Author Topic: How much should you be focusing on dividends vs overall return.  (Read 2593 times)

canadian235

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Hey guys,

I'm happy to say I'm well on the way to FIRE... one question that still bugs me a bit is how many of you focus strictly on dividends vs overall return.

For a couple years I was following all the dividend gurus out there and everyone is so focused on the getting the dividend to your FIRE number... but I found that quite depressing.. to FIRE just on dividends would take quite a bit longer.. when I changed my focus to overall value of the portfolio and looking at it holistically at dividends + capital gains the picture became much more attainable and easier to follow.

I completely understand that if you just focus on dividends it's a much safer play but how many of you do... and what's the risk of your based portfolio eroding more quickly because you're not just drawing dividends but also the principle.

And go... :)

RichMoose

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Re: How much should you be focusing on dividends vs overall return.
« Reply #1 on: March 06, 2017, 07:49:49 PM »
All you're really doing is changing your withdrawal rates. Once your WR drops to around 3.33%, your success rate is guaranteed over any time period you choose.

So if your dividend yield on a blue chip portfolio is 3.33%, you're also guaranteed to succeed.

The 4% SWR often referenced here is simply an acceptable risk level for most Mustachians. About 90% over 30 years.

So in a nutshell while you chose to decrease your time to FIRE by moving to the 4% Rule, you actually just increased your level of acceptable risk of failure.

ChpBstrd

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Re: How much should you be focusing on dividends vs overall return.
« Reply #2 on: March 06, 2017, 09:28:06 PM »
I'm actually not a fan of dividends. They are forced distributions that might trigger taxes, given out by declining or at least unimaginative companies that cannot identify more attractive reinvestments of capital. Plus, most "dividend aristocrats" borrow money to finance their dividends. I've seen companies borrowing at 8% while paying their grateful, retired shareholders a 4% dividend.

Dividends made sense in the old days when it cost $1,000 to make a trade, but these days $6 is considered expensive. More importantly, the opposite of a growth stock is a shrinking stock.

pbkmaine

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dixonge

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Re: How much should you be focusing on dividends vs overall return.
« Reply #4 on: March 07, 2017, 04:56:50 AM »
A never-ending debate with a *ton* of misinformation out there. Wade through it all and come to a conclusion that works for you. Sift through the noise. Personally I love the idea of dividends, but mainly as a technique to simultaneously increase both yield and total return *and* avoid typical 'investor psychology' issues. Works for me, but your mileage may vary.

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Heckler

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Re: How much should you be focusing on dividends vs overall return.
« Reply #5 on: March 07, 2017, 05:13:26 AM »
As a fellow canuck, its my understanding to focus on canadian eligable  dividends in a non registered account for tax reduction reasons.  TFSA should be growth focus and RRSP income generating.  Its about total return for me, and reducing taxes is the best guaranteed bang for your buck.

http://canadiancouchpotato.com/2013/10/30/making-smarter-asset-location-decisions/

As a personal example, the VUN (which simply hold VTI) in my RSP currently has a 1.7% dividend yield.  The VTI I now hold in my spousal RSP has a 2.378% dividend yield, with the same capital gains when measured in $CAD.  As I contribute and rebalance, I am switching to VTI for this reason.
« Last Edit: March 07, 2017, 05:39:56 AM by Heckler »

Heckler

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Re: How much should you be focusing on dividends vs overall return.
« Reply #6 on: March 07, 2017, 05:42:57 AM »
I focus on allcap global diversification to reduce risk.  1075 short and long bonds, 221 Canada stocks, and 9709 international stocks (US, EAFE and EM). 
« Last Edit: March 07, 2017, 05:50:38 AM by Heckler »

Retire-Canada

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Re: How much should you be focusing on dividends vs overall return.
« Reply #7 on: March 07, 2017, 09:04:38 AM »
Hey guys,

I'm happy to say I'm well on the way to FIRE... one question that still bugs me a bit is how many of you focus strictly on dividends vs overall return.

For a couple years I was following all the dividend gurus out there and everyone is so focused on the getting the dividend to your FIRE number... but I found that quite depressing.. to FIRE just on dividends would take quite a bit longer.. when I changed my focus to overall value of the portfolio and looking at it holistically at dividends + capital gains the picture became much more attainable and easier to follow.

I completely understand that if you just focus on dividends it's a much safer play but how many of you do... and what's the risk of your based portfolio eroding more quickly because you're not just drawing dividends but also the principle.

And go... :)

I don't focus on dividends at all. I focus on total return and reaching a 4%WR [I'll FIRE at closer to 5%, but that's impatience and age talking]. I get something like 2% in dividends from my broad stock index ETFs. It's nice and I do a happy dance when thousands of $$ show up in my account every 3 months. However, I do the same happy dance when $100K of stocks is worth $101K over the course of a day or three.

I prefer the diversity and robustness of holding a broad set of stocks and index funds are simpler to manage as I only need 2-3 to capture the world's economy.

If I were you save and invest in index funds. Shoot for 25 times your spending in invested $$ and then FIRE. Don't chase dividends - especially if that means working extra years of your precious life.

SwedishMoustache

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Re: How much should you be focusing on dividends vs overall return.
« Reply #8 on: March 07, 2017, 02:21:56 PM »
As a dividend investor with a very broad portfolio (~80 companies, no company heavier than 1.5% in weight)i , try to achieve a mix of both growth and yield. Over the latest year i've been focusing to shift my stocks more towards growth than high yield, which currently nets me a YoC of about 4.76% on my overall portfolio. I'm about 46% on the way towards FIRE at age 31.

