Author Topic: Living Off Dividends?  (Read 11427 times)

mlbfan07

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Living Off Dividends?
« on: March 25, 2018, 07:58:48 PM »
Evening MMM Family!
I have been reading blogs for years now about FIRE, minimalism, simplifying and retirement.
One of the most intriguing concepts to me has been "living off dividends in retirement", primarily off individual dividend paying stocks.
Of course this is a possibility, with a decent income, debt kept within reason and enough time, absolutely - I feel like I am reading a new story about this concept weekly.
But as I hit my early 40s now and look at where I am at, and even with living a somewhat basic life, the idea of living simply off dividend income seems to be fading away.
Especially since I have so many friends and family that have govt/edu pensions in place and are looking at exiting their careers within the next decade.

Is this a goal for many of you on the forum?
How viable is this goal if your savings path didnt start till later in life?
Should this even be a target?
Or based on the mental aspects of investing in individual stocks does this become more difficult to pursue than simply investing in index funds and depending on the 4% rule?
After 401k / Roth I can invest $2k a month, at $24k a year pulling $800.00 in dividends from that seems minimal.

If seems as the years pass that this idea coming to fruition is going to happen.
(I know that 43 is not old, but seeing friends and family with X amount of years to go, the plan of living off dividends just may not be right)

Me:
$3k per month liquid after expenses (maybe $2500.00 in off months)
Approx $300k in retirement accounts
$40k sitting in cash pending my next financial move

Thanks all for the time!

MrUpwardlyMobile

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Re: Living Off Dividends?
« Reply #1 on: March 25, 2018, 09:28:20 PM »
Evening MMM Family!
I have been reading blogs for years now about FIRE, minimalism, simplifying and retirement.
One of the most intriguing concepts to me has been "living off dividends in retirement", primarily off individual dividend paying stocks.
Of course this is a possibility, with a decent income, debt kept within reason and enough time, absolutely - I feel like I am reading a new story about this concept weekly.
But as I hit my early 40s now and look at where I am at, and even with living a somewhat basic life, the idea of living simply off dividend income seems to be fading away.
Especially since I have so many friends and family that have govt/edu pensions in place and are looking at exiting their careers within the next decade.

Is this a goal for many of you on the forum?
How viable is this goal if your savings path didnt start till later in life?
Should this even be a target?
Or based on the mental aspects of investing in individual stocks does this become more difficult to pursue than simply investing in index funds and depending on the 4% rule?
After 401k / Roth I can invest $2k a month, at $24k a year pulling $800.00 in dividends from that seems minimal.

If seems as the years pass that this idea coming to fruition is going to happen.
(I know that 43 is not old, but seeing friends and family with X amount of years to go, the plan of living off dividends just may not be right)

Me:
$3k per month liquid after expenses (maybe $2500.00 in off months)
Approx $300k in retirement accounts
$40k sitting in cash pending my next financial move

Thanks all for the time!

Dividend investing requires you to save more, growth may be slower, and assumes a 2-3% withdrawal rate in most cases.  You should be able to calculate out what you need to cover your expenses in retirement and see if calculate out whether you can ever save enough for dividend investing to make sense long term.

soccerluvof4

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Re: Living Off Dividends?
« Reply #2 on: March 26, 2018, 03:01:49 AM »
I thought about it for years and for me it just was/is a lot simpler to do index funds. For fun I have done a little trading and I mean really a little just to keep up on the whole "financial world" but I couldnt get behind living off the dividend investing idea not that its not a good way to go but I like simple.

chasesfish

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Re: Living Off Dividends?
« Reply #3 on: March 26, 2018, 05:01:16 AM »
"Living Off Dividends" sounds great, but it is really more complicated than that.  You have different accounts to manage your spending from and a lot of dividend companies are paying dividends because they've run out of effective places to invest their money (ie General Electric).  You can be stuck riding companies into their oblivion and not be invested in the replacement company.   

A dividend investor could have owned Kodak and missed out on Apple, even though the use of the "camera" has exploded.

The S&P yields just under 2%, that plus a little Bond/REIT allocation would have be spending very little principal on a flat model.

Its good timing for your question too, I have a couple dividend aristocrats I've owned for a while that I'm ready to say uncle on and just index the money.

mlbfan07

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Re: Living Off Dividends?
« Reply #4 on: March 26, 2018, 07:16:37 AM »
Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.

I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.

Financial.Velociraptor

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Re: Living Off Dividends?
« Reply #5 on: March 26, 2018, 07:21:46 AM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

thd7t

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Re: Living Off Dividends?
« Reply #6 on: March 26, 2018, 08:15:19 AM »
As Financial Velociraptor says, this is contreversial, here.  I'm not arguing against them as a strategy, but I will mention a few of the reasons, here.

There are a few reasons:  First, dividends come at the cost of stock value, so many see it as a zero sum game.  Second, many people argue that they're more stable than stock returns, but this position is tainted by survivorship bias (as happens in many cases of individual stock picking).  Third, people aren't always aware that non-qualified dividends are taxed as ordinary income.

