Dividend Income Questions

[pb4uski]

I actually don't focus on income at all.... I focus on total return (IRR)... and i don't particularly care what portions of the return is interest, dividends, realized gains or unrealized gains.

If I look at what funds our living expenses it is about 25% from dividends and capital gain distributions from taxable accounts that we take in cash and 75% proceeds from the sale of taxable investments. However, of that 75% probably 80% is basis and 20% are realized gains.

Any dividends and interest on tax-deferred or tax-free accounts is reinvested.

 

[Danmar]

Over the past few days in different threads, people have referred to themselves as "Total Return Investors". "...I'm a total return investor, so I don't worry about dividends....."

To me a total return investor's portfolio more or less represents a fairly balanced/allocated portfolio with a mix of equities, some that deliver dividends and bonds. Not something I'd put a label on.

When someone identifies as a TRI, does that just mean that income comes from equity/bond dividends AND sale of equities?
Or is it considered a particular strategy? Aiming for the best of both worlds.
If your portfolio could cover your expenses+ on just dividends would that make you NOT a TRI?

Just trying to get my arms around the label and what the up/downsides might be.

It is a little confusing. Here is a stab at it. Total return is simply a portfolio's divs plus any cap gains. It is really the only useful return metric. When someone says they are a total return investor they simply mean they buy equities based on expected total return. They aren't particularly concerned whether it is from divs or cap gains.
On the other hand people who describe themselves as dividend investors usually are concerned about the co's div yield and div growth rate. They are more concerned about getting a reasonable cash flow from their portfolio. This doesn't necessarily mean these divs are their only source of income or that they get enough divs to live on. They may not even be retired yet and reinvest the divs. It's really just a description of their investing emphasis. Even div investors should measure their success based on total returns as it is the best all inclusive measurement.

 

[nun]

I reinvest all dividends and don't use them for retirement income. The amount was $40k

 

[hesperus]

Even the SPX generates a 2% dividend, so it's kind of hard to get away from them completely when talking about total return. There is a very lively debate over at bogleheads about this topic, and some who consider themselves to be 'total return' investors there swear off any dividend strategy. Unfortunately people tend to get polarized on the matter, when there is almost always a dividend component to total return.

 

[marko]

It is a little confusing. Here is a stab at it. Total return is simply a portfolio's divs plus any cap gains. It is really the only useful return metric. When someone says they are a total return investor they simply mean they buy equities based on expected total return. They aren't particularly concerned whether it is from divs or cap gains.
On the other hand people who describe themselves as dividend investors usually are concerned about the co's div yield and div growth rate. They are more concerned about getting a reasonable cash flow from their portfolio. This doesn't necessarily mean these divs are their only source of income or that they get enough divs to live on. They may not even be retired yet and reinvest the divs. It's really just a description of their investing emphasis. Even div investors should measure their success based on total returns as it is the best all inclusive measurement.

Ok. Thanks.
One more: you say "Total return is simply a portfolio's divs plus any cap gains." I would assume you also mean organic NAV appreciation as well. Yes?

 

[NW-Bound]

... When someone says they are a total return investor they simply mean they buy equities based on expected total return. They aren't particularly concerned whether it is from divs or cap gains...

+1

I have a mixed bag of dividend stocks, some middle-of-the-road stocks, and also some growth stocks if their PEG is not too outrageous. I have on occasions bought distressed stocks that have negative earnings let alone dividends, but I expect them to recover and give me some cap gains.

If your portfolio dividend yield is something like 3 or 4%, a lot higher than the S&P which is currently around 2.1%, then I would say you are a dividend investor. For example, the utility sector is currently paying around 3.5%. Some REIT ETFs pay close to 4%.

 

[timemoveson]

Spectrum

I agree with NW above. I think of it as a spectrum.

If you are biased to the "dividend" side, you have designed your portfolio to generate income levels and yields well above the return of the market in general. If you have biased to generate capital growth, you are likely forsaking income for the superior growth opportunity that might be afforded.

Obviously you can fall between, segment your money, or switch gears at any time.

I am currently biased to the dividend side of the spectrum and targeting and largely achieving 4% dividend income returns.

 

[hesperus]

Here's a pretty good discussion on total return from vanguard:
View attachment total return.pdf

It is often taken as a 'one or the other' approach, when in fact total return involves (as mentioned) both growth and income.

 

[Animorph]

Ok. Thanks.
One more: you say "Total return is simply a portfolio's divs plus any cap gains." I would assume you also mean organic NAV appreciation as well. Yes?

I'm pretty sure Danmar was using capital gains to mean NAV appreciation as well as reinvesting of any capital gains distributions. Threw me off a little when I initially was thinking only of capital gain distributions, which I hope is not what was intended. Pretty much reinvest everything and then sell as needed.

 

[marko]

I'm pretty sure Danmar was using capital gains to mean NAV appreciation as well as reinvesting of any capital gains distributions. Threw me off a little when I initially was thinking only of capital gain distributions, which I hope is not what was intended. Pretty much reinvest everything and then sell as needed.

