Author Topic: Retiring Early on Stock Dividends video/presentation  (Read 3531 times)

mikescepaniak

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Retiring Early on Stock Dividends video/presentation
« on: February 17, 2022, 02:18:00 PM »
More than 2 years ago, I started a forum thread here asking for thoughts on investing for dividends for the purpose of reaching and maintaining FIRE status. The responses I received in that thread, while overwhelmingly negative, still proved very helpful toward the creation of my presentation. For that, I'm thankful.

After doing the presentation, I published (on my blog) a written version of the content I presented - Misguided Early Retiree Somehow Manages to Live Off of Dividends. Recently, the leader/organizer of the meet-up at which I gave the presentation posted a video recording he took of said presentation. For those who are interested, please have a look-see - Retiring Early on Stock Dividends, the Movie.

For those who are wondering - yes, I do still follow this strategy and yes, I am still retired.

Thanks.

Telecaster

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #1 on: February 17, 2022, 03:52:10 PM »
Thanks for sharing.  This para jumped out at me:

Quote
Survivorship Bias
"Investing for dividends is subject to survivorship bias." I may not completely understand this argument. If I do understand it properly, I would argue that every investment strategy that doesn't include everything is subject to survivorship bias. If you feel compelled to have your investment portfolio include everything (including stocks, bonds, precious metals, real estate, commodities, etc.), that's your prerogative. Go for it.

Some background:  An argument that many dividend investors make goes something like this: "a basket of stocks that increased their dividend by X amount of Y number of years would have beaten the S&P 500 over that time frame."   But there is no way to know what those stocks would have been ahead of time.  They just looked at stocks that turned out to be successful companies and sure enough it turns out they were successful.   That's why those types of strategies cannot be relied upon. 

ASFAIK, you did not make that argument, so survivorship bias isn't really a valid criticism of your strategy.   


mikescepaniak

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #2 on: February 17, 2022, 05:02:35 PM »
Some background:  An argument that many dividend investors make goes something like this...

Gotcha'. Thanks for the explain!

joe189man

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #3 on: February 18, 2022, 10:55:48 AM »
Thanks for this, My folks could likely benefit from this dividend approach, i asked about it once here and was shot down. But for them, it seems like the best option to ensure constant simple "income"

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #4 on: February 18, 2022, 12:07:17 PM »
Thanks for this, My folks could likely benefit from this dividend approach, i asked about it once here and was shot down. But for them, it seems like the best option to ensure constant simple "income"

I don't know that we need to have the dividend discussion again...but since you mentioned it, keep in mind that dividend strategies are not simple.   There are a lot of crappy companies with high dividend yields that you don't want to own.   Similarly there are some great companies like Apple and Microsoft that pay low dividends.  The trick is to find good companies that pay good dividends. 

Nothing simple about that last part.    The OP uses a newsletter to inform his picks (nothing wrong with that) but it stills requires analyzing the newsletter and making the trades.   If your folks want simple, maybe that's not the best route.  Now, there are some perfectly fine dividend ETFs.   But the dividend yields typically aren't very high ~3%-ish.

If you want a simple fire and forget strategy, perhaps consider a Vanguard Life strategy fund set up with automatic withdrawals to your bank based on the 4% rule.  Then just look at your bank statement and ignore the investment balance.  The reason being 4% > 3%.   

waltworks

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #5 on: February 18, 2022, 01:21:12 PM »
If someone isn't sophisticated enough to understand how dividends work, and they don't want to "eat into principal", there are worse strategies out there. Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

This forum is probably not the place to find those people, though.

-W

boarder42

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #6 on: February 18, 2022, 01:56:55 PM »
I mean you can retire on any strategy and stay retired. That doesn't mean it's efficient. You could write the same article about gold in your mattress.

Retiring and staying retired on a sub efficient strategy doesn't give credence to it's value.

