9-year fixed income plan

[pb4uski]

Vanguard states that the correct benchmark for VYM is large cap value.

I could take a 10 year period that includes the dot com bubble and the great recession and compare it to a long term treasury bond fund (or whatever) and I am positive I can find some investment that will have outperformed VTI during that period (or any period, ex: triple leveraged S&P 500 etf during a bull market compared to non-leveraged VTI).

It is important to use proper benchmarks when comparing funds.

The issue at hand was whether a high dividend portfolio is preferable to a total stock portfolio... different strategies... so your post is irrelevant to the question.

 

[pb4uski]

Barf away...

I am 100% convinced that the dividend withdrawal strategy is better than the total return withdrawal strategy.

Evidence? What convinces you? Just because you think it doesn't make it so... let's see some proof.

 

[pb4uski]

....The money paid out by dividend withdrawal strategy is determined by every single company in the portfolio that pays a dividend. Every company employs accountants and finance people to study their current internal data and their projections to come up with a dividend policy. That policy is then approved by the executives and the BOD. IMHO this is a very logical basis on which to safely withdraw money....

And some of the people telling you that you are wrong are the very accountants and finance people that used to do that analysis.

 

[ESRwannabe]

Ehh, what the hell. I'll try this one more time.

What I see time and time again in arguments about dividends vs total return is that most people fall into the "trap" of thinking they are discussing two different "investing strategies" when in reality they are discussing different "withdrawal strategies".

If you talk to someone about why they invest in dividend companies, the true crux of the matter is that they do so because they ultimately want to base their withdrawals on the dividend income. That is the ultimate reason why they invest in a dividend paying company.

What happens 99% of the time in these conversations is that anti-dividend people immediately jump on the dividend investor and start pulling out charts showing XYZ has a better total return, therefore dividends are garbage and dividend investors are morons QED.

When this happens the dividend investor tries to point out that total return is not the end all be all of every investing discussion. However, it is 99% of the time pointless. The total return person is going to keep arguing about 10-yr returns of this vs that, how dividends are tax inefficient, yada yada yada. The conversation always goes nowhere.

However, if people would stop focusing on which investing method is the best, and instead focus on the withdrawal method, then the conversation may be able to shift focus off of the irrelevant investing method and onto the real heart of the issue which is how can someone safely determine the amount of money they can withdraw?

How does one decide on how much money to withdraw in a world that is undergoing massive changes every year? Compounded with the fact that the stock market price fluctuations are influenced by the moods of people, i.e. manic depressives. Its like trying to ring fence complete chaos.

One answer to this is what I call the "dividend withdrawal strategy", and IMHO is the entire reason why people invest for dividends.

Ok, I'm over and out on this thread. I don't think I will be commenting anymore on it.

 

[pb4uski]

....When this happens the dividend investor tries to point out that total return is not the end all be all of every investing discussion. ....

There is the problem... and explanation of why you don't get it... total return is the end all... it is the bottom line... the most comprehensive measure of return.... maybe that is why they call it total return.

 

[ESRwannabe]

pb4uski,

What I have observed on message board forums is that whenever there is a dividend vs total return discussion, the total return people come out swinging as hard as they can, with what appears to me at least is the desire to shut down the conversation as soon as possible.

I think the ultimate reason for this is that deep down inside, or perhaps in the subconscious of the total return investor they realize that their withdrawal strategy is built on hope and little else. Where as the dividend withdrawal strategy is built on real world current data (not perfect data, but as good of data as each company can come up with).

When the total return investor chooses to go with the Trinity study or whatever, they do so basing their withdrawals on (IMHO) completely arbitrary information. Why do I say this?

Here is a recent article from doing a google search just now. Its from 2016. I'll cut and paste a small excerpt and leave it at that, and now I'm done with this pointless thread.

https://www.inc.com/ilan-mochari/innosight-sp-500-new-companies.html

Why Half of the S&P 500 Companies Will Be Replaced in the Next Decade

The lifespan of large, successful companies has never been shorter.

That's according to a new study of turnover in the S&P 500, conducted by the growth strategy consulting firm Innosight.

