How to properly withdraw from high dividend portfolio?

[HPstache]

I posted about a year ago about some stocks that I inherited, worth around $100,000, with which I wanted to "test" the 4% rule on as an experiment prior to FIRE.  The reasons were so that I get the feel for the mechanics, the real world ups and downs, as well as I have a specific use for the ~$4,000 per year I can safely withdrawal.  This thread is not mean to be a discussion as to whether or not you agree with me doing this experiment, it is about how to do it properly... this inheritance was never in my plans toward FIRE.

I understand how the concept of withdrawing 4% and increasing for each for inflation works, but what I don't understand is how it differs when a portfolio is heavy in dividend producing stocks.  The stocks in this portfolio include: AEP, AAPL, CL, XOM, IBM, KHC, KMB, MCD & PFE.  From what I can tell, it yields annual dividends of about 3% which are not being re-invested and rather kicked out into a separate account (did not set it up this way, just the way it is).  What I am wondering is, when something is set up this way, I am assuming I can only take out and additional ~1% from the account for a total of 4% for the safe withdrawal to work?  I assume taking out 4% in addition to the 3% already being paid out as dividends would cause a high likelihood of failure?

Another option would potentially be to sell all the individual stocks, buy a VTI/Bond ratio that I feel comfortable with and proceed normally.  But that would lead to at least the question of how do people normally deal with the fact that VTI, for instance, pays out a 1.36% dividend?  Is it because most people choose to re-invest that 1.36% and withdraw 4%?

Thank you for your time.

[NotJen]

Yes, if you don't reinvest the dividends, that counts as money you are withdrawing that year.

I believe historical growth rates assume reinvested dividends.

But that would lead to at least the question of how do people normally deal with the fact that VTI, for instance, pays out a 1.36% dividend?  Is it because most people choose to re-invest that 1.36% and withdraw 4%?

No, I think most people who are withdrawing from their stash use their dividends (at least, in taxable accounts).

I think "normally", people are not blindly pulling out 4% each year.  They are pulling out what they need to live, and using dividends are (an easy!) part of that.

[vand]

Against all standard advice, I have 40% of my portfolio in an actively managed (by me) high dividend stock portfolio that yields about 8.4%. 

It's my plan to keep this high yield part at 40%, and build up my pot so that the dividend income alone can, in theory, support my living costs.


When I eventually start living off my portfolio I will primarily spend this dividend income first and leave the other 60% to continue to compound and grow.  Obviously withdrawing 8.4% is way above the generally accepted 4% swr and I accept all the evidence to disprove the "yield shield" portfolio, so it will be interesting to see how well my own attempt at disproving the disprovers goes. The other 60% is the cavalry for if and when I'm forced to accept that 8% isn't a sustainable WR :-)

[HPstache]

Yes, if you don't reinvest the dividends, that counts as money you are withdrawing that year.

I believe historical growth rates assume reinvested dividends.

But that would lead to at least the question of how do people normally deal with the fact that VTI, for instance, pays out a 1.36% dividend?  Is it because most people choose to re-invest that 1.36% and withdraw 4%?

No, I think most people who are withdrawing from their stash use their dividends (at least, in taxable accounts).

I think "normally", people are not blindly pulling out 4% each year.  They are pulling out what they need to live, and using dividends are (an easy!) part of that.

Very helpful, thank you.

[HPstache]

Against all standard advice, I have 40% of my portfolio in an actively managed (by me) high dividend stock portfolio that yields about 8.4%. 

It's my plan to keep this high yield part at 40%, and build up my pot so that the dividend income alone can, in theory, support my living costs.


When I eventually start living off my portfolio I will primarily spend this dividend income first and leave the other 60% to continue to compound and grow.  Obviously withdrawing 8.4% is way above the generally accepted 4% swr and I accept all the evidence to disprove the "yield shield" portfolio, so it will be interesting to see how well my own attempt at disproving the disprovers goes. The other 60% is the cavalry for if and when I'm forced to accept that 8% isn't a sustainable WR :-)

Interesting.  Yes, although I am (obviously) still learning exactly how dividends work toward FI, they do seem like and interesting weapon as a first line of defense for income.  I agree it would be tough to rely completely on them, especially since most FI simulations are based on a split of diverse index funds and bonds... having such a small number of dividend producing stocks may not be as stable?

[Stimpy]

I posted about a year ago about some stocks that I inherited, worth around $100,000, with which I wanted to "test" the 4% rule on as an experiment prior to FIRE.  The reasons were so that I get the feel for the mechanics, the real world ups and downs, as well as I have a specific use for the ~$4,000 per year I can safely withdrawal.  This thread is not mean to be a discussion as to whether or not you agree with me doing this experiment, it is about how to do it properly... this inheritance was never in my plans toward FIRE.

I understand how the concept of withdrawing 4% and increasing for each for inflation works, but what I don't understand is how it differs when a portfolio is heavy in dividend producing stocks.  The stocks in this portfolio include: AEP, AAPL, CL, XOM, IBM, KHC, KMB, MCD & PFE.  From what I can tell, it yields annual dividends of about 3% which are not being re-invested and rather kicked out into a separate account (did not set it up this way, just the way it is).  What I am wondering is, when something is set up this way, I am assuming I can only take out and additional ~1% from the account for a total of 4% for the safe withdrawal to work?  I assume taking out 4% in addition to the 3% already being paid out as dividends would cause a high likelihood of failure?

Another option would potentially be to sell all the individual stocks, buy a VTI/Bond ratio that I feel comfortable with and proceed normally.  But that would lead to at least the question of how do people normally deal with the fact that VTI, for instance, pays out a 1.36% dividend?  Is it because most people choose to re-invest that 1.36% and withdraw 4%?

