Questions on Investing for Income

[Chuckanut]

I know we have a number of people here who favor high dividend stocks for income so I want to ask a few questions they might help with.

1. Have you found that the dividend approach tends to overweight you in value stocks as compared to the market as a whole?

2. Have you found that higher yielding stocks have, in the long run, provided about the same total return as lower yielding stocks?

 

[2017ish]

FYI, this is interesting, and quite timely, posted by Wade Pfau earlier today: Retirement Researcher Blog: Potential Dangers of Investing for Income

Looks at some of the risks of both bond and stock income investing.

 

[pb4uski]

I know we have a number of people here who favor high dividend stocks for income so I want to ask a few questions they might help with.

1. Have you found that the dividend approach tends to overweight you in value stocks as compared to the market as a whole?

2. Have you found that higher yielding stocks have, in the long run, provided about the same total return as lower yielding stocks?

The answer to the first question is probably yes. The iShares S&P 500 Value and Growth Index ETFs have yields of 2.23% and 1.67%, respectively so if you favor high dividend stocks your portfolio would likely have a value tilt. Also, dividend yield is one of the for factors used to split the S&P 500 between value and growth so there is an implicit link.

 

[nun]

The decreasing level of returns from portfolios with sensible amounts of risk just underlines that to bank on 4% return whether it's from an income or total return approach is itself increasingly risky. The drift of portfolios towards higher yielding bond and dividend funds has lots of danger. That's why I'm glad to have 50% of my ER income requirement covered by rental income. When US SS, UK state pension and my deferred annuity kick in the performance of my portfolio will be irrelevant as far as income generation goes as rental and those fixed sources will cover my needs.

Investment companies are obviously going to talk about strategies that use the products they sell and the video with the Vanguard analyst has lots of good information, but there are other options. I chose to buy a two family house and pay off the mortgage asap to reduce my need for income and so it would also generate net income every month. I also chose to voluntarily contribute to the UK's equivalent of SS. At the time many people thought I was stupid to pay an extra tax, but it's been a great "investment".

As ever diversification is important, and that doesn't mean just equities and bonds. FYI my AA is pretty simple, 32% Total Bond index, 21% total stock market index, 20% "psst", 11% international index, 6% TIAA-Traditional (deferred annuity), 5% bits and pieces of old REITs and emerging markets, 5% cash and I'd favour a total return approach to income as I'm an indexer at heart.

 

[W2R]

Like nun, I have tried to diversify my income sources as much as possible. I have paid off my house, I have a small pension, eventually I will claim SS, and then there are my dividends.

Like many here, I choose to get my dividends from funds rather than individual stocks, specifically 30% Wellesley and also some lesser dividends from my index funds. Wellesley has been a reasonably reliable source of income for me, and for others for many years. My spending has been more than covered by the dividends I receive, and I re-invest the capital gains.

Wellesley is managed by Wellington Management, est. 1928, with a good track record since then. So, they pretty much take care of both your points 1) and 2) for me. I never recommend more than 30% in any fund, even Wellesley.

 

[braumeister]

I'm OK with being overweight in value stocks. When I do projections, one of my underlying assumptions is that future portfolio earnings will exactly equal inflation. When I get a real return above that, I'm delighted, but I don't count on it.