How are dividends for retirement

[disneysteve]

Except dividends can be anything but stable

True, which is why diversification is so important. A good dividend ETF is probably going to provide a more stable income stream than a small basket of individual stocks because if one or two companies do poorly, it has less impact on the overall picture.

 

[all4j]

If you don't believe that the price changes, buy some shares on the ex dividend day at the close, then buy more shares the next morning at the opening bell.

Like HOG?

 

[all4j]

The tax treatment of dividends is worse than selling shares.

There are some situations where it is a wash, but it is never better.

So, if a taxpayer is in the 35% bracket & sells incurring a short term cap gain, the 15% treatment on qdi is a wash or worse?

 

[mathjak107]

Most of us would not liquidate a short term gain for income …typically we draw off a portfolio so it’s tax efficient .

 

[mrfeh]

So, if a taxpayer is in the 35% bracket & sells incurring a short term cap gain, the 15% treatment on qdi is a wash or worse?

Most of us would not liquidate a short term gain for income …typically we draw off a portfolio so it’s tax efficient .

This is the answer to your question all4j

Anybody doing what you suggested is doing it wrong.

 

[Winemaker]

Like HOG?

HOG went ex dividend on Friday 9/9/22, closing at $42.71, it opened at $41.21. While there were other big market forces today because of the CPI report, it would have normally have opened in an up market today at $42.5525, since the quarterly divvy is $0.1575/share.

 

[mathjak107]

HOG went ex dividend on Friday 9/9/22, closing at $42.71, it opened at $41.21. While there were other big market forces today because of the CPI report, it would have normally have opened in an up market today at $42.5525, since the quarterly divvy is $0.1575/share.

So to further illustrate this ,

If hog didn’t go ex div and market forces doubled that stock you would have 42.71 x 2 = 85.42

Instead what you have compounding is 42.55 and 16 cents in hand .

If markets doubled that you have 42.55 x2 =85.10. Plus about 16 cents in hand .

If you reinvested you would have the same 42.71 x 2 which is the same 85.42 .

Nothing gained from the div or reinvesting it

 

[foxfirev5]

Absolutely. I agree 100%.

People who buy dividend stocks aren't looking to increase wealth and grow their portfolio's value. They are looking to create a regular, relatively predictable, automatic income stream. There is generally the added benefit of growth over time, but that's secondary to the goal.

Lots of retirees, including many people on this site, have all or most of their money in CDs and bonds. It isn't to grow their wealth. It's to get those monthly and quarterly interest payments to fund their living expenses.

People who buy annuities surrender tens or hundreds of thousands of dollars of principal to insurance companies to get that guaranteed monthly check.

All of these are fundamentally the same. But all things being equal, the dividend route is probably the best. You don't give up your principal and over time, chances are pretty good that your principal will actually continue to grow. Sure it will be at a slower rate than if you had invested purely for growth, but that's okay because that wasn't your goal.

Excellent observation. The endless debate is fruitless. Personally I hold both dividend and growth ETF's. Today I like my divy payers more.

On top of that, my 92 yo DM with 50 years in the brokerage business only wants to know - " Will Wellesley pay a decent dividend this quarter?"

 

[mathjak107]

The only thing I disagree with is you are spending what you call principal which is really invested dollars in all cases .

No such thing as taking a withdrawal of invested dollars and not spending our own dollars.

It is your invested dollars they are handing you back that you gave them and your spending it.

All money is our money in investing ..there is no such thing as house money so to speak .

It is all ours for the taking at any point just like a bank account is all our money ..we may just choose to keep it in play each day

 

[foxfirev5]

Well this thread is now dead to me.

 

[disneysteve]

It is your invested dollars they are handing you back that you gave them and your spending it.

It is all ours for the taking at any point just like a bank account is all our money

Agreed. And using dividend payers is just a way to automate that money coming to you rather than you having to manually sell shares every time you need some cash.


