What if you retire in 2008-9 and your portfolio takes a 20-30% hit you still need to sell off shares but you eat into your principle amount.
If you truly understand the math, then you know that companies eat into your principal amount when they pay out a dividend, so your principal gets eaten equally in either case. If a company that doesn't pay dividends takes a 30% hit during a market crash, then a twin of that company, whose only difference is that they pay out dividends rather than retaining their earnings, would also take a 30% hit.
If you're assuming that your dividend-paying company would only take a 10% hit while the broad market drops 30%, that's because you're
assuming a different company, with different characteristics. It's may be possible to find a set of stocks that are less volatile than another set, and many of them would probably pay dividends, but it's not their dividends that
make them less volatile, no more than being encoded as pits on a plastic disc is what
makes good music. In other words, while dividends may correlate with lower volatility, they're are not the cause. Things like earnings, company maturity, market share, industry, etc. are more likely to be predictive of lower-volatility than dividend payouts. Sometimes these qualities all converge on "value stocks". If "dividends" are the only thing you screen with, you'll needlessly throw stocks that are just as good at meeting your goals, but who use buybacks instead of dividends. So if you're going to screen for low-volatility stocks, it makes a lot more sense to screen directly for those inherent qualities rather than focusing on the earnings-return mechanism.
But, good luck finding those low-volatility stocks. As depressing of a strategy as it would be to limit yourself to music that you could buy on CD at Wal-Mart, picking non-volatile stocks based solely on their dividend history might be even worse.
Here is how three ETFs based on various flavors of dividend-aristocrat indexes performed compared to the total market during '08-'09. One fell less, one fell about the same, and one fell more. If you can explain why the 2006 version of you would have known that that one dividend index was the one to pick, and the other two were garbage, I would love to be enlightened!
Then, even if you do manage to find a way to discover low-volatility stocks, you're almost surely increasing your risk by lowering your diversification.
As far as divs being old cd players, is a little too speculative imho, you never know share buybacks could be the zune of the ipod world :P
Yes, of course, that's why I said you should just invest in a total market fund and embrace the total return, because whether the world ends up moving towards Zunes or moving towards iPods, you'll win either way, automatically.
And as you also said if div's do go by the wayside "and youre sitting on a giant investment pile" you could liquidate that just as well
Well yeah, that's exactly what an investor who gave no special status to dividends would do. But you've expressed fear of "eating into your principal", which suggests you're unwilling to take such a course. Have you changed your mind halfway through this post, and realized that there is nothing dangerous about "eating into your principal" before I've even finished my response? Damn, I'm good!
I know how passionate skyrefuge you are about indexing, so your following post youre probably going to try and beat it into me that indexing is better in every way. However, ive been through at least 50 different forum discussions addressing the topic and I havent seen anything yet that makes me think any different as far as the END GAME is concerned.
Well yes, you literally have incorporated dividends into your personal identity, so I expected it might be difficult for you to see the rewardless-risk that you get from a dividend-focused approach. Just like it was impossible to make SUV-luvvvr to see that buying a used Honda Fit would be a huge boon for her financial goals. But at the least, maybe other less-invested readers will learn something from the discussion.
If you've read 50 different forum discussions, then surely you've come across this, but maybe read it again:
Vanguard's Total-return Investing whitepaperPages 8-14 is even all you really need to read. It essentially repeats what I've already said, showing how you get no reward with a dividend-focused approach over a total-return approach, while you add diversification risk. But maybe hearing it from someone who offers dividend-focused funds will make it seem less-biased to you.
If lower volatility during the withdrawal phase is your goal, and you're willing to accept lower returns in exchange, just increase your bond allocation. Problem solved.