Author Topic: Do you live off dividends? What is your portfolio like?  (Read 2162 times)

meteor

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Do you live off dividends? What is your portfolio like?
« on: March 18, 2017, 08:22:34 PM »
I'm FI and am thinking of restructuring my portfolio to live off dividends.  My reasoning is that it would allow me to have an ongoing stream of income without having to decide what mutual fund to withdraw from for living expenses. I feel like dividends are a different way to approach investing that might be good leverage against stock market swings.  Do you do this?  Does this make sense?  Do you recommend a high dividend Vanguard mutual fund? or do you buy direct stocks? All advice welcome.

JAYSLOL

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Re: Do you live off dividends? What is your portfolio like?
« Reply #1 on: March 18, 2017, 08:45:29 PM »
(disclaimer: I'm not FI or retired yet)

From everything i've read about setting up investments for FIRE, most seem to agree that to live off dividend only (in a broad and balanced portfolio), you may need somewhere in the ballpark of 2x - 3x the stash that you would otherwise need if you were just using the 4% rule regardless of what the dividends were paying.  If you specifically pick all high dividend stocks, you could reduce the amount you need back down to around 25x annual spending (the 4% rule amount), but might endure much larger fluctuations in income than most in FIRE here.  Experts, please correct me if i'm mistaken. 

RetirementInvestingToday

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Re: Do you live off dividends? What is your portfolio like?
« Reply #2 on: March 19, 2017, 07:05:26 AM »
I'm FI, will FIRE in the summer and I'm planning on living off the dividends of a balance portfolio (effectively 60% equities : 40% bonds).

To ride out the inevitable downturns where dividends are reduced/cut I have 3 years spending in cash.  To ensure that I replenish that cash during the good times my WR rate at FIRE will be slightly under 2% with my current dividend yield sitting at 2.5%.
43 years of age, UK based (for now) and on the FIRE home straight. A lot more detail on my blog http://www.retirementinvestingtoday.com/

Mezzie

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Re: Do you live off dividends? What is your portfolio like?
« Reply #3 on: March 19, 2017, 08:37:38 AM »
I like the idea of dividends, so I'll follow this thread. Right now I only invest in specific dividend stocks in my fun account so if it doesn't work out, the bulk of my money is in indexes.
http://forum.mrmoneymustache.com/journals/preparing-for-forced-early-retirement-due-to-disability/

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PizzaSteve

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Re: Do you live off dividends? What is your portfolio like?
« Reply #4 on: March 19, 2017, 08:50:34 AM »
There are risks to chasing dividend stocks.  This is a complicated financial topic, not very suitable to MMM crowds, but in summary one can really hurt diversification and likely hurt overall total returns with this approach.

Think of it this way. 

1.  It is a myth that dividends correllate with price stability.
2. Dividend payments can be changed, so they are not predictable income like a bond.  BofA cut a healthy dividend to nothing, without a bit of notice, when faced with some performance challenges.  Kodak paid a great dividend until it went bankrupt.
3. Companies that buy back shares rather than pay out cash are typically signaling to their shareholders that they are a better investment than what is available.  These non dividend paying companies tend to be the growth companies that drive the S&Ps healthy returns.
4.  The payment of a dividend is in essence 'liquidating' the company bit by bit.  It does not show confidence.  Further, many blue chip companies actually borrow cash to meet their dividend payments, knowing their investors expect it.  By paying interest and issuing shares to raise capital for operations, they can actually reduce their overall profits and earnings per share.  Their CFOs dont care, because they want to keep their high payjng jobs and shareholders are not focused enough to punish them for what is a bad business practice.
5. Dividends force annual tax payments.  Retained earnings put the money into the share price and YOU decide when to cash in and pay your taxes.  I like the potential ability to control tax rates via management of capital gains.

That said, buying dividend paying stocks is not a bad thing.  My best performing stock last year was bought when it paid a healthy 2% dividend.  That said, the share price went from  $15 to $100 during the 5 years i have held it.  Since the dividend is now about .4%,  do i sell?  That is the type of question you face when the dividend % is the deciding factor for your portfolio.

