Author Topic: Living off dividends from portfolio invested for total return (70/30)  (Read 1766 times)

myfirenow

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Are there any calculators for this assumption? Living off dividends from portfolio invested for total return (70 stocks/30 bonds). All money in a taxable account. Planning for a 50+ year retirement.

For example, using a 3 fund portfolio from Vanguard produces a dividend yield of ~2.5%.  This will obviously fluctuate over time. What if I choose to just pay dividends to cash, and live off whatever that is. The rest of the portfolio will continue to grow, without selling shares.

EvenSteven

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I'm not sure exactly what you want to calculate. If you are only spending dividends, and your yield is 2.5%, then that is a 2.5% withdrawal rate.

You are almost certainly assured to die with a giant pile of money. Make sure you designate some charities in your will.

nereo

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There's no "magic" in living solely off of dividends.  The near fail-safe track record is entirely due to using an absurdly low WR (you mentioned 2.5%) and not the fact that you are only spending dividend income.  You could just as easily buy a blended fund and use a 2.5% WR with similar success.

the money companies pay out in dividends reduces the amount the share price would otherwise rise by an almost equal amount.

myfirenow

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Thanks, this makes sense. I do understand this point. I'm thinking about it from the standpoint of not wanting to sell shares in correction. Not trying to take a "shortcut" here.

Considering this type of hybrid approach since I'm starting FIRE now at at 37 and I'm fearful of the first 5-10 years and where equities are priced now. Once I feel comfortable, I can take the full 3.5% (div plus selling some shares).

Andy R

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Companies can distribute money via dividends or via share buybacks where they buy back a number of shares, thereby boosting up the price of remaining shares, instead of paying it out as dividends - the end result to your gains are the same (but more tax efficient for those still accumulating), you just sell down a bit of what the shares increased in price by.

Dividends are arbitrary, they have no actual meaning relating to your total return. It's like saying you will only buy companies with green in their logo.

ChpBstrd

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I'm thinking about it from the standpoint of not wanting to sell shares in correction. Not trying to take a "shortcut" here.

Dividends are usually cut right after major recessions. Bond defaults increase at about the same time.

One thing you could do to protect against SORR is to look into how options could be used to reduce your portfolio’s volatility. This insurance comes at a cost to your total returns, but by my calculations it is a lower cost than what one loses hiding in treasuries or working several years extra to get the WR down to 3%. I’m currently targeting a 4% WR with a 90% stock portfolio that has less volatility and downside risk than many bond portfolios.

Travis

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I'm thinking about it from the standpoint of not wanting to sell shares in correction. Not trying to take a "shortcut" here.

Dividends are usually cut right after major recessions. Bond defaults increase at about the same time.


In your calculations and concern over a recession should one happen, remember that the money coming to you will be smaller whether you sell shares or just take the dividend.  It's not a fixed amount.

BicycleB

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One way you can get a feel for how different portfolios work is by studying the charts and calculators on portfoliocharts.com.

https://portfoliocharts.com/

The feature where you can adjust your own portfolio and make multiple chart types, including drawdowns and withdrawal rates, is harder to find than it used to be. It's at the bottom of the Charts section; here's a direct link.

https://portfoliocharts.com/portfolio/my-portfolio/

The site has several calculators you might find valuable. They've been sort of buried in the middle of the Charts section, but they're there. Consider studying the Withdrawal Rates calculator first. Then enhance your knowledge by playing with the calculators for Drawdowns, Long Term Returns, and maybe Target Accuracy.

https://portfoliocharts.com/portfolio/withdrawal-rates/
https://portfoliocharts.com/portfolio/drawdowns/
https://portfoliocharts.com/portfolio/long-term-returns/
https://portfoliocharts.com/portfolio/target-accuracy/

For understanding, it also doesn't hurt to read the other portions of the site. I think the article below is a thought-provoking example.
https://portfoliocharts.com/2019/02/11/when-aiming-for-a-target-consider-the-accuracy-of-the-weapon/

habanero

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In general US companies pay low dividends and rather repurchase shares (I assume its for tax reasons but I'm not into the details as I don't live in the US). Been a while since I looked at it, but the dividend yield for the S&P 500 was just above 2% or so. For reference our main index here in Norway has a dividend yield of ~4.25% and most european indices also have significantly higher dividend yields than the S&P 500. But its not very relevant. Apart from the joy of seeing the dividend payments into your account (I admit i do have a certain liking for it) there is nothing special with dividends vs capital gains trough repurchases. In fact, the latter might be more tax efficient for you as an investor.

If I wanted to live off dividends I could buy a selection of companies here yielding 6-7-8%. But there reason they do is that they pay out a large chunk of the profits as they have limited growth potential so the share prices tend to not really go anywhere. The total return ain't bad, but dividend yield isn't everything.