The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: mlbfan07 on March 25, 2018, 07:58:48 PM
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Evening MMM Family!
I have been reading blogs for years now about FIRE, minimalism, simplifying and retirement.
One of the most intriguing concepts to me has been "living off dividends in retirement", primarily off individual dividend paying stocks.
Of course this is a possibility, with a decent income, debt kept within reason and enough time, absolutely - I feel like I am reading a new story about this concept weekly.
But as I hit my early 40s now and look at where I am at, and even with living a somewhat basic life, the idea of living simply off dividend income seems to be fading away.
Especially since I have so many friends and family that have govt/edu pensions in place and are looking at exiting their careers within the next decade.
Is this a goal for many of you on the forum?
How viable is this goal if your savings path didnt start till later in life?
Should this even be a target?
Or based on the mental aspects of investing in individual stocks does this become more difficult to pursue than simply investing in index funds and depending on the 4% rule?
After 401k / Roth I can invest $2k a month, at $24k a year pulling $800.00 in dividends from that seems minimal.
If seems as the years pass that this idea coming to fruition is going to happen.
(I know that 43 is not old, but seeing friends and family with X amount of years to go, the plan of living off dividends just may not be right)
Me:
$3k per month liquid after expenses (maybe $2500.00 in off months)
Approx $300k in retirement accounts
$40k sitting in cash pending my next financial move
Thanks all for the time!
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Evening MMM Family!
I have been reading blogs for years now about FIRE, minimalism, simplifying and retirement.
One of the most intriguing concepts to me has been "living off dividends in retirement", primarily off individual dividend paying stocks.
Of course this is a possibility, with a decent income, debt kept within reason and enough time, absolutely - I feel like I am reading a new story about this concept weekly.
But as I hit my early 40s now and look at where I am at, and even with living a somewhat basic life, the idea of living simply off dividend income seems to be fading away.
Especially since I have so many friends and family that have govt/edu pensions in place and are looking at exiting their careers within the next decade.
Is this a goal for many of you on the forum?
How viable is this goal if your savings path didnt start till later in life?
Should this even be a target?
Or based on the mental aspects of investing in individual stocks does this become more difficult to pursue than simply investing in index funds and depending on the 4% rule?
After 401k / Roth I can invest $2k a month, at $24k a year pulling $800.00 in dividends from that seems minimal.
If seems as the years pass that this idea coming to fruition is going to happen.
(I know that 43 is not old, but seeing friends and family with X amount of years to go, the plan of living off dividends just may not be right)
Me:
$3k per month liquid after expenses (maybe $2500.00 in off months)
Approx $300k in retirement accounts
$40k sitting in cash pending my next financial move
Thanks all for the time!
Dividend investing requires you to save more, growth may be slower, and assumes a 2-3% withdrawal rate in most cases. You should be able to calculate out what you need to cover your expenses in retirement and see if calculate out whether you can ever save enough for dividend investing to make sense long term.
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I thought about it for years and for me it just was/is a lot simpler to do index funds. For fun I have done a little trading and I mean really a little just to keep up on the whole "financial world" but I couldnt get behind living off the dividend investing idea not that its not a good way to go but I like simple.
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"Living Off Dividends" sounds great, but it is really more complicated than that. You have different accounts to manage your spending from and a lot of dividend companies are paying dividends because they've run out of effective places to invest their money (ie General Electric). You can be stuck riding companies into their oblivion and not be invested in the replacement company.
A dividend investor could have owned Kodak and missed out on Apple, even though the use of the "camera" has exploded.
The S&P yields just under 2%, that plus a little Bond/REIT allocation would have be spending very little principal on a flat model.
Its good timing for your question too, I have a couple dividend aristocrats I've owned for a while that I'm ready to say uncle on and just index the money.
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Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.
I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
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As Financial Velociraptor says, this is contreversial, here. I'm not arguing against them as a strategy, but I will mention a few of the reasons, here.
There are a few reasons: First, dividends come at the cost of stock value, so many see it as a zero sum game. Second, many people argue that they're more stable than stock returns, but this position is tainted by survivorship bias (as happens in many cases of individual stock picking). Third, people aren't always aware that non-qualified dividends are taxed as ordinary income.
Another issue (obviously not for F.V.) is that this method frequently leads people to oversave, but there are lots of methods that do that!
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Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.
I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.
Just for giggles I looked up XOM, COP, PFE, IBM on a dividend reinvestment calculator for the last 20 years compared to SPY (S&P 500).
Average annual total return with dividends reinvested.
SPY 6.71%, XOM 7.05%, COP 11.04%, PFE 4.47%, IBM 6.96%
Average annual total return without dividends reinvested.
SPY 5.85% XOM 6.38%, COP 9.68%, PFE 3.27%, IBM 6.63%
https://www.dividendchannel.com/drip-returns-calculator/
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Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.
I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.
I'm saying this as a guy who has a dividend income spreadsheet I used to track to help know how much supplemental income I have coming in and due to this, I missed plenty of the upside because I avoided tech stocks and indexing for a while. The dividend chart actually looks okay right now because of a REIT allocation, but dividends reflect 100% (or more) of those company's returns right now.
It turns out part of my withdraw strategy will be a deferred compensation plan that pays out over 15 years. I only have eight fund options including the Vanguard Total Stock Market Index, so that'll be paid out to me in monthly increments with an annual reset of the payout rate.
As I get older, I am also not enjoying the individual stock game as much. I have money now, so it pains me 3x more to lag the index than it does to beat the market. I'm considering eating $1300 in capital gains in an hour then moving the money into FSTVX...market is so volatile I need to sell in the last few minutes to not get mismatched pricing.
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Count me among the anti-dividend crowd*.
1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.
*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).
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I used to think I wanted to be dividend investor until I really started reading everything in MMM and learning better about investing. It didn't take too long to realize it's ok to sell off some stock rather than have to potentially have a bigger portfolio to only live off of dividends alone.
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Count me among the anti-dividend crowd*.
1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.
*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).
Sounds to me like you are talking about stock picking, which may or may not be what the op wants.
1) Sometimes yes, sometimes no. See Blue chips for Yes and (honestly) you have to do some searching for the good no companies. (They do exist though!)
2) More tax efficient... Sure will go with that one. Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash... (Other issues too but I'll keep it short.)
3) True. But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
4) This is true, and such stocks should be avoided. This point is why stock pickers need to do their research. (and get burned when they do not!)
5) ... So this is different from a non-dividend stock how?
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we? Gotten you bond money back yet?
7) I can't disagree here. Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
8) Yup zero sum. But in theory (not always the case) the money could also be put in bad places. Can you imagine Coke investing say in say electric cars? Neither can I. It can (and often does) help keep priorities straight for companies. Invest in what you know to make money and give back the rest though buy backs and dividends.
9) Sir you are correct. Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!
Personally I do like the dividends and plan to make them part of my income when I eventually FIRE. If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.
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During the accumulation phase, dividends are not really relevant. Most young investors set them to automatically re-invest anyway. You should focus on maximizing return, NOT cash flow from investments.
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3) Forced tax realization - no good way to throttle withdraws to match spending
3) True. But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
You're making the assumption that people are receiving dividends only from retirement accounts. Even the OP said he was investing $24K/yr after his 401K/Roth.
Myself, my taxable brokerage account has more stash than my retirement accounts, and I'm paying 15% capital gains on qualified dividends while I'm working, but my capital gains rate will drop to 0% during FIRE. They are simply reinvested. This is a forced tax realization that I would have preferred to have waited until FIRE. As for non-qualified dividends, I'm paying at a higher marginal tax rate than I will be when I'm FIREd as well.
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This is why the MMM forum is outstanding.
I am a new poster on the forum and still have received plenty of thought-provoking replies.
Thank you Rob_bob for that website. I had found comparable sites out there but www.dividendchannel.com is great for this research.
Thank you all for these replies and thoughts.
Love to see both sides of this discussion.
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Comments in green!
Count me among the anti-dividend crowd*.
1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.
*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).
Sounds to me like you are talking about stock picking, which may or may not be what the op wants.
True. I'm assuming the OP is not talking about replacing their entire budget with the S&P 500's 1.8% dividend. Usually people talk about creating a portfolio of stocks that pay an above-average dividend.
1) Sometimes yes, sometimes no. See Blue chips for Yes and (honestly) you have to do some searching for the good no companies. (They do exist though!)
