Is living off of dividends an illusion?

[JoelT1]

Hi, first-time poster with a timely question regarding retirement in the period of Coronavirus. I’m retired, with an IRA balance that just a few weeks ago prior to the virus panic and stock market decline was about $950,000 and which has since declined to about $750,000. My IRA is comprised of two funds: The Wellington and Wellesley funds, with a combined 60%/40% stock/bond ratio. My IRA currently generates about $6,000 in dividends quarterly, which have always been reinvested. My monthly expenses are about $2,000. My initial thought had been to *temporarily* not reinvest the dividends and use them toward paying my living expenses until the virus situation is over and the stock market, and my IRA balance, rebound. But, would I be doing long-term damage by not reinvesting dividends during this time when stock prices are lower? In the end, would temporarily diverting dividends for living expenses with the intent to bolster the IRA balance just be an illusion?

 

[freedomatlast]

Welcome JoelT1!

I retired about 8 months ago and have chosen to keep reinvesting the dividends, since I don't need them for income at this time. If I was still working, I would be dollar cost averaging into the market at this time to be buying more shares of stock at lower prices compared to 4 weeks ago. By reinvesting the dividends, I am betting that at some point in the future, maybe before the end of the year, stock prices will rebound and we'll get a nice return on those reinvested dividends.

 

[SumDay]

Welcome to the forum!

This is discussed frequently, and I also struggle with this. Last week, I actually decided to take my March/quarterly dividends from my Vanguard accounts, and on Monday I flipped everything back to reinvest.

Here's are a few recent discussions on the subject: https://www.early-retirement.org/forums/f28/reinvest-dividends-or-no-96043.html

https://www.early-retirement.org/forums/f28/aca-magi-living-off-of-dividends-vs-ltcg-101550.html

https://www.early-retirement.org/forums/f28/dividends-capital-gains-99579.html

Good luck to you. I've come to the conclusion there's no right or wrong answer. Like much with personal investing, it depends on your own personal preference and comfort level.

 

[bloom2708]

Yes. If you can live off a ~2% withdrawal rate you likely saved too much or are not spending enough. Or both.

 

[ERD50]

Something's missing (or I missed it).

If you are not taking the ~ $6,000 quarterly dividends now, how are you funding your $2,000/month expenses?

edit/add: If you have been reinvesteing, and your expenses are met from other sources, why in the world would you change now? As you say, you would be re-investing at lower prices, buying more shares. Assuming we eventually recover, that's a good thing, the holy grail of "buy low sell high". /edit

It's pretty common for people to use divs for their regular spending, though if you are taking them from an IRA they are taxes as regular income, and you might want to wait until RMDs force you. But that is very situational dependent, not everyone can wait.

At any rate, dividends themselves are not an 'illusion', they provide money that is every bit as real as any other money. I'd be very surprised if any service/goods provider didn't want your money if it came from dividends! Some people do assign some magical properties to dividends, but that seems to be outside your question.

-ERD50

 

[VFK57]

Welcome to the Forum JoelT1. There are two types of investors here: some sell as soon as bearish Market strikes and other keep their investments and live from stable income (bonds, CDs, RE etc). I belong to a second group and also did not sell on time and run into a horrible losses. However since the Feds moved to negative rates and resume QE to deal with the Covid-19 effects on economy, I plan to move from my 40/60 AA to 50/50 soon as stocks prices are on low side. Mostly I buy and keep individual dividends paying stocks.

 

[GravitySucks]

Reinvesting dividends. DCAing is how I got here and the divvies are all Ive used to buy so far in retirement. These times are why I have cash and bonds. Feels like selling low not to reinvest dividends right now.
But there's really no wrong answer.

 

[JoelT1]

Something's missing (or I missed it).

If you are not taking the ~ $6,000 quarterly dividends now, how are you funding your $2,000/month expenses?
-ERD50

I have been selling shares from my IRA monthly to pay for living expenses.

