Author Topic: Living off the dividends instead of pulling the $$ out?  (Read 2496 times)

Tyguy20000

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Living off the dividends instead of pulling the $$ out?
« on: April 30, 2019, 11:59:44 PM »
I am just wondering if anyone is investing into REIT, or another income producing asset to build their stache, and then using just the dividends to live off of. For example I am setting up a model, assuming that the REIT( Fundrise) would pay a 6% dividend for as long as they are in existence. I have then worked backwards to determine the amount I need to start setting aside at 21 years, to achieve FI by 30. I have been reading around and many people begin to withdraw from the stache, has anyone used the dividends for their annual income? My plan would be to reach that number, and then never touch the principle again, living solely off of the interest earned? Does anyone have more advanced math that I may need to consider for this strategy?

Andy R

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #1 on: May 01, 2019, 12:33:09 AM »
The amount of dividend that is paid to you comes directly out of the total return.
If the total return is 10%, and they payout 6%, then the other 4% has gone to growth.
If the total return is 10%, and they payout 2%, then the other 8% has gone to growth.
You can see this in real time when a fund goes ex dividend and the price drops the same value of the dividend paid out.
Dividends are not some sort of free separate return where more dividends equals more total return.

Problems with dividend investing include
1. By living off a higher amount with companies paying out more dividends, your growth will lag, so beware of that. At 30, you would reach 60 and your inflation adjusted value will be far below someone doing the same thing with funds that throw off 4% as dividends and you may no longer be able to meet your needs as the growth in value of your shares has not kept up pace with inflation.
2. By investing only in high dividend stock, you face concentration risk through lack of diversification, which is idiosyncratic risk - a form of risk that has no higher return to match the higher risk.

Some links for more info

https://www.cnbc.com/2016/12/08/dont-buy-in-to-the-dividend-fallacy-new-academic-paper-warns.html
https://www.forbes.com/sites/jimdahle/2018/11/11/five-reasons-to-avoid-focusing-on-dividend-stocks/#71d677a77479
https://www.youtube.com/watch?v=UpXI_Vd51dA&t=9s
https://retirementresearcher.com/can-rely-dividends-income/
https://www.bogleheads.org/wiki/Why_did_my_fund_unexpectedly_drop_in_value
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=258311
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=274340&start=50#p4411037
https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

AdrianC

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #2 on: May 01, 2019, 07:18:50 AM »
Agree with Andy, plus REIT dividends are not just earnings, they often include a return of capital component. And REITs employ huge leverage. See how they did in the financial crisis: VNQ had a 68% drawdown.

Once the residual income from our business drops off we'll be living off of selling bits of our index funds and Berkshire.

Stimpy

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #3 on: May 01, 2019, 12:18:49 PM »
So, I believe what Andy has said is correct in the math department.  However, there are other items to think of when your trying to live off your Dividends and not your stock growth. 

Such as in that 6% sustainable.  What happens if they cut the dividend,  Do you have a plan to recapture that income somewhere?  etc. etc..

I HIGHLY recommend you take a close look at the DGI strategy if you want to live off of dividends.  This IS a Stock picking strategy and is NOT for everyone, but it does work.  I would check out seekingalpha.com, and specifically look for articles by David Van Knapp to get started.  He is considered to be a very good resource for that.  As well as seeking alpha in general.

If however, your looking at just using ETF's (Which I would also HIGHLY recommend, as it's just that much easier) consider that many sustainable ETF's play out around 2% on average.  Which as an example, if you want to live on say 40k a year, your would need roughly 2 million invested (2Million * .02).  Probably a little more then that actually, as the dividends do fluctuate with ETFs.  Something i have noticed is that Dividends from these sources may not keep up with the rising cost of inflation.  But should not, from what I have seen, be very far behind if at all.

You should also still consider what to do should your income fall short in a single month, (ie have a back up plan, like bonds or House rentals) but again, this works and I am aware of people who do live off income from dividends from etfs.