I agree every company is different, but if you select for dividend paying companies, the "out of ideas" variety is over-represented in your portfolio compared to the total market.
2) More tax efficient... Sure will go with that one. Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash... (Other issues too but I'll keep it short.)
Yep, it's a fact. Companies tend to do buybacks at the top of economic cycles. However, they also increase their dividends at those times. This becomes detrimental when their profits evaporate and they're taking on debt at sky-high rates in the middle of the next recession and yet they have this reoccurring dividend in the budget.
3) True. But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
My thought here was the retiree who receives $50k in dividends in a year but only spends $40k. S/he is paying taxes on $50k income because s/he planned to receive income via dividends and the dividends grew over time (even if the stock prices did not). Had s/he mostly funded his/her retirement by occasionally clicking sell, s/he could withdraw exactly what's needed for spending and pay taxes on only the capital gains within those $40k. Much lower taxes = much slower portfolio depletion.
4) This is true, and such stocks should be avoided. This point is why stock pickers need to do their research. (and get burned when they do not!)
I've found few debt-free companies paying a hefty dividend that are also not in the "out of ideas" set.
5) ... So this is different from a non-dividend stock how?
It would be different than bonds, for a retiree looking for a cash flow equal to 4-5% of their portfolio. The bonds would probably drop much less in a correction.
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we? Gotten you bond money back yet?
In bankruptcies, equity holders are usually 100% wiped out and bond holders take an average 50-60% haircut. But of course we're talking about a diversified dividend-payer portfolio versus a diversified bond portfolio, not about taking on company-specific or government-specific risks. A portfolio that includes 100% wipeouts is more volatile than a portfolio that includes 60% haircuts or delayed payments.
7) I can't disagree here. Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
Also, executives compensated with stock options or holding lots of shares will be wary of cutting the dividend to pay down debt or fund an opportunity, even when that would be best for the company in the long run. Dividends create an incentive to loot, rather than act like fiduciaries.
8) Yup zero sum. But in theory (not always the case) the money could also be put in bad places. Can you imagine Coke investing say in say electric cars? Neither can I. It can (and often does) help keep priorities straight for companies. Invest in what you know to make money and give back the rest though buy backs and dividends.
There's certainly no shortage of bad reinvestment ideas, and I've witnessed many of these (mostly acquisitions, but also Kodak's cryptocurrency. WTF!?). However, on the flip side, an investor who receives a dividend could make a bad decision in how they reinvest that money. The company that pays down $10M in 6% debt, for example, makes a permanent increase in the company's cash flow by ~$600k/year. This increase in cash flow is multiplied as an increase in the stock price. Plus the reduced leverage makes the rest of their debt cheaper over time. Plus the company becomes less risky, increasing the value of the stock. Dividends are almost always a missed opportunity from a shareholder's perspective.
9) Sir you are correct. Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!
I'll add that dividends were popularized in the era of paying your "full service" broker $1,000+ per trade. It was BAD in the bad ole days!
Personally I do like the dividends and plan to make them part of my income when I eventually FIRE. If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.
Yea, even holding the S&P we'll receive 1.7% of our portfolios handed back to us as dividends, even if we hate it. A good drawdown plan needs to include both projected sales and dividends. E.g. for a 4% withdraw rate stock sales cover 2.3% and dividends 1.7%. We can throttle stock sales up or down as needed, but the dividend income is fixed.
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In the current era of ultra-low interest rates, dividend investing has been all the rage because high paying dividend stocks handily beat T-bills. However, that has not been true for very long periods of time. For example, from about 1969-ish to about 2008-ish The 10-year Treasury would have beat dividends (unless you had a crystal ball). In the 1980s and 1990s many retirees only in invested bonds because interest rates were so attractive that many people didn't want to bother with stocks. The exact opposite situation we have now.
I don't think we will repeat 1969-ish to about 2008-ish, but I don't think we will continue to experience current economic conditions either. Dividends are an attractive strategy right now, but recent history suggests that likely won't continue on indefinitely.
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Take a look at the chart embedded in this article (not posted for the political commentary) courtesy of Ben Carlson, one of the better finance writers out there.
https://www.bloomberg.com/view/articles/2018-03-27/congress-would-make-a-mistake-by-banning-share-buybacks
One driver of the ultra-low dividend rates paid by stocks is most companies return capital by paying dividends AND buying back shares. Dividend yields used to be 3%+ before rules were clarified allowing stock buybacks.
Academically, buybacks are also preferable in a taxable account. Dividends force a shareholder to realize taxable income while buybacks increase the share price through reducing shares outstanding, then you realize the income when you sell appreciated shares.
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Take a look at the chart embedded in this article (not posted for the political commentary) courtesy of Ben Carlson, one of the better finance writers out there.
https://www.bloomberg.com/view/articles/2018-03-27/congress-would-make-a-mistake-by-banning-share-buybacks
One driver of the ultra-low dividend rates paid by stocks is most companies return capital by paying dividends AND buying back shares. Dividend yields used to be 3%+ before rules were clarified allowing stock buybacks.
Academically, buybacks are also preferable in a taxable account. Dividends force a shareholder to realize taxable income while buybacks increase the share price through reducing shares outstanding, then you realize the income when you sell appreciated shares.
^ That's exactly right. At one point in time, even before there were stock markets, all companies paid dividends. That's how investors got their money out of the company. As the chart in your article indicates, back in the day, the majority of the return of the S&P 500 was from the dividends, not price. High dividends were seen as a way to mitigate the risk of owning an individual stock. That's been slowly flipped around as companies both revinvest in the company, buy back shares, and individual investors have moved to mutual funds which mitigates the risk. Today, the majority of the returns are from price, not dividends.
From a tax efficiency standpoint, and quite often from an economic efficiency standpoint, investors are better served by the company either buying back shares or simply reinvesting profits back into the company. For those reasons and others, I think it is very likely the dividend yield of the S&P will continue its slow decline. I could be wrong, but I think dividend strategies will become increasingly harder to maintain as time goes on.
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Comments in green!
Count me among the anti-dividend crowd*.
1) Strategy selects "out of ideas" companies
2) Buybacks are more tax efficient and easier, so dividends are obsolete, and your managers haven't figured that out(!)
3) Forced tax realization - no good way to throttle withdraws to match spending
4) Companies funding their dividends with debt, destroying equity along the way, with interest!
5) Little or no protection from corrections
6) More safety is available from bond income (see 2008-9 dividend cuts and bankruptcies, also see GE)
7) Inertia and fear often keep these companies paying dividends even when better ideas arise or financial difficulties occur. Thus, dividends create risk for the company.
8) To an investor, retained cash in the company has about the same value as retained cash in their account from a dividend. Funds used to pay down debt or reinvest earn a return within the company. Dividend payment is a zero-sum activity.
9) It's 2018, not 1978. You can sell stock with a click of a button for only a few bucks commission.
*I'll make an exception for REITs, MLPs, and BDCs who get a sweet tax deal in exchange for returning capital as dividends (but the law is stupid anyway).
Sounds to me like you are talking about stock picking, which may or may not be what the op wants.
True. I'm assuming the OP is not talking about replacing their entire budget with the S&P 500's 1.8% dividend. Usually people talk about creating a portfolio of stocks that pay an above-average dividend.
1) Sometimes yes, sometimes no. See Blue chips for Yes and (honestly) you have to do some searching for the good no companies. (They do exist though!)
I agree every company is different, but if you select for dividend paying companies, the "out of ideas" variety is over-represented in your portfolio compared to the total market.
2) More tax efficient... Sure will go with that one. Easier, not so much, but like Dividends, this kills the future investments plus often times is done when stock is riding high being a further drain on cash... (Other issues too but I'll keep it short.)
Yep, it's a fact. Companies tend to do buybacks at the top of economic cycles. However, they also increase their dividends at those times. This becomes detrimental when their profits evaporate and they're taking on debt at sky-high rates in the middle of the next recession and yet they have this reoccurring dividend in the budget.
3) True. But in the end your gonna get taxed on any IRA/401k etc withdraws anyway so.....
My thought here was the retiree who receives $50k in dividends in a year but only spends $40k. S/he is paying taxes on $50k income because s/he planned to receive income via dividends and the dividends grew over time (even if the stock prices did not). Had s/he mostly funded his/her retirement by occasionally clicking sell, s/he could withdraw exactly what's needed for spending and pay taxes on only the capital gains within those $40k. Much lower taxes = much slower portfolio depletion.