MustacheAndaHalf

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #7 on: February 18, 2022, 02:20:18 PM »
SPIVA's scorecard employs very solid approaches that include eliminating survivorship bias - they track all funds from the start, rather than looking for what funds exist later.  Here's their explanation:

"Survivorship Bias Correction: Many funds might be liquidated or merged during a period of study. However, for someone making an investment decision at the beginning of the period, these funds are part of the opportunity set. Unlike other commonly available comparison reports, SPIVA Scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias."
https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-mid-year-2021.pdf

PDXTabs

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #8 on: February 18, 2022, 03:10:44 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

waltworks

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #9 on: February 18, 2022, 03:20:10 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

Generally speaking, the critique is that companies that pay out big dividends are large mature ones that have no growth prospects. The ones that will make you money are the ones reinvesting in growing their business and not paying dividends. Sitting on cash is of course bad.

As I recall (vaguely, I could be wrong) the underperformance of a dividend focused strategy is pretty small, but it does exist. If someone is bored they could do some googling but I'm headed to the park with my 2 year old.

-W

boarder42

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #10 on: February 18, 2022, 03:44:28 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

Generally speaking, the critique is that companies that pay out big dividends are large mature ones that have no growth prospects. The ones that will make you money are the ones reinvesting in growing their business and not paying dividends. Sitting on cash is of course bad.

As I recall (vaguely, I could be wrong) the underperformance of a dividend focused strategy is pretty small, but it does exist. If someone is bored they could do some googling but I'm headed to the park with my 2 year old.

-W

Damn 2 year old. I would have pegged you for a 50-60 year old.  Prejudice is crazy. But your points are always spot on. I approve the message above.

Telecaster

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #11 on: February 18, 2022, 03:59:12 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

If they have a big pile of cash they can't invest internally, I would prefer they buy back shares.  It is a little more tax efficient from my standpoint.  Assuming of course the company is not re-purchasing overvalued shares, which certainly happens. 

boarder42

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #12 on: February 18, 2022, 05:07:00 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

If they have a big pile of cash they can't invest internally, I would prefer they buy back shares.  It is a little more tax efficient from my standpoint.  Assuming of course the company is not re-purchasing overvalued shares, which certainly happens.

Share buy backs should be illegal

JJ-

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #13 on: February 18, 2022, 05:16:38 PM »
Do you give up a little return, and is it a bad idea for tax reasons? Sure. But it's not terrible, and if it keeps people from doing dumb stuff with their money, then good.

Ignoring taxes, are you giving up return? Either the company can reinvest that capital or you can?

EDITed to add - as a thought experiment would your rather your company pay out a dividend or sit on a big pile of cash?

Generally speaking, the critique is that companies that pay out big dividends are large mature ones that have no growth prospects. The ones that will make you money are the ones reinvesting in growing their business and not paying dividends. Sitting on cash is of course bad.

As I recall (vaguely, I could be wrong) the underperformance of a dividend focused strategy is pretty small, but it does exist. If someone is bored they could do some googling but I'm headed to the park with my 2 year old.

-W

Damn 2 year old. I would have pegged you for a 50-60 year old.  Prejudice is crazy. But your points are always spot on. I approve the message above.

50-60 year old can have a 2 yo but I'm with you on my perception of waltworks. Tons of sagesse and inoffensive writing with a bit of "whatever you want to do" but always showing common sense as the alternative. That doesn't come quickly.

PDXTabs

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #14 on: February 18, 2022, 06:42:13 PM »
Share buy backs should be illegal

I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

boarder42

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #15 on: February 18, 2022, 06:59:49 PM »
Share buy backs should be illegal

I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

Executive comp.is typically tied to stock price. Buying more share switch extra money inflates price and allows CEOs to extract wealth that may not be there. Compound that with the us govt bailing companies out who then turn around and buy back shares. 

It may be one of the biggest flaws in the trickle down economic system. Tax breaks for the rich and corps just lead to purchasing shares of companies not money to people who need it.

PDXTabs

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #16 on: February 18, 2022, 07:44:03 PM »
Share buy backs should be illegal

I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

Executive comp.is typically tied to stock price. Buying more share switch extra money inflates price and allows CEOs to extract wealth that may not be there. Compound that with the us govt bailing companies out who then turn around and buy back shares. 

It may be one of the biggest flaws in the trickle down economic system. Tax breaks for the rich and corps just lead to purchasing shares of companies not money to people who need it.