Another issue (obviously not for F.V.) is that this method frequently leads people to oversave, but there are lots of methods that do that!

Rob_bob

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Re: Living Off Dividends?
« Reply #7 on: March 26, 2018, 11:51:25 AM »
Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.

I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.

Just for giggles I looked up XOM, COP, PFE, IBM on a dividend reinvestment calculator for the last 20 years compared to SPY (S&P 500).

Average annual total return with dividends reinvested.

SPY 6.71%,  XOM 7.05%, COP 11.04%, PFE 4.47%, IBM 6.96%

Average annual total return without dividends reinvested.

SPY 5.85%  XOM 6.38%, COP 9.68%, PFE 3.27%, IBM 6.63%

https://www.dividendchannel.com/drip-returns-calculator/

chasesfish

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Re: Living Off Dividends?
« Reply #8 on: March 26, 2018, 12:34:27 PM »
Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.

I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.

I'm saying this as a guy who has a dividend income spreadsheet I used to track to help know how much supplemental income I have coming in and due to this, I missed plenty of the upside because I avoided tech stocks and indexing for a while.  The dividend chart actually looks okay right now because of a REIT allocation, but dividends reflect 100% (or more) of those company's returns right now.

It turns out part of my withdraw strategy will be a deferred compensation plan that pays out over 15 years.  I only have eight fund options including the Vanguard Total Stock Market Index, so that'll be paid out to me in monthly increments with an annual reset of the payout rate.

As I get older, I am also not enjoying the individual stock game as much.  I have money now, so it pains me 3x more to lag the index than it does to beat the market.  I'm considering eating $1300 in capital gains in an hour then moving the money into FSTVX...market is so volatile I need to sell in the last few minutes to not get mismatched pricing.

ChpBstrd

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Re: Living Off Dividends?
« Reply #9 on: March 27, 2018, 12:31:24 PM »
Count me among the anti-dividend crowd*.

1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.

*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).

sisto

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Re: Living Off Dividends?
« Reply #10 on: March 27, 2018, 02:22:33 PM »
I used to think I wanted to be dividend investor until I really started reading everything in MMM and learning better about investing. It didn't take too long to realize it's ok to sell off some stock rather than have to potentially have a bigger portfolio to only live off of dividends alone.
« Last Edit: March 27, 2018, 02:31:14 PM by sisto »

stimepy

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Re: Living Off Dividends?
« Reply #11 on: March 27, 2018, 02:27:58 PM »
Count me among the anti-dividend crowd*.

1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.

*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).

Sounds to me like you are talking about stock picking, which may or may not be what the op wants.

1) Sometimes yes, sometimes no.  See Blue chips for Yes and (honestly) you have to do some searching for the good no companies.  (They do exist though!)
2) More tax efficient... Sure will go with that one.  Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash...  (Other issues too but I'll keep it short.)
3) True.  But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
4) This is true, and such stocks should be avoided.  This point is why stock pickers need to do their research.  (and get burned when they do not!)
5) ...  So this is different from a non-dividend stock how?
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we?  Gotten you bond money back yet?
7) I can't disagree here.  Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
8) Yup zero sum.  But in theory (not always the case) the money could also be put in bad places.  Can you imagine Coke investing say in say electric cars?  Neither can I.  It can (and often does) help keep priorities straight for companies.  Invest in what you know to make money and give back the rest though buy backs and dividends.
9) Sir you are correct.  Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!


Personally I do like the dividends and plan to make them part of my income when I eventually FIRE.  If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.

talltexan

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Re: Living Off Dividends?
« Reply #12 on: March 27, 2018, 02:47:38 PM »
During the accumulation phase, dividends are not really relevant. Most young investors set them to automatically re-invest anyway. You should focus on maximizing return, NOT cash flow from investments.

DreamFIRE

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Re: Living Off Dividends?
« Reply #13 on: March 27, 2018, 03:34:41 PM »
3) Forced tax realization - no good way to throttle withdraws to match spending
3) True.  But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....

You're making the assumption that people are receiving dividends only from retirement accounts.  Even the OP said he was investing $24K/yr after his 401K/Roth.

Myself, my taxable brokerage account has more stash than my retirement accounts, and I'm paying 15% capital gains on qualified dividends while I'm working, but my capital gains rate will drop to 0% during FIRE.  They are simply reinvested.  This is a forced tax realization that I would have preferred to have waited until FIRE.   As for non-qualified dividends, I'm paying at a higher marginal tax rate than I will be when I'm FIREd as well.
« Last Edit: March 27, 2018, 07:00:24 PM by DreamFIRE »

mlbfan07

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Re: Living Off Dividends?
« Reply #14 on: March 27, 2018, 08:29:23 PM »
This is why the MMM forum is outstanding.
I am a new poster on the forum and still have received plenty of thought-provoking replies.

Thank you Rob_bob for that website. I had found comparable sites out there but www.dividendchannel.com is great for this research.

