Anybody Rely Mostly on Dividend Funds? Questions

[SoReadyToRetire]

My sister gave her notice on Friday at the high-stress job she's held for 8 years. She's almost 62 and a widow.

She still has a mortgage on her house and will continue to make payments on it, rather than robbing her retirement accounts to pay it off.

She'll obviously need ACA for the next 3 years, so needs to manage her income to get the best subsidy possible.

She plans to work part time once she's done in two weeks (has already obtained a job, 20 hrs/week @ $15/hr).

She will get ~$1K/month from her widow's SS benefits, until she can draw her own SS at FRA.

She has ~$550K in retirement funds, all pre-tax.

She'll need some additional income in order to over all her monthly bills, which total $2800/month. So we've been looking at putting the bulk of her IRAs into dividend funds.

I've been looking at funds for this such as ProShares S&P 500 Dividend Aristocrats. I understand that "aristocrats" have a record of long-term, steady or growing dividends.

Does anyone in this forum also depend on dividends to generate enough income to cover their monthly expenses? Does it seem doable, if she were to put the entire $500K into that fund, or even half of it? Or is that dumb?

I don't want a risky, high-yield fund that would jeopardize the money she worked so long and hard to put away. That's why we're thinking aristocrats.

Any advice on how to best (/ie, fairly safely) generate dividend income, and things to consider, etc, would be greatly appreciated. TIA.

 

[OldShooter]

Dr. Ken French is one of the investment luminary academics. You can check him out at Wikipedia. (https://en.wikipedia.org/wiki/Kenneth_French) Here is his discussion on the issue: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[ownyourfuture]

I've been looking at funds for this such as ProShares S&P 500 Dividend Aristocrats. I understand that "aristocrats" have a record of long-term, steady or growing dividends.

Does anyone in this forum also depend on dividends to generate enough income to cover their monthly expenses? Does it seem doable, if she were to put the entire $500K into that fund, or even half of it? Or is that dumb?

I'm no expert, but I don't think it's ever a good idea to put all your eggs in one basket. I can see the attraction to the dividend aristocrats. Well established mostly mature companies that not only have a long-term history of paying dividends, but a long-term history of increasing them as well.

Maybe she could consider a mix of stocks, ETFs, REIT'S, & the dividend aristocrats fund to meet her income goals ?

I have a feeling they'll be many more replies. I look forward to seeing what others think.

Good luck

 

[aja8888]

The question I have is how much additional does she need as a return from that $550K?

Depending on that number, there are different ways to structure the dividends. One way is to buy Treasuries in a ladder. At Schwab, a $200 K 2 year ladder can return about 1.4% annually. (Just an example). Or you can make the ladder return more with additional funds or go out to 5 years.

Treasuries are pretty safe.

 

[Taco]

$2800 expenses.
$1000 SS benefit
$1000 part time employment (estimate, after tax on the $15/hr, 20 per week)
----
$800 need

Using the 4% rule of thumb, 500K would produce $20K/year or over $1600 per month.
A 3% withdraw rate would still produce over $1200 per month.

A conservative asset allocation (60/40 or 50/50) and 3-4% withdraw rate would likely work out fine. I'd lean toward investing for total return rather than for dividends.

 

[daylatedollarshort]

A TIPS ladder, with real yields of 0% or better, would allow for a minimum safe withdrawal rate of 3.33% over 30 years (100 / 30 years = 3.33%), or $18,150 per year, with the safety of Treasuries. Most of the shorter maturities are still negative right now, but those yields should go up later in the year when the Fed raises interest rates, which, if all goes to plan, will likely lower inflation and TIPS prices.

Fed Chairman - We need to raise interest rates quickly - Fed Chairman Jerome Powell: We need to raise interest rates quickly - CNN.

 

[Out-to-Lunch]

$2800 expenses.
$1000 SS benefit
$1000 part time employment (estimate, after tax on the $15/hr, 20 per week)
----
$800 need

Using the 4% rule of thumb, 500K would produce $20K/year or over $1600 per month.
A 3% withdraw rate would still produce over $1200 per month.

A conservative asset allocation (60/40 or 50/50) and 3-4% withdraw rate would likely work out fine. I'd lean toward investing for total return rather than for dividends.

But I imagine that she is not planning to hold this employment for the rest of her natural life, is she?