I'm onboard with fixing executive compensation. Executive compensation should not be tied to stock price.

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #17 on: February 18, 2022, 08:27:46 PM »
I'm a reformed dividend investor. I was attracted to dividend investing circa 2004, for the same reason Mike talks about in his good pitch.  I found the Morningstar Dividend Investor newsletter when it first started.  Josh Peters, the original author was a really smart guy, who's not only a gifted  stock picker, but was an excellent explainer about why.  His book, while horribly out of date, is still worth reading if you want to do dividend investing   By closing following his newslesster, my portfolio was consistently beating the appropriate indexes by 1-2%. According to Schwab's portfolio, I was even getting higher returns with lower risk, terrific for those Seeking Alpha.

I entered 2008, with around 3 dozen dividend-paying stocks with a dividend yield of just under 4%. Perfect for a 3.5% withdrawal rate. The big problem was that the portfolio was overweight in financial stocks, especially banks. Not only did the bank stocks valued plummet, but all of them slashed their dividend and many eliminated them entirely.  However, overall the portfolio performed as expected, stable value stocks, with Beta <1, and high dividend yields fell less than the S&P 500.  More worrying was the dividend cuts, Josh had explained that dividend cuts were quite rare. It turned out 2009, was a record year for dividend cuts, surpassing cuts in the great depression.  Not just bank stock but dividend aristocrats, like GE slashed dividends also.  So while my dividend income was only slashed by about 25%, far less than the S&P 45% drop. It still resulted in my dividend income being a bit below my withdrawal rate. Since, the whole idea of dividend investing while in retirement is you have enough income so you don't have to sell in bear market, that's a bad outcome.


I stopped doing dividend investing around 2015, for a couple of reasons. First of all, it became too hard, Josh Peters got lured away to run a hedge/mutual fund (I'm sure he got hefty raise). His replacement was not nearly as good. I looked at other income-oriented newsletters, and there wasn't a lot of variety. By and large, you can just buy all the stocks the Vanguard Wellesley fund, throw in a few MLP (master limited partnerships mostly oil pipelines as such) and you too can write a dividend newsletter.

But most importantly, dividend investing sucks in bull market.  Up until around 2010-2012, you could make a case that dividend investing had similar returns to index investing with lower volatility.  Thanks to the dramatic increase in the price of growth stock (e.g FAANG) that's no longer true.

I just checked the Morningstar Dividend Newsletter home page. From 2005 to 12/31/2021 the dividend investor has a total return of 327%, not bad. But nowhere near as good as the 466% of the S&P. Considering when I stopped subscribing, it was still beating the S&P 500, the last seven or so years must have been really bad.

mikescepaniak

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #18 on: February 19, 2022, 08:29:44 AM »
I'm a reformed dividend investor. I was attracted to dividend investing circa 2004...

Excellent points, clifp. We've got basically the same story, except that I stayed in while you got out.

I never fully quantified those dividend cuts during the great recession, as I was not retired at the time. But, I'm fully aware that they happened. There were also some cuts made during the early months of the pandemic. In that case, I was retired, so I took more notice of them. But, the pain was completely bearable. However, whereas the overall market recovered very quickly from the pandemic dip, the Dividend Investor portfolio took longer to recover its yield.

I completely agree that the manager that replaced Josh Peters was lacking. He didn't communicate his thought process well. Fortunately, he didn't last long. I feel much more comfortable with the current portfolio manager. Still not as good as Peters, though.

Your assessment that income-oriented newsletter options are lacking matches my own. So, if Dividend Investor went away, I'd most likely shift gears into total market indexing.

Telecaster

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #19 on: February 19, 2022, 06:18:28 PM »
I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

At the risk of oversimplification, buy backs allow the investor defer the taxes which is generally seen as a good thing.   With dividend reinvestments like you describe, you are incurring a taxable event before you get to reinvest the money.  In theory, you are stepping up your basis which lowers your future taxes so maybe it is a wash.  But you are giving up the bird in the hand, and complicating your future taxes.   I would much prefer taxable events to be on a time and scale of much choosing.  For example, if you need to keep your MAGI low to qualify for ACA subsidies.  Or maybe if you want to pass money onto your heirs. 

