9-year fixed income plan

[ERD50]

ERD50,

I use VYM. The single stock issues of CTL are irrelevant. ... .

I used CTL (which came up in a recent thread) as a current example to counter your statement that the BOD 'know what percentage of profits can be distributed to the shareholders'. (edit/add: pb4uski and OldShooter provided the general case,)

And VYM is made of of stocks like CTL. In fact CTL is VYM's 150th largest holding (out of 451), so it is not irrelevant.

https://investor.vanguard.com/etf/profile/overview/VYM/portfolio-holdings

... The correct benchmark for VYM is the value index. VYM outperforms its benchmark. ....

I disagree. The 'value index' is just another representation of the sector. For equities, the benchmark is the total market. Why venture into sectors, when the total market is so easily available at a very low ER, unless they actually out-perform the total market? Why benchmark sector-to-sector? Just benchmark against the grand-daddy of them all, the total market.

So another back-test. Here VYM under-performs the total market (CAGR of 7.7% vs 8.44% for VTI), though with a small reduction in std dev (14.17% vs 15.24% for VTI).

If we adjust for near-equal performance with an 81/19 AA to bonds, the VTI/Bond mix has significantly lower std dev ( 11.86% vs VYM's 14.17%). This is to Bernstein's point (I think it was Bernstein, can't swear to it), you are better off adjusting the AA, than to try to goose returns with high-yield. He didn't find any alpha in the high yield, and neither have I.

http://bit.ly/2S0YkXN << short link to back-test

... I completely disagree that the stock market can put a value on a company with more precision than the companies employees can set the correct dividend policy. 100% disagree with you.

OK, but it's irrelevant. What is relevant is performance, money in my pocket. And I have yet to see data that shows high-yield will put more money in my pocket than the Total Market.

-ERD50

 

[pb4uski]

This is VYM vs VTSAX with a 4% annual withdrawal adjusted for inflation... a simulation of funding a 4% WR with a high dividend yield portfolio vs the market (total return).

The market wins.

https://www.portfoliovisualizer.com...ocation2_2=100&total1=100&total2=100&total3=0

 

[OldShooter]

This is VYM vs VTSAX with a 4% annual withdrawal ...

I really don't have a dog in this fight as I pay no attention to dividends but it does seem blindingly obvious that if one is taking money off the table instead of reinvesting it, that portfolio will underperform a similar one with reinvestment.

(My comment to @ESRwannabe were strictly intended to be factual corrections to his (IMO) somewhat theoretical idea of how the world works. If he/she wants to buy dividend stocks, that's fine with me.)

 

[ERD50]

This is VYM vs VTSAX with a 4% annual withdrawal adjusted for inflation... a simulation of funding a 4% WR with a high dividend yield portfolio vs the market (total return).

The market wins.

https://www.portfoliovisualizer.com...ocation2_2=100&total1=100&total2=100&total3=0

Informative data. So after each retiree spends the same amount of money for ~ 13 years, the one in the Total Market has 12.9% more money in their account. I like money.

The TM retiree could up their spending by 12.9% at that point, which takes a 4% WR to over 4.5%, a nice bump, with no additional risk.

Another interesting point - at the market trough in 2009, the high-yield fund had dropped more than the Total Market fund ($4,662 vs $4,907). So even though the std dev was a bit lower, it didn't help in those scary days.

-ERD50

 

[ESRwannabe]

No problem. My point was slightly different, though. Dividend rates are not set only based on the detailed economic analysis that you envision. They are set for reasons like stabilizing the stock price, "because that's what we did last quarter," "that;s what the street expects," and other non-economic reasons. The proof is simple: Despite quarterly and annual changes in the business' sales, profits, and balance sheet, dividends are typically held constant for long periods. And as I pointed out, dividends are not typically changed in the small increments that you would expect if they were strictly based on the current business situation.