Realistically, if you've got money in the stock market, you probably own lots of dividend-paying stocks so this whole discussion is really kind of pointless. If you have a total market index or an S&P 500 index, you own a bunch of dividend payers and you get those dividends quarterly whether you want them or not. You may choose to have those dividends reinvested to buy more shares, which is what I've always done. Once you're retired, though, you may opt, as I have, to start having some or all of those dividends paid out to you instead. You're getting them either way. You're paying the taxes either way (if it's a taxable account). Unless you've hand-picked a portfolio of non-dividend-paying stocks, or own no stocks at all, you're collecting dividends.

 

[all4j]

The endless debate is fruitless. "

Yeah, you're right & I'm shamed into confessing I shouldn't have been playing some of these guys. Was just hoping for some originality. Still wish someone bit on #167, but time passes on. Maybe someone got something out of it

Thanks for perspective

 

[mathjak107]

Agreed. And using dividend payers is just a way to automate that money coming to you rather than you having to manually sell shares every time you need some cash.


Realistically, if you've got money in the stock market, you probably own lots of dividend-paying stocks so this whole discussion is really kind of pointless. If you have a total market index or an S&P 500 index, you own a bunch of dividend payers and you get those dividends quarterly whether you want them or not. You may choose to have those dividends reinvested to buy more shares, which is what I've always done. Once you're retired, though, you may opt, as I have, to start having some or all of those dividends paid out to you instead. You're getting them either way. You're paying the taxes either way (if it's a taxable account). Unless you've hand-picked a portfolio of non-dividend-paying stocks, or own no stocks at all, you're collecting dividends.

Exactly We all have a combination of sources that makeup our income stream and at the end of the day they are all withdrawals of our own money

 

[TripleLindy]

Still wish someone bit on #167, but time passes on. Maybe someone got something out of it

Thanks for perspective

I definitely got something out of it!

 

[Chuckanut]

Math is math.
Purchase two stocks investing $10,000 each.
Stock #1 pays 3% dividend annually.
Stock #2 does not pay dividend.

After ten years new technology is developed that makes Stocks 1 & 2 business models obsolete. Stocks tank to penny stocks.

Stock #1 shareholders have received $3,000 in dividends over the ten years.
Stock #2 shareholders have received nothing.

A stock’s share price is based on future expected earnings. Dividends allow shareholders to receive a return on their investment from the cash flow of the business while maintaining their stake in the company’s future earnings. Selling shares reduces that stake.

You need to think about this. You are making hidden assumptions about the $3000 not paid in dividends that tilt the playing field. This money did not just disappear so as to support your conclusion.

 

[pb4uski]

The day after you are paid a dividend your account is exactly the same value as the day before because the value of the stock/ETF/equity fund drops equal to the dividend. How is that income? A bond or a CD however actually is income. The interest paid increases the value of your account the day it is paid. Interest is additive, a dividend is not.

WADR, that happens with bonds too.

Let's take an example of a bond trading at $1,000 par that pays 4% semi-annually. If you buy a bond the day before interest is paid you'll pay the market price plus accrued interest of $20 so a total of $1,020. The next day you receive the $20 interest coupon... if you sell the bond later that day you receive $1,000 plus $0 accrued interest.

So it is quite similar to the way that... all else being equal... that a stock declines by the amount of the dividend.

So if I had $1,020 in a stock and it pays a $20 dividend then at the end of the day I have $1,020... $1,000 in stock and $20 in cash. If I have a $1,000 bond with $20 of accrued and unpaid interest and it pays $20 in interest at the end of the day I have $1,000 bond and $20 in cash.

Dividends are income and interest is income too. In the case of bonds, the accrued interest that attaches to the bond declines in value when it is paid out but with stock the share value declines.... a nuance a difference IMO.

There are a few distinct differences with bonds. All is known at the time of purchase. There is a par value the bond returns to at maturity and market price on the day you purchase is based on the cashflow over the duration of the bond. None of that exists with an equity. So you can get paid dividends and still lose in total value. Examples Verizon and AT&T. With a bond you are paid interest and get your par value. So a bond short of default will always be additive to your assets, a dividend is a maybe.