Obviously, if companies are buying back shares above intrinsic value they are actually destroying shareholder value.  But same principle applies to dividends too. 



mistymoney

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #20 on: February 19, 2022, 08:43:32 PM »
I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

At the risk of oversimplification, buy backs allow the investor defer the taxes which is generally seen as a good thing.   With dividend reinvestments like you describe, you are incurring a taxable event before you get to reinvest the money.  In theory, you are stepping up your basis which lowers your future taxes so maybe it is a wash.  But you are giving up the bird in the hand, and complicating your future taxes.   I would much prefer taxable events to be on a time and scale of much choosing.  For example, if you need to keep your MAGI low to qualify for ACA subsidies.  Or maybe if you want to pass money onto your heirs. 


but if the stocks were in roth/ira/401k rollover, then this would not apply. Dividend withdrawals would be taxed the same as selling and withdrawing, or not taxed as the case may be.

Within a taxable account, I had thought dividends had some advantageous tax treatments as well. Depends on income level overall, I suppose.

While dividend amount can vary, they are fairly predicable so you can plan out if you want x% of your income supplied by dividends and not be supject to too many surprises.

So I don't find your arguments here very pursuasive.

I think the real questions about dividend stocks is whether or not they are less volatile than growth stocks and could be part of a strategy for managing SORR. both from a volatility of price and the dependability (or not) of the income stream.

While it is true that dividends can be cut or eliminated in a downturn, it's still a question of by how much and how does that effect the SORR for the entirety of the retirement period.

so while that is a question, as mentioned above it can depend on the sector of the ddividend stocks, financial, utility, REIT, etc. and the nature/foundation of the downturn.

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #21 on: February 20, 2022, 01:37:31 AM »
There is virtually no difference from a tax perspective from dividend investing or index investing, if you are in retirement.
Selling $40K of your $1 million worth of index funds, each year to live on give you $40K capital gains
Getting $40K of qualified dividends from you portfolio is taxed at the same rate as capital gains.
Assuming a person has both taxable and 401K/IRA accounts, and it is very easy to make them identical.

In the past, the lower beta of dividend stocks, reduced the volatility of a portfolio, and that arguably made up for the lower returns. It just hasn't been true the last decade.

There is one sort of psychological advantage to dividend/fundamental investing, you have a greater understanding of what you own.  The problem with index investing is stocks just become this black box/casino chips. During a bear market it's easy to get spooked and just sell cause you see your net worth dropping every day for months at a time.  It's what happened to one of my sisters and BIL, and some friends. 

By Jan-March of 2009, I was standing on top of my soapbox (aka forums) telling people buy buy, stocks may go lower in the short term but you will make money in 5+ years. I had no more cash left, so I couldn't buy as much as I wanted. But thanks to Josh Peters and others, I had a pretty good understanding of how much money Coke, Intel, Apple, Berkshire, Realty Income, Chevron, etc. and I knew they were bargains. So I was never tempted to sell.

Right now, I think stocks and bonds are both overvalued and will go down, but I have very little conviction this will happen anytime real soon.
Is that understanding worth the pain and lower returns of dividend investing probably not.
 

seattlecyclone

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #22 on: February 20, 2022, 02:35:16 AM »
Share buy backs should be illegal

I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

Executive comp.is typically tied to stock price. Buying more share switch extra money inflates price and allows CEOs to extract wealth that may not be there. Compound that with the us govt bailing companies out who then turn around and buy back shares. 

It may be one of the biggest flaws in the trickle down economic system. Tax breaks for the rich and corps just lead to purchasing shares of companies not money to people who need it.

Let's say you're a company with a $100 share price, and $1/share of earnings that you could (or could not) distribute to shareholders. Your CEO is scheduled to get 1,000 shares vesting every month. What do you do with your earnings?

