DIvidends

[ashtondav]

Hello

I have been reading these boards for some time now and am perplexed by the relatively few times dividends are mentioned.

I happen to live in the UK and here it is quite possible to find decent mutual funds and investment trusts, and even an ETF which have a dividend yield of 4%. In the UK you receive dividends free of any extra tax unless you earn over about $80,000. So a million dollar dividend fund would deliver $40,000 - with no extra tax to pay.

My question is why is there so much talk of 'selling' investments. Why not just live off the dividend income. I have done a preliminary analysis of the last 70 years in the UK and, over a 30 year period, total (but not, obviously, every year) dividend increases have always matched inflation and often exceeded it. There has never been a need to sell capital, as far as i can see.

Am i missing something? Or do you guys just not have so many high yielding shares

 

[FinanceDude]

Hello

I have been reading these boards for some time now and am perplexed by the relatively few times dividends are mentioned.

I happen to live in the UK and here it is quite possible to find decent mutual funds and investment trusts, and even an ETF which have a dividend yield of 4%. In the UK you receive dividends free of any extra tax unless you earn over about $80,000. So a million dollar dividend fund would deliver $40,000 - with no extra tax to pay.

My question is why is there so much talk of 'selling' investments. Why not just live off the dividend income. I have done a preliminary analysis of the last 70 years in the UK and, over a 30 year period, total (but not, obviously, every year) dividend increases have always matched inflation and often exceeded it. There has never been a need to sell capital, as far as i can see.

Am i missing something? Or do you guys just not have so many high yielding shares

Tax structure is different than UK here............

I have no problems finding yield..........but am more interested in growth at this time...........

Moderator edit: quote fix

 

[Nords]

Am i missing something? Or do you guys just not have so many high yielding shares

Other than the facts that dividend yields tend to be lower here and to not always rise with the rate of inflation, your strategy should work fine!

I'd be terrified to dig into principal, though...

 

[Zathras]

I myself like and use dividend investing.

Personally I like using large cap stable companies that have a good record of dividend growth. While there are quite a few, those stocks alone aren't very well diversified. So I don't want to put all my eggs in that basket.

Generally you can get better returns in other areas of the market. While the returns generally aren't there in many dividend stocks, it is a nice steady stream of income.
It is all a matter of your personal preferences and tax situation.

 

[astromeria]

When I pick a fund for an asset class, one of the factors I consider is dividends. And I sure love my REITs, which pay some of the best dividend (equivalents) in the US.

ashtondav, wanna share the names of your high-dividend funds/etfs with us? I'm still working on increasing the dividend/value tilt in my foreign funds.

 

[maddythebeagle]

In a taxable account, I would also look to harvest dividends and hang on to shares..makes sense..right now I reinvest dividends with the idea of taking more as income as I get to FIRE.

 

[FIRE'd@51]

I agree that dividends, and their growth, are an essential part of the FIRE equation. Living "well" seems to require an income stream that increases faster than inflation as meausured by the CPI. Real estate taxes, health care, country club dues, etc. all have been increasing faster than the CPI.

In addition, in taxable accounts, qualified dividends are treated the same way as long-term capital gains. This has encouraged companies to pay out more of their earnings in dividends. Since the 2003 tax cuts, the S&P 500 dividend has grown at better than 8% per year (better than 5% after inflation).

From 1960-2005, the S&P 500 dividend has grown nearly 1.3% over the rate of inflation. Only in the 70's did dividend growth not keep pace with inflation. Here is a table of the growth (after inflation) of the S&P 500 dividend.

Real Dividend Growth
1960 - 1970 1.9%
1970 - 1980 -1.0%
1980 - 1990 2.4%
1990 - 2000 0.3%
2000 - 2005 2.3%

The current yield on the S&P 500 is about 1.8%, so you would need about 56 times your annual expenses to employ this strategy just using an S&P 500 index fund, as opposed to 25 times with a 4% SWR. However, the larger the fraction of the SWR that comes from growing dividends, the more secure one should be.

 

[F M All]

Am I missing something here? As far as I am aware dividends are taxed in the UK. You state "no extra tax to pay", do you agree that the tax on dividends is 10% for lower rate tax payers? I believe this rises to 32.5% for higher rate payers (albeit lower than the ordinary income rate for these poor souls).

