Dividend Yield vs Total Return Income in Retirement

[mathjak107]

All dow stocks and 80% of the S&P 500 pay dividends …

So it is likely you will get dividends like it or not ….

Rather then spend the dividends in our taxable account which we find varies each year , we prefer to buffer them and put them towards next years budget .

Then comes jan 1 ,we see what we are short , and refill for the new year .

Our dividends and distributions ranged from 29k to 69k …

Much to variable for us to use tryimg to live hand to mouth.

So we found collecting them towards next years budget worked so much better .

 

[ncbill]

There is no difference between the company selling off a piece of your investment value and giving it back to you or you doing it off your portfolio…

A 4% dividend as an example is the same as the same dollars off a non div payer or portfolio assuming total return is the same

Income and balances will be the same.

Dividends are very tax inefficient.

The whole dividend gets taxed where if you create your own equivalent cash flow you only get taxed on the gain portion.

Yep, if you want income there are alternatives like preferred stocks.

Even ultra-conservative Wade ("Safety-First = "buy SPIAs") Pfau has those in his portfolio.

 

[mathjak107]

Yep, if you want income there are alternatives like preferred stocks.

Even ultra-conservative Wade ("Safety-First = "buy SPIAs") Pfau has those in his portfolio.

Pfau is principal in a company that sells annuities .

He is always a bit to pro annuity for my taste

 

[corn18]

To the OP, I normally chime in on these types of threads and poo poo dividends, but I thought I might be more helpful.

MO is a machine. My best friend was a VP there. I just looked at their financials and they can crank out some serious free cash flow. Only blip they have had recently is the Juul debacle. Juul is a good lesson, though, that you should diversify. They banned fruity Juul pods. Now they want to ban menthol cigarettes. Who knows, maybe they ban all cigarettes one day. Then your $50k will go to zero real fast.

So, keep some MO but get some more of other stuff.

 

[ncbill]

Pfau is principal in a company that sells annuities .

He is always a bit to pro annuity for my taste

Yeah, he now says the SWR is only 2.2%...so buy annuities.

Though one commentator pointed out changing to 20% stocks/80% TIPS at the start of retirement with a rising equity glide path to 60/40 over 10-20 years & then buying a SPIA 10-15 years in would likely trounce that 2.2% return.

I might try that approach.

 

[Klucsamj]

According to Portfolio Visualizer from 1986 to2022 MO 's CAGR is 17.04% versus 10.75% for S&P 500.Agree withCorn18. Get some other stuff to diversify but keep a good chunk!

Portfolio performance statistics
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown Sharpe Ratio Sortino Ratio Market Correlation
Altria Group $10,000 $3,165,137 17.04% 25.32% 105.93% -54.66% -61.62% 0.64 0.98 0.37
Vanguard 500 Index Investor $10,000 $418,416 10.75% 15.28% 37.45% -37.02% -50.97% 0.55 0.80 0.99

 

[ejman]

A dividend approach is riskier than a total market approach, so returns should be higher but in backtesting the total return approach results in a higher ending portfolio balance.

Now that's comparing indices...once you start picking a limited number of dividend stocks instead portfolio risk goes even higher.

Those chasing higher dividend yields usually end up with significant sector concentration, i.e. more risk.

Most people will ignore the higher risk and focus just on the total return, which given the extra risk should be higher versus a market portfolio, but...

Another dividend approach downside is the income that must be realized, lowering ACA subsidies & limiting headspace for Roth conversions.

Interesting to note that a diversified dividend fund such as SCHD is down YTD in the vicinity of 2% while VFINX is down well over 10% YTD not including the drop of over 20% at times for VFINX during this year. It seems to me that a diversified dividend fund lowers risk, not increases it. As to long term returns, when I compare SCHD vs VFINX in portfolio visualizer since Jan 2012 (start of SCHD) I see practically identical CAGR (13.72% vs 13.95%) so it seems to me the total return argument against dividend funds is very weak as well.

 

[mrfeh]

Interesting to note that a diversified dividend fund such as SCHD is down YTD in the vicinity of 2% while VFINX is down well over 10% YTD not including the drop of over 20% at times for VFINX during this year. It seems to me that a diversified dividend fund lowers risk, not increases it. As to long term returns, when I compare SCHD vs VFINX in portfolio visualizer since Jan 2012 (start of SCHD) I see practically identical CAGR (13.72% vs 13.95%) so it seems to me the total return argument against dividend funds is very weak as well.

You can't draw conclusions such as these from 8 months of performance. Or 10 years, for that matter.

 

[ejman]

You can't draw conclusions such as these from 8 months of performance. Or 10 years, for that matter.

Why not? what is the proper time frame? 20 years, 30 years, 100 years?

 

[mrfeh]

Why not? what is the proper time frame? 20 years, 30 years, 100 years?

The longer the better.

8 months is pure noise.

 

[OldShooter]

Why not? what is the proper time frame? 20 years, 30 years, 100 years?

I'm sorry I don't remember the video, but there is one where Eugene Fama is bemoaning the fact that he has only 100 years of very noisy data, so it is impossible to calculate solid numbers.

8 months is pure noise.

