Almost there - where to invest for income?

[pac_NW]

Good day all Mustachians! For those who have made the leap or are almost there into early or semi retirement using their Mustachian ways, can you point me to some posts on income investing?  How does one move to an income model to support the retirement?  When you are used to saving it and watching it grow via appreciation and some dividend income reinvested, how do you change to a portfolio that sends you a check?  Any good books to recommend on the subject (e.g. The Ultimate Dividend Playbook)?  Thanks in advance for your insights!

[arebelspy]

Rebalance and sell some each year.  Ideally with a proper SWR your portfolio will grow more than you sell, and you never run out.  See: FIRECalc models.

The fad lately has been a bunch of dividends, mainly (IMO) because people don't understand the total return model.  There's nothing special about dividends, the company is sending you a check for some of their growth, instead of you deciding when to sell and take the profits from that growth.

[pac_NW]

Arebelspy - thank you.  FireCalc is an excellent resource.  I will look at the rebalance and sell option.  I defer to income investing because as you say, I have not spend enough time understanding the math.  Have there been any recent posts on the math?  There is some discussion in the 4% SWR topics.

[arebelspy]

There are lots of strategies for generating income in retirement.

Dividends, rental income, total return, annuities, pensions, SS, etc.

Your situation will depend on what is available to you and your inclinations.  From what I understand you have a large portfolio such that 3-4% return on it would cover your expenses.  You need to determine your appropriate asset allocation that will let you sleep at night and give you a mix of investments you are comfortable with,

This is not a bad place to start: www.early-retirement.org/forums/f28/bernsteins-new-ebook-62041.html

[pac_NW]

Yes - downloaded that book last week - in my queue and will report back.  Thanks for the insights.

[MooreBonds]

The fad lately has been a bunch of dividends, mainly (IMO) because people don't understand the total return model.  There's nothing special about dividends, the company is sending you a check for some of their growth, instead of you deciding when to sell and take the profits from that growth.

One other item that I forgot to add to the recent discussion on that thread about dividends was that there's nothing special about a company's decision making abilities. Just as there are great examples of companies using all of that cash to invest in R&D for a new product/division or acquiring a company, and it becoming a success....there are also plenty of examples of executives using all of that cash flow to make bad or mediocre decisions instead of returning more (or any!) to shareholders. Not to mention using plenty of cash to buy back stock - only to use a majority of the shares to gift back to executives in various compensation packages.

I understand the "total return" model quite well....which is why I diversify with a blend of dividends as well as long-term capital growth that will be rebalanced from time to time.

[arebelspy]

So would you rather make that decision, or let them?

[nvestysly]

...The fad lately has been a bunch of dividends...

It may be a fad for some but it's been my method for over 25 years.  I've let the dividends reinvest for those 25+ years so I've seen the total return work wonders.  Now that I'm retired I've turned off the automatic dividend reinvestment and I live on those dividend payments.  Yes, the dividends decreased in the 2008 time frame but the drop in dividends was far less dramatic compared to the change in portfolio value.

My suggestions for reading are The Little Book of Value Investing, and The Little Book of Big Dividends.  Lots of other information is out there but these are two I've found to be very useful.

There's no question that the total return approach works for many people.  In my case I do sometimes "harvest" profits and move on - that is, move on to other dividend paying stocks.

[tooqk4u22]

The fad lately has been a bunch of dividends, mainly (IMO) because people don't understand the total return model.  There's nothing special about dividends, the company is sending you a check for some of their growth, instead of you deciding when to sell and take the profits from that growth.

One other item that I forgot to add to the recent discussion on that thread about dividends was that there's nothing special about a company's decision making abilities. Just as there are great examples of companies using all of that cash to invest in R&D for a new product/division or acquiring a company, and it becoming a success....there are also plenty of examples of executives using all of that cash flow to make bad or mediocre decisions instead of returning more (or any!) to shareholders. Not to mention using plenty of cash to buy back stock - only to use a majority of the shares to gift back to executives in various compensation packages.

I understand the "total return" model quite well....which is why I diversify with a blend of dividends as well as long-term capital growth that will be rebalanced from time to time.

Practically speaking - if you feel management does not allocate its resources wisely then it probably doesn't makes sense to own the stock at all.

If it is growing company with a management team that makes good decisions then I would rather have the bulk of the money stay in the company.  Not to mention with possible tax changes coming up dividends may not be favored any more.

[MrSaturday]

The current tax break on dividends could expire at the end of this year or in the near future.  Depending on your income in retirement, selling stocks/mutual funds may be more tax efficient than taking dividends, which until recently were taxed at your marginal rate.