Thank you all for these replies and thoughts.
Love to see both sides of this discussion.

ChpBstrd

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Re: Living Off Dividends?
« Reply #15 on: March 27, 2018, 09:54:26 PM »
Comments in green!

Count me among the anti-dividend crowd*.

1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.

*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).

Sounds to me like you are talking about stock picking, which may or may not be what the op wants.
True. I'm assuming the OP is not talking about replacing their entire budget with the S&P 500's 1.8% dividend. Usually people talk about creating a portfolio of stocks that pay an above-average dividend.

1) Sometimes yes, sometimes no.  See Blue chips for Yes and (honestly) you have to do some searching for the good no companies.  (They do exist though!)
I agree every company is different, but if you select for dividend paying companies, the "out of ideas" variety is over-represented in your portfolio compared to the total market.
2) More tax efficient... Sure will go with that one.  Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash...  (Other issues too but I'll keep it short.)
Yep, it's a fact. Companies tend to do buybacks at the top of economic cycles. However, they also increase their dividends at those times. This becomes detrimental when their profits evaporate and they're taking on debt at sky-high rates in the middle of the next recession and yet they have this reoccurring dividend in the budget.
3) True.  But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
My thought here was the retiree who receives $50k in dividends in a year but only spends $40k. S/he is paying taxes on $50k income because s/he planned to receive income via dividends and the dividends grew over time (even if the stock prices did not). Had s/he mostly funded his/her retirement by occasionally clicking sell, s/he could withdraw exactly what's needed for spending and pay taxes on only the capital gains within those $40k. Much lower taxes = much slower portfolio depletion.
4) This is true, and such stocks should be avoided.  This point is why stock pickers need to do their research.  (and get burned when they do not!)
I've found few debt-free companies paying a hefty dividend that are also not in the "out of ideas" set.
5) ...  So this is different from a non-dividend stock how?
It would be different than bonds, for a retiree looking for a cash flow equal to 4-5% of their portfolio. The bonds would probably drop much less in a correction.
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we?  Gotten you bond money back yet?
In bankruptcies, equity holders are usually 100% wiped out and bond holders take an average 50-60% haircut. But of course we're talking about a diversified dividend-payer portfolio versus a diversified bond portfolio, not about taking on company-specific or government-specific risks. A portfolio that includes 100% wipeouts is more volatile than a portfolio that includes 60% haircuts or delayed payments.
7) I can't disagree here.  Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
Also, executives compensated with stock options or holding lots of shares will be wary of cutting the dividend to pay down debt or fund an opportunity, even when that would be best for the company in the long run. Dividends create an incentive to loot, rather than act like fiduciaries.
8) Yup zero sum.  But in theory (not always the case) the money could also be put in bad places.  Can you imagine Coke investing say in say electric cars?  Neither can I.  It can (and often does) help keep priorities straight for companies.  Invest in what you know to make money and give back the rest though buy backs and dividends.
There's certainly no shortage of bad reinvestment ideas, and I've witnessed many of these (mostly acquisitions, but also Kodak's cryptocurrency. WTF!?). However, on the flip side, an investor who receives a dividend could make a bad decision in how they reinvest that money. The company that pays down $10M in 6% debt, for example, makes a permanent increase in the company's cash flow by ~$600k/year. This increase in cash flow is multiplied as an increase in the stock price. Plus the reduced leverage makes the rest of their debt cheaper over time. Plus the company becomes less risky, increasing the value of the stock. Dividends are almost always a missed opportunity from a shareholder's perspective. 
9) Sir you are correct.  Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!
I'll add that dividends were popularized in the era of paying your "full service" broker $1,000+ per trade. It was BAD in the bad ole days!

Personally I do like the dividends and plan to make them part of my income when I eventually FIRE.  If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.
Yea, even holding the S&P we'll receive 1.7% of our portfolios handed back to us as dividends, even if we hate it. A good drawdown plan needs to include both projected sales and dividends. E.g. for a 4% withdraw rate stock sales cover 2.3% and dividends 1.7%. We can throttle stock sales up or down as needed, but the dividend income is fixed.


Telecaster

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Re: Living Off Dividends?
« Reply #16 on: March 27, 2018, 10:01:02 PM »
In the current era of ultra-low interest rates, dividend investing has been all the rage because high paying dividend stocks handily beat T-bills.  However, that has not been true for very long periods of time.  For example, from about 1969-ish to about 2008-ish The 10-year Treasury would have beat dividends (unless you had a crystal ball).  In the 1980s  and 1990s many retirees only in invested bonds because interest rates were so attractive that many people didn't want to bother with stocks.  The exact opposite situation we have now.

