Author Topic: Building a dividend income revenue stream  (Read 15756 times)

pac_NW

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Building a dividend income revenue stream
« on: August 11, 2013, 07:44:59 AM »
I have an opportunity to invest a significant sum, and as I near FI, I would like to consider dividend income funds.  I will be adding to a well diversified portfolio so stocks and index mutual funds with a small % of bonds.  Which dividend funds have you found the most rewarding in terms of return and expense ratios?  VDIGX, I know is a popular one.  Eager to hear your recommendations.

Freeyourchains2

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Re: Building a dividend income revenue stream
« Reply #1 on: August 12, 2013, 08:48:27 AM »
I have an opportunity to invest a significant sum, and as I near FI, I would like to consider dividend income funds.  I will be adding to a well diversified portfolio so stocks and index mutual funds with a small % of bonds.  Which dividend funds have you found the most rewarding in terms of return and expense ratios?  VDIGX, I know is a popular one.  Eager to hear your recommendations.

If you want Apple dividend returns of 1% - fund fees, go to VDIGX. If you want to chose your own diversified portfolio of 3%-7% return yields and growing dividend returns, go to dividend mantra's site and learn more. www.dividendmantra.com

fiveoh

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Re: Building a dividend income revenue stream
« Reply #2 on: August 12, 2013, 10:10:30 AM »
I have an opportunity to invest a significant sum, and as I near FI, I would like to consider dividend income funds.  I will be adding to a well diversified portfolio so stocks and index mutual funds with a small % of bonds.  Which dividend funds have you found the most rewarding in terms of return and expense ratios?  VDIGX, I know is a popular one.  Eager to hear your recommendations.

If you want Apple dividend returns of 1% - fund fees, go to VDIGX. If you want to chose your own diversified portfolio of 3%-7% return yields and growing dividend returns, go to dividend mantra's site and learn more. www.dividendmantra.com

Good link.  I read DM's blog frequently.  Here's a few more I like:

www.theconservativeincomeinvestor.com
www.dividendmonk.com


GreenGuava

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Re: Building a dividend income revenue stream
« Reply #3 on: August 12, 2013, 03:44:04 PM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

steveo

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Re: Building a dividend income revenue stream
« Reply #4 on: August 13, 2013, 12:11:26 AM »
I really like the idea of building a really good dividend income stream. One question I'd have though is how possible is it to build up this stream and what are the pros and cons compared to simply investing in the total market index or even a high dividend index fund.

pac_NW

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Re: Building a dividend income revenue stream
« Reply #5 on: August 13, 2013, 12:31:21 AM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

I am concerned about cashing in on my total return assets as income early in FI. I would rather those keep growing and reap income from dividends. I know it's counter intuitive to think this way. How should I adjust that thinking?

fiveoh

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Re: Building a dividend income revenue stream
« Reply #6 on: August 13, 2013, 07:20:28 AM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

I am concerned about cashing in on my total return assets as income early in FI. I would rather those keep growing and reap income from dividends. I know it's counter intuitive to think this way. How should I adjust that thinking?

Why do you feel it is counter intuitive to think this way?  If you can live off dividends only then you never deplete your principle and will never have to worry about running out of money.

Stache In Training

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Re: Building a dividend income revenue stream
« Reply #7 on: August 13, 2013, 11:54:29 AM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

I am concerned about cashing in on my total return assets as income early in FI. I would rather those keep growing and reap income from dividends. I know it's counter intuitive to think this way. How should I adjust that thinking?

Why do you feel it is counter intuitive to think this way?  If you can live off dividends only then you never deplete your principle and will never have to worry about running out of money.

Haha, I just had this debate a bit ago in another post.  Basically it was Green Guava's concern of getting taxed every time you have a dividend payout, or only when you decided, by selling.   However I have to agree with fiveoh saying that you never have to worry about running out of money if you can live off of the dividends.  I kind of like taking a hybrid approach.  Try to live off the dividends if you can.  But if you ever have to move, have medical expenses, or have some huge expenses that your emergency fund wouldn't cover, then you can always sell some principal.  Then buckle down again, and drip the dividends for as long as you can manage, in order to replenish principal.