Here are two of the report's most significant insights:

In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years. It's forecast to shrink to 14 years by 2026.
About 50 percent of the S&P 500 will be replaced over the next 10 years, if Innosight's forecasted churn rate holds.

In the past seven years alone, many renowned companies have been jettisoned from the S&P list: Eastman Kodak, National Semiconductor, Sprint, US Steel, Dell, and the New York Times. New companies to the list include Facebook, PayPal, Level 3 Communications, Under Armour, Seagate Technology, and Netflix.

In tracking all the comings and goings to the S&P 500 for the last 50 years, the study shows that the duration companies spend on the list fluctuates in cycles mirroring the overall state of the economy and disruption from new technologies, including biotech breakthroughs, social media, and cloud computing.

But the overall trend is that average tenure on the list is sloping downward.

 

[ERD50]

I see I'm cross posting with ESR's last post, but OK, it's late and I have this typed up, I'll submit and follow up later if needed...

ERD50,

"But I have to wonder, are we wasting each others time, or do you just not want to answer my questions?"

I am wondering the exact same thing about you. ....

I literally do not think we are able to communicate with each other. I will assume you are not doing it on purpose to troll me, but there is no point in me talking to you about... probably anything. Not saying that in a rude way. This conversation is literally not possible between us.

I'm willing to try. I went back, and I see you didn't join the conversation until post #67. It's possible I was in a mind frame from earlier posts, and thinking you were building on that, but maybe you were going in a little different direction? I'll try again, keeping that in mind, in case it influenced my responses.

...

"Are you saying only withdraw divs?"

Yes, I have been saying that since the very first post. That's why I called one of the withdrawal strategies "dividend withdrawal strategy" and the other "total return withdrawal strategy". ...

That wasn't clear to me from your post #67.

Furthermore the total return withdrawal method is subject to the irrational whims of the market, which often do not correspond to what individual companies are experiencing at the current time.

People can poo poo dividends all they want and claim they are a useless tax burden, yada yada yada. However, there is no question in my mind that the dividend withdrawal method is much safer and logical than the total return withdrawal method.

You talk a lot about the total return withdrawal method being based on history and the "whims of the market". Well, Sure seems to me dividends are based on history, and sometimes the whims of the market. So I don't see where you are going with that. But all this seems to be putting the cart before the horse. I'd need to see data to show that method is superior, then we can talk about why that may be the case.

...

"So if we pull the same amount, and I have more money than you, didn't I do better? I can easily and simply sell what I need it I have to during an annual re-balance of my AA. Takes me maybe 5 minutes a year. If I understand you right, you are 'at the mercy' of whatever VYM decides to distribute."

You keep talking about things which I am not talking about. ...

OK, can you put that in terms that would defend your "vastly superior" appraisal?

If I only take divs, I'm limited to that. Each year, I don't really know what I can spend. A fund like VYM is probably pretty consistent, I haven't looked at that. But you can't be any more sure that the divs won't be cut, or will keep up with inflation, than I am that the market will do no worse than the worst of the past. And I don't vary my withdrawals based on current market conditions. I have confidence the market will grow enough to support a 3.3% inflation adjusted WR for my lifetime, it seems like you are confident that your divs will meet that requirement. It's close to the same thing, yet you say one is vastly superior?

If we assume VYM maintains that ~ 3.3%, and increases with inflation, then pb4uski's chart already shows what happened (change $400 annual to $330 annual, but nothing changes in the concept). You take your 3.3%, the VTI holder takes 3.3% (a combo of divs and selling), and the VTI holder has more money at the end of the trial. And the VTI holder had more in the 2008 -9 dip. Where is the "vastly superior", or even "superior"?

I guess yahoo would have all the divs going back to inception. Might be interesting, but it's late, I'm off to bed soon. MAybe later.

post #88

Its based on logic.

(1) The money paid out by dividend withdrawal strategy is determined by every single company in the portfolio that pays a dividend. Every company employs accountants and finance people to study their current internal data and their projections to come up with a dividend policy. That policy is then approved by the executives and the BOD. IMHO this is a very logical basis on which to safely withdraw money.