I don't think we will repeat 1969-ish to about 2008-ish, but I don't think we will continue to experience current economic conditions either.  Dividends are an attractive strategy right now, but recent history suggests that likely won't continue on indefinitely. 



chasesfish

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Re: Living Off Dividends?
« Reply #17 on: March 28, 2018, 05:08:43 AM »
Take a look at the chart embedded in this article (not posted for the political commentary) courtesy of Ben Carlson, one of the better finance writers out there.

https://www.bloomberg.com/view/articles/2018-03-27/congress-would-make-a-mistake-by-banning-share-buybacks

One driver of the ultra-low dividend rates paid by stocks is most companies return capital by paying dividends AND buying back shares.  Dividend yields used to be 3%+ before rules were clarified allowing stock buybacks.

Academically, buybacks are also preferable in a taxable account.  Dividends force a shareholder to realize taxable income while buybacks increase the share price through reducing shares outstanding, then you realize the income when you sell appreciated shares.

Telecaster

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Re: Living Off Dividends?
« Reply #18 on: March 28, 2018, 04:49:33 PM »
Take a look at the chart embedded in this article (not posted for the political commentary) courtesy of Ben Carlson, one of the better finance writers out there.

https://www.bloomberg.com/view/articles/2018-03-27/congress-would-make-a-mistake-by-banning-share-buybacks

One driver of the ultra-low dividend rates paid by stocks is most companies return capital by paying dividends AND buying back shares.  Dividend yields used to be 3%+ before rules were clarified allowing stock buybacks.

Academically, buybacks are also preferable in a taxable account.  Dividends force a shareholder to realize taxable income while buybacks increase the share price through reducing shares outstanding, then you realize the income when you sell appreciated shares.

^ That's exactly right.  At one point in time, even before there were stock markets, all companies paid dividends.  That's how investors got their money out of the company.   As the chart in your article indicates, back in the day, the majority of the return of the S&P 500 was from the dividends, not price.   High dividends were seen as a way to mitigate the risk of owning an individual stock.  That's been slowly flipped around as companies both revinvest in the company,  buy back shares, and individual investors have moved to mutual funds which mitigates the risk.   Today, the majority of the returns are from price, not dividends.

From a tax efficiency standpoint, and quite often from an economic efficiency standpoint, investors are better served by the company either buying back shares or simply reinvesting profits back into the company.  For those reasons and others, I think it is very likely the dividend yield of the S&P will continue its slow decline.   I could be wrong, but I think dividend strategies will become increasingly harder to maintain as time goes on. 


Mr Mark

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Re: Living Off Dividends?
« Reply #19 on: March 31, 2018, 11:34:58 PM »
Comments in green!

Count me among the anti-dividend crowd*.

1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.

*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).

Sounds to me like you are talking about stock picking, which may or may not be what the op wants.
True. I'm assuming the OP is not talking about replacing their entire budget with the S&P 500's 1.8% dividend. Usually people talk about creating a portfolio of stocks that pay an above-average dividend.

1) Sometimes yes, sometimes no.  See Blue chips for Yes and (honestly) you have to do some searching for the good no companies.  (They do exist though!)
I agree every company is different, but if you select for dividend paying companies, the "out of ideas" variety is over-represented in your portfolio compared to the total market.
2) More tax efficient... Sure will go with that one.  Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash...  (Other issues too but I'll keep it short.)
Yep, it's a fact. Companies tend to do buybacks at the top of economic cycles. However, they also increase their dividends at those times. This becomes detrimental when their profits evaporate and they're taking on debt at sky-high rates in the middle of the next recession and yet they have this reoccurring dividend in the budget.
3) True.  But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
My thought here was the retiree who receives $50k in dividends in a year but only spends $40k. S/he is paying taxes on $50k income because s/he planned to receive income via dividends and the dividends grew over time (even if the stock prices did not). Had s/he mostly funded his/her retirement by occasionally clicking sell, s/he could withdraw exactly what's needed for spending and pay taxes on only the capital gains within those $40k. Much lower taxes = much slower portfolio depletion.
4) This is true, and such stocks should be avoided.  This point is why stock pickers need to do their research.  (and get burned when they do not!)
I've found few debt-free companies paying a hefty dividend that are also not in the "out of ideas" set.
5) ...  So this is different from a non-dividend stock how?
It would be different than bonds, for a retiree looking for a cash flow equal to 4-5% of their portfolio. The bonds would probably drop much less in a correction.
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we?  Gotten you bond money back yet?
In bankruptcies, equity holders are usually 100% wiped out and bond holders take an average 50-60% haircut. But of course we're talking about a diversified dividend-payer portfolio versus a diversified bond portfolio, not about taking on company-specific or government-specific risks. A portfolio that includes 100% wipeouts is more volatile than a portfolio that includes 60% haircuts or delayed payments.
7) I can't disagree here.  Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
Also, executives compensated with stock options or holding lots of shares will be wary of cutting the dividend to pay down debt or fund an opportunity, even when that would be best for the company in the long run. Dividends create an incentive to loot, rather than act like fiduciaries.
8) Yup zero sum.  But in theory (not always the case) the money could also be put in bad places.  Can you imagine Coke investing say in say electric cars?  Neither can I.  It can (and often does) help keep priorities straight for companies.  Invest in what you know to make money and give back the rest though buy backs and dividends.
There's certainly no shortage of bad reinvestment ideas, and I've witnessed many of these (mostly acquisitions, but also Kodak's cryptocurrency. WTF!?). However, on the flip side, an investor who receives a dividend could make a bad decision in how they reinvest that money. The company that pays down $10M in 6% debt, for example, makes a permanent increase in the company's cash flow by ~$600k/year. This increase in cash flow is multiplied as an increase in the stock price. Plus the reduced leverage makes the rest of their debt cheaper over time. Plus the company becomes less risky, increasing the value of the stock. Dividends are almost always a missed opportunity from a shareholder's perspective. 
9) Sir you are correct.  Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!
I'll add that dividends were popularized in the era of paying your "full service" broker $1,000+ per trade. It was BAD in the bad ole days!

