in the US. This is not free money, as it comes out of money that would have been re-invested to grow the company, so it is basically the same as taking the 2% dividends and selling down 2% of shares.

So by the logic of living off dividends (or the lack of any logic), if you were living in Australia you would be living off 4% of the same total return but in the US you would be living off 2% of the same total return. It makes zero sense.

Dividends are not company earnings
https://forum.mrmoneymustache.com/investor-alley/4-withdrawl-questions/msg2291323/#msg2291323

Financial.Velociraptor

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #8 on: February 12, 2019, 06:53:06 AM »
Most people who go for a dividends only withdrawal strategy invest almost entirely in dividend growth companies.  Most of them are thus stock pickers and not indexers.  There are dividend growth indexes though.  Even Vanguard has one that trades on the exchanges as VIG and I believe VDADX internally. 

The idea is the dividend growth portfolio is highly resistant to recession.  The companies chosen all have paid increasing dividends consistently through previous recessions.  Their growth is usually trivial but the cash payouts are (mostly) reliable. 

I have set up my portfolio with an 11.4% total distribution by investing in high yield REIT, MLP, BDC, and 40% high yield bonds.  That returns 107.57% of my annual budget.  I produce additional income by trading options around the underlying positions.  I initially retired on only about 12.5 times annual spend and am now at 16.27x.  It can totally be done better than just VOO.  But it requires a time investment.

MustacheAndaHalf

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #9 on: February 12, 2019, 07:34:46 AM »
I have set up my portfolio with an 11.4% total distribution by investing in high yield REIT, MLP, BDC, and 40% high yield bonds.  That returns 107.57% of my annual budget.  I produce additional income by trading options around the underlying positions.  I initially retired on only about 12.5 times annual spend and am now at 16.27x.  It can totally be done better than just VOO.  But it requires a time investment.
REIT and high yield bonds are taxed at ordinary income tax rates - doesn't that hurt the tax efficiency of your portfolio?

Financial.Velociraptor

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #10 on: February 12, 2019, 12:58:26 PM »

REIT and high yield bonds are taxed at ordinary income tax rates - doesn't that hurt the tax efficiency of your portfolio?

My interest on bonds and gains on sales of options are also taxed at regular income rates.  I try not to let the tax tail wag the investing dog. But at about 27,000 a year, taxes are trivial and I get the max ACA subsidy most years.

martind

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #11 on: February 12, 2019, 03:19:35 PM »
The portfolio I have, and am working towards, consist of Vanguards VOO and VNQ stocks(as well as a 10-20% bond allocation to smooth out the rough spots).  These shares have an average yield of 3%, or 2.4% after taxes as far as I can determine.  My plan is to build my portfolio on a 34 times annual expenses so that I and my girlfriend can retire and just live on our dividends.  Market appreciation above the rate of inflation therefore becomes irrelevant and any appreciation that I do get allows for higher expenses later in life and an increase in charitable giving.  Am I being a moron and missing something or am I on track?

Just be aware of dividend payments dropping hard in a recession. In 2009 S&P500 dividends dropped -23.2%.

talltexan

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #12 on: February 13, 2019, 09:23:10 AM »
Martind's point means that--if you are trying to keep lifestyle constant--you're going to have to sell shares at literally the worst time.

chasesfish

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #13 on: February 13, 2019, 11:44:33 AM »
I used to be in the camp of "dividends fund my retirement".   I've slowly moved away from that, not because its wrong, I just don't trust myself to constantly stay on top of the research for all the better yielding companies.

I hold up to 30% individual stocks and I'm drawn to older companies that tend to pay better dividends.  This is because its part of my defensive portfolio, not because I'm living on the dividend.    I look for good companies with moats around their business and set target prices.  Sometimes I buy them, sometimes I don't.   Right now my taxable portfolio will generate $12,000/year.   That plus my deferred comp will throw off $30k.

The rest has to come from somewhere, either selling down principal or starting to pull Roth contributions and running the Roth IRA ladder.  Index funds are just easier to do this with

seattlecyclone

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #14 on: February 14, 2019, 11:09:54 AM »
The portfolio I have, and am working towards, consist of Vanguards VOO and VNQ stocks(as well as a 10-20% bond allocation to smooth out the rough spots).  These shares have an average yield of 3%, or 2.4% after taxes as far as I can determine.  My plan is to build my portfolio on a 34 times annual expenses so that I and my girlfriend can retire and just live on our dividends.  Market appreciation above the rate of inflation therefore becomes irrelevant and any appreciation that I do get allows for higher expenses later in life and an increase in charitable giving.  Am I being a moron and missing something or am I on track?

Just be aware of dividend payments dropping hard in a recession. In 2009 S&P500 dividends dropped -23.2%.

Even if you had gone with a strategy of picking only the "dividend aristocrats" (companies that have increased their dividends every year for the past 25 years), you would have seen dividend cuts from more than a third of your holdings between 2009 and 2010. There's nothing magical about dividends. They depend on the health of the underlying companies. Nobody is completely immune from the effects of a recession.