(2) The total return withdrawal strategy however is based on historical data, such as the 4% rule. Also note this historical data may have nothing to do with the companies that currently exist. For example the Dow 30 compared to now vs 100 years ago. Why should the performance of buggy whips incorporated have any baring on how much I can safely withdraw in 2019? IMHO it is illogical.

If some people believe (2) is better than (1), that's fine with me. I don't care. I don't care if I am the only person that will ever exist that thinks option (1) is a better withdrawal strategy than option (2) or equivalent.

I don't follow this. For #2, why is this any different for div-payers. Some div payers are not around, their businesses change over time. The buggy whip corporations aren't paying dividends now either. Is there some sort of Crystal Ball that only works for div paying stocks? I really do not follow your thinking here.

The future is, to some degree, a leap of faith. For everyone.

For #1, I just don't see what a BOD setting the div has to do with anything either. Some companies cut their divs, or don't increase them with inflation. This is due to business performance, the thing you say we can't predict in #2. Their policy should be based on their performance, and this is what you are saying. But then in #2 you say we can't count on performance. There is a contradiction here.

OK, so I'm pretty sure I responded to your inputs, not those of others (that does sometimes happen). If I made a mistake, please point it out, maybe we can clear it up. But right now, I'm still not seeing the advantage.

-ERD50

 

[ERD50]

...
What happens 99% of the time in these conversations is that anti-dividend people immediately jump on the dividend investor and start pulling out charts showing XYZ has a better total return, therefore dividends are garbage and dividend investors are morons QED. ...

OK, very quickly. None of what you described happened.

-ERD50

 

[pb4uski]

pb4uski,

What I have observed on message board forums is that whenever there is a dividend vs total return discussion, the total return people come out swinging as hard as they can, with what appears to me at least is the desire to shut down the conversation as soon as possible.

I think the ultimate reason for this is that deep down inside, or perhaps in the subconscious of the total return investor they realize that their withdrawal strategy is built on hope and little else. Where as the dividend withdrawal strategy is built on real world current data (not perfect data, but as good of data as each company can come up with).

When the total return investor chooses to go with the Trinity study or whatever, they do so basing their withdrawals on (IMHO) completely arbitrary information. Why do I say this?

Here is a recent article from doing a google search just now. Its from 2016. I'll cut and paste a small excerpt and leave it at that, and now I'm done with this pointless thread.

https://www.inc.com/ilan-mochari/innosight-sp-500-new-companies.html

Why Half of the S&P 500 Companies Will Be Replaced in the Next Decade...

Well first, you said that you're an IT guy so you obviously know more than us finance types who lived this stuff during our careers.... but I can assure you that if you think that dividend policy is based on high science as you seem to then you are clueless.

Your second paragraph is probably the craziest post that I have ever seen on this forum, so congratulations. You may view the market as some arbitrary thing... "hope and little else"... and in the short term it can be, but in the long term it is ~3,600 businesses that make and sell products and services and make money and the underlying economics will win in the long run and it is the long run that we are interested in.

And have you ever thought that perhaps during the long term that was studied during the Trinity Study that companies came and went just like they do today?

Finally, since you are now done with this pointless thread, I'm sorry that you'll never see this post.

 

[corn18]

What happens to dividends when the underlying equities drop 50%? They just keep paying out the same absolute dollars that they always have?

 

[ncbill]

Trinity study is based on historical data, which includes downturns like the Great Depression, nothing "arbitrary" about that.

Both the Trinity approach (4& SWR) and "only spend dividends" are withdrawal strategies.

But as ERD50 has pointed out, taking 3.3% via a total return method results in more money left over than taking 3.3% via a high-yield dividend index.

Also, as we've pointed out for early retirees, being forced to realize dividends as income can negatively impact eligibility for ACA subsidies.

Plus use up headspace that otherwise could be used for IRA -> Roth conversions pre "tax-torpedo."

So a dividend-only withdrawal strategy does provide emotional comfort, but remains inferior, logically, to a total return withdrawal strategy.

Only the individual making the withdrawals can decide if the emotional positives of a "dividend-only" withdrawal strategy outweigh those logical negatives.

 

[rayvt]

What happens to dividends when the underlying equities drop 50%? They just keep paying out the same absolute dollars that they always have?