4) This is true, and such stocks should be avoided. This point is why stock pickers need to do their research. (and get burned when they do not!)
I've found few debt-free companies paying a hefty dividend that are also not in the "out of ideas" set.
5) ... So this is different from a non-dividend stock how?
It would be different than bonds, for a retiree looking for a cash flow equal to 4-5% of their portfolio. The bonds would probably drop much less in a correction.
6) Yup bonds = (Mostly) safe, but well, lets talk Puerto Rico shall we? Gotten you bond money back yet?
In bankruptcies, equity holders are usually 100% wiped out and bond holders take an average 50-60% haircut. But of course we're talking about a diversified dividend-payer portfolio versus a diversified bond portfolio, not about taking on company-specific or government-specific risks. A portfolio that includes 100% wipeouts is more volatile than a portfolio that includes 60% haircuts or delayed payments.
7) I can't disagree here. Fear of not doing the "norm" whether it be dividends, buy backs, <insert whatever here>, etc will do bad things to good companies.
Also, executives compensated with stock options or holding lots of shares will be wary of cutting the dividend to pay down debt or fund an opportunity, even when that would be best for the company in the long run. Dividends create an incentive to loot, rather than act like fiduciaries.
8) Yup zero sum. But in theory (not always the case) the money could also be put in bad places. Can you imagine Coke investing say in say electric cars? Neither can I. It can (and often does) help keep priorities straight for companies. Invest in what you know to make money and give back the rest though buy backs and dividends.
There's certainly no shortage of bad reinvestment ideas, and I've witnessed many of these (mostly acquisitions, but also Kodak's cryptocurrency. WTF!?). However, on the flip side, an investor who receives a dividend could make a bad decision in how they reinvest that money. The company that pays down $10M in 6% debt, for example, makes a permanent increase in the company's cash flow by ~$600k/year. This increase in cash flow is multiplied as an increase in the stock price. Plus the reduced leverage makes the rest of their debt cheaper over time. Plus the company becomes less risky, increasing the value of the stock. Dividends are almost always a missed opportunity from a shareholder's perspective.
9) Sir you are correct. Traders do it all the time, but yes, investing (and de-investing) in the market has never been easier!
I'll add that dividends were popularized in the era of paying your "full service" broker $1,000+ per trade. It was BAD in the bad ole days!
Personally I do like the dividends and plan to make them part of my income when I eventually FIRE. If you are planning to live off them just be aware of the risks (only some of which have been stated here!) and how to deal with them so you will be prepared in case you need to touch your principle and shorten you dividend income.
Yea, even holding the S&P we'll receive 1.7% of our portfolios handed back to us as dividends, even if we hate it. A good drawdown plan needs to include both projected sales and dividends. E.g. for a 4% withdraw rate stock sales cover 2.3% and dividends 1.7%. We can throttle stock sales up or down as needed, but the dividend income is fixed.
Excellent post ChpBstrd.
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In the midst of this thread, I sold off the rest of my Genuine Parts Company. I owned this company since 2010 and were picking up shares between then and 2012. Dividend aristocrat, best thing its known for is NAPA.
Long time CEO and CFO retired in 2014/2015 and the thing has horribly trailed the market. Former management was also tighter with shareholder money than their own (I worked about three miles from their headquarters, a hidden non-discript 2 story cement building). New CEO/CFO, bad acquisitions, no revenue growth, and being attacked and killed by Amazon. Rock solid balance sheet is being wrecked by continuing to buy other declining companies.
If I had been indexed, I would have seen the offset of this pain. You just never know.
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I sorta do this by default.
When I was working I disliked dividends because our State charges you 9% no matter whether its long term or short term.. Plus then Federal taxes and 24% of the dividend was gone. So I stuck with index investing and put up with the smaller dividend.
Now in retirement I still stick with index investing but my federal is zero% and I still pay the State taxes because I have no choice.. So I port the dividend to my checking account and treat it as income.
The rent we get plus dividends is very close to 100% of our spend, plus we get a $1100/m bronze HC plan for $15 due to the subsidy.
Note that this is all after tax, we are not old enough to tap the retirement funds yet.
One day we will get out of the rental business.. Its just hard to turn away income despite the fact that sometimes its a PITA.
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I am neither American nor invested (directly) in American companies - but my assets are 90% invested in dividend-yielding Scandinavian and northern-European stocks. I feel that potentially living off dividends off said stocks suits me quite well and, coupled with a somewhat sizeable cash "mattress" as well as freelance contracts (which i genuinely love) here and there eliminates the need for a withdrawal altogether.
I personally don't think it matters how a person achieves FIRE. Due to a few quite lucky circumstances, i achieved it a few months back with a current average monthly "coverage" of 112% due to Annual Dividends/12. Some achieve it through index investing - an approach i completely respect - but it's not an approach i find suitable for me. I suspect i'm one of the minority on these forums who prefers stock picking to index investment.
Few things are as safe and as low management as index investing, however, so unless you genuinely enjoy delving into individual companies, i'd advise you to stick to that.
As far as taxation for stocks go, Sweden has one of the most investor-friendly tax systems as far as stocks go, in the world. Capital gains, including dividends in investment accounts, are taxed at a flat percentage (of a percentage). The rough tax rate for my current annual yield is somewhere in the range of 4.5%.
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As far as taxation for stocks go, Sweden has one of the most investor-friendly tax systems as far as stocks go, in the world. Capital gains, including dividends in investment accounts, are taxed at a flat percentage (of a percentage). The rough tax rate for my current annual yield is somewhere in the range of 4.5%.
How does that work? I'm a bit confused about your statement on taxes. What do you mean by "tax on yield"?
From here it looks like capital gains/dividend taxes is flat 30% in Sweden:
https://www.globalpropertyguide.com/Europe/Sweden/Taxes-and-Costs (https://www.globalpropertyguide.com/Europe/Sweden/Taxes-and-Costs)
That doesn't sound very good to me. Am I missing something? The US has flat 15%. Even Norway which generally has higher taxes than Sweden is 27% or so.
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The US has a flat 15% tax???... News to me.
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The US has a flat 15% tax???... News to me.
On qualified dividends.
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I am actively trying to build up a dividend bearing portfolio. Dividend taxes are ZERO here ,if your net income is under $45k from all sources.
This means a married couple could have up to $90k in income and still pay zero taxes on their dividends. Versus pulling money from an RRSP (401k) at full marginal tax rate.
I think Dividend strategies can work very well as a part of tax planning strategies, and you need to look at the return, net of taxes, dividends, capital gains, after tax return on 401k/ RRSP withdrawals.
For you Americans, capital gains taxes are very low (0%, 15%, 20%), so maybe the dividend tax reduction does not attract you as much as it does people in other higher tax countries. If that is the case, perhaps a capital growth oriented non-registered portfolio would be to your advantage in retirement.
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The US has a flat 15% tax???... News to me.
On qualified dividends.
Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
State income taxes come in addition. These are from 0% to ~13% I believe.
So capital gains tax in the US is between 0% and 36.8%.. Ok?
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The US has a flat 15% tax???... News to me.
On qualified dividends.
Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
State income taxes come in addition. These are from 0% to ~13% I believe.
So capital gains tax in the US is between 0% and 36.8%.. Ok?
Yup... a "flat" tax of between 0 and 36.8%....:)
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Chasesfish - you are spot on with your comments.
Not sure if I am getting more risk-averse as I get older or if the turbulence of the market is catching up to me but I have been feeling the same.
The more individual stocks I watch I realize that for every V, MA or AAPL that keep hitting highs there are more like XOM, COP, PFE, IBM and plenty of others that have had literally zero appreciation for 20 years on their long term chart.
I enjoy the research, charting and everything that comes with the daily basis of watching the market, but the more time that goes by (and the more I read MMM and other blogs) I am shifting my mindset to more of an index/whole market approach.
Just for giggles I looked up XOM, COP, PFE, IBM on a dividend reinvestment calculator for the last 20 years compared to SPY (S&P 500).
Average annual total return with dividends reinvested.
SPY 6.71%, XOM 7.05%, COP 11.04%, PFE 4.47%, IBM 6.96%
Average annual total return without dividends reinvested.
