Dividend Strategy

[RetirementColdHardTruth]

I have been reading a lot about dividend investing and wonder if anybody here uses it for a strategy for ER.

If I was to buy one of a few different High Dividend ETF and use dividend reinvesting between now and ER, I could know at what point I could really ER with ver little risk. At the time my income in dividends exceeds my expenses I know I would be safe to leave the workforce. Build in a 12 month living emergency fund in cash and then live off the dividends.

I know that the pile would have to be larger as these tend to pay around 4% and ideally you wouldn't want to touch principle.

What are the downsides to this? It seems too simple to not have some hidden issues.

 

[teejayevans]

For your taxable accounts, since dividends get preferred tax treatment, seems like a good plan.
Downside;
they can change the tax laws,
when things get bad, dividends can go (ie BP)
Being all in on just large cap equities....sounds risky to me, maybe go with high dividend stocks in taxable accounts, and bonds in your non taxable account
TJ

 

[justplainbll]

It's not uncommon for many etf's (e.g. JPS) to pay declining dividends which still amount to 4% of the declining etf price.
We have held JPS for 6.35 years and have experienced a market value decline of 9.9% per annum; big whoops that it's paying $.66 on its current market value of less than $7.48 per share.

 

[Animorph]

Investing in only dividend stocks is not as diversified as you could be. You might look into ETF's like DEM and DLS to increase diversity, but that still ignores the growth half of the market. They may also be lower growth than optimum during the accumulation phase. But really I think it's a decent idea if that's what you're comfortable with. You could do worse.

 

[nun]

High dividend EFT and mutual funds are not low risk. My approach to dividend investing is to emphasize quality over return or just do the no brainer and go with Wellesley

 

[JPatrick]

Another dividend strategy is to buy quality stocks through a DRIP plan.
There are many stocks that have paid and increased their divies for many years.
I Drip COP, EMR, DUK, and SE.
Their plans are 100% free of fees with very low starting deposits, some as low as $50 as I recall.
Warren Buffet loves to talk about how his dividends have increased over the years.
Check out this snippet about his Coke holdings:


.Buffett’s cost basis in Coca-Cola (KO) is $1.3 billion. At the current distributions rate he is essentially generating a yield on cost of 29%. This means that every three years he gets his initial investment back in the form of dividends alone. The majority of his position in the company was initiated between 1988 and 1989.

In Buffett’s words “Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

 

[TN_INVEST]

What are the downsides to this? It seems too simple to not have some hidden issues.

I am a big proponent of dividends. One of my first investments was a nice dividend paying stock and it got me hooked.

Some of the downsides are:

1. Dividends are not guaranteed. There are several companies that have stopped paying dividends...many have household names.

2. The price of the shares can & will fluctuate. Sometimes by quite a lot (and that might be a little scary for somebody that is drawing income from their investments). The iShares Dow Dividend ETF (DVY) fell nearly 60% in 6 months, beginning Oct 2008 to March 2009. The dividend of the DVY has also dropped from just over $2 per share, per year, to just under $2 per share, per year over the past 5 years. There are a number of reason for the drops (mainly because of some of the component replacements), but it did happen.

I like dividend paying stocks, but don't forget that they are still stocks.

 

[CyclingInvestor]

This is basically what I did (although I used individual stocks), building up a portfolio (mostly in my IRA after a big 401k rollover) for a number of years. In 2004 the dividends passed my take-home pay (adjusting for a mortgage payoff, taxes, health insurance, savings), making me feel FI, and I retired in 2006. Since then, dividends have increased about another 50%. My portfolio is full of JNJ, PG, KO, ABT, ADP, MSFT, MMM etc (although it was full of REITs like VNO, AVB, WRE, PLD, KIM etc from 1998-2005) and yields about 3.4%.

Investing in individual stocks requires additional work, however. If you do not enjoy spending some time analyzing stocks, the ETF approach is probably better.

 

[braumeister]

The majority of my individual stocks are dividend payers, and I wouldn't have it any other way. However, the big picture and big diversification is so important. One of my formerly largest holdings was that stellar dividend payer, General Electric. The mighty can fall as easily as the lesser lights.

 

[justplainbll]

The majority of my individual stocks are dividend payers, and I wouldn't have it any other way. However, the big picture and big diversification is so important. One of my formerly largest holdings was that stellar dividend payer, General Electric. The mighty can fall as easily as the lesser lights.