Perhaps in the future i will reshift towards index funds and ETF's (perhaps a 40 fund/60 stock ratio), but for now i'm very happy to not have a single index fund in my portfolio - only stocks. I'm globally diversified in 7 countries and 5 currencies and feel comfortable knowing 3 companies annually could go bankrupt and i would still return a profit simply on dividends. My portfolio is also up a grand total of 47.8% since i started, which beats market development by about double or so since then.

Regarding dividend investing versus overall return - all i will say that for me as a swede, dividend investing makes sense because of tax purposes.

We pay a flat tax based on the equity/value of our portfolio, not on dividends or profits, which makes dividends taxable at around 0.35% for the year 2016. Also, what made me finally go for stocks instead of funds is that i'm fairly comfortable and feel fairly competent choosing my investments individually. If i were to go for ETFs or funds, i would be stuck with a lot of "crap" as well as good (companies i do not want). I'm also a very ethically-minded investor, and i don't want anything to do with oil, guns/military technology and the like - yes, i do have a blacklist of companies ;). Even the so-called socially responsible ETF's and funds in Vanguard have things like RGR, OLN and SWHC. That's a big no-no for me. I sometimes read people posting on MMM and other financial forums complaining about people's unethicality and the like - while happily investing in companies that cause billions of dollars worth of social damage, pollution and other things.

https://livingafi.com/2016/06/17/unloading-guns-from-a-portfolio/ <---- That's a great post about the challenge of unloading unethical stocks from ETF/Fund-investing from someone who has reached FIRE. A worthwhile read, imo. I know that this is a controversial subject particularly in the US - and i personally am no anti-gun-lobbyist (i even hunt, got a rifle and all :)), but i feel that someone should have the option to have a socially responsible ETF in more than just name.

In the end, people should invest in what they feel like. Find out what your tax situation is, and what is the best option for you personally, and financially. I found that for me, this is dividend investment. It grants me a greater degree of control, which is something i want.

Good luck :).

Edit: My biggest gripe with dividend investing is that it takes both time and money to re-shift priorities in the portfolio due to the individual positions, each a singular trade. If i had it mostly consolidated into 2-3 funds, doing so would be easy. Perhaps this is something i will do once i've reached FIRE and am happy downgrading my YoC in exchange for the broad appeal of a fund. In doing so, i could sell even a 500k+ position for no more than 5$.  Now it costs me quite a bit to, if i at some point want to, re-shift the portfolio weights. This is a bit of an issue, and one i'm having to swallow right now.
« Last Edit: March 07, 2017, 02:26:34 PM by SwedishMoustache »

Greenway52

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Re: How much should you be focusing on dividends vs overall return.
« Reply #9 on: March 07, 2017, 07:37:51 PM »
Hey guys,

I'm happy to say I'm well on the way to FIRE... one question that still bugs me a bit is how many of you focus strictly on dividends vs overall return.

For a couple years I was following all the dividend gurus out there and everyone is so focused on the getting the dividend to your FIRE number... but I found that quite depressing.. to FIRE just on dividends would take quite a bit longer.. when I changed my focus to overall value of the portfolio and looking at it holistically at dividends + capital gains the picture became much more attainable and easier to follow.

I completely understand that if you just focus on dividends it's a much safer play but how many of you do... and what's the risk of your based portfolio eroding more quickly because you're not just drawing dividends but also the principle.

And go... :)

I remember a couple of years ago I debated this too. But I went the opposite way from you. When I initially created my financial forecasts, I included total return (dividends, interest & capital gains). But last year I changed it to be purely based on interest & dividends.

As you mentioned this is just to be safer with my FI calculations. Also, it help that I'm interested in FI, but not RE because including just dividends and interest, it did significantly push back my FI date ... which I'm ok with since I'm not interested in RE. But I can see how my thought process would be different if I was interested in RE.

One important thing that I would try to keep in mind if you're focusing on just dividends to achieve FIRE, is that while your FI number may be based on purely dividends, in the end what is most important is the total return. So you should never sacrifice total return for dividends. If your FI number is based on dividends, you might be tempted to chase yield, and that can end badly. For instance, there could be some junior mining stock that offers a 10% dividend yield, but if the fundamentals of the company are bad, it might be a poor investment.


scottish

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Re: How much should you be focusing on dividends vs overall return.
« Reply #10 on: March 07, 2017, 08:11:03 PM »
A good example of dividend yield gone bad would be Yellow Pages or Transalta...   although it's interesting how hard it is to find a good description of what happened at yellow pages only 6 years later.

Both had excellent dividend yields and should have been a solid business.

aspiringnomad

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Re: How much should you be focusing on dividends vs overall return.
« Reply #11 on: March 08, 2017, 10:38:59 PM »
The mathematically correct answer to the topic question is not at all. Math is good enough for me.

dixonge

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Re: How much should you be focusing on dividends vs overall return.
« Reply #12 on: March 09, 2017, 04:48:59 AM »
A good example of dividend yield gone bad would be Yellow Pages or Transalta...   although it's interesting how hard it is to find a good description of what happened at yellow pages only 6 years later.

Both had excellent dividend yields and should have been a solid business.
So.....Sell stocks that drop dividends and buy something better? I don't know, sounds pretty easy, simple...

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dixonge

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Re: How much should you be focusing on dividends vs overall return.
« Reply #13 on: March 09, 2017, 04:53:08 AM »


... if the fundamentals of the company are bad, it might be a poor investment.

Also true of any investment choice, not specific to yield or dividends...

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