Author Topic: Living Off Dividends?  (Read 11367 times)

MustacheAndaHalf

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Re: Living Off Dividends?
« Reply #50 on: April 14, 2018, 09:27:37 PM »
I have dividends, distribution, and interest that cover 120% of my budget.  Withdrawal rate is currently 5.12%
Why not withdraw 100%, and lower your withdrawal rate to 4.25%?  According to Vanguard's nest egg calculator, with 100% stocks and 40 years in retirement, your odds would go from 70% chance of success to over 79%.  But I suspect "stocks" isn't a fair representation of your investing style.

Bill_

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Re: Living Off Dividends?
« Reply #51 on: April 15, 2018, 04:17:27 AM »
Max is now 20%, since 3.8% "net investment income tax" has been repealed.

Bad news, net investment income tax has not been repealed.

ACA may be gone, but NIIT stayed.

Interest Compound

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Re: Living Off Dividends?
« Reply #52 on: April 17, 2018, 09:35:57 PM »
Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.

Bill_

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Re: Living Off Dividends?
« Reply #53 on: April 18, 2018, 06:08:56 AM »
Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.

If you were a 100% owner of a C-Corp and did not take a salary how would you pay yourself?  The company is not public and you can't sell shares.

Nobody ever answers this one either.  Why does Warren Buffett primarily make passive investments in companies that pay dividends?

CorpRaider

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Re: Living Off Dividends?
« Reply #54 on: April 18, 2018, 06:15:20 AM »
Dividends did go down much less than quoted prices during most historical bear markets, sort of implying additional liquidity (and perhaps utility) when cash is in short supply.

talltexan

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Re: Living Off Dividends?
« Reply #55 on: April 18, 2018, 06:53:33 AM »
Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.

If your income is sufficiently low, there are no tax consequences to either.

But--if you're income is high enough that you are taxed, the ENTIRE dividend is taxable, while only the gain is taxable when you sell.

Rob_bob

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Re: Living Off Dividends?
« Reply #56 on: April 18, 2018, 05:03:20 PM »
Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.

Can you sell shares for an indefinite number of years?

Can you collect dividends for an indefinite number of years?

Bill_

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Re: Living Off Dividends?
« Reply #57 on: April 18, 2018, 05:17:04 PM »
I know of no other way of maintaining my ownership in the company and getting paid without receiving a dividend.

Who wants to own a company and never get paid?  Just rely on somebody paying more for my shares in the future.

I'm going to buy a rental property and instead of getting rent I am going to tell the renter just to improve the property for me.  You know, $2000 worth a month.  I assume everyone who hates dividends does this with their rental properties.

Telecaster

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Re: Living Off Dividends?
« Reply #58 on: April 18, 2018, 06:38:08 PM »
I know of no other way of maintaining my ownership in the company and getting paid without receiving a dividend.


It is an illusion.  The value of the company must drop by the amount of the dividend.  That means the value of your ownership goes down.   Look at it this way:  The dividend yield of the S&P 500 is about 2%.  Berkshire Hathaway has never paid a dividend.  But if you sold 2% of your ownership of BRK every single year, your ownership take would have only grown.  So you would have maintained ownership and still got your money out of the company. 

So why does it matter if you sell shares or get a dividend?  It is the same thing. 

daverobev

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Re: Living Off Dividends?
« Reply #59 on: April 18, 2018, 06:57:06 PM »
Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.

Can you sell shares for an indefinite number of years?

Can you collect dividends for an indefinite number of years?

Yes to both. You sell a fraction of your non dividend bearing holdings, but the value of each share goes up, and there will either be stock splits or you just sell a lower and lower number of shares each year.

I like dividends but mathematically, dividends or not is irrelevant.

Bill_

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Re: Living Off Dividends?
« Reply #60 on: April 18, 2018, 07:11:52 PM »
It is an illusion.  The value of the company must drop by the amount of the dividend.  That means the value of your ownership goes down.

That mantra is highly flawed.  By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).

The free market sets the value of a company.  If AAPL pays out $$2.52/sh in dividends their cash drops by $2.52 but I'm pretty sure AAPL is valued by more than just how much cash they have.

If you sell your shares you give up the right to future profits.

I wonder how many companies have come and gone without ever paying a dividend.

daverobev

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Re: Living Off Dividends?
« Reply #61 on: April 19, 2018, 07:46:51 AM »
It is an illusion.  The value of the company must drop by the amount of the dividend.  That means the value of your ownership goes down.

That mantra is highly flawed.  By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).