Before someone else says it.  Yes there are tax consequences depending on the account everything is in.  Ususally more with ETF's then with stocks (only talking on a dividend level), but it is something you need to be aware of and understand.

Finally, if you decided to use Dividends, don't go all googly eyed for large yields as they could be potential traps for your money.  Especially when reality catches up with the stock/etf in question.  Your reit may or may not fall into this category, I always find it hard to tell with those, but I have not done as much research in valuing those stocks.

From my personal view, I actually prefer to live off Dividends, and other income as it ensures I don't have to sell anything.  Such plans could theoretically last forever, but I am sure someone has a different view on that.  (Which is fine.)

Financial.Velociraptor

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #4 on: May 01, 2019, 01:14:20 PM »
Stimpy gives good advice.  Also recommend https://www.mrfreeat33.com/ for a real life example of someone who retired at 33 on DGI strategy.  (Greatly improved lifestyle with geo-arbitrage to Chaing Mai, Thailand a few years in.)

I use a blended strategy to live off cash returns and not capital gains.  I go for about a quarter high yield (REIT, BDC, MLP, CEFs) and a third AA into dividend yielding stocks.  I target about a third in bonds (and prefer to buy a broad basket of discounted bonds rated around BB or high into the "junk" range).  The rest of my cash income comes from selling options to collect upfront cash premiums.  I'm working with a withdrawal rate around 5% and feel comfortable with that. 

I blog essentially all trades, including reporting my losses.  See sig link if you are interested.

But seriously, if you have to ask - stick with indexing until you know more.  Indexing is a perfectly fine strategy that is proven by science.

edit: include CEFs in high yield fund category
« Last Edit: May 01, 2019, 01:21:04 PM by Financial.Velociraptor »

waltworks

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #5 on: May 01, 2019, 02:02:40 PM »
Worth mentioning that if you're selling shares to fund RE, you can pick/choose what shares to sell and when, which can be a HUGE advantage for tax and healthcare/ACA purposes.

If you're pulling in everything in dividends, on the other hand, you are stuck with a much higher taxable income and all the costs that entails.

-W

Andy R

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #6 on: May 01, 2019, 07:56:18 PM »
Dividend growth investing is nonsense because of survivorship bias.

You can look back and ignore all the companies who intended to offer long term dividend growth but failed and show that it works by only including those that survived (hence the term "survivorship bias").
You can not predict in advance which companies will successfully grow their dividends for decades.

cloudsail

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #7 on: May 01, 2019, 08:07:48 PM »
Stimpy gives good advice.  Also recommend https://www.mrfreeat33.com/ for a real life example of someone who retired at 33 on DGI strategy.  (Greatly improved lifestyle with geo-arbitrage to Chaing Mai, Thailand a few years in.)

I use a blended strategy to live off cash returns and not capital gains.  I go for about a quarter high yield (REIT, BDC, MLP, CEFs) and a third AA into dividend yielding stocks.  I target about a third in bonds (and prefer to buy a broad basket of discounted bonds rated around BB or high into the "junk" range).  The rest of my cash income comes from selling options to collect upfront cash premiums.  I'm working with a withdrawal rate around 5% and feel comfortable with that. 

I blog essentially all trades, including reporting my losses.  See sig link if you are interested.

But seriously, if you have to ask - stick with indexing until you know more.  Indexing is a perfectly fine strategy that is proven by science.

edit: include CEFs in high yield fund category

Oh hey, so that's what happened to the Dividend Mantra guy! I stopped checking out his site when I realized that DGI wasn't for me. Good to see that he's done well for himself.

I wonder what happened to the lady he was engaged to though. They seemed really good together.

vand

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #8 on: May 02, 2019, 04:30:04 AM »
Dividend growth investing is nonsense because of survivorship bias.

You can look back and ignore all the companies who intended to offer long term dividend growth but failed and show that it works by only including those that survived (hence the term "survivorship bias").
You can not predict in advance which companies will successfully grow their dividends for decades.

