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Old 12-26-2013, 03:26 PM   #81
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Originally Posted by galeno View Post
We are total return investors. IMO and experience, "income investors" have smaller portfolios and have a need to "try and make a dollar out of 99 cents" because they need higher AWRs than their portfolios can naturally provide.

Here's a 10 stock "income portfolio" that generates an annual dividend yield of 70.2%. Just buy equal parts of: ANDC, BVZCY, CETV, CCMS, DGPIF, TFINQ, TRRU, TYOBY, UFGSY, and VLRDY.
Pretty sure my portfolio doesn't fall into your rather dismissive description. Well into 8 figures.
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Old 12-26-2013, 03:44 PM   #82
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I do not fit into either camp.

Up until the market crash in 2003, I invested for cap gains and saw my portfolio drop 40% even though I held a lot of cash as a hedge. Since then, I used a somewhat "barbell" approach. Many of my positions are stodgy dividend-paying stocks like utilities, telecoms, consumer staples, etc... These tend to be fairly stable (low beta), and I do not have to watch them much. The other portion, I used to time the market with economic sensitive stocks like basic material, technology, emerging markets, etc... These need watching. Oh, and then there are the occasional triple-leveraged ETFs too. The latter is like adding a bit of habanero to a dish.

PS. I am only well into the 7 figure, and still aspiring to see that 8th digit some day. Maybe I will live long enough to see it unless the market is going mad like the 1980-2000, then it can happen a lot sooner. Anyway, that 8th digit is something to look forward to, and a guy needs something to do when he's not traveling or taking naps.
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Old 12-26-2013, 03:47 PM   #83
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Dividends are one component of total return. I'm just lost as to how focusing on one component can be more helpful than looking at the entire picture. Maybe it's just my thick skull, but I just can't get over 'a dollar is a dollar'.

As far as the question you wrapped up there - do you increase your 3.5% WR to the new, higher portfolio amount, or stick to the initial 3.5% of $1M (plus inflation) - that's been discussed before, the answer is simple but takes longer to spell out than I have time for right now.

I fail to see how matching your spending to the divs of a group of stocks provides any more of 'answer' than anything else. It's just a number.

It would be interesting if FIRECalc, or some other tool provided a 'spend the divs' options, so we could do some historic comps. Lacking that, I'm reluctant to change horses.

I don't think anyone is 'not concerned' about selling in a down market. But I do think that many over rate the fear surrounding this. First off, if you have a conservative WR, let's say 3% - you are probably getting ~ 2% divs from your portfolio. So in any single year, you may be selling ~ 1% of your portfolio. So if it's down 30%, you have to sell 1.43% instead. It's not a huge amount, it's not like you are liquidating a third of your portfolio when it is down.

-ERD50
The reason to focus on dividends is they are the far more stable portion of the return component of equities and volatility is the enemy of the retiree....


The $37,700 spend for Irv in 2014, is not just a number it has two very important characteristics. First if you only spend your dividends and interest each year you will never run out of money, period. This is especially important for early retirees with potentially 40+ years in retirement.Even a 3.5% withdrawal rate has a 3% failure rate over 40+ year retirement.

Second the dividends are pretty stable and growing. There have been less than 10 cuts in the S&P dividends in the last 100 year or so. The 2009 cut of 19% was by far the largest on record (Depression cuts were in the single digits). Likewise since the 1930, there hasn't been a ten year period, where inflation adjusted dividends (i.e. real) haven't increased.

Now this isn't to say that there are some disadvantages. I tend to agree with SamClem, a dividend centric portfolio tends to get concentrated, in 2008 it was bank stocks, now it is energy, consumer defensive, and last centuries tech stocks. Also it tends to have a lower initial withdrawal rate, since typically dividend yields are under 4%. Although I think that it is good thing that a dividend growth portfolio has a yield of 3.2% today and had 5.5% back in Feb 2009.

Now the rest of my argument is primarily psychological and frankly doesn't really apply to the large number of forum members with healthy percentage of Vulcan blood. . Lots of total return forum members grimly held on to their stocks during the crises. In contrast, reviewing the forum threads most of us income investor/individual stock pickers were excited about blue chips with 4 and 5% yields and good quality REITs like O with almost 10% yields. (Although one of the best posts I ever made was laying out the case for buying Berkshire in March 2009 which doesn't yield anything.)

But in a nutshell focusing on yield makes it easier to not panic during a bear market and avoid selling at the bottom. Now if you realize that I am already getting 2% of my income from dividends so a bear market only selling a couple percentage then you are halfway there. I am not ready to not check my portfolio values as SamClem suggests but if I lost my internet for a month, it wouldn't be the first think I checked, because the portfolio value is less important than the income it generates.
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Old 12-26-2013, 04:04 PM   #84
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I don't pay a whole lot of attention to the dividends. Although now I am trying to get them down to make it less painful on ROTH conversions. Marginal rate with QD jumps quickly to 30% when other income (ROTH conversion) gets introduced -- even when your total is in a lower bracket. Just goes to show you that brackets often don't matter.
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Old 12-26-2013, 04:14 PM   #85
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...I am not ready to not check my portfolio values as SamClem suggests but I lost my internet for a month, it wouldn't be the first think I checked, because the portfolio value is less important than the income it generates.
I do not daytrade but check my portfolio several times a day when I have internet access, like at home. When I was up in my boonies home or RV'ing, I have had several days if not a week or two of internet black out (I would be also too busy with activities to think much about stocks).

Still, during these blackout periods, I often wondered if the market crashed and I did not know about it. And if it did, I thought I would still be able to comb through the ashes and found a few of those stodgy dividend-paying stocks still left smoldering. Oh, and I usually tried to clear out these 3x leveraged ETFs before travel too.
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Old 12-26-2013, 04:49 PM   #86
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The occasional Michael Milken does exist. That said, we'd be income investors too if we could live on less than $130K per year from our $10M port.

Since we need about $250K per year, we need to sell 1.2% of principal per year.

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Pretty sure my portfolio doesn't fall into your rather dismissive description. Well into 8 figures.
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Old 12-26-2013, 09:04 PM   #87
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For me, the question of income investing vs total return boils down to two things: (1) is the dividend causal? I.e. does the fact that a company pays a dividend result in it being more stable and profitable? Do dividends predict future returns for the company? As far as I can tell the answer is no as dividends don't appear in predictive models (e.g. Fama/French) except as they are correlated to value.
For me, it all boils down to the fact that, because many dividend payers don't fluctuate their dividends much (since many dividend payers aren't paying out 100% of cash flow/profits each year), I'm not as directly impacted by the portfolio value changes - both gains and losses.

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(2) How do you amass a large dividend portfolio (outside of retirement accounts) during the accumulation phase without losing substantial amounts to taxes every year?
I can't answer that without involving my retirement accounts. Despite my love affair with dividends, I do have a large amount of my overall portfolio in capital growth-based securities (mostly foreign funds/ETFs) which have low enough yields to not put me in the poor house paying taxes each year on them.

My current cut-off regarding dividend paying holdings:

Qualified Dividends - if the yield is roughly less than 3%, then it's held in my taxable account. Any qualified dividend payer yielding more than that, goes to tax-deferred.

Non-qualified Dividends/interest - if the yield on a non-qualified dividend holding is roughly less than 1.5%, then it's held in my taxable account.

Foreign Taxes - as noted in my post in the other thread, I have 2 spreadsheet tables set up to compare which of 2 investments should be held in which account, depending on