Question about how much dividends fall during recesssions

[ER Eddie]

Hi folks. I currently fund my retirement, which began 8 months ago, with dividends and a small pension. As we potentially approach a recession, I'm wondering how my dividends will hold up.

I did some reading on the subject prior to retirement, and here's what I learned:

1. Dividends are much less volatile than stock prices. There seem to be several reasons for this: stock prices get detached from the underlying fundamentals of the economy through cycles of irrational exuberance and panic; cutting dividends is one of the last things a company wants to do, since it signals financial stress and reduced confidence in the business; and companies that pay dividends tend to be more mature and steady.

2. There have been 11 bear markets or recessions since WWII. Stocks dropped an average of 34% and dividends dropped an average of 0.5%. However, those figures are probably misleading, since they include two outliers -- the post-WWII recession, where dividends actually increased 46%, and the 2008-2009 recession, where dividends dropped 23%. The 2008-09 recession was considered an outlier because of the financial bailout, which "pressured nearly all strategically important financial institutions to reduce dividends substantially;" it was also statistically somewhat of an outlier, with all the other dividend drops being single digit.

If you take those two out, the overall dividend drop was 1.9%. If you just remove the WWII outlier and leave the 2008-2009 recession in the mix, the average dividend drop becomes 4.0%.

Here are those data:

https://www.simplysafedividends.com...-dividends-during-recessions-and-bear-markets

So I'm thinking I'm fairly safe. A 4% drop in dividend income wouldn't be a problem at all, and I could even weather a 20% drop without much trouble -- although I'd have to keep spending levels steady and forgo extravagant spending, which wouldn't be difficult.

Is there something I'm overlooking or not understanding?

To answer a possible question, I'm not specialized in one type of dividend stock. I'm an index fund investor, so my dividend-yielding stocks are just the usual ones that get lumped in with those.

Thanks in advance for any input. I'm just trying to assess how much dividends drop during a bear market or recession. I've read a little, but I'm not a financial whiz kid, so there may be something I've overlooked.

 

[pb4uski]

FWIW, companies typically try to keep dividends relatively stable... they are typically conservative in increasing them in good times which give them flexibility to defer reducing them in bad times.

Most companies view a dividend policy as an integral part of the corporate strategy. Management must decide on the dividend amount, timing, and various other factors that influence dividend payments. There are three types of dividend policies: a stable dividend policy, a constant dividend policy, and a residual dividend policy.

Stable Dividend Policy
Stable dividend policy is the easiest and most commonly used. The goal of the policy is steady and predictable dividend payouts each year, which is what most investors seek. Whether earnings are up or down, investors receive a dividend. The goal is to align the dividend policy with the long-term growth of the company rather than with quarterly earnings volatility. This approach gives the shareholder more certainty concerning the amount and timing of the dividend.

(emphasis added)

 

[bloom2708]

If you are only withdrawing ~2%, then your portfolio will outlive you.

Consider withdrawing in the 3 to 3.5% range of your portfolio. Dividends are not magical.

Your total return is what matters. Spend more now while you are able.

 

[ERD50]

Yes, I think you are overlooking something (though it may or may not change the end result).

I don't think the year-to-year change in divs, or changes over certain time periods is telling you enough. I think you want to look at annual divs over time. That table looks only at declines, what about the recovery? I'd want to know if they recovered after that 2009 drop, I don't see that info. But we know stock prices did recover. Compare those divs over time to inflation, is it keeping up?

Are you in a div paying fund (you mention indexes)? I would want to compare taking the divs only, versus what if I drew a similar amount form SPY or VTI - which would have me ahead at this point?

-ERD50

 

[target2019]

So I'm thinking I'm fairly safe. A 4% drop in dividend income wouldn't be a problem at all, and I could even weather a 20% drop without much trouble -- although I'd have to keep spending levels steady and forgo extravagant spending, which wouldn't be difficult.

Is there something I'm overlooking or not understanding?

To answer a possible question, I'm not specialized in one type of dividend stock. I'm an index fund investor, so my dividend-yielding stocks are just the usual ones that get lumped in with those.

Thanks in advance for any input. I'm just trying to assess how much dividends drop during a bear market or recession. I've read a little, but I'm not a financial whiz kid, so there may be something I've overlooked.

The growth of dividend is also important. We can expect that more dividend payers will hold the dividend rate and not grow it for several years more than you'd like. But I think you have to accept some of that as your companies scramble to cope with change.

