Author Topic: Revenue from Dividends?  (Read 6198 times)

oldtoyota

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Revenue from Dividends?
« on: July 10, 2014, 12:09:46 PM »
Has anyone successfully complemented their retirement savings by living partly off of stock dividends?

I was looking at my earnings and wondering if I could increase them to add significantly to my income.


gimp

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Re: Revenue from Dividends?
« Reply #1 on: July 10, 2014, 01:51:15 PM »
I'm going to speak out of my ass for a moment here, but my opinion is this: yes, people do it, but it's probably not a great return on investment.

There are generally two kinds of stock: value and growth; growth stocks grow quickly, and value stocks return dividends but stay stable. Of course, that's a massive oversimplification, but consider this: very few stocks give you a 4% dividend, and you would probably want to diversify (a dividend fund, perhaps). Since they're giving a relatively low return, and low growth, they don't add up to being more profitable for you than a simple index fund. In addition to that, many value stocks do take a beating in recessions, even when they shouldn't, which means that you're not that much more stable than a broad index fund.

On the other hand, for stability, things like municipal bonds seem like a much better idea; higher returns and often there are tax advantages. Just avoid detroit.

So while people do indeed do it, I think I'd prefer going for a broad index fund and bond asset allocation, than specifically going for dividend stocks.

arebelspy

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Re: Revenue from Dividends?
« Reply #2 on: July 10, 2014, 02:03:53 PM »
Total return investing > dividends, IMO.

Whether you sell some stock, or the company pays a dividend, it's the same thing towards getting cash in your pocket.  The latter just has a "feel good" for people that don't understand where dividends come from.

This has been discussed before, you can do a search for prior discussions.

The advantage of total return investing is you can decide when to sell, not the company, and you can do it in tax efficient ways.
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Cheddar Stacker

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Re: Revenue from Dividends?
« Reply #3 on: July 10, 2014, 02:59:01 PM »
Has anyone successfully complemented their retirement savings by living partly off of stock dividends?

I was looking at my earnings and wondering if I could increase them to add significantly to my income.

I have to defer to people smarter than me on what is a better strategy. I don't fully understand the arguments on the pros/cons. I've read them, but my head explodes every time.

Anyway, to answer your question, yes. Here: http://forum.mrmoneymustache.com/journals/spoonman's-journal/

He's been investing heavily for about 4 years, he just quit his job, and is in the middle of around 6 weeks notice. His strategy/results convinced me enough to dabble a bit and I put a little cash into some of the dividend champions recently. It's not my main plan of attack, but I'm having some fun with it.

bako_frugal

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Re: Revenue from Dividends?
« Reply #4 on: July 10, 2014, 04:18:29 PM »
My yearly dividends are currently over 20k per year on my taxable portfolio (aiming for 25k by the end of the year).  I'm getting into FI territory but am looking for closer to 50k per year for ER.  I'm just stocks & REITS in my taxable funds. 

So yes it is possible.

AssetGrinder

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Re: Revenue from Dividends?
« Reply #5 on: July 10, 2014, 04:23:34 PM »
I know a few people that have retired and are living off their pensions and dividend income. Very possible to supplement your income. Good dividends stocks will not only pay u during huge market drops some will even increases dividends during that time. I am talking about the Coca Colas, Proctor Gamble , Walmart, Mcdonalds, Chevron, AT&T stocks of the world.

skyrefuge

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Re: Revenue from Dividends?
« Reply #6 on: July 10, 2014, 04:59:06 PM »
I think a dividend-focused approach indicates an incomplete understanding of dividends, the stock market, and investing, and I would never take such an approach myself.

Despite that, the cash thrown off by my index fund portfolio (85% stock/15% bond) will likely be near $20k this year.

Obviously $20k can do a lot more than just "complementing" retirement income, and that's entirely possible to achieve without the risk and effort involved in stock-picking.

Breaker

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Re: Revenue from Dividends?
« Reply #7 on: July 10, 2014, 06:40:53 PM »
Has anyone successfully complemented their retirement savings by living partly off of stock dividends?

That's my plan

I was looking at my earnings and wondering if I could increase them to add significantly to my income.

