Dividend paying Stocks

[MichaelB]

Mathjak107, what you are saying is

1. Some people say dividends from stocks are like interest payments from bonds, and you disagree

2. Even when you are in the withdrawal phase, dividends should not be withdrawn and must be reinvested.

3. You have first hand experience with a REIT that kept a high dividend by returning capital without proper disclosure


It’s probably fair to say everyone here agrees on the first point. The third is regrettable. Stocks and REITS must comply with reporting requirements and disclosures and the financial statements show whether the business is generating enough earnings and cash to satisfy the dividend or not. This shows the importance of due diligence and portfolio diversification.

The second point is not intuitive. The withdrawal phase means your portfolio provides you with money to live. If you don’t need the income and have some other source to meet your needs then I can see why you advocate reinvesting. Most people need the income from their portfolios, however, and dividends are one way to provide that.

Finally, the literature that has been referenced here shows that your experience with REITS is possible but the more likely case is that dividend income rises over time faster than inflation and can be a real benefit to an investor in the withdrawal phase.

 

[mathjak107]

correct across the board except on one point.

if you need the money to live on than its just the opposite of what you said.
the dividends are re-invested to provide future growth so you have money growing at the max for conversion later in the future into cash and bonds for living on.

the income stream for eating today typically will come from safe money and bonds...

when ever markets are higher you can sell off some equities to keep cash and bond buckets primed and full.

once they are full again let the stock bucket continue to grow again with dividends reinvested for refilling your spending buckets again when needed .

many systems are based on this concept, in fact we are having a discussion on buck systems right now in this section.

while yes you can channel those dividends into the cash bucket all the time i believe they will be most effective just being re-invested and allowed to grow for future use.

as i said current spending then would not be effected by cuts and suspensions.....

 

[Chuckanut]

This is a very good thread with a lot of meat to chew on. I think I will print it out and reread it over coffee later today. Hmm... Is there an easy way to print out a thread on this board?

 

[GregLee]

Mathjak107, what you are saying is
...
2. Even when you are in the withdrawal phase, dividends should not be withdrawn and must be reinvested.

That's going beyond where the basic argument leads us. Dividends are equivalent to the same dollar value of market value. You could withdraw dividends as an alternative to selling shares: if your retirement plan calls for selling shares, you could take dividends instead, perhaps as a convenience. To put it another way, reinvesting dividends and then selling the shares you got through reinvestment is obviously the same as just taking the dividends.

I don't think the (purported) stability of dividends in a market decline shows there is any advantage to dividends. Consider the alternative of reinvesting dividends in a mutual fund and then instructing the fund to sell shares and send you a check every month in approximately the amount of the dividend. So long as any money at all remains in your mutual fund account, that check amount will be completely stable, more stable than a dividend, market decline or no.

 

[REWahoo]

Is there an easy way to print out a thread on this board?

The best method I've seen is change the number of posts displayed per page to 100 before printing:

User CP > Edit Options > scroll to Thread Display Options, from the drop-down menu select Show 100 Posts Per Page, scroll to the bottom of the page > Save Changes

 

[Dawg52]

havent retired yet... not because we cant but only because we havent finalized our plans yet.

your off base that with that statement, its not what i said at all.

its all about having a working plan and a portfolio that meets your goals and risk tolerance.

im very much invested in dividend paying funds. but im also careful to make sure i leave at least a 15 year time frame before i count on selling them so odds are ill never sell into a downturn. thats death to a portfolio when spending down..

my plan works just fine with 7 years of withdrawls in cash instruments and eventually an immeadiate annuity, another 7 years in fixed income and the rest growing long term in equities..

why 15 years? because 15 years is the shortest time frame where we always had at least some point where equities could be sold at a gain.

my dividends are reinvested and are never used as cash . they are reinvested to keep that stock bucket growing.......

the income stream is not dependant on what stocks and dividends do in the short term. the cash flow is pretty steady and can be sustained up to 15 years out if need be.

thats only my plan, there are loads of plans,methods an ideas out there. you have to find what works best for you.

what doesnt work is what many retirees have done and that is blindly did away with the income buckets and loaded up on dividend paying stocks instead.

its for them im posting what i did above

You missed the wink I guess.

