Anybody Rely Mostly on Dividend Funds? Questions

[SecondCor521]

Quote:

Originally Posted by target2019 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.cornerstonestrategicvalue...nnual_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]

Quote:

Originally Posted by ejman 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]

Quote:

Originally Posted by Closet_Gamer 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]

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by disneysteve 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]

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by disneysteve 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.

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by mrfeh 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]

Quote:

Originally Posted by mz44 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]

Quote:

Originally Posted by mrfeh 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?

[target2019]

Quote:

Originally Posted by G-Man What articles can I read to understand how dividend 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.

This article explains dividends.
https://www.investopedia.com/terms/d/dividend.asp

Time to play the card.

[Dash man]

Quote:

Originally Posted by mrfeh 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.

I get the impression you don’t like others having differing opinions. [emoji12]
A company with growing dividends and a reasonable payout ratio is an indication of a healthy company. Reinvesting dividends is a good way to dollar cost average into additional shares. Dividends are a way of taking some off the top, without having to sell in a down market.
If you don’t like dividend stocks, then avoid them. I personally like them. It’s nice having a regular paycheck in retirement.

[ERD50]

Quote:

Originally Posted by Dash man Quote: Originally Posted by mrfeh View Post 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. I get the impression you don’t like others having differing opinions. [emoji12] ...

People are free to have opinions, mrfeh is outlining the facts. Attacking him in this way isn't helping your case.

Quote:

... A company with growing dividends and a reasonable payout ratio is an indication of a healthy company. ...

That's a rear-view mirror look. We need to know about the future. Plenty of once healthy dividend (and non-dividend) payers have gone from healthy to sick, and it isn't clear until the stock has dropped and/or dividends have been cut, to do anything about it. And plenty of once healthy dividend (and non-dividend) payers have gone from sick to healthy - dividends don't have any special value here. If you believe they do, show some evidence of how an investor can take advantage of this with a diversified portfolio (not a handful of stocks).

Quote:

... Reinvesting dividends is a good way to dollar cost average into additional shares. ....

No, it's an awful way to do it.

If the company did not distribute the dividend, it would be retained in the stock price. So there would be no need to go through the song/dance of distributing it, just to "reinvest it", and maybe pay taxes on that distribution. Without a dividend distribution, it was already invested, there is zero need to "re-invest" it. And retaining happens 365 days a year, better than dollar cost averaging once quarter.

Quote:

Dividends are a way of taking some off the top, without having to sell in a down market.

This is another red-herring. In a balanced portfolio, the fixed income side will handle that. There is rarely ever a case where stocks must be sold when they are down.

Quote:

... If you don’t like dividend stocks, then avoid them. I personally like them. It’s nice having a regular paycheck in retirement.

I don't avoid them - I take them in my broad based stock funds in the ratio they are represented. They are part of the market, I'm not going to discriminate. Though I would prefer that none of them paid a dividend, but that's not up to me.

All this talk about stocks that have paid a steady/growing dividend for 20 years. If you go back 20 years, the stocks that fit that category at the time (all that matters for stock picking w/o a crystal ball) did not outperform the market. Because the past was/is not a good indicator of future performance, and div payers tend to put you into a less diversified portfolio.

-ERD50

[thod]

In school we were taught that a company's value can be calculated as the "present value of future cash flows". The tricky part is figuring out what the future cash flows are. Of course, there are dividends and the sale/liquidation price.

In that equation, dividends are somewhat predictable (or at least most companies strive to keep them predicable.) If a company can increase its dividend over time, then it usually indicates there is confidence in the cash flows going forward. If they cannot not or even need to decrease them, it indicates that there might be something unhealthy with the company.

As far as a company that has no dividends, the only future cash flow is a buyout, bankruptcy, liquidation, or the company keeps operating 'forever'.
In the case of 'operating forever', what is the future cash flow? In that case, it becomes just the ability to hope there are more 'buyers' (positive on the stock), than 'sellers' (negative on the stock.)

Everyone buys a stock hoping to make money. If the only way to realize that money is to sell, then what happens if everyone decides to sell at the same time. Or what happens if everyone chooses to buy at the same time. Either way your investment is potentially at the mercy of the crowd/mob.

Dividends cannot necessarily stop any bad stuff from happening, but they can serve as a check on management taking too many risks or just doing stupid stuff. The flip side of that is that, sometimes taking risks can be very profitable.

So there really is no right or wrong answer. Either way, the market will decide, and I treat dividends as a check on management to not do something too stupid with my money.

[Dash man]

Here’s one of many charts you can find searching the Internet showing how dividend growing stocks outperform.

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