SPY 5.85% XOM 6.38%, COP 9.68%, PFE 3.27%, IBM 6.63%
https://www.dividendchannel.com/drip-returns-calculator/
BAC 1.49% SPY 6.01%
Note the severe drop in BAC in 2007. That wasn't only because they absorbed a toxic company in the midst of the GFC, it was also because they slashed their dividend. Given that BAC hadn't decreased their dividend for decades, could you have predicted a temporary drop to zero?
GE has a dividend of 0.48 and an EPS loss of 0.72. Is that viable?
GE -1.07% SPY 6.01%
In 1987, the DIA had Kodak, Sears, and Woolworth. They all paid good dividends. Would you have dumped those because of ... why? This whole AOL thing is going to really take off? Cameras will go out of fashion?
This comes down to stock picking.* Are you clever enough to only pick the winners and avoid the losers? Or, to paraphrase Dirty Harry,
Do you feel lucky, punk?
* What about a dividend ETF? There's a ~4% yield with CVY.
CVY 4.18% SPY 8.13%
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The US has a flat 15% tax???... News to me.
On qualified dividends.
Ok, so in case we get more pendants:
15% tax on qualified dividends and capital gains if you make more than a certain amount, and less than a lot. For most here, and most middle class in general it's 15% so I just said that. But:
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
State income taxes come in addition. These are from 0% to ~13% I believe.
So capital gains tax in the US is between 0% and 36.8%.. Ok?
Yup... a "flat" tax of between 0 and 36.8%....:)
Well, point was that I'd wager that for something like 80-90% of working people here it's a flat 15% in federal tax. But yes pedant point well taken.
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Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.
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Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.
Sounds nice. Would you mind sharing?
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Through a widely diversified and carefully selected basket of ETFs, stocks, preferred stocks, MLPs, and REITs I have built a portfolio that yields over 7% and offers market stability, income stability, and capital growth that well outpaces inflation - it also provides me the income I need to satisfy my objectives.
I wouldn't mind a peek under the hood too and see how it compares to my own collection :)
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It's nothing fancy - long time holder of $PCI, $PDI from PIMCO which both yield north of 8%. I also own $PONDX which is north of 8% too I believe, maybe slightly less. I purchased $RIV, $NHF, and $BGH back in 2015 and they all have double-digit yields. I smooth it out a bit with some of the Gundelach funds like $TOTL $DLFNX, I really like him.
One of my favorite preferreds is $GPT.A, I have followed their CEO for quite some time and really trust him. I sunk a lot of my capital into their $25 preferred that yields 7.125% (I believe, going from memory here) and I have some AT&T baby bonds as well along with several other preferreds that hover over that 7% mark.
About 5 years ago I bought a "basket" of small regional banks that held cash in excess of 50% of their NAV and traded below NAV as a whole. That basket yields around 3% but capital appreciation has been colossal - wow! Life insurance companies too that held massive cash at 50% of NAV and traded below book - about 6 or 7 of those companies that yield around 3% with massive capital appreciation over the last 5 years. $AAPL, $BRK.B, and $AMZN round out some growth alongside the boring $RSP as a core stock fund.
Life is good!
Cheers,
Salmo
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Warren Buffett hates paying dividends, but he absolutely loves collecting them. How do you reconcile that?
Every company Berkshire has a passive stake in pays dividends. If it doesn't pay dividends then he just buys the whole company and pays himself with their earnings.
What company has been a wise repurchaser of their own stock? Most stock repurchases occur at market highs, not at market lows. Besides Berkshire Hathaway, who was buying back stock in 2008/2009 at the market lows? Instead of hoarding cash in the good times they were buying back overpriced stock.
The Kodak example is the worst. Just like Buffett took the dividends from the original Berkshire Mills investment and invested them into new companies you could do the same with Kodak. All those dividends means you weren't left with nothing when Kodak disappeared. When all the techs went sky high in the 90s and never paid a dividend you were left with nothing when they went bust in 2000.
Since 1995 how much in dividends have you collected from Coca Cola? Not aware of them dropping dead yet. What about your local utility?
I help an older friend gather his tax papers every year and he gets all these 1099s from direct stock purchases. He said his Dad bought him a some shares of these companies back in the 70s. Those "few" shares turned until a few hu
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The Kodak example is the worst. Just like Buffett took the dividends from the original Berkshire Mills investment and invested them into new companies you could do the same with Kodak. All those dividends means you weren't left with nothing when Kodak disappeared. When all the techs went sky high in the 90s and never paid a dividend you were left with nothing when they went bust in 2000.
Since 1995 how much in dividends have you collected from Coca Cola? Not aware of them dropping dead yet. What about your local utility?
Is that backtested? For that matter, how do you backtest a dividends strategy if you aren't using high dividend payers at a certain point in time?
In other words, using Kodak in a 1990 backtesting portfolio would've made perfect sense. The question becomes, what's the strategy for dumping a (p)stock/closed-end fund/whathaveyou?
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Is the following a good summary of the mustachian approach to dividends:
During the accumulation phase, your goal is to maximize Total Return. Some dividends may come from this, but you're reinvesting them anyway.
During the retirement phase, your goal is to create cash flow: dividends can be a useful part of this, but you should acknowledge that generating them requires a trade-off of a slightly lower total return.
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Is the following a good summary of the mustachian approach to dividends:
During the accumulation phase, your goal is to maximize Total Return. Some dividends may come from this, but you're reinvesting them anyway.
During the retirement phase, your goal is to create cash flow: dividends can be a useful part of this, but you should acknowledge that generating them requires a trade-off of a slightly lower total return.
That is my understanding of it, yes.
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I disagree. During both phases your goal is to maximize total return. There is nothing magical about dividends that makes them better than selling a piece of your investments.
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I disagree. During both phases your goal is to maximize total return. There is nothing magical about dividends that makes them better than selling a piece of your investments.
+1
Dividends are an antiquated way of returning value to shareholders in a world of $5 commissions.
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work? How do you find these funds? Examples? Buy into them if they are closed? Buy at a discount? etc. It sounds really interesting.
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
Similar to my strategy and I think the CEF space flies under the radar when people begin looking for instruments that can satisfy both yield and capital appreciation.
Cheers,
Salmo
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work? How do you find these funds? Examples? Buy into them if they are closed? Buy at a discount? etc. It sounds really interesting.
A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand. As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments. Plenty are available that routinely trade below NAV. There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par.
I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation. I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions. The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time. This is perfect as these are 'hold forever' positions for me.
A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener (https://www.cefconnect.com/closed-end-funds-screener). I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter. Link in signature line.
HTH
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work? How do you find these funds? Examples? Buy into them if they are closed? Buy at a discount? etc. It sounds really interesting.
A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand. As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments. Plenty are available that routinely trade below NAV. There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par.
I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation. I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions. The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time. This is perfect as these are 'hold forever' positions for me.
A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener (https://www.cefconnect.com/closed-end-funds-screener). I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter. Link in signature line.
HTH
Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.
Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?
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Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.
Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?
The main complaint I get when highlighting these is people think the fees are too high. (I saw one the other day with .13% though.) I find I can't get a better return with a low fee open ended bond fund however. And part of that fee is the interest expense for the leverage. It is hard to borrow at the same rate as these large banks can.
I've never known one of these to liquidate to capture the price difference. I think these are seen as steady cash flow generators and that it would be problematic to redeploy the management staff after frequent liquidations. So they just keep on keeping on. I have seen the funds merge to gain greater scale. A reduction in management fee usually results.
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As mentioned cefconnect.com is a good place to find infor and screen for CEF's. Some of their data will be old though so look up the funds web sites for the latest info. Morningstar has a CEF forum with good discussions and the funds that are popular. Seeking Alpha also has articles written about CEFs although some people on the Morningstar forum say some of the SA articles are not the best but still a place to learn.
Management fees can be high but also include interest cost. The yields are NET of fees. Many equity CEFs NAV move sideways, not generally something to buy for capital gains, think more in terms of bonds, you are looking for an income stream. Some do have good capital gains though plus income, that is why you have to pay closer attention to them.
Most CEFs trade at a discount to their NAV and never trade at a premium, it is just what investors are willing to pay. If a fund closed down and liquidated then you would realize the NAV. A few CEFs trade at nearly perpetual premiums, it is the perceived value of the management in investors eyes, in a recession Danger Will Robinson as investors bail the premium could become a discount to NAV. Some funds move from a discount to a premium and back again, some investors like to trade this movement. Also leverage will make the fund more volatile but there are some funds that don't use leverage. There are CEFs that use option trading in place of leverage to generate income as well.
