index fund dividends worse than individual shares?

[mohawkbrah]

I find that index fund dividends rarely change over time, so they have consistency.


but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

[NorCal]

Dividend investing is a decent strategy with a lot of followers.  There isn't anything fundamentally wrong with it.

The part you're missing is dividend growth.  What if you buy a company with a low dividend today, but they're growing their dividend distributions by 20% / yr? 

Would you rather own a company paying a 3% dividend with no growth, or a company paying a 1.5% dividend, but increasing it at 20%/yr?

Index's contain a balance of company's with high current dividends and growing dividends.  Assuming the market is efficient, the price of stocks should already reflect inherent growth potential.

[faramund]

Down here in Oz, you can get a Vanguard 'index fund' that only buys companies with high dividends (VHY). Its about 0.1% higher in annual fees then they're vanilla fund (VAS).

I buy-and-hold individual shares, but I have some of each of these to benchmark my performance. Interestingly, VHY has slightly outperformed VAS in the long-run according to Vanguard's own data. Since I've had them though (around 3 years)- its slightly the reverse.

[Monkey Uncle]

I find that index fund dividends rarely change over time, so they have consistency.


but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

In today's low interest rate environment, any stock that is yielding 10% is probably cheap because it is in poor financial shape and is about to cut its dividend rather than raise it.  And the share price is probably tanking, too.  So while your scenario is good in theory, you are not likely to be able to implement it in the real world.

It may be more realistic to look for stocks that are paying an average dividend (currently about 2%) but that have good prospects for raising the dividend over time (the very popular dividend growth investing strategy).  But such companies are typically richly valued, so share price performance could lag the market.  Plus you have to correctly identify companies that are going to continue growing their dividends (i.e., predict the future).  Some people can do it successfully, but not many.

[mathjak107]

I find that index fund dividends rarely change over time, so they have consistency.


but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

whatever the dividend is gets subracted right off the share price . if you had x-amount invested the night before the dividend ,the next morning at the open if you reinvested the dividends you have exactly the same amount of money compounding for you as you had the night before .

all share price resets are mandatory at the open .

in the end how your total return is broken out is irrelevant gain wise . it may have some different tax ramifications though

[Retire-Canada]

I'm getting ~2% dividends across my portfolio of index funds. No complaints about that and no need to hunt and peck for individual dividend stocks.

[mathjak107]

i run just under 3% as a yield on my retirement portfolio's  . but i can duplicate that regardless even if i had all non dividend payers .

[seattlecyclone]

but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

This effect of increasing dividends as the share price rises is something that happens just the same with index funds as it does with individual stocks. Eventually the amount of your dividends will be much higher than 2% of the initial amount you invested. It's just that individual stocks tend to be a bit more volatile so you'll have some that increase their dividends a lot while you have some that cut dividends. On average you should expect individual stock investing to come out to about the same overall as if you bought an index fund, the variability will just be higher.

[adizb]

I find that index fund dividends rarely change over time, so they have consistency.


but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

So just because a stock price goes up it doesnt mean the dividend will go up as well. A 5% dividend stock at $10 will pay the same amount of $0.50 annually when it goes up to $20 a share lowering its yield to 2.5%. Yield doesnt stay the same as stock price goes up, unless the company declares a dividend increase. (sorry thought i should point it out since you seem to correlate dividend payout with stock price)
 

[mathjak107]

the reverse is true too . a rising dividend from a falling share price is bad if you are not the one buying at that lower price .

[faramund]

I think as long as there's not a bubble. A company's share price increases because its dividend increases (or if the expectation of its future rate increases).

There's one theory that says a share price is the sum of the future discounted dividends that it will pay.

[mathjak107]

today  dividends are being paid out by big name company's that exceed earnings . the company's are basically saying here is your money back , we can't grow it .

more money was going in to stock buy backs than spent on improving efficiency or gaining market share  and that is not a good thing .

dividends have increased by almost 40%  on the s&p 500 while profits over the same time have not .

