Dividend Income Questions

[ESRwannabe]

Quote:

Originally Posted by NW-Bound No, he does not mind. Not if the seeds grow bigger and bigger by themselves without sprouting. He has fewer seeds as time goes by, but why should he mind if his buckets of seeds are overflowing? He does not count the seeds, but gets happy when he measures their total weight.

Yeah you could say I basically contradicted myself by using Warren Buffet as an example. Berkshire pays no dividends...

[Danmar]

Quote:

Originally Posted by ESRwannabe Basically, a total return investor is someone that doesn't mind eating their seed corn from time to time... I prefer income investing because I don't believe the market is efficient nor rational very often. I do believe some people can consistently do better than market cap weighted indexes (Warren Buffet as an example). I also believe the market behaves like a manic depressive and that even pitiful investors like myself can take advantage of crisis (like oil right now). However, I do think market cap indexes to a descent job when your not willing to put any effort into investing. Which is why I have most of my money in ETFs. I focus on income because its a safer withdrawal strategy imho. I started out as a Boglehead 10+ years ago but became disillusioned with it over time. During the last recession you had even the staunchest of Bogleheads panicking, talking about "Plan Bs" and other things... The way I see it total return requires that share prices are rational when you need to withdraw money. My experience (starting off with the dot com bubble) is that the stock market is filled with non-stop manias, flash crashes, and other nonsense which makes me want to have as little dependence on capital gains as possible.

This would be my view as well. I think divs are a less risky way to realize cash flow. Well established div payers tend to be well managed companies with long track records. At least the ones I invest in. They also tend to be low beta stocks and in my view expose you to much less sequence of return risk. For these reasons it is my opinion that they could provide a higher SWR. For me, this strategy has outperformed the appropriate index by several percentage points CAGR over my investing time frame(18years). Now, I am not very well diversified so it may simply have been luck in picking the right names. Either way, I'm happy.

[NW-Bound]

The comparison of a stock share to a corn seed is actually a flawed one. It is earning of a company that's important, whether that earning is paid out as dividend or not. Without a good earning, a dividend-paying company will wither and shrink with time. Eventually, shareholders will lose both dividend and principal.

[Danmar]

Quote:

Originally Posted by ESRwannabe Yeah you could say I basically contradicted myself by using Warren Buffet as an example. Berkshire pays no dividends...

Right but he seems quite happy to collect them.

[NW-Bound]

It is true that growth investors are often lured by promise of quick growth, which was just a mirage in the case of the dot-coms of yesteryear. And even when the growth has been real, one must ask if that growth can continue forever and ever.

Can any company keep on growing faster than the economy, until it becomes a big part of the GDP? Like a cancer tumor that far outgrows its host? Or perhaps its growth attracts competition, who will cut into its share of the market?

The above are questions that a growth investor, particularly in individual stocks, must find an answer for himself. Hence, some want to avoid growth and go for established companies that pay dividends. But here, they have another problem. Many older companies fail to keep up, or their products become obsolete with technology advances. That's the value trap.

Either growth or value investing, I think diversification is key. Reward does not come without risk. Never.

[Senator]

Quote:

Originally Posted by pb4uski Are you talking about just dividends from equities or both dividends and interest? Why would your dividend income almost double when you rollover your 401k to an IRA? Mine didn't change at all as my 401k investments received dividends as did my IRA investments.

I was indeed referring to dividends and interest. Anything thrown off from a portfolio, without selling the base.

My 401K consists of VIIIX, VEMPX, VDIPX and some company stock (5%). The only dividends that are shown are from the company stock. I assume the others throw off dividends, somehow. In the quotes, it shows a dividend of 1.96%, it's just not listed in my 401K as a transaction. And my cash does not increase.

This is all great information for me. As I wind down, and develop multiple income streams, it is interesting to see what others have done. No plan is perfect, and no two plans are the same.

As I get ready to put on my retirement parachute and jump, it's nice to see others who have successfully jumped and landed safely, in an untested parachute like my own will be.

[NW-Bound]

The MFs in my wife's 401k do not report dividends or cap gains, though they have them. And they are all internally reinvested. The cash balance does not increase, nor the number of shares. Same number of seeds, but the seeds grow bigger. See, it's all about accounting. It's earnings that matter.

