Dividend Yield vs Total Return Income in Retirement

[G-Man]

I have acquired a large number of shares of a Dividend King stock (company has been growing its dividends for over 51 consecutive years) over the last 23 years. The current dividend yield is around 8%.

In retirement planning, I have included this dividend income as part of my retirement income for the first 6 years of retirement. Currently it generates about $50K per year in dividend income.

Would like to hear feedback from others on whether this is a good idea to rely on dividend income as part your retirement income.

Found this article on the topic:
https://seekingalpha.com/article/44...esting-total-return-vs-income-growth#comments

 

[TheWizard]

8% seems high...

 

[Al18]

Is this a REIT? REIT dividends are NOT qualified. This means REIT dividends are taxed at your normal income tax rate (10%, 12%, etc.)

 

[mrfeh]

Do a search over on bogleheads.org

This topic has been beaten to death.

 

[target2019]

High Yield Dividend King #1: Altria Group (MO)
Dividend Yield: 7.9%
Altria Group was founded by Philip Morris in 1847. Today, it is a consumer staples giant. It sells the Marlboro cigarette brand in the U.S. and a number of other non-smokeable brands, including Skoal and Copenhagen.
https://www.suredividend.com/highest-yielding-dividend-kings/

 

[pb4uski]

I have acquired a large number of shares of a Dividend King stock (company has been growing its dividends for over 51 consecutive years) over the last 23 years. The current dividend yield is around 8%.

In retirement planning, I have included this dividend income as part of my retirement income for the first 6 years of retirement. Currently it generates about $50K per year in dividend income.

Would like to hear feedback from others on whether this is a good idea to rely on dividend income as part your retirement income.

Found this article on the topic:
https://seekingalpha.com/article/44...esting-total-return-vs-income-growth#comments

I don't think this is a good idea for two reasons.

First and most important, your "large number of shares" which is ~$650k results in a concentration and lack of diversification. There have been many highly regarded stocks and companies that fallen from grace... think Kodak, GM, Sears, GE, etc.

Second, in the long run high dividend stocks often slightly underperform the overall stock market.

Finally, often the reason that a company pays high dividends is because it doesn't have sufficient opportunities to reinvest profits at an attractive return and grow the company so the company decides to increase payouts to shareholders instead.

 

[pjigar]

I don't think this is a good idea for two reasons.

First and most important, your "large number of shares" which is ~$650k results in a concentration and lack of diversification. There have been many highly regarded stocks and companies that fallen from grace... think Kodak, GM, Sears, GE, etc.

Second, in the long run high dividend stocks often slightly underperform the overall stock market.

Finally, often the reason that a company pays high dividends is because it doesn't have sufficient opportunities to reinvest profits at an attractive return and grow the company so the company decides to increase payouts to shareholders instead.

+1


I have two words for you: Mental accounting.

 

[Dash man]

I’m a big proponent of stocks that grow their dividends each year, not high dividend yields. Growing dividends indicate a healthy, growing company. High dividends by themselves can be problematic. I bring in about $70k/ year in dividends. Remember REITs and BDCs are taxed as ordinary income and should only be kept in retirement accounts.
Examples of stocks I’ve had for years include MSFT, AVGO, DUK, AAPL, ABC, ADP, MAIN (in Roth), HD, KMB, LLY, RPM, SBUX, CSX, AEP and XOM. I have SCHD, SCHB, SCHF and SCHA for ETFs.
Diversification is critical, so you shouldn’t have more that 5% in any one company stock.

 

[G-Man]

Thanks everyone for the feedback. I need to diversify.

 

[target2019]

Reaching for yield works, and then it doesn't.

Diversifying is the way to go. For dividends I'm focusing on SCHD and SPYD. Wherever you invest there's an ETF or fund to help you buy a broader index.

 

[Montecfo]

If you have owned Altria while then you know the volatility it has had at times.

Relying on dividends is something we all do to some extent. No issue there. But diversify for sure.

And you want companies that GROW their dividends, not just high yield. In fact, you probably want to avoid high yield as a very high yield can be a red flag.

Good luck.

 

[G-Man]

I don't think this is a good idea for two reasons.

First and most important, your "large number of shares" which is ~$650k results in a concentration and lack of diversification. There have been many highly regarded stocks and companies that fallen from grace... think Kodak, GM, Sears, GE, etc.

Second, in the long run high dividend stocks often slightly underperform the overall stock market.

Finally, often the reason that a company pays high dividends is because it doesn't have sufficient opportunities to reinvest profits at an attractive return and grow the company so the company decides to increase payouts to shareholders instead.

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

 

[mrfeh]

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

Of course not. But the question does not make sense.