Option 1: Keep the cash in the corporate checking account. Shares are still worth $100 apiece, the CEO gets $100k/month worth of shares as compensation. Shareholders don't need to pay any tax.
Option 2: Pay a $1/share dividend. Shares are now worth $99 apiece because you sent 1% of the wealth out of the corporate entity without changing the number of shares. The CEO now gets $99k/month worth of shares as compensation. All shareholders need to pay tax on $1 of income per share.
Option 3: Do a buyback. You buy back 1% of the shares, but each share is still worth $100 because the cash leaving the company's books is equivalent to the number of shares being retired. The CEO gets $100k/month worth of shares as compensation. Certain shareholders—the ones who were interested in selling anyway—have to pay capital gains tax. None of the other shareholders owe anything.

So, you can point out that the executives get more compensation if they do a buyback than if they do a dividend, and you'll be right! But (a) it's not much more unless you're distributing a pretty significant percentage of the market cap, and (b) the executives make the same amount when the company does a buyback as they make if they distribute no cash at all. The dividend option is worse for the executives than a buyback, and worse for the buy-and-hold investors too.

You could ban buybacks to really stick it to the executives (because having them make $100k/month instead of $99k/month is really going to make a difference for income inequality), but take a look at how you've changed the incentives. Instead of having three options, they now have two: pay a dividend or retain the earnings within the company. Paying a dividend is worse for the executives' income than not paying one, so the executives will now have a short-term incentive to retain earnings even if the company has no real long-term plan for reinvesting those earnings into future growth.

With legal buybacks the question of whether or not to distribute earnings has no immediate impact on the executive compensation; the shares are worth the same either way. They therefore have an incentive to decide to distribute or retain cash based on what they think is likely to be best for the long-term share price. Isn't that a good outcome?

MustacheAndaHalf

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #23 on: February 20, 2022, 06:27:57 AM »
Within a taxable account, I had thought dividends had some advantageous tax treatments as well. Depends on income level overall, I suppose.
Paying no tax is better than advantageous tax treatments.  For a single filer earning $50k income, ordinary income tax is 22% while qualified dividends are taxed at 15%.  But you pay $0 on a dividend that doesn't happen.  I don't follow why you dismiss the difference between 15% and 0% as not convincing, when most wealth is outside retirement accounts (401ks are almost entirely used by the richest half of the population, and the very richest have far more outside retirement accounts).

waltworks

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #24 on: February 20, 2022, 08:19:02 AM »
There is virtually no difference from a tax perspective from dividend investing or index investing, if you are in retirement.
Selling $40K of your $1 million worth of index funds, each year to live on give you $40K capital gains
Getting $40K of qualified dividends from you portfolio is taxed at the same rate as capital gains.

You only pay capital gains on *gains* though. So if your $40k of shares has a basis of $20k, that's $20k of capital gains, not $40k.

$40k of dividends is $40k of dividends, on the other hand.

-W

mistymoney

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #25 on: February 20, 2022, 08:44:43 AM »
Within a taxable account, I had thought dividends had some advantageous tax treatments as well. Depends on income level overall, I suppose.
Paying no tax is better than advantageous tax treatments.  For a single filer earning $50k income, ordinary income tax is 22% while qualified dividends are taxed at 15%.  But you pay $0 on a dividend that doesn't happen.  I don't follow why you dismiss the difference between 15% and 0% as not convincing, when most wealth is outside retirement accounts (401ks are almost entirely used by the richest half of the population, and the very richest have far more outside retirement accounts).

If you make under 40k (80k mfj) your tax rate for dividends is 0 anyway, hence "depends on income overall".

And my post was more focused on when you are using the money to live on. 401k withdrawals are taxed similarly to earned income, I guess it is deferred income, but dividends in a taxable account will be taxed as dividends. Seems like many ways to splice and dice those income sources to lower overall tax burden. Add in Roth money and you have so many options.

mistymoney

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #26 on: February 20, 2022, 08:51:47 AM »
Within a taxable account, I had thought dividends had some advantageous tax treatments as well. Depends on income level overall, I suppose.
Paying no tax is better than advantageous tax treatments.  For a single filer earning $50k income, ordinary income tax is 22% while qualified dividends are taxed at 15%.  But you pay $0 on a dividend that doesn't happen.  I don't follow why you dismiss the difference between 15% and 0% as not convincing, when most wealth is outside retirement accounts (401ks are almost entirely used by the richest half of the population, and the very richest have far more outside retirement accounts).

to this piece, the only wealth I have is in 401k and rollovers. Well - some in Roth too, maybe 10% of total.  I wouldn't think I was that unusual.

mistymoney

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #27 on: February 20, 2022, 09:05:45 AM »
I guess I will throw another question out there into the mix.