 

[ERD50]

I have been selling shares from my IRA monthly to pay for living expenses.

You are selling shares, and re-investing dividends (buying shares) at the same time? The only (slight) difference is timing, quarterly versus monthly. But it sounds crazy to me.

This makes no sense - you do see that, don't you (or did I totally miss something?)?

-ERD50

 

[JoelT1]

You are selling shares, and re-investing dividends (buying shares) at the same time? The only (slight) difference is timing, quarterly versus monthly. But it sounds crazy to me.

This makes no sense - you do see that, don't you (or did I totally miss something?)?

-ERD50

I have been selling shares in my IRA monthly for living expenses and reinvesting dividends that are generated quarterly. Doing so has enabled my IRA to sustain its balance and even grow it. Is this a bad technique?

 

[OldShooter]

You are selling shares, and re-investing dividends (buying shares) at the same time? The only (slight) difference is timing, quarterly versus monthly. But it sounds crazy to me.

This makes no sense - you do see that, don't you (or did I totally miss something?)?

-ERD50

It makes sense to me. Fewer transactions to deal with. OP just takes what he needs when he needs it and doesn't worry about the small stuff.

We do the same thing. All our divs are reinvested and we pay no attention. When we need some money, we sell something. I guess you could call it a total return approach.

That said, we haven't sold any equities for months. We are selling from the fixed income tranche.

 

[ownyourfuture]

If you were reinvesting the dividends when the Dow was at 29K, seems logical to keep reinvesting them when it's at 20.

 

[ERD50]

It makes sense to me. Fewer transactions to deal with. OP just takes what he needs when he needs it and doesn't worry about the small stuff.

We do the same thing. All our divs are reinvested and we pay no attention. When we need some money, we sell something. I guess you could call it a total return approach.

That said, we haven't sold any equities for months. We are selling from the fixed income tranche.

OK, I see where it might make sense in some cases if it simplifies transactions for you, but I took OP's question (and follow up quoted next...) to be about the investment itself.

I have been selling shares in my IRA monthly for living expenses and reinvesting dividends that are generated quarterly. Doing so has enabled my IRA to sustain its balance and even grow it. Is this a bad technique?

If you remove the same amount overall, I just don't see any difference between taking that amount in divs, or reinvesting the divs, and taking the amount in shares.

In one case you sell shares, then the divs re-buy them, no net change (other than gain/loss of the fund itself). In the other case, you take the divs, so there is no buy, but there is also no sell, so also no net change.

Do you see a difference?

-ERD50

 

[RetiredAt55.5]

You are selling shares, and re-investing dividends (buying shares) at the same time? The only (slight) difference is timing, quarterly versus monthly. But it sounds crazy to me.

This makes no sense - you do see that, don't you (or did I totally miss something?)?

-ERD50

Well, it would definitely be silly if this was a taxable account.

In a tax deferred account, it does give you more control over your taxable income (since you can't control the dividend amounts).

 

[JoelT1]

OK, I see where it might make sense in some cases if it simplifies transactions for you, but I took OP's question (and follow up quoted next...) to be about the investment itself.



If you remove the same amount overall, I just don't see any difference between taking that amount in divs, or reinvesting the divs, and taking the amount in shares.

In one case you sell shares, then the divs re-buy them, no net change (other than gain/loss of the fund itself). In the other case, you take the divs, so there is no buy, but there is also no sell, so also no net change.

Do you see a difference?

-ERD50

As the OP, just to clarify, my IRA is in a tax-deferred account. My technique has been to take monthly withdrawals (sell shares) from my Roth IRA for living expenses. I also have a traditional IRA and do annual conversions to my Roth, in preparation for RMDs in the future. I have been reinvesting dividends in both trad. & Roth IRAs, in addition to end-of-year capital gains. My annual living expenses are about $36,000; Annual dividends + capital gains have been about $24,000 + about $15,000 for a total of about $40,000 each year. Granted, we have been experiencing a major bull market but my IRA balance in the past few years since withdrawing from it has grown nicely. I checked with a Vanguard rep who didn’t see anything wrong with my approach.