Personally I do like the dividends and plan to make them part of my income when I eventually FIRE.  If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.
Yea, even holding the S&P we'll receive 1.7% of our portfolios handed back to us as dividends, even if we hate it. A good drawdown plan needs to include both projected sales and dividends. E.g. for a 4% withdraw rate stock sales cover 2.3% and dividends 1.7%. We can throttle stock sales up or down as needed, but the dividend income is fixed.


Excellent post ChpBstrd.

chasesfish

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Re: Living Off Dividends?
« Reply #20 on: April 01, 2018, 06:19:22 AM »
In the midst of this thread, I sold off the rest of my Genuine Parts Company.  I owned this company since 2010 and were picking up shares between then and 2012.  Dividend aristocrat, best thing its known for is NAPA.

Long time CEO and CFO retired in 2014/2015 and the thing has horribly trailed the market.  Former management was also tighter with shareholder money than their own (I worked about three miles from their headquarters, a hidden non-discript 2 story cement building).   New CEO/CFO, bad acquisitions, no revenue growth, and being attacked and killed by Amazon.  Rock solid balance sheet is being wrecked by continuing to buy other declining companies.

If I had been indexed, I would have seen the offset of this pain.  You just never know.

Exflyboy

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Re: Living Off Dividends?
« Reply #21 on: April 03, 2018, 11:48:43 AM »
I sorta do this by default.

When I was working I disliked dividends because our State charges you 9% no matter whether its long term or short term.. Plus then Federal taxes and 24% of the dividend was gone. So I stuck with index investing and put up with the smaller dividend.

Now in retirement I still stick with index investing but my federal is zero% and I still pay the State taxes because I have no choice.. So I port the dividend to my checking account and treat it as income.

The rent we get plus dividends is very close to 100% of our spend, plus we get a $1100/m bronze HC plan for $15 due to the subsidy.

Note that this is all after tax, we are not old enough to tap the retirement funds yet.

One day we will get out of the rental business.. Its just hard to turn away income despite the fact that sometimes its a PITA.


SwedishMoustache

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Re: Living Off Dividends?
« Reply #22 on: April 03, 2018, 12:38:29 PM »
I am neither American nor invested (directly) in American companies - but my assets are 90% invested in dividend-yielding Scandinavian and northern-European stocks. I feel that potentially living off dividends off said stocks suits me quite well and, coupled with a somewhat sizeable cash "mattress" as well as freelance contracts (which i genuinely love) here and there eliminates the need for a withdrawal altogether.

I personally don't think it matters how a person achieves FIRE. Due to a few quite lucky circumstances, i achieved it a few months back with a current average monthly "coverage" of 112% due to Annual Dividends/12. Some achieve it through index investing - an approach i completely respect - but it's not an approach i find suitable for me. I suspect i'm one of the minority on these forums who prefers stock picking to index investment.

Few things are as safe and as low management as index investing, however, so unless you genuinely enjoy delving into individual companies, i'd advise you to stick to that.

As far as taxation for stocks go, Sweden has one of the most investor-friendly tax systems as far as stocks go, in the world. Capital gains, including dividends in investment accounts, are taxed at a flat percentage (of a percentage). The rough tax rate for my current annual yield is somewhere in the range of 4.5%.

Scandium

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Re: Living Off Dividends?
« Reply #23 on: April 03, 2018, 02:04:07 PM »
As far as taxation for stocks go, Sweden has one of the most investor-friendly tax systems as far as stocks go, in the world. Capital gains, including dividends in investment accounts, are taxed at a flat percentage (of a percentage). The rough tax rate for my current annual yield is somewhere in the range of 4.5%.

How does that work? I'm a bit confused about your statement on taxes. What do you mean by "tax on yield"?
From here it looks like capital gains/dividend taxes is flat 30% in Sweden:
https://www.globalpropertyguide.com/Europe/Sweden/Taxes-and-Costs

That doesn't sound very good to me. Am I missing something? The US has flat 15%. Even Norway which generally has higher taxes than Sweden is 27% or so.

