Author Topic: Reducing sequencing risk...dividends only?  (Read 1886 times)

undercover

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Reducing sequencing risk...dividends only?
« on: September 28, 2016, 04:21:18 PM »
Would only withdrawing dividends completely eliminate sequence of returns risk or only substantially lower it? My first thought is that it would eliminate it since you're not touching principle.

Murse

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Re: Reducing sequencing risk...dividends only?
« Reply #1 on: September 28, 2016, 09:49:28 PM »
the simple answer is no. Dividends does not effect sequence of returns risk.


CanuckExpat

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Re: Reducing sequencing risk...dividends only?
« Reply #2 on: September 28, 2016, 11:17:45 PM »
Concur with murse. Read up on total return

arebelspy

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Re: Reducing sequencing risk...dividends only?
« Reply #3 on: September 29, 2016, 01:55:24 AM »
It reduces it only insofar as dividend yield is so low nowadays (2%ish) that if you can cover expenses at that level, you're way below the 4% SWR (approximately half).  But if you saved that much, you'll be fine regardless of dividends--it has nothing to do with the dividends, and everything to do with the amount of savings.

If you reach for yield, overweight in higher paying dividend stocks (to get the dividend payouts on your portfolio 4% or higher), you're adding in other risk, but still not reducing sequence of returns risk (as the risk of dividends being cut when needed--and still having to sell low, continues to exist).
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undercover

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Re: Reducing sequencing risk...dividends only?
« Reply #4 on: September 29, 2016, 10:15:30 AM »

I'm not considering an all dividend portfolio anything, I'm just referring to the dividend component of VTSAX or any other total-market fund/ETF.

My thinking is that since you're not actually selling shares, you can ride out "the storm" through whatever your dividends are paying until the principle increases more in line with your SWR. I understand that dividends are not guaranteed and are sometimes cut, but they are often increased and reliable even during recessions. As long as you can wait for price appreciation on your principle, you are safer to only use dividends if necessary.


Which leads me to my next line of thinking...won't dividends be less and less part of your "total return" as you begin to sell shares? Won't you be relying more on price appreciation? I know it is a negligible affect, since in theory you should be withdrawing less and less shares each year as your portfolio increases in size, but it's still there.

Murse

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Re: Reducing sequencing risk...dividends only?
« Reply #5 on: September 29, 2016, 10:57:01 AM »

I'm not considering an all dividend portfolio anything, I'm just referring to the dividend component of VTSAX or any other total-market fund/ETF.

My thinking is that since you're not actually selling shares, you can ride out "the storm" through whatever your dividends are paying until the principle increases more in line with your SWR. I understand that dividends are not guaranteed and are sometimes cut, but they are often increased and reliable even during recessions. As long as you can wait for price appreciation on your principle, you are safer to only use dividends if necessary.


Which leads me to my next line of thinking...won't dividends be less and less part of your "total return" as you begin to sell shares? Won't you be relying more on price appreciation? I know it is a negligible affect, since in theory you should be withdrawing less and less shares each year as your portfolio increases in size, but it's still there.

Vtsax pays around 2% per year. That means if you wanted to be living on the dividends on Vtsax you would have a 2% withdrawal rate (half of the typical 4%) which means you would need 50x your expenses. Again the dividends does not protect you from sequence of returns risk, however a smaller withdrawal rate does.

neo von retorch

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Re: Reducing sequencing risk...dividends only?
« Reply #6 on: September 29, 2016, 11:03:29 AM »
Your original question as worded... the answer is "yes." If you never need to withdraw any more money than dividends paid out, sequence of returns does not pose a risk. However, the reason for that is simply that your withdrawing a small amount, i.e. having a huge savings compared to your expenses.

To think about your other question, think about two options:
1) Only sell shares but let dividends purchase new shares
2) Only withdraw dividends, which cannot purchase new shares

See how it's really not a choice? What does it matter?