Total Return Strategy vs. Income and Dividend Strategy for a Nestegg

[Golden sunsets]

Thanks for all the responses.

 

[misanman]

We are in the decumulation stage and our "style" is dividend growth, relying on income from dividend paying stocks to pay the bills.

 

[pb4uski]

Total return got me to ER... "and I'm dancing with the girl that brung me".

I have no problem if we have a year and I end up spending "principal" because I saved it to spend it once I retired, so it seems silly that principal is so sacrosanct.

 

[38Chevy454]

Total return got me to ER... "and I'm dancing with the girl that brung me".

I have no problem if we have a year and I end up spending "principal" because I saved it to spend it once I retired, so it seems silly that principal is so sacrosanct.

Good attitude to have. I think many are afraid to touch principle, even though they saved and depending on financial circumstances it can be the right thing to do,

My only comment on the discussion is that I believe it is important to have some inflation protection, and therefore you need the growth component as well as the income component. Specific AA is dependent on your risk tolerance and volatility concerns.

 

[fanmail]

The primary reason to alter a total return approach would be for tax reasons.

 

[arky]

Total return got me to ER... "and I'm dancing with the girl that brung me".

I have no problem if we have a year and I end up spending "principal" because I saved it to spend it once I retired, so it seems silly that principal is so sacrosanct.

In principle, I plan to not touch my principal

 

[Cobra9777]

Total return got me to ER...

What does that mean, exactly? To me, the distinction between these two strategies is only meaningful for retirees. But maybe I'm missing something.

 

[RunningBum]

The primary reason to alter a total return approach would be for tax reasons.

Could you expand on this? I understand I may take a capital gains tax hit on selling investments, but they should be LT gains which would be taxed at the same rate as qualified dividends. And I can probably choose which shares to sell which may allow me to harvest a loss, take a lesser gain, or maybe take a larger gain if I still have room to take 0% tax in the 15% bracket. I will usually come nowhere close to having all of my sales be taxable income.

What might I be missing that you were thinking of?

 

[fanmail]

Could you expand on this? I understand I may take a capital gains tax hit on selling investments, but they should be LT gains which would be taxed at the same rate as qualified dividends. And I can probably choose which shares to sell which may allow me to harvest a loss, take a lesser gain, or maybe take a larger gain if I still have room to take 0% tax in the 15% bracket. I will usually come nowhere close to having all of my sales be taxable income.

What might I be missing that you were thinking of?

Sounds like you are on top of it and are not missing any tax savings.

 

[GTFan]

What does that mean, exactly? To me, the distinction between these two strategies is only meaningful for retirees. But maybe I'm missing something.

I think he's saying exactly what I thought - using a total return strategy on portfolio built your egg to the level at which you could (safely, based on FireCalc) ER.

You keep dancing with the one that brung ya, in other words, because it works.

 

[marko]

With January being my traditional annual withdrawal month (i.e. the spending money bucket needs replenishment), I'm just glad that I set aside dividends instead of having to sell anything in the current market.

But that's just me.

 

[ERD50]

With January being my traditional annual withdrawal month (i.e. the spending money bucket needs replenishment), I'm just glad that I set aside dividends instead of having to sell anything in the current market.

But that's just me.

But this isn't the big, bad bugga-boo that people make it out to be.

Peel that onion back, just a tiny bit...

A) An investor probably gets ~ 2% from divs to begin with? So no selling there.

B) A conservative investor (one afraid of selling at market dips) probably has a WR of < 4%, but let's go with that.

C) That conservative investor probably has at least 25% in non-equity investments. In a falling market, rebalancing would have you selling from the non-equity side.

D) Even at 4% WR, only 2% would need to be sold. So there is no forced selling of equities for over a decade (round numbers). And even if there was, is selling 2% at a non-optimum time a deal breaker? Heck, a conservative 50/50 portfolio would have ~ 15% dip if the market dipped 30%. In comparison, a 2% withdraw is a pretty small effect.

E) People tend to look at these dips from the peaks, and get all excited. But your non-equity side probably didn't experience the peak like the market did - so it's a false comparison. They didn't fall, because they never rose. So maybe selling on a dip is still 'selling high', in relative terms?

Maybe next week I'll start a thread about whether our fear of volatility isn't completly irrational. It is the long term gain that matters - are the dips really hurting us, or is the desire to avoid dips hurting us more?

-ERD50

 

[Senator]

My total return is mostly equity related. If I can get $2K a month in dividends, $2K a month in SS, another ~1500 a month in pensions, that takes care of my needs. That is part of the plan. Plus some rental income for a bonus.

I buy mostly IVV, with a 2.25% dividend at today's prices. Most high dividend yields do not retrn much more.

 

[marko]

But this isn't the big, bad bugga-boo that people make it out to be.

Peel that onion back, just a tiny bit...

A) An investor probably gets ~ 2% from divs to begin with? So no selling there.

B) A conservative investor (one afraid of selling at market dips) probably has a WR of < 4%, but let's go with that.

C) That conservative investor probably has at least 25% in non-equity investments. In a falling market, rebalancing would have you selling from the non-equity side.

D) Even at 4% WR, only 2% would need to be sold. So there is no forced selling of equities for over a decade (round numbers). And even if there was, is selling 2% at a non-optimum time a deal breaker? Heck, a conservative 50/50 portfolio would have ~ 15% dip if the market dipped 30%. In comparison, a 2% withdraw is a pretty small effect.

E) People tend to look at these dips from the peaks, and get all excited. But your non-equity side probably didn't experience the peak like the market did - so it's a false comparison. They didn't fall, because they never rose. So maybe selling on a dip is still 'selling high', in relative terms?