[Vagabond76]

whatever the dividend is gets subracted right off the share price . if you had x-amount invested the night before the dividend ,the next morning at the open if you reinvested the dividends you have exactly the same amount of money compounding for you as you had the night before .

all share price resets are mandatory at the open .

in the end how your total return is broken out is irrelevant gain wise . it may have some different tax ramifications though

This argument against dividend investing is the biggest bunch of bullshit repeated on this forum.  Here are the reasons to ONLY invest in dividend-paying stocks or dividend-focused ETFs:

1.   The investor can choose to receive cash or reinvest in additional shares.
2.   Dividends aren’t guaranteed, but well-run companies are loathe to cut them.
3.   Dividends generally increase over time.
4.   Dividend growth from well-run companies keep up with or exceed inflation
5.   Encourage the investor to hold the investment to continue receiving the dividend.
6.   Allow the investor to enjoy cash without selling
7.   Allows the investor to diversify by using the income to buy other investments
8.   Indicate the company has positive cash flow
9.   Indicates the company treats shareholders as business partners
10.   Deter fraudulent bookkeeping, because the company needs cash to fund the dividend.
11.   Dividends are a multigenerational income stream.
12.   The investor does not have to ever pay capital gains taxes to access cash from the investment.
13.   Once the investor has enough income to fund the lifestyle, he or she will never run out of money.
14.   Never worry about selling at a profit or loss, saving taxes and commissions.
15.   Don’t care what happens to the stock market.
16.   Dividends are generally predictable.
17.   Yield, dividend growth, and payout ratios make it easier to evaluate companies based on hard data and not stock tipsters.
18.   Can compound shares over time through reinvestment.
19.   If the investor starts earlier enough, he or she can retire early off the income.
20.   If the investor is inclined to sell during a downturn, the dividend tends to support the company’s price.

[Vagabond76]

today  dividends are being paid out by big name company's that exceed earnings . the company's are basically saying here is your money back , we can't grow it .

And this is an outright lie.

[MustacheAndaHalf]

Here are the reasons to ONLY invest in dividend-paying stocks or dividend-focused ETFs:

6.   Allow the investor to enjoy cash without selling
12.   The investor does not have to ever pay capital gains taxes to access cash from the investment.
14.   Never worry about selling at a profit or loss, saving taxes and commissions.

Disagree with your confusion of tax situations between dividends and long-term capital gains:
(6) dividends are forced selling - you always pay tax on the dividend.
(12) dividends are taxed at the same rate as long-term capital gains.  They pay the same amount.
(14) You don't save taxes, you pay the same in taxes.  A $200 dividend and $200 long-term capital gain are both taxed at the same rate.

[mathjak107]

what qualifies dividends though is different from what  may qualify long term capital gains ,especially from funds .

people tend to have a misunderstanding of what dividends are .

increasing dividends used to be a sign of company health . after all it used to say look at me , i have so much cash i can give it away . investors liked that .

but today the least efficient way of growing investor money is giving it back to the investor .

there is really nothing a dividend can do that you can't do selling the same dollars from your own portfolio .assuming equal total return .

in both cases either the company breaks off a piece of the share price or you break off equal dollars from your portfolio or non div payer, they are pretty much the same thing . .

a portfolio or non div payer that went up 2 or 3% can have the same dollars broken off as a 3% dividend and have the same balance left

[Monkey Uncle]

Why do people own businesses?  Because they expect the business to generate profits that they can use as income.  When a small business owner opens a store, he may reinvest much of the profit into growing the business, and if he has another source of income, he may even reinvest all of the profit for a while so he can grow the business as much as possible.  But eventually, he's going to start keeping some of that profit to cover his income needs.  Otherwise, why start a business in the first place?  Yes, some people start businesses for the sole purpose of getting bought out for a big capital gain, but why is the buyer purchasing that business?  If you were a real estate investor, would you build up a portfolio of rental houses if you never expected to get to keep any of the rent?

So it is with shares of publicly traded companies.  They have value because someone down the line, eventually, expects to get a return on his investment.  If a company never has any prospects of paying a dividend, why buy shares?  The shares would have no value if the investors knew that the company intended to never return any of the profits to shareholders.  Of course there is a balance between reinvesting profits for future growth and returning them to shareholders.  No reinvestment of profits to grow the business = no growth in the dividend.  But its crazy to expect share prices to keep growing indefinitely if the company never intends to return any profits to investors.