As for the dearth of dividend folk here - I'll let UncleMick and his two close friends respond.

 

[jazz4cash]

I'll agree with the general premise that dividend yield is widely overlooked here and in general.....I could never understand either especially after recent tax changes that favor dividend income over ordinary income for higher brackets....it's 15% I think.

 

[Meadbh]

Currently in Canada, income is taxed higher than dividends, which in turn are taxed higher than capital gains. The exact proportion depends on your province and marginal tax rates. Dividend income should definitely be part of the withdrawal mix.

 

[ashtondav]

Hi

I have no problems finding yield..........but am more interested in growth at this time...........

In the UK, from 1986 to 2006 (the period in which we have had a high yield index) high yield outperformed growth. Their lower growth in some years was massively outweighed by their much smaller losses in 2000, 2001 and 2002. Maybe it's different in the USA but over here value tends to outperform growth over the long term. The majority of our long term total return comes through the re-investment of dividends. For those of you who interested in poring over market facts here's a link to a UK analysis http://www.hedgeweek.com/download/2071/Barcap Equity Guilt Study 2006.pdf

do you agree that the tax on dividends is 10% for lower rate tax payers? I believe this rises to 32.5% for higher rate payers (albeit lower than the ordinary income rate for these poor souls).

Yes, that's right. But the yield quoted by the index, individual shares and mutual funds is after that 10% tax, because it's deducted before payment. So, after tax (for someone earning less than about $80,000) the yield on our main FTSE 100 index (the 100 largest companies in the UK) is 3.2% right now with a PE of about 12.5. If you trawl our largest 350 companies and simply take the 50% with the largest yields the overall (after tax) yield is 3.9%. On the other hand interest from banks and savings accounts is taxed at 20% for a low rate payer. Highest rates are about 5% so you net 4% - about the same as from a portfolio which can grow over time!!!

We would have real problems with your SWRs because, over the last 100 years, our market growth has lagged yours by about 2% per year. In addition our mutual funds are really expensive compared to yours. An active fund will charge about 2% a year and we even have trackers that charge 1% a year. We have about 2 funds that charge 0.2% a year and even our ETFs charge 0.4% a year.

ashtondav, wanna share the names of your high-dividend funds/etfs with us? I'm still working on increasing the dividend/value tilt in my foreign funds.

We have an ETF which tracks the largest dividend yielders of our largest companies. This has a forecast yield of about 4.5% (again for a UK basic rate taxpayer that's after tax of 10%). It's ticker is IUKD i think

We have several investment trusts currently yielding nearly 4% that have never cut their dividend in the last 25 years. Take a look at trustnet.

For more discussion on High Yielding share strategies you could sign up and look at the discussion boards of the UK Motley Fool site (It's all free over here ). In particular http://boards.fool.co.uk/Messages.asp?bid=51166 and you can link to a podcast here http://www.fool.co.uk/specials/2006/specials060908.htm?ref=foolwatch.

Unfortunately we have nowhere near as much discussion of early retirement in the UK. We probably earn too little, are taxed too much, have higher priced goods and have lower market returns . We don't have to worry quite so much about medical insurance, though . You probably get better treatment!

 

[maddythebeagle]

I'll agree with the general premise that dividend yield is widely overlooked here and in general.....I could never understand either especially after recent tax changes that favor dividend income over ordinary income for higher brackets....it's 15% I think.

I also think this board doesnt talk enough about the tastiness of beaver_cheese, but I dont think I would start a new thread on it questioning why we dont talk about it more...

 

[JackD]

I myself like and use dividend investing.

Personally I like using large cap stable companies that have a good record of dividend growth. While there are quite a few, those stocks alone aren't very well diversified. So I don't want to put all my eggs in that basket.

25 consecutive years of dividend growth

Reasonable diversification across industries that are likely to have sustainable earnings growth.

 

[JackD]

The current yield on the S&P 500 is about 1.8%, so you would need about 56 times your annual expenses to employ this strategy just using an S&P 500 index fund, as opposed to 25 times with a 4% SWR. However, the larger the fraction of the SWR that comes from growing dividends, the more secure one should be.

If you use one of the dividend ETF's that focuses on dividend growth, you start out with a higher yield and get greater dividend growth than the S&P.

 

[LOL!]