I must lead a sheltered life as I haven't run across anyone who has blindly loaded up on dividend stocks as their only means of income. Most people I know use dividend stocks as one source to supplement their income. But they also own CD's, bonds, have a pension or own an annuity. I don't have a pension or annuity, but may add an annuity to the mix at some point down the road.

Looks to me you are just recommending a balanced approach, which most here would agree on. Whether one uses their dividends or other cash to keep their AA intact doesn't matter much to me.

 

[foxfirev5]

I just noticed a posting on the CNBC website; News Headlines describing the potential drop in equities due to boomers cashing in for retirement. This is an old issue debated quite frequently. However I wonder if the boomers are loading up dividend stocks and what impact this may have on future stock values.

 

[REWahoo]

However I wonder if the boomers are loading up dividend stocks and what impact this may have on future stock values.

I can tell you exactly what will happen: They will go down, and up, and down, and up, and down, and up...

 

[foxfirev5]

I can tell you exactly what will happen: They will go down, and up, and down, and up, and down, and up...

Three up , three down now I understand

 

[REWahoo]

Oh - not necessarily in that order...

Glad I could be of assistance...

 

[Gatordoc50]

I can tell you exactly what will happen: They will go down, and up, and down, and up, and down, and up...

In what time frame?

 

[REWahoo]

In what time frame?

The near, intermediate and distant future.

 

[Gatordoc50]

The near, intermediate and distant future.

lol

 

[clifp]

correct across the board except on one point.

if you need the money to live on than its just the opposite of what you said.
the dividends are re-invested to provide future growth so you have money growing at the max for conversion later in the future into cash and bonds for living on.

the income stream for eating today typically will come from safe money and bonds...

when ever markets are higher you can sell off some equities to keep cash and bond buckets primed and full.

once they are full again let the stock bucket continue to grow again with dividends reinvested for refilling your spending buckets again when needed .


as i said current spending then would not be effected by cuts and suspensions.....

My we really disagree.
One of the dirty secrets of FIRECalc, Trinity studies, and virtually every study of the withdrawal stage, is they make an assumption that every year at New Years Eve at 3:59 PM EST, the early retiree totals up his assets, and sells the appropriate amount of stocks/bonds to rebalance plus next years withdrawal+ inflation adjustments and lives off those fund for the next year.

The reality is that I have yet to "meet" any actual retiree who does this or in fact anything close. From my dozen years reading boards like this the actual behavior of real early retiree is significantly different than the theoretical behavior of the study retirees.

1. Most retirees here have additional steady sources of income, pension, SS, rents, or annuities. For many their basic needs are covered by the income stream, and in most cases there is some inflation protection.
2. Transfers to living expense happen on monthly or quarterly basis rather than annually
3. AA rebalancing rather than being done on a fixed annual schedule is done on an ad hoc basis, e.g. I rebalance when my AA is off by more than to 5 or 10%. In fact there is a form of dirty market timing going on. (I welcome folks who have strict rules on rebalancing that they've followed for the last 5 years to tell me I am wrong)
4. Inflation adjustments are squishy. People are comfortable spending an increase in their pension or SS check. They are also ok with adjusting for inflation when their portfolio values have increased, not so much when the market is down. For example I doubt any portfolio-only retiree increased their spending by 2.85 or 3%% from 2000 to 2001 after the NASDAQ collapse. I certainly didn't.

In effect what a dividend income stream does for me is replace #1 for those of us who don't have additional income streams. It is also replace the anxiety of having to pick an annual or quarterly date to sell. Plus for me it completely eliminates worrying about inflation adjustment, if my dividends and interest went up I can spend more if they didn't I don't. I still have a CD ladder and some bonds, but the CD ladder is 1/2 years spending per year for the next 5 years.