Here is an approach that is more deductive than statistical: Separate stocks into two categories, dividend payers, and non-payers. Now consider the total return of those two categories. To argue that a portfolio of payers will be equal to or better than a total market portfolio, you have to be arguing that the performance of the non-payers will be less than or equal to the performance of the payers. Is that something that you can believe? I can't.

 

[target2019]

Interesting to note that a diversified dividend fund such as SCHD is down YTD in the vicinity of 2% while VFINX is down well over 10% YTD not including the drop of over 20% at times for VFINX during this year. It seems to me that a diversified dividend fund lowers risk, not increases it. As to long term returns, when I compare SCHD vs VFINX in portfolio visualizer since Jan 2012 (start of SCHD) I see practically identical CAGR (13.72% vs 13.95%) so it seems to me the total return argument against dividend funds is very weak as well.

Diversification is your friend, for sure. It works in SCHD, VFINX, SCHG, etc. What you should see in the future is value and growth exchanging 1st place among these three. Over certain measurement periods you'll find that 1 of the 3 must be in 1st place.

10 years is a lot of data, and so is each longer period. Investors can have a preference for 1, 2 or all 3, and place a fund in the portfolio due to characteristics and yes, some preference.

 

[ejman]

I'm sorry I don't remember the video, but there is one where Eugene Fama is bemoaning the fact that he has only 100 years of very noisy data, so it is impossible to calculate solid numbers.

8 months is pure noise.

What about the 12 years where SCHD vs VFINX come out neck and neck is that also noise?

 

[ejman]

The longer the better.

8 months is pure noise.

Interesting you zeroed in on the 8 months but ignored the 12 year track record - why?

 

[ejman]

Diversification is your friend, for sure. It works in SCHD, VFINX, SCHG, etc. What you should see in the future is value and growth exchanging 1st place among these three. Over certain measurement periods you'll find that 1 of the 3 must be in 1st place.

10 years is a lot of data, and so is each longer period. Investors can have a preference for 1, 2 or all 3, and place a fund in the portfolio due to characteristics and yes, some preference.

Agree, market segments will rotate in return over time and I think they all have a place. I personally like the dividend approach with diversified funds because its simple to implement, I don't have to worry about what to sell if I were to follow the total return approach and I want to simplify things for my wife who has no interest in things financial as much as I can. Regular and fairly constant dividend payments from a Dividend fund help with that.

 

[mrfeh]

Interesting you zeroed in on the 8 months but ignored the 12 year track record - why?

Because you can't draw conclusions from 12 years either.

 

[ejman]

Because you can't draw conclusions from 12 years either.

So I ask the question again, what is the proper time period? 20 years, 50 years, 100 years as Oldshooter mentioned? Lets see in 100 years I'll be a sprightly 172 year old. Lets compare notes then

 

[OldShooter]

What about the 12 years where SCHD vs VFINX come out neck and neck is that also noise?

Well, in a sense yes. Running Portfolio Visualizer from Jan 2012 (the earliest PV would give me) to today I see that VFINX has led SCHD pretty consistently, though sometime by small amounts, over the long haul. To the end of 2021, its CAGR was 16.39 vs SCHD at 15.34, so hardly neck and neck. The market hit this year hurt VFINX worse than SCHD just as one would expect. But over the long term that is noise, as will be the reversion to the mean that will occur as SCHD recovers more quickly than VFINX, again as expected. These kinds of comparisons are often very sensitive to the time period chosen, which is the case with this one. A comparison run after the inevitable market recovery, maybe next year, will look very different than the one we see using today as the end date. My guess is that VFINX will regain its 1 point CAGR advantage over SCHD. We'll see.

 

[pb4uski]

So I ask the question again, what is the proper time period? 20 years, 50 years, 100 years as Oldshooter mentioned? Lets see in 100 years I'll be a sprightly 172 year old. Lets compare notes then

I tend to look at 3, 5, 7 and 10 year rolling averages to compare returns between different tickers.... I think that tends to smooth out any bias in returns from cherry picking the time periods. YMMV.

 

[Phroig]

If you click on the ‘Factor Regressions’ tab, you can see funds’ alphas. I compared SCHD and SPY. I didn’t specify a time period and got 11/11-7/22. SCHD’s alphas are higher than SPY’s for all models.

 

[Dash man]

The market hit this year hurt VFINX worse than SCHD just as one would expect. But over the long term that is noise, as will be the reversion to the mean that will occur as SCHD recovers more quickly than VFINX, again as expected.

There’s a lot to be said about SCHD not being as volatile when retired. Growth with moderate volatility is well worth it over the slight long term benefits VFINX may have. When in the withdrawal phase, it’s key.

 

[OldShooter]

That is a totally different argument than you have been making. Not interested in going off on that tangent.

 

[Lawrence of Suburbia]

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.

 

[youbet]

I don't do individual stocks either these days, not for quite awhile.

So, like mathjak107, you’re not involved, just commenting passively.

 

[pb4uski]

There’s a lot to be said about SCHD not being as volatile when retired. Growth with moderate volatility is well worth it over the slight long term benefits VFINX may have. When in the withdrawal phase, it’s key.

Ah, the ol' pivot! Well done!