The reason is that the account reporting of dividend, interest, and cap gain incomes is for the share owners to file taxes, and as 401k accounts are tax free, they do not bother to give you the info.

[Cobra9777]

I have to admit, I'm a little confused by this distinction as well. I always thought this referred to one's approach to withdrawals in retirement...

Income: tries to generate enough interest and dividends to cover expenses without touching principal
Total Return: uses both principal and income to cover expenses.

Yet Danmar says:

Quote:

Originally Posted by Danmar ...They may not even be retired yet and reinvest the divs. It's really just a description of their investing emphasis...

I've seen others make comments like, I'm sticking with total return investing, since that's what got me to ER... suggesting this refers solely to an investment strategy.

So which is it? Can I be a "total return investor" if I withdraw both principal and income from a dividend-heavy portfolio? Am I an "income investor" if I survive solely on the 1.8% dividend produced by VTI? Or is it the investment emphasis in the portfolio that defines my approach, as Danmar and others seem to suggest? Does it refer to a withdrawal strategy or an investing strategy? Or both?

[ESRwannabe]

Quote:

Originally Posted by Cobra9777 I have to admit, I'm a little confused by this distinction as well. I always thought this referred to one's approach to withdrawals in retirement... Income: tries to generate enough interest and dividends to cover expenses without touching principal Total Return: uses both principal and income to cover expenses. Yet Danmar says: I've seen others make comments like, I'm sticking with total return investing, since that's what got me to ER... suggesting this refers solely to an investment strategy. So which is it? Can I be a "total return investor" if I withdraw both principal and income from a dividend-heavy portfolio? Am I an "income investor" if I survive solely on the 1.8% dividend produced by VTI? Or is it the investment emphasis in the portfolio that defines my approach, as Danmar and others seem to suggest? Does it refer to a withdrawal strategy or an investing strategy? Or both?

I think its both an investment strategy and a withdrawal strategy. However the withdrawal strategy trumps the strategic focus...

So imho someone invested in the S&P 500 and only withdrawing the dividends would be an income investor.

Someone that is focused on income producing assets yet relies on capital gains in addition to income would be a total return investor.

I think withdrawals define the approach and that this also spills over into asset selection, although not always.

If I could get away with just taking dividends on the S&P 500 I would be ecstatic to do so. It would require no effort on my part.

[Danmar]

Yes, I think my explanation describes the type of investment approach.
The withdrawal approach could be quite different. For example, even though I am a dividend or income investor and this income is enough to fund a very nice retirement, I may at some point also start liquidating some of my gains. Maybe splurge on something or make a big gift,etc. I suspect few people can live solely on the div stream but I also have a big pension that augments my cash flow. I think when most people are talking about this stuff they are talking about the investment approach, not a withdrawal strategy.

[Theseus]

Today's spending money comes from pensions that cover about 33% of the budgeted needs. Have three primary retirement accounts, smallest of which holds cash that will supplement the pensions for about 18 months. Very low rate of return, but that money is, and needs to remain very liquid. Next account is about 36 months cash needs and remains invested in a 403(b) guaranteed investment (PRUGI) that pays ~1.75%. Very liquid, but at a rate of return that rivals CD's of a matching term, I'm OK with it.

By the time those two buckets go dry, and we would need to tap the primary account (which dwarfs the first two) we could opt to begin collecting SS and only need to supplement pensions + SS for a minimal topping off now and then. A more optimal plan has us holding off on SS until FRA, which at that point when combining pensions and SS our needs would be pretty much covered. The primary account is producing a steady stream of dividend income that is being used to purchase CD's to adjust the AA away from stocks as time goes on.

[pb4uski]

Quote:

Originally Posted by ESRwannabe .... I do think market cap indexes to a descent job ....

The market cap indices certainly were in descent last week and earlier this week.

[pb4uski]

Quote:

Originally Posted by Danmar I believe NAV will be reflected in the quoted price so NAV Appreciation is very close to price appreciation? I only buy individual equities so not as familiar with ETF's or MF's

Yes, you can think of the NAV as essentially the value of the underlying portfolio marked to market.... there are a few other things as well (transactions in process, accrued expenses, etc) but they are a pittance in the whole scheme of things.