In terms of portfolio advice, i do own some SCHD and a low expense fund like that can be a good approach (an ETF like that or VIG).  I would recommend that, you want a structured, dividend oriented portfolio.
« Last Edit: March 23, 2017, 10:05:29 AM by PizzaSteve »
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maizeman

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Re: Do you live off dividends? What is your portfolio like?
« Reply #5 on: March 19, 2017, 09:02:00 AM »
(disclaimer: I'm not FI or retired yet)

From everything i've read about setting up investments for FIRE, most seem to agree that to live off dividend only (in a broad and balanced portfolio), you may need somewhere in the ballpark of 2x - 3x the stash that you would otherwise need if you were just using the 4% rule regardless of what the dividends were paying.  If you specifically pick all high dividend stocks, you could reduce the amount you need back down to around 25x annual spending (the 4% rule amount), but might endure much larger fluctuations in income than most in FIRE here.  Experts, please correct me if i'm mistaken.

I'm not correcting the spirit of your question, but will correct some of the numbers.

If you wanted to retire living just off dividends and were buying the S&P 500 index, you'd need ~52x annual spending to  FIRE today (so about 2x what the 4% rule would suggest).

Getting to 3x what the 4% rule would suggest would require the stock market to run up another 50% without an dividend increases at all. The lack of increased dividends would likely imply no or negative earnings growth, which would mean a 50% increase in price would put us up at a Shiller PE ratio of 45 (comparable to the very last days of the internet stock bubble in 2000).

Now one way people approach deciding to live off of dividends is to pick companies (or index funds) that actually pay dividends (so no amazon, no google, no berkshire hathaway, etc), or specifically that pay higher dividends than the overall S&P yield, which includes a lot of those no dividend companies. If they do this in moderation they actually end up with a lot of low volatility companies in mature sectors of the economy (like electrical utilities), paying on the order of 3-3.5% dividends. The risk here is that these companies will almost certainly grow more slowly than the stock market as a whole (if at all), but they tend to also be respond less to overall swings in the stock market (lower beta), and their dividends are reasonably safe even in recessions (the electric bill is one of the last things people stop paying).*

However, you're certainly correct that if people start looking for even higher dividends, they start to get into very volatile waters, particularly since those high yields tend to be correlated with worries about the future of the company, and when/if those problems materialize, the dividend ends up cut, and it turns out the high yield was the only reason people were buying the stock at all. One of my handful of individual stock purchases was a company called "SeaDrill" because I was excited about how high its dividend yield was (stock price had just declined but I figured the yield was so good that even after a major cut in the dividend I'd still be okay). And well.. you can see how that worked out.



*In case it sounds like I'm making the case for retiring on dividends here, keep in mind you'd still need to save between 28.5-33.3x your annual expenses to retire on a portfolio of 3-3.5% dividend paying stocks.
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PizzaSteve

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Re: Do you live off dividends? What is your portfolio like?
« Reply #6 on: March 19, 2017, 09:09:53 AM »
Maizeman offers a wise perspective.  One other note, in addition to tilting towards mature industries, high dividend stocks also tend to tilt heavily towards REITs, which are required to distribute earnings.  This can be eithef good or bad, depending on your faith in the real estate industry and its prospects.
« Last Edit: March 23, 2017, 09:51:28 AM by PizzaSteve »
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jim555

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Re: Do you live off dividends? What is your portfolio like?
« Reply #7 on: March 19, 2017, 09:22:46 AM »
Total return investing doesn't consider dividends.  Just sell the needed amounts to get to the 4% withdrawal.  Total market investing is better than chasing dividends.

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Re: Do you live off dividends? What is your portfolio like?
« Reply #8 on: March 19, 2017, 10:33:48 AM »
Going on two years fire'd (April 1st) and I withdraw 4% on a 60/40 portfolio. This year my withdrawl rate will be much lower or I will do some projects around the house as my DW did take a job for Health Insurance (which is really good) couple months ago till we find out how this ACA all pans out. Having a family of 6 we don't want to play around with this. So as of now have been saving 100% of her take home pay and saving a ton on HC cost. We will see how year plays out but above is what we were doing till most recently.
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Re: Do you live off dividends? What is your portfolio like?
« Reply #9 on: March 19, 2017, 10:51:12 AM »
I don't really think it matters -- dividends vs total returns -- other than dividends seem to have an emotional appeal.  It does "feel good" to do no explicit withdrawals.  But I don't think it really matters.

