Retirement Calculator based on Dividends, with a bonus

[Gray Peachfuzz]

There's an article on Lifehacker today with a brief explanation and a link to Google spreadsheet that will allow to input a stock and see how much income it could generate, based on the current divident rate. Good enough as it goes, but even better is a link to a clear and useful explanation (if you need such a thing) on the extreme joy of compound interest when it's in your favor, and the extreme need to punch yourself in the face when you're carrying a balance on your credit cards. I detect a Mustachian in the author, perhaps undeclared or independently developed.

http://lifehacker.com/this-calculator-helps-estimate-how-much-you-need-to-liv-1694974172

What do you think of this?

[johnny847]

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.

[arebelspy]

I agree with the problem that this focuses too much on dividends, and investors who don't know any better may make poor decisions due to that.

I guess focusing on dividend paying companies is not as bad as many investor problems/fallacies, but still.

All that aside, more ridiculous to me is this "calculator."

Who the * can't multiply by a percent?  Wow, it took 1MM * 4.52% dividend yield and got 45200 annual dividend income. Wow!  I definitely need a spreadsheet for that!

[Poorman]

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

[johnny847]

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/#msg184781

For 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.

[deborah]

The other thing is that dividends are expected to be from profits. The company has a choice between reinvesting the profits to buy new equipment and expand, or to give the profits to the shareholders. Mining companies (for example) tend to give lower dividends because they use more of their profits to expand. Banks (for example) tend to be the opposite.

If you invest just for dividends, you will tend to be biased towards some parts of the share market rather than having a more even spread. This means that your portfolio will be more volatile than the market in general.

Companies that reinvest their profits more than others in the same industry (if everything else is equal - which it isn't) will grow more and become worth more.