 

[Sunset]

I think the OP is simply checking that should we end up in a prolonged recession, how will his cash flow look.

Myself, I've always figured the dividends would keep coming mostly unaffected, even while the stock prices plummeted to 50% of their original value. Thus I can look at my cash reserves and know that $X amount of cash does not need to be used, as the dividends will be coming in each year.

A Simple Pretend Example:
When a recession hits.

• My spending is $50K per year.
• I get $10K in dividends each year.
• So I only need $120K in cash reserves (not $150K) to live for 3 years while not selling stocks at a depressed price.

This simple example ignores the 2% drop in dividend value which would be $200 per year.

 

[Al18]

If you stick with the Dividend Aristocrats (stocks that have increased their dividend payouts for 25 consecutive years or more), you'll have the best chance of not seeing dividend payouts decrease.

 

[ERD50]

I think the OP is simply checking that should we end up in a prolonged recession, how will his cash flow look.

Myself, I've always figured the dividends would keep coming mostly unaffected, even while the stock prices plummeted to 50% of their original value. Thus I can look at my cash reserves and know that $X amount of cash does not need to be used, as the dividends will be coming in each year.

A Simple Pretend Example:
When a recession hits.

• My spending is $50K per year.
• I get $10K in dividends each year.
• So I only need $120K in cash reserves (not $150K) to live for 3 years while not selling stocks at a depressed price.

This simple example ignores the 2% drop in dividend value which would be $200 per year.

It could also be relatively stable fixed income (A Total Bond Fund/ETF for example), rather than cash. That would also keep you from selling off stocks in a down market.

But OP actually said they live off divs plus a small pension. I was curious, I downloaded some data, and tried to formulate a response, but it isn't really a math/data problem. It comes back around to the fact that it is just rather silly to think of divs as something different or magic, outside of total return. As has been said countless times, money is fungible.

If you are going to set your budget based on what these companies decide to set their divs at, well, then that's the end of it. You get what you get. But why ignore the market value of the underlying stocks?

FIRECalc shows us what happens historically using total return. I don't see any value at all to isolating the dividend stream from that. Money is fungible.

Remember that a dividend is in effect the company deciding to sell off a portion of their NAV and distributing it to you. It is no different than you selling a portion of that stock, except when you do it you have the flexibility of when and how much.

I prefer to be in control of my budget, not the BOD sitting around deciding how much of their company I get each year. This seems to me to be a problem of your own creation.

-ERD50

 

[ERD50]

If you stick with the Dividend Aristocrats (stocks that have increased their dividend payouts for 25 consecutive years or more), you'll have the best chance of not seeing dividend payouts decrease.

Do you have any data to back that up?

I've often seen people present rear-view mirror 'data' for this, which is no help going forward.

For example, go back 25 years to 1995, select the stocks that met that criteria in 1995 (not today - you didn't have that crystal ball in 1995!). How did they do in the next 25 years? What was their div performance, and most important (actually, the only thing of importance), what was their total return versus the Total Market?

-ERD50

 

[ER Eddie]

If you are only withdrawing ~2%, then your portfolio will outlive you.

Consider withdrawing in the 3 to 3.5% range of your portfolio. Dividends are not magical.

Your total return is what matters. Spend more now while you are able.

I understand. At this point, though -- 8 months into retirement and facing a recession -- I'm not in the mood to ramp up spending. I did try to do that in the first six months of retirement, with limited success. I prefer a simple lifestyle and don't need much to feel content, so spending lots of money doesn't come naturally to me. But otoh, I don't want to end up as the rich guy in the graveyard.

I think the OP is simply checking that should we end up in a prolonged recession, how will his cash flow look.

That's right. Just trying to figure out if my info is correct, so I can relax about RECESSION! WAAAAHHH!

Yes, I think you are overlooking something (though it may or may not change the end result).

I don't think the year-to-year change in divs, or changes over certain time periods is telling you enough. I think you want to look at annual divs over time. That table looks only at declines, what about the recovery? I'd want to know if they recovered after that 2009 drop, I don't see that info. But we know stock prices did recover. Compare those divs over time to inflation, is it keeping up?

I think so. That info is covered elsewhere in the article I linked. Here is one relevant graph:

 

[Sunset]

It could also be relatively stable fixed income (A Total Bond Fund/ETF for example), rather than cash. That would also keep you from selling off stocks in a down market.

