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Old 12-21-2013, 10:38 AM   #21
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FWIW, the legendary John Templeton when asked about investing for income or growth on WSW with Luis Rukeyser, advised people to invest for growth and sell some of the growth as needed.

Personally, I have a bias for growth, but I also have some income producing assets. As much as I admire Sir John, I admire diversification even more.

That said, if a person is an income/dividend investor and it works for him, and he sleeps well at night, who am I to argue?
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Old 12-21-2013, 10:52 AM   #22
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FWIW, the legendary John Templeton when asked about investing for income or growth on WSW with Luis Rukeyser, advised people to invest for growth and sell some of the growth as needed.
Exactly.

What's the difference if I "bank" a distribution or sell shares that have been purchased with that distribution, in the future?

Sure, you have market risk but than again there is risk in any decision made.

I retired May 1, 2007 - some 80 months ago. I have no pension nor am I drawing SS (even though I will be FRA age the week after next). My expenses have been met primarily with the proceeds of my portfolio with conversions to cash as conditions meet my criteria for doing so.

Is my portfolio down from day 1 of my retirement? Sure. When you are in the 25% FIT bracket (gives an idea of my retirement budget/expenses), it dosen't take much to reduce that retirement portfolio.

OTOH, I've only reduced my portfolio value (on average) less than $5k/year since my retirement. In four years (when I start SS) my annual income will increase by just over $40k/year, so I'm not really worried about my current reduction in assets and how it will affect my long term financial future.

FWIW...
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Old 12-21-2013, 11:57 AM   #23
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I think income chasing is foolish, but it is especially dangerous in the current environment.
"Chasing" income is foolish in any market. IMHO- Those who make real $$ on highest dividend stocks are generally not income chasers but traders looking to exploit short term market fluctuations. A hi-risk game.

But "chasing" is not same as investing in stable companies with dividends well-covered by ongoing profit (i.e. comfortable pay-out ratio). As we all know, dividends have been an important part of total long-term returns of equities. Many have done very well by stocking up (pun-intended ) on solid companies yielding >4% just after '08 crash.
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Old 12-21-2013, 12:18 PM   #24
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it quickly becomes difficult to tell which holdings are principle and which are not.
And differentiating between "original principle" and "saved earnings" can be an impediment to investing efficiency. It's a illusionary distinction that hinders good investment decision making, IMHO.

A buck is a buck. Whether it was part of your RE portfolio on the day you last worked or whether it came from some investment earning is moot at the current point in time.
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Old 12-21-2013, 12:52 PM   #25
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"Chasing" income is foolish in any market. IMHO- Those who make real $$ on highest dividend stocks are generally not income chasers but traders looking to exploit short term market fluctuations. A hi-risk game.

But "chasing" is not same as investing in stable companies with dividends well-covered by ongoing profit (i.e. comfortable pay-out ratio). As we all know, dividends have been an important part of total long-term returns of equities. Many have done very well by stocking up (pun-intended ) on solid companies yielding >4% just after '08 crash.
Fair enough, yet I see examples of dopey yield chasing all over the place. High yield bonds have an ocean of money running after them despite the lowest spreads and loosest covenants in years (think credit bubble proportions). Preferreds offer piddling little yields despite the huge risks they pose. Every stock with a dividend yield much above the indicies has a wall of money pouring into it. None of this looks like a market where investors (and I use that term loosely) are exercising much discretion.
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Old 12-21-2013, 02:23 PM   #26
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....I retired May 1, 2007 - some 80 months ago. I have no pension nor am I drawing SS (even though I will be FRA age the week after next). My expenses have been met primarily with the proceeds of my portfolio with conversions to cash as conditions meet my criteria for doing so.

Is my portfolio down from day 1 of my retirement? Sure. When you are in the 25% FIT bracket (gives an idea of my retirement budget/expenses), it dosen't take much to reduce that retirement portfolio.

OTOH, I've only reduced my portfolio value (on average) less than $5k/year since my retirement. In four years (when I start SS) my annual income will increase by just over $40k/year, so I'm not really worried about my current reduction in assets and how it will affect my long term financial future.

FWIW...
Same here. While it hasn't happened yet in the 2 years that I have been retired due to great investment performance, the plan at the time I retired and even currently has my nestegg declining modestly from ER (or now) to age 70 and then increasing once SS and pension start. I look at the decline as a small price to pay for 9 years of freedom (56 to 65).
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Old 12-21-2013, 02:28 PM   #27
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If you have a PLAN that says that you should now sell stocks and buy bonds (or FI) this is a test. If you can not follow what your PLAN indicates, then you probably need a new PLAN. I see a lot of folks (here and other places) that seem to be abandoning their PLAN without noticing that fact.
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Old 12-21-2013, 03:04 PM   #28
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Exactly.

What's the difference if I "bank" a distribution or sell shares that have been purchased with that distribution, in the future?

