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

[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]

Quote:

Originally Posted by RunningBum 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]

Quote:

Originally Posted by 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.

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

[RunningBum]

Quote:

Originally Posted by 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.

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).

[mathjak107]

a history of a rising dividend is a good show of health . no company's with financial issues raise dividends over and over . but the bluest of blue chips have sustained their dividends right to the grave .

[Chuckanut]

Quote:

Originally Posted by mathjak107 a history of a rising dividend is a good show of health . no company's with financial issues raise dividends over and over . but the bluest of blue chips have sustained their dividends right to the grave .

Due Diligence is always required to make sure the company's earnings support the dividends. I think we will all agree with that.

[audreyh1]

Quote:

Originally Posted by marko 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.

Why is one's only option to sell equities. Because they are 100% stocks? Or some really high number like 85%?

Otherwise, the fixed income would handle the withdrawals, even with dividends reinvested. Most folks here are 50/50 +/-10 in equities, fixed income. If equities drop, withdrawal comes out of fixed income.

Yes, I'm glad I took my distributions in cash as it simplifies things, but it doesn't negate the above.

[Gone4Good]

Quote:

Originally Posted by RunningBum My comment was to correct your misconception or misrepresentation that total return people reinvest everything . . .

If anyone actually does that they should really consider changing strategies, unless all of their assets are in tax advantaged accounts.

Otherwise they're doing this. . .

1) Paying taxes on the fund / stock distribution
2) Paying taxes on the gains incurred when selling to pay for 100% of your living expenses.

When they could be doing this . . .

1) Pay taxes on distributions
2) Spend distributions
3) Pay taxes only on the gains incured to fund the spending not covered by the distributions you spent

[Mulligan]

Quote:

Originally Posted by Chuckanut Due Diligence is always required to make sure the company's earnings support the dividends. I think we will all agree with that.

That is right where I am focused on, as that is all I am concerned with as preferred stocks are useless without dividends. Mathjack is correct the dividends can be passed out without earnings to support it. And Mr. Market is always biting at the heels of companies passing out dividends without the financial wherewithal to continue them. One of our favorite stocks of discussion, KMI just recently proved this.


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[Gone4Good]

Quote:

Originally Posted by ERD50 A distinction without a difference. Money is fungible. If one approach was clearly superior in all ways, money would flow into it, driving up the price until it was no longer superior. -ERD50

+1

There's no evidence high dividend paying stocks, or stocks paying any dividend at all, perform better than any other stock on average. So all else being equal, it's total returns that matter. It doesn't matter how those returns arrive, either through dividends or capital gains, just so long as they arrive.

One area that matters a great deal, though, is whether the income constraint imposes more discipline on the retiree. It's easy for a total return investor to say "Hell, I can pull 4% real out of my portfolio forever" and hope for the best. If you have to generate your spending needs from dividends and interest you may come to the conclusion that you can't spend 4% because it's hard to get that kind of income from most stock / bond portfolios in this market.

On the other hand, trying to generate 4% income could cause some folks to build risky, high income, death machine portfolios (like that guy several years back who was going to live off High Yield Bond fund distributions or folks who loaded up on the juicy yields of the big banks pre-2008.) In that case, you'd be better off going the total return route with a more traditional asset allocation.

[LOL!]

I use a Total Return strategy.

I took my December distributions and paid my property taxes, my child's college tuition for Spring 2016, all my credit card bills, and my car payment (0% interest rate). That left enough money for Roth IRA contributions which were invested today and two days ago. I won't have any bills until the end of February.

My bond funds are up 1% in the past 2 weeks.

So all is well with the world.

[foxfirev5]

Quote:

Originally Posted by audreyh1 Why is one's only option to sell equities. Because they are 100% stocks? Or some really high number like 85%? Otherwise, the fixed income would handle the withdrawals, even with dividends reinvested. Most folks here are 50/50 +/-10 in equities, fixed income. If equities drop, withdrawal comes out of fixed income. Yes, I'm glad I took my distributions in cash as it simplifies things, but it doesn't negate the above.

Exactly. All I want to do is pay the bills. I'll leave the rest to hopefully grow.

[marko]

Quote:

Originally Posted by audreyh1 Why is one's only option to sell equities. Because they are 100% stocks? Or some really high number like 85%? .

As RunningBum pointed out, I was under the mistaken idea that a Total Return investor was reinvesting all dividends and had to sell equities to get cash.

[audreyh1]

Quote:

Originally Posted by marko As RunningBum pointed out, I was under the mistaken idea that a Total Return investor was reinvesting all dividends and had to sell equities to get cash.

Because they were 100% stocks? What if they were 50% bonds? Wouldn't they just sell some from their bond funds if they needed cash for withdrawals or rebalance the portfolio?