FWIW: about the time we hit FIRE, we were "living off of dividends".  We are about 70/30 for stocks/bonds and are about 90/10 for index funds vs individual stocks.  The individual stocks are generally dividend stocks.  To me, that makes sense because they're in a brokerage where there is some minimal charge for buying/selling.   We used to use the non-automatic dividends on the individual stocks as a tool for rebalancing.  Now we use them for daily income.
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frugal_c

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Re: Do you live off dividends? What is your portfolio like?
« Reply #10 on: March 19, 2017, 11:53:52 AM »
There are risks to chasing dividend stocks.  This is a complicated financial topic, not very suitable to MMM crowds, but in summary one can really hurt diversification and likely hurt overall total returns with this approach.

Think of it this way. 

1.  It is a myth that dividends correllate with price stability.
2. Dividend payments can be changed, so they are not predictable income like a bond.  BofA cut a healthy dividend to nothing, without a bit of notice, when faced with some performance challenges.  Kodak paid a great dividend until it went bankrupt.
3. Companies that buy back shares rather than pay out cash are typically signaling to their shareholders that they are a better investment than what is available.  These non dividend paying companies tend to be the growth companies that drive the S&Ps healthy returns.
4.  The payment of a dividend is in essence 'liquidating' the company bit by bit.  It does not show confidence.  Further, many blue chip companies actually borrow cash to meet their dividend payments, knowing their investors expect it.  By paying interest and issuing shares to rise capital for operations, they can actually reduce their overall profits and earnings per share.  Their CFOs dont care, because they want to keep their high payjng jobs and shareholders are not focused enough to punish them for what is a bad business practice.
5. Dividends force annual tax payments.  Retained earnings put the money into the share price and YOU decide when to cash in and pay your taxes.  I like the potential ability to control tax rates via management of capital gains.

That said, buying dividend paying stocks is not a bad thing.  My best performing stock last year was bought when it paid a healthy 2% dividend.  That said, the share price went from  $15 to $100 during the 5 years i have held it.  Since the dividend is now about .4%,  do i sell?  That is the type of question you face when the dividend % is the deciding factor for your portfolio.

In terms of portfolio advice, i do own some SCHD and a low expense fund like that can be a good approach (an ETF like that or VIG).  I would recommend that, you want a structured, dividend oriented portfolio.

I really agree with this.  I always veer towards dividend stocks but you can quickly end up with a portfolio of energy companies, utilities, maybe a few consumer staples.  It is hard to get good diversification and high dividend right now in the US with this approach.  Also, yes you need to consider whether the higher dividend yield will just be offset by  lower earnings growth.

All that being said, international index funds do tend to offer higher dividend yields and often approach 3%.  I am not talking about dividend focused ETF's, just broad market funds.  Entirely possible I am just fooling myself with them and as I just said maybe they will just grow earning slower but if I was looking for dividends (and I am) that is one place I would look

FIRE4Science

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Re: Do you live off dividends? What is your portfolio like?
« Reply #11 on: March 20, 2017, 11:26:04 AM »
A great site for dividend investing and knowledge used to be www.dividendmantra.com until he sold his website, then he went to twitter to write. He lost his audience big time after selling his website, but that allowed him to reach FI faster.

All the old posts are there, however the new owner took down his active portfolio. I saved it somewhere though, and may post it here.

Also, great dividend investing advice comes from Warren Buffet.

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Re: Do you live off dividends? What is your portfolio like?
« Reply #12 on: March 20, 2017, 12:54:15 PM »
Chasing dividends is not going to provide you with the most sustainable drawdown rate.

Do you care more about mental accounting, or having the highest likelihood of succeeding in retirement?
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racy

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Re: Do you live off dividends? What is your portfolio like?
« Reply #13 on: March 20, 2017, 05:56:34 PM »
Total return investing doesn't consider dividends. ...