The free market sets the value of a company.  If AAPL pays out $$2.52/sh in dividends their cash drops by $2.52 but I'm pretty sure AAPL is valued by more than just how much cash they have.

If you sell your shares you give up the right to future profits.

I wonder how many companies have come and gone without ever paying a dividend.

I have $100.

I give you $5.

Now how much do I have?

***

The amount of cash available to me has dropped by $5. That is a simple fact. If a company pays out a dividend of $5 per share, they have $5 less. Simple maths.

Nothing in that says they won't earn more money, or go bankrupt, or whatever.

Telecaster

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Re: Living Off Dividends?
« Reply #62 on: April 19, 2018, 04:00:11 PM »
It is an illusion.  The value of the company must drop by the amount of the dividend.  That means the value of your ownership goes down.

That mantra is highly flawed.  By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).


Well no, that's not the logic.  Because every Dow stock, in theory at least, will earn back the amount of the dividend (and hopefully a little more) in the next quarter. 

If what you are saying is true, that the stock price doesn't drop after the dividend is paid, then here's the ultimate dividend strategy:  You buy a stock just before the ex-date so you are the owner of record when the the dividend is paid.  And then you sell the next day.   I guess because stock trades take a couple days to settle you'd have to buy a couple days before the ex date.   Let's look at this handy calender of ex dates:

https://www.thestreet.com/dividends/index.html

 Tomorrow (the 20th the stock with the highest dividend yield is CVS with 3.13%.   So a couple of days ago, I use all of my money to buy the stock.  I own it all day on the 20th, and then I sell the whole thing on the the next Monday and pocket my 3.13%.  That next Friday the stock with the highest dividend yield Tallgrass Energy Partners with a nice 9.96% DY.  So I buy that, and sell it the next Monday.  Rise, lather, and repeat.  I make several percent every trade I'm only in the market for a couple of days, so market risk is tiny.  You could probably make 60-70 trades a year.  With compounding, you will be FIRE within a year, maybe two.  Max.
 
But nobody trades like that because the stock price goes down by the amount of the dividend (or perhaps goes up in anticipation on the dividend) so you can't make money by doing that.    Not only that,  the stock exchanges automatically adjust the bid and ask prices down by the amount of the dividend.  It is a real thing.


Bill_

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Re: Living Off Dividends?
« Reply #63 on: April 19, 2018, 04:42:23 PM »

I have $100.

I give you $5.

Now how much do I have?

***

The amount of cash available to me has dropped by $5. That is a simple fact. If a company pays out a dividend of $5 per share, they have $5 less. Simple maths.

Nothing in that says they won't earn more money, or go bankrupt, or whatever.

I understand that quite well, it is a small detail at the beginning of the day that gets rapidly over ridden by the market and the prospect of future earnings. 

Most companies trade for far more than the cash they have available, I hope everyone gets that.

I've still yet to hear an answer as to why Berkshire Hathaway primarily takes passives stakes in companies that pay dividends.

Prairie Stash

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Re: Living Off Dividends?
« Reply #64 on: April 19, 2018, 04:53:27 PM »
Dividends are the equivalent of share buybacks. Neither is very exciting. In Canada, dividends are preferred because of the preferential tax treatment. In the US capital gains are preferred because of the preferential tax treatment. Both take advantage of taxation to send as much money to the shareholders as possible.

I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.

As an example "FTSE Canadian High Dividend Yield Index ETF (VDY)" current dividend yield is 5.13% and the trailing 12 months is 3.83%. If we want to achieve the 4% rule, it's much easier with the dividends than the capital gains. Long term the gains are better, on the short term dividends are easier to manage. Would you rather be getting the dividends, which have stayed constant all year, or selling stocks?

The best retirement portfolio should have diversification; capital gains, dividends, bonds and cash are all slightly diferent and all have benefits. They all fluctuate slightly out of sync, which I find appealing.

jeroly

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Re: Living Off Dividends?
« Reply #65 on: April 19, 2018, 04:59:57 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.

Wrong.

As Schwab puts it in their breakdown of the new tax law,

Quote

Wealthier filers will continue to pay an additional 3.8% tax on investment income, known as the Net Investment Income Tax.


Telecaster

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Re: Living Off Dividends?
« Reply #66 on: April 19, 2018, 07:16:28 PM »

I've still yet to hear an answer as to why Berkshire Hathaway primarily takes passives stakes in companies that pay dividends.

I'm your huckleberry.   But there is a little nuance, so hold on.   This from the "Berkshire Hathaway Owner's Manual." Emphasis mine: 

We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, <b>but overall we have garnered far more than a dollar of value for each dollar they have retained. </b>We consequently regard look-through earnings as realistically portraying our yearly gain from operations.