Oldshooter,

That should not matter in my case. The algorithm for VYM, is to take the top 60% highest dividend payers out of the russell 1000, discard the other 40% (and all REITs), and then with the remaining companies they are purchased by their market cap weightings.

The market cap is setting the percentage of each company that I own. If there are companies with dubious dividend policies the efficient market should sniff that out right... Surely you agree.

Just because I prefer the dividend growth withdrawal strategy does not mean I am not utilizing market cap weightings. One could use VTI if they wanted to, but I prefer to not waste any money on non-dividend payers as they do not support my preferred withdrawal strategy.

 

[ESRwannabe]

ERD50,

Vanguard states that the benchmark for VYM is the large cap value index. Surely you do not think that using VTI as the benchmark is appropriate for any stock portfolio no matter what?

The ER on VYM is .06% for VTI it is .03%. While it is technically true that VYM is twice as expensive, given that both ER are already so low, it seems like a silly thing to worry about. I can tell you that it doesn't bother me at all.

One could argue that any back testing between different funds is always a case of cherry picking (particularly once one starts tossing in bonds which are a completely different asset class). At any rate, why does it matter? One can invest in VTI if they want to and still follow a dividend withdrawal strategy (although money will be wasted on non-dividend payers).

You have not convinced me that the dividend withdrawal strategy is not vastly superior to the total return withdrawal strategy.

 

[ESRwannabe]

This is VYM vs VTSAX with a 4% annual withdrawal adjusted for inflation... a simulation of funding a 4% WR with a high dividend yield portfolio vs the market (total return).

The market wins.

https://www.portfoliovisualizer.com...ocation2_2=100&total1=100&total2=100&total3=0

Vanguard states that the correct benchmark for VYM is large cap value.

I could take a 10 year period that includes the dot com bubble and the great recession and compare it to a long term treasury bond fund (or whatever) and I am positive I can find some investment that will have outperformed VTI during that period (or any period, ex: triple leveraged S&P 500 etf during a bull market compared to non-leveraged VTI).

It is important to use proper benchmarks when comparing funds.

 

[ESRwannabe]

ERD50,

Why do you think comparing VTI to VYM that you can tell that they have equal "risk". What does that mean?

At any rate, you are using the wrong benchmark to compare VYM to.

 

[ESRwannabe]

Maybe I was unclear in my initial post.

One can invest in the total market and still use the dividend withdrawal method. They are not mutually exclusive.

This is why I specifically called them withdrawal strategies.

 

[corn18]

You have not convinced me that the dividend withdrawal strategy is not vastly superior to the total return withdrawal strategy.

Is that your assertion? That the dividend withdrawal strategy is vastly superior to the total return withdrawal strategy? If so, I need a barf emoji.

I think it's 6 one way half dozen the other if you use broadly diversified funds for both.

 

[ESRwannabe]

Is that your assertion? That the dividend withdrawal strategy is vastly superior to the total return withdrawal strategy? If so, I need a barf emoji.

I think it's 6 one way half dozen the other if you use broadly diversified funds for both.

Barf away...

I am 100% convinced that the dividend withdrawal strategy is better than the total return withdrawal strategy.

 

[corn18]

Barf away...

I am 100% convinced that the dividend withdrawal strategy is better than the total return withdrawal strategy.

And you have data to support that? I respect your opinion, I'll believe your data.

 

[ESRwannabe]

And you have data to support that? I respect your opinion, I'll believe your data.

Its based on logic.

(1) The money paid out by dividend withdrawal strategy is determined by every single company in the portfolio that pays a dividend. Every company employs accountants and finance people to study their current internal data and their projections to come up with a dividend policy. That policy is then approved by the executives and the BOD. IMHO this is a very logical basis on which to safely withdraw money.

(2) The total return withdrawal strategy however is based on historical data, such as the 4% rule. Also note this historical data may have nothing to do with the companies that currently exist. For example the Dow 30 compared to now vs 100 years ago. Why should the performance of buggy whips incorporated have any baring on how much I can safely withdraw in 2019? IMHO it is illogical.