[ESRwannabe]

Quote:

Originally Posted by pb4uski The market cap indices certainly were in descent last week and earlier this week.

lol nice, maybe it was subliminal message from my subconscious

[pb4uski]

Quote:

Originally Posted by Senator I was indeed referring to dividends and interest. Anything thrown off from a portfolio, without selling the base. My 401K consists of VIIIX, VEMPX, VDIPX and some company stock (5%). The only dividends that are shown are from the company stock. I assume the others throw off dividends, somehow. In the quotes, it shows a dividend of 1.96%, it's just not listed in my 401K as a transaction. ....

I suspect that if you dig a little deeper into your 401k transactions that they are there because all three tickers pay dividends. I know that in my 401k you had to dig a little but you can find them and that they are all being reinvested.

https://personal.vanguard.com/us/fun...tExt=INT#tab=4

https://personal.vanguard.com/us/fun...tExt=INT#tab=4

https://personal.vanguard.com/us/fun...tExt=INT#tab=4

[Mulligan]

Quote:

Originally Posted by Danmar Right but he seems quite happy to collect them.

And he also likes them high yielding preferred stock dividends also...Especially when he can put them over the barrel with them. Of course if you are a billionaire you can strong arm these types of deals.


Sent from my iPad using Tapatalk

[Closet_Gamer]

Interesting thread. I'm still 8-10 yrs away from RE, but have decided to begin building up a passive, dividend driven income stream. I'm doing this for 2 reasons:

1). I've found that most big goals in life are best achieved with sustained, small efforts. While I'm still putting most of my money into core index holdings (SPY, DIA, QQQ) I have started to put some monthly money into dividend centric funds. It allows me to keep a tally of "what % of current living expenses am I now receiving passively." I have a long way to go, but it's 2x what it was 12 months ago.

2). A passive income stream hedges a layoff in the near term. If my emergency fund would normally last 12 months, the ability to replace 25% of my income passively stretches it to 15 months.

To the point about how much principle is needed to really live solely off dividends I find that my growing dividend stream makes me smile and also makes me cringe when I realize how far I have to go!

[pb4uski]

Quote:

Originally Posted by Cobra9777 .... Income: tries to generate enough interest and dividends to cover expenses without touching principal Total Return: uses both principal and income to cover expenses. ....So which is it? Can I be a "total return investor" if I withdraw both principal and income from a dividend-heavy portfolio? Am I an "income investor" if I survive solely on the 1.8% dividend produced by VTI? Or is it the investment emphasis in the portfolio that defines my approach, as Danmar and others seem to suggest? Does it refer to a withdrawal strategy or an investing strategy? Or both?

I'm not sure I agree with the total return definition... I would say it is more:

uses both principal capital appreciation and income to cover expenses

My point is that one doesn't necessarily have to dip into principal, but a typical total return investor would need to use capital appreciation (essentially sell and realize gains).

In my case and many others it gets more complicated than that in that I am selling taxable investments and using the proceeds to supplement taxable account interest and dividends for living expenses BUT I am at the same time reinvesting interest and dividends in my tax-deferred and tax-free accounts.

I think the terms refer more to whether portfolio growth is income-tilted or capital appreciation-tilted rather than withdrawal oriented.

[pb4uski]

Quote:

Originally Posted by krotoole ....To the point about how much principle is needed to really live solely off dividends I find that my growing dividend stream makes me smile and also makes me cringe when I realize how far I have to go!

I'll probably be flamed for this but if you work until your dividends are sufficient to cover your living expenses you are probably working longer than necessary.

[Cobra9777]

Quote:

Originally Posted by pb4uski I suspect that if you dig a little deeper into your 401k transactions that they are there because all three tickers pay dividends. I know that in my 401k you had to dig a little but you can find them and that they are all being reinvested.

DW's 457b shows no dividend transactions in her S&P 500 index fund. I can look up the ticker on M* and find dividend declarations, but they are not reflected as transactions in her account. Instead, the share price has been adjusted up by the amount of cumulative dividends since she first bought that fund. I suspect we don't really own that ticker directly, but rather own shares in some non-ticker internal fund that simply absorbs the dividends. It weird, but I've gotten used to it.