 

[Phroig]

But I imagine that she is not planning to hold this employment for the rest of her natural life, is she?

That's why your sister needs portfolio growth. I'd second a 60/40-type portfolio. However, some folks have a hard time selling shares to generate an income stream. Something like SCHD has total returns comparable to a broad market index, while generating distributions that can be spent. I'd wait to add the bonds until we're done with at least a couple more rate hikes, and then gradually add a high-quality intermediate bond fund/ETF. For now, putting two-thirds of the $550K into SCHD (or another dividend ETF) should get her the $800-1K per month she needs.

 

[Drewjd]

Unless I missed it, here’s a huge factor you’re overlooking about the $550K in pre-tax investments: If she sells that to invest in something else (e.g, dividend focused investments), what’s the tax burden for that? She’s going to pay taxes on the gains from her $550K. It may be mostly long term capital gains, but the tax cost needs to factored in.

 

[SecondCor521]

Unless I missed it, here’s a huge factor you’re overlooking about the $550K in pre-tax investments: If she sells that to invest in something else (e.g, dividend focused investments), what’s the tax burden for that? She’s going to pay taxes on the gains from her $550K. It may be mostly long term capital gains, but the tax cost needs to factored in.

OP mentioned retirement accounts and IRAs. Reallocating within an IRA, if that's what OP's relative decides to do, should generally come with zero tax cost.

Speaking of taxes, OP, I would note that any withdrawal from an IRA is treated as ordinary income regardless of whether it's capital gains, interest, dividends, or whatever else.

So it comes down to an asset allocation decision really, but the decision should be based on risk tolerance and total return capability, not whether something happens to pay a dividend or not.

 

[mrfeh]

$2800 expenses.
$1000 SS benefit
$1000 part time employment (estimate, after tax on the $15/hr, 20 per week)
----
$800 need

Using the 4% rule of thumb, 500K would produce $20K/year or over $1600 per month.
A 3% withdraw rate would still produce over $1200 per month.

A conservative asset allocation (60/40 or 50/50) and 3-4% withdraw rate would likely work out fine. I'd lean toward investing for total return rather than for dividends.

This.

OP - go over to bogleheads.org and search for "total return" or "dividend investing" for more reading than anyone can handle.

There is nothing special about dividends, and they are probably sub-optimal.

 

[ImThinkin2019]

One possibility for her is to put enough money in a covered call fund like JEPI to get some equity ups (and downs) and a steady income.

Assuming she needs around $1800/month = $21,000/year after tax, at a 20% tax rate she needs $21,600/.8 = $27,000 gross.

At 7.5% yield she would need to invest $27,000/.075 = $360,000 in JEPI. The balance of her $550K could be invested in other things.

JEPI probably will have a somewhat smaller growth rate than the S&P 500. But it still should appreciate if the market goes up.

We have JEPI as a portion of our income bucket.

 

[Taco]

But I imagine that she is not planning to hold this employment for the rest of her natural life, is she?

I sure hope not!

The OP said the $1000 SS benefit was the widow's benefit, and she would draw her own SS at full retirement age. They did not say what the FRA benefit would be, but the impression I got was that the job was to bridge that gap from 62-67, and the FRA benefit would end up in the same ballpark as the job + widow's benefit.

 

[robls]

Spouse and I have lived on a combination of our SS benefits, my pension and about 50% of dividends generated from IRA's. We reinvest the other 50% back into the stocks we own automatically. We have a mixture of mostly high quality dividend paying companies with a handful of lesser quality names. Been doing this for the last 11 years, and sleeping comfortably at night.

 

[Accidental Retiree]

I sure hope not!

The OP said the $1000 SS benefit was the widow's benefit, and she would draw her own SS at full retirement age. They did not say what the FRA benefit would be, but the impression I got was that the job was to bridge that gap from 62-67, and the FRA benefit would end up in the same ballpark as the job + widow's benefit.

That’s what I was wondering about—her FRA amount.

I’m also wondering how much longer she has to pay on her mortgage and whether refinancing to a lower rate/payment is worthwhile.

 

[FANOFJESUS]

Look at Wellington or Wellesley they both pay a lot of dividends.

