Dividend Yield vs Total Return Income in Retirement

[pjigar]

All this debate is quite interesting and reminds me of a blog that I read a while back: https://www.collaborativefund.com/blog/play-your-own-game/

 

[G-Man]

I'm tempted to keep my SCHD, due to a) it's amazing NAV increase over time -- pretty much up there with S&P 500 -- and b) it's consistently growing dividends! About 30% of my stash is in it, and I'm hopeful the dividend increase with keep the wolf from the door 'til I fall over.

So is SCHD a good ETF to fund a Roth IRA? I'm debating between FSKAX and SCHD.

 

[Dash man]

Ah, the ol' pivot! Well done!

I had insinuated this earlier, just not as clearly. A main reason I’m switching from individual stocks into ETFs is to reduce volatility. The first six months of this year showed me it’s time to adjust.

 

[Gumby]

All this debate is quite interesting and reminds me of a blog that I read a while back: https://www.collaborativefund.com/blog/play-your-own-game/

Very appropriate. Thanks.

 

[Lawrencewendall]

All this debate is quite interesting and reminds me of a blog that I read a while back: https://www.collaborativefund.com/blog/play-your-own-game/

Good read. Hits home for me.

 

[Phroig]

So is SCHD a good ETF to fund a Roth IRA? I'm debating between FSKAX and SCHD.

Either one’s fine. (I have both.) If you plan to invest relatively small amounts frequently, a mutual fund is convenient.

 

[target2019]

So is SCHD a good ETF to fund a Roth IRA? I'm debating between FSKAX and SCHD.

FSKAX = SCHD + SCHG

There are different opinions on what should go where (taxable, tax-deferred, tax-free).

I'm of the mind that if you think that Roth will be used last, then you would want maximum growth. My WAG is that funds ordered by growth over a long period might look like this:

1) SCHG (Growth)
2) FSKAX (Blend)
3) SCHD (Value)

I use VG Reit fund and VTSAX (FSKAX equiv.) in my Roth. We have a total portfolio approach, and consider all of our accounts. YMMV.

 

[marko]

FWIW Altria (MO) just announced a 4.4% dividend increase.

 

[G-Man]

FWIW Altria (MO) just announced a 4.4% dividend increase.

The dividend increase averages around 4-6% per year

 

[Gumby]

FWIW Altria (MO) just announced a 4.4% dividend increase.

Which gives it a current yield of 8.2% based on yesterday's closing price.

 

[RobbieB]

I'd keep that stuff if I owned it.

 

[Gumby]

I'd keep that stuff if I owned it.

I've owned MO for the last 10 years and will probably keep it forever.

 

[G-Man]

I'd keep that stuff if I owned it.

It’s very tempting based on the history.

100+ year old company

 

[Letj]

I have owned MO since 1996. By the time I start drawing from my portfolio in about 10 years, MO dividends will cover my entire retirement budget if the increase in dividends continues to be as consistent as it’s been for all these years.

 

[G-Man]

I have owned MO since 1996. By the time I start drawing from my portfolio in about 10 years, MO dividends will cover my entire retirement budget if the increase in dividends continues to be as consistent as it’s been for all these years.

It's hard not too based on the dividend history.

 

[G-Man]

I have owned MO since 1996. By the time I start drawing from my portfolio in about 10 years, MO dividends will cover my entire retirement budget if the increase in dividends continues to be as consistent as it’s been for all these years.

If you have all MO in your traditional IRA or 401K, when RMD kicks in at age 72, that will force you to sell shares thus reducing your dividend income after age 72.

 

[marko]

If you have all MO in your traditional IRA or 401K, when RMD kicks in at age 72, that will force you to sell shares thus reducing your dividend income after age 72.

If it was the only stock you owned that would be true, but who would do that?

 

[Gumby]

If you have all MO in your traditional IRA or 401K, when RMD kicks in at age 72, that will force you to sell shares thus reducing your dividend income after age 72.

Not necessarily. Let's cogitate a moment - suppose you have a tIRA with nothing but MO in it. Suppose MO is spinning off 8.2% in dividends and you don't reinvest. Under the new 2022 RMD tables, the distribution period at 90 years old is 12.2 years, so the percentage is 8.2% of your tIRA balance. For all years prior, the RMD period is longer and the percent distribution is lower. That means for every year prior to age 91, your MO dividends will cover your RMD and you won't have to sell shares.

Or, you may have many different assets in your tIRA and may elect to sell off something else.

 

[G-Man]

Not necessarily. Let's cogitate a moment - suppose you have a tIRA with nothing but MO in it. Suppose MO is spinning off 8.2% in dividends and you don't reinvest. Under the new 2022 RMD tables, the distribution period at 90 years old is 12.2 years, so the percentage is 8.2% of your tIRA balance. For all years prior, the RMD period is longer and the percent distribution is lower. That means for every year prior to age 91, your MO dividends will cover your RMD and you won't have to sell shares.