 

[ERD50]

As the OP, just to clarify, my technique has been to take monthly withdrawals (sell shares) from my Roth IRA for living expenses. I also have a traditional IRA and do annual conversions to my Roth, in preparation for RMDs in the future. My IRAs are in tax-deferred accounts. I have been reinvesting dividends in both trad. & Roth IRAs, in addition to end-of-year capital gains. My annual living expenses are about $36,000; Annual dividends + capital gains have been about $24,000 + about $15,000 for a total of about $40,000 each year. Granted, we have been experiencing a major bull market but my IRA balance in the past few years since withdrawing from it has grown nicely. I checked with a Vanguard rep who didn’t see anything wrong with my approach.

OK, if your expenses are less than total annual divs + cap gains distributions, I now can see the rationale behind drawing a consistent $X/month, and reinvesting divs/distributions (wait, wasn't I told no one changes their mind on forums?).

But I still don't see why you would want to change that now. Isn't the difference between the two really minimal? You either invest some to replace what you sold, or you just don;t sell - 6/1 half dozen of the other?

-ERD50

 

[JoelT1]

OK, if your expenses are less than total annual divs + cap gains distributions, I now can see the rationale behind drawing a consistent $X/month, and reinvesting divs/distributions (wait, wasn't I told no one changes their mind on forums?).

But I still don't see why you would want to change that now. Isn't the difference between the two really minimal? You either invest some to replace what you sold, or you just don;t sell - 6/1 half dozen of the other?

-ERD50

Hi, thanks for your feedback. I thought *temporarily* taking dividends for living expenses during the virus and stock market panic would lessen depletion of my IRA balance from which I have been making monthly withdrawals (selling shares).

 

[ERD50]

Hi, thanks for your feedback. I thought *temporarily* taking dividends for living expenses during the virus and stock market panic would lessen depletion of my IRA balance from which I have been making monthly withdrawals (selling shares).

But aren't you taking out (approximately) the same amount either way? The timing would be slightly different, but none of this seems like it would be better/worse in any meaningful way?


-ERD50

 

[JoelT1]

But aren't you taking out (approximately) the same amount either way? The timing would be slightly different, but none of this seems like it would be better/worse in any meaningful way?


-ERD50

Point taken.

 

[GravitySucks]

I'm doing the same as OP.
It's in an IRA and no transaction fees. Don't see any problem.

 

[latexman]

Very interesting!

What about fees? A fee is charged each time a share is bought or sold. Wouldn't taking the divvy, stop the churn and it's fees.

 

[RunningBum]

Just make sure you don't own the same stock or fund in taxable, and sell it at a loss in the taxable account. The reinvested shares could result in a wash sale that you can never recover.

 

[DrRoy]

I have been using dividends as part of my spending since RE. In a small way, that held down my equity AA going in to this, plus I pulled out $ for home projects in Dec, and over 3 years reduced my AA from 63 to 58%.

 

[pb4uski]

It makes sense to me. Fewer transactions to deal with. OP just takes what he needs when he needs it and doesn't worry about the small stuff.

We do the same thing. All our divs are reinvested and we pay no attention. When we need some money, we sell something. I guess you could call it a total return approach.

That said, we haven't sold any equities for months. We are selling from the fixed income tranche.

+1 in an tIRA or a Roth... actually easier... stay the course Joel, it shouldn't make much of a difference.

If it were dividends on a taxable account then I'd take the cash but all my tIRAs and Roths are set to reinvest... then I have more control.

 

[OldShooter]

+1 in an tIRA or a Roth...

Yes. At this point in life, 100% of our investable assets are in IRAs or Roths, so one of my blind spots in these discussions is the tax aspects of decisions. Thanks for the point-out.