Dividend Growth / Dividend Income Investing for RE

[papadad111]

I don't chase yield. I'm really a total return investor and much prefer the diversification of the SP500 or even broader basket of shares. I simply don't hold individual stocks any longer. I did that for 25 years with more than a few blow ups. Tracking my actual results, I was a fool to do it that way versus broad indexing. Aside higher total returns, I spend less than 1 minute per month on my income strategy.

I collect dividends in cash from 4 ETF's and asset allocation looks like this :

VTI (45%)
VXUS (20%),
VYM (5%)
SPY (20%)
Cash (10%)

The dividend yield is around 2.6%. Not quire enough for my WR of 3.5% but I'm diversified out to the efficient frontier. https://en.m.wikipedia.org/wiki/Efficient_frontier

A monthly sweep to a cash account collects the dividends to cover annual spending and taxes.

Basically a bogleheads lazy portfolio ..

 

[ownyourfuture]

I have a 401-k which doesn’t offer individual stock selection, a small IRA, & about 90k in company stock (non dividend) so I’m not going to list any of these here.

-Do you invest in individual stocks for dividends? Yes

My ‘main’ account is @ Fidelity. It’s about 480k and is ’taxable’
I’ll list only those holdings.
*Yield & Payout ratio shown*

Apple Computer: 2.43% - 27.00%
American Water Works: 2.02% - 53.00%
Bank Of America: 1.35% - 15.00%
Colgate Palmolive: 2.16% - 56.00%
Cinemark Holdings: 3.05% - 54.00%

Consolidated Comm: 6.34% - 235.00%
Gilead Sciences: 2.11% - 15.00%
Intel Corp: 3.40% - 43.00%
Johnson & Johnson: 2.84% - 49.00%
Kraft Heinz: 2.89% - 78.00%

Kinder Morgan: 2.84% - 72.00%*Taken a real beating on this one over the past year*
Eli Lilly: 2.65% - 57.00%
3M Company: 2.64% - 54.00%
Pinnacle Foods: 2.39% - 48.00%
Verizon: 4.40% - 57.00%

Wisconsin Energy: 3.39% - 68.00%


-If so, any interesting resources you use for research?
I like Ford Equity Research, which is available @ Fidelity. But not neccesarily for a Buy/Sell rating.
What I like best is the simple bar charts they use to show the previous 5 years, & Trailing 12 months EPS. They do the same for Annual Revenues. IMO this cuts through a lot of the fluff.

-What kind of dividend strategy do you employ? (high yield, dividend growth, blend, other etc)
I’d have to say a blend.

-Do you blend dividend focused etfs/funds into your strategy? Yes

2 ETF’s
iShares International Select Dividend: 4.53%
Vanguard Dividend Appreciation: 2.01%

& 2 REIT’s
National Health Investors Inc: 5.21% - 74.00%
Realty Income Corporation: 3.98% - 83.00%

A somewhat boring portfolio, but that's the way I want it.

 

[Brat]

I have some individual stocks MO, MRK, AEP, O, T, GE. Some ETFs too, SDOG, IDOG, PFF. Some of these I've had for a long time the MO positions have done very well.

Research mainly with Fidelity, someone here is responsible for me getting into O at a great discount. Don't recall who it was but a big thank you.

You are welcome!

O is pretty pricey at the moment. I purchased it years ago in my IRA, it's dividends alone enable me to collect my MRDs. That won't last forever as the IRS is fast on my heels.

 

[tcaron20]

I got tired of getting unexpected mutual fund distributions each year and having to report on tax return.
I now only invest in dividend stocks such as T, BNS, VZ, etc. they have run up a bit lately. Will buy more when price comes done.


Sent from my iPad using Early Retirement Forum

 

[gayl]

Dividends have increased to a little over 700 m on average by focusing on SCHD & dividend aristocrats. Currently reinvesting them but could take if needed. Goal is to get to 1k per month

 

[mathjak107]

i am a total return investor no matter how i get it . at the end of the day that is all that matters . getting a x-percent dividend and spending it is no different then just pulling x-percent from a total portfolio that had the same total return . there is really nothing special going on .

 

[papadad111]

i am a total return investor no matter how i get it . at the end of the day that is all that matters . getting a x-percent dividend and spending it is no different then just pulling x-percent from a total portfolio that had the same total return . there is really nothing special going on .

Except for the tax efficiency of dividends over short term capital gains ...

Taxes. Darn taxes.

 

[mathjak107]

not really , first of all not all dividends are qualified , where as one can control that in their own portfolio by selling longer term assets to raise cash .. second the distribution of those dividends outside of your control can hurt at times .

like now , i am hoping to get an aca subsidy but whether i do or not is depending on the funds dividend payouts and distributions ,.

i don't know what to expect until the year's end because i am not in control and do have quite a few dividend paying funds .

that aspect is kind of variable on both sides .

 

[Zathras]

not really , first of all not all dividends are qualified , where as one can control that in their own portfolio by selling longer term assets to raise cash .. second the distribution of those dividends outside of your control can hurt at times .

like now , i am hoping to get an aca subsidy but whether i do or not is depending on the funds dividend payouts and distributions ,.

i don't know what to expect until the year's end because i am not in control and do have quite a few dividend paying funds .

that aspect is kind of variable on both sides .

That is unfortunate and part of the reason I don't use funds.
And yes, if you don't use funds, you have complete control over the dividends being qualified or not.

I understand dividends aren't right for you (more so than other investments). Some people find great success with them and prefer the lower volatility.

