Author Topic: Shares and Dividends  (Read 4751 times)

Badass by 41

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Shares and Dividends
« on: June 16, 2014, 11:12:22 AM »
I'm sure I'm missing something, so I would love some help from this community.

Can you make up lost time by investing more when it comes to dividends?

That is the question, though let me preface the following with the fact that I realize dividend payouts are a reduction in the value of the underlying company and are similar (but not the same) as selling a equal amount of owned shares.

Presumably the number of shares is mostly irrelevant when it comes to appreciation as like inflation, it's an average increase over time, and that only matters if you sell.  However, dividends are directly correlated to the number of shares you own, so it's that number that's important.

I'm concerned that because I've only just gotten our act together in terms of investing, and we have a 5 year FIRE goal, that even though we'll be investing large sums annually (instead of small or medium sums over the last 10-20 years) that the total # of shares we'll own by FIRE won't sustain a high enough dividend payout to be meaningful.  For us that's ideally 50% of our annual spending.

Here's the math I'm thinking about.

If I had invested $100k in VTSAX in 2008/2009 at $20 that would have netted me 5000 shares which would be worth ~245k (@$49) today and would have paid $1030 last quarter or roughly $4k/yr in dividends.

If I had invested $100k in VTSAX in April 2014 at $47 that would have netted me 2127 shares which would be worth ~$104k (@$49) today and would have paid $417 last quarter or roughly ~$1.6k/yr in dividends.

That's a HUGE difference and it makes me worried that in the next 4 years, even at the amounts I'm hoping to put into the market, I won't accumulate enough shares to rely on dividends for as part of our income.

Obviously this is an over simplified example.  I'm actually buying in monthly, and reinvesting dividends over the next 4 years, so I'll accumulate more than the illustrative examples above.

What say you Mustachians? Am I over thinking this?  If my thinking is right, what else should I be looking at instead of dividends?

MDM

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Re: Shares and Dividends
« Reply #1 on: June 16, 2014, 11:40:32 AM »
As the saying goes, "The best time to plant a tree invest in the market was 20 years ago. The second best time is now."

In hindsight, early 2009 was a great time to invest because the market has essentially done nothing but increase since then.  Don't know what the next five years will bring - and note that "5 years" is "short term" when viewed from many investment perspectives.

To answer your bolded question: no, you can't make up lost time.  You can, however, do better in the future than you have in the past (as it appears you are doing), and eventually accumulate what you seek.  Definition of "eventually" is partly in your control and partly affected by things outside your control, so do the best you can - and follow your avatar's advice. ;)

Badass by 41

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Re: Shares and Dividends
« Reply #2 on: June 16, 2014, 11:47:56 AM »
Thanks MDM.

So, given that it sounds like I've missed the boat somewhat, how would you change the general FIRE advice for accumulation and the 4% rule?

If I'm only working for the next 5 years, then I'm limited in the "do better in the future than you have in the past" department.  I'll have enough net worth to make the 4% rule work (in theory).  It just sounds like I won't be able to rely on dividends as a significant source of income (~50% as stated in OP).

Caveat a market crash of course.  9)

nereo

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Re: Shares and Dividends
« Reply #3 on: June 16, 2014, 11:53:42 AM »
Quote
What say you Mustachians? Am I over thinking this?  If my thinking is right, what else should I be looking at instead of dividends?
yes, it sounds like you are overthinking things a bit - or at the least playing the 'if only i'd invested when...' game.  Forget what could have happened and just pile as much money as you can in now (and over the next several years).  I'm convinced that 20 years from now you'll be happy for every cent you saved now.
In terms of investing in dividend vs. non-dividend paying stocks, you don't necessarily have to reply on stocks with high dividend payouts.  Some of your ER income can come from stock-price appreciation, and some shares will be replenished by stock splits, etc.

Quote
So, given that it sounds like I've missed the boat somewhat, how would you change the general FIRE advice for accumulation and the 4% rule?
First, you haven't "missed the boat".  You just need to invest as much as you can as often as you can until you hit your SWR.
All the best!

Badass by 41

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Re: Shares and Dividends
« Reply #4 on: June 16, 2014, 12:01:02 PM »
Thanks nereo, your post makes it clear that I need to refine my question a bit.

