Anybody Rely Mostly on Dividend Funds? Questions

[all4j]

Soreadytoretire, I’m coming at this a bit differently than many of previous posters. I’ll start with my basic understanding & assumptions. There is no investing strategy that always provides a positive return & is optimal for all investors at all stages of life in all economic environments. Admirably, you’re trying to help your sister who has a mainly 3 year gap that needs filling in cash flow; clearly though it is hoped she will live well past that. Her demeanor is that she’d prefer to ignore the finances. That is important as she’ll be executing the strategy. Her time horizon starts ‘consumption’ now (as in April 2022). I’m not aware of any legit investing strategy that would generate returns to help on those April bills & going forward.

I was a bit unclear as to whether these funds are currently in an ira & will be taken out periodically & how they are currently invested. Perhaps she’s comfortable doing rebalancing. But, I question how she might mentally/emotionally handle periodically selling; especially if a down market & her total is falling.

Starting from now, the investing environment presents a classic bind. Central bank intervention for more than a decade has driven $ into riskier assets & made yield from bonds basically, or at least near, zero. Traditionally, rule of thumb has been that money needed within 2 to 3 years should not be in stocks. On top of that, central banks have announced their reversal on key policies that won’t immediately create yield, but may likely affect stocks (already has begun). Actually, I won’t build the case for stocks to go lower, but for those who think stocks only go up….well, anyway….

Which companies will fare better in the upcoming environment? Quite possibly those with best balance sheets, free cash flow, less dependent on future earnings – that is, hallmarks of many dividend stocks. Note that many dividend funds have a beta <1. Do a quick check on year to date performance & indeed you’ll see they’ve fallen less than the total market.

However, I still wouldn’t advocate for putting all into 1 fund – whichever fund picked. I’d start with setting aside a few months of expenses to get her started. I’d take a portion & do a CD/treasury ladder to take advantage of rising rates. I’d probably put some into Vanguard Wellington. Then if a dividend fund is comfortable to you, I’d think that will work. For such a compressed time frame & current environment, sequence of return risk is a key consideration I would think.

Success in this case is your sister paying her bills, least damage to nest egg, & sleeping well at night (& possibly your sleep also?!). That’s what I’d suggest based on info provided & my reasons why; others have, & will, disagree.

 

[OldShooter]

Where do you get 20 years of returns for SCHD? The inception date was 10/2011.

Operator error. Sorry. I was looking at the ten year results in PV and my fingers typed "20."

... I’ll also note that dividend funds tend to have a value focus, one espoused by Fama-French. ...

IMO yhou have to be a little careful with that. The consistent recommendation from the academics is: "You have to hold the market portfolio." IOW, everything. Broad diversification. The F/F three factor model identifies Value and Small as positive factors, but I have never heard or read that any of the academic crowd recommend making sector bets. The closest they come (and the raison d'être of Dimensional Fund Advisors) is to suggest that a market portfolio might be tilted somewhat to Value or Small. Tilted, not focused. (F/F are on the board at DFA.) Here's a very interesting 37 minute video where Fama touches a little on the market-portfolio-with-a-tilt concept.

Fama has the Nobel of course, not me. He has stated that he believes that the bias towards value and small reflects is due to increased risk and hence is close to permanent. That puzzles me because most successful ideas are quickly arbitraged away as they become known. So why not Value and Small? I dunno,but I have not chosen to tilt our portfolio.

 

[Chuckanut]

To elaborate, it isn't just about what return you get from dividends. It's about what the total return of the investments is including dividends and growth in value.


Let's say you put $10,000 in a stock that pays a 3% dividend and after a year, it has gone up 2% in value. Your total return is 5%. You got $300 in dividends and your stock is now worth $10,200.



But let's say I put my $10,000 in a stock that paid no dividend, but after a year it has gone up 8% in value so it's now worth $10,800. I sell off $300 worth of shares to get cash to live on, same as what you got, but I'm left with $10,500, $300 more than you.


That's the risk OldShooter is talking about.

Yes. It's called opportunity cost. You gave up the opportunity to earn an extra $300 to have the 'certainty' of the dividend payout.

Each person has to decide if the opportunity cost is worth it. They are often unseen and hard to predict, especially in the short-run.

Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision making.

 

[TheWizard]

With respect, I think there is a false premise here. Dividends are not fixed. Recent history confirms.

Y'know, I've never been a fan of that old "living on a fixed income" explanation for financial limitations in retirement.

I mean, even SS by itself isn't a fixed income: it went up 5% this year!

So instead, just say: I live on a pitifully inadequate retirement income due to my failure to plan properly.

Or is that too wordy?

 

[SoReadyToRetire]

One benefit of dividend stocks is the automatic nature of the payouts. Many people like getting that quarterly check and not having to think about it. And there is definitely value in that. There's no way I'd want my 91-year-old mother having to decide what shares to sell every few months to get cash. I'm much happier with her getting those dividend checks. So in a sense, you're paying for that automated income stream and not having to make selling decisions regularly.