 

[target2019]

That is unfortunate and part of the reason I don't use funds.
And yes, if you don't use funds, you have complete control over the dividends being qualified or not.

I understand dividends aren't right for you (more so than other investments). Some people find great success with them and prefer the lower volatility.

+1 - use funds in tax-advantaged, stocks in tax-managed.

 

[mathjak107]

one of the problems is the old rules of thumb were really wrong .

the premise that you keep your income generating stuff like reits and interest bearing stuff in deferred accounts since they are taxed at regular rates and equity's in the taxable account where they get special tax treatment ended up a poor idea .

any distributions and dividends over time that are taxable eventually kill off the tax advantage .

in the mean time you have valuable space in the deferred accounts taken up by things like bonds generating little income .

it should have been the opposite today.

so many things today are linked to retirement income .

 

[eta2020]

any distributions and dividends over time that are taxable eventually kill off the tax advantage .

How could that be? If I do not trade then almost all dividends are qualified. If I make total income under 90k then they are tax free . Simple as that.

I have nice chunk of dividends from taxable account and maybe only 10% are not qualified. I do not trade just buy and hold and enjoy dividends growing faster then inflation.

 

[mathjak107]

if you can get them tax free that trumps all . other wise fund dividends being taxable and fund turnover are key . even a 1% dividend over a typical accumulation period of 30-40 years will destroy tax savings .

owning index funds may not matter either as they too can have turnover .

kitces did an excellent article on the fact we may have been told wrong .

https://www.kitces.com/blog/asset-l...e-account-versus-ira-depends-on-time-horizon/

 

[mathjak107]

as you see here even a simple s&p 500 fund or total market fund can have terrible tax implications .

most funds do not own all the s&p 500 stocks or every stock out there so they buy the ones that will help mimic the index and that can require a lot of turnover

 

[eta2020]

if you can get them tax free that trumps all . other wise fund dividends being taxable and fund turnover are key . even a 1% dividend over a typical accumulation period of 30-40 years will destroy tax savings .

owning index funds may not matter either as they too can have turnover .

kitces did an excellent article on the fact we may have been told wrong .

https://www.kitces.com/blog/asset-l...e-account-versus-ira-depends-on-time-horizon/

I checked my taxes for 2015. Having bunch of ETFs like VWO, VIG, SCHD, VXUS, S&P 500, KO, MO, PM, etc etc resulted in about 10% non qualified dividends.

That means for any couple with total income under 91k 90% of my dividends would tax free. I am still working so for me that are taxed at 15%.

But once I am FIRE I can control 401k and IRA withdrawals to remain under 91k and pay 0% taxes on majority of my income if I choose so.

 

[mathjak107]

the problem is for those who have enough in assets to worry about this stuff odds are once ss kicks in tax free 100% will not be the case . you can see that from the poll they did here .

i know in our case just both our ss , a small 20k pension and the little bits of non qualified dividends and interest we get leave very little room left in the tax free 15% bracket . this will get worse once rmd's kick in .

distributions from our funds can range from 29k to 69k a year . so our real life scenario is we would have been better off reversing things .

to late now .

 

[Gone4Good]

if you can get them tax free that trumps all . other wise fund dividends being taxable and fund turnover are key . even a 1% dividend over a typical accumulation period of 30-40 years will destroy tax savings .

owning index funds may not matter either as they too can have turnover .

kitces did an excellent article on the fact we may have been told wrong .

https://www.kitces.com/blog/asset-l...e-account-versus-ira-depends-on-time-horizon/

I'd have to spend a lot more time working through the math to see how this works but at first blush it just doesn't seem right.

Here are the initial assumptions . . .

The stocks are assumed to grow at a long-term return of 10%, and the bonds at 5%. The IRA is taxed (at 25% ordinary income rates) at the end upon liquidation, the stocks in the taxable account are also taxed at the end upon liquidation but at 15% long-term capital gains rates, and the bonds in the taxable account are simply taxed annually (also at 25% ordinary income rates).

So bonds return 5% and are taxed at 25%. Equity is assumed to be taxed at 15%. He then changes the scenario as follows . . .

For instance, if the long-term appreciation for equities is only 5% (which on top of a 2% dividend would lead to a total return of “just” 7%), there is still a benefit to holding equities inside an IRA in the long run, but not as much:

So he's claiming that paying 25% every year on 100% of your 5% bond income plus paying 25% on your 7% capital gains & dividends instead of 15% is better because by putting your stocks in an IRA you [-]avoid[/-] delay the annual 15% hit on a fraction of your 7% qualified dividends and gains?

I'd need to walk through the numbers before I believe that. By putting stocks in the IRA I pay more taxes every year and I pay more taxes at liquidation. How can that be better?

My guess is that he's not stepping up the stock basis as he increases the fund turnover percentage and therefore is taxing that twice at 15% each.

My second guess is that he's not rebalancing the portfolio so whatever tax drag hits the equity account compounds forever instead of getting reallocated across both the equity and fixed income positions.

Fix those two things and my third guess is that this issue goes away entirely.

 

[MichaelB]

The Kitces analysis assumes the tax rate on the IRA [-]withdrawal[/-] final portfolio value is equal in all scenarios. This cannot be - if the final portfolio value is higher for equities vs FI, the IRA marginal tax rate must also be higher.

 

[mathjak107]

not always . brackets are pretty wide as well as increase yearly with more and more money going through in lower brackets over time . pretty soon `100k will be in the 15% bracket .