As to the idea that relying on dividends would cause you to sell stocks at "literally the worst time," someone who is in 100% non-dividend equities would have the same problem. This is where a small bond allocation can be a lifesaver. The 2008 market drop was steep but relatively brief. Having some other non-correlated assets on hand to sell while the stock market recovered would have been much better that year than 100% equities, whether those equities pay dividends or not.

clumlee

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #15 on: February 14, 2019, 07:04:06 PM »
I personally like and am striving for that goal myself. While my entire stock/ETF/CEF portfolio is made up of eight (8) holdings- and I might add one or two more- my plan is to make my dividend income thrive on four (8) of them: Gabelli Dividend Trust for US exposure ($GDV), Blackrock Limited Duration Trust for bond exposure ($BLW), and Nuveen Preferred Income Securities fund ($JPS). Currently I only have a few hundred shares of each so I don't have a huge chunk of money in there (yet)- but to generate monthly income of $2,000; $1,250, and; $1,500, respectively, I would need to put in an additional amount of approximately $925,000. That's not bad.

jim555

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #16 on: February 15, 2019, 05:18:32 PM »
Every thing I read says total market beats high dividend portfolios for total returns.  The only thing that matters is total return.

chasesfish

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #17 on: February 15, 2019, 09:28:38 PM »
Every thing I read says total market beats high dividend portfolios for total returns.  The only thing that matters is total return.

You're absolutely right in the accumulation phase.  Total market index every time.

If you're about to retire early or just retired, sequence of return risk matters too.  Many dividend stocks perform on the lower volatility scale and helps.

I setup my retirement portfolio at 50% index funds, 20% cash/bonds, and 30% Individual Stocks/REITs.  The individual stocks I own are more defensive.

I'm happy to get 65-75% the market's return for 65-75% of the volatility.  Bonus points if I can get closer to the index's return with less volatility.

RWD

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #18 on: February 15, 2019, 09:33:18 PM »
Many dividend stocks perform on the lower volatility scale and helps.
But is that because they are dividend stocks? Couldn't you also find low dividend low volatility stock? I kind of doubt they are inherently linked.

terran

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #19 on: February 15, 2019, 09:50:13 PM »
Here's a post relevant to this discussion: https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

The TLDR version: high dividend portfolios can actually be worse for sequence of return risk.

specialkayme

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #20 on: February 17, 2019, 08:39:46 AM »
I have set up my portfolio with an 11.4% total distribution by investing in high yield REIT, MLP, BDC, and 40% high yield bonds.  That returns 107.57% of my annual budget.  I produce additional income by trading options around the underlying positions.  I initially retired on only about 12.5 times annual spend and am now at 16.27x.  It can totally be done better than just VOO.  But it requires a time investment.

Somewhat off topic, but I'd be interested in learning more if you care to share. What you chose, why you chose what you did, ect.

I've never been able to select a good REIT. A year or two down the road I'm always in a worse position when I chose individual REITs. And VGSLX appears to perform at the same rate as VTSAX, only with a higher expense ratio, less diversification, and higher risk.

In my 9-5 job, I've been exposed to a number of MLP, BDC, and private equity firms that operate similarly, and I've always found them to run EXTREMELY inefficiently from a business perspective. Many invest with a combo of high debt and equity in the hopes of flipping a company in 5 years. Those individual investments that work well turn great returns, but those that don't fall hard. It seems like a very risky venture to invest in, almost like a house of cards that's fall is inevitable. But I'd be interested in learning more, and if perhaps I missed something.

Padonak

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #21 on: February 17, 2019, 09:16:29 AM »
   

I have set up my portfolio with an 11.4% total distribution by investing in high yield REIT, MLP, BDC, and 40% high yield bonds.  That returns 107.57% of my annual budget.  I produce additional income by trading options around the underlying positions.  I initially retired on only about 12.5 times annual spend and am now at 16.27x.  It can totally be done better than just VOO.  But it requires a time investment.

Like the poster above, I would also like to know more about your portfolio if you don't mind sharing more details.

Financial.Velociraptor

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #22 on: February 18, 2019, 04:40:21 PM »
@Padonak @specialkayme

These aren't necessarily where I'd put money today, e.g. these are my "hold" positions not my "buy" positions.

For income: (about 40% by cost basis)
AVK, GPMT, HNW, IGD, OXLC, PCI, REM, TWO, AMZA, AWP, BX, CCR, EPD, GLO, IGD, JPS, MIC, MO, MORL, PSEC, SXCP.
Munis (no longer relevant, purchased during accumulation phase when I actually paid taxes.  Might "upgrade" them.:
IIM, IQI, NEA, NVG,
Individual bonds: (about 15% by cost basis)
CUSIPS - 032359AE1, 12505JAA1, 20367QAB3, 609453AG0, 018772AS2, 761519BD8

The rest is a 10% notional short in VXXB and individual securities (various) that are bought to write covered calls against for additional income.

The tickers and CUSIPs listed are pretty static and rarely get exchanged.  The rest is more active and I write about on my blog as listed in my signature line.

frugledoc

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #23 on: February 19, 2019, 03:06:31 AM »
@Padonak @specialkayme

These aren't necessarily where I'd put money today, e.g. these are my "hold" positions not my "buy" positions.