Or phrased another way:

When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.

In other words, all things being equal he'd rather his acquisitions retain earnings than pay dividends.  And so he'd much prefer to pay a premium to get his money that way.  He re-emphasized this in the last shareholder letter, by the way.

Now for the nuance:  He's said many times he likes the dividends that companies pay to BRK.  But he's also explained that if a company does things a certain way, he doesn't want them to change.   "Don't sell Chinese food at a hamburger joint."    If he buys a hamburger joint, he doesn't want them to start selling Chinese food because that's not what they do, and he uses that analogy specifically about dividend paying companies. 
As I mentioned in a earlier post, at one time all companies paid dividends.  Most companies still do (big ones, at least), but the amount they pay has vastly decreased.  So if you take positions in large companies, odds are they will be dividend paying companies because most companies pay dividends.  But Buffett isn't looking for just the dividend, he's looking for the total value.  And as stated in his quote above, he looks at the retained earnings when calculating the value. 

talltexan

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Re: Living Off Dividends?
« Reply #67 on: April 20, 2018, 07:03:10 AM »
I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.


In 2008, my dividends all were coming from Financial Stocks. When they cut their dividends in 2008, I lost years of saving in just a few weeks.

Prairie Stash

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Re: Living Off Dividends?
« Reply #68 on: April 20, 2018, 08:23:25 AM »
I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.


In 2008, my dividends all were coming from Financial Stocks. When they cut their dividends in 2008, I lost years of saving in just a few weeks.
Geography matters, in 2008 my financial stocks dropped in share price drastically and the dividends remained constant (a dividend strategy would have excelled for myself that year). Canada is much bigger on dividends, because of tax treatment, it provides a good comparison to understand what the USA would be like if dividends were taxed at 0%.

How much did the share price decrease oin 2008 on those same stocks? I'm saying they are correlated but not 100%, at times they won't be in lockstep. So its possible to have a dividend cut or a share price drop but its not always going to be both. Obviously sometimes it is both, that's where bonds and cash comes in.  Being 100% in anything is far more risky than spreading out into multiple revenue streams.

Did you need to return to work in 208 because of the crash or were you able to maintain FIRE? That's the yardstick of determining what the right mixture is, total value of your portfolio is shortsighted. For me a healthy mix of dividends would have maintained FIRE (if I was already there). Too much in stocks would have forced selling at lows and locked in those temporary losses.

ChpBstrd

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Re: Living Off Dividends?
« Reply #69 on: April 20, 2018, 12:15:20 PM »
I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same.
Perhaps you got lucky with an undiversified portfolio of companies that didn't cut dividends or go bankrupt during that period? The S&P 500 dividend dropped precipitously in 2009 and didn't recover until 2012. Anyone living completely off dividends (which you are not suggesting, but others do) would have faced a 23% drop in income in 2009.

http://www.multpl.com/s-p-500-dividend/table

The drop in dividends lagged the recession and drop in prices by a year or more, but I'm not sure that helps. Getting through 2008 but then having to sell shares in 2009 when dividends were finally cut would suck.

Prairie Stash

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Re: Living Off Dividends?
« Reply #70 on: April 23, 2018, 10:02:16 AM »
I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same.
Perhaps you got lucky with an undiversified portfolio of companies that didn't cut dividends or go bankrupt during that period? The S&P 500 dividend dropped precipitously in 2009 and didn't recover until 2012. Anyone living completely off dividends (which you are not suggesting, but others do) would have faced a 23% drop in income in 2009.

http://www.multpl.com/s-p-500-dividend/table

The drop in dividends lagged the recession and drop in prices by a year or more, but I'm not sure that helps. Getting through 2008 but then having to sell shares in 2009 when dividends were finally cut would suck.
During the exact same time, how much did stocks drop? How is geting through 2008 a bad thing, I think the ability to get through a terible year is always great!

Thank you for proving my point, stocks and dividends don't operate in lockstep. The same person all in stocks would have dropped in 2008 and be selling at a greater loss. However, if you mitigate some of that by having a cash reserve, supplemented by dividends, a person could have rode that out.

In practice, lets say you spend $30k/year and receive $20K from dividends and $10k from gains/year. If you hold a one year cash buffer you might skip selling in 2008 and end the year having spent your cash but getting $20k in dividends. In 2009 you get $15k and end the year with $5000. In 2010 you get another $15k, and sell $10k in stocks/bonds. In 2011 you start riding the bull market and start replenishing the cash buffers, also getting $15k in dividends. In 2012 you receive roughly $20k in dividends but need to get on replacing the cash reserves, when stock prices are back to great levels.