Over the last 2+ years I have concentrated on buying stocks that pay dividends.  My first goal was to earn enough dividends in a year to pay my mortgage.  I have accomplished that and will have enough dividends to pay for my property tax and property insurance too by the end of this year.  Just that takes a big load off of my mind.

Then with SS and another small pension and rent (when the place is rented) should be more than enough to cover my retirement. 

By concentrating on dividends, I don't worry  much about the price of the stock.  I now buy only stocks that have paid dividends for many years in a row and that raise their dividends at least yearly.  Some Companies have raised dividends for over 25 years in a row.  (Many of these dividend raises are much higher than the inflation rate, so the dividends should keep up just fine.)  In the last 3 years I have also seen the price of the securities rise so that is icing on the cake.  I'm sure you have heard the advice "Don't touch the principal."

Eventually I hope that dividends will cover all of my regular bills so that any other income will be for unexpected expenses and FUN.

BTW, the most I have ever earned in a year is 60K and if I had learned about MMM's ideas earlier in my life I would have paid of the mortgage and that would not be the worry that it is now.  Sometimes paying off the mortgage doesn't make sense money-wise but you can't beat a mortgage free life for peace of mind. 

I am now in my 60's and just refinanced so have about 28 years on this mortgage.  I'm semi-retired so don't make enough to really pay off the house so decided to try to invest my money in a way that will bring in passive income instead. 

I see no reason that dividends can't complement your retirement income.

Jan




RapmasterD

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Re: Revenue from Dividends?
« Reply #8 on: July 10, 2014, 07:15:24 PM »
a) I think the operative term on the post above mine is "complement."

b) Stating the obvious, it depends on the size of your portfolio. Let's say you've got $5 million. I'd still be thinking about a total market or S&P 500 ETF for most of that. $8 - $10 million? Now you're getting into the territory where you might take a chunk and put it into a bunch of dependable dividend producing stocks -- perhaps. I mean.....4% of $3 million is $120,000. Pretty yummy.

c) What I think I'm gonna do is wait till the next hellatious downturn...when the highest quality REIT ETFs -- like a Vanguard -- are paying a sweet 5-6 percent dividend or more. And I'll put 25% of my money in that. Boom!

arebelspy

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Re: Revenue from Dividends?
« Reply #9 on: July 10, 2014, 07:16:43 PM »
I think a dividend-focused approach indicates an incomplete understanding of dividends, the stock market, and investing, and I would never take such an approach myself.

Despite that, the cash thrown off by my index fund portfolio (85% stock/15% bond) will likely be near $20k this year.

Obviously $20k can do a lot more than just "complementing" retirement income, and that's entirely possible to achieve without the risk and effort involved in stock-picking.

100% agree, especially with the first sentence. Dividends will happen, they're an important part of your overall return. But chasing them can lead to lower overall results.

I have a personal philosophy not to read any blog with "dividend" in the title.

(I'll admit, it's an attractive idea at first. I was on board, until I read and understood more.)
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bigchrisb

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Re: Revenue from Dividends?
« Reply #10 on: July 10, 2014, 07:21:27 PM »
No issue with seeking dividends for retirement income, or as a portion of your income.  In my own situation, my total dividends are about $65k/year at the moment, which is sufficient to cover off on my spending needs.

Agree with all the previous comments about portfolio returns and tax treatment.  Divisibility and liquidity of stocks is one of the substantive advantages I see of them over real estate - with stocks, you can access portfolio return easily by selling a share or two, with very low transaction costs if needed, to supplement dividend income.  With RE, that's a bit harder, as you can't just sell off a bedroom to supplement your rental returns.  There are options, like releasing some equity through a loan, but that has a different set of risks, or if selling, a higher transaction cost.

My own outlook on income from stocks is that:
- I bank on the dividend return being there - its tended to stay fairly stable through financial busts (and booms).  Hence I use index dividend yields as my planning number.
- I treat portfolio returns as a bonus


deborah

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Re: Revenue from Dividends?
« Reply #11 on: July 10, 2014, 07:31:05 PM »
Think of dividends as rent. They are the regular (?) payments you receive from a business you have invested in. Just like with real estate, some types of businesses (banks) pay more dividends than others (miners). Some types of businesses make more capital gains (share price) than others. You are better off diversifying, so that when one type of business is in the doldrums, you are still making a profit (whether by dividends or capital gains) from other business sectors.