For income: (about 40% by cost basis)
AVK, GPMT, HNW, IGD, OXLC, PCI, REM, TWO, AMZA, AWP, BX, CCR, EPD, GLO, IGD, JPS, MIC, MO, MORL, PSEC, SXCP.
Munis (no longer relevant, purchased during accumulation phase when I actually paid taxes.  Might "upgrade" them.:
IIM, IQI, NEA, NVG,
Individual bonds: (about 15% by cost basis)
CUSIPS - 032359AE1, 12505JAA1, 20367QAB3, 609453AG0, 018772AS2, 761519BD8

The rest is a 10% notional short in VXXB and individual securities (various) that are bought to write covered calls against for additional income.

The tickers and CUSIPs listed are pretty static and rarely get exchanged.  The rest is more active and I write about on my blog as listed in my signature line.

Completely unsuitable for about 99% of non professional investors.

specialkayme

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #24 on: February 19, 2019, 07:08:06 AM »
@Padonak @specialkayme

These aren't necessarily where I'd put money today, e.g. these are my "hold" positions not my "buy" positions.

For income: (about 40% by cost basis)
AVK, GPMT, HNW, IGD, OXLC, PCI, REM, TWO, AMZA, AWP, BX, CCR, EPD, GLO, IGD, JPS, MIC, MO, MORL, PSEC, SXCP.
Munis (no longer relevant, purchased during accumulation phase when I actually paid taxes.  Might "upgrade" them.:
IIM, IQI, NEA, NVG,
Individual bonds: (about 15% by cost basis)
CUSIPS - 032359AE1, 12505JAA1, 20367QAB3, 609453AG0, 018772AS2, 761519BD8

The rest is a 10% notional short in VXXB and individual securities (various) that are bought to write covered calls against for additional income.

The tickers and CUSIPs listed are pretty static and rarely get exchanged.  The rest is more active and I write about on my blog as listed in my signature line.

Interesting. Some of those appeared promising, even today. But many are showing fundamental issues to my investing strategy (some are showing negative EPS despite throwing off double digit dividends, others are showing negative sales or equity growth over the past 7 years), although its an interesting comparison all the same.

What caused you to select those over other choices?

Financial.Velociraptor

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #25 on: February 19, 2019, 10:48:47 AM »
@Padonak @specialkayme

These aren't necessarily where I'd put money today, e.g. these are my "hold" positions not my "buy" positions.

For income: (about 40% by cost basis)
AVK, GPMT, HNW, IGD, OXLC, PCI, REM, TWO, AMZA, AWP, BX, CCR, EPD, GLO, IGD, JPS, MIC, MO, MORL, PSEC, SXCP.
Munis (no longer relevant, purchased during accumulation phase when I actually paid taxes.  Might "upgrade" them.:
IIM, IQI, NEA, NVG,
Individual bonds: (about 15% by cost basis)
CUSIPS - 032359AE1, 12505JAA1, 20367QAB3, 609453AG0, 018772AS2, 761519BD8

The rest is a 10% notional short in VXXB and individual securities (various) that are bought to write covered calls against for additional income.

The tickers and CUSIPs listed are pretty static and rarely get exchanged.  The rest is more active and I write about on my blog as listed in my signature line.

Interesting. Some of those appeared promising, even today. But many are showing fundamental issues to my investing strategy (some are showing negative EPS despite throwing off double digit dividends, others are showing negative sales or equity growth over the past 7 years), although its an interesting comparison all the same.

What caused you to select those over other choices?

At the time I picked each of these, they looked likely to provide good cash on cost returns and to have more or less sustainable dividends.  MORL has been a big disappointment (originally bought over 26) but has more than broken even based on cash distributions in excess of my long term unrealized losses.  I set things up this way to protect against sequence of returns risk.  I have cash returns in excess of my budget straight out of the gate and enough excess to trade buy/write options plays in (mostly) dividend paying names with combined yields over 12% annualized.  This provides my portfolio growth.  At some point, it will be fine if the distribution paying ballast all goes to zero.  It only matters that it takes a "long" time to do so.

Quote from: frugaldoc
Completely unsuitable for about 99% of non professional investors.

OK sure.  99% should probably index anyway.  I have no beef with indexers and have recommended several people who asked for investing advice to use Vanguard.  If you have to ask how/why I do what I do, you probably need to index.  Cheers.

smallstache

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Re: Financial Independence On Dividends Alone, am I an Idiot?
« Reply #26 on: February 19, 2019, 10:51:08 AM »
SPY's dividend has averaged an 8% rise over the fund's 26 years of existence (1993-2018).  It dropped 20% in 2009, however, it rose an average of 12.13% over the next 5 years.  There was only one other times that SPY's dividend fell was in 2000 when it fell by 0.27%.  The next year it rose 30.16%.  Investing for income alone outpaces inflation and works.

During those same 26 years, the S&P500 index was up 21 years and down 5 years.  The average rise over that time was 10.66%.  Investing for capital gains also outpaces inflation and works.