Sure, you have market risk but than again there is risk in any decision made.
Because for those of us who have large baskets of stocks/ETFs, you can't simply take 30 different stock positions at $5,000 each, and sell 3% of each one without commissions taking a substantial chunk out of it. (like my portfolio, which has over 400 positions). Also, while growth and income stocks both fall in down markets, I'd rather know that a basket of companies that are yielding about 3.5% will still be paying me that much despite their stock performance...rather than seeing my portfolio holdings drop 20%, and psychologically having to sell off small positions of each holding. I'd rather have an income stream I know is fairly consistent in-place during up and down markets, and still having the same 100 shares of ABC company that can recover after dropping 20%, rather than having that 100 shares of ABC dropping 20%, having to sell off 7 shares to live off of, and then only have 93 shares left to grow.

If you're a pure indexer, then obviously it's easier to sell a random/small number of shares of a Vanguard ETF or mutual fund whenever you want without commissions....but for those who are at the other end of the spectrum, it ain't so easy.
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Old 12-21-2013, 03:20 PM   #29
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Well I don'twhat you call it but starting next year my ole buddies old pals at the IRS are going to hep me with 80% of my retirement portfolio. After 20 yrs of ER it's party time with 70 1/2 and RMD.

heh heh heh - with no immediate heirs on either side we expect to consume some principle with a minimum amount of tears ala ORP spend it while you can or some other calculator as a rough guide.
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Old 12-21-2013, 03:31 PM   #30
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Total return is clearly what matters and one could certainly invest for growth and periodically sell stock to fund retirement spending. If you are a good picker, this is probably the way to go. Me, on the other hand, feel more comfortable simply spending my divs. I don't reach for yield and have had pretty much the same portfolio since retiring in 2006. I don't have to decide when and what to sell which would seem to introduce another level of risk. Also, I don't need to sell in down markets. Divs going up very nicely but market yield very stable. Pension represents my FI component. Really on auto pilot. Many paths to FI and very independent I am.
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Old 12-21-2013, 03:59 PM   #31
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Well I don'twhat you call it but starting next year my ole buddies old pals at the IRS are going to hep me with 80% of my retirement portfolio. After 20 yrs of ER it's party time with 70 1/2 and RMD.

heh heh heh - with no immediate heirs on either side we expect to consume some principle with a minimum amount of tears ala ORP spend it while you can or some other calculator as a rough guide.
Given how expensive Louisiana-raised crawfish and gulf shrimp are up here in MO, you'll need those RMDs!
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Old 12-21-2013, 08:22 PM   #32
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Because for those of us who have large baskets of stocks/ETFs, you can't simply take 30 different stock positions at $5,000 each, and sell 3% of each one without commissions taking a substantial chunk out of it. (like my portfolio, which has over 400 positions). Also, while growth and income stocks both fall in down markets, I'd rather know that a basket of companies that are yielding about 3.5% will still be paying me that much despite their stock performance...rather than seeing my portfolio holdings drop 20%, and psychologically having to sell off small positions of each holding. I'd rather have an income stream I know is fairly consistent in-place during up and down markets, and still having the same 100 shares of ABC company that can recover after dropping 20%, rather than having that 100 shares of ABC dropping 20%, having to sell off 7 shares to live off of, and then only have 93 shares left to grow.

If you're a pure indexer, then obviously it's easier to sell a random/small number of shares of a Vanguard ETF or mutual fund whenever you want without commissions....but for those who are at the other end of the spectrum, it ain't so easy.
When the market tanks you're supposed to sell bonds and buy stocks.
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Old 12-21-2013, 08:34 PM   #33
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Yep - that always gets me too. But I think a lot of folks want to buy funds/stocks, never actually sell anything, but live off the distributions.

If you are truly going to keep your principal intact, then you have to let it grow to keep up with inflation. This can mean you end up with a really low withdrawal rate to accomplish that preservation.

And then what are you going to do if your portfolio loses value due to a nasty event - like bond fund NAVs dropping due to rising interest rates? Do you just ignore it since you are not "selling any shares"? But your principal did just get hit.

And if you receive capital gains distributions - do you reinvest them? Do you not "count" them as part of the principal? Here you have to figure out how much needs to be reinvested to "preserve the principal".
Historically dividends have far outpaced inflation, this is true despite the dividend payout ratio (percentage of earning paid out in dividends) shrinking in recent years. There is some signs that dividend payout ratio is turning around now that dividends are more or less permanently treated the same as LTGC.

In fact I think for a 60/40 portfolio the dividend portion would keep up with inflation over almost any long period, although I have not checked that.
I am not sure if this would include reinvestment of capital gains or not of an s&p index fund. In my case with index funds,plus lots of individual stocks I take all taxable distributions in cash.


As M* Christina mentions in her article for a income investing logistically it is hell of a lot easier than total return for those in retirement. No worrying about when to sell (once a year, once a quarter), no fancy rules about I'll take X% withdrawal, except for when we are in the 3rd year of bear market and it is leap year. No need to keep a fancy bucket for spending during bear market. None of that crap.

I get $Y each from interest and dividends and spend less than $Y. No worry about running out of money. If it doesn't keep up with inflation so be it. My income is far more stable than I'll take 4 or 5% of my portfolio at the beginning of the year. This approach would have produced some wild income swings the last 5 years.

I realize that almost all of us using discretion in applying these rules and the other guys approach isn't as cut and dried as it sounds.