So from 2008 to 2010 I would have sold $10k of my portfolio, with the sharp divivdend cut you speak of. Would you rather sell $60k at a loss? Remember, I didn't say it was all or nothing, I said dividends operate on a different cycle and provide a level of diversification.

All these rules are for retired people, its meaningless to compare a person in the accumulation phase to a retired person. Is it easier to live off pure stocks or a blend of stocks/dividends? What will gurantee FIRE sucess more often?

talltexan

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Re: Living Off Dividends?
« Reply #71 on: April 23, 2018, 12:08:12 PM »
For those of you who advocate the stock-picking high-dividend approach, do you recommend less allocation to bonds as well?

It sounds as though this most recent post is advocating only 1-year worth of cash (sounds like 4% cash to me).

Financial.Velociraptor

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Re: Living Off Dividends?
« Reply #72 on: April 23, 2018, 05:10:12 PM »
For those of you who advocate the stock-picking high-dividend approach, do you recommend less allocation to bonds as well?

It sounds as though this most recent post is advocating only 1-year worth of cash (sounds like 4% cash to me).

YMMV.

For my portfolio, I go with 40% allocation (target) to the bucket I call "fixed income".  Fixed income is composed of primarily closed end bond funds, but also includes variable rate note funds, preferreds, and some REIT exposure.  This high yield bucket covers about 120% of my annual budget (except in blockbuster years when I have a high tax bill.)

The remaining 60% is in individual stocks, mostly dividend payers that are used as the basis for options writing.  That is, I sell options to generate an additional income stream.  Results vary based on market conditions but has always (five years FIRE and counting) covered 100% or more of my budget, yet again. 

My withdrawal rate is about 5% and I sleep well at night knowing I can take a 50% haircut to portfolio income and still not be in the 'danger' zone.

Indexing to VOO is good too.  Whatever works for you.

ADI

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Re: Living Off Dividends?
« Reply #73 on: May 11, 2018, 07:23:06 PM »
Great thread!

I'm also attempting to live of dividends eventually. I primarily use diversified LICs (or CEFs) that pay strong dividends. Australia also has reasonable tax advantages for dividend income which makes it a little bit more attractive for me.

The reason why I'd prefer this over selling to replicate dividend income is that this way I simply have dividend income turning up in my account at specified intervals. I don't even have to look at the market, really, as long as my asset allocation remains broadly in line. The less decisions I'm making the better, I've found!

Goldielocks

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Re: Living Off Dividends?
« Reply #74 on: May 12, 2018, 12:23:11 AM »
I am having a challenge finding strong eligible dividends that are Canadian only, that provide net decent returns.

(Because of Canada's tax rate for lower income earners makes Cdn eligible dividends attractive)

Any one else? 

At some point, having a strong capital gains return (e.g., VUN) could outweigh the dividend / low tax returns.   Has anyone figured out what that cut off point is?

daverobev

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Re: Living Off Dividends?
« Reply #75 on: May 12, 2018, 08:12:14 AM »
I am having a challenge finding strong eligible dividends that are Canadian only, that provide net decent returns.

(Because of Canada's tax rate for lower income earners makes Cdn eligible dividends attractive)

Any one else? 

At some point, having a strong capital gains return (e.g., VUN) could outweigh the dividend / low tax returns.   Has anyone figured out what that cut off point is?

Depends on province, but you are over time generally better focussing on setting your asset allocation, then putting those assets in the most efficient place.

You're good up to about $40k if your only income is Canadian eligible divis.

But - if you're lower income, be aware that the dividend gross up on eligible dividends actually artificially inflates your income - meaning you'd lose the GST credit and so on faster. Because every dollar of eligible divis 'looks like' $1.38 of income. Same deal on child benefits; Canadian divis reduces your benefit faster.

I sold off a chunk of stuff unreg when I realised this, and put it into something else.

Goldielocks

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Re: Living Off Dividends?
« Reply #76 on: May 12, 2018, 07:57:01 PM »
Yeah, it is not that bad.   I have pretty much never received GST, and with DH earning modest amounts still, we wouldn't.

Only one kid left and he turns 16 next month, so again, based on family income and my current dividend income being still low, under $8k, not an issue. 

My plan was to build the dividend income but so far, it seems that global (with US) equities have capital gains that far exceed the return on the dividend paying stocks.

I am just starting to put my thoughts around this -- e.g., for non registered, when my income is under $45k (no dividend tax), does it still make sense to go the dividend route versus global equities?

Has anyone done the math?