The main math to do is keep in mind whether or not your total return will be less because of aiming for more dividends.  I.e. does it make more sense to want 3% dividends but experience only 3% growth, or just 6% growth.  (numbers made up, obviously)  An example is that high dividend yield (VHDYX) will get you 2.96% dividends, and growth at 4.76% since inception.  Yet the total stock market (VTSAX) will get you 1.89% dividends and growth of 4.2% since inception. This example makes high dividend seem more attractive.  Yet if you look at more recent years, you'll see that 10k would have more than doubled in VTSAX, but only gained 4k in VHDYX.  So then is the 2.96% on 14K more worth more to you than 1.89% on 20k, in 10 years? More dividends, but less principal? (but maybe not with DRIPing) That's where I am right now too.  Let me know your thoughts, because I haven't made up my mind either yet.

GreenGuava

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Re: Building a dividend income revenue stream
« Reply #8 on: August 13, 2013, 11:58:15 AM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

I am concerned about cashing in on my total return assets as income early in FI. I would rather those keep growing and reap income from dividends. I know it's counter intuitive to think this way. How should I adjust that thinking?

You should realize that spending dividends is cashing in on your total return assets.  When a company issues a dividend, their stock price adjusts accordingly (along with the other changes happen during the day - it's rarely "exactly that amount").  The same happens when a mutual fund distributes a dividend.  This shouldn't surprise you:  the shares are a fractional ownership of the entity (company or mutual fund assets), and the entity is marginally worth that much less;  if it paid out three cents per share, it has three cents per share less total value.

Now, I'm not saying companies shouldn't issue them - some companies have no way to use their cash on hand and decide that returning it to the investors is the best use of it.  It's also worth noting that some companies have done some shady things to maintain their dividend, while one very well-respected company has never issued a dividend.  Somewhere in between is probably the right mix for most companies.

(In the U.S., mutual funds must distribute the dividends they receive - other countries have other laws, and some allow their funds to auto-reinvest the dividends without the end holder ever seeing them)

So, why are dividends so popular?  Part of it is that some people don't realize it isn't free money.  Others feel it's the best indicator of the future health of the company.  There used to be a popular theory that dividend yield was what Warren Buffet looks for when he acquires a company (whether or not this is true, you don't have his kind of leverage anyway, so it's moot).  There certainly exist periods of time when a dividend focus yielded better returns than the total market (and, conversely, there were periods where it didn't - you can't expect a free lunch in the market).   There's also a convenient "bird in hand" theory here, too:  with very few exceptions, once the dividend hits your bank account, it's yours.

Finally, the good reason for their popularity: legacy.  Back before mutual funds were the popular method of stock investing for your average investor, individual stock picking was the order of the day.  This was also well before the days of $2 trades, 100 free trades, or even buying to your dollar amount decided quantity;  stocks were purchased in large lots with fairly healthy commissions.  It just wasn't feasible to focus on total return in order to get a sustained withdrawal rate - selling enough to the SWR would have required an enormous savings for a modest stock-based income.  The only realistic way to get a sustained 4% withdrawal from your portfolio was to have a dividend yield of approximately 4% - receiving those didn't cost you anything beyond the taxes on the dividends themselves.  So people who wanted this as a form of retirement income bought stable, dividend-paying stocks (whether or not these 'beat the market', either in return or volatility, in this era is meaningless, as retail mutual funds - to say nothing of the index variety - weren't available as an alternative to most people).

Why do you feel it is counter intuitive to think this way?  If you can live off dividends only then you never deplete your principle and will never have to worry about running out of money.

While the dividends do deplete the investment somewhat, "dividend yield from a well-diversified portfolio" is almost always a sustainable withdrawal rate, and rarely requires any math to do properly.  That's a huge advantage to the approach.

KingCoin

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Re: Building a dividend income revenue stream
« Reply #9 on: August 13, 2013, 12:56:12 PM »
Now, I'm not saying companies shouldn't issue them - some companies have no way to use their cash on hand and decide that returning it to the investors is the best use of it. 