If some people believe (2) is better than (1), that's fine with me. I don't care. I don't care if I am the only person that will ever exist that thinks option (1) is a better withdrawal strategy than option (2) or equivalent.

 

[levindb]

Here is an opinion on Dividend stocks, that suggests a subset of those stocks, Dividend Aristocrats, have done better than the S&P 500 over the past 10 years (11.2% vs 7.8%).

Different time periods may produce different results, but the data presented suggests dividend payers have more value.

https://www.suredividend.com/dividend-stocks-annuities/

(just ignore the section on annuities)

 

[corn18]

Its based on logic.

(1) The money paid out by dividend withdrawal strategy is determined by every single company in the portfolio that pays a dividend. Every company employs accountants and finance people to study their current internal data and their projections to come up with a dividend policy. That policy is then approved by the executives and the BOD. IMHO this is a very logical basis on which to safely withdraw money.

(2) The total return withdrawal strategy however is based on historical data, such as the 4% rule. Also note this historical data may have nothing to do with the companies that currently exist. For example the Dow 30 compared to now vs 100 years ago. Why should the performance of buggy whips incorporated have any baring on how much I can safely withdraw in 2019? IMHO it is illogical.

If some people believe (2) is better than (1), that's fine with me. I don't care. I don't care if I am the only person that will ever exist that thinks option (1) is a better withdrawal strategy than option (2) or equivalent.

I don't believe #1 is true. So we will always disagree. But we are splitting hairs. You do your way, I'll do mine and we'll both do equally well.

 

[ERD50]

Vanguard states that the correct benchmark for VYM is large cap value. ...

It is important to use proper benchmarks when comparing funds.

That's fine, but their intent is not aligned with my goals, or what is actionable by me.

They are trying to compare a sector fund with other funds in that same sector. That's fine and proper if you want to invest in that sector.

I will only invest in a sector if I see evidence that shows I can expect that sector to reliably outperform the total market. As I said before, it is easy for me to invest in the total market, I'm not taking sector risk, so that is my default (for the equity side).

So yes, VTI (or equiv) is the proper benchmark for me, and really for any investor who hasn't decided they want to invest in a sector. Is that clear?

... Why do you think comparing VTI to VYM that you can tell that they have equal "risk". What does that mean?
...

Well, I should have used "volatility" in place of risk.

I was trying to be proactive. If I had simply reported that VTI out-performed VYM, someone would (correctly) point out that VTI had more volatility, and say it's not a fair comparison. OK, so I hunted for the blend of equity and fixed that gave the same performance as VYM. And it showed lower volatility for the VTI/Bond blend than for VYM. Another way to state that is, VYM showed no risk/volatility-adjusted advantage.

....
I could take a 10 year period that includes the dot com bubble and the great recession and compare it to a long term treasury bond fund (or whatever) and I am positive I can find some investment that will have outperformed VTI during that period (or any period, ex: triple leveraged S&P 500 etf during a bull market compared to non-leveraged VTI).
... .

Not sure what your point is there, we can cherry-pick anything. I took VYM from inception, since it hasn't such a long history (DEC 2006). You want to take a 10 year period? Five year? Try it, you lose (at least in performance, I'm not going to hunt-peck each combo to find the risk balance, I'll leave that to you if you are interested).

-ERD50

 

[ESRwannabe]

There is a misconception which I see all the time when people argue about dividends vs total return.

If you think about it logically, people invest in dividend paying companies with the "withdrawal method" in mind, not the "investment method". People invest in dividend companies because they ultimately want to set their withdrawal policy based on their dividend income.

This is not an investing strategy, it is a withdrawal strategy.

One can invest in the total market and still follow a dividend withdrawal strategy. They are not mutually exclusive.

 

[ERD50]

There is a misconception which I see all the time when people argue about dividends vs total return. ...