But OP actually said they live off divs plus a small pension. I was curious, I downloaded some data, and tried to formulate a response, but it isn't really a math/data problem. It comes back around to the fact that it is just rather silly to think of divs as something different or magic, outside of total return. As has been said countless times, money is fungible.

If you are going to set your budget based on what these companies decide to set their divs at, well, then that's the end of it. You get what you get. But why ignore the market value of the underlying stocks?

FIRECalc shows us what happens historically using total return. I don't see any value at all to isolating the dividend stream from that. Money is fungible.

Remember that a dividend is in effect the company deciding to sell off a portion of their NAV and distributing it to you. It is no different than you selling a portion of that stock, except when you do it you have the flexibility of when and how much.

I prefer to be in control of my budget, not the BOD sitting around deciding how much of their company I get each year. This seems to me to be a problem of your own creation.

-ERD50

I used the term cash, but to me cash is really cash-like , so savings in savings account, CD's, and bond funds are my cash.

I agree a dividend is not magic, it's just part of the return.

But when the market drops a lot, it feels nice getting a return from stocks without having to sell at a big discount.

Sometimes it is hard to see the value in a non-dividend paying stock, example BRK.B as in the last 10 years, the lack of dividend has not been impressive.

And sometimes (I feel) paying out a dividend prevents the company from doing incredibly stupid things with the extra cash they would have on hand from not having a dividend, as there are not a lot of CEO's that can sit on a cash pile without dreaming up some use for it.

 

[ERD50]

...


I think so. That info is covered elsewhere in the article I linked. Here is one relevant graph:

Not sure what to make of that graph. What does a 25% drop in growth mean followed by some positive years? Hard for me to say.

Remember, a 50% drop in something followed by a 50% gain does not get you back to even. You are down at 75%:

$100 * 0.5 = $50
$50 * 1.5 = $75

you need a 100% increase after a 50% drop to get back to even.

-ERD50

 

[ER Eddie]

Not sure what to make of that graph. What does a 25% drop in growth mean followed by some positive years? Hard for me to say.

Remember, a 50% drop in something followed by a 50% gain does not get you back to even. You are down at 75%:

$100 * 0.5 = $50
$50 * 1.5 = $75

you need a 100% increase after a 50% drop to get back to even.

-ERD50

Hm, well if you're stumped, I'm stumped, too. All I can say is that a graph of the stock market over the same timeframe looks very similar, but with a much wider fluctuation. So I'd assume that if the stock market is doing okay over time, so are dividends.

https://www.simplysafedividends.com...-dividends-during-recessions-and-bear-markets

 

[ERD50]

I used the term cash, but to me cash is really cash-like , so savings in savings account, CD's, and bond funds are my cash.

I agree a dividend is not magic, it's just part of the return.

But when the market drops a lot, it feels nice getting a return from stocks without having to sell at a big discount. ....

Yes, but your cash/fixed keeps you from selling stocks as well. I really think this fear of selling stocks at a low is just a "feeling", there's really little/no merit to it for someone with a reasonably conservative WR and AA.

... Sometimes it is hard to see the value in a non-dividend paying stock, example BRK.B as in the last 10 years, the lack of dividend has not been impressive.

And sometimes (I feel) paying out a dividend prevents the company from doing incredibly stupid things with the extra cash they would have on hand from not having a dividend, as there are not a lot of CEO's that can sit on a cash pile without dreaming up some use for it.

For BRK, sure, any sector can be expected to vary from the Total Market. But going back to 1999, it has outperformed the S&P in total return.

I would imagine that back in 1999, stocks like T,GE and IBM would be considered safe dividend stocks? They have not done well at all. At this link, set the time bar to "ALL":

https://stockcharts.com/freecharts/perf.php?SPY,BRK/B,GE,T,IBM


-ERD50

 

[bloom2708]

First lowered dividend. Occidental. From 77 cents to 11 cents.

https://www.zerohedge.com/markets/it-begins-occidental-first-us-energy-major-slash-dividend-capex

 

[Sunset]

Yes, but your cash/fixed keeps you from selling stocks as well. I really think this fear of selling stocks at a low is just a "feeling", there's really little/no merit to it for someone with a reasonably conservative WR and AA.

