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Old 08-26-2016, 06:58 AM   #61
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No, I think what you described is exactly right... principal is what you put in... to the extent that the value exceeds what you put in then your principal is still intact... any value over principal (original investment) is either income reinvested or unrealized appreciation.
Or is this simply the basis (as in capital gains tax basis)? Regardless, to my thinking its pretty irrelevant. We've invested and accumulated assets over our lifetimes. And though it forms the foundation of our wealth, it's totally unimportant for figuring our current spending plans.

Which, I suppose, is why I'm a total return investor. I look at the sum total of our assets and our future behavior is based on that.
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Old 08-26-2016, 07:02 AM   #62
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I can't stop myself from looking at total return and percentage payout from earnings once in a while, but that does not generate immediate action, just things to watch for an adjustment to mix.
Yes, I do this regularly. Also unlikely to cause action as my imbedded cap gains are very high. Quite expensive to re balance names although, I have done so occasionally.
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Old 08-26-2016, 07:08 AM   #63
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Canada is in the same low interest "punish the savers" environment as the US, it would be somewhat surprising if Canadian investors weren't also seeking higher dividend stocks--and maybe bidding them up considerably.
Yes, agree. CDN Bank stocks are the cornerstone of my portfolio. They have very conservative pay out ratios (generally 40-50%) but still yield over 4% in most cases. P/e's in the 10-11X range so doesn't look like they are bid up at this stage.

I think the key is to look at their underlying businesses. As long as these are strong and growing, divs are safe and should also grow. The risk is that many investors fixate on divs without understanding the underlying business. Managements can sometime ps take advantage of this and artificially boost divs.
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Old 08-26-2016, 07:11 AM   #64
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Since we are discussing the "never touch the principal" concept, could someone please define what constitutes "the principal"? I've never been clear on this. At what point in time is "the principal" defined?

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I take a classic conservative view on this. Ie selling any shares is "touching the principal" for me. Spending divs is not. There are lots of ways to define this but I think mine is the simplest and most conservative. My fear( probably not rational) is that I start selling shares, divs would thus decline, and I have to sell more shares to maintain my lifestyle-creating a downward spiral of continually increasing capital encroachment.

Also agree with the sentiment that spending divs is really just one variable withdrawal method. Divs are not guaranteed and a retiree has to be prepared to cut back if his divs are cut.

However, by focusing on div growers (as long as earnings also grow) you tend to pick low volatility, high quality companies. I have only had one immaterial div cut in 10 years of retirement (insurance co). My divs have grown by about 80% in 10 years. Portfolio would be up by about 65% in comparable terms.
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Old 08-26-2016, 07:23 AM   #65
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I tend to agree with you. You or I could be "living off the dividends" while capital value has declined below the original investment, reducing principal. What is important, I think is that you have a withdrawal rate and that rate is "safe" in the context of history and your plans.

What is also meaningful is the amount if cushion you have between your SWR and what you are actually drawing.

That's not to say that you or I might not receive psychological benefits from "living off the dividends".

Good Investing!
Agree completely with this, spendable money is just that, no matter the source. We just happen to have enough to gear our machine to produce enough spendable money through dividends (and some fixed incomes), not through capital appreciation. There is massive psychic benefit to this. We will also take capital appreciation when it makes sense to re-balance the portfolio to harvest big winners that no longer yield at market levels, stocks that are no longer on strategy for some reason, or write off losses that do not appear recoverable. Tax considerations will play into this heavily.

The issue with a large portfolio is our long term objectives. Ours are to pay to support the rest of our lives in retirement at a selected standard of living level, but also sustain the portfolio across generations. It's a great problem to have but it required thought and a plan. After having created this situation from scratch in one generation, there is no chance we are going to let it be spent (unless that is exactly what we choose to do). We will certainly do everything we can to ensure it is not lost and in fact that it is much larger 10-20 years from now than it is today. We have too much respect for the work required to get here to allow this to just happen randomly.
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Old 08-26-2016, 07:35 AM   #66
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Yea but living of the dividends only means safest SWR that there is.

Spending Capital gains means spending principal that generates dividends. It is fine to spend principal but certainly not as safe as living of off dividends only.
Actually, it depends on your total return.

