Author Topic: Is it really that bad to have an exclusively dividend based income after FIRE?  (Read 3813 times)

louloubelle

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HI. I'm new here, so far just been lurking.
I seriously considering pulling the plug very soon. My DH has been retired 4 years now already, but I am somewhat younger than he is.  I know I should do a full Case Study and I probably will in the near future, but for now my question is how dangerous do you all think it is to have an income that is based almost entirely on dividend income?  My hubby has a small pension that pays for most of our essential bill and he also has a large  portfolio in a registered account that is mostly dividend stocks. I have no pension, nor will I have when I pull the plug, but I have a large portfolio in a non-registered account that is also almost all dividend paying stocks. We are in Canada and the Canadian banks, which are a huge part of our portfolios, are generally considered a very low risk; they never reduced or cut dividends even in 2009. Generally the dividend paid out is around 4%, and their growth is also generally good. Both DH and I got in at a good time and so are doing better than 4%, so all of our needs will be entirely met from the income provided by his pension and both of our dividend based portfolios.  I know this is extremely bad asset  allocation, but so far it has worked great. So please give me your opinion, and  I would also like to know in your responses if you are already ER, and what your SW plan is.

Another Reader

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In your shoes, I would look at the price and dividend performance of the major US banks over the last ten years.   Consider the effects of a collapse in real estate prices on Canadian banks.  Then decide whether having your portfolio largely concentrated in these companies is risky. 

k9

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The very fact that you hesitate makes me think you don't feel very comfortable with that AA. If Canadian banks were having a horrible time, you would probably panic and do bad things at the worse possible time. That's the sign of a subjectively bad AA. You will probably sleep better if you diversify a little.

One more thing : don't confuse dividend yield with SWR. They are not the same. The SWR assumes you are consuming your capital, year after year. The dividend yield is just an income flow and doesn't consume the capital (well, in sane companies, it doesn't). If you can live on your dividend yield, it will remain available "forever".

arebelspy

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It's not BAD, per se, but I do think it tends to be suboptimal versus other plans.

It's all about what your comfortable with. Some people get scared by the idea of selling stocks due to not wanting to eat into their base (not realizing that a dividend is the exact same equivalent).

I would just think about how you'll react if there's a downturn and dividends are cut. Will you cut spending?  Will you sell shares?  Other?

I think the bigger issue is your lack of diversity. That would worry me, personally. But again, research and learn and do what feels right to you. :)
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ColaMan

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In my view, an adequately diversified dividend portfolio would provide an excellent source of retirement income, especially given that there is some pension income thrown in to cover some basics.  However, the key is adequate diversification.  You say you have a "huge" percentage of your portfolio in Canadian banks.  This could prove to be very risky.  Just because Canadian banks performed well during 2008-2009 crash doesn't mean that they will in a future hiccup.  What if oil stays at $40 for two more years? Do these banks have heavy exposure to commodity producers than could cause them serious problems? Canada is currently technically in recession, right? What if that deepens? What happens to real estate prices then, and what impact will this have on the banks' dividends?   Prior to the Great Recession U.S. banks were viewed as good value plays, and great sources of safe dividends.  While there has been significant recovery, there were 3-4 years of brutal dividend cuts, even among some of the better and "safer" banks like USB and WFC.  Some of the major money center banks like C never fully recovered.

Abe

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Having investments concentrated in one sector is generally not advised due to the risk of significant disruptions of that sector. As the financial crisis demonstrated, even large corporations that people thought were stable can suffer severe losses due to exposure to other corporations.

CanuckExpat

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Having investments concentrated in one sector is generally not advised due to the risk of significant disruptions of that sector. As the financial crisis demonstrated, even large corporations that people thought were stable can suffer severe losses due to exposure to other corporations.

Yes. I think the title of the original post is misleading. The major risk in this situation comes not from relying on dividends for income but rather from a portfolio concentrated in one sector, in one geographic market, and in a handful of companies at that.

It may pay off spectacularly, it may be a horrible idea, but I would certainly consider it more "risky" then a diversified portfolio.

louloubelle

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Thanks for your help everybody. I do realize that this is "risky" situation for me. I have made a bit of an effort to diversify with hedged  international etfs, but right now the Canadian $ is ~.75 to US$ so, what I really want to buy as far as US stocks is extremely pricey right now if you take in share price as well as exchange. I  do feel that the 2009 mortgage crisis and resulting meltdown should have been a reasonable indicator of what happen could happen to a specific  company's dividend, and the fact that the banks over here fared well  seems like a definite positive indicator, especially since huge companies like BCE cut their dividends.  I will work harder on getting a little more diversity though.

MrMoogle

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I never understood why conversion rates make things expensive.  If 1CAD is $0.75US.  If in the US, a pound of apples is $2.  Is a pound of apples in Canada 2CAD or is it 2.66 CAD?  I can understand fluctuations in conversion rates adds risk.  Maybe you buy into USD when 1CAD = 1USD, then when you withdraw 1CAD = 2USD, then you just lost half that worth.

daverobev

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Thanks for your help everybody. I do realize that this is "risky" situation for me. I have made a bit of an effort to diversify with hedged  international etfs, but right now the Canadian $ is ~.75 to US$ so, what I really want to buy as far as US stocks is extremely pricey right now if you take in share price as well as exchange. I  do feel that the 2009 mortgage crisis and resulting meltdown should have been a reasonable indicator of what happen could happen to a specific  company's dividend, and the fact that the banks over here fared well  seems like a definite positive indicator, especially since huge companies like BCE cut their dividends.  I will work harder on getting a little more diversity though.

Canada should be at most 25% of your portfolio. You need to find your asset allocation, and rebalance to get to it. Just because the USD is 'strong' doesn't mean you shouldn't do this. Parity between the USD and CAD is not a given, is not normal, and could be decades in returning - if ever.

Check out Canadian Couch Potato. I'd say, if you are retiring, you want some bonds - but if you have CPP and OAS then that income can really replace bonds as it is not likely to be cut in your lifetime. Check out ZEA/XEF - they hold "international" stocks directly.

I'm not being entirely coherent here, but just remember - VXUS, which is a Vanguard ETF for 'ex-US', contains 8% Canada I think. Which means Canada's global market cap is like 4%.

Also check out ZDV, ZPR and the like for monthly income. Not recommendations, but worth checking into.

http://www.etfs.bmo.com/bmo-etfs/glance?fundId=97630