Dividend Income Questions

[Theseus]

Today's spending money comes from pensions that cover about 33% of the budgeted needs. Have three primary retirement accounts, smallest of which holds cash that will supplement the pensions for about 18 months. Very low rate of return, but that money is, and needs to remain very liquid. Next account is about 36 months cash needs and remains invested in a 403(b) guaranteed investment (PRUGI) that pays ~1.75%. Very liquid, but at a rate of return that rivals CD's of a matching term, I'm OK with it.

By the time those two buckets go dry, and we would need to tap the primary account (which dwarfs the first two) we could opt to begin collecting SS and only need to supplement pensions + SS for a minimal topping off now and then. A more optimal plan has us holding off on SS until FRA, which at that point when combining pensions and SS our needs would be pretty much covered. The primary account is producing a steady stream of dividend income that is being used to purchase CD's to adjust the AA away from stocks as time goes on.

 

[pb4uski]

.... I do think market cap indexes to a descent job ....

The market cap indices certainly were in descent last week and earlier this week.

 

[pb4uski]

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

Yes, you can think of the NAV as essentially the value of the underlying portfolio marked to market.... there are a few other things as well (transactions in process, accrued expenses, etc) but they are a pittance in the whole scheme of things.

 

[ESRwannabe]

The market cap indices certainly were in descent last week and earlier this week.

lol nice, maybe it was subliminal message from my subconscious

 

[pb4uski]

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. ....

I suspect that if you dig a little deeper into your 401k transactions that they are there because all three tickers pay dividends. I know that in my 401k you had to dig a little but you can find them and that they are all being reinvested.

https://personal.vanguard.com/us/funds/snapshot?FundId=0854&FundIntExt=INT#tab=4

https://personal.vanguard.com/us/funds/snapshot?FundId=1860&FundIntExt=INT#tab=4

https://personal.vanguard.com/us/funds/snapshot?FundId=1457&FundIntExt=INT#tab=4

 

[Mulligan]

Right but he seems quite happy to collect them.

And he also likes them high yielding preferred stock dividends also...Especially when he can put them over the barrel with them. Of course if you are a billionaire you can strong arm these types of deals.


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[Closet_Gamer]

Interesting thread. I'm still 8-10 yrs away from RE, but have decided to begin building up a passive, dividend driven income stream. I'm doing this for 2 reasons:

1). I've found that most big goals in life are best achieved with sustained, small efforts. While I'm still putting most of my money into core index holdings (SPY, DIA, QQQ) I have started to put some monthly money into dividend centric funds. It allows me to keep a tally of "what % of current living expenses am I now receiving passively." I have a long way to go, but it's 2x what it was 12 months ago.

2). A passive income stream hedges a layoff in the near term. If my emergency fund would normally last 12 months, the ability to replace 25% of my income passively stretches it to 15 months.

To the point about how much principle is needed to really live solely off dividends I find that my growing dividend stream makes me smile and also makes me cringe when I realize how far I have to go!

 

[pb4uski]

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

....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'm not sure I agree with the total return definition... I would say it is more:

uses both [-]principal[/-] capital appreciation and income to cover expenses

My point is that one doesn't necessarily have to dip into principal, but a typical total return investor would need to use capital appreciation (essentially sell and realize gains).

In my case and many others it gets more complicated than that in that I am selling taxable investments and using the proceeds to supplement taxable account interest and dividends for living expenses BUT I am at the same time reinvesting interest and dividends in my tax-deferred and tax-free accounts.

I think the terms refer more to whether portfolio growth is income-tilted or capital appreciation-tilted rather than withdrawal oriented.

 

[pb4uski]

....To the point about how much principle is needed to really live solely off dividends I find that my growing dividend stream makes me smile and also makes me cringe when I realize how far I have to go!

I'll probably be flamed for this but if you work until your dividends are sufficient to cover your living expenses you are probably working longer than necessary.