Disneysteve, you hit it right on the head with this. My sister is like your mom—she needs something that’s basically on autopilot. Otherwise, I’ll be the one trying to make all the decisions for her, and I’m just not up to that. Got plenty to handle with my own retirement financing, after my husband got a severe case of Covid, was hospitalized, went on oxygen at home, and then lost his job, 2 years earlier than planned. &#55357;&#56862;

Someone else asked about her home. She has a big house, way too much for just her, but she became kind of a hoarder to deal with the stress after her husband died unexpectedly 10 years ago at age 58. So next job after figuring out finances is getting her to part with tons of “stuff”. If she did that, she could actually rent out her downstairs. That would be a huge help.

But one thing at a time …

 

[Fishsticks007]

Dividends work for me

Early retired 5 1/2 years now. Just turned 61. I have all dividend stocks with the exception of Amazon. I used the dividend kings list to determine which stocks I wanted. I diversified my 401k among several companies. My personal non 401k portfolio is also diversified. Dividends have worked just fine for me. The income has went up every year and life is good. The value of 98% of my stocks has also went up, many doubled the first 4 years - yay me! AT&T is the only one that hasn’t grown, but they still increased the dividend. So yeah sometimes things go sideways, but overall I think dividends are a fantastic way to generate income without having to go to work!

 

[24601NoMore]

Big fan of dividend income myself. That said..while Dividends do have a sort of 'auto-pilot' appeal, just remember that the plane can, and occasionally DOES crash into the side of a mountain, with dividends either getting cut or eliminated entirely.

Ask me how I know Yeah, I held CTL (and now hold LUMN). 54+% cut. That one hurt, as it was a big chunk of our yearly cash flow.

For that reason - and just good diversification strategy alone - hold something like SCHD or Wellesley instead..or hold relatively small percentages of single dividend payers like O (Realty Income) and don't get over-extended in a single stock.

 

[gooddog]

Preferred market ETFs could do the trick. The per share value may vary, but the dividends are good. There is also a high yield S&P ETF (SPHD) that is not too risky. Lastly, there are regional bank ETFs that pay good dividends.

 

[sscharf]

Check out CLM, I think I learned about it on this site. Current dividend is 15.29%


CLMCORNERSTONE STRATEGIC VALUE FD COM

Home | Cornerstone Strategic Value Fund, Inc.

 

[target2019]

I would think long and hard about a CEF with 15% dividend.

 

[SecondCor521]

I would think long and hard about a CEF with 15% dividend.

Well it does trade at a 50%+ premium to NAV, and it can invest in other CEFs and ETFs.

About the "dividend", from their most recent annual report:

"The Fund has maintained its policy of regular distributions to stockholders which continues to be popular with investors. These distributions are not tied to the Fund’s investment income and capital gains and do not represent yield or investment return on the Fund’s portfolio. ... The Board of Directors again approved a distribution percentage of 21% of net assets for the calendar year 2022."

-- http://www.cornerstonestrategicvaluefund.com/assets/pdfs/investor-reports/CLM_Annual_2021.pdf

The fund earned investment income of about $13.1M from it's investments and spent about $11.6M on investment expenses, including over $10M on management fees (page 14 of the above annual report).

It did have a good 2021, though.

 

[NW-Bound]

Total return investing is optimal from a financial standpoint. Problem is that it doesn't take into account inexperienced investors response to a large say 50% drop in stock prices. Inexperienced investors tend to panic and lock in losses by selling at the low point. Dividend payers (and funds that hold them) tend to have smaller swings in bear markets and may help with the psychological side of things during a bear market. Also, funds that combine dividend paying stocks with bonds tend to have much lower variability (Vanguard Wellington or Wellesley) and create no additional taxable events when held in an IRA. For example, Wellesley in an IRA (40% stocks, 60% bonds) at current yield 2.34% $500K would generate $11,700 a year enough to cover OP's income needs.

+1

I added the above bold face for emphasis.

For people who cannot stomach the up/down of the total market, a fund with a lower swing works better for them. Else, they would go put it all on CDs. What works for us doesn't work for people with a weak stomach.

As Koolau always says, YMMV.

PS. I am not a dividend seeker, but also not an indexer. I pick companies based on their profitability, whether they pay dividends or not. I don't buy a company just because it is included in an index either.

 

[COcheesehead]

I will likely get dumped on by the dividend investors on here for saying this, but I have always viewed a dividend as a forced (potential) taxation mechanism rather than income. The day after a dividend is paid, your net worth doesn’t go up, you just had someone else decide to “sell” a small portion of your equity and now you may (or may not depending on your tax situation) owe a tax on it. Compared to an individual bond for instance, the day interest is paid, my net worth increases because the interest is additive vs already in the price of the asset. They also will cause you to become myopic on what you hold in equities.
So I see nothing magical about dividends and actively avoid them in my taxable account.

 

[Closet_Gamer]

Interesting thread.

Three thoughts:

1) On the OPs need to bridge $800 of monthly expenses for a few years and perhaps provide some certainty/simplicity over the long haul. I popped $200K into an immediate annuities calculator. It generates $960/mo for life (not inflation adjusted). Perhaps a way to deploy part of the assets, allowing the balance to be invested more aggressively for the long haul?