Another option worth mentioning is a company buying back its own shares, which is a much more efficient way of returning value to shareholders than issuing a dividend.  All things being equal, you'd always prefer companies that engage in share buy-backs as opposed to issuing dividends. As far as I'm concerned, the benefits of dividends are purely psychological (barring some special exceptions, such as a company having special insight that its shares are overvalued, thereby making dividends preferable to buybacks).

kyleaaa

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Re: Building a dividend income revenue stream
« Reply #10 on: August 13, 2013, 01:30:31 PM »
Is there a particular reason that you are interested in dividends instead of total return?  It seems you're already into investing and have plenty in index funds, so I'm curious why you're now interested in being on someone else's payout schedule.

I am concerned about cashing in on my total return assets as income early in FI. I would rather those keep growing and reap income from dividends. I know it's counter intuitive to think this way. How should I adjust that thinking?

Spending a dividend is logically the same as selling shares and then spending the money, except the total return approach gives you more flexibility. Taking dividends IS making a withdrawal.

aclarridge

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Re: Building a dividend income revenue stream
« Reply #11 on: August 13, 2013, 01:56:05 PM »
Another option worth mentioning is a company buying back its own shares, which is a much more efficient way of returning value to shareholders than issuing a dividend.  All things being equal, you'd always prefer companies that engage in share buy-backs as opposed to issuing dividends.

I think for a perfectly liquid market, 0 trading fees, and ignoring tax implications, there's no difference between getting a dividend and selling off part of the position.

Practically though, there are some differences and they don't seem to favour share buybacks to me:
- It is effectively a small withdrawal from your position that costs you nothing in trading commissions or bid/ask spreads. This may or may not be what you want or useful to you. In a FIRE scenario where you're trying to live off your dividends anyway, it's great.
- If the market isn't liquid, it's better to receive cash directly from the company rather than look for a buyer to sell your shares to, since you'll pay the bid/ask spread.
- In some cases, dividends are taxed less than capital gains.

KingCoin

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Re: Building a dividend income revenue stream
« Reply #12 on: August 13, 2013, 02:10:24 PM »
Practically though, there are some differences and they don't seem to favour share buybacks to me:
1) It is effectively a small withdrawal from your position that costs you nothing in trading commissions or bid/ask spreads. This may or may not be what you want or useful to you. In a FIRE scenario where you're trying to live off your dividends anyway, it's great.
2) If the market isn't liquid, it's better to receive cash directly from the company rather than look for a buyer to sell your shares to, since you'll pay the bid/ask spread.
3) In some cases, dividends are taxed less than capital gains.

1) I guess. Though, if you're doing your sales quarterly, you're probably talking about $100/yr in commissions. Additionally, selling shares allows you to raise exactly the amount of money you need, when you need it.  Realistically, your dividends aren't going to exactly match your income needs anyway. So you're going to have to do some trading regardless (in addition to normal maintenance activity like rebalancing).
2) The bid/ask is effectively 0 for the vast majority of stocks that people are going to be trading.
3) This is unusual. And when selling shares to raise funds, it's often possible to pair with a capital loss and take the tax rate to 0.

Practically speaking, we're probably not talking about a huge difference. However, I think there's additional risk in owning a portfolio dominated by high dividend payers, which may reduce diversification. Better to own the broad index, clip your ~2% dividend yield, and sell shares if you need additional funds.
« Last Edit: August 13, 2013, 03:10:57 PM by KingCoin »

aclarridge

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Re: Building a dividend income revenue stream
« Reply #13 on: August 14, 2013, 08:30:21 AM »
Practically though, there are some differences and they don't seem to favour share buybacks to me:
1) It is effectively a small withdrawal from your position that costs you nothing in trading commissions or bid/ask spreads. This may or may not be what you want or useful to you. In a FIRE scenario where you're trying to live off your dividends anyway, it's great.
2) If the market isn't liquid, it's better to receive cash directly from the company rather than look for a buyer to sell your shares to, since you'll pay the bid/ask spread.
3) In some cases, dividends are taxed less than capital gains.

1) I guess. Though, if you're doing your sales quarterly, you're probably talking about $100/yr in commissions. Additionally, selling shares allows you to raise exactly the amount of money you need, when you need it.  Realistically, your dividends aren't going to exactly match your income needs anyway. So you're going to have to do some trading regardless (in addition to normal maintenance activity like rebalancing).
2) The bid/ask is effectively 0 for the vast majority of stocks that people are going to be trading.
3) This is unusual. And when selling shares to raise funds, it's often possible to pair with a capital loss and take the tax rate to 0.