[...]
We have an ETF which tracks the largest dividend yielders of our largest companies. This has a forecast yield of about 4.5% (again for a UK basic rate taxpayer that's after tax of 10%). It's ticker is IUKD i think

[...]

I think there is plenty of talk about dividends around here. Stocks, mutual funds and ETFs supply plenty of dividends. We read here all the time about DVY (3.3% yield), PID (2.9%), and lots of Wisdom Tree ETFs with "dividend" in the name. DEB is a total European dividend fund. Those yields are not quite in your 4% range, but I'm sure searching a little bit could find you something.

Then there is BDJ which is an enhanced dividend achiever fund with yield of about 8%.

 

[trixs]

I personally only invest in dividend paying companies. I have always done individual stocks and some etfs with raising dividends. Really dont have to worry about it because everyyear my dividends go up 5-10% without any extra investment.

 

[astromeria]

Although I hold plenty of dividend-paying stocks (through funds), I am watching closely as there are lots of financial institutions in the mix. I wouldn't be buying bank stocks right now--in fact I sold BAC (Bank of America) from my husband's Roth last week. I shed a tear--beacause of BAC, my husband's Roth had pulled ahead of mine, and I like to treat him nice I orignally wanted to add VGSIX (REIT fund) to his Roth, but I'm rethinking that now. I would choose PID, but the rest of his Roth is already in EFV (foreign large-cap value). <Our Roths are small and only have 2 investments each.> Eh...maybe I'll give him some DODBX.

 

[mathjak107]

I personally only invest in dividend paying companies. I have always done individual stocks and some etfs with raising dividends. Really dont have to worry about it because everyyear my dividends go up 5-10% without any extra investment.

better hope the stock price climbs back up too.

dividends dont mean a thing if the stock price dosnt go up.

those high dividend paying dogs of the dow are still dogs from when i bought them 2 years ago. luckly i sold them before they dipped and that was last venture into individual stocks. only funds now

 

[Zathras]

I am sorry you had poor luck with the individual stock picking Math.
If you are going for a hold an grow portfolio of stocks, you can find plenty that grow as well as paying dividends.
My best is up 25% this year, worst is down %7. As these are holds though, the yearly bumps don't matter as long as the long term is there. Unless there is a major restructuring you will rarely see dividends cut. It does happen, but not often.
Just because some don't perform well, don't assume none perform well.

 

[FIRE'd@51]

dividends dont mean a thing if the stock price dosnt go up.

If the dividends continue to grow, eventually the stock price has to go up. Meanwhile it is a good place to have your money parked and really helps your SWR.

those high dividend paying dogs of the dow are still dogs from when i bought them 2 years ago. luckly i sold them before they dipped and that was last venture into individual stocks. only funds now

That's because a lot of those stocks don't have growing dividends. The ones that do have done pretty well.

 

[mathjak107]

actually the dividends are high because the 10 highest yielding dow stocks sucked in performance ,except for altria

 

[FIRE'd@51]

actually the dividends are high because the 10 highest yielding dow stocks sucked in performance ,except for altria

MO is a good example of a high-yielding stock that has had a growing dividend. That's why it has been a good performer.

 

[mathjak107]

the problem with high dividend paying stocks is sometimes the high dividend is based on the fact the share prices have dropped . now as i always say the paying of the dividend itself is a zero sum event as the stock price by exchange rules must be adjusted downward by the same amount. what makes a dividend paying stock a good thing is when you get the dividend and the stock recovers from the drop and goes higher.

if a dividend is payed and the stock dosnt recover from the drop then each dividend payment just throws your stock price deeper in the hole.

 

[FIRE'd@51]

the problem with high dividend paying stocks is sometimes the high dividend is based on the fact the share prices have dropped .

I think you are confusing the dividend with the dividend yield. The yield goes up when the price drops. When I say growing dividend, I mean the actual dividend is increased, not the yield.

 

[Zathras]

Math, while the stock price looks like it is adjusted on payout, very few of the large cap companies with good history of dividend growth ever have any trouble making up for that difference.

Look at the long term return for companies with 10+ years of solid dividend growth. Sure, you can find a loser (maybe) but most do exceptionally well.

And since I live on the dividends, I still have the same number of shares at the end of the year as I did when I started. The only problem is if the dividend doesn't grow as fast as inflation which is very rare. If it happens, I'll switch to another dividend paying stock.