 

[Cobra9777]

I suspect that if you dig a little deeper into your 401k transactions that they are there because all three tickers pay dividends. I know that in my 401k you had to dig a little but you can find them and that they are all being reinvested.

DW's 457b shows no dividend transactions in her S&P 500 index fund. I can look up the ticker on M* and find dividend declarations, but they are not reflected as transactions in her account. Instead, the share price has been adjusted up by the amount of cumulative dividends since she first bought that fund. I suspect we don't really own that ticker directly, but rather own shares in some non-ticker internal fund that simply absorbs the dividends. It weird, but I've gotten used to it.

 

[REWahoo]

... if you work until your dividends are sufficient to cover your living expenses you are probably working longer than necessary.

+1

But just think of the fat estate you'll leave your heirs!

 

[pb4uski]

That is weird.... most 401k statements that I have seen (ours, DD, DS, friend whose taxes I do) are akin to a mutual fund statement and explicitly show dividends and their reinvestment. Has she ever asked them about it?

 

[clifp]

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.

For me it is an investment approach also, and it isn't just stocks. A few years ago when I bought some properties in Vegas it was because of the income they generate not the price appreciation. I saw a property that I could purchase for $55,000 that would generate $800/month or $9,600/year gross rents. 17%, what a fantastic rate of return. Now as it turned out I was somewhat optimistic about the rents I could collect, and extremely naive about the expenses I would incur.

What really bailed me out was the price appreciation as bargain hunters from all over the world (like China and IRRC Danmar (Canada)) went into places like Vegas, Arizona, Florida and bought up properties. Now at the same time I was buying, there were lots of buyers who's idea was to buy foreclosures, and fix them and flip them. They really don't care much about the rents a property might generate.

A total return investor in real estate would say, I'm counting on both collecting rents and also price appreciation.

 

[pb4uski]

+1

But just think of the fat estate you'll leave your heirs!

and how often they will fondly remember you!

 

[Cobra9777]

I think the terms refer more to whether portfolio growth is income-tilted or capital appreciation-tilted rather than withdrawal oriented.

The Vanguard paper that someone linked to earlier clearly describes these terms as "spending strategies." And BTW, they use the word "principal" not capital appreciation to distinguish the total return approach.

 

[pb4uski]

The Vanguard paper that someone linked to earlier clearly describes these terms as "spending strategies." And BTW, they use the word "principal" not capital appreciation to distinguish the total return approach.

But with reference to principal they dumbed down the Executive Summary and get more precise later in the paper (did you get past the first page? ):

Investors spending from a portfolio often focus on its overall yield—the income received over a given period—rather than on the total return, which includes both the income and the increase or decrease in the portfolio’s value. A spending approach based solely on income ignores capital change, whereas an approach based on total return utilizes both the income and capital appreciation of the portfolio.

It’s important to note, however, that under the total-return approach, the income generated by the portfolio is the first source tapped to meet spending needs, and only when this source is insufficient does the investor liquidate some holdings.

Also, often the capital appreciation on a diversified portfolio will exceed the income received; therefore, if an investor needs more than the annual cash flows from his or her investments, the total-return approach is the more prudent, and most likely only viable, long-term spending method.

 

[Cobra9777]

That is weird.... most 401k statements that I have seen (ours, DD, DS, friend whose taxes I do) are akin to a mutual fund statement and explicitly show dividends and their reinvestment. Has she ever asked them about it?

All of mine have always been as you describe as well. This is a rather small plan administrator with some other quirky practices and a small selection of high-ER funds. I can't wait to roll this account into Fidelity when she retires.

I called them once, but of course they wouldn't talk to me about it because I didn't sound like a female. DW called, but she didn't really understand the question well enough, so the answer was "everything is fine with your account." One day we'll get on the phone together and try to get an explanation.

But with reference to principal they dumbed down the Executive Summary and get more precise later in the paper (did you get past the first page? ):

I did, but I was using their terminology referenced in the Executive Summary in my original post. But I won't quarrel with "dumbed down."

