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

[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]

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]

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]

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]

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]

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]

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]

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]

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?

 

[mathjak107]

+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.

exactly my view . in the end it is all about your total return .

as an example a 6% total return does not care if it is 2% dividends and 4% appreciation or 6% appreciation .

income can be the same in either case .

 

[marko]

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?

My false assumption was that a total return investor didn't set aside dividends but mostly/always reinvested them and, when cash was needed that the equities/bonds would be sold vs banked dividends.

 

[mathjak107]

it amounts to the same thing in the end for the most part .

there are study's that show if tax advantaged reinvesting the dividends and letting them grow while spending lesser producing assets can have a tiny advantage but in the end it is really just a question of which pockets you want to spend from .

 

[audreyh1]

My false assumption was that a total return investor didn't set aside dividends but mostly/always reinvested them and, when cash was needed that the equities/bonds would be sold vs banked dividends.

Even with that assumption (reinvesting all dividends), what would such an investor sell after a big equity market drop to fund a withdrawal? - from their bond funds.

 

[mathjak107]

it is amazing how even being 100% equity's and spending directly from that 100% resulted in excellent success rates .

the bigger up years from the higher allocation cushion the down years more then smaller allocations.

i cant imagine doing it in retirement but the facts say you would have been good to go as is .

drawing equally from the pie regardless if markets are up or down has worked just as well as a little bucket system has which uses cash first , then bonds .

spending cash first then bonds makes my mind happier but in dollars and cents really does not do much over spending equally from all your assets whether up or down .

 

[marko]

it is amazing how even being 100% equity's and spending directly from that 100% resulted in excellent success rates .

the bigger up years from the higher allocation cushion the down years more then smaller allocations.

i cant imagine doing it in retirement but the facts say you would have been good to go as is .

drawing equally from the pie regardless if markets are up or down has worked just as well as a little bucket system has which uses cash first , then bonds .

It sounds like you're saying that it doesn't really matter a whole lot which path you choose.

 

[mathjak107]

yep , study after study pretty much concludes that . some rides mentally are just easier .

spending cash first , then bonds , then equity's seems to ease the mind more then systematic withdrawals equally from the pie in down markets but in the end they are pretty much just switching pockets .

 

[marko]

yep , study after study pretty much concludes that . some rides mentally are just easier .

spending cash first , then bonds , then equity's seems to ease the mind more then systematic withdrawals equally from the pie in down markets but in the end they are pretty much just switching pockets .

Your comment makes my ride mentally easier!

 

[Gone4Good]

Even with that assumption (reinvesting all dividends), what would such an investor sell after a big equity market drop to fund a withdrawal? - from their bond funds.

Yup. Even just for rebalancing purposes you'd want to spend from your over-allocated asset class which, after a big market drop, wouldn't be equities.

 

[GTFan]

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

With your income from divs and SS, that's pretty easy to do. Kind of hard to relate that to those that haven't gotten there yet and don't have pensions to live on. I know that I could easily live on divs and SS, for example, but I'm 13+ years from that age.

Selling is going to be a part of the strategy, in other words, as a bridge to that end. But that's always been part of the plan so why should I or anyone else doing TR be worried about it? That's why we all ran FireCalc, Fido RIP etc. and are willing to adjust expenses to meet market conditions.

But nothing is ever guaranteed, including divs and SS.

 

[sanfanciscotreat]

exactly my view . in the end it is all about your total return .

as an example a 6% total return does not care if it is 2% dividends and 4% appreciation or 6% appreciation .

income can be the same in either case .

After tax net will not be the same in most cases unless all dividends are qualified.

 

[mickeyd]

I've always considered myself as a TR guy because I was always looking to the long term. A good part of my AA is in tax-deferred funds so RMD is where I am required to look as I just exchanged my IRA TSM for my taxable STB (less tax) and I look to see how many (few?) shares I was required to sell to meet the requirement.

 

[mathjak107]

After tax net will not be the same in most cases unless all dividends are qualified.

even in a taxable account it will work out pretty close at the end . you may double pay taxes on dividends reinvested if you sell other assets but your cost basis will be that much higher in the asset you reinvested in and the taxes lower in the asset you sold off some of , since you no longer owe on that asset . . . you may be in a lower tax bracket now so it may be a good thing .

it is no different then tax loss harvesting would be . in some cases better then other cases .

so while yes there is a 2x tax you have to follow it through down the road .

 

[Markola]

+1 on Total Return strategy given that investors face a natural trade-off of yield versus growth. Part of the game is income but the other part is staying ahead of inflation.


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[Mulligan]

+1 on Total Return strategy given that investors face a natural trade-off of yield versus growth. Part of the game is income but the other part is staying ahead of inflation.


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While most people here I assume consider income to be dividends from higher paying commons, CDs, and bond funds, there is a subset of investors truly invested solely for income. I feel for them because many have had their head handed to them in capital losses stretching for yield in debt/preferred issues of Mreits, Hospitality Reits, shippers, and energy.
I reviewed the thread which started a ways back. I noticed a March post where I was 40% utility preferred. Im up to almost 80% now. Though I am mostly income invested, not stretching for yield has kept my head on my neck and very profitable the past 2 years since I started this. 500 basis points above present inflation with investment grade issues is good enough for me.


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