Exflyboy

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Re: Living Off Dividends?
« Reply #24 on: April 03, 2018, 02:19:32 PM »
The US has a flat 15% tax???... News to me.

thd7t

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Re: Living Off Dividends?
« Reply #25 on: April 03, 2018, 02:51:03 PM »
The US has a flat 15% tax???... News to me.
On qualified dividends.

Goldielocks

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Re: Living Off Dividends?
« Reply #26 on: April 03, 2018, 02:52:07 PM »
I am actively trying to build up a dividend bearing portfolio.   Dividend taxes are ZERO here ,if your net income is under $45k from all sources.

This means a married couple could have up to $90k in income and still pay zero taxes on their dividends.  Versus pulling money from an RRSP (401k) at full marginal tax rate.

I think Dividend strategies can work very well as a part of tax planning strategies, and you need to look at the return, net of taxes, dividends, capital gains, after tax return on 401k/ RRSP withdrawals.

For you Americans, capital gains taxes are very low (0%, 15%, 20%), so maybe the dividend tax reduction does not attract you as much as it does people in other higher tax countries.   If that is the case, perhaps a capital growth oriented non-registered portfolio would be to your advantage in retirement.

Scandium

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Re: Living Off Dividends?
« Reply #27 on: April 03, 2018, 03:01:18 PM »
The US has a flat 15% tax???... News to me.
On qualified dividends.

Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.

State income taxes come in addition. These are from 0% to ~13% I believe.

So capital gains tax in the US is between 0% and 36.8%.. Ok?

Exflyboy

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Re: Living Off Dividends?
« Reply #28 on: April 03, 2018, 04:23:35 PM »
The US has a flat 15% tax???... News to me.
On qualified dividends.

Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.

State income taxes come in addition. These are from 0% to ~13% I believe.

So capital gains tax in the US is between 0% and 36.8%.. Ok?

Yup... a "flat" tax of between 0 and 36.8%....:)

bacchi

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Re: Living Off Dividends?
« Reply #29 on: April 03, 2018, 05:11:51 PM »
Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.

I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.

Just for giggles I looked up XOM, COP, PFE, IBM on a dividend reinvestment calculator for the last 20 years compared to SPY (S&P 500).

Average annual total return with dividends reinvested.

SPY 6.71%,  XOM 7.05%, COP 11.04%, PFE 4.47%, IBM 6.96%

Average annual total return without dividends reinvested.

SPY 5.85%  XOM 6.38%, COP 9.68%, PFE 3.27%, IBM 6.63%

https://www.dividendchannel.com/drip-returns-calculator/

BAC 1.49% SPY 6.01%

Note the severe drop in BAC in 2007. That wasn't only because they absorbed a toxic company in the midst of the GFC, it was also because they slashed their dividend. Given that BAC hadn't decreased their dividend for decades, could you have predicted a temporary drop to zero?


GE has a dividend of 0.48 and an EPS loss of 0.72. Is that viable?

GE -1.07%  SPY 6.01%


In 1987, the DIA had Kodak, Sears, and Woolworth. They all paid good dividends. Would you have dumped those because of ... why? This whole AOL thing is going to really take off? Cameras will go out of fashion?


This comes down to stock picking.* Are you clever enough to only pick the winners and avoid the losers? Or, to paraphrase Dirty Harry,

Do you feel lucky, punk?





* What about a dividend ETF? There's a ~4% yield with CVY.

CVY 4.18%  SPY 8.13%

Scandium

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Re: Living Off Dividends?
« Reply #30 on: April 03, 2018, 06:11:41 PM »
The US has a flat 15% tax???... News to me.
On qualified dividends.

Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.

State income taxes come in addition. These are from 0% to ~13% I believe.

So capital gains tax in the US is between 0% and 36.8%.. Ok?

Yup... a "flat" tax of between 0 and 36.8%....:)
Well, point was that I'd wager that for something like 80-90% of working people here it's a flat 15% in federal tax. But yes pedant point well taken.

salmo trutta

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Re: Living Off Dividends?
« Reply #31 on: April 03, 2018, 09:21:53 PM »
Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.

Mrbeardedbigbucks

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Re: Living Off Dividends?
« Reply #32 on: April 04, 2018, 05:31:08 AM »
Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.


Sounds nice. Would you mind sharing?

Rob_bob

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Re: Living Off Dividends?
« Reply #33 on: April 04, 2018, 04:35:51 PM »
Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.

I wouldn't mind a peek under the hood too and see how it compares to my own collection  :)

salmo trutta

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Re: Living Off Dividends?
« Reply #34 on: April 05, 2018, 06:20:36 AM »
It's nothing fancy - long time holder of $PCI, $PDI from PIMCO which both yield north of 8%. I also own $PONDX which is north of 8% too I believe, maybe slightly less. I purchased $RIV, $NHF, and $BGH back in 2015 and they all have double-digit yields. I smooth it out a bit with some of the Gundelach funds like $TOTL $DLFNX, I really like him.

One of my favorite preferreds is $GPT.A, I have followed their CEO for quite some time and really trust him. I sunk a lot of my capital into their $25 preferred that yields 7.125% (I believe, going from memory here) and I have some AT&T baby bonds as well along with several other preferreds that hover over that 7% mark.