[mathjak107]

in the end it is only about total return on your money , end of story . how it is arrived at is not much of a factor .except perhaps tax wise .

an x-perecent gain on your money is the same gain whether all dividends ,dividends and appreciation or just appreciation .

[Monkey Uncle]

in the end it is only about total return on your money , end of story . how it is arrived at is not much of a factor .except perhaps tax wise .

an x-perecent gain on your money is the same gain whether all dividends ,dividends and appreciation or just appreciation .

From the standpoint of the individual investor over a short period of time, that is true.  But without the prospect of a dividend at some point in the future, there would be no share price appreciation.

[mathjak107]

so non dividend payers never  or rarely  do well ?   i think you may want to rethink that . ever hear of a  little stock called berkshire hathaway ?

a stock handing me back my own money now or in the future  is never my criteria for what i own . i spent the first 25 years as an investor owning  few dividend paying stock funds and those funds and the underlying holdings did very very well

[Monkey Uncle]

so non dividend payers never  or rarely  do well ?   i think you may want to rethink that .

That's not what I said.

Share prices of many non-payers do increase, and the do so because the companies are growing their earnings.  People buy that earnings stream because the potential exists for them to share that earnings stream eventually.  Sure, lots of people are chasing momentum and speculating that the share price will increase and allow them to cash out with a nice capital gain.  But without the prospect of eventually sharing in that earnings stream, it's just a speculative bubble that is bound to burst.

Think of it this way.  Your buddy comes to you and says he has a sure-fire business idea that is guaranteed to make tons of money, and he'd like you to invest some capital to help get him started.  You do your due diligence and conclude that, in fact, he has found a business idea that is absolutely guaranteed to make money hand over fist.  But there's a catch.  Your buddy says that he is only interested in growing the business indefinitely, so he is going to reinvest all profits back into the business forever.  Therefore, you will never get a return on your investment.  Would you give him your money?

[mathjak107]

but in the end as i said it is all about your total return and what greed ,fear and perception do to your investments . how it is arrived at is irrelevant .  i have never bought anything for a future income stream . i buy it for compounding my money in any way it can . compounding investor dollars it what investing is all about . i can generate my own income stream off anything that goes up .

like i said 25 years of growth funds with little to no dividends spinning off  grew a lot of money . the model i used has been around a lot longer but i shifted to growth and income when i retired .

100k in the growth model portfolio i used   back in 1987 when i started is 2.3 million today . the s&p 500 with dividends reinvested is worth 438k less . 80% of the s&p 500 pay dividends . my growth model paid very little and in some years almost no dividends . dividend yield today on it is under .60%

stocks with no eventual earnings are gone eventually in any case , the dot com and tech bust proved that .

[radram]

Think of it this way.  Your buddy comes to you and says he has a sure-fire business idea that is guaranteed to make tons of money, and he'd like you to invest some capital to help get him started.  You do your due diligence and conclude that, in fact, he has found a business idea that is absolutely guaranteed to make money hand over fist.  But there's a catch.  Your buddy says that he is only interested in growing the business indefinitely, so he is going to reinvest all profits back into the business forever.  Therefore, you will never get a return on your investment.  Would you give him your money?

A man by the name of Charlie Munger had a friend with the EXACT same sales pitch.  His name was Warrren Buffett.  Buffet had never said anything other than his intention to grow the business indefinitely.  That does not mean you will never get a return on your investment, because as a shareholder, you are an owner of the company.  You can do what you will with your portion of the business.  The key to your story is that there are profits in the business.  It is how those profits are utilized that will determine long term value.  If your profits are retained and are not used to generate greater profits, then your shareholders would have been better off receiving a dividend and the market will let you know that in your share price.

It is true that as you get larger, it is more difficult to grow those earnings.  You can no longer buy million dollar companies to move the needle, you require billion dollar companies.  But I do not at all own Berkshire Hathaway for a share of its profits.  I own it for a share in its VALUE.  Even if dividends are never paid, there is still an increasing value in the company.