Animorph, thanks! Got it now.

 

[ESRwannabe]

Basically, a total return investor is someone that doesn't mind eating their seed corn from time to time...

I prefer income investing because I don't believe the market is efficient nor rational very often. I do believe some people can consistently do better than market cap weighted indexes (Warren Buffet as an example). I also believe the market behaves like a manic depressive and that even pitiful investors like myself can take advantage of crisis (like oil right now).

However, I do think market cap indexes to a descent job when your not willing to put any effort into investing. Which is why I have most of my money in ETFs.

I focus on income because its a safer withdrawal strategy imho.

I started out as a Boglehead 10+ years ago but became disillusioned with it over time. During the last recession you had even the staunchest of Bogleheads panicking, talking about "Plan Bs" and other things...

The way I see it total return requires that share prices are rational when you need to withdraw money. My experience (starting off with the dot com bubble) is that the stock market is filled with non-stop manias, flash crashes, and other nonsense which makes me want to have as little dependence on capital gains as possible.

 

[NW-Bound]

No, he does not mind. Not if the seeds grow bigger and bigger by themselves without sprouting.

He has fewer seeds as time goes by, but why should he mind if his buckets of seeds are overflowing? He does not count the seeds, but gets happy when he measures their total weight.

 

[marko]

Basically, a total return investor is someone that doesn't mind eating their seed corn from time to time.

Ok, and that personally spooks me,

BUT:

If the investor applies a fairly trustworthy SWR, does it matter once withdrawals begin?

Does it then just become a matter of terminal balance (love that term)?

If the SWR has been calculated to achieve a zero balance at, say age 95, does it matter if the strategy is been total return or income investing?

Or is this about reaching the highest starting point before withdrawals? Or is it more about building a safer cushion?

Sorry to be such a PITA on this one but I seem to have too much time on my hands today.

 

[Danmar]

Ok. Thanks.
One more: you say "Total return is simply a portfolio's divs plus any cap gains." I would assume you also mean organic NAV appreciation as well. Yes?

I believe NAV will be reflected in the quoted price so NAV Appreciation is very close to price appreciation? I only buy individual equities so not as familiar with ETF's or MF's

 

[ESRwannabe]

Ok, and that personally spooks me,

BUT:

If the investor applies a fairly trustworthy SWR, does it matter once withdrawals begin?

Does it then just become a matter of terminal balance (love that term)?

If the SWR has been calculated to achieve a zero balance at, say age 95, does it matter if the strategy is been total return or income investing?

Or is this about reaching the highest starting point before withdrawals? Or is it more about building a safer cushion?

Sorry to be such a PITA on this one but I seem to have too much time on my hands today.

The lower your withdrawal rate the more you can get away with... You could throw it down a rat hole if you want to withdraw zero. lol

If you go with total stock market, you can probably get away with 1% or 2% withdrawals for as long as the United States doesn't break up. Maybe 1,229 something years like Rome.

 

[ESRwannabe]

No, he does not mind. Not if the seeds grow bigger and bigger by themselves without sprouting.

He has fewer seeds as time goes by, but why should he mind if his buckets of seeds are overflowing? He does not count the seeds, but gets happy when he measures their total weight.

Yeah you could say I basically contradicted myself by using Warren Buffet as an example. Berkshire pays no dividends...

 

[Danmar]

Basically, a total return investor is someone that doesn't mind eating their seed corn from time to time...

I prefer income investing because I don't believe the market is efficient nor rational very often. I do believe some people can consistently do better than market cap weighted indexes (Warren Buffet as an example). I also believe the market behaves like a manic depressive and that even pitiful investors like myself can take advantage of crisis (like oil right now).

However, I do think market cap indexes to a descent job when your not willing to put any effort into investing. Which is why I have most of my money in ETFs.

I focus on income because its a safer withdrawal strategy imho.

I started out as a Boglehead 10+ years ago but became disillusioned with it over time. During the last recession you had even the staunchest of Bogleheads panicking, talking about "Plan Bs" and other things...

The way I see it total return requires that share prices are rational when you need to withdraw money. My experience (starting off with the dot com bubble) is that the stock market is filled with non-stop manias, flash crashes, and other nonsense which makes me want to have as little dependence on capital gains as possible.

This would be my view as well. I think divs are a less risky way to realize cash flow. Well established div payers tend to be well managed companies with long track records. At least the ones I invest in. They also tend to be low beta stocks and in my view expose you to much less sequence of return risk. For these reasons it is my opinion that they could provide a higher SWR. For me, this strategy has outperformed the appropriate index by several percentage points CAGR over my investing time frame(18years). Now, I am not very well diversified so it may simply have been luck in picking the right names. Either way, I'm happy.