CEFs can be like sector funds investing in bonds, mortgages, preferred shares, technology, health care, energy, utilities, domestic and foreign equity. One fund has a high % of Berkshire A and B shares and tracks near the S&P 500, some days better some worse since it isn't actually the S&P but it pays about 3.8% dividend.
CEFs require more watching than an index fund, it needs to be a hobby :)
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%. A lot of my distributions are from closed end funds bought at a discount to NAV. There are lots of CEFs that are invested in debt and debt like instruments (with 20-40% leverage) that yield 8 to 12%. I keep 40% of my portfolio in this space and thus have a conservative 60/40 allocation.
The idea is controversial here but I find it has worked for me since going FIRE in 2012 with a near 10% withdrawal rate that has fallen nearly in half.
@Financial.Velociraptor, would you explain a bit more about how one goes about making your strategy work? How do you find these funds? Examples? Buy into them if they are closed? Buy at a discount? etc. It sounds really interesting.
A closed end fund is like an ETF except that it has a fixed number of shares and does not create or destroy shares based on demand. As a result, the price is based on fixed supply and variable demand allowing the price to rise or fall above/below the net asset value of the underlying instruments. Plenty are available that routinely trade below NAV. There are hedge funds that exclusively trade CEFs by buying the volatile ones below NAV and selling when they revert to par.
I stick with just the ones investing in debt and debt like instruments e.g. it is my 'bond allocation. I like closed end funds for bonds better than regular funds because the fixed number of shares prevents them from being forced to 'sell low' if there are redemptions. The CEFs can and do hold their bonds to maturity and thus my duration risk expires over time. This is perfect as these are 'hold forever' positions for me.
A good free tool to find them including their discount/premium to NAV is https://www.cefconnect.com/closed-end-funds-screener (https://www.cefconnect.com/closed-end-funds-screener). I highlight three each Friday on my blog and do a special post on just federal tax free municipals at the end of each quarter. Link in signature line.
HTH
Thoughts on CEFs generally - seems/smells like 'high expense' ETFs or mutual funds that are actively managed.. but I'm intrigued. I was looking into Mexican stuff the other day (we're considering a move there to escape... snow in April, this year), and found an ETF unhappily with ticker "EWW" and then the Mexico Fund, https://www.cefconnect.com/fund/MXF?view=fund.
Buying 'on sale' with a discount to NAV sounds great - why pay full price again?! I don't quite understand why a fund that, presumably, mostly holds liquid shares would trade at such a discount when they could just liquidate?
Imagine I started a CEF containing only a share of Amazon stock. My management fee is 2%/year.
Obviously, it would be a better deal for you to just buy a share of Amazon directly instead of paying me the 2% to run a fund containing it.
However, at some level of discount, my CEF would be equally valuable as the one unencumbered share of Amazon. The expected discount to NAV would be the present value of the fees in the future. If the discount was larger, my fund would be a better deal than the stock. If smaller, the stock would be a better deal. (I'm sure inefficiencies exist in this space, based on the wide range of premiums/discounts)
As a fund manager, it makes more sense for me to buy Amazon for $1400 and sell it to you for $1300 because I'm trading the upfront loss for a stream of future payments. Meanwhile, you are enjoying increased leverage because you can buy more shares at $1300 than you could at $1400. It's a complicated balance.
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The fund manager isn't selling anything to anyone after fund launch. And they're certainly not selling you assets at a discount in exchange for an annuity-like stream of management fees.
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0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
...
Max is now 20%, since 3.8% "net investment income tax" has been repealed.
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I have dividends, distribution, and interest that cover 120% of my budget. Withdrawal rate is currently 5.12%
Why not withdraw 100%, and lower your withdrawal rate to 4.25%? According to Vanguard's nest egg calculator, with 100% stocks and 40 years in retirement, your odds would go from 70% chance of success to over 79%. But I suspect "stocks" isn't a fair representation of your investing style.
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Max is now 20%, since 3.8% "net investment income tax" has been repealed.
Bad news, net investment income tax has not been repealed.
ACA may be gone, but NIIT stayed.
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Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.
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Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.
If you were a 100% owner of a C-Corp and did not take a salary how would you pay yourself? The company is not public and you can't sell shares.
Nobody ever answers this one either. Why does Warren Buffett primarily make passive investments in companies that pay dividends?
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Dividends did go down much less than quoted prices during most historical bear markets, sort of implying additional liquidity (and perhaps utility) when cash is in short supply.
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Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.
If your income is sufficiently low, there are no tax consequences to either.
But--if you're income is high enough that you are taxed, the ENTIRE dividend is taxable, while only the gain is taxable when you sell.
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Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.
Can you sell shares for an indefinite number of years?
Can you collect dividends for an indefinite number of years?
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I know of no other way of maintaining my ownership in the company and getting paid without receiving a dividend.
Who wants to own a company and never get paid? Just rely on somebody paying more for my shares in the future.
I'm going to buy a rental property and instead of getting rent I am going to tell the renter just to improve the property for me. You know, $2000 worth a month. I assume everyone who hates dividends does this with their rental properties.
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I know of no other way of maintaining my ownership in the company and getting paid without receiving a dividend.
It is an illusion. The value of the company must drop by the amount of the dividend. That means the value of your ownership goes down. Look at it this way: The dividend yield of the S&P 500 is about 2%. Berkshire Hathaway has never paid a dividend. But if you sold 2% of your ownership of BRK every single year, your ownership take would have only grown. So you would have maintained ownership and still got your money out of the company.
So why does it matter if you sell shares or get a dividend? It is the same thing.
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Dividends are mathematically equivalent to selling. You're adding complexity, and risk, for no gain.
Can you sell shares for an indefinite number of years?
Can you collect dividends for an indefinite number of years?
Yes to both. You sell a fraction of your non dividend bearing holdings, but the value of each share goes up, and there will either be stock splits or you just sell a lower and lower number of shares each year.
I like dividends but mathematically, dividends or not is irrelevant.
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It is an illusion. The value of the company must drop by the amount of the dividend. That means the value of your ownership goes down.
That mantra is highly flawed. By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).
The free market sets the value of a company. If AAPL pays out $$2.52/sh in dividends their cash drops by $2.52 but I'm pretty sure AAPL is valued by more than just how much cash they have.
If you sell your shares you give up the right to future profits.
I wonder how many companies have come and gone without ever paying a dividend.
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It is an illusion. The value of the company must drop by the amount of the dividend. That means the value of your ownership goes down.
That mantra is highly flawed. By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).
The free market sets the value of a company. If AAPL pays out $$2.52/sh in dividends their cash drops by $2.52 but I'm pretty sure AAPL is valued by more than just how much cash they have.
If you sell your shares you give up the right to future profits.
I wonder how many companies have come and gone without ever paying a dividend.
I have $100.
I give you $5.
Now how much do I have?
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The amount of cash available to me has dropped by $5. That is a simple fact. If a company pays out a dividend of $5 per share, they have $5 less. Simple maths.
Nothing in that says they won't earn more money, or go bankrupt, or whatever.
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It is an illusion. The value of the company must drop by the amount of the dividend. That means the value of your ownership goes down.
That mantra is highly flawed. By that logic every Dow stock would have no value since they have paid out far more in dividends than their current stock price (maybe not AAPL).
Well no, that's not the logic. Because every Dow stock, in theory at least, will earn back the amount of the dividend (and hopefully a little more) in the next quarter.
If what you are saying is true, that the stock price doesn't drop after the dividend is paid, then here's the ultimate dividend strategy: You buy a stock just before the ex-date so you are the owner of record when the the dividend is paid. And then you sell the next day. I guess because stock trades take a couple days to settle you'd have to buy a couple days before the ex date. Let's look at this handy calender of ex dates:
https://www.thestreet.com/dividends/index.html
Tomorrow (the 20th the stock with the highest dividend yield is CVS with 3.13%. So a couple of days ago, I use all of my money to buy the stock. I own it all day on the 20th, and then I sell the whole thing on the the next Monday and pocket my 3.13%. That next Friday the stock with the highest dividend yield Tallgrass Energy Partners with a nice 9.96% DY. So I buy that, and sell it the next Monday. Rise, lather, and repeat. I make several percent every trade I'm only in the market for a couple of days, so market risk is tiny. You could probably make 60-70 trades a year. With compounding, you will be FIRE within a year, maybe two. Max.