Buying a stock for its dividend(hopefully increasing) is a valid and rational reason to own a stock.  So is buying one that never plans to pay a dividend, as long as the retained earnings are producing greater value.

[Seppia]

You have to keep in mind that some companies have a hard time growing even more.
Think Walmart, or coke.

Coke generates much much more cash than they actually need to keep the business humming nicely.

The real attractive part of the dividend aristocrats idea is that they are usually big, solid, mature businesses that have a very good competitive advantage.

The upside might be lower, but the downside is also.
I am much more confident owning Coke and Walmart than I would be owning tesla or Netflix at today's valuations.
Tesla and Netflix have almost no real upside (unless there's a greater fool), and it's not inconceivable that in 10 years they might be worth zero.
I'm willing to bet all my life savings that in 10 years Coke and Walmart will still be around

dividends are taxed at the same rate as long-term capital gains.  They pay the same amount.

Aren't dividends considered income? If so, they pay the same taxes as SHORT term capital gains.
EDIT I was clearly wrong, they are taxed as long term gains

[waltworks]

TANSTAAFL. The dividend strategies cost you a little in taxes but they don't hurt your overall returns much so if it makes you happy, great. But you're not going to magically beat the market, either.

-W

[arebelspy]

.
Think of it this way.  Your buddy comes to you and says he has a sure-fire business idea that is guaranteed to make tons of money, and he'd like you to invest some capital to help get him started.  You do your due diligence and conclude that, in fact, he has found a business idea that is absolutely guaranteed to make money hand over fist.  But there's a catch.  Your buddy says that he is only interested in growing the business indefinitely, so he is going to reinvest all profits back into the business forever.  Therefore, you will never get a return on your investment.  Would you give him your money?

If he plans to IPO at some point (very likely if his goal is grow indefinitely)?   Absolutely.

[arebelspy]

TANSTAAFL. The dividend strategies cost you a little in taxes but they don't hurt your overall returns much so if it makes you happy, great. But you're not going to magically beat the market, either.

-W

I think on average it doesn't hurt much, but I think dividend chasers have tilted the value of things like the dividend aristocrats and such, and as dividend investing has become over-hyped online especially via poorly written blogs over the past 5-8 years, they are now positioned to hurt your growth more than they typically would just from their subpar tax treatment.

[Vagabond76]

Here are the reasons to ONLY invest in dividend-paying stocks or dividend-focused ETFs:

6.   Allow the investor to enjoy cash without selling
12.   The investor does not have to ever pay capital gains taxes to access cash from the investment.
14.   Never worry about selling at a profit or loss, saving taxes and commissions.

Disagree with your confusion of tax situations between dividends and long-term capital gains:
(6) dividends are forced selling - you always pay tax on the dividend.
(12) dividends are taxed at the same rate as long-term capital gains.  They pay the same amount.
(14) You don't save taxes, you pay the same in taxes.  A $200 dividend and $200 long-term capital gain are both taxed at the same rate.

Response to (6): Dividends are not "forced selling" ... it is just the opposite.  If I buy 1000 shares of XYZ and collect the dividend over 10 years, I still own 1000 shares.  If the yield at purchase is 4% and growing every year at the rate of inflation, I have met the 4% SWR and will never run out of money.  That becomes multigenerational wealth when I pass it on to my heirs.  If I reinvest the dividend until retirement, then I might have double or triple the number of shares by then.

If I buy 1000 shares of QRS that pays no dividend or less than 4%, then to meet the 4% SWR I have to sell shares to make up the difference.  That normally involves a brokerage fee.  I consider that "forced selling" because without a sale there is no money.  Plus, I better hope the stock price appreciates so that I don't run out of money.  In the end I will have fewer (or perhaps no) shares to pass on to my heirs. 

Response to (12) and (14):  If you never sell the stock, then you never pay capital gains taxes.  Your heirs won't either because the basis will step up.  Yet, the whole time you received cash and had all the other benefits you did not take issue with.