What I'm after is an understanding of how I can rely on the SWR of 4% when it takes into account ~2% return from dividends which is necessarily presuming a specific number of shares owned.  Given an accumulation period of 10-20 years, I can see how this probably averages out, but given an accelerated accumulation period, doesn't that change the SWR assumptions?

Eric

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Re: Shares and Dividends
« Reply #5 on: June 16, 2014, 12:27:30 PM »
Thanks nereo, your post makes it clear that I need to refine my question a bit.

What I'm after is an understanding of how I can rely on the SWR of 4% when it takes into account ~2% return from dividends which is necessarily presuming a specific number of shares owned.  Given an accumulation period of 10-20 years, I can see how this probably averages out, but given an accelerated accumulation period, doesn't that change the SWR assumptions?

The withdrawal rate doesn't care if you have 4% dividends or 0% dividends.  It's the same calculation.  If you have somewhere in between, then you sell appreciated stock to add to the dividend amount received to reach 4%.

rmendpara

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Re: Shares and Dividends
« Reply #6 on: June 16, 2014, 12:38:54 PM »
I'm sure I'm missing something, so I would love some help from this community.

Can you make up lost time by investing more when it comes to dividends?

That is the question, though let me preface the following with the fact that I realize dividend payouts are a reduction in the value of the underlying company and are similar (but not the same) as selling a equal amount of owned shares.

Presumably the number of shares is mostly irrelevant when it comes to appreciation as like inflation, it's an average increase over time, and that only matters if you sell.  However, dividends are directly correlated to the number of shares you own, so it's that number that's important.

I'm concerned that because I've only just gotten our act together in terms of investing, and we have a 5 year FIRE goal, that even though we'll be investing large sums annually (instead of small or medium sums over the last 10-20 years) that the total # of shares we'll own by FIRE won't sustain a high enough dividend payout to be meaningful.  For us that's ideally 50% of our annual spending.

Here's the math I'm thinking about.

If I had invested $100k in VTSAX in 2008/2009 at $20 that would have netted me 5000 shares which would be worth ~245k (@$49) today and would have paid $1030 last quarter or roughly $4k/yr in dividends.

If I had invested $100k in VTSAX in April 2014 at $47 that would have netted me 2127 shares which would be worth ~$104k (@$49) today and would have paid $417 last quarter or roughly ~$1.6k/yr in dividends.

That's a HUGE difference and it makes me worried that in the next 4 years, even at the amounts I'm hoping to put into the market, I won't accumulate enough shares to rely on dividends for as part of our income.

Obviously this is an over simplified example.  I'm actually buying in monthly, and reinvesting dividends over the next 4 years, so I'll accumulate more than the illustrative examples above.

What say you Mustachians? Am I over thinking this?  If my thinking is right, what else should I be looking at instead of dividends?

Stop thinking about the past. You can't change it now. Why don't you compare what you "lost" in VTSAX compared to buying in 2003? You'll just feel dumb all over again.

Stocks rise over time, but values fluctuate in cycles, so you need enough in assets to weather the bear markets, but need to stay invested to participate in the bull markets.

I think you need to realize that your retirement will like last for 15+ years, so we'll probably see two recessions between now and 2030, and probably at least one every decade.

The only way to lose for certain is to not play the game, whereas if you play wisely, you'll mitigate your risk (not eliminate).

To answer your question:

No, you can't make up for lost time. We may never see the Dow at 12,000 again... or maybe we will. Who knows?
« Last Edit: June 16, 2014, 12:40:46 PM by rmendpara »

kyleaaa

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Re: Shares and Dividends
« Reply #7 on: June 16, 2014, 02:30:06 PM »
Well, prices were a lot lower in 2008/2009 than they are now, so of COURSE you'd get more for your money if you invested then vs now. Buying low is obviously the best investment strategy. I am not sure I understand your logic.

"I realize dividend payouts are a reduction in the value of the underlying company and are similar (but not the same) as selling a equal amount of owned shares."

No, they are not similar, they are exactly the same. Dividend payouts are exactly identical than selling an equal amount of owned shares because money is fungible.