Practically speaking, we're probably not talking about a huge difference. However, I think there's additional risk in owning a portfolio dominated by high dividend payers, which may reduce diversification. Better to own the broad index, clip your ~2% dividend yield, and sell shares if you need additional funds.

Depends on your asset allocation, but yeah, $100 is $100. No reason to waste it. Maybe with a small withdrawal at one point during the year, you could live off dividends the rest of the year.
Bid-ask spreads are small, and as index investors we should only be involved with liquid ETFs so you have a point. But a 10bp spread which is not totally uncommon even on some relatively liquid names is $10 on a $10k withdrawal. It's small but not nothing.
Regarding taxes, this article is about how dividends for higher income people aren't that great tax-wise, but it states:
"For an Ontario taxpayer with an income of $42,000 in 2012, the marginal rate on eligible Canadian dividends is just 3.8%, while the rate on capital gains is more than 12%." Definitely better tax-wise for an average person.

Basically I think dividends are a good thing to have since they are a free option to use that "free" small withdrawal once a quarter. If you don't need/want it, you can just sign up for the DRIP. But an option like that has to have some value.

I fully agree with your last point though, about there being additional risk to owning a portfolio of high dividend payers. I wouldn't own stocks just because they pay dividends. However, if I had any say I'd encourage more companies in the index to start paying out a small dividend for the (admittedly relatively small) advantages discussed.

grandcanyon

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Re: Building a dividend income revenue stream
« Reply #14 on: August 14, 2013, 08:40:10 AM »
Instead of building a stream with dividends couldn't the original poster build the revenue stream with bonds. I was looking at my broker's site and the longer term high grade (A) pay around 6+ percent and a bit higher for munis. Of course, when rates go up the values will go down but if you hold for the term you'll still get your money. The downside I see is if you need the money when rates are up you'll take a beating and then you have to worry about default but it seems really low on A grade or higher. Plus if you do munis you'll get some tax benefits. Any thoughts?

KingCoin

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Re: Building a dividend income revenue stream
« Reply #15 on: August 14, 2013, 09:19:30 AM »
Instead of building a stream with dividends couldn't the original poster build the revenue stream with bonds. I was looking at my broker's site and the longer term high grade (A) pay around 6+ percent and a bit higher for munis. Of course, when rates go up the values will go down but if you hold for the term you'll still get your money. The downside I see is if you need the money when rates are up you'll take a beating and then you have to worry about default but it seems really low on A grade or higher. Plus if you do munis you'll get some tax benefits. Any thoughts?

Sure. This logic is why most portfolios become more bond heavy toward retirement. It's just a question of the tradeoffs between the higher risk/return of equity vs the higher certainty of bonds.

Freeyourchains2

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Re: Building a dividend income revenue stream
« Reply #16 on: August 14, 2013, 11:04:10 AM »
A small advantage of dividends that people are overlooking too is during a bear market, as your principal on paper falls to the floor, yet your true value and dividends are set in stone, still paying out quarterly during the "panic" or "buying frenzy on deals of 50%-75% off!"

The dividends grant a nice option, to prevent everyone from needing to sell low, if they happened to desperately need the cash.

$0.03 dividend when your stock price was $12 and is now 6$, reassures you of an income during "tough times" or "buying times".

aclarridge

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Re: Building a dividend income revenue stream
« Reply #17 on: August 14, 2013, 11:34:22 AM »
A small advantage of dividends that people are overlooking too is during a bear market, as your principal on paper falls to the floor, yet your true value and dividends are set in stone, still paying out quarterly during the "panic" or "buying frenzy on deals of 50%-75% off!"

The dividends grant a nice option, to prevent everyone from needing to sell low, if they happened to desperately need the cash.

$0.03 dividend when your stock price was $12 and is now 6$, reassures you of an income during "tough times" or "buying times".

But dividends are often cut aggressively during bear markets, they aren't "set in stone".

KingCoin

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Re: Building a dividend income revenue stream
« Reply #18 on: August 14, 2013, 11:42:21 AM »
A small advantage of dividends that people are overlooking too is during a bear market, as your principal on paper falls to the floor, yet your true value and dividends are set in stone, still paying out quarterly during the "panic" or "buying frenzy on deals of 50%-75% off!"