With current tax rates (which are always subject to change), the tax on qualified dividends is 0% if you are able to stay within the 15% tax bracket.  Most early retirees do.  So no income tax anyway

One can also access various amounts of tax-free distributions from master limited partnerships, equity REITs, and royalty trusts.  Instead of paying tax on a dividend, these returns of capital are subtracted from the basis.  As mentioned earlier, the basis steps up upon death, so there is never a tax--dividend, capital gains, ACA, or otherwise--on this amount.

[arebelspy]

Here are the reasons to ONLY invest in dividend-paying stocks or dividend-focused ETFs:

6.   Allow the investor to enjoy cash without selling
12.   The investor does not have to ever pay capital gains taxes to access cash from the investment.
14.   Never worry about selling at a profit or loss, saving taxes and commissions.

Disagree with your confusion of tax situations between dividends and long-term capital gains:
(6) dividends are forced selling - you always pay tax on the dividend.
(12) dividends are taxed at the same rate as long-term capital gains.  They pay the same amount.
(14) You don't save taxes, you pay the same in taxes.  A $200 dividend and $200 long-term capital gain are both taxed at the same rate.

Response to (6): Dividends are not "forced selling" ...

It's pretty equivalent.  It's not selling in terms of you have less shares, but it's the company choosing when to take money and distribute it to you, instead of you choosing to have the money distributed to you.  That's out of your control, versus the selling of shares, which is in your control.

If a company does no dividends, but share price rises, you can choose to sell shares equivalent to what those dividends would have been, and net out the same versus a company that distributes dividends but share price doesn't rise equivalently.  In either case, the value is the same, but you decide to sell (or not) without the dividend--with the dividend, the choice is made for you, thus the idea that a dividend is, in essence, a forced sale.

[cerat0n1a]

I think on average it doesn't hurt much, but I think dividend chasers have tilted the value of things like the dividend aristocrats and such, and as dividend investing has become over-hyped online especially via poorly written blogs over the past 5-8 years, they are now positioned to hurt your growth more than they typically would just from their subpar tax treatment.

As the OP is British (not that he seems to respond to threads he starts), I'll just point out that this is another area (like e.g. mortgages) where the difference in tax treatment between the US and the UK (and perhaps elsewhere) is significant enough for it to be worth approaching things differently.

In tax privileged accounts (ISAs, pensions) there's no tax on dividends (or capital gains of course). Outside of those, you can now earn £5000 per year from dividends free of tax. Taking an income from shares by selling a %age of them incurs dealing costs, taking an income from dividends does not. For that reason, a lot of retirees here prefer to have a high yield portfolio to generate an income and relatively few will pay any tax on it.

[arebelspy]

I think on average it doesn't hurt much, but I think dividend chasers have tilted the value of things like the dividend aristocrats and such, and as dividend investing has become over-hyped online especially via poorly written blogs over the past 5-8 years, they are now positioned to hurt your growth more than they typically would just from their subpar tax treatment.

As the OP is British (not that he seems to respond to threads he starts), I'll just point out that this is another area (like e.g. mortgages) where the difference in tax treatment between the US and the UK (and perhaps elsewhere) is significant enough for it to be worth approaching things differently.

In tax privileged accounts (ISAs, pensions) there's no tax on dividends (or capital gains of course). Outside of those, you can now earn £5000 per year from dividends free of tax. Taking an income from shares by selling a %age of them incurs dealing costs, taking an income from dividends does not. For that reason, a lot of retirees here prefer to have a high yield portfolio to generate an income and relatively few will pay any tax on it.

Ah, that is a significant difference.

Thanks for adding that info!

[Doubleh]

As others have said, in mathematical terms receiving dividends and selling shares are absolutely identical - this is one of the things we had to prove with real numbers in accountant classes. There are
some behavioral reasons to like dividends - primarily that the amount of dividends is relatively stable in a downturn which certainly makes people feel less exposed to risk and may or may not in fact help to an extent.