So I have been thinking on mitigating SORR. One interesting idea I saw out there was to get a shorter term annuity for like 10 or even 20 years.

While annuities do have a bad rap, the argument was to manage SORR with some small percentage of your portfolio, and if the early years did not have negative impacts, could use the annuity money to delay taking ss to increase the monthly payment.

But of course the principal invested goes poof at the end of the payout - or poof at the begining perhaps. If you did have an annuity that was large enough for you to not pull any other money out, then your remaining stach would likely more than double during the 10 years.

wondering if there was a way to use dividends instead. Would certainly be less secure than an annuity, but if you set up a percentage of your stach into dividend vehicles that paid out your yearly income needs, don't touch the rest of the stach, and cannibalize the dividend stach in the event of lowered dividends not supporting the yearly income needs, it would likely beat the annuity in most scenarios. Best case, it always supplies the needed income, and most worst case, likely left with something after the equivalent annuity distributions.

Of course the worse of all is that you end up with nothing in it and even have to go after the nondivident stach, but that would be pretty extreme......with the annuity of course meant to bypass the most extreme scenarios.

Telecaster

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #28 on: February 20, 2022, 10:42:26 AM »
I don't have a strong opinion on this one way or another. Could you elaborate on how they are fundamentally different than dividends with me reinvesting the dividends to buy more of the same shares?

At the risk of oversimplification, buy backs allow the investor defer the taxes which is generally seen as a good thing.   With dividend reinvestments like you describe, you are incurring a taxable event before you get to reinvest the money.  In theory, you are stepping up your basis which lowers your future taxes so maybe it is a wash.  But you are giving up the bird in the hand, and complicating your future taxes.   I would much prefer taxable events to be on a time and scale of much choosing.  For example, if you need to keep your MAGI low to qualify for ACA subsidies.  Or maybe if you want to pass money onto your heirs. 


but if the stocks were in roth/ira/401k rollover, then this would not apply. Dividend withdrawals would be taxed the same as selling and withdrawing, or not taxed as the case may be.

The previous poster was talking about reinvesting the dividends, not spending.   This partly why I said "at the risk of over simplification."  There are a bunch of different tax scenarios for sure. 

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #29 on: February 20, 2022, 12:43:29 PM »
There is virtually no difference from a tax perspective from dividend investing or index investing, if you are in retirement.
Selling $40K of your $1 million worth of index funds, each year to live on give you $40K capital gains
Getting $40K of qualified dividends from you portfolio is taxed at the same rate as capital gains.

You only pay capital gains on *gains* though. So if your $40k of shares has a basis of $20k, that's $20k of capital gains, not $40k.

$40k of dividends is $40k of dividends, on the other hand


First of all index funds also pay dividends a $1 million worth VTI paid about $13K worth dividends last year, so the delta between index and dividend investing is only $27K
If you've been accumulating for 20 or 30 years your basis is going to be a lot lower than 1/2
So for instance, if I look at VTI in my taxable account, worth 310K, with a basis of 66K bought in 10/2008 or 79% taxable.   My Intel stock purchased in the mid 80s has a basis of $.62 or 98.7% taxable, Apple stock you bought 10 years ago 90% taxable.

In addition, most everyone is going to have IRAs (taxable or Roth) a dividend investor and index investor tax treatment is identical for these accoount.  Let's assume 1/2 the money is taken from IRAs and have enough other income to push you into the 15% taxable bracket .   So the Indexer would have to sell $13,500 worth VTI to get to their $40K.  If it was 79% taxable that would leave a basis $2,835 which would save $425.  So the after tax the dividend investors get 99% as much as indexer. Seems pretty close to "virtually identical" to me.

waltworks

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #30 on: February 20, 2022, 02:07:23 PM »
Sure, you'll end up with some dividends no matter what, and sure, many times you're selling highly appreciated stock (though you can pick and choose which shares to sell, of course, and sell less appreciated ones when you want a lower CG hit).