About 5 years ago I bought a "basket" of small regional banks that held cash in excess of 50% of their NAV and traded below NAV as a whole. That basket yields around 3% but capital appreciation has been colossal - wow! Life insurance companies too that held massive cash at 50% of NAV and traded below book - about 6 or 7 of those companies that yield around 3% with massive capital appreciation over the last 5 years. $AAPL, $BRK.B, and $AMZN round out some growth alongside the boring $RSP as a core stock fund.

Life is good!

Cheers,

Salmo

Bill_

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Re: Living Off Dividends?
« Reply #35 on: April 05, 2018, 06:52:13 PM »
Warren Buffett hates paying dividends, but he absolutely loves collecting them.  How do you reconcile that?

Every company Berkshire has a passive stake in pays dividends.  If it doesn't pay dividends then he just buys the whole company and pays himself with their earnings.

What company has been a wise repurchaser of their own stock?  Most stock repurchases occur at market highs, not at market lows.  Besides Berkshire Hathaway, who was buying back stock in 2008/2009 at the market lows?  Instead of hoarding cash in the good times they were buying back overpriced stock.

The Kodak example is the worst.  Just like Buffett took the dividends from the original Berkshire Mills investment and invested them into new companies you could do the same with Kodak.  All those dividends means you weren't left with nothing when Kodak disappeared.  When all the techs went sky high in the 90s and never paid a dividend you were left with nothing when they went bust in 2000.

Since 1995 how much in dividends have you collected from Coca Cola?  Not aware of them dropping dead yet.  What about your local utility?

I help an older friend gather his tax papers every year and he gets all these 1099s from direct stock purchases.  He said his Dad bought him a some shares of these companies back in the 70s.  Those "few" shares turned until a few hu

bacchi

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Re: Living Off Dividends?
« Reply #36 on: April 05, 2018, 07:04:18 PM »
The Kodak example is the worst.  Just like Buffett took the dividends from the original Berkshire Mills investment and invested them into new companies you could do the same with Kodak.  All those dividends means you weren't left with nothing when Kodak disappeared.  When all the techs went sky high in the 90s and never paid a dividend you were left with nothing when they went bust in 2000.

Since 1995 how much in dividends have you collected from Coca Cola?  Not aware of them dropping dead yet.  What about your local utility?

Is that backtested? For that matter, how do you backtest a dividends strategy if you aren't using high dividend payers at a certain point in time?

In other words, using Kodak in a 1990 backtesting portfolio would've made perfect sense. The question becomes, what's the strategy for dumping a (p)stock/closed-end fund/whathaveyou?

talltexan

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Re: Living Off Dividends?
« Reply #37 on: April 06, 2018, 07:22:48 AM »
Is the following a good summary of the mustachian approach to dividends:

During the accumulation phase, your goal is to maximize Total Return. Some dividends may come from this, but you're reinvesting them anyway.

During the retirement phase, your goal is to create cash flow: dividends can be a useful part of this, but you should acknowledge that generating them requires a trade-off of a slightly lower total return.

MrUpwardlyMobile

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Re: Living Off Dividends?
« Reply #38 on: April 06, 2018, 10:28:10 AM »
Is the following a good summary of the mustachian approach to dividends:

During the accumulation phase, your goal is to maximize Total Return. Some dividends may come from this, but you're reinvesting them anyway.

During the retirement phase, your goal is to create cash flow: dividends can be a useful part of this, but you should acknowledge that generating them requires a trade-off of a slightly lower total return.

That is my understanding of it, yes.

grantmeaname

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Re: Living Off Dividends?
« Reply #39 on: April 06, 2018, 06:03:28 PM »
I disagree. During both phases your goal is to maximize total return. There is nothing magical about dividends that makes them better than selling a piece of your investments.

ChpBstrd

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Re: Living Off Dividends?
« Reply #40 on: April 06, 2018, 07:23:21 PM »
I disagree. During both phases your goal is to maximize total return. There is nothing magical about dividends that makes them better than selling a piece of your investments.

+1

Dividends are an antiquated way of returning value to shareholders in a world of $5 commissions.

SwordGuy

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Re: Living Off Dividends?
« Reply #41 on: April 06, 2018, 07:58:13 PM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work?   How do you find these funds?  Examples?  Buy into them if they are closed?  Buy at a discount?  etc.   It sounds really interesting.

salmo trutta

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Re: Living Off Dividends?
« Reply #42 on: April 07, 2018, 07:36:33 AM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

Similar to my strategy and I think the CEF space flies under the radar when people begin looking for instruments that can satisfy both yield and capital appreciation.

Cheers,

Salmo

Financial.Velociraptor

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Re: Living Off Dividends?
« Reply #43 on: April 07, 2018, 07:54:52 AM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work?   How do you find these funds?  Examples?  Buy into them if they are closed?  Buy at a discount?  etc.   It sounds really interesting.