Dividends can and will fall during recessions. Nothing "set in stone" there.

For instance, dividends on the S&P500 fell over 20% from 2008 and 2009, and that's among the largest and most established companies. Not as bad as the market as a whole for sure, but to say that dividends represent a bullet-proof income stream is grossly mischaracterizing the situation.

Another Reader

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Re: Building a dividend income revenue stream
« Reply #19 on: August 14, 2013, 12:30:16 PM »
Most of the dividend cuts in 08-09 were in the financial sector, primarily by the banks.  And I will take a 20 percent drop in dividend oncome over a 50 percent loss in the value of assets I have to sell to maintain my income any day. 

The key difference in relying on dividend income rather than decumulation is that the piece of the company you own is still yours after the dividend is paid.  Yes, the stock price may temporarily drop, but it builds back up as the next quarter's dividend is accumulated and anticipated. 

Compare 100 shares of two stocks, one that pays a 3 percent dividend and one that pays none.  If you require 3 percent for income, in the first case, you take the dividend and you still have 100 shares of stock.  Next year, you get 3 percent and the dividend is likely to grow if management is operating the business well.  You still have 100 shares of the company.  In the second case, you sell three shares the first year, leaving you with 97 to do the heavy lifting.  Next year you will have to sell shares again to meet the income goal implied in SWR theory.  You hope the value of the stock goes up over time, but if it does not, you are in trouble.

Throw a little tax advantaged rental property into the mix and your savings rate during retirement will likely be positive.  I believe Arebelspy was projecting a savings rate of 30 percent in ER.  That means a negative withdrawal rate.  And I'd call that withdrawal rate safe, wouldn't you?

KingCoin

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Re: Building a dividend income revenue stream
« Reply #20 on: August 14, 2013, 01:09:05 PM »
Most of the dividend cuts in 08-09 were in the financial sector, primarily by the banks.  And I will take a 20 percent drop in dividend oncome over a 50 percent loss in the value of assets I have to sell to maintain my income any day.

1) The source of the drop isn't really relevant. Though homebuilders, automakers, and other cyclicals weren't exactly firing on all cylinders either.
2) Sometimes you'll have to sell some stocks low (during the crash) and sometimes you'll sell high (during the bubble) . On average, it will be a wash. Ideally, you'll have enough financial flexibility in retirement that you can forgo some sales at levels you consider truly depressed.

The key difference in relying on dividend income rather than decumulation is that the piece of the company you own is still yours after the dividend is paid.  Yes, the stock price may temporarily drop, but it builds back up as the next quarter's dividend is accumulated and anticipated. 

But if a company chooses to buy back its stock rather than pay dividends, your sale of stock really won't be a decumulation as you now own a larger percent of the company. E.g., you own, 20% of the company, company does buyback of 10% of shares so now you own 22% of company, you sell 2% of company. This is functionally the same as paying a dividend except for the benefits mentioned earlier.


Compare 100 shares of two stocks, one that pays a 3 percent dividend and one that pays none.  If you require 3 percent for income, in the first case, you take the dividend and you still have 100 shares of stock.  Next year, you get 3 percent and the dividend is likely to grow if management is operating the business well.  You still have 100 shares of the company.  In the second case, you sell three shares the first year, leaving you with 97 to do the heavy lifting.  Next year you will have to sell shares again to meet the income goal implied in SWR theory.  You hope the value of the stock goes up over time, but if it does not, you are in trouble.

This doesn't make sense as you need to compare a company paying dividends vs a company buying back stock (or at least retaining the cash), not a company that is paying 3% vs a company that is evidently doing nothing. See my example above.


Throw a little tax advantaged rental property into the mix and your savings rate during retirement will likely be positive.  I believe Arebelspy was projecting a savings rate of 30 percent in ER.  That means a negative withdrawal rate.  And I'd call that withdrawal rate safe, wouldn't you?