Or, you may have many different assets in your tIRA and may elect to sell off something else.

Got it. Thanks for the clarification.

 

[TheWizard]

For a taxable account, I'd have to compare the total return of MO to that of my various index funds.
If you're taking dividends out for living expenses, then MO might be ok, but 8% is high compared to the 4% rule of thumb.
But no one's going to have 100% MO in their taxable account, right?

If you're NOT taking dividends out for expenses, like me, then high dividends are suboptimal...

 

[G-Man]

For a taxable account, I'd have to compare the total return of MO to that of my various index funds.
If you're taking dividends out for living expenses, then MO might be ok, but 8% is high compared to the 4% rule of thumb.
But no one's going to have 100% MO in their taxable account, right?

If you're NOT taking dividends out for expenses, like me, then high dividends are suboptimal...

If I could rely on 6 years of MO dividend income in retirement for living expenses, my retirement would be golden. I would be set for retirement considering the other retirement investments incomes such as 401K, brokerage account, pension, and SS income.

 

[Lawrence of Suburbia]

OK, here's questions ...

I own Schwab Dividend Index ETF (SCHD), and take the dividends as income. People tell me I'd be better off reinvesting the dividends, and selling shares. But if the dividend payout (3.2% at the moment) is the same as the percentage of shares I'd be selling anyway, does it make a difference?

The other thing is, let's say SCHD isn't really diversified, due to the above-average dividend payout. If I exchanged it for (say) VOO (S&P 500 ETF), whose payout is only 1.5%, do I have to limit my "homemade dividend" take to 1.5% to avoid reducing my portfolio growth and endangering its longevity?

I'd think so. It's chart nearly matches the S&P 500, and seems a fairly diverse, quality set of companies.

 

[OldShooter]

OK, here's questions ...

I own Schwab Dividend Index ETF (SCHD), and take the dividends as income. People tell me I'd be better off reinvesting the dividends, and selling shares. But if the dividend payout (3.2% at the moment) is the same as the percentage of shares I'd be selling anyway, does it make a difference?

No. But there would really be no reason to do what you say and it might increase your taxes to the extent of the stock sales. You'll be paying taxes on the dividends you reinvest so you might as well just keep them.

The other thing is, let's say SCHD isn't really diversified, due to the above-average dividend payout. If I exchanged it for (say) VOO (S&P 500 ETF), whose payout is only 1.5%, do I have to limit my "homemade dividend" take to 1.5% to avoid reducing my portfolio growth and endangering its longevity?

No. The whole idea of homemade dividends is that you are effectively choosing whatever dividend rate you want. One scenario might be where you decided that you wanted your portfolio to grow at the rate of inflation, so you take dividends only for the difference between its actual growth and the inflation rate. For example, you might say that you expect inflation to be 4% in the next few years and you expect the S&P to do 8%over the period. The difference is 4%, so you take the 1.5% actual dividends and sell another 2.5% to make homemade dividends. Do this for a few years then reassess your inflation and growth rates then adjust your dividend plan as necessary.

 

[Lawrence of Suburbia]

No. But there would really be no reason to do what you say and it might increase your taxes to the extent of the stock sales. You'll be paying taxes on the dividends you reinvest so you might as well just keep them.

No. The whole idea of homemade dividends is that you are effectively choosing whatever dividend rate you want. One scenario might be where you decided that you wanted your portfolio to grow at the rate of inflation, so you take dividends only for the difference between its actual growth and the inflation rate. For example, you might say that you expect inflation to be 4% in the next few years and you expect the S&P to do 8%over the period. The difference is 4%, so you take the 1.5% actual dividends and sell another 2.5% to make homemade dividends. Do this for a few years then reassess your inflation and growth rates then adjust your dividend plan as necessary.

Thank you for that explanation! Been confusing me for awhile.

 

[G-Man]

Not necessarily. Let's cogitate a moment - suppose you have a tIRA with nothing but MO in it. Suppose MO is spinning off 8.2% in dividends and you don't reinvest. Under the new 2022 RMD tables, the distribution period at 90 years old is 12.2 years, so the percentage is 8.2% of your tIRA balance. For all years prior, the RMD period is longer and the percent distribution is lower. That means for every year prior to age 91, your MO dividends will cover your RMD and you won't have to sell shares.

Or, you may have many different assets in your tIRA and may elect to sell off something else.

Let me make sure I understand your logic here. Are you telling me during the RMD years, reinvest the dividends and then take the RMD amount required. So, essentially you are taking the dividend amount by taking the RMD amount.