Badass by 41

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Re: Shares and Dividends
« Reply #8 on: June 16, 2014, 02:32:06 PM »
The withdrawal rate doesn't care if you have 4% dividends or 0% dividends.  It's the same calculation.  If you have somewhere in between, then you sell appreciated stock to add to the dividend amount received to reach 4%.

Isn't the 4% rule based on the average market return which includes 2% dividend yield?  I guess I'm confused how I can plan to get average market returns (specific to dividends) when I'm only "buying in" for a short period of time.  It makes sense to me over a long "buy-in" period like 10-20 years.  I'm just trying to figure out how my FIRE strategy may need to adjust given this scenario.

Stop thinking about the past. You can't change it now. Why don't you compare what you "lost" in VTSAX compared to buying in 2003? You'll just feel dumb all over again.

I'm sorry if my illustrative examples were too specific.  I'm not comparing past returns.  I'm just trying to understand a difference in investment timelines.

Perhaps I should have said the following instead.

The 4% SWR seems to assume a "long" accumulation time (10-20years).  This leads me to wonder how the SWR might be affected if someone has a short accumulation time (Say 1yr).  In particular, it seams to me that dividend returns might be adversely affected, since the total number of shares owned will necessarily be less due to the lack of averaging price volatility over time (and therefore share accumulation).

In the short accumulation scenario, you get the number of shares that you get at the price you buy-in at, and then you immediately start your drawdown for FIRE.

kyleaaa

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Re: Shares and Dividends
« Reply #9 on: June 16, 2014, 02:52:55 PM »
The 4% SWR seems to assume a "long" accumulation time (10-20years).

Ahh, there's your problem. The 4% SWR doesn't assume any specific accumulation time. It doesn't care if you saved over 40 years or invested it all in one day. It is only concerned with your balance on the day you retire.

Eric

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Re: Shares and Dividends
« Reply #10 on: June 16, 2014, 02:57:14 PM »
The withdrawal rate doesn't care if you have 4% dividends or 0% dividends.  It's the same calculation.  If you have somewhere in between, then you sell appreciated stock to add to the dividend amount received to reach 4%.

Isn't the 4% rule based on the average market return which includes 2% dividend yield?  I guess I'm confused how I can plan to get average market returns (specific to dividends) when I'm only "buying in" for a short period of time.  It makes sense to me over a long "buy-in" period like 10-20 years.  I'm just trying to figure out how my FIRE strategy may need to adjust given this scenario.

No.  Much of history, dividend yield was much higher than 2%.  But because stock prices are reduced by the dividend amount, it's essentially a wash.  Either you get dividend money and your stock prices go down, or you don't get dividend money but your stock prices don't go down.  So it doesn't matter if you get a dividend or not.

The 4% rule says that using historical data, one can withdrawal 4% of their stash from a 50/50 or 75/25 stock/bond mix and have a ~95% chance of not running out of money after 30 years.  It doesn't matter if the 4% withdrawal is all dividends, no dividends, or some combination of both.

Example:
$100 worth of stock, pays 4% dividend, you get $4 and the stock is now worth $96
$100 worth of stock, pays no dividend, you sell $4 worth of stock, you get $4 and you own $96 worth of stock

http://www.investopedia.com/articles/stocks/07/dividend_implications.asp

milesdividendmd

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Re: Shares and Dividends
« Reply #11 on: June 16, 2014, 02:57:54 PM »
The 4% rule is based on total returns from a 50/50 equity/bond portfolio.  Total returns in the equity portion of a portfolio are determined by dividend yield + share appreciation.  There is no advantage to using dividends versus using sold shares to live off of.

There is nothing special about dividend yielding stocks versus non dividend yielding stocks other than:

1.  Dividend yielding stocks are less tax efficient because you are taxed on dividends, but not share appreciation (until you sell.)
2.  Dividend stocks tend to be "value" stocks based on their price to book ratio.  And the value factor has been associated with higher returns historically.

If anything I think that dividend stocks are overvalued in the current market because investors are irrationally reaching for yield, because interest rates are so low.  But you need not worry about any of that if you are a buy the whole market and hold it investor.  (which you should be!)

Alexi

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Re: Shares and Dividends
« Reply #12 on: June 16, 2014, 03:43:06 PM »
Thanks all!  I think I get it now. I really appreciate the clarification.