All true, but that wasn't what I was responding to... I was responding to your previous post where you claimed that bonds were superior to equities because they didn't decline in value when dividends were paid and pointing out that bonds work the same as equities.

Nice pivot though.... are you a retired politician?

 

[pb4uski]

I'm curious. For those who think the share price of a stock is changed....

1) what does that mean exactly? At least 1 share traded at that precise amount? A number flash on a screen somewhere at that amount? If nothing trades at that level, what relevance did it have?

2) who or what does it?

Please understand I am asking about the share price of an individual stock. Not price referenced in an outstanding limit order. not a price in a call/put option, etc. But the actual price of the stock.

OK, I'll bite. Let's say XXX is trading for $30/share and you think that $30 is a fair price and plan to buy it at the next days opening. Overnight, XXX goes ex dividend, paying $1 in dividends so with 100m shares XXX has $100m less cash than it had the previous day.

Are you still so keen to pay $30/share for XXX?

 

[youbet]

Its really different with a fund since the dividends are accumulating within the fund throughout the year.

+1

I'm beginning to see that the root of most of the contention in this discussion is due to definition of terms. The most problematic term, to me, in this discussion is "value." Are we talking about the market value of a share? The market capitalization of a company? The book value? NAV of a fund share? Etc.?

 

[youbet]

OK, I'll bite. Let's say XXX is trading for $30/share and you think that $30 is a fair price and plan to buy it at the next days opening. Overnight, XXX goes ex dividend, paying $1 in dividends so with 100m shares XXX has $100m less cash than it had the previous day.

Are you still so keen to pay $30/share for XXX?

That would depend on my estimate of XXX's future earnings. I already knew XXX was going ex-div when I decided that future earnings would justify some future price above $30. So, as advertised, the stock went ex-div. I pay the $30 and hope the future performance/earnings brings the future price to a higher level.

If the stock goes down, because it went ex-div or some combination of reasons, lucky me, I get it cheaper at market open. If it goes up at open, I have to decide if my prediction of future earnings and likely future share price justifies paying more than my current $30 purchase price target.

I'm not arguing that it would be preferable to pay $30 for a stock before it goes ex than after. That amounts to a discount on the trading price of whatever the div is. What I am saying is that I've made of number of buys where I took a future ex-div date into consideration at my "guess" at what I should pay, but my "guess" at future earnings is much more important.

Now, if you're talking about XXX being a fund, I'd suspect the impact of going ex-div is dominant because the beta of a fund is typically much lower than that of an individual stock, especially a broad fund like a TSM. And a fund's share price really is lowered overnight by the amount of the div. So, that would be a different scenario.

 

[youbet]

No.

Your example was not apples-apples math. When you use faulty logic, you aren't making your point, your a making a point for the opposing view.

Let's correct your example:

---------------------------------------------------------------------------------------------------------------
Math is math.
Purchase two stocks investing $10,000 each.
Stock #1 pays 3% dividend annually.
Stock #2 does not pay dividend.

[NEEDED CORRECTION ADDITION]>> You sell ~ 3% ( an amount equal to the Stock #1 dividend) of Stock #2 every year.

After ten years new technology is developed that makes Stocks 1 & 2 business models obsolete. Stocks tank to penny stocks.

Stock #1 shareholders have received $3,000 in dividends over the ten years.
Stock #2 shareholders [NEEDED CORRECTION ADDITION]>> [-]have received nothing.[/-] have received $3,000 in LTCG over the ten years, and if taxable, only paid tax on the gains.
---------------------------------------------------------------------------------------------------------------

And no, I don't own less ($-wise) of stock #2 because I was selling. If all else is equal, as has been pointed out, that dividend came out of the value of the stock - essentially a 'forced sale'.

ERD50

I think you need to make a couple of adjustments.