 

[NW-Bound]

On a company balance sheet, net earning is most important, not what they throw out to their investors, which is called dividend. Perhaps a prudent investor should also look to see how big a percentage of the earning that dividend is.

Occasionally, I have seen companies issuing dividends higher than their earnings. They are spending down their cash!

 

[MichaelB]

On a company balance sheet, net earning is most important, not what they throw out to their investors, which is called dividend. Perhaps a prudent investor should also look to see how big a percentage of the earning that dividend is.

Occasionally, I have seen companies issuing dividends higher than their earnings. They are spending down their cash!

Not the get technical, but earnings aren't on the balance sheet. That is for assets and liabilities. Earnings are found on the income statement.

As for most important, some would say that cash generation is the key number, this is found on the Source and Application of Funds. Warren B focuses heavily on that number.

 

[pb4uski]

Actually, cash generation is on the Statement of Cash Flows.... you're showing your age Michael.... the Statement of Changes in Financial Position (aka Sources and Applications of Funds) was changed the the Statement of Cash Flows around 1988.

 

[NW-Bound]

Obviously, I can learn from the more financially oriented guys, or someone with that background.

For example, I am not sure how the cash flow can be so important, if it does not result in earnings. Is it not what you keep at the end of the day that counts?

PS. I just thought of an example. Oh well. Most investors do not look this deep into it. And then, these statements only tell the status quo, not what is in the future for the company anyway.

 

[pb4uski]

....I was using their terminology referenced in the Executive Summary in my original post. But I won't quarrel with "dumbed down."

Well, it was an Executive Summay after all.... what did you expect?

 

[Running_Man]

Not the get technical, but earnings aren't on the balance sheet. That is for assets and liabilities. Earnings are found on the income statement.

As for most important, some would say that cash generation is the key number, this is found on the Source and Application of Funds. Warren B focuses heavily on that number.

Current Year Earnings have been on every balance sheet I ever submitted for a 10K filing to the SEC for required Retained Earnings balance sheet schedules. I would highly recommend a balance sheet review for anyone seriously looking at what a company is doing with/how they create their earnings. Not only in the shareholder equity section by the accruals/liability changes as well.

http://www.pginvestor.com/Cache/1001201802.PDF?Y=&O=PDF&D=&fid=1001201802&T=&iid=4004124

 

[Theseus]

DW's 457b shows no dividend transactions in her S&P 500 index fund. I can look up the ticker on M* and find dividend declarations, but they are not reflected as transactions in her account. Instead, the share price has been adjusted up by the amount of cumulative dividends since she first bought that fund. I suspect we don't really own that ticker directly, but rather own shares in some non-ticker internal fund that simply absorbs the dividends. It weird, but I've gotten used to it.

My 401 was like that too, and it was a Hewitt managed 401 for a Fortune 500 corporation. Drove me nuts, and was one of the reasons I rolled it over as soon as eligible to do so.

That is weird.... most 401k statements that I have seen (ours, DD, DS, friend whose taxes I do) are akin to a mutual fund statement and explicitly show dividends and their reinvestment. Has she ever asked them about it?

Can't say as I could put a finger on the specifics, but I'd been told the practice of not breaking out the dividends and fees, thereby preventing one from really understanding what was going on under the hood had become subject to further regulation, and was to come to an end, someday.

 

[Mulligan]

Not the get technical, but earnings aren't on the balance sheet. That is for assets and liabilities. Earnings are found on the income statement.

As for most important, some would say that cash generation is the key number, this is found on the Source and Application of Funds. Warren B focuses heavily on that number.

When I took a graduate accounting class, the first class the professor had the financials of two companies on the board. With Company A net income of $1 million and Company B with a net loss of a million. He then asked class which company would we all like to be CEO of. We all raised our hands for "A". He then proceeded with the details to show it was the exact same company same reporting quarter with GAAP. It was all how the accounting was done. Thus, the saying "Accounting is an art, not a science".


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