2) On dividends vs. total return, we have to remember that virtually all of our investing lives have been characterized by a bond bull market which also serves to float equity asset values. If we enter a decade+ bond bear market, we may see that total return is harder to pull off while divvy yields have to float up to pace interest rates a bit.

That's not a prediction, I'm just very aware that the interest rates drives most everything and all of my experience is in a declining rate environment.

3) Dividends make me smile. Its just true. I like seeing my assets go up in value regardless of reason, but seeing cash materialize in the account just gives me an extra smile. I've been working since I was 13 to put cash into my accounts. Having it just show up is the easiest way to see "my money working for me."

 

[mrfeh]

3) Dividends make me smile. Its just true. I like seeing my assets go up in value regardless of reason, but seeing cash materialize in the account just gives me an extra smile. I've been working since I was 13 to put cash into my accounts. Having it just show up is the easiest way to see "my money working for me."

As stated above, your assets aren't increasing in value. Whatever asset that produced the cash has deceased in value commensurately.

 

[disneysteve]

Whatever asset that produced the cash has deceased in value commensurately.

That's true in the moment. But it's also true that dividends and growth aren't mutually exclusive.

My cousin died on 5/17/21 and left me 2 dividend-paying stocks worth a total of $156,197 at the time of his death.

Today those stocks are worth $215,639.

Since inheriting them, I have also received dividend checks totaling $5,168.

I'm okay with that.

 

[mrfeh]

That's true in the moment. But it's also true that dividends and growth aren't mutually exclusive.

My cousin died on 5/17/21 and left me 2 dividend-paying stocks worth a total of $156,197 at the time of his death.

Today those stocks are worth $215,639.

Since inheriting them, I have also received dividend checks totaling $5,168.

I'm okay with that.

And if they didn't pay a dividend, they'd be worth $220807

I fail to see the benefit.

 

[COcheesehead]

And if they didn't pay a dividend, they'd be worth $220807

I fail to see the benefit.

Right, it’s a taxation event, not an income event.

 

[Zathras]

I also prefer dividends although I avoid funds.
I find the downturns in the market far less concerning and the growth of my portfolio good.

 

[NW-Bound]

That's true in the moment. But it's also true that dividends and growth aren't mutually exclusive.

My cousin died on 5/17/21 and left me 2 dividend-paying stocks worth a total of $156,197 at the time of his death.

Today those stocks are worth $215,639.

Since inheriting them, I have also received dividend checks totaling $5,168.

I'm okay with that.

And if they didn't pay a dividend, they'd be worth $220807

I fail to see the benefit.

Ah, come on youse guys.

Instead of squabbling over $215,639 plus $5,168 dividend or $220,807 without dividend, let's be happy that the original $156,197 did not become $100,000.

Plenty of stocks are worth 60c on the dollar since Jan 1st. And I am not talking about the decline since their high, which was way back in early 21.

Counting from the high, some are now less than 50c on the dollar. Or a lot worse.

I am just glad I don't have any like that. Yet.

 

[Phroig]

We’re providing suggestions to someone whose money is in pre-tax retirement funds. Withdrawals of dividends or from the sale of shares will have the same impact on portfolio value and the same tax implications.

 

[mz44]

And if they didn't pay a dividend, they'd be worth $220807



I fail to see the benefit.

As I see it, the benefit of dividends are:
Consistent and growing payout assuming invested in a solid company. Reinvesting compounds, especially in down markets, buying more shares.

 

[Closet_Gamer]

As stated above, your assets aren't increasing in value. Whatever asset that produced the cash has deceased in value commensurately.

I get that.

You took my point backwards. My point was while capital gains make me smile as well, the cash nature of dividends give me an extra smile.

It was a personal point, not a financial one.

 

[mrfeh]

As I see it, the benefit of dividends are:
Consistent and growing payout assuming invested in a solid company. Reinvesting compounds, especially in down markets, buying more shares.

Again, there is no financial benefit. If the dividend isn't paid, the value of the stock/fund simply increases.

And if divs are being reinvested, that amounts to nothing more than an additional purchase to keep track of and potentially cause a wash sale (as demonstrated by a lengthy thread a couple months ago on this site).

I get the impression that some folks here don't really understand how dividends work, or that they are somehow magical/free money.

 

[G-Man]

Again, there is no financial benefit. If the dividend isn't paid, the value of the stock/fund simply increases.

And if divs are being reinvested, that amounts to nothing more than an additional purchase to keep track of and potentially cause a wash sale (as demonstrated by a lengthy thread a couple months ago on this site).

I get the impression that some folks here don't really understand how dividends work, or that they are somehow magical/free money.

What articles can I read to understand how dividends work? I have one of those dividend aristocrat stock and struggle on whether to reinvest the dividends or withdrawal the dividend income quarterly. For retirement planning, I have included the quarterly dividend as a source of income for at least 3 years. Is this a good or bad idea to include dividend income as a source of income during retirement?