Well, according to the logic of this seekingalpha article, yes. https://seekingalpha.com/article/4234831-long-and-t-pays-100000-per-year-dividends

ESR has a totally wrong conception of how companies determine their dividends. I would call it a fantastical view, in that it is a fantasy that companies decide it this way.

As for the claim that either "dividend withdrawal" or "total return" is superior to the other--let alone vasty superior-- just a few moments thought tells you that this is impossible.
If one was clearly superior, people would notice that and would move their money from the inferior method to the superior method. We would see evidence of that.

On the whole, people are not stupid and large investors particularly are not stupid. They would not invest in VTI if was markedly inferior to VYM, et. al. Yet, VTI has $118B AUM whereas VYM has $25B AUM. Even though VYM pays much higher dividend yield.

 

[ERD50]

Here is an opinion on Dividend stocks, that suggests a subset of those stocks, Dividend Aristocrats, have done better than the S&P 500 over the past 10 years (11.2% vs 7.8%).

Different time periods may produce different results, but the data presented suggests dividend payers have more value.

https://www.suredividend.com/dividend-stocks-annuities/

(just ignore the section on annuities)

Didn't mean to ignore you, but this got lost in the recent noise...

So OK, that chart looks pretty good.

Can you tell us more, I'm confused right off the bat. You mention,over the past 10 years (11.2% vs 7.8%). But when I click the link, I get 16.77% vs 15.34% (div aristocrats still better, but slimmer, different numbers):

https://us.spindices.com/indices/strategy/sp-500-dividend-aristocrats

Index Name Index Level 10 Yr Ann. Returns
S&P 500 Dividend Aristocrats (TR)
Launch Date: May 02, 2005
2,806.31 16.77 %▲
S&P 500 (TR)
Launch Date: Sep 11, 1989
5,979.34 15.34 %▲

Can you clarify this for us?

And more importantly, if there is an advantage, how does your typical poster here invest in this? It wasn't clear to me from that link. Do I need to review their list every year, and buy/sell if the list changes, or if weighting changes?

In the past, when someone has posted info that says some div-payers performed better than the total market, we've found some slight to extreme cherry-picking. The worst was the "time machine" method, where they find the current stocks that meet a criteria, and then plot results based on buying them 10 years ago! Well, we didn't have that info available 10 years ago. So can you confirm that the 10 year data is based on picks that met their criteria at that time, 10 years ago?

Wait a minute, found this:

Investing in the S&P 500 Dividend Aristocrats

Exchange-traded funds (ETF) are a popular way of gaining exposure to the list of dividend aristocrats. Some popular assets that directly follow the index include the ProShares S&P 500 Dividend Aristocrats (NOBL) and the SPDR S&P Global Dividend ETF (WDIV).

OK, so checking NOBL and WDIV in portfolio analyzer...

OK, WDIV stinks. And NOBL only goes back to Nov 2013, and it under-performs VTI. And assuming we didn't know in advance which of those would do well, and diversified across them, it would still stink. And why so much variation in two funds following a defined method? That's very suspicious right there.

http://bit.ly/2S4A72y

-ERD50

 

[corn18]

Well, according to the logic of this seekingalpha article, yes. https://seekingalpha.com/article/4234831-long-and-t-pays-100000-per-year-dividends

ESR has a totally wrong conception of how companies determine their dividends. I would call it a fantastical view, in that it is a fantasy that companies decide it this way.

As for the claim that either "dividend withdrawal" or "total return" is superior to the other--let alone vasty superior-- just a few moments thought tells you that this is impossible.
If one was clearly superior, people would notice that and would move their money from the inferior method to the superior method. We would see evidence of that.

On the whole, people are not stupid and large investors particularly are not stupid. They would not invest in VTI if was markedly inferior to VYM, et. al. Yet, VTI has $118B AUM whereas VYM has $25B AUM. Even though VYM pays much higher dividend yield.

Hmmm, well I read the article and it seems to have recency bias. I looked at T dividends, and they have had some pretty drastic cuts over the years. None of these are associated with a stock split.