And stocks which do not pay dividends I guess are ok to sell (following your logic)?

I can see that if you think of yourself as living off dividends you would not want to sell any stock. I just find that different than the concept of SWR's but also very consistent with leaving a boatload of money to heirs, which, as someone else pointed out, means you may have worked longer than you had to.

OTOH if you have a portfolio which generates a 5% total return on average, you can pull 3% from that pretty much forever, without regard to whether your divided yield is 2% or 4%. Doesn't matter.

Is this a matter of not "trusting" the SWR? I get that also. That is part of the psychological benefit I mentioned.

Good Investing!
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Old 08-26-2016, 07:58 AM   #67
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I think the key is to look at their underlying businesses. As long as these are strong and growing, divs are safe and should also grow.
Agree with all of that, but I'd also want to avoid concentrations in particular industries/sectors. IIRC, banks/financials had good earnings in 2006, and a lot of dividend/value investors had heavy tilts in that direction. This turned out to be a problem when the bottom fell out in 2008 and these got hit particularly hard.

Investors who pick stocks to generate high/growing dividends are, often, effectively making sector "bets" (I suppose there can be arguments about whether it is a "bet" if the investor never intends to sell). But I think many are comforted by the "I'm not selling any shares" mantra and may lose sight of the fact that they aren't, in fact, behaving in a manner that best preserves/grows the value of their holdings--in the long or the short term.
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Old 08-26-2016, 08:17 AM   #68
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The issue with a large portfolio is our long term objectives. Ours are to pay to support the rest of our lives in retirement at a selected standard of living level, but also sustain the portfolio across generations. It's a great problem to have but it required thought and a plan. After having created this situation from scratch in one generation, there is no chance we are going to let it be spent (unless that is exactly what we choose to do). We will certainly do everything we can to ensure it is not lost and in fact that it is much larger 10-20 years from now than it is today. We have too much respect for the work required to get here to allow this to just happen randomly.
Well said. Exactly my view. Besides, spending it down even close to zero, requires knowing things that are unknowable ( life span and future health for 2 people). My current plan has a significant legacy for my daughter.
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Old 08-26-2016, 08:19 AM   #69
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Agree with all of that, but I'd also want to avoid concentrations in particular industries/sectors. IIRC, banks/financials had good earnings in 2006, and a lot of dividend/value investors had heavy tilts in that direction. This turned out to be a problem when the bottom fell out in 2008 and these got hit particularly hard.

Investors who pick stocks to generate high/growing dividends are, often, effectively making sector "bets" (I suppose there can be arguments about whether it is a "bet" if the investor never intends to sell). But I think many are comforted by the "I'm not selling any shares" mantra and may lose sight of the fact that they aren't, in fact, behaving in a manner that best preserves/grows the value of their holdings--in the long or the short term.
Can't argue with this. I have "made bets" all along. Most have and continue to work out. Agree, div investors tend to sacrifice some diversification especially in Canada.
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Old 08-26-2016, 08:25 AM   #70
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However, by focusing on div growers (as long as earnings also grow) you tend to pick low volatility, high quality companies. I have only had one immaterial div cut in 10 years of retirement (insurance co). My divs have grown by about 80% in 10 years. Portfolio would be up by about 65% in comparable terms.
You got it!

Examples are 2 ETFs: SCHD and VIG. VIG had no dividend drop during 2008-2009 crisis.

There is no sector bet in VIG and SCHD. It is more high quality dividend and earnings grower bet.
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Old 08-26-2016, 11:36 AM   #71
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I think when people try to "live on the dividends" there is a tendency to want to overreach for yield. That has been fine these last few years, but you are putting yourself in a risky position if rates ever start to rise again.
Yes I think that is where "moderation in all things" comes into play. Getting a 3-5% dividend is a reasonable goal. Then analyze the history of increases and the percentage payout of profits, along with profit history. This does limit the potential picks. And if that is not enough, then your SWR will dictate how much capital is needed, as you have pointed out.