One of the underlying assumptions of your approach is that you can do a good job timing the market and refill the bond and cash bucket when the market is "higher". Can you give me a S&P price that would qualify as higher?

A second assumption that you make is your money in cash is safer than dividend income. This really depends on your definition of safety, which I assume for you means nominal dollars. My definition of safety is having the ability to the purchase the same amount of goods and services after tax. (i.e. real after tax dollars) So while you look at my dividend income portfolio and think this poor guy is screwed if we have another financial crisis and his dividends get slashed, I look at your 15 years of cash bucket, immediate annuity, and fixed income at today historically low rates, and think this poor guy is screwed if we get high inflation.

Let's hope both of us are wrong.

 

[mathjak107]

screwed? not at all .the almost 40- 50% allocation in the equities bucket makes that system just fine. that bucket can contain stocks,reits,gold ,commodities etc.

all that system does is make sure you can get through the valleys of about 15 years hopefully never selling at a loss. rebalancing is by years of money left not just performance.

the safe money is for spending in the near term, it may be a little more than most retirees keep but the stock allocation may be higher than retirees tend to keep as well.

the bonds and fixed income allocations are for medium term spending.

it all shakes out fine. the only thing i wont do is put dividends in my safe money. those dividends are reinvested and untouched until called upon years down the road.

the 2000's have been very unkind to new retirees. back to back recessions have caught many severly under stocked in safe money. that safe money is there for paying bills now and over the next few years. it has to be there in full ,under no un-certain terms. while purchasing power may fluctuate so will rates .

markets that went pretty much no where and interest rates at or near zero had many living through the failure rate firecalc and other planners talk about .

many folks had enough cash and bonds to only get through a portion of those years without selling at a loss and quite a few at this point are 1/2 broke from spending down their equities over the last 12 years.

the people all my points were addressed to above were those that went chasing yield. rather than have extra years cash and bonds and low and no interest they chose to load up on dividend paying stocks as a proxy.

well with two back to back recessions many saw that income stream fail early on and they had to sell off that goose laying those golden eggs right into down markets..

it was poor planning that put their retirement in the failed retirement graveyard ,not the markets. everything in a well designed plan has a use and function. its when you start to use something intended for another time frame in place of what should be used that troubles start all to easy..

 

[unclemick]

Down to roughly 10% dividends(from a few good stocks), 20% from an inherited IRA, 30% cap gains(still eliminating a few pesky DRIP plans) and 40% SS and pension - handgrenade wise looking at 2010 tax return.

Still like psst Wellesley and DRIP dividends cause that was my thinking not being aware of the '4% rule" back in the 1970's, 80's and 90's. So I started ER in the 90's with a heavy dividend stream component.

Time ticks on - so sneaking up on the RMD offer I can't refuse and also getting lazy I'm tending more toward lifecycle funds.

heh heh heh - no scientific basis for my mixture of investments - just getting older and lazier.

Still roughly 60/40 stocks/bonds. And I varied/aka cutback withdrawals periodically as required during the last decade. And yes took some(maybe 20% of total div stream) div cuts - BAC, Sun Trust, Citigroup for example.

 

[Chuckanut]

screwed? not at all .the almost 40- 50% allocation in the equities bucket makes that system just fine. that bucket can contain stocks,reits,gold ,commodities etc.

Is there an explanation of the 'bucket' system mentioned above by Mathjak107? I am referring to an article or book about it.
It seems like a system that might work for me, but I need to understand it first.

 

[mathjak107]

quite a few. i actually like the ray lucia way but there are many ohers..

Ready


heres a nice discussion of other ideas

http://www.early-retirement.org/forums/f28/details-of-your-buckets-57541.html

 

[REWahoo]

Here's a link to a buckets article: http://www.early-retirement.org/forums/f28/details-of-your-buckets-57541.html#post1103001

 

[mathjak107]

beat ya to it ha ha ha ha

 

[TN_INVEST]

I buy dividend paying stocks the same way I buy rental property and bonds. I buy them with a maturity date.