I do agree to some extent about the survivorship bias, but I think its impossible to still construct a good income portfolio containing dividend paying stocks. This is after all what Warren Buffett has been doing for 60 years, because he implemented the idea of investing in companies with a competitive advantage ie, had natural barriers to entry that protected them from competition and were therefore able to continually grow. sure, no advantage lasts forever and technology today arguably makes competition easier, but for these type of companies things don't usually go from good to bad overnight. Utility companies are a good example.. you're not going to wake up tomorrow and find that a new water supplier has set up business and attempting to compete with existing suppliers.
« Last Edit: May 02, 2019, 09:31:03 AM by vand »

FIREstache

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #9 on: May 02, 2019, 05:17:03 AM »

I'm not a fan of dividends, myself.  They're not really free extra magical dollars dropping from the sky.  See this recent thread:

https://forum.mrmoneymustache.com/investor-alley/living-off-dividends-89677/

Financial.Velociraptor

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #10 on: May 02, 2019, 08:05:02 AM »
Oh hey, so that's what happened to the Dividend Mantra guy! I stopped checking out his site when I realized that DGI wasn't for me. Good to see that he's done well for himself.

I wonder what happened to the lady he was engaged to though. They seemed really good together.

@cloudsail

They were married for a short time.  Parted ways as friends after discovering they had different long term needs.  He has a steady girlfriend "Oh" in Chaing Mai now that wants mostly the same things out of life he does.

Stimpy

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #11 on: May 02, 2019, 08:36:19 AM »
Dividend growth investing is nonsense because of survivorship bias.

You can look back and ignore all the companies who intended to offer long term dividend growth but failed and show that it works by only including those that survived (hence the term "survivorship bias").
You can not predict in advance which companies will successfully grow their dividends for decades.

So, yes and no.   Also note that not all companies grow forever, and eventually tumble down and fail  See GE, <insert big growth stock here that's gone flat/falling> as the latest example.  Growth can get you so far, same with DGI.  Either way, you need a plan.  You need to KNOW how to replace your income/failing stock/ticking time bomb.   That's why it's a strategy.  It's not perfect but it works.

This is ALSO, funny enough, why indexing works, cause they toss out the bad, and bring in the good.  Be it a dividend ETF or a Growth ETF.

I am not going to make an arguement here on why dividends are better then growth stocks, mainly cause both are equal IF you have a valid strategy AND a plan for when something doesn't go your way.  If someone REALLY want to stick to growth, I applaud them so long as they understand what they are doing.  Same goes for someone whom really wants dividends.

Also, to make a point.  There are no "Magic Pants" so yes, dividends do take something.  But so do acquisitions and buybacks (Which can be efficient or inefficient pending when they happen).  Money has to go somewhere, I prefer it go to me, to spend how I see fit.  But again, this is only an opinion, every one is welcome to their own.

Financial.Velociraptor

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #12 on: May 02, 2019, 10:25:10 AM »
So, yes and no.   Also note that not all companies grow forever, and eventually tumble down and fail  See GE, <insert big growth stock here that's gone flat/falling> as the latest example.  Growth can get you so far, same with DGI.  Either way, you need a plan.  You need to KNOW how to replace your income/failing stock/ticking time bomb.   That's why it's a strategy.  It's not perfect but it works.

This is ALSO, funny enough, why indexing works, cause they toss out the bad, and bring in the good.  Be it a dividend ETF or a Growth ETF.

I am not going to make an arguement here on why dividends are better then growth stocks, mainly cause both are equal IF you have a valid strategy AND a plan for when something doesn't go your way.  If someone REALLY want to stick to growth, I applaud them so long as they understand what they are doing.  Same goes for someone whom really wants dividends.

Also, to make a point.  There are no "Magic Pants" so yes, dividends do take something.  But so do acquisitions and buybacks (Which can be efficient or inefficient pending when they happen).  Money has to go somewhere, I prefer it go to me, to spend how I see fit.  But again, this is only an opinion, every one is welcome to their own.