Maybe next week I'll start a thread about whether our fear of volatility isn't completly irrational. It is the long term gain that matters - are the dips really hurting us, or is the desire to avoid dips hurting us more?

-ERD50

My point was a little more simple:
This being January, I'd guess a lot of folks replenish their spending bucket at this time (I do). My annual expenses are almost exclusively covered by dividends and SS.

If as a total return investor, one's only option is to sell equities (which had had the dividends reinvested) to refill the bucket, this would not be a good time to do so.

 

[RunningBum]

My point was a little more simple:
This being January, I'd guess a lot of folks replenish their spending bucket at this time (I do). My annual expenses are almost exclusively covered by dividends and SS.

If as a total return investor, one's only option is to sell equities (which had had the dividends reinvested) to refill the bucket, this would not be a good time to do so.

A total return investor does not necessarily reinvest dividends. I sure don't. All total return means to me is that I focus on getting the best overall return on my money rather than focusing on getting a high dividend yield to live off of. For income I use a combination of dividends (which I don't reinvest), distributions (also not reinvested), interest, and sale of assets if needed. I've got plenty in the bucket right now and have not had to sell any shares in this downturn.

 

[marko]

That's great!
One of the most common sentiments on this forum is some variation of "Whatever works best for you".

My comment was more of an observation of my particular situation than a challenge to anyone's strategy.

 

[RunningBum]

I think we're both happy that we aren't having to sell at this time! But even if I were, I'd be selling bond funds right now. I don't hold bond funds in my taxable account, so I'd actually be selling stock funds, and then exchanging bonds for stocks in my IRA (careful not to trigger a wash sale which would not be recovered in an IRA), so the net sale would be of bonds.

My comment was to correct your misconception or misrepresentation that total return people reinvest everything and our only recourse is to sell assets to get money to live on. Some may do that, but from another recent thread I know many do not. There are many valid and sound reasons for having a dividend strategy to generate your income, but thinking that you otherwise have to reinvest and subsequently sell is not one of them.

 

[marko]

My comment was to correct your misconception or misrepresentation that total return people reinvest everything and our only recourse is to sell assets to get money to live on. Some may do that, but from another recent thread I know many do not. There are many valid and sound reasons for having a dividend strategy to generate your income, but thinking that you otherwise have to reinvest and subsequently sell is not one of them.

Well then, I stand corrected!

 

[W2R]

I love that so many of us have different individual approaches to the distribution phase. There is more than one way to skin a cat, as the saying goes. It's fascinating reading, and every time I read a thread like this I check and think about my own strategies which is a good exercise, too.

 

[marko]

I love that so many of us have different individual approaches to the distribution phase. There is more than one way to skin a cat, as the saying goes. It's fascinating reading, and every time I read a thread like this I check and think about my own strategies which is a good exercise, too.

Right! I came from a "whatever you do, never ever touch the principle" family so I already have a certain predisposition.

 

[RunningBum]

I love that so many of us have different individual approaches to the distribution phase. There is more than one way to skin a cat, as the saying goes. It's fascinating reading, and every time I read a thread like this I check and think about my own strategies which is a good exercise, too.

I agree! I read and consider most posts here on any number of financial strategies. Most of the time I decide my own strategy still holds, but I have changed or softened my stance on a few things. Often I post my own position, not to declare mine as the correct one for everyone, but to see if others can find flaws that make me consider changing.

 

[FIREd]

Nowadays our portfolio is mainly composed of a handful of Vanguard index funds (so some might say that we follow a total return strategy), but all the dividends get paid to a money market fund and that's what our budget is based on (so personally I consider myself an income investor).

Technically, there is a bit of selling going on. We cannot readily access the income generated by our IRAs and 401Ks yet, so we have to do some selling in our taxable account as we reinvest the dividends in our tax-deferred accounts. So if our 401K/IRAs generate say $10K per year in income, we use it to buy $10K worth of new securities in our 401K/IRAs and we sell $10K worth of similar securities in our taxable account. So overall it's a neutral operation, except for transaction fees (really low) and taxes (which are minimal - most of the proceed is return of principal, and we can use TLH to offset the small gains). That's how we access the income generated in our tax-deferred accounts without paying penalties.

 

[ESRwannabe]

An income strategy definitely works better for me. I started out as a Bogglehead and didn't like it.

For one I have a much easier time investing in specific companies as opposed to financial instruments. With a company I can listen into the quarterly data and form an actual opinion about the company. With a broad based index, I just have to put my faith in it that the US is not like Japan or some other country where broad indexes have done poorly for decades.

Secondly building up income gives me a goal to focus on that I can see progress in. With total returns you are going through such dramatic capital gains and losses it feels far too random and out of ones control.

Third I think that the entire point of investing in a company is to share in the profits via dividends. Without dividends you might as well invest in baseball cards, stamps, art, etc. because your return is dependent on what other people will pay you for it.

Fourth I think paying dividends is one of the few things that can be done to keep company management on the ball and not wasting shareholder money. I am not a fan of share buybacks as they seem to encourage exactly the opposite discipline (i.e. lots of buybacks when they are not needed and none when they are).

 

[mathjak107]

dividends do not have much to do with profits, dividends are a return of investor capital that is decided by the board .

dividends can be paid and have been paid even when company's lose money .

in fact many pay dividends right up until they are gone .

 

[MichaelB]

Dividends are primarily a distribution to owners of the cash generated by a business, after paying debt and funding investments.

While there is no requirement that a company have a profit or positive cash flow, these things are usually seen as indicators of a healthy business (and sustainable dividend).