That said, there is nothing wrong with making enough from your dividends to live on, while still having good diversification in your stock holdings. Plenty of people do this. But chasing shares just for dividends tends to reduce your diversity or increase your risk (high dividend shares in sectors not known for big dividends are a bit sus).

oldtoyota

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Re: Revenue from Dividends?
« Reply #12 on: July 10, 2014, 08:38:07 PM »
Thanks, all!

oldtoyota

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Re: Revenue from Dividends?
« Reply #13 on: July 10, 2014, 08:41:28 PM »
I think a dividend-focused approach indicates an incomplete understanding of dividends, the stock market, and investing, and I would never take such an approach myself.

Despite that, the cash thrown off by my index fund portfolio (85% stock/15% bond) will likely be near $20k this year.

Obviously $20k can do a lot more than just "complementing" retirement income, and that's entirely possible to achieve without the risk and effort involved in stock-picking.

100% agree, especially with the first sentence. Dividends will happen, they're an important part of your overall return. But chasing them can lead to lower overall results.

I have a personal philosophy not to read any blog with "dividend" in the title.

(I'll admit, it's an attractive idea at first. I was on board, until I read and understood more.)

You both use similar terms--"chasing dividends" and "dividend focused." What if one purchases stocks that add diversity to a portfolio and are also good stocks? Is the trouble mostly that it's not that great based on ROI?


TreeTired

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Re: Revenue from Dividends?
« Reply #14 on: July 10, 2014, 09:36:12 PM »
I also have been buying dividend paying stocks for the past 5 years and many of them,  while purchased solely for the dividend,  now have some pretty hefty unrealized capital gains and don't even offer an attractive dividend... so what to do now?   (It's a nice "problem" to have).  I have actually sold a few,  like KMB,  and wondering about a few others,  like COP.    Both of these were purchased with pretty much no "analysis" of the company fundamentals.   I just took the quarterly dividend,  multiplied by 4, divided by the stock price and said, "hmmm... that looks attractive"  and bought the stock.   Both yielded over 4% when purchased. 

Probably an overly popular strategy at this point with too many investors reaching for yield.

skyrefuge

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Re: Revenue from Dividends?
« Reply #15 on: July 10, 2014, 10:00:51 PM »
What if one purchases stocks that add diversity to a portfolio and are also good stocks?

If you're invested in broad-based stock index funds, it's essentially impossible to add diversity by buying individual stocks, since your index funds already contain those "good dividend stocks". All you would be accomplishing by buying more of them would be shifting your portfolio away from the index's weighting. Essentially saying "I think these 5 stocks will perform better than the other 3600 stocks in the index". If you had that ability, your best bet would be to just invest solely in those 5 stocks, but no one has that ability.

And adding dividend stocks to an indexed portfolio wouldn't add much to your passive income either. The current yield on Vanguard's Total Stock Market fund (VTSAX), which doesn't focus on dividend-payers, is 1.82%. For SDY, a "High Yield Dividend Aristocrats" ETF (which holds exactly the "quality dividend growth stocks" that dividend people endorse), it's only 2.25%.  So if you had $100k in VTSAX, you'd get $1820 in dividends per year. If you decided to move 25% of that $100k to SDY, then you'd instead be getting $1928 per year. Woo!

chasesfish

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Re: Revenue from Dividends?
« Reply #16 on: July 11, 2014, 05:23:23 AM »
I'm a huge fan of investing in dividend paying stocks, specifically in my taxable account.  I think they're a good way to get annual income that grows each year while not worrying about the underling stock price.

However, as a lot of people have already pointed out, there are a ton of pitfalls.  Dividends aren't the end all, be all, but its a consistent way companies can return cash to shareholders.

Lots of dividend paying stocks are financials and REITs.  These cut their dividend quickly in a bad economy because they are usually highly leveraged businesses.  I avoid these.

You then have to look at the underlying company, what they earn, then what they pay out.  Depending on the industry, the payout ratio (Dividend/Earnings) is really important.  You can get a higher yield today from a utility or tobacco company, but they don't reinvest as much because there's only so much growth they can get. 

I like settling in for the 30-60% payout companies.  I just bought a chunk of railroad stock - they only pay 2%, but consistently increase their dividend while holding half their money for growth in the business.