But you still get to *pick* when you do that. If I decide to pick up a part time job, or my rental property starts making so much money I don't need as much from my stock portfolio, I can avoid paying taxes on capital gains by not generating any. I can't do that with dividends.

Again, I think a dividend strategy is just fine, and it's more comfortable for lots of people. The underperformance as I recall is pretty small and if it helps you sleep at night and not make bad decisions/panic sell your holdings, that's a huge win for almost everyone.

But it's not magic and it's not objectively *better* than normal index investing.

-W

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #31 on: February 20, 2022, 03:32:44 PM »

Again, I think a dividend strategy is just fine, and it's more comfortable for lots of people. The underperformance as I recall is pretty small and if it helps you sleep at night and not make bad decisions/panic sell your holdings, that's a huge win for almost everyone.

But it's not magic and it's not objectively *better* than normal index investing.

-W

I think you must have missed my key point a few posts.
The Morningstar Dividend Investor newsletter was started back in 2005 with $100,000 real money portfolio and year or two later they added a second $100K portfolio.
By the newsletters own tracking that $200K would have been worth $654,000 at the end of 2021. The same $200,000 would be worth $924,000 if you simply put the money  into a S&P 500 index fund.
The case against dividend investing isn't the few hundreds more in taxes you pay or the complexity. It is more than a quarter million you lose out on because dividend investing does so badly in a bull market.  I believe it will outperform indexing in a bear market, but since we have more bull market years than bear year, that's bad a tradeoff  I understand psychologically why Mike stuck with it, and given the likelihood of a bear market, maybe it still makes sense he is retired. 

But the data doesn't lie it is been killed in the last 5 years, and its not just Morningstar newsletter, Vanguard High Yield dividend index fund VYM also is getting killed by VTI/SPY.  Don't use dividend investing in the accumulation phase.

Minotaur

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #32 on: April 03, 2022, 01:17:00 PM »
I think there are a couple of points being missed here.
1) You should spread your shares around as many industries as possible. Diversification in everything.
2) You should know about the companies you buy shares in.
My 2 lemon shares come from a newsletter's advice. I listened to Motley Fool rather than myself.
The others are doing ok, not brilliant however Covid has killed a lot of industries.
The problem with a lot of the other investments is I have to trust the finance industry and we know how that goes.

boarder42

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #33 on: April 03, 2022, 01:35:38 PM »
I think there are a couple of points being missed here.
1) You should spread your shares around as many industries as possible. Diversification in everything.
2) You should know about the companies you buy shares in.
My 2 lemon shares come from a newsletter's advice. I listened to Motley Fool rather than myself.
The others are doing ok, not brilliant however Covid has killed a lot of industries.
The problem with a lot of the other investments is I have to trust the finance industry and we know how that goes.

You started a whole other thread about how bad dividend investing is what are you looking for. You won't find people sympathetic there to a bad approach. And further questioning your approach after losing to the sp500 for half a decade means you don't understand your approach at all and should have never done it.

Minotaur

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #34 on: April 04, 2022, 01:39:30 PM »
You started a whole other thread about how bad dividend investing is what are you looking for. You won't find people sympathetic there to a bad approach. And further questioning your approach after losing to the sp500 for half a decade means you don't understand your approach at all and should have never done it.
Actual I started a thread about buying a bad stock. I like the idea of dividend investing from a practical point of view of going for an income. The other shares I have brought across a range of industries have worked out especially with me ignoring them for 4 plus years.

clifp said:
The big problem was that the portfolio was overweight in financial stocks, especially banks. Not only did the bank stocks valued plummet, but all of them slashed their dividend and many eliminated them entirely.
One of the big rules is do not put all your eggs in one basket.

Also everyone pro-dividend has said that bad advice is damaging which I really agree with.