+1  Stimpy nails this analysis

John Doe

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #13 on: May 02, 2019, 05:58:35 PM »
Our plan is to live off dividends for the most part -  2/3 dividends and 1/3 pension. We invest in blue chip Canadian stocks an$ some REITS.  Most of our holdings have a history of annual increases so this should reduce the risk of inflation. While no approach is guaranteed I like this approach vs growth as I understand these well established businesses and therefore rightly or wrongly I feel it reduces risk. Seems to have worked so far.  Yield overall is about 5% and exceeds our normal expenditures.  Growth is simply a bonus and most years there is growth also. It is our comfort zone but certainly not the approach many others prefer.

BigMoneyJim

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #14 on: May 04, 2019, 04:01:12 PM »
Heh, lots of people want the live-off-dividends method. "Don't eat your seed corn" sounds like a good idea. It used to be with bonds, especially when TIPS and iBonds were new, and when they were around 4%.

But with any form of dividend, you can't rely on it being at a certain level for the decades of your income needs.

Generally speaking you need a much higher nest egg to live off dividends alone than you do if you spend your principal.

chasesfish

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #15 on: May 05, 2019, 05:35:02 AM »
Lots of hate going on regarding the idea of living off dividends.

Recently retired:

- $13,000/year in regular dividends coming in off our taxable brokerage account of around $400,000 (3.2%ish)
- $18,000/year in deferred comp
- Will convert $25,000 - $30,000 from the Roth IRA.

The regular account looks more like a dividend growth account.   We are still over 60% mutual funds as of the end of Q1.   

chasesfish

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #16 on: May 05, 2019, 05:38:02 AM »
Agree with Andy, plus REIT dividends are not just earnings, they often include a return of capital component. And REITs employ huge leverage. See how they did in the financial crisis: VNQ had a 68% drawdown.

Once the residual income from our business drops off we'll be living off of selling bits of our index funds and Berkshire.

@AdrianC - This statement above is entirely accurate.   Past results may also not be an indication of future returns, it is unlikely the next recession will be led by a real estate collapse.  I also dislike VNQ as a benchmark because it includes mortgage REITs, which are essentially 2x leveraged.   A REIT is already a fund and I prefer to buy a few individual names over VNQ.   

waltworks

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #17 on: May 05, 2019, 09:42:09 AM »
Lots of hate going on regarding the idea of living off dividends.

I'm not sure I'd characterize it as "hate". Dividend focused strategies have some distinct disadvantages (a bit lower overall return historically, higher taxes in RE, potentially more risk if you're only holding a few individual stocks, etc) and in the era of the ACA they are even more problematic since they are taxable income you can't control. Reasonably clever selling off of shares can easily keep your income (and taxes) as low as you want, and keep you eligible for ACA subsidies. Dividends, not so much.

-W

Financial.Velociraptor

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #18 on: May 05, 2019, 02:27:16 PM »
The community seems to be pretty highly fixated on binary strategy approaches.  If someone wants to dividend invest, there seems to be an assumption they mean 100% allocation to dividend paying stocks.  This need not be the case.  If you want a 25,000 budget, you can accumulate 25k in DGI and bond interest, and the rest in any other strategy.  Even half of your budget in dividend stocks with reasonable payout ratios can serve as a great buffer in a downturn.  (And winter IS coming).

My strategy is about a third high yield, third fixed income, and third using equity to anchor selling options for premium income.  Or at least that is what I do on my taxable investments.  I have less than 500k nut and am on pace to generate a little over 42k in dividends, distributions, interest, and premium income this year.  This is the strategy that let me FIRE and has let me feel a sense of comfort for 6.5 years of FIRE.

CoffeeR

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #19 on: May 05, 2019, 04:27:09 PM »
... and third using equity to anchor selling options for premium income.
What tools and/or sources of information do you use to evaluate/find profitable options?