There are some significant disadvantages to the income approach. The most important one is it results in a withdrawal rate significantly below the 3.5-4% that is historically pretty safe. Last I checked (a few months ago) the yield on my portfolio is 2.8% despite some nice dividend hikes (include 35% hike from MMM) the yield has probably dropped.

As Christina says it is really hard to get to portfolio much above 3%, unless you are really chasing yield. Dividend stocks have become far more popular than when I first started getting serious about them a decade ago. I maybe wrong but I don't think Cramer was hyping them back ten years ago.
Brewer points out that in the bond market you are taking a huge risk for the extra 200-300 basis points of yield. MLP have had big price increases and lot more attention on them thanks to the Shale Oil/Gas boom. I think the risk of trying to assembly a portfolio with an average yield of 4% exceed the extra 1+%.

I think her point is rather than chase yield for either stocks or bonds, it is ok to take some of the gains off the table. So for me this is going to be a total return year, and while I'll spend far more than my dividend income produced, it is also considerably less than my portfolio was up.
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Old 12-21-2013, 08:50 PM   #34
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I think her point is rather than chase yield for either stocks or bonds, it is ok to take some of the gains off the table. So for me this is going to be a total return year, and while I'll spend far more than my dividend income produced, it is also considerably less than my portfolio was up.

I think the judicious and occasional use of covered calls can also be a nice way to juice income and periodically take money off the table if you wish to do so. If the option expires worthless, you get extra income. If the underlying is called away, you have taken money off the table. You would want to pick your times to do so and your underlying carefully, but I grow more and more fond of covered calls as I get fat, old, and wealthy.
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Old 12-21-2013, 08:53 PM   #35
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... Last I checked (a few months ago) the yield on my portfolio is 2.8% despite some nice dividend hikes (include 35% hike from MMM) the yield has probably dropped.

As Christina says it is really hard to get to portfolio much above 3%, unless you are really chasing yield. ....
So for me, this is where everything converges, and a 'dividend portfolio' and an equivalent WR from a 75/25 index becomes a distinction without a difference.

So what if I want to go the index route (which also helps comparisons - maybe one anecdote is from a good/lucky dividend stock picker?)? What is a decent dividend index fund/ETF? There is DVY,

PerfCharts - StockCharts.com - Free Charts

you can stretch that time period out to JAN 1999, and DVY did outperform SPY significantly. But Wellesley outperformed them both.

Wellesley is providing 2.98% in divs, DVY 3.10%. But Wellesley has grown more than DVY - isn't total return all that matters? Why compartmentalize it into divs versus growth? Money is money, a buck is a buck. If I pulled 3% from my portfolio for ten years, and my portfolio is now worth $X, how can it make a wits bit of difference if the 3% I pulled was divs, some selling, or a combination?

This is starting to sound like the 'buckets' rationalization/religion to me.

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Old 12-21-2013, 08:59 PM   #36
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I think there are two separate issues. Are my securities well chosen and very unlikely to lose me a lot of money? And second, do I need to sell some securities for living expenses?

If you need to answer yes to the second question, some people will try to go further out in risk with their income sources, other probably smarter people will sell some securities.

I prefer to be able to answer yes to question #1, and no to question #2. This creates very comfortable posture, and one that I would prefer to always have.

I've been living from capital for many years, and I know what feels good to me. Someone with a study in his pocket is very unlikely to change my mind.

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Old 12-21-2013, 09:03 PM   #37
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There are some significant disadvantages to the income approach. The most important one is it results in a withdrawal rate significantly below the 3.5-4% that is historically pretty safe. Last I checked (a few months ago) the yield on my portfolio is 2.8% despite some nice dividend hikes (include 35% hike from MMM) the yield has probably dropped.

As Christina says it is really hard to get to portfolio much above 3%, unless you are really chasing yield.
Yeah, it has been pretty easy for me to just blithely say that I was living off my dividends when I was spending 2%. But now that I am planning to increase that percentage a bit, I am having to come to terms with the idea that I might want to exceed my dividends and spend as much as 3%. Logically, being a total return investor makes sense. Sticking with dividends only gives a false illusion of safety IMO. I admit that that appeals to me a great deal, though (and I'm not even Norwegian, much less a widow).
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Old 12-21-2013, 09:21 PM   #38
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W2R - are you really going to go all the way from 2% to 3%?
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Old 12-21-2013, 09:22 PM   #39
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W2R - are you really going to go all the way from 2% to 3%?
Heh, talk is cheap. Whee will see what happens.
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Old 12-21-2013, 09:28 PM   #40
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W2R - are you really going to go all the way from 2% to 3%?
Well, I'm going to withdraw about 2.8% - 3.0% at the beginning of 2014. I usually always have some left over at the end of the year to return to the nestegg. I have no idea how much I will have at the end of 2014, though!

Also, I think my 2013 spending may be around 2.4% already (assuming I don't buy anything BIG in the next 11 days ). I will figure it out exactly after the year is over. The 2% figure was for 2011 and 2012.

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Heh, talk is cheap. Whee will see what happens.
Exactly!
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