FIRE planning - SWR with Dividend Income

[axes_of_evil]

Hi Mustachians!

Just a couple of question to throw out there for the community.
All the articles & forum discussion tend to centre around the 4% rule and the firecalc/cfiresim of the world are great for calculating that.
But I know that my withdrawal rate will be much lower because I will rely on my dividend income to cover, if not 100%, the vast majority of my spending. 
While I realize that dividends aren't guaranteed and may fluctuate over time with market conditions, I tend prefer this solution rather than investing in growth stocks and dipping into capital to cover spending.
My average yield on net worth is around 2.5% (dividend & non-dividend investments) & my average yield on my dividend only assets is around 4.5%.  My dividend picks tend to be with the reliable reliable Telco / Banks & Utilities within Canada (40%) and the USA (60%) markets.

I just noticed that I could use pension income/ other income feature in the calculators to handle this but it's not an elegant solution.

I'm wondering if someone has any advice on how to handle this scenario and run the calculations and also what your thoughts are on those yield %'s I mentioned above.  I'm sure most of you have dividend income so i'm curious to know how everyone handles them for planning purposes.

Thanks!

[Financial.Velociraptor]

You don't need to make special adjustments to your estimator for dividends or other distributions.  The distributions are theoretically just another method of drawing down capital.  The company's balance sheet was reduced when the cash went out, therefore that should already be reflected in the spot stock price.  For withdrawal purposes, you will only have to sell 1.5% as the other 2.5% is already in the form of cash.   Tax considerations may muddy the waters for somewhat.

If you insist on going the dividend investing route, I recommend you explore "dividend growth investing".  There are plenty of companies that have raised their distribution for more than 25 consecutive years and will likely continue to do so.  Current yield will be lower but your long run distributions will be higher.

[axes_of_evil]

Thanks for the feedback Financial.Velociraptor - I've definitively been going down the path of dividend growth with securies with a proven track record of raising dividend (TRP, FTS, RY etc...) and I shy away from very high yields (>5-6%) cause that's just silly!  My time horizon is long (30+ years) so my strategy would be to collect the regular dividend "paycheque" and betting on long term growth of the companies to make sure my money still grows, although at a more modest pace than non dividend investments.

[jim555]

Chasing dividends will hurt your total return.  Just sell some shares if you need to. 

[Telecaster]

Hi Mustachians!

Just a couple of question to throw out there for the community.
All the articles & forum discussion tend to centre around the 4% rule and the firecalc/cfiresim of the world are great for calculating that.
But I know that my withdrawal rate will be much lower because I will rely on my dividend income to cover, if not 100%, the vast majority of my spending. 
While I realize that dividends aren't guaranteed and may fluctuate over time with market conditions, I tend prefer this solution rather than investing in growth stocks and dipping into capital to cover spending.
My average yield on net worth is around 2.5% (dividend & non-dividend investments) & my average yield on my dividend only assets is around 4.5%.  My dividend picks tend to be with the reliable reliable Telco / Banks & Utilities within Canada (40%) and the USA (60%) markets.

I just noticed that I could use pension income/ other income feature in the calculators to handle this but it's not an elegant solution.

I'm wondering if someone has any advice on how to handle this scenario and run the calculations and also what your thoughts are on those yield %'s I mentioned above.  I'm sure most of you have dividend income so i'm curious to know how everyone handles them for planning purposes.

Thanks!

One thing to keep in mind is that the dividend yield of the S&P 500 has been steadily decreasing for decades and is likely to continue to do so for reasons of tax efficiency.   Solid dividend payers like utilities are likely to be around for a long time to come, but if history is our guide, quality dividend paying stocks will continue to be harder and harder to find. 

The 50 Dividend Aristocrats have an average trailing dividend yield of 2.3%.  Today, coincidentally, the 2-Year Treasury is also paying 2.3%.   If you are getting the same yield, do you want a stock or a bond?  Also remember that the 4% is extremely conservative.  The median wealth at the end of 30-years of inflation adjusted withdrawals is almost three times starting principal.  Basically, most of the time you wind up filthy rich.  If you stop worrying about the dividends and focus on total return things become better and simpler. 

[maizefolk]

@axes_of_evil I agree with the posters above, but putting that aside, we'd need to know more about your retirement plans to model success rates.

Let's say you retire with a budget of $30k/year, and a portfolio paying $30k/year in dividend income. Another great recession hits and dividends are cut an average of 20%. Now you have spending of $30k, but income of only $24k. What do you do about the $6k gap? Sell shares? Cut spending? The choice impacts how best to model your future retirement.

Next: same starting scenario but we hit another 1970s and inflation is running 10% for a couple of years. Now you still have $30k in dividend income in nominal dollars, but the same annual budget has group to >$36,000. What do you do about the $6k+ gap?

If you are getting the same yield, do you want a stock or a bond?

Well the stock has less inflation risk and less interest rate risk. So if we're about to repeat the 1970s I'd like the stock please. (If we're about to repeat the 1930s I'd prefer the bond.)

Figuring out which past decade is a better historical model for today... that's the tricky bit.