MoneyTree

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #20 on: May 05, 2019, 05:53:39 PM »
mostly agree with the previous posts here. When I started my FI journey, I was all in on the DGI strategy, followed many of the dividend blogs, including Dividend Mantra.

I changed my perspective when I realized that dividends were a tax drag, especially in the accumulation phase. Also that after a few years, my total return lagged the market by a healthy amount.

One thing I don't think that anyone has mentioned in this thread, distributions from REITs in particular are usually treated as ordinary income, so unless you are holding them in a tax advantaged account (and if you are intending to live off those distributions after retiring early, I'm guessing they may be in a taxable account) this will impact how many of those dollars is actually available for you to spend, vs going to uncle sam.

chasesfish

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #21 on: May 05, 2019, 06:56:13 PM »
@MoneyTree - You're right about the tax drag of REITs.   I turned mine off dividend reinvestment but have to wait until 2020 to capital gain harvest them.   I'm up so much in my taxable account I choose between two great problems, take the higher dividend payment now with the tax rates and sell in 2020 when I can gain harvest at 0%, or I sell and eat the cap gain today at 15-20% and rebuy the same assets in my tax deferred account.


I have to admit though, its cool getting 8%+ yield on my cost on a position I bought in February of 2018

MoneyTree

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #22 on: May 05, 2019, 10:32:22 PM »
@MoneyTree - You're right about the tax drag of REITs.   I turned mine off dividend reinvestment but have to wait until 2020 to capital gain harvest them.   I'm up so much in my taxable account I choose between two great problems, take the higher dividend payment now with the tax rates and sell in 2020 when I can gain harvest at 0%, or I sell and eat the cap gain today at 15-20% and rebuy the same assets in my tax deferred account.


I have to admit though, its cool getting 8%+ yield on my cost on a position I bought in February of 2018

Luckily, most of my REITs are already in my Roth, but yeah, I'm in a similar boat with most of my other dividend stocks. Not the worst problem to have, but one that my younger self could have avoided. But if you're only 1 year away from being able to harvest at 0%, that's not too bad at all!

I'll still be working in 2020, so I'll just have to hang on to most of these dividend payers until at least 2021.

ChpBstrd

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Re: Living off the dividends instead of pulling the $$ out?
« Reply #23 on: May 10, 2019, 08:49:56 PM »
@Andy R and @Stimpy both reflect my sentiments about dividends. I'll add an issue I haven't seen mentioned.

When people do research about the survival odds of various withdraw rates, the "equity" portfolio is almost always a diversified total market or S&P 500 fund which includes REITs but it not comprised ONLY of REITs. If you simply buy a security yielding 4%, that is not the same thing as locking in a 4% WR. This is because as inflation occurs, you will withdraw more than your original 4% to cover increased living expenses - more year after year after year. The dividend would have to grow at least as fast as inflation for this strategy to work, and the dividend could never be cut (as often happens during recessions or if interest rates increase) or you'd have to sell shares.

The broad equity indexes almost always rise to this challenge in the long term because most of these companies can compound their growth by reinvesting profits into the business. REITs, however, are legally required to pay out 95% of earnings as dividends. They cannot reinvest very much of their profit into their businesses, and as a result they usually issue new shares when they want to make acquisitions. Yes, rents rise, but so do expenses. Without compounding reinvestment into new products, new ideas, R&D, marketing, or organic expansion, most REITs have relatively slow earnings growth, and therefore relatively slow dividend growth.
A retiree 100% in VNQ would live comfortably for a year or two, but then slowly realize how the growth of their dividends is not keeping up with inflation.

To illustrate, in 2018, VNQ increased its dividend 0.5%, SPY increased its dividend 4.9%, and inflation was 1.9%.

https://www.dividend.com/dividend-stocks/uncategorized/other/spy-spdr-sandp-500/
https://www.bls.gov/opub/ted/2019/consumer-price-index-2018-in-review.htm