....
-ERD50

My allocation is probably about 80% stock, so in my non-stock is cash that I can spend, and the dividends from some of my stock, mean I need less cash than if I had zero dividend paying stock.

 

[bloom2708]

You do know that taking the dividend out of an account is the same as selling shares and withdrawing? No difference at all. Except in taxable where tax is due on the dividend.

 

[ERD50]

My allocation is probably about 80% stock, so in my non-stock is cash that I can spend, and the dividends from some of my stock, mean I need less cash than if I had zero dividend paying stock.

That's true as stated, but lacks essential context, making it "magic".

If we don't assume dividends are magic (see bloom2798 next), then your other stocks, all else being equal in this hypothetical world, would be up in NAV by the amount of the dividends that would have been paid. So you could sell that amount yourself (instead of the company essentially selling them), and be right back in the same boat.

It only makes a difference if those divs are extra "magic money". If you can identify a diversified group of companies that offer a total return higher than average - well, that's what everyone is looking for right? If divs were the way to identify it, it would be easy, and we'd all be above average.

You do know that taking the dividend out of an account is the same as selling shares and withdrawing? No difference at all. Except in taxable where tax is due on the dividend.

+1

-ERD50

 

[ERD50]

OK, one more then I gotta run!

A "portfoliovisualizer" analysis:

I grabbed the top DIV funds from some 'best of' list, and took the first 4 that had longer time frames available (DEC2006). Put those in a portfolio, 20% weighing each, plus 20% to a bond fund. Using 4 to average out the results

The average divs appeared to be ~ 3.5%, so I used that as an inflation adjusted withdraw amount. Annual rebalance.

The comparison portfolio is SPY 80%, the same bond fund 20%.

So after taking 3.5% from each inflation adjusted, 14 years later, you each had the same amount to spend, and... the holder of the broad based SPY/bonds portfolio has significantly more money in his account.

1.547x original investment for SPY/bonds, versus 1.253x for the div/bonds

I like money. If I have more of it after pulling my spending, that's a good thing, right?

short link: http://bit.ly/2xrUuAK

edit/add: Also note, the SPY/bond portfolio did NOT dip as much as the div payers in 2008. The "conventional wisdom" (presented w/o data) is that div payers are more stable. Well.... no.

edit/add#2: To put this in another perspective... if you click "inflation adjusted" you'll see that after just 14 years, the extra funds in the SPY/bond portfolio would fund an additional 6 years of spending and any divs (SPY is ~ 2% bond fund ~ 3%) would not even need to be touched over those 6 years, and could be left to reinvest!

-ERD50

 

[target2019]

You do know that taking the dividend out of an account is the same as selling shares and withdrawing? No difference at all. Except in taxable where tax is due on the dividend.

Dividends are paid to my account, without reinvesting. Before and after the event I have the same number of shares. It is not the same as selling shares.

 

[ER Eddie]

Yeah, it's refraining from buying shares, which is different than selling them.

 

[steelyman]

First lowered dividend. Occidental. From 77 cents to 11 cents.

https://www.zerohedge.com/markets/it-begins-occidental-first-us-energy-major-slash-dividend-capex

That’s a pretty large cut. First I’ve heard, thanks for the update. I think the prior payout was 79 cents.

 

[ncbill]

ERD's results are what you also see on boglehead threads...versus a dividend strategy a total return approach always has a higher risk-adjusted return.

Most people pursuing a dividend strategy, especially high-yield don't seem to understand that their portfolio's risk is always going to be higher than a market portfolio.

 

[HarveyS]

Dividends, as bloom2708 accurately pointed out, don't always go up or stay the same. The SP500 12 month, real dividend in inflation-adjusted $ (to Jan 2020) dropped from $34.83 paid in 2008 to $26.76 in 2009. That's a 23% hair cut. I don't know which companies may have changed in the SP500 in 2009, but I believe the bulk of the reduction was due to dividend cuts by companies. By the end of 2012 the payout was above $35. The link has a table and a graph.
Source: SP500 and Robert Shiller
https://www.multpl.com/s-p-500-dividend/table/by-year

 

[ER Eddie]

OP here. I think my original question (am I accurately understanding the amount that dividends will drop during a recession) has been answered in the affirmative or at least not contradicted. That's reassuring, thank you.

The thread seems to have wandered into territory I'm not really tracking or interested in, so I'll let you ladies and gentlemen continue your perambulations while I take my hat and mosey out the door.