Amen.
GM, T, AIG, and Westinghouse are among the others also used to be big potatoes. Sure hope NSRGY and SI do not go that route in the next decade or so.

 

[carnivalday]

I am saving for retirement using dividend stocks and bond funds that give a monthly distribution. I am protecting myself (as much as one can) by not allowing any individual stock to be any more than 5% of my total annual dividends. I read everything I can find online about dividend stocks and dont move stocks around; I buy and hold. If a stock doesnt raise its dividend in a year or a year and a half, I sell and buy another one. All my stocks are in my roth IRA. I also have a few drips, in COP, DUK, AEP, and VZ, that range from $25 to $50 a month, right out of my checking account, so its a painless addition. I subscribe to a dividend growth stock newsletter, which has helped me a lot, too. So far so good.

The compounding of dividends is extraordinary. As soon as you get a quarterly dividend, and its reinvest, it immediately starts earning dividends. So your dividends earn dividends.

 

[ERD50]

Warren Buffet loves to talk about how his dividends have increased over the years.
Check out this snippet about his Coke holdings:


Buffett’s cost basis in Coca-Cola (KO) is $1.3 billion. At the current distributions rate he is essentially generating a yield on cost of 29%. This means that every three years he gets his initial investment back in the form of dividends alone.

I'm going to disagree on the usefulness of "yield-on-cost". While it is an interesting number, it could lead to bad decisions. Consider an extreme example for illustration:

1) An investor buys a single share of stock at $1. It pays a 1% (1 cent) dividend.

2) Ten years later, the stock price is $1 million, and still pays the 1% dividend (now $10,000).

The investor can brag that he is getting 10,000x his initial purchase price every year in divs. But it is still 1%. He could sell that stock, and invest in a diverse group paying 2-3% divs, and have 2-3x the income. But his "yield-on-cost" would go down by a factor of 1 million - so should he pass on the extra income, for the sake of some odd metric? I wouldn't. And I doubt Warren would either, I think he's just doing a little colorful marketing here. Sounds good on the surface, I admit. But numbers is numbers. I'd bet that Warren is holding it because he thinks it looks good going forward, not based on what he paid for it in 1995.


-ERD50

 

[Nords]

Ruh-roh. Another fanboy thread about dividend-paying stocks. Must be time to sell the asset class.

Or read this blog for some fairly rigorous screening criteria:
Dividend Growth Investor

 

[JPatrick]

Consider an extreme example for illustration:

1) An investor buys a single share of stock at $1. It pays a 1% (1 cent) dividend.

2) Ten years later, the stock price is $1 million, and still pays the 1% dividend (now $10,000).

The investor can brag that he is getting 10,000x his initial purchase price every year in divs. But it is still 1%. He could sell that stock, and invest in a diverse group paying 2-3% divs, and have 2-3x the income. But his "yield-on-cost" would go down by a factor of 1 million - so should he pass on the extra income, for the sake of some odd metric?
-ERD50

With investments like your example, his major concentration should be on the numbers on his golf scorecard.

Of course the real lesson here is that quality stocks that pay regular/increasing dividends can amount to a tidy sum. The magic of compounding.
Another hidden lesson here might be taking care in structuring your investments so a loved one does not get saddled with a major (very) capital gain when you depart this earth.

 

[Ronnieboy]

I am saving for retirement using dividend stocks and bond funds that give a monthly distribution. I am protecting myself (as much as one can) by not allowing any individual stock to be any more than 5% of my total annual dividends. I read everything I can find online about dividend stocks and dont move stocks around; I buy and hold. If a stock doesnt raise its dividend in a year or a year and a half, I sell and buy another one. All my stocks are in my roth IRA. I also have a few drips, in COP, DUK, AEP, and VZ, that range from $25 to $50 a month, right out of my checking account, so its a painless addition. I subscribe to a dividend growth stock newsletter, which has helped me a lot, too. So far so good.

The compounding of dividends is extraordinary. As soon as you get a quarterly dividend, and its reinvest, it immediately starts earning dividends. So your dividends earn dividends.

My retirement plan is very similar, except I am going as low as 2.5% in any one stock. That way worse case scenario my hit would only be 2.5% and could quickly be 'rerouted' if needed.

 

[FIRE'd@51]

I'm going to disagree on the usefulness of "yield-on-cost". While it is an interesting number, it could lead to bad decisions. Consider an extreme example for illustration:

1) An investor buys a single share of stock at $1. It pays a 1% (1 cent) dividend.