A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand.  As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments.  Plenty are available that routinely trade below NAV.  There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par. 

I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation.  I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions.  The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time.  This is perfect as these are 'hold forever' positions for me.

A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener.  I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter.  Link in signature line.

HTH

daverobev

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Re: Living Off Dividends?
« Reply #44 on: April 07, 2018, 09:27:40 AM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work?   How do you find these funds?  Examples?  Buy into them if they are closed?  Buy at a discount?  etc.   It sounds really interesting.

A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand.  As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments.  Plenty are available that routinely trade below NAV.  There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par. 

I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation.  I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions.  The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time.  This is perfect as these are 'hold forever' positions for me.

A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener.  I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter.  Link in signature line.

HTH

Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.

Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?

Financial.Velociraptor

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Re: Living Off Dividends?
« Reply #45 on: April 07, 2018, 11:38:12 AM »
Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.

Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?

The main complaint I get when highlighting these is people think the fees are too high.  (I saw one the other day with .13% though.)  I find I can't get a better return with a low fee open ended bond fund however.  And part of that fee is the interest expense for the leverage.  It is hard to borrow at the same rate as these large banks can. 

I've never known one of these to liquidate to capture the price difference.  I think these are seen as steady cash flow generators and that it would be problematic to redeploy the management staff after frequent liquidations.  So they just keep on keeping on.  I have seen the funds merge to gain greater scale.  A reduction in management fee usually results.

Rob_bob

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Re: Living Off Dividends?
« Reply #46 on: April 07, 2018, 04:11:40 PM »
As mentioned cefconnect.com is a good place to find infor and screen for CEF's.  Some of their data will be old though so look up the funds web sites for the latest info.  Morningstar has a CEF forum with good discussions and the funds that are popular.  Seeking Alpha also has articles written about CEFs although some people on the Morningstar forum say some of the SA articles are not the best but still a place to learn.

Management fees can be high but also include interest cost.  The yields are NET of fees.  Many equity CEFs NAV move sideways, not generally something to buy for capital gains, think more in terms of bonds, you are looking for an income stream.  Some do have good capital gains though plus income, that is why you have to pay closer attention to them.

Most CEFs trade at a discount to their NAV and never trade at a premium, it is just what investors are willing to pay.  If a fund closed down and liquidated then you would realize the NAV.  A few CEFs trade at nearly perpetual premiums, it is the perceived value of the management in investors eyes, in a recession Danger Will Robinson as investors bail the premium could become a discount to NAV. Some funds move from a discount to a premium and back again, some investors like to trade this movement.  Also leverage will make the fund more volatile but there are some funds that don't use leverage.  There are CEFs that use option trading in place of leverage to generate income as well.

CEFs can be like sector funds investing in bonds, mortgages, preferred shares, technology, health care, energy, utilities, domestic and foreign equity.  One fund has a high % of Berkshire A and B shares and tracks near the S&P 500, some days better some worse since it isn't actually the S&P but it pays about 3.8% dividend.

CEFs require more watching than an index fund, it needs to be a hobby  :)

 

ChpBstrd

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Re: Living Off Dividends?
« Reply #47 on: April 09, 2018, 12:13:58 PM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%.  A lot of my distributions are from closed end funds bought at a discount to NAV.  There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%.  I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation. 

The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.

@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work?   How do you find these funds?  Examples?  Buy into them if they are closed?  Buy at a discount?  etc.   It sounds really interesting.

A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand.  As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments.  Plenty are available that routinely trade below NAV.  There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par. 

I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation.  I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions.  The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time.  This is perfect as these are 'hold forever' positions for me.

A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener.  I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter.  Link in signature line.

HTH

Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.

Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?
Imagine I started a CEF containing only a share of Amazon stock. My management fee is 2%/year.

Obviously, it would be a better deal for you to just buy a share of Amazon directly instead of paying me the 2% to run a fund containing it.

However, at some level of discount, my CEF would be equally valuable as the one unencumbered share of Amazon. The expected discount to NAV would be the present value of the fees in the future. If the discount was larger, my fund would be a better deal than the stock. If smaller, the stock would be a better deal. (I'm sure inefficiencies exist in this space, based on the wide range of premiums/discounts)

As a fund manager, it makes more sense for me to buy Amazon for $1400 and sell it to you for $1300 because I'm trading the upfront loss for a stream of future payments. Meanwhile, you are enjoying increased leverage because you can buy more shares at $1300 than you could at $1400. It's a complicated balance.

grantmeaname

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Re: Living Off Dividends?
« Reply #48 on: April 14, 2018, 01:02:42 AM »
The fund manager isn't selling anything to anyone after fund launch. And they're certainly not selling you assets at a discount in exchange for an annuity-like stream of management fees.

MustacheAndaHalf

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Re: Living Off Dividends?
« Reply #49 on: April 14, 2018, 09:20:15 PM »
...
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
...
Max is now 20%, since 3.8% "net investment income tax" has been repealed.