2/2/1993 $0.7300
5/3/1993 $0.3775 (48% cut)

5/1/1987 $1.7400
8/1/1987 $0.5800 (66% cut)

That would suck to take a 65% cut in income that doesn't recover for years. Not sure what I am missing.

 

[GravitySucks]

What happens to dividends when the underlying equities drop 50%? They just keep paying out the same absolute dollars that they always have?

Depends. Dividend payouts should be related to earnings, not stock price.
Not sure on the 50% drop, but many keep paying on a 35% drop. XOM has dropped by that much at times and still increased dividend payout. I don't think the old ATT ever cut its dividend over a hundred years. ( I see above the new non monopoly T has - thanks Corn)
Many banks stopped paying dividends in 08, 09. One reason the divvy funds did poorly in that period is bank stocks were over weighted compared to total market. Divvy funds will always be over weight in certain industries.

 

[RunningBum]

However, if people would stop focusing on which investing method is the best, and instead focus on the withdrawal method, then the conversation may be able to shift focus off of the irrelevant investing method and onto the real heart of the issue which is how can someone safely determine the amount of money they can withdraw?

Focusing on withdrawals is like focusing on tax efficiency. You're looking at only part of the picture. If you focus on maximizing your money, with appropriate safety, with investment returns (including dividends), taxes, withdrawals, etc all considered, you come out best.

How does one decide on how much money to withdraw in a world that is undergoing massive changes every year? Compounded with the fact that the stock market price fluctuations are influenced by the moods of people, i.e. manic depressives. Its like trying to ring fence complete chaos.

Throwing around terms like "manic depressives" and "complete chaos" is meaningless to the point. If you ever come back to this thread, come back with actual data, not scare tactics.

 

[Mtmingus]

As an example, I plugged HYD (mentioned by COcheesehead in another thread) into Portfolio analyzer. I iteratively plugged in an AA for VTI and BND until the total return matched as close as I could get it. Turns out a conservative 28/72 (portfolio 1) slightly outperformed HYD (portfolio 2), with significantly less volatility.

http://bit.ly/2N7RMrv << short link to Portfolio Analyzer

I don't see the attraction. Was there another ticker we should analyze?

-ERD50

That's similar to what I have in my 401k: 1/3 Fidelity® 500 Index Fund FXAIX and 2/3 BAIRD CORE PLUS INST BCOIX. CAGR: 6.69% vs 5.37% MAX Drawdown: -3.88% vs -2.38%.

 

[ERD50]

That's similar to what I have in my 401k: 1/3 Fidelity® 500 Index Fund FXAIX and 2/3 BAIRD CORE PLUS INST BCOIX. CAGR: 6.69% vs 5.37% MAX Drawdown: -3.88% vs -2.38%.

Please be aware that the HYD fund wasn't a good comparison (see earlier posts). It is a muni fund, not a good comparison to a taxable high yield fund.

But the concept holds, we have not seen solid evidence that the high-yield funds outperform a Total Market fund in total return, and when Total Market is adjusted with some bonds to match performance, the high-yield does not have lower volatility either.

Maybe someone will come up with a strategy that does reliably beat the Total Market on a volatility-adjusted basis. Like Ross Perot "I'm all ears!".

-ERD50

 

[PatrickA5]

The company I worked for didn't cut the dividend until they were knee deep in bankruptcy discussions and were forced to by the bondholders. The writing was on the wall at least 18 months before they made the cut. I'm convinced that management made the decision to continue dividends due mainly to trying to keep the stock price propped up. Hmm, I wonder if maybe stock options had something to do with that?

 

[OldShooter]

... How does one decide on how much money to withdraw in a world that is undergoing massive changes every year? Compounded with the fact that the stock market price fluctuations are influenced by the moods of people, i.e. manic depressives. Its like trying to ring fence complete chaos. ...

The answer to this one is easy: stop looking.

For example, I pay attention to the market like I watch the fish in an aquarium. Pretty fish, bumping around, no rhyme or reason to it. Nothing to get emotionally involved with.

Once a year we look at our portfolio and maybe one year out of three we make a strategic change. We also never look at market indices or our mutual fund holdings with a time scale of less than a year. Five years is better. Over time, the chaos you fear simply cancels itself out.