From Vanguard Research, "Itís important to note, however, that under the total-return approach, the income generated by the portfolio is the first source tapped to meet spending needs, and only when this source is insufficient does the investor liquidate some holdings. As a result, in situations when the total portfolio cash flow is more than the annual spending requirement, the total-return approach is equivalent to the income approach".    https://personal.vanguard.com/pdf/s557.pdf


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Re: Do you live off dividends? What is your portfolio like?
« Reply #14 on: March 20, 2017, 06:03:47 PM »
It's a matter of opinion whether I live off dividends, I guess.  I make enough in dividends, non-dividend distributions, and interest to cover 104% of my annual budget.  I also make enough to cover my budget by trading around the existing positions with short sold options.

I like this income centric approach.  It might not give the greatest long run return but it has the best sequencing of returns.  For a retiree, sequence of returns risk is the greatest risk.  I feel safe with a higher than 4% withdrawal rate because my returns are heavily front loaded.  YMMV.
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frugal_c

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Re: Do you live off dividends? What is your portfolio like?
« Reply #15 on: March 20, 2017, 08:36:13 PM »
Chasing dividends is not going to provide you with the most sustainable drawdown rate.

Do you care more about mental accounting, or having the highest likelihood of succeeding in retirement?

I don't think this is true.  I don't know that higher dividend stocks increase your return but they don't decrease it either.  If you can stay diversified it should pretty much level out to a similar total return.  I mean that is the whole basis behind efficient market theory, it's all the same.  There are actually studies that indicate higher dividend stocks beat lower dividend stocks going back decades FWIW, I am always skeptical of these type of thing so I just assume that it's probably about the same.

It does seem like they should smooth things out a bit if nothing else.

BTDretire

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Re: Do you live off dividends? What is your portfolio like?
« Reply #16 on: March 22, 2017, 07:39:21 PM »
 I'm not sure I would go 100% dividend stocks, but might go a medium percentage.
Look into the Dividend Aristocrates, they are stocks that have paid a continuous
and increasing dividend for at least 25 years in a row.
 I get a newsletter called 'Sure Dividend' (obviously looking for subscribers for the premium service)
but the free part has good information. It is all about 'Dividend Aristocrats'.
Here's a special one about, "How To Build Your Dividend Growth Portfolio from Scratch"

http://www.suredividend.com/starting-from-scratch-building-your-dividend-growth-portfolio/

 Oh! found the all articles button.
http://www.suredividend.com/archives/
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FIREby35

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Re: Do you live off dividends? What is your portfolio like?
« Reply #17 on: March 24, 2017, 07:46:25 AM »
I know there are lots of pros and cons to the dividend strategy. But, if you want to have a steady income and still be invested broadly (i.e. without having to focus only on dividend stocks and possibly overpaying because of this dividend quality) --- then you might try the Vanguard fund that pays out a 4% monthly income.


https://investor.vanguard.com/mutual-funds/managed-payout/#/

AnswerIs42

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Re: Do you live off dividends? What is your portfolio like?
« Reply #18 on: March 24, 2017, 01:27:48 PM »
I plan on mostly living off dividends - UK and EU index funds still pay a reasonable dividend. Less than 4%, but not by that much.

The dividend on US and emerging market trackers is too small to be useful though, so for these areas I'm thinking of doing a "virtual dividends" approach, that works like this:

- Look up the earnings of the index in question, as a percentage of the total value (can probably be looked up quite easily)
- From this proportion, decide your own percentage of what should be taken as income vs reinvested (take 75% perhaps, leaving 25% to grow)
- Subtract the amount of actual dividends received
- Take the remainder as "virtual dividends" by selling units

I'm slightly tilting the portfolio towards dividend payers (I have a handful of individual shares, some income-based managed funds, and I have some of a Vanguard high-dividend-filtered ETF which takes all the companies in the world and selects the half of them that pay the most dividends), but I'm going to be keeping it simple and putting most of my money in normal index funds going forwards.