Not sure what arebelspy or his projected savings rate have to do with dividends, though I won't argue the real estate would be a nice part of a retirement portfolio.
« Last Edit: August 14, 2013, 01:33:13 PM by KingCoin »

CI

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Re: Building a dividend income revenue stream
« Reply #21 on: August 24, 2013, 08:50:27 PM »
Interesting thread here.  Choosing an income or total return strategy is more or less a wash.  It just depends on your goals, personality, and how much time you want to spend with investing.  Personally I favor (and practice) an income strategy because the idea of selling an asset in retirement makes me shiver.  If I have to sell assets for living expenses, am I really ready to retire?  I'm not comfortable with that notion and would keep on saving till dividends/interest exceed expenses.  That's just me though.

The nice thing about dividends is the fact that they are disconnected from the market.  Stock prices will move up and down, but the individual company BODs choose the dividend rate, not the stock market.  Mr. Market might have forgotten to take his prozac, but it doesn't matter because he cannot control my dividends.  Obviously the companies must have enough cash flow to continue payments.

Really though, once my passive income stream exceeds my expenses (with an added margin of safety) why should I care about total return or net worth?  It no longer matters as long as the income stream is sustainable, predictable, and growing faster than inflation.  I choose assets that follow this mold because it is in sync with my ultimate goal.  Reinvest dividends & interest in the accumulation phase, then spend 'em in retirement.

To each his own, there is no right or wrong.  It's all personal preference but do realize the financial industry will shove ideas such as "total return," and "beating the market" down your throat to sell products and collect fees.



p.s.: I prefer dividends over buybacks.  If buybacks are done right I don't have a problem with them.  If management is prudent, meaning buybacks are done when shares are undervalued it's fine.  Unfortunately I have yet to see much evidence of this.  Typically it's just "we have extra cash, let's buy back shares" without considering the valuation.  Example- if AAPL bought back shares at 700, it's a disservice to investors.  With a dividend I can choose to simply DRIP or take as cash towards a more attractive asset.  I will conceded that buybacks have a small tax advantage if performed correctly.

tooqk4u22

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Re: Building a dividend income revenue stream
« Reply #22 on: August 26, 2013, 10:35:11 AM »
The posters that are advocating for total return are correct - if each option yields a 10% return then it is moot. You have to keep in mind why companies pay dividends - it is becaue they have matured to the point where they can't full reinvest the cash to provide ROIs that are greater than other options. Thus investors are returned a portion of the company's income to do with what they want - By definition dividend paying companies are expected to realize a lower total return but a nice stable cash flow stream (sort of an inflation indexed bond) - these companies are generally too big to have growth rates that significantly exceed GDP growth (they will exceed this because of scale, efficiencies, leverage, branding, etc but not by much).  Conversely, a high growth company is much better to hold the cash and reinvest in its operations that are producing high growth rates (growth consumes cash) - these are the companies that drive the total market to that 8+% total return given 20+% growth that greatly exceeds GDP growth - but they are also higher risk thus the higher return.

I have no problem buying Coke with a 3% dividend but will it see a 20% average return - nope.  Futhermore those that say they prefer to have a dividend instead of having to sell shares at a downturn - it is just another form of market timing.

All that said, if I were to take dividend strategy because I wanted the predictible cash flow I would be conducting major basic fundamental analysis (a la Warren Buffet - remember Buffet views it as buying the company even if it is minority interest in a public one).

Return on Equity Matters
Leverage matters as it can enhance ROE but dramatically reduce flexibility.
Cash flow matters.
Growth matters - a 3% dividend is pointless if the trends are declining.
Competitive landscape/business strategy matters - (the Moat)
Specifically for Dividend stocks - payout ratio matters 75%+ pay ratio is a cut waiting to happen.
The list goes on but the point is a basket of dividend paying stocks should not be bought into blindly (it sort of goes into the "you can't beat the market, so why try argument")

1) The source of the drop isn't really relevant. Though homebuilders, automakers, and other cyclicals weren't exactly firing on all cylinders either.

I get what you are saying, but the source matters - before the crisis financials were high dividend payers that comprised a signficant portion of dividend strategies and they cut dividend entirely and while it might have been a 20% if you had a dividend portfolio that was more concentrated in financials your income would have gotten clobbered.  Of course to the point about basic analysis in in most cases this could have been avoided with some basic analysis because investors would have seen that financials were highly leveraged with unsustainable growth and nature of business that they were transacting.