I'm not arguing about dividends vs total return. Dividends are one part of total return. That's a fact, nothing to argue about.

... If you think about it logically, people invest in dividend paying companies with the "withdrawal method" in mind, not the "investment method". People invest in dividend companies because they ultimately want to set their withdrawal policy based on their dividend income.

This is not an investing strategy, it is a withdrawal strategy.

One can invest in the total market and still follow a dividend withdrawal strategy. They are not mutually exclusive.

No, that's not correct at all. OK, some people invest in dividend companies because they ultimately want to set their withdrawal policy based on their dividend income.

So sure, if you have decided you only want to spend dividends, you invest in dividend paying companies. That's a tautology.

I have some money in my taxable account in BRK because it pays no dividend. I want to maximize Roth conversions and 0% LTCG rates in the next few years. If your statement was across the board, not a single person would invest in BRK, and the stock would be worthless.

For the most part, I invest in companies regardless of their dividends, because I just want more money, period. And I look at all the components of "more money", which is divs and NAV.


But what some of us are trying to say, there is no reason we can see for restricting yourself in that way. Certainly, you are free to do so. But when you claim that the dividend withdrawal strategy is vastly superior to the total return withdrawal strategy, well, people here are going to expect something to back that up. I don't see it.

... One can invest in the total market and still follow a dividend withdrawal strategy. They are not mutually exclusive.

Agreed, but does it matter? Funny thing is, I will be doing this at age 71. Between SS, pensions, and RMDs, I don't expect I will need to sell anything. But I have to take the dividends, I have no choice. In the likely event I pass on some money to my kids, my cap gains will be stepped up, no tax due. That's not true of any divs I received along the way. So having higher div payers would hurt my situation. That doesn't apply to everyone, but it's another minus for the div payers, and I have yet to see a plus.

I'll try to get to your "logic" post later, there is some merit to it, but it still falls apart upon review.

-ERD50

 

[ESRwannabe]

ERD50,

You are talking about one thing and I am talking about something else.

If you would like to comment about why you prefer what I call the total return withdrawal strategy, for example the 4% rule, vs withdrawing only dividends. That might be a useful discussion. Otherwise I think we are just wasting each others time.

 

[corn18]

ERD50,

You are talking about one thing and I am talking about something else.

If you would like to comment about why you prefer what I call the total return withdrawal strategy, for example the 4% rule, vs withdrawing only dividends. That might be a useful discussion. Otherwise I think we are just wasting each others time.

I don't want to work long enough to live on dividends alone. I can retire a lot sooner if I plan to accept drawing down principal.

 

[ERD50]

ERD50,

You are talking about one thing and I am talking about something else.

If you would like to comment about why you prefer what I call the total return withdrawal strategy, for example the 4% rule, vs withdrawing only dividends. That might be a useful discussion. Otherwise I think we are just wasting each others time.

I'm having trouble understanding the difference, but we are this far into it, sure, I'm game. But I have to wonder, are we wasting each others time, or do you just not want to answer my questions?

But OK, let's use the 4% number (which I don't use, because I want to be more conservative than that). As was posted earlier (by pb4uski I think), take your high-yield fund (VYM), and take the total market (VTI). Withdraw 4% a year, inflation adjusted. The VYM ended up with a lower balance than VTI, so would not be able to support the draw-down for as long.

That's as apples-apples as we can get I think.

Are you saying only withdraw divs? Well, then you need to adjust your lifestyle to match the div payout. Per Vanguard, the yield on VYM is 3.3% (so you'd need to sell too to support 4%). OK, so go back and run that scenario again with 3.3% (we have to assume yield keeps up with inflation - do you have a source for that info?). I'm sure the result will be the same - VYM will have a lower balance - less to live on going forward, less to pass on to spouse/heirs.

So what some of us are saying is that needing to sell a bit along the way to add to dividends does not hurt the total market fund portfolio. It still out performs VYM.