1. Stocks do not pay dividends in percentages. They pay in dollars. After the dividend is paid in dollars (per share), you can calculate the percentage that amounted to by using the closing share price. But companies do not pay out divs out as a percentage of anything. The BOD declares the div in dollars per share. What percentage of share price that turns out to be depends on the share price on the div pay date or sometimes it's calculated on the current date regardless of when the div was paid. That is, based on the last div payment in dollars and today's share price, the percentage is X. This makes it hard to follow your example because you have them paying out as a percentage and then state the share price drops and it becomes a penny stock....... In your example, the divs would have followed the stock price down.

2 When you sell shares to obtain an equal amount of money as the div, you can't do that by a percentage of the shares you own. It would be a number of shares which when multiplied by the market price at the time of the sale = the amount of the div in dollars. You said these proceeds would all be LTGC. Wouldn't the LTCG portion be only the difference between your proceeds from the sale and the price you paid for the stock? That is, you sold a number of shares that when multiplied by the market price at the time of the sale = the most recent div distribution. The proceeds would be partially return of capital and partially LTCG. No?

In the end, as I understand your description, both stocks would have the same "penny stock" market price, but the owner of stock #1 would own more shares because she never sold any. She would have a bigger long term cap loss to declare partially offsetting the pain of paying taxes on the divs over the years. Or am I misreading your example?

And, finally, you been using the term "if all else is equal" frequently. But, with one company paying a significant div and one not paying a div, can this be realistic? Or is it something hypothetical and not likely to happen in the real world? When I look at a start-up or even a so-called "growth" company that's not paying a div and then look at an established div payer, maybe a "cash cow," whose shareholders expect and receive divs, I don't see two companies where typically "all else is equal." Do you? They likely in very different businesses with investor-owners who have different expectations. How could "all else be equal?"

Bottom line, I don't think that with individual stocks the presence or absence of divs is generally the key thing that will determine my happiness with the investment. That's given that the level of or the absence of a div makes sense with the business they are in. (No tech start-ups paying high divs and no cash-cows paying zero divs, etc.)

Funds or ETFs? A different matter with its own set of pros and cons.

 

[youbet]

I used them inter-changeably.




-ERD50

Just as an FYI, for the stock of an individual company, NAV and the market price of the stock are not interchangeable. Perhaps you were referring to funds when you said this?

 

[Time2]

I couldn't figure out how to copy the text of what you cited, but it clearly says "funds".

My point from the beginning has been that the share price is NOT interchangeable with nav for individual stocks. If you disagree with me, you likely have lots of company. & no point in me trying to elaborate. I said in earlier post I wasn't trying to sway the opinions of those who do disagree. That's one thing I did learn! I'm done now

Amazon NAV $12.07, share price $126.82. No dividend.

 

[DJRR]

Yeah, you're right & I'm shamed into confessing I shouldn't have been playing some of these guys. Was just hoping for some originality. Still wish someone bit on #167, but time passes on. Maybe someone got something out of it

It confuses 2 things. When a company pays a dividend, shareholder equity (retained earnings) is reduced. That is the other entry for the accounting. Does it matter? only if the company magically freezes operation and is liquidated on that date. Otherwise, market capitalization = shares x price and is influenced by factors that everyone thinks they know but no one actually knows.

Since the government controls how accounting is done this change is correctly applied via GAAP. Since the government does not control stock prices there may never be a trade at that exact value. Based on exchange rules there is a market maker who is supposed to step in and take trades. I do not believe they have an obligation to be stupid. If a stock splits from $100 to $20 the market maker is not obligated to buy the stock at $100 because some people do not believe stock splits change the value. In the same way if a stock pays a 50% dividend, the market maker is not obligated to buy the stock at 2x the price because some people believe the dividend is "income". When the dividend is a smaller amount, like .5% then the practical effect is probably lost to the noise. I would not argue that dividends crush stock prices because my stock went ex dividend yesterday and dropped 4% even though the dividend was .5%. There are traders that have tried to capture alpha based on the theory that stock prices do not drop efficiently ex dividend, but I have not seen any studies that show this possible given trading costs and taxes.