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #35 on: April 09, 2022, 10:53:19 PM »
You started a whole other thread about how bad dividend investing is what are you looking for. You won't find people sympathetic there to a bad approach. And further questioning your approach after losing to the sp500 for half a decade means you don't understand your approach at all and should have never done it.
Actual I started a thread about buying a bad stock. I like the idea of dividend investing from a practical point of view of going for an income. The other shares I have brought across a range of industries have worked out especially with me ignoring them for 4 plus years.

clifp said:
The big problem was that the portfolio was overweight in financial stocks, especially banks. Not only did the bank stocks valued plummet, but all of them slashed their dividend and many eliminated them entirely.
One of the big rules is do not put all your eggs in one basket.

Also everyone pro-dividend has said that bad advice is damaging which I really agree with.

I (nor the Morningstar Dividend Investor newsletter MDI) didn't have all of our eggs in one basket. There were 30-35 stocks of which about 8 were financial, and they were about 30% of the value of total portfolio Jan 2008.  By comparison today FAANG is about 20% and IT is 29% of the SPY, so my portfolio was no more concentrated than someone who owns SPY or VTI today.

One of the disadvantages of dividend investing is almost by definition you'll be overweight in value stocks.  So here is my challenge to you show me a portfolio of 30+ stocks that yield 3% or more that isn't overly concentrated in one or more sectors. Right now my guess it would be energy and real estate.

If you are successful we can figure out some suitable prize, some thing like me writing time 100 times that "Minotaur is a portfolio genius"

Rob_bob

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #36 on: April 11, 2022, 11:57:49 AM »
You started a whole other thread about how bad dividend investing is what are you looking for. You won't find people sympathetic there to a bad approach. And further questioning your approach after losing to the sp500 for half a decade means you don't understand your approach at all and should have never done it.
Actual I started a thread about buying a bad stock. I like the idea of dividend investing from a practical point of view of going for an income. The other shares I have brought across a range of industries have worked out especially with me ignoring them for 4 plus years.

clifp said:
The big problem was that the portfolio was overweight in financial stocks, especially banks. Not only did the bank stocks valued plummet, but all of them slashed their dividend and many eliminated them entirely.
One of the big rules is do not put all your eggs in one basket.

Also everyone pro-dividend has said that bad advice is damaging which I really agree with.

I (nor the Morningstar Dividend Investor newsletter MDI) didn't have all of our eggs in one basket. There were 30-35 stocks of which about 8 were financial, and they were about 30% of the value of total portfolio Jan 2008.  By comparison today FAANG is about 20% and IT is 29% of the SPY, so my portfolio was no more concentrated than someone who owns SPY or VTI today.

One of the disadvantages of dividend investing is almost by definition you'll be overweight in value stocks.  So here is my challenge to you show me a portfolio of 30+ stocks that yield 3% or more that isn't overly concentrated in one or more sectors. Right now my guess it would be energy and real estate.

If you are successful we can figure out some suitable prize, some thing like me writing time 100 times that "Minotaur is a portfolio genius"

What is your idea of overweight in a sector?  I'm about 11% energy and 13% real estate.

clifp

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #37 on: April 13, 2022, 04:16:29 AM »
I'd consider more than twice the S&P sector allocation to be overweight, and triple weigh very overweight.
Although I generally just run Schwab portfolio check to see what their algorithm says.

Currently, S&P is 2.6% Real Estate and Energy is 3.7% so I'd say you are overweight. 
Is that bad? Got me.

I'm just saying you can't do dividend investing without be overweight in some sectors, and perhaps more importantly underweighting others.




Rob_bob

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #38 on: April 13, 2022, 12:32:43 PM »
I have heard that the "historical" weight for energy in the S&P is ~11% so currently it would be underweight.  But I suppose whatever it currently is will be considered "correct".  And the top 5 stocks (1%) in the S&P make up about 24% of the index, seems kinda overweight to me, but it is what it is.

talltexan

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Re: Retiring Early on Stock Dividends video/presentation
« Reply #39 on: April 13, 2022, 12:44:17 PM »
I think your piece explains the strategy well. The appeal of dividends is that you avoid the second guessing that comes along with timing the sale of equities. It's putting one more thing on auto-pilot.

A lot of index investors underperform their funds because they succumb to "gut feelings" trying to dance into and out of positions at certain times. Best of luck!