But nobody trades like that because the stock price goes down by the amount of the dividend (or perhaps goes up in anticipation on the dividend) so you can't make money by doing that. Not only that, the stock exchanges automatically adjust the bid and ask prices down by the amount of the dividend. It is a real thing.
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I have $100.
I give you $5.
Now how much do I have?
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The amount of cash available to me has dropped by $5. That is a simple fact. If a company pays out a dividend of $5 per share, they have $5 less. Simple maths.
Nothing in that says they won't earn more money, or go bankrupt, or whatever.
I understand that quite well, it is a small detail at the beginning of the day that gets rapidly over ridden by the market and the prospect of future earnings.
Most companies trade for far more than the cash they have available, I hope everyone gets that.
I've still yet to hear an answer as to why Berkshire Hathaway primarily takes passives stakes in companies that pay dividends.
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Dividends are the equivalent of share buybacks. Neither is very exciting. In Canada, dividends are preferred because of the preferential tax treatment. In the US capital gains are preferred because of the preferential tax treatment. Both take advantage of taxation to send as much money to the shareholders as possible.
I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.
As an example "FTSE Canadian High Dividend Yield Index ETF (VDY)" current dividend yield is 5.13% and the trailing 12 months is 3.83%. If we want to achieve the 4% rule, it's much easier with the dividends than the capital gains. Long term the gains are better, on the short term dividends are easier to manage. Would you rather be getting the dividends, which have stayed constant all year, or selling stocks?
The best retirement portfolio should have diversification; capital gains, dividends, bonds and cash are all slightly diferent and all have benefits. They all fluctuate slightly out of sync, which I find appealing.
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...
0% if you make below a certain amount.
up to 23.8% if you make above a certain amount.
...
Max is now 20%, since 3.8% "net investment income tax" has been repealed.
Wrong.
As Schwab puts it in their breakdown of the new tax law,
Wealthier filers will continue to pay an additional 3.8% tax on investment income, known as the Net Investment Income Tax.
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I've still yet to hear an answer as to why Berkshire Hathaway primarily takes passives stakes in companies that pay dividends.
I'm your huckleberry. But there is a little nuance, so hold on. This from the "Berkshire Hathaway Owner's Manual." Emphasis mine:
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, <b>but overall we have garnered far more than a dollar of value for each dollar they have retained. </b>We consequently regard look-through earnings as realistically portraying our yearly gain from operations.
Or phrased another way:
When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.
In other words, all things being equal he'd rather his acquisitions retain earnings than pay dividends. And so he'd much prefer to pay a premium to get his money that way. He re-emphasized this in the last shareholder letter, by the way.
Now for the nuance: He's said many times he likes the dividends that companies pay to BRK. But he's also explained that if a company does things a certain way, he doesn't want them to change. "Don't sell Chinese food at a hamburger joint." If he buys a hamburger joint, he doesn't want them to start selling Chinese food because that's not what they do, and he uses that analogy specifically about dividend paying companies.
As I mentioned in a earlier post, at one time all companies paid dividends. Most companies still do (big ones, at least), but the amount they pay has vastly decreased. So if you take positions in large companies, odds are they will be dividend paying companies because most companies pay dividends. But Buffett isn't looking for just the dividend, he's looking for the total value. And as stated in his quote above, he looks at the retained earnings when calculating the value.
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I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.
In 2008, my dividends all were coming from Financial Stocks. When they cut their dividends in 2008, I lost years of saving in just a few weeks.
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I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same. Dividends have a nice way of reducing volatility, they would have allowed me to remain on autopilot that year. A healthy dose of dividends, in Canada, is a great way to get a steady income stream.
In 2008, my dividends all were coming from Financial Stocks. When they cut their dividends in 2008, I lost years of saving in just a few weeks.
Geography matters, in 2008 my financial stocks dropped in share price drastically and the dividends remained constant (a dividend strategy would have excelled for myself that year). Canada is much bigger on dividends, because of tax treatment, it provides a good comparison to understand what the USA would be like if dividends were taxed at 0%.
How much did the share price decrease oin 2008 on those same stocks? I'm saying they are correlated but not 100%, at times they won't be in lockstep. So its possible to have a dividend cut or a share price drop but its not always going to be both. Obviously sometimes it is both, that's where bonds and cash comes in. Being 100% in anything is far more risky than spreading out into multiple revenue streams.
Did you need to return to work in 208 because of the crash or were you able to maintain FIRE? That's the yardstick of determining what the right mixture is, total value of your portfolio is shortsighted. For me a healthy mix of dividends would have maintained FIRE (if I was already there). Too much in stocks would have forced selling at lows and locked in those temporary losses.
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I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same.
Perhaps you got lucky with an undiversified portfolio of companies that didn't cut dividends or go bankrupt during that period? The S&P 500 dividend dropped precipitously in 2009 and didn't recover until 2012. Anyone living completely off dividends (which you are not suggesting, but others do) would have faced a 23% drop in income in 2009.
http://www.multpl.com/s-p-500-dividend/table
The drop in dividends lagged the recession and drop in prices by a year or more, but I'm not sure that helps. Getting through 2008 but then having to sell shares in 2009 when dividends were finally cut would suck.
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I really liked my dividends in 2008, they stayed constant. Where my stocks were dropping by 30% my dividend (total dollars) stayed the same.
Perhaps you got lucky with an undiversified portfolio of companies that didn't cut dividends or go bankrupt during that period? The S&P 500 dividend dropped precipitously in 2009 and didn't recover until 2012. Anyone living completely off dividends (which you are not suggesting, but others do) would have faced a 23% drop in income in 2009.
http://www.multpl.com/s-p-500-dividend/table
The drop in dividends lagged the recession and drop in prices by a year or more, but I'm not sure that helps. Getting through 2008 but then having to sell shares in 2009 when dividends were finally cut would suck.
During the exact same time, how much did stocks drop? How is geting through 2008 a bad thing, I think the ability to get through a terible year is always great!
Thank you for proving my point, stocks and dividends don't operate in lockstep. The same person all in stocks would have dropped in 2008 and be selling at a greater loss. However, if you mitigate some of that by having a cash reserve, supplemented by dividends, a person could have rode that out.
In practice, lets say you spend $30k/year and receive $20K from dividends and $10k from gains/year. If you hold a one year cash buffer you might skip selling in 2008 and end the year having spent your cash but getting $20k in dividends. In 2009 you get $15k and end the year with $5000. In 2010 you get another $15k, and sell $10k in stocks/bonds. In 2011 you start riding the bull market and start replenishing the cash buffers, also getting $15k in dividends. In 2012 you receive roughly $20k in dividends but need to get on replacing the cash reserves, when stock prices are back to great levels.
So from 2008 to 2010 I would have sold $10k of my portfolio, with the sharp divivdend cut you speak of. Would you rather sell $60k at a loss? Remember, I didn't say it was all or nothing, I said dividends operate on a different cycle and provide a level of diversification.
All these rules are for retired people, its meaningless to compare a person in the accumulation phase to a retired person. Is it easier to live off pure stocks or a blend of stocks/dividends? What will gurantee FIRE sucess more often?
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For those of you who advocate the stock-picking high-dividend approach, do you recommend less allocation to bonds as well?
It sounds as though this most recent post is advocating only 1-year worth of cash (sounds like 4% cash to me).
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For those of you who advocate the stock-picking high-dividend approach, do you recommend less allocation to bonds as well?
It sounds as though this most recent post is advocating only 1-year worth of cash (sounds like 4% cash to me).
YMMV.
For my portfolio, I go with 40% allocation (target) to the bucket I call "fixed income". Fixed income is composed of primarily closed end bond funds, but also includes variable rate note funds, preferreds, and some REIT exposure. This high yield bucket covers about 120% of my annual budget (except in blockbuster years when I have a high tax bill.)
The remaining 60% is in individual stocks, mostly dividend payers that are used as the basis for options writing. That is, I sell options to generate an additional income stream. Results vary based on market conditions but has always (five years FIRE and counting) covered 100% or more of my budget, yet again.
My withdrawal rate is about 5% and I sleep well at night knowing I can take a 50% haircut to portfolio income and still not be in the 'danger' zone.
Indexing to VOO is good too. Whatever works for you.