Of course it may lead to spending down the principle during down years. That is the basic idea behind FIRECalc. That is where "living off the dividends" falls down. If dividend yield has grown from when you established your portfolio, total spending has to still reflect your SWR to remain sound. Otherwise you might spend the buffer that you need for the down years. IOW reinvest some of those dividends in the good years (like this one).
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Old 08-27-2016, 07:56 AM   #72
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What I always have trouble understanding is that people save for retirement but then fear using principal.... that is what you saved the money for... to spend it in your retirement! IMO if you can live on just income then you probably worked too long and will have wealthy heirs.
Yep, that's my problem with an income approach. You're sacrificing time for perceived safety, and there's risk with any approach so I'm really not sure what it buys you here other than a perception that you don't have to worry about principal. It usually means you will have to wait longer to retire vs. total return.
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Old 08-27-2016, 09:44 AM   #73
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Agree completely with this, spendable money is just that, no matter the source. We just happen to have enough to gear our machine to produce enough spendable money through dividends (and some fixed incomes), not through capital appreciation. There is massive psychic benefit to this. We will also take capital appreciation when it makes sense to re-balance the portfolio to harvest big winners that no longer yield at market levels, stocks that are no longer on strategy for some reason, or write off losses that do not appear recoverable. Tax considerations will play into this heavily.

The issue with a large portfolio is our long term objectives. Ours are to pay to support the rest of our lives in retirement at a selected standard of living level, but also sustain the portfolio across generations. It's a great problem to have but it required thought and a plan. After having created this situation from scratch in one generation, there is no chance we are going to let it be spent (unless that is exactly what we choose to do). We will certainly do everything we can to ensure it is not lost and in fact that it is much larger 10-20 years from now than it is today. We have too much respect for the work required to get here to allow this to just happen randomly.
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Well said. Exactly my view. Besides, spending it down even close to zero, requires knowing things that are unknowable ( life span and future health for 2 people). My current plan has a significant legacy for my daughter.
+1 Comes down to the size of your stash (size matters), and whether or not you have someone you'd like to leave it to. Retirement approach is as individual as one's fingerprints.

We've been very fortunate in life to have put away a sizeable retirement stash (unfortunately no pensions and don't care for annuities). We live very well off Social Security, and taxable account dividends (occasionally pulling long term capital gains to replenish cash). Will draw off IRAs for Roth conversions in a couple of years (ACA issues), and at 70.5 when RMDs have to be taken.

We retired early at 58/57 (seven years now). We still have a LBYMs lifestyle, but it's above the norm. We have friends who've also retired early and plan to spend their retirement investments down, as they have no children to leave it to (charity and a few nieces and nephews will get the remaining balance). Our plan is to live well, and leave a nice inheritance to our daughters who have learned the value of money and how to manage it properly from us. Our grandkids will benefit from our daughters' value/understanding of how to manage money.
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Old 08-27-2016, 05:35 PM   #74
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Robert Carlson describes the notion of living off dividends in retirement as antiquated in his excellent recent book The New Rules of Retirement. Perhaps those of us who can do this (or think/hope that we can) are among the fortunate considering the current economic climate.
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Old 08-27-2016, 07:59 PM   #75
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I'm coming up on the end of my second year in ER.

I've been drawing down my cash account but thinking of stopping DRIP on some of the accounts. The AA hasn't changed a lot because the market has been down before the recent upswing. Most of my assets are in post-tax accounts.

I've increased my spending in ER but it's been less than 2% of assets -- well a few months back, when the market was down, it was just a bit over 2%.

But yeah, I heard the utilities sector has a high P/E because of people chasing dividend yields and there are no prospects for earnings expansion so the market is bound to correct.
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Old 08-27-2016, 08:04 PM   #76
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We've been very fortunate in life to have put away a sizeable retirement stash (unfortunately no pensions and don't care for annuities). We live very well off Social Security, and taxable account dividends (occasionally pulling long term capital gains to replenish cash). Will draw off IRAs for Roth conversions in a couple of years (ACA issues), and at 70.5 when RMDs have to be taken.
What do you do with the capital gains distributions from funds?

When you say "occasionally pulling long term capital gains" you're talking about redeeming shares?
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Old 08-27-2016, 10:13 PM   #77
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What do you do with the capital gains distributions from funds?