Just as I don't call my realtor to ask the value of my houses every month, I don't really care about the value of my stocks each month. I do, however make sure those rental checks keep rolling in. Last I checked, my rental income was quite a bit higher than when I first purchased the properties several years ago. Same for my dividends (my effective yield on some of them would make you blush).

As to the value of my stocks and my properties...I'm told that some folks that bought a few years/months ago couldn't sell them for what they paid for them. Guess I'm lucky in that I don't plan on flipping my rentals or my stocks any time soon. I hope those folks didn't think flipping investments was the way to go.

A lot of folks think retirement is about total return. However, some folks think it is about total income. I think we all know rich widows with tons of money in the bank that go around pinching pennies because their CD income is getting destroyed (don't waste your breath trying to convince them they got money...you'll quickly find out that it ain't about money, it's about income).

 

[Brat]

There is a book called Buckets of Money by Ray Lucia, find the first edition - probably in your local library. Ignore the author's bs about non-traded real estate but the essence is that you have three buckets: one for income you need in the short term (5 to 7 years.. in our case MRDs) so it would contain cash equivalents, an intermediate term bucket for the 5 to 10 year period from which you fill bucket 1, the balance for long term investments that you don't plan on touching for 10 years (growth stocks).

The concept is managing risk. Overlaying this would be your asset allocation.

 

[mathjak107]

the biggest risk as retirees we have is not as much the risk of our overall returns but rather the biggest risk is the order those gains and losses come in.
its those orders that really determine if our retirements will fail.

anything we can do to smooth out those valleys when we happen or to avoid them increases our survival greatly.

since as it stands right now there has never been a 15 year period where at least at some point equities were higher so you can refill . hense thats why the 2 buckets of 7 years each in my plan.

one of the things im looking into is working in maybe 20% of an immeadiate annuity to smooth those valleys out even more when things are down.

i want to introduce other elements to diversify other than market risk and rate risk. i want to add dead bodies into my mix.

in the old days if we fell 15% in equities at the normal 6-7% interest levels you were whole again in 2 years .well today thats not going to happen.

im looking at alternatives for pensionizing a slight income stream to lessen any selling i may have to do if rates stay down and markets dont pick up for long periods of time.

'
its all a work in progress.

 

[mathjak107]

I buy dividend paying stocks the same way I buy rental property and bonds. I buy them with a maturity date.

Just as I don't call my realtor to ask the value of my houses every month, I don't really care about the value of my stocks each month. I do, however make sure those rental checks keep rolling in. Last I checked, my rental income was quite a bit higher than when I first purchased the properties several years ago. Same for my dividends (my effective yield on some of them would make you blush).

As to the value of my stocks and my properties...I'm told that some folks that bought a few years/months ago couldn't sell them for what they paid for them. Guess I'm lucky in that I don't plan on flipping my rentals or my stocks any time soon. I hope those folks didn't think flipping investments was the way to go.

A lot of folks think retirement is about total return. However, some folks think it is about total income. I think we all know rich widows with tons of money in the bank that go around pinching pennies because their CD income is getting destroyed (don't waste your breath trying to convince them they got money...you'll quickly find out that it ain't about money, it's about income).

well you watch the income, ill watch my total return from both. a falling share price on a dividend payer isnt any better than a falling non dividend payer. especially if they fall the exact same amount in total return.

 

[haha]

A lot of folks think retirement is about total return. However, some folks think it is about total income. I think we all know rich widows with tons of money in the bank that go around pinching pennies because their CD income is getting destroyed (don't waste your breath trying to convince them they got money...you'll quickly find out that it ain't about money, it's about income).

This is so true. There is one world of books, gurus and websites, another of actual living people with their own sets of needs and preferences..

Ha