Go peruse bogleheads.org for posts on this subject. Eventually you'll realize dividends are just forced sales.

 

[G-Man]

Of course not. But the question does not make sense.

Go peruse bogleheads.org for posts on this subject. Eventually you'll realize dividends are just forced sales.

Sorry. Did not mean to upset anyone.

 

[Dash man]

Sorry. Did not mean to upset anyone.

If you focus on achieving a $50k dividend income, you’ll make mistakes for chasing high yield stocks that may have deteriorating fundamentals. Select stocks that grow their dividends and they tend to appreciate more. You want total return. You should look at SCHD or VIG ETFs.

 

[mrfeh]

Sorry. Did not mean to upset anyone.

No need to apologize. And I'm not upset. I've just seen this topic discussed dozens of times.

Which is why I suggest you visit bogleheads.

 

[G-Man]

No need to apologize. And I'm not upset. I've just seen this topic discussed dozens of times.

Which is why I suggest you visit bogleheads.

Not a problem. Thank you.

 

[OldShooter]

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

No one knows, including not knowing what Altria's future dividend rate might be. Given Altria's market, I think this aphorism applies: "If something can't go on forever, it won't."

Here's some expert advice on dividend investing and its pitfalls: https://famafrench.dimensional.com/videos/homemade-dividends.aspx

 

[pb4uski]

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

Probably not, but who knows. As others are pointing out, you're missing the point. You are too concentrated in Altria... one could suggest that today's Altria is yesteryear's Kodak (which ultimately went bankrupt as a result of its product becoming obsolete).

Now will a low cost index fund or ETF match Altria's total return? That is a distinct possibility but nothing is guaranteed.

 

[pjigar]

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

Like I said, it is mental accounting. If you spend 10% from your portfolio (dividend stocks or total market index fund), you will have exactly 90% of the portfolio left the next year. The stocks prices generally adjust to reflect the paid dividends.


The problem with a "dividend heavy" portfolio is that you may tilt your holdings to certain sectors and/or take undue business risks. There is no free lunch.

 

[target2019]

Will I be able to replace the $50K in dividend income by earning a minimum 10% return per year in a low cost index fund or ETF?

I point out that a dividend stock like MO is not returning 10% a year if you look at a performance measure.

You can prove this to yourself by listing the end of year balance, then add in the dividends you've taken. Do that for your investment period and you'll find that money has been lost over a 5-year period, and it is not just the dividends you've been taking. The stock price has fallen quite a bit.

 

[Chuckanut]

I have acquired a large number of shares of a Dividend King stock (company has been growing its dividends for over 51 consecutive years) over the last 23 years. The current dividend yield is around 8%.

I agree with those who are concerned you may have excess lack of diversification risk. It's the first thing that popped into my mind upon reading your original post.

If losing that dividend for whatever reason would negatively alter your quality of life, it's time to diversify. If you love dividends then diversify into other dividend stocks in other industries. Or look into mutual funds that invest with an eye towards dividend and interest payments. Wellesley is one possibility.

 

[Dash man]

It’s best not to use mutual funds in a taxable account to avoid those year end capital gains surprises. ETFs are more tax efficient. In retirement accounts it doesn’t matter.

 

[marko]

Like I said, it is mental accounting. If you spend 10% from your portfolio (dividend stocks or total market index fund), you will have exactly 90% of the portfolio left the next year. The stocks prices generally adjust to reflect the paid dividends.

True. But we have lived exclusively on dividends and cap gains (and SS) for 18 years now.

Despite the 'the price adjusted to reflect paid dividends', we've doubled the value of our portfolio over those 18 years.

Agree with more diversification, yet we have MO, XOM, ENB, IRM, T and others, mostly in small amounts. Less concerned with the volatility as long as the dividends keep coming in.

 

[W2R]

Would like to hear feedback from others on whether this is a good idea to rely on dividend income as part your retirement income.

When designing my retirement, I decided to take no more than 3.5% from my portfolio each year. I also decided to take no more than my dividend income from my portfolio each year. Yeah, that's a pretty conservative approach I suppose.

So anyway, whichever was smaller (3.5% or dividend income in my taxable accounts), that would be my maximum withdrawal that year. Most of my portfolio is in taxable accounts.

That seemed safe to me, and worked out well during that gap between ER and when my full "age 70 SS" and mini-pension kicked in. By now, I'm 74. For the past several years I have not withdrawn anything at all from my portfolio (except a very small amount for RMD's), because I had all I need/want. So, I'm letting that unused withdrawal money accumulate and grow inside my portfolio, in case some big expenses arise unexpectedly later on.