Thank you for your time.

Experiments are fun, and can be helpful, to you and possibly others....

As for withdraw, IF you were solely focused on dividends, you would find a way make that 3% work.  Cause in theory it's a 3%yield on cost, increasing a bit every year, for forever. At least based on the fact most of those stocks have historically grown their dividend every year.  Note that they may or may not increase with inflation so there is that to consider which you seem to understand.  You would not sell ANY of those stocks unless your IPS told you to do so.  AND you WOULD have an ISP for this. 

Is this better then the Sell your stock as you go?  Matter of opinion, really.  Both CAN work, and have been proven to work so...  Pick your poison and drink up.

[Rob_bob]

Against all standard advice, I have 40% of my portfolio in an actively managed (by me) high dividend stock portfolio that yields about 8.4%. 

It's my plan to keep this high yield part at 40%, and build up my pot so that the dividend income alone can, in theory, support my living costs.


When I eventually start living off my portfolio I will primarily spend this dividend income first and leave the other 60% to continue to compound and grow.  Obviously withdrawing 8.4% is way above the generally accepted 4% swr and I accept all the evidence to disprove the "yield shield" portfolio, so it will be interesting to see how well my own attempt at disproving the disprovers goes. The other 60% is the cavalry for if and when I'm forced to accept that 8% isn't a sustainable WR :-)

Is that 8.4% yield on the total portfolio or only on the 40% part of the portfolio?

Are you planning to withdraw at 8.4%?  If so is it because you will need to or only to see if it is sustainable?

[Rob_bob]

I posted about a year ago about some stocks that I inherited, worth around $100,000, with which I wanted to "test" the 4% rule on as an experiment prior to FIRE.  The reasons were so that I get the feel for the mechanics, the real world ups and downs, as well as I have a specific use for the ~$4,000 per year I can safely withdrawal.  This thread is not mean to be a discussion as to whether or not you agree with me doing this experiment, it is about how to do it properly... this inheritance was never in my plans toward FIRE.

I understand how the concept of withdrawing 4% and increasing for each for inflation works, but what I don't understand is how it differs when a portfolio is heavy in dividend producing stocks.  The stocks in this portfolio include: AEP, AAPL, CL, XOM, IBM, KHC, KMB, MCD & PFE.  From what I can tell, it yields annual dividends of about 3% which are not being re-invested and rather kicked out into a separate account (did not set it up this way, just the way it is).  What I am wondering is, when something is set up this way, I am assuming I can only take out and additional ~1% from the account for a total of 4% for the safe withdrawal to work?  I assume taking out 4% in addition to the 3% already being paid out as dividends would cause a high likelihood of failure?

Another option would potentially be to sell all the individual stocks, buy a VTI/Bond ratio that I feel comfortable with and proceed normally.  But that would lead to at least the question of how do people normally deal with the fact that VTI, for instance, pays out a 1.36% dividend?  Is it because most people choose to re-invest that 1.36% and withdraw 4%?

Thank you for your time.

I've been retired since 2020 at age 62.  I have lived off my taxable account dividends.  Since starting Medicare I use dividends from my Roth to pay those premiums.  I currently spend less than total dividends available which at current value would be about 3% WR.  I also have been selling options and using the premiums for some discretionary spending.

My portfolio is a core of index ETF with a mix of individual stocks and closed end funds.  This will get me to SS at my full retirement age which should cover most if not all of my necessary expenses.

[vand]

Against all standard advice, I have 40% of my portfolio in an actively managed (by me) high dividend stock portfolio that yields about 8.4%. 

It's my plan to keep this high yield part at 40%, and build up my pot so that the dividend income alone can, in theory, support my living costs.


When I eventually start living off my portfolio I will primarily spend this dividend income first and leave the other 60% to continue to compound and grow.  Obviously withdrawing 8.4% is way above the generally accepted 4% swr and I accept all the evidence to disprove the "yield shield" portfolio, so it will be interesting to see how well my own attempt at disproving the disprovers goes. The other 60% is the cavalry for if and when I'm forced to accept that 8% isn't a sustainable WR :-)

Is that 8.4% yield on the total portfolio or only on the 40% part of the portfolio?

Are you planning to withdraw at 8.4%?  If so is it because you will need to or only to see if it is sustainable?

Only on the 40% part. That will be the first bucket which I draw from, and yes I will likely be spending all the dividends and then the capital if required. Of course in an ideal world my dividend stocks do well as businesses, increase their payouts to at least match inflation, and I continue to live off the income without even having to touch the capital and I'm the richest corpse in the graveyard -- though I'm fully aware the back tests all suggest that won't be the case so we will see. Still a few years away.

[ChpBstrd]

Seems like this experiment could be more easily done as an account shuffle or a tabletop exercise.

Example 1: Transfer a 4% WR via sales + dividends into a separate account. Observe the performance of the original account.

Example 2: Do this via accounting. On your own books, simulate the 4% withdraws. E.g. if you have 100 shares in the account, next year record that you have 96 shares, and only about 98% of the dividends. So while the account stays whole, your books demonstrate what the account would be with a 4% WR. This method allows for backtesting too.

Of course, you mentioned you have a need to spend the money, so neither of these options works for that purpose unless you are willing to spend out of another account besides the experimental one.

[Heckler]

MMM did a great job kicking us in the pants to drive up savings rate and reduce expenses.  But I find many better resources on financial planning out there.


https://www.bogleheads.org/wiki/Withdrawal_methods