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Great thread!
I'm also attempting to live of dividends eventually. I primarily use diversified LICs (or CEFs) that pay strong dividends. Australia also has reasonable tax advantages for dividend income which makes it a little bit more attractive for me.
The reason why I'd prefer this over selling to replicate dividend income is that this way I simply have dividend income turning up in my account at specified intervals. I don't even have to look at the market, really, as long as my asset allocation remains broadly in line. The less decisions I'm making the better, I've found!
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I am having a challenge finding strong eligible dividends that are Canadian only, that provide net decent returns.
(Because of Canada's tax rate for lower income earners makes Cdn eligible dividends attractive)
Any one else?
At some point, having a strong capital gains return (e.g., VUN) could outweigh the dividend / low tax returns. Has anyone figured out what that cut off point is?
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I am having a challenge finding strong eligible dividends that are Canadian only, that provide net decent returns.
(Because of Canada's tax rate for lower income earners makes Cdn eligible dividends attractive)
Any one else?
At some point, having a strong capital gains return (e.g., VUN) could outweigh the dividend / low tax returns. Has anyone figured out what that cut off point is?
Depends on province, but you are over time generally better focussing on setting your asset allocation, then putting those assets in the most efficient place.
You're good up to about $40k if your only income is Canadian eligible divis.
But - if you're lower income, be aware that the dividend gross up on eligible dividends actually artificially inflates your income - meaning you'd lose the GST credit and so on faster. Because every dollar of eligible divis 'looks like' $1.38 of income. Same deal on child benefits; Canadian divis reduces your benefit faster.
I sold off a chunk of stuff unreg when I realised this, and put it into something else.
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Yeah, it is not that bad. I have pretty much never received GST, and with DH earning modest amounts still, we wouldn't.
Only one kid left and he turns 16 next month, so again, based on family income and my current dividend income being still low, under $8k, not an issue.
My plan was to build the dividend income but so far, it seems that global (with US) equities have capital gains that far exceed the return on the dividend paying stocks.
I am just starting to put my thoughts around this -- e.g., for non registered, when my income is under $45k (no dividend tax), does it still make sense to go the dividend route versus global equities?
Has anyone done the math?
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Great thread. Kicking it back to the top.
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Mostly posting to follow, but does anyone buy securities specifically (or at least don't mind) the cap gains? If you do have assets that pay a cap gain, would you mind sharing those?
Fidelity has funds that seem to pay stupid cap gains.
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I like the anti-dividend approach. Why? Control.
Say you have dividend paying stocks. You're maybe trying to control income to stay below MAGI or AGI to use savings bonds for college or to put money directly in a Roth or for an ACA cliff or for Medicare premiums or any other valid reason. But then here comes the dividend payment and BAM....you fall over a cliff because you have absolutely no control over these dividends and when they're paid.
Ok....same scenario. You know that dividends will be paid one more time before the end of the year and you're $3 from going over an income cliff. But you hold no dividend stocks. How is this better control? Well....you simply don't sell any stock this year. Clean as can be, you have no added income.
I am only invested in non-dividend paying stock at a very low level ($5500 of BRK/B out of $2.5M). But moving forward, I may either buy more or convert dividend paying ETFs into BRK/B. We'll see. I'm still working, so don't have to jump through these hoops yet.
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To me, living off dividends just means you worked way too long. I plan on living off dividends in addition to selling shares and if I die with nothing left, that's fine with me. Now if I tap out before the reaper calls...that's the only problem :P
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Mostly posting to follow, but does anyone buy securities specifically (or at least don't mind) the cap gains? If you do have assets that pay a cap gain, would you mind sharing those?
Fidelity has funds that seem to pay stupid cap gains.
I own some - albeit not US names but local to me. They are small, local, low-risk savings banks with limited growth prospects. I view it as more stable than "normal" equities in terms of share price with an handsome yield (typically 6-9%). Under local rules I also have deferred tax on dividends for all practical purposes - i.e. its treated as unrealized share price gains which are also tax-deferred. Its not a big part of my stash but I think it will help reduce volatility while providing decent+ payoffs. The main risk is a serious housing crisis as their lending books are very mortgage-heavy. They are also not part of any index, not many analysts cover them and they generate no headlines or anything exiting and they are spread out across the country which offers some diversification - albeit still within a specific sector. But the money trickles in. I do reinvest the dividends in index funds, however, so I dont really add to the position. I don't plan to hold them forever and don't base any long-term calculations on receiving those dividends. 2008-2009 showed they aren't constant and they retained more earnings the last few years to boost their capital due to regulatory requirements.
While the yields might sound very impressive to an US-based investor, dividend yields are generally higher over here - the main domestic index has a dividend yield of ~4.6% currently.
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I used to think I wanted to be dividend investor until I really started reading everything in MMM and learning better about investing. It didn't take too long to realize it's ok to sell off some stock rather than have to potentially have a bigger portfolio to only live off of dividends alone.
+1- and taxes
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I like the anti-dividend approach. Why? Control.
Say you have dividend paying stocks. You're maybe trying to control income to stay below MAGI or AGI to use savings bonds for college or to put money directly in a Roth or for an ACA cliff or for Medicare premiums or any other valid reason. But then here comes the dividend payment and BAM....you fall over a cliff because you have absolutely no control over these dividends and when they're paid.
Ok....same scenario. You know that dividends will be paid one more time before the end of the year and you're $3 from going over an income cliff. But you hold no dividend stocks. How is this better control? Well....you simply don't sell any stock this year. Clean as can be, you have no added income.
I am only invested in non-dividend paying stock at a very low level ($5500 of BRK/B out of $2.5M). But moving forward, I may either buy more or convert dividend paying ETFs into BRK/B. We'll see. I'm still working, so don't have to jump through these hoops yet.
I don't see it as an all or none thing. You can reasonably predict dividends, and can sell stocks to make up income shortfalls. Personally, I would not advocate planning on iving off dividends. YMMV.
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I used to think I wanted to be dividend investor until I really started reading everything in MMM and learning better about investing. It didn't take too long to realize it's ok to sell off some stock rather than have to potentially have a bigger portfolio to only live off of dividends alone.
+1- and taxes
+2 - and because dividends have no meaning to your return since dividends include distribution of capital gains and excludes distributions via buybacks. Buying based on dividend amount is as useful of a metric as buying only companies with green logo's.
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Flip the metaphor around.
If a company with a $99M market cap receives a gift of $1M in cash, about what is their market cap now?
a) $99M
b) $100M
c) Can't decide because then I would have to apply the same rule when the company gives out a $1M gift. They would lose $1M in market cap every time they did it. Because I think money can be extracted from a company without reducing its value, I chose to believe the change in market cap cannot be estimated no matter how much cash is funneled into or out of a company.
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Flip the metaphor around.
If a company with a $99M market cap receives a gift of $1M in cash, about what is their market cap now?
a) $99M
b) $100M
c) Can't decide because then I would have to apply the same rule when the company gives out a $1M gift. They would lose $1M in market cap every time they did it. Because I think money can be extracted from a company without reducing its value, I chose to believe the change in market cap cannot be estimated no matter how much cash is funneled into or out of a company.
Trick question. Companies can't receive cash gifts.
Someone mentioned it in another thread but dividend stocks are a weak proxy for value stocks. It's why DLS (International SmallCap Dividend Fund) is used as an international small company value ETF in the Merriman portfolio. In the US, there are a plethora of SCV options and there's no need to focus on dividend payers.
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Flip the metaphor around.
If a company with a $99M market cap receives a gift of $1M in cash, about what is their market cap now?
a) $99M
b) $100M
c) Can't decide because then I would have to apply the same rule when the company gives out a $1M gift. They would lose $1M in market cap every time they did it. Because I think money can be extracted from a company without reducing its value, I chose to believe the change in market cap cannot be estimated no matter how much cash is funneled into or out of a company.
Trick question. Companies can't receive cash gifts.
Someone mentioned it in another thread but dividend stocks are a weak proxy for value stocks. It's why DLS (International SmallCap Dividend Fund) is used as an international small company value ETF in the Merriman portfolio. In the US, there are a plethora of SCV options and there's no need to focus on dividend payers.
Ahhhh so that's why people favour dividend stocks, because they are targeting value factor, not because they think dividends are some sort of separate money unrelated to the value of the business.