2) Ten years later, the stock price is $1 million, and still pays the 1% dividend (now $10,000).

The investor can brag that he is getting 10,000x his initial purchase price every year in divs. But it is still 1%. He could sell that stock, and invest in a diverse group paying 2-3% divs, and have 2-3x the income. But his "yield-on-cost" would go down by a factor of 1 million - so should he pass on the extra income, for the sake of some odd metric? I wouldn't. And I doubt Warren would either, I think he's just doing a little colorful marketing here. Sounds good on the surface, I admit. But numbers is numbers. I'd bet that Warren is holding it because he thinks it looks good going forward, not based on what he paid for it in 1995.


-ERD50

+1

Yield on cost is basically a meaningless number going forward as ERD50's example so clearly illustrates, not withstanding the fact that we recently had a thread where posters bragged about this number.

 

[clifp]

+1

Yield on cost is basically a meaningless number going forward as ERD50's example so clearly illustrates, not withstanding the fact that we recently had a thread where posters bragged about this number.

I agree it is mostly bragging rights. Although it ain't much different than I bought Apple at $50 or psst Wellesley.

 

[REWahoo]

I agree it is mostly bragging rights. Although it ain't much different than I bought Apple at $50 or psst Wellesley.

Hey, I bought some Wellesley at $50, does that give me any special bragging rights?

 

[ERD50]

I agree it is mostly bragging rights. Although it ain't much different than I bought Apple at $50 or psst Wellesley.

Bragging is fine (to a point). I'm just saying the number shouldn't be thrown out as anything significant in forward looking decisions (which are the only ones that matter, other than for education purposes - what's done is done)

-ERD50

 

[JPatrick]

Hey, I bought some Wellesley at $50, does that give me any special bragging rights?

PSSSSST, only if you are having a beer with Unclemick...

 

[Chuckanut]

Most rich people cannot relate to the middle class, much less the poor. They may try their best and have the best intentions, but they really don't know what we are going through. When a RICH person goes to bat for me, I get very careful and take it with a grain of salt.

 

[ERD50]

Most rich people cannot relate to the middle class, much less the poor. They may try their best and have the best intentions, but they really don't know what we are going through. When a RICH person goes to bat for me, I get very careful and take it with a grain of salt.

And how does this affect your Dividend Strategy?

-ERD50

 

[clifp]

Bragging is fine (to a point). I'm just saying the number shouldn't be thrown out as anything significant in forward looking decisions (which are the only ones that matter, other than for education purposes - what's done is done)

-ERD50

I'll quibble a bit. One of theories behind a dividend income approach is that dividends growth keeps up with inflation. Calculating your yield on cost helps you determine that.

One of other theories behind dividend investing is over the long term dividend yield and dividend growth are of equal value. Hence a company with 2% yield but an expected dividend growth rate of 8% is equivalent to company with a 8% yield and 2% growth rate since they both add up to 10%. (In practice the 8% yield is worth more all things being equal because of uncertainty of future growth.) It is helpful to know your yield on cost when comparing your holdings.

 

[harley]

Most rich people cannot relate to the middle class, much less the poor. They may try their best and have the best intentions, but they really don't know what we are going through. When a RICH person goes to bat for me, I get very careful and take it with a grain of salt.

Middle class? I Fart In Your General Direction! - YouTube

 

[ERD50]

I'll quibble a bit. One of theories behind a dividend income approach is that dividends growth keeps up with inflation. Calculating your yield on cost helps you determine that.

One of other theories behind dividend investing is over the long term dividend yield and dividend growth are of equal value. Hence a company with 2% yield but an expected dividend growth rate of 8% is equivalent to company with a 8% yield and 2% growth rate since they both add up to 10%. (In practice the 8% yield is worth more all things being equal because of uncertainty of future growth.)

I'm not sure we quibbling, even a bit. I don't have any issues at all with a dividend strategy. Though I look at things in terms of total return, but divs are part of total return, so it's all the same to me. Div paying stocks may well be a good approach to total return.

It is helpful to know your yield on cost when comparing your holdings.

Seems to me, that would tell you how you've done historically. That might be useful looking forward, but it might not. It seems like you're saying if I bought a stock that went up 100%, and another went up 10%, that that is helpful when comparing holdings? Or is just a measure of when I bought them and how they did in the past?

-ERD50