When you say "occasionally pulling long term capital gains" you're talking about redeeming shares?
Realized LTCGs on our taxable mutual funds declared at years end are normally reinvested, but if we've used any of our cash reserves during the year, I'll switch the year end capital gains distribution from "reinvest" to "bank" to replenish cash reserves. Vanguard allows this change to be made easily online anytime. Have done this a couple of times with taxable and once with Roth accounts gains at year end before distributions (costly medical issue for wife, daughter's wedding, and a couple of large purchases). Roth accounts are used as we manipulate income for ACA subsidy. Haven't paid federal taxes (maybe a few hundred subsidy bucks back to the ACA for underestimating annual income) since retiring. That will change in another 1.5 yeas when the wife goes on Medicare, and we can do Roth conversions between 65 and 70.5 before RMDs kick in on our IRAs.

We use my Social Security, and quarterly dividends off taxable and Roth accounts to cover basic living expenses. Wife's SS is used for travel or for any special purchase we desire, and not for basic living expenses (goes away when one of us does).

Using the above method has allowed me to never have had to sell shares for cash funds since retiring (seven years now - retired early at 58/57). As mentioned previously by another member here - reinvesting any taxable account Divs and CGs on which one pays taxes annually, and then selling taxable account shares (which exposes LTCGs gains and creates another taxable event) isn't good financial management. Given our manipulation of annual income - LTCGs are not taxed Federally, but our state sees both as normal income (Divs and CGs) and are fully taxable.
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Old 08-28-2016, 01:47 AM   #78
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I haven't sold any shares yet.

The two years of my ER, the dividends and cap gain distributions have been reinvested but they would have been enough to cover my annual expenses with some money left over.

But I don't know if that will always be the case. If the market is flat or even down, it seems the dividends and cap gain distributions go down slightly.
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Old 08-28-2016, 07:24 AM   #79
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All my portfolio is in individual equities so I don't have to worry about any end of year cap gain distribution. I think it would be easier to spend some if this distribution though, rather than having to actually sell shares. Just hate to "encroach".
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Old 08-28-2016, 10:15 AM   #80
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When we first retired, we had set aside a separate cash reserve for the years between retiring and 59.5 to tap my IRA. I'd have to look back, but it was a year or two where we just took dividends off my IRA B4 Social Security. Took Social Security at 62 and continued tapping Divs on just taxable account (1/3rd of investments) and Roth accounts for covering basic living expenses. As mentioned, I have never had to sell shares during our 7 years of retirement.

Part of our early retirement plan was figuring out how to take our funds and minimize taxes. We paid our healthcare as individual accounts - had to buy them on the open market. I am VA, but carried insurance as VA doesn't say it will cover emergency care in non VA facilities. Wife's was the heavier coverage as no VA fallback like me. FYI - healthcare was less than half of what it is now on the ACA (just wife now as I went on Medicare last month) and coverage back then was much better.

Set our taxable accounts up for paying out dividends for an income stream. Was a long time holder of Vanguard Wellington, and added Wellesley when first retired. Moved taxable to 50% stock and 50% bond for that income stream (right now it's 50/50 Wellington/Wellesley). Don't see changing this anytime soon. Used to do my own slicing and dicing, but came to realize that this wasn't prudent for us, as wife cares little about investing. I also realize that as I age, I will probably suffer diminished abilities to handle finances (and not realize it). Had to figure out how to set finances for the long term (possibly without me). Wellington and Wellesley balanced funds do all my rebalancing and income stream is on auto for Divs, and optional for gains (wife understands this method). There is a simple 2-page letter of instructions for what to do when, that includes through age 70.5 (don't change anything and only use Vanguard if you need any assistance). Flagship offers this assistance. Even if she hands it over to them and incurs the now .3% extra management fees - it's still cheaper than anywhere else.

We live off investments as we have no pensions, and don't care for annuities. We live below our means, but live well, winter south since retiring, and purchase what we desire (new cars, etc). There will be tax issues in the future with IRA RMDs (and we have a tentative plan), but feel pretty good about retirement income sources and current tax strategy.
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