So if we pull the same amount, and I have more money than you, didn't I do better? I can easily and simply sell what I need it I have to during an annual re-balance of my AA. Takes me maybe 5 minutes a year. If I understand you right, you are 'at the mercy' of whatever VYM decides to distribute.

No, I don't see the advantage. Can you help me see it?

If it is merely a preference, regardless of actual results, then yes, there is nothing more to discuss with you. But I have found this forum to provide valuable information, and when I can, I try to contribute, and part of that is calling out information which appears to be wrong, or at least questionable. So either convince us that high-yield funds are "vastly superior", or even just superior, or accept that I will continue to point out that charts that show no advantage to the high-yield funds. Or just say it is your preference, but nothing shows them to be superior. And if/when they do show an advantage, then I'm in!

-ERD50

 

[ERD50]

I don't want to work long enough to live on dividends alone. I can retire a lot sooner if I plan to accept drawing down principal.

+1

And to put a finer point on that, while we are technically drawing principal, we aren't always drawing it down.

If you look at the squiggly line trends on a FIRECalc output, especially with a conservative 3.x% WR, something like 75% of the time the principal grows in buying power. On average, we are drawing on the growth of the principal, not really the principal.

And of course, if a div payer retained those divs, they would be part of their growth. Amazing.

-ERD50

 

[ESRwannabe]

I don't want to work long enough to live on dividends alone. I can retire a lot sooner if I plan to accept drawing down principal.

That makes sense and is a good reason to use the total return withdrawal strategy. There are no easy answers, nor "correct" answers. When I say that the dividend withdrawal strategy is better, I mean that strictly for myself. I cannot say what is best for someone else.

I personally do not want to base my withdrawal strategy on historical data. For one, many of the companies that made up the S&P 500 decades ago don't even exist anymore. I work in IT and I see companies die every year. The fact that in the past I could withdraw 4% or whatever every year seems irrelevant when we are holding nothing in a steady state.

The companies die/merge, new ones IPO, the global politics and economy change radically. Hardly anything stays constant.

The dividend withdrawal strategy is based on current data, determined by experts at every single company, have real world consequences (get it wrong and your fired), and fluctuate as needed. In bad years dividends go down, in good they go up.

However as a consequence of this I will probably leave money on the table, and I will probably retire latter than I could have. I am ok with that.

 

[ESRwannabe]

ERD50,

"But I have to wonder, are we wasting each others time, or do you just not want to answer my questions?"

I am wondering the exact same thing about you.

"Are you saying only withdraw divs?"

Yes, I have been saying that since the very first post. That's why I called one of the withdrawal strategies "dividend withdrawal strategy" and the other "total return withdrawal strategy".

"So if we pull the same amount, and I have more money than you, didn't I do better? I can easily and simply sell what I need it I have to during an annual re-balance of my AA. Takes me maybe 5 minutes a year. If I understand you right, you are 'at the mercy' of whatever VYM decides to distribute."

You keep talking about things which I am not talking about.

"If it is merely a preference, regardless of actual results, then yes, there is nothing more to discuss with you. But I have found this forum to provide valuable information, and when I can, I try to contribute, and part of that is calling out information which appears to be wrong, or at least questionable. So either convince us that high-yield funds are "vastly superior", or even just superior, or accept that I will continue to point out that charts that show no advantage to the high-yield funds. Or just say it is your preference, but nothing shows them to be superior. And if/when they do show an advantage, then I'm in!"

I literally do not think we are able to communicate with each other. I will assume you are not doing it on purpose to troll me, but there is no point in me talking to you about... probably anything. Not saying that in a rude way. This conversation is literally not possible between us.

 

[pb4uski]

I really don't have a dog in this fight as I pay no attention to dividends but it does seem blindingly obvious that if one is taking money off the table instead of reinvesting it, that portfolio will underperform a similar one with reinvestment. ....

Sorry, perhaps I wasn't clear... in both cases there were annual withdrawals of the same amounts... the only difference was the underlying investments.