Freeyourchains2

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Re: Building a dividend income revenue stream
« Reply #23 on: August 26, 2013, 11:50:01 AM »
A small advantage of dividends that people are overlooking too is during a bear market, as your principal on paper falls to the floor, yet your true value and dividends are set in stone, still paying out quarterly during the "panic" or "buying frenzy on deals of 50%-75% off!"

Dividends can and will fall during recessions. Nothing "set in stone" there.

For instance, dividends on the S&P500 fell over 20% from 2008 and 2009, and that's among the largest and most established companies. Not as bad as the market as a whole for sure, but to say that dividends represent a bullet-proof income stream is grossly mischaracterizing the situation.

There are a hand full of companies that consistently grow their dividends and pay them out without ever an aggressive cut during a bear market or world war for that matter, but they continue to work hard to keep earnings growing.

This is a big consideration in research when looking for "set in stone" high quality, successful dividend companies with a growing still potential future.

Dividend cut potential is a big factor to consider, though so is potential future success in the sense as if your cubicle neighbor is going to keep buying a coke everyday at work, or walk over to the water fountain.



« Last Edit: August 26, 2013, 11:59:06 AM by Freeyourchains2 »

johnjm22

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Re: Building a dividend income revenue stream
« Reply #24 on: September 10, 2013, 04:58:34 PM »
Even if you're trying to set up a dividend income stream, why do stock picking?

There's plenty of funds that pay out monthly dividends.  Sure they might have a higher expense ratio than a typical index fund, but over the long term it's still probably safer and better performing than picking individual stocks.

Monkey Uncle

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Re: Building a dividend income revenue stream
« Reply #25 on: June 01, 2016, 04:33:36 AM »
Interesting thread here.  Choosing an income or total return strategy is more or less a wash.  It just depends on your goals, personality, and how much time you want to spend with investing.  Personally I favor (and practice) an income strategy because the idea of selling an asset in retirement makes me shiver.  If I have to sell assets for living expenses, am I really ready to retire?  I'm not comfortable with that notion and would keep on saving till dividends/interest exceed expenses.  That's just me though.

It's nice if you have the luxury to take such a super-conservative approach.  But you will be working/saving far longer than you really need to.

Monkey Uncle

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Re: Building a dividend income revenue stream
« Reply #26 on: June 01, 2016, 04:37:57 AM »
Instead of building a stream with dividends couldn't the original poster build the revenue stream with bonds. I was looking at my broker's site and the longer term high grade (A) pay around 6+ percent and a bit higher for munis. Of course, when rates go up the values will go down but if you hold for the term you'll still get your money. The downside I see is if you need the money when rates are up you'll take a beating and then you have to worry about default but it seems really low on A grade or higher. Plus if you do munis you'll get some tax benefits. Any thoughts?

That's all well and good when inflation is <2%.  But the risk with long duration bonds is that inflation will rise during the term of the bond and erode your real returns.  Inflation greater than the 6% coupon rate has occurred historically in the US.  If that happens, you'd be stuck with a negative real return and no way to sell the bond to replace it with a more current issue that has a higher coupon rate.

talltexan

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Re: Building a dividend income revenue stream
« Reply #27 on: June 02, 2016, 07:55:02 AM »
Suppose your starting point is an SP500 index fund that pays dividends around 2%. If your goal is to be above that, you're picking individual stocks with dividend rates in excess of that (let's say your minimum is 3%). It seems like you're taking on a lot more risk as regards the total return. If you pick a fund/etf that focuses on dividends, it's going to be hard to get in excess of 4%. So I'm thinking that there IS a (risk-adjusted) trade-off of total return to dividends.

Scandium

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Re: Building a dividend income revenue stream
« Reply #28 on: June 02, 2016, 11:21:21 AM »
You people do realize that this is a 3 year old thread that was only resurrected by somebody who wanted to push his blog? 

DividendMonster

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Re: Building a dividend income revenue stream
« Reply #29 on: June 02, 2016, 03:26:21 PM »
You people do realize that this is a 3 year old thread that was only resurrected by somebody who wanted to push his blog?

This.

Monkey Uncle

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Re: Building a dividend income revenue stream
« Reply #30 on: June 03, 2016, 03:49:32 AM »
The date stamp is so damn small...