 

[NW-Bound]

The comparison of a stock share to a corn seed is actually a flawed one. It is earning of a company that's important, whether that earning is paid out as dividend or not. Without a good earning, a dividend-paying company will wither and shrink with time. Eventually, shareholders will lose both dividend and principal.

 

[Danmar]

Yeah you could say I basically contradicted myself by using Warren Buffet as an example. Berkshire pays no dividends...

Right but he seems quite happy to collect them.

 

[NW-Bound]

It is true that growth investors are often lured by promise of quick growth, which was just a mirage in the case of the dot-coms of yesteryear. And even when the growth has been real, one must ask if that growth can continue forever and ever.

Can any company keep on growing faster than the economy, until it becomes a big part of the GDP? Like a cancer tumor that far outgrows its host? Or perhaps its growth attracts competition, who will cut into its share of the market?

The above are questions that a growth investor, particularly in individual stocks, must find an answer for himself. Hence, some want to avoid growth and go for established companies that pay dividends. But here, they have another problem. Many older companies fail to keep up, or their products become obsolete with technology advances. That's the value trap.

Either growth or value investing, I think diversification is key. Reward does not come without risk. Never.

 

[Senator]

Are you talking about just dividends from equities or both dividends and interest?

Why would your dividend income almost double when you rollover your 401k to an IRA? Mine didn't change at all as my 401k investments received dividends as did my IRA investments.

I was indeed referring to dividends and interest. Anything thrown off from a portfolio, without selling the base.

My 401K consists of VIIIX, VEMPX, VDIPX and some company stock (5%). The only dividends that are shown are from the company stock. I assume the others throw off dividends, somehow. In the quotes, it shows a dividend of 1.96%, it's just not listed in my 401K as a transaction. And my cash does not increase.

This is all great information for me. As I wind down, and develop multiple income streams, it is interesting to see what others have done. No plan is perfect, and no two plans are the same.

As I get ready to put on my retirement parachute and jump, it's nice to see others who have successfully jumped and landed safely, in an untested parachute like my own will be.

 

[NW-Bound]

The MFs in my wife's 401k do not report dividends or cap gains, though they have them. And they are all internally reinvested. The cash balance does not increase, nor the number of shares. Same number of seeds, but the seeds grow bigger. See, it's all about accounting. It's earnings that matter.

The reason is that the account reporting of dividend, interest, and cap gain incomes is for the share owners to file taxes, and as 401k accounts are tax free, they do not bother to give you the info.

 

[Cobra9777]

Total Return Investing

I have to admit, I'm a little confused by this distinction as well. I always thought this referred to one's approach to withdrawals in retirement...

Income: tries to generate enough interest and dividends to cover expenses without touching principal
Total Return: uses both principal and income to cover expenses.

Yet Danmar says:

...They may not even be retired yet and reinvest the divs. It's really just a description of their investing emphasis...

I've seen others make comments like, I'm sticking with total return investing, since that's what got me to ER... suggesting this refers solely to an investment strategy.

So which is it? Can I be a "total return investor" if I withdraw both principal and income from a dividend-heavy portfolio? Am I an "income investor" if I survive solely on the 1.8% dividend produced by VTI? Or is it the investment emphasis in the portfolio that defines my approach, as Danmar and others seem to suggest? Does it refer to a withdrawal strategy or an investing strategy? Or both?

 

[ESRwannabe]

I have to admit, I'm a little confused by this distinction as well. I always thought this referred to one's approach to withdrawals in retirement...

Income: tries to generate enough interest and dividends to cover expenses without touching principal
Total Return: uses both principal and income to cover expenses.

Yet Danmar says:



I've seen others make comments like, I'm sticking with total return investing, since that's what got me to ER... suggesting this refers solely to an investment strategy.

So which is it? Can I be a "total return investor" if I withdraw both principal and income from a dividend-heavy portfolio? Am I an "income investor" if I survive solely on the 1.8% dividend produced by VTI? Or is it the investment emphasis in the portfolio that defines my approach, as Danmar and others seem to suggest? Does it refer to a withdrawal strategy or an investing strategy? Or both?

I think its both an investment strategy and a withdrawal strategy. However the withdrawal strategy trumps the strategic focus...

So imho someone invested in the S&P 500 and only withdrawing the dividends would be an income investor.

Someone that is focused on income producing assets yet relies on capital gains in addition to income would be a total return investor.

I think withdrawals define the approach and that this also spills over into asset selection, although not always.

If I could get away with just taking dividends on the S&P 500 I would be ecstatic to do so. It would require no effort on my part.

 

[Danmar]

Yes, I think my explanation describes the type of investment approach.
The withdrawal approach could be quite different. For example, even though I am a dividend or income investor and this income is enough to fund a very nice retirement, I may at some point also start liquidating some of my gains. Maybe splurge on something or make a big gift,etc. I suspect few people can live solely on the div stream but I also have a big pension that augments my cash flow. I think when most people are talking about this stuff they are talking about the investment approach, not a withdrawal strategy.