 

[38Chevy454]

Speaking of taxes, OP, I would note that any withdrawal from an IRA is treated as ordinary income regardless of whether it's capital gains, interest, dividends, or whatever else.

So it comes down to an asset allocation decision really, but the decision should be based on risk tolerance and total return capability, not whether something happens to pay a dividend or not.

This is why there is nothing special about the OP's plan for dividends. There is no tax break like one might get in an after tax account where qualified dividends get lower tax rate treatment. So this comes down to the money is fungible discussion. Ultimately the total return is what counts, whether that return is from dividends, price appreciation, or combination.

I do understand that the money is needed for relatively short term 1-3 years until medicare can help with the medical side costs. So the "safety" of the stable dividend flow is attractive. The dividend aristocrats should be able to produce a higher return than other fixed income type investments like CDs or bonds.

Just a question, can your sister get a higher paying job than $15/hr? That would have a direct positive effect if she is able to get more income, thus reducing the required withdrawals from the retirement accounts.

 

[OldShooter]

... other fixed income type investments ...

With respect, I think there is a false premise here. Dividends are not fixed. Recent history confirms.

 

[Phroig]

With respect, I think there is a false premise here. Dividends are not fixed. Recent history confirms.

That’s why you need a dividend ETF that also screens for quality. Both NOBL and SCHD paid higher dividends in 2020 than in 2019. I suggested SCHD because the yield is better. I agree total return is more important, but some folks are reluctant to sell shares to generate cash flow, especially after market declines. I think Wellington/Wellesley will also be good options after we’ve had a few more rate hikes.

 

[SoReadyToRetire]

OP here--thank you very much for all the responses so far.

More info:

My sister "G" would like to NOT work at all if that ever becomes doable. The mortgage is the biggest thing that bothers her about her current situation, but for many reasons it makes no sense for her to pay it off (she'd have to do it out of her IRA), or to refinance it. She has 10 years left to pay, at $730/month. If she refinanced, her payment would actually go UP, which wouldn't help with cash flow. Oh, and she'd get a huge tax bill because of the withdrawal from her IRA to pay if off, and THAT would eat up most of the cash she has left in her bucket. It's a crappy situation.

I believe her SS at FRA will be $1770. That will be enough additional to just cover her mortgage payment, once it starts. We need to meet with SS to get clear on that amount asap. I had her open a MySSA account, but unfortunately she's dragging her feet on giving me current info from it.

She is the kind of person who feels that if you just ignore financial decisions, they'll miraculously go away. QUITE stressful/aggravating for me. I'm having to stay on her night and day to get this stuff figured out.

The reason we even started thinking about dividends was because we finally met with a financial planner, and that person wants to take all her money and put it into a separately managed account that will cost her 1% per year. It focuses on dividends. She said if we did that, G wouldn't have to work at ALL.

What else did I leave out?

 

[SoReadyToRetire]

Oh--and she could probably get a job for about $17/hour, but it would be much less flexible than the one she took for $15. She really needs a break from stress and some freedom, at least for a short time.

And yes, I've done tons of reading on Bogleheads and every other side I can find relative info on. At some point, though, it's more helpful to hear from people who have actual real-life experience with something than to try to comprehend any more online information, you know?

I really appreciate the input. This is highly stressful.

 

[disneysteve]

we finally met with a financial planner, and that person wants to take all her money and put it into a separately managed account that will cost her 1% per year.

If nothing else happens, I at least hope you are able to convince her not to do this. Hopefully she understands that paying someone that much money to do something she can easily do herself will just make it that much harder to meet her goals.

 

[Phroig]

If nothing else happens, I at least hope you are able to convince her not to do this. Hopefully she understands that paying someone that much money to do something she can easily do herself will just make it that much harder to meet her goals.

+1
To put things in perspective, the "1%" advisor costs her $450 per month.

 

[disneysteve]

+1
To put things in perspective, the "1%" advisor costs her $450 per month.

It is insane to me that anyone would ever do that. That’s serious money.

 

[Chuckanut]

Oh--and she could probably get a job for about $17/hour, but it would be much less flexible than the one she took for $15. She really needs a break from stress and some freedom, at least for a short time.

A well known chicken sandwich outfit has an operation near me. They are paying new hires $17 an hour. And they are not open on Sundays.

That might help her, and she gets at least one weekend day off, guaranteed.