The differences in tax treatment between dividends and capital gains also are significant - historically the USA has had less dividends friendly tax policies than eg the uk, and consequent us listed shares tend to pay lower dividends. Even when companies in USA want to return funds to shareholders they frequently do so by way of a share buyback, which is effectively the same as a dividends but with different tax treatment and without the expectation of being repeated every year.

So there is nothing wrong with receiving dividends - and remember that even if you hold say an s&p 500 fund, which had averaged around 2% yield the last few years - so that accounts for fully half of your 4% swr before you have had to sell a single share. So in fact the questions is much less either or than it is often made out to be.

Ultimately though what put me off aiming for a pure dividends strategy is that by trying to raise that 2% up to 4% - reaching for yield - you can fall into many traps including missing out on the next big things that will become the blue chips of the future because you don't want them until they pay a dividend; being overweight in mature companies with low growth potential; falling for failing companies whose plummeting share price makes their yield look temporarily high; paying a higher price because other dividends investors also want to but the same high yielding stocks as you - paradoxically pushing up their price and lowering the yield; and concentrating in certain industries which pay high yield - just look how many bank stocks were  held by dividend investors in 2007.

[mathjak107]

a non dividend payer that went up the same 4% is no better or worse off than 2% dividend and 2%  appreciation . the fact you personally  didn't sell any of your investment off to get the dividend is irrelevant , the company  in effect did it for you .

your investment is in dollars . it is not in number of shares . it is no different than a stock split . at the end of the day your investment is worth x-amounrt and whether the company pulls out  an amount and gave it to you as a dividend or you pull out the same amount in dollars the ending is the same balance no matter what .

all future compounding is on your dollars no matter if it is one share at 100k or 100,000 shares at 1 buck .

[Vagabond76]

Any day:  give me shares in a company with a steadily rising dividend than shares of a non-payer that might go up.  All stocks will go up, all will come down.  Those that pay a dividend will be loathe to cut it.  Get enough shares so that dividends fund your lifestyle and you won't give half a shit about the rest of the noise.

[arebelspy]

Any day:  give me shares in a company with a steadily rising dividend than shares of a non-payer that might go up.  All stocks will go up, all will come down.

Sure, all else being equal.  It isn't, necessarily. As I said above, I think dividend chasing is overhyped and skewed valuations on the "dividend aristocrats," O, etc., leading to lower long term results.

Get enough shares so that dividends fund your lifestyle and you won't give half a shit about the rest of the noise.

Sure.  You just may work a lot longer to do so, rather than focusing on total return.  It's not a free lunch, and I'd rather not trade more of my time for a little more security.  Were I to do that, I'd still focus on total return, I'd just have more invested, and a lower SWR.

If you focus on dividends covering your spending, either your portfolio is very skewed (towards a few high paying ones, adding in much more risk), or your SWR is stupid low (say, 2%, so 2% dividends cover your spending), so you worked too long.  Neither of those scenarios are appealing to me.

[mathjak107]

any swr is based on principal being depleted too in down years when  dividends are cut ,suspended or just don't match your personal cost of living . all compounding and that draw rate is based on total portfolio value . you better care what share price is doing .

there is no difference getting a 4% dividend vs pulling 4% out of your portfolio assuming same total return and no dividends  . it all counts and all works the same .

[Vagabond76]

Sure.  You just may work a lot longer to do so, rather than focusing on total return.  It's not a free lunch, and I'd rather not trade more of my time for a little more security.  Were I to do that, I'd still focus on total return, I'd just have more invested, and a lower SWR.

If you focus on dividends covering your spending, either your portfolio is very skewed (towards a few high paying ones, adding in much more risk), or your SWR is stupid low (say, 2%, so 2% dividends cover your spending), so you worked too long.  Neither of those scenarios are appealing to me.

A portfolio paying $48k in dividends (4%), three rentals (so far) netting $56k, and two pensions paying $96k, for a total of $200k per year...I think we will be okay.  I can retire at 44 (I'm 40 now) and collect the pension.  Maybe 44 is too long to work, but it's fun supervising a bunch of gonna-save-the-world millennials.