And all this time I thought they were using the value argument as a way to confirm their bias of believing dividends are some sort of separate money unrelated to the value of the business. How silly of me!
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Ahhhh so that's why people favour dividend stocks, because they are targeting value factor, not because they think dividends are some sort of separate money unrelated to the value of the business.
And all this time I thought they were using the value argument as a way to confirm their bias of believing dividends are some sort of separate money unrelated to the value of the business. How silly of me!
No, I expect you're right and dividends are seen as separate money by a lot of people.
But they are linked. Dividend chasers search for high yield. Follow the yield and value trails along...maybe. The dividend strategy doesn't really follow the value paradigm entirely, though, because it only looks at dividends. Also, of course, picking individual stocks simply for their high yield is just plain risky.
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Ahhhh so that's why people favour dividend stocks, because they are targeting value factor, not because they think dividends are some sort of separate money unrelated to the value of the business.
And all this time I thought they were using the value argument as a way to confirm their bias of believing dividends are some sort of separate money unrelated to the value of the business. How silly of me!
No, I expect you're right and dividends are seen as separate money by a lot of people.
But they are linked. Dividend chasers search for high yield. Follow the yield and value trails along...maybe. The dividend strategy doesn't really follow the value paradigm entirely, though, because it only looks at dividends. Also, of course, picking individual stocks simply for their high yield is just plain risky.
This is why many advocate chasing the total market, so you capture growth and value.
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
Yes, extremely sad. We get to retire early and make heaps upon heaps of money for almost zero effort. So sad. I hope you are weeping for me.
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
Yes, extremely sad. We get to retire early and make heaps upon heaps of money for almost zero effort. So sad. I hope you are weeping for me.
Blubbering and inconsolable. Because if you’d done just 1% better than the market over a space of years you’d be retiring how many years earlier?
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Flip the metaphor around.
If a company with a $99M market cap receives a gift of $1M in cash, about what is their market cap now?
a) $99M
b) $100M
c) Can't decide because then I would have to apply the same rule when the company gives out a $1M gift. They would lose $1M in market cap every time they did it. Because I think money can be extracted from a company without reducing its value, I chose to believe the change in market cap cannot be estimated no matter how much cash is funneled into or out of a company.
d) The market cap depends on what your president tweeted overnight.
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
Yes, extremely sad. We get to retire early and make heaps upon heaps of money for almost zero effort. So sad. I hope you are weeping for me.
Blubbering and inconsolable. Because if you’d done just 1% better than the market over a space of years you’d be retiring how many years earlier?
Maybe 1 year earlier? But since I'm not able to consistently be 15% better than the market, I'll have to settle for making obscene amounts of money for doing nothing.
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If dividends will help you stay in the market, you should do that. If they don't help you stay the course when the world is falling, you should figure out a less ulcer inducing asset allocation.
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Flip the metaphor around.
If a company with a $99M market cap receives a gift of $1M in cash, about what is their market cap now?
a) $99M
b) $100M
c) Can't decide because then I would have to apply the same rule when the company gives out a $1M gift. They would lose $1M in market cap every time they did it. Because I think money can be extracted from a company without reducing its value, I chose to believe the change in market cap cannot be estimated no matter how much cash is funneled into or out of a company.
Trick question. Companies can't receive cash gifts.
Have you proven this by attempting to give a meaningful gift to a company?
Is there a law against it? Am I doing something illegal when I donate hundreds of dollars to my local hospital each year?
Tips to sole entrepreneurs?
Have you ever thrown out or lost a gift card with a few cents or dollars remaining on it?
When the government cut taxes in 2017, wasn’t that an external event that put billions of dollars into company coffers at someone else’s expense (I.e. future generations)?
Crowdfunding?
As the company accountant, how would you handle a gift if you had to? You would credit the cash account and debit the corporate gifts expense account (or credit a new gifts received revenue account on the other side of the ledger). The net effect on cash is the opposite as if a dividend is paid.
The accounting is straightforward so the only leap of faith is the assumption that investors factor a company’s level of cash into its valuation. If that were not true, any company holding significant amounts of cash (e.g. Berkshire Hathaway, any solvent bank) could be purchased at a discount to their net asset value and broken up for a massive profit.
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
Why would it be sad that a local sports team that's made up of hobbyists cannot beat a team of professionals? That's just expected. (Not to mention that professional fund managers mostly cannot beat the market either.)
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This is why many advocate chasing the total market, so you capture growth and value.
And then there are others who view chasing the overall market returns as suboptimal.
It’s pretty sad when you think about it. We’re saying that our skills as investors are so bad that we’re better off saying screw it, buying all stocks in an index, and hoping for the best. And what’s even sadder is that you can make a very good argument that most investors should do exactly that.
If this were a sports team, we’d call it the Mediocrities.
Why would it be sad that a local sports team that's made up of hobbyists cannot beat a team of professionals? That's just expected. (Not to mention that professional fund managers mostly cannot beat the market either.)
Except that the hobbyists not only can beat the professionals, the hobbyists crush the field and win the championship almost every year.
By simply buying the index and doing nothing, you will beat 95% of professional money managers, year in and year out.
Imagine beating 95% of professional golfers without ever going to the driving range.
Imagine scoring 1420 on the SAT, but without ever going to class or studying.
Imagine beating 95% of professional race car drivers without knowing how to work a clutch.
Imagine winning the world cup in skiing by sitting in the lodge and drinking hot toddys and never putting on your ski boots.
You can be an elite investor--literally among the very best on the planet--by simply buying the index and doing nothing else. Some people find that sad. I find it exhilarating.
Where can I get a Mediocrities jersey? Because if it was a professional sports team, it would be better than the New England Patriots. And the Pats wouldn't' even be a close second.
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If dividends will help you stay in the market, you should do that. If they don't help you stay the course when the world is falling, you should figure out a less ulcer inducing asset allocation.
When dividend investors have exhausted every other attempt at defending dividend investing, their final argument is that focusing on dividends offers a behavioural benefit that allows you to remain invested during market turbulence, therefore it still has value.
The problem with "feeling good" at the expense of facing reality is that one day there may be a sustained market decline and a long drawn out recovery and you will find that dividend focused shares are not a bond proxy and you will be drawing down and depleting your portfolio faster and for longer due to the fact that a recession hits earnings of all businesses and this will put you at a higher risk of running out of money in old age, whereas if you had faced reality, you would have had a more appropriate allocation of bonds which would have lowered this risk. The fact that fixed income assets have low returns does not mean they have no use, and assuming LICs are a bond proxy is a mistake of potentially devastating proportion.
Deluding yourself to avoid facing reality and consequently failing to prepare for potential risks is not a benefit, it's a downside.
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If dividends will help you stay in the market, you should do that. If they don't help you stay the course when the world is falling, you should figure out a less ulcer inducing asset allocation.
When dividend investors have exhausted every other attempt at defending dividend investing, their final argument is that focusing on dividends offers a behavioural benefit that allows you to remain invested during market turbulence, therefore it still has value.
The problem with "feeling good" at the expense of facing reality is that one day there may be a sustained market decline and a long drawn out recovery and you will find that dividend focused shares are not a bond proxy and you will be drawing down and depleting your portfolio faster and for longer due to the fact that a recession hits earnings of all businesses and this will put you at a higher risk of running out of money in old age, whereas if you had faced reality, you would have had a more appropriate allocation of bonds which would have lowered this risk. The fact that fixed income assets have low returns does not mean they have no use, and assuming LICs are a bond proxy is a mistake of potentially devastating proportion.
Deluding yourself to avoid facing reality and consequently failing to prepare for potential risks is not a benefit, it's a downside.
I think it’s more specific to say that in a long bear market dividend stocks will have a harder time than non-dividend stocks, all else being equal. They have this semi-obligatory massive cash drain that forces them to seek debt funding during times when profits do not cover the dividend. That’s why today’s dividend stocks are often borrowing in the junk bond market to pay their dividends, paying 6-8% interest so their stock holders can collect 3-5%. What happens when the debt markets freeze up or require higher interest rates? A fire sale, that’s what! I remember 2005-2006 when AIG was a “dividend aristocrat”.
If anyone disagrees, they can put everything into NLY right now and retire on the 12% dividend yield. Good luck! It might work.
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If anyone disagrees, they can put everything into NLY right now and retire on the 12% dividend yield. Good luck! It might work.
Tolerance is to be championed. Except if it differs from the orthodoxy.