At the end you are left with the current market price and a distribution. Based on your tax situation and other opportunities it may be better or worse for you. It is equivalent to a sale but you do not control how much or when, which is why some people do not like them.

FWIW my MBA finance professor would give you a big fat "0" on your exam if you tried to argue that paying dividends did not reduce the stock value

 

[mathjak107]

What matters is that your balance being compounded on by markets after ex div is no different then anyone first buying in with less money at that price.

If you made a withdrawal from your portfolio and markets doubled after that withdrawal wouldn’t your balance be effected compared to not taking money out?

Of course it would ,the compounding is on less dollars invested then you had .

If you took money out of your portfolio and decided to put it back in , that is akin to a dividend reinvestment.

Same dollars as you had compounding prior to taking it out .

So all in all the payout is a wash .

You have no more invested dollars then you had if you reinvest and less dollars starting out then you had if you spend that div.

It is no different than fund payouts where you wake up with the same dollars compounding only arraigned differently .

It really is very simple as to what is going on .

It has nothing to do with book value or market action .

It is simply the same or less dollars compounding then you had

 

[ERD50]

I think you need to make a couple of adjustments.

1. Stocks do not pay dividends in percentages. They pay in dollars. ... .

Yes, I know this, but I was working with Dashman's example from his post #158 ( https://www.early-retirement.org/forums/f28/how-are-dividends-for-retirement-115275.html#post2828270 ), where he called out a 3% div. I didn't want to alter his example too much, but I tried to clarify a bit that investor in stock #2 would sell "an amount equal to the Stock #1 dividend".

I think you need to make a couple of adjustments. ...

2 ... You said these proceeds would all be LTGC. Wouldn't the LTCG portion be only the difference between your proceeds from the sale and the price you paid for the stock? That is, you sold a number of shares that when multiplied by the market price at the time of the sale = the most recent div distribution. The proceeds would be partially return of capital and partially LTCG. No? ...

Ahhh, you are right, I messed up the wording. The second part was correct, the first part wrong. I said:

WRONG:

have received $3,000 in LTCG over the ten years, and if taxable, only paid tax on the gains.

Should have been:

CORRECTED:

have received $3,000 [-]in LTCG[/-] over the ten years, and if taxable, only paid tax on the gains.

And of course they would only be Long Term if held > 1 year, but this is typically easy to manage.

.... In the end, as I understand your description, both stocks would have the same "penny stock" market price, but the owner of stock #1 would own more shares because she never sold any. She would have a bigger long term cap loss to declare partially offsetting the pain of paying taxes on the divs over the years. Or am I misreading your example? ...

I'm going to finish my coffee before tackling that one!

.... And, finally, you been using the term "if all else is equal" frequently. But, with one company paying a significant div and one not paying a div, can this be realistic? Or is it something hypothetical and not likely to happen in the real world? ...

I've been trying to get across some points about the mechanics of dividends, and I think the clearest way to do this is with the hypothetical. It's a pretty common approach when trying to explain XYZ. Like "all else being equal, adding insulation to an under-insulated attic will lower your energy bills". But of course, energy prices can go up, weather changes, and your use profile may change. But to focus on what insulation can do for you, "all else being equal" makes sense, although it will never happen.

.... Bottom line, I don't think that with individual stocks the presence or absence of divs is generally the key thing that will determine my happiness with the investment. That's given that the level of or the absence of a div makes sense with the business they are in. (No tech start-ups paying high divs and no cash-cows paying zero divs, etc.) ...

Agreed, and that is a different discussion from what I've been having in these last few posts (recognizing that divs come out of the value of the stock, similar to selling that same amount).

In my investments, I'm mostly agnostic to dividends. I mostly invest in the broad based index funds, and just accept whatever div and non-div payers make up that group. The one exception is in my taxable account, I have a chunk of BRK precisely to avoid dividends so I can do more Roth conversions within a lower tax bracket. That might turn out to be the tax-tail waging the dog, but I viewed it as a reasonable risk.

-ERD50