[waltworks]

A portfolio paying $48k in dividends (4%), three rentals (so far) netting $56k, and two pensions paying $96k, for a total of $200k per year...I think we will be okay.  I can retire at 44 (I'm 40 now) and collect the pension.  Maybe 44 is too long to work, but it's fun supervising a bunch of gonna-save-the-world millennials.

Congrats, you worked too long...

Just kidding. If you like your job, awesome. If you have some dividend paying stocks you like, also awesome. But you aren't all set because of your awesome dividend strategy, any more than you would be from just buying VTSAX (or whatever equivalent you prefer). So really, your comment is totally irrelevant to the thread.

-W

[arebelspy]

Sure.  You just may work a lot longer to do so, rather than focusing on total return.  It's not a free lunch, and I'd rather not trade more of my time for a little more security.  Were I to do that, I'd still focus on total return, I'd just have more invested, and a lower SWR.

If you focus on dividends covering your spending, either your portfolio is very skewed (towards a few high paying ones, adding in much more risk), or your SWR is stupid low (say, 2%, so 2% dividends cover your spending), so you worked too long.  Neither of those scenarios are appealing to me.

A portfolio paying $48k in dividends (4%), three rentals (so far) netting $56k, and two pensions paying $96k, for a total of $200k per year...I think we will be okay.  I can retire at 44 (I'm 40 now) and collect the pension.  Maybe 44 is too long to work, but it's fun supervising a bunch of gonna-save-the-world millennials.

Bolded my response to this, above.  :)

If it works for you, great, more power to you.  I just decided to earn enough, then move on from earning money.  Your scenario--ER'ing at 44 with way more than I needed--doesn't appeal to me in the slightest.  Had I decided to work until 44, my projections have us coming in at well over $200k annual real income as well.  Don't need it, don't want it, I'll take the extra years of life, personally.  Comparing individually like this proves a great example of different strokes for different folks.

There are those that may want those tradeoffs, and go for a dividend strategy.  But they should understand its benefits, and its drawbacks.

[Vagabond76]

The dividend income alone would be more than enough to live off of.  The rest will pay for the RV, gas, and places on the beach and up in the mountains.

[waltworks]

The dividend income alone would be more than enough to live off of.  The rest will pay for the RV, gas, and places on the beach and up in the mountains.

Sure, everyone gets that you're all set - but that's not because it's *dividends*. It's because of the total return you get out of those holdings.

-Walt

[mathjak107]

it is only because of the total return not how that return breaks out  in to dividends and appreciation .

[Proud Foot]

I find that index fund dividends rarely change over time, so they have consistency.


but with shares, say you buy a boat load of shares on the cheap where it's current payout is 10p per share. then as the share stock rises so does it's dividend payout per share to 33p per share. So now you have a massive dividend payout every year for little invested? or am i thinking about this all wrong?

If you are comparing individual shares of dividend companies to an index fund then yes the index fund will seem worse when looking at the dividend return as the index fund also holds companies who do not pay dividends.

For your second part, if you're saying the current is 10p (pounds?) and the dividend payout rises to 33pounds, yes you will have a massive dividend with little invested, but you also need to look at the other side of things.  I hold a small amount of dividend paying companies and I look at the dividend payout in two different ways, yield on cost and yield on market.  Because one of the things I look for is dividend growth I want to see the yield on cost to increase, but I will look at the yield on market for sell evaluation.  I want to maximize the earnings of my money so once the yield on market drops below a certain level, currently set at 1.25%, I will evaluate the company and others on my watch list to see if I want to reallocate that capital.  I do not see any point in holding an investment with a yield on cost of 15% when it has a yield on market of 1% and there are other options with a better yield I could be invested in.

[Retire-Canada]

For your second part, if you're saying the current is 10p (pounds?)

I think p = pence.

https://en.wikipedia.org/wiki/Pound_sterling

The pound sterling (symbol: £; ISO code: GBP [Great Britain Pound]), commonly known as the pound, is the official currency of the United Kingdom, Jersey, Guernsey, the Isle of Man, South Georgia and the South Sandwich Islands, the British Antarctic Territory,[5] and Tristan da Cunha.[6] It is subdivided into 100 pence (singular: penny, abbreviated: p).