This is like any other investing, sometime you win big and sometime you don't.  I bought KO as a dividend investment and its only up 7% while the market was up 30%.  At the same time, I bought a restaurant with a good balance sheet and cash flow, but challenging management.  An activist investor got on them and they have since doubled their dividend and the stock is up 60% because they stopped opening new, marginally profitable stores and instead sending that cash back to the shareholders.  My yield on that deal relative to my cost basis is above 6% and I've only had the stock for two years.

Others have just consistently raised their dividend each year, which is where the real nice returns start happening. 

Warren Buffett pointed out recently that his 1986 investment in Coca Cola now returns more each year in dividends than what he invested originally.   


I keep a separate spreadsheet I look at that tracks the income.  It looks like:

Stock, Shares, Dividend/Q, Dividend/Y, Income.   

Then I total that up.  I have a nice passive income coming in each month and it grows.

I'll say it again, dividends are not the end all, be all, but I enjoy their functions of consistently returning cash to the shareholders


arebelspy

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Re: Revenue from Dividends?
« Reply #17 on: July 11, 2014, 10:19:36 AM »
I think a dividend-focused approach indicates an incomplete understanding of dividends, the stock market, and investing, and I would never take such an approach myself.

Despite that, the cash thrown off by my index fund portfolio (85% stock/15% bond) will likely be near $20k this year.

Obviously $20k can do a lot more than just "complementing" retirement income, and that's entirely possible to achieve without the risk and effort involved in stock-picking.

100% agree, especially with the first sentence. Dividends will happen, they're an important part of your overall return. But chasing them can lead to lower overall results.

I have a personal philosophy not to read any blog with "dividend" in the title.

(I'll admit, it's an attractive idea at first. I was on board, until I read and understood more.)

You both use similar terms--"chasing dividends" and "dividend focused." What if one purchases stocks that add diversity to a portfolio and are also good stocks? Is the trouble mostly that it's not that great based on ROI?

It's not a valid strategy that will add "extra" to your ROI.  Those dividends have to come from somewhere, they don't magically appear from thin air.  They come from the profitability of the company.  There is no reason to think a company that pays dividends will make more money on their products than one that doesn't.  So you're left with no upside, and only the potential downsides I mentioned (tax implications, inflexibility on loss harvesting, inflexibility on when to sell, etc.)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

bako_frugal

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Re: Revenue from Dividends?
« Reply #18 on: July 11, 2014, 01:26:58 PM »
OldToyota:

A slightly different take on things.  When I was first investing in the stock market in my mid-20's, I did not have much free cash.  Though I stick primarily with industrials, I did target moderate dividend paying stocks since the dividends were an incentive for additional stock purchases.   

I had a very simple starting target of matching the dividends that I received with cash savings to make new stock purchases.  (A leveraging technique)  The small initial dividends were a prompt or encouragement to keep at investing, even when my initial portfolio and cash was quite small.  The compounding effect over time meant that I was investing more each year, and actively having to work at increasing my cash savings to be able to match my growing dividends, so it really paid off.

Over-all it really just matters most what is going on in your own head.  If dividends are something that help  you stay the course of investing, then yes, go for dividends.  Different people will have different mental "rewards" from how their investments appear to them.  Do try to keep in mind what feels right to  yourself.

oldtoyota

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Re: Revenue from Dividends?
« Reply #19 on: July 12, 2014, 06:02:49 AM »
OldToyota:

A slightly different take on things.  When I was first investing in the stock market in my mid-20's, I did not have much free cash.  Though I stick primarily with industrials, I did target moderate dividend paying stocks since the dividends were an incentive for additional stock purchases.   

I had a very simple starting target of matching the dividends that I received with cash savings to make new stock purchases.  (A leveraging technique)  The small initial dividends were a prompt or encouragement to keep at investing, even when my initial portfolio and cash was quite small.  The compounding effect over time meant that I was investing more each year, and actively having to work at increasing my cash savings to be able to match my growing dividends, so it really paid off.

Over-all it really just matters most what is going on in your own head.  If dividends are something that help  you stay the course of investing, then yes, go for dividends.  Different people will have different mental "rewards" from how their investments appear to them.  Do try to keep in mind what feels right to  yourself.

I appreciate the input. Thank you.