I detect the fallacy that somehow a stock is like a chicken, and dividends are like eggs. And that you should only live off the eggs the chicken lays. Because the eggs are somehow "free."
(This analogy is not mine - I saw it on this forum. Probably Dodge or skyrefuge).
What a joke. Receiving a dividend is mathematically equivalent to selling stock. There's no reason you should limit yourself to living off dividends because that will cause you to either
1) Chase dividend yields.
2) Save way more than necessary.
Can you post your math on that? The author of this article shows how they are not equivalent:
http://seekingalpha.com/article/2203693-why-selling-a-few-shares-is-not-the-same-as-getting-a-dividend
http://forum.mrmoneymustache.com/investor-alley/total-stock-vs-500-vs-dividend-growth/msg184781/#msg184781For another perspective, consider this:
Suppose Intel pays a dividend on 3/29 of $0.50/share. By the close of 3/28, their share price is $30.00. On 3/29, they pay out dividends on $0.50/share.
On 3/29, the stock price drops by $0.50/share because of the dividend payout. Now
this does not mean the stock will close $0.50/share lower than 3/28.. It just means that on top of the normal market fluctuation on 3/29, there is an additional drop of $0.50/share.
Some people contend that dividend paying companies are better companies to invest in - the fact that they pay out dividends is reflective of better performance in the long run. I am not contesting whether that's true or not.
What I am saying is that dividends are not somehow "free money." The dividend has to come from somewhere. When a company pays out $.50/share in dividends, their market capitalization drops by $0.50/share * (# of shares in existence).
If you are investing in high dividend yield companies because you think they are better companies to invest in in the long run, then that's your prerogative. But if you're investing in high dividend yield companies because you somehow think this is a "free lunch," you are mistaken.
In fact, for the same performance (where performance is measured by capital appreciation of stock + dividend yield), a high dividend yield company will at best net you the same profits, and in most cases will net you less profits than a company that always reinvests their money and never issues a dividend.
This is because unless all of the following apply while you are building up your stache:
1) You live in a no income tax state
2) You are in the 15% or lower tax bracket
3) The stocks or stock funds you are invested in always yield 100% qualified dividends
you WILL pay taxes on your dividends. This tax on your dividends is a drag on your portfolio, and in terms of after tax returns can be translated into a higher effective expense ratio.
For basically everyone, their tax rates while working will be higher than their tax rates when retired. If you invest in a dividend yielding stock, you'll be taxed on dividends while building your stache. If you were to invest in an "anti dividend fund" or stock (as far as I know, an anti dividend fund doesn't exist, except maybe Berkshire Hathaway?) you defer your taxes on your capital gains until retirement. At which point your tax rate should be lower than your working years. Meaning you will net yourself more profit, assuming the same performance (performance = stock appreciation + dividends) if you invest in a company/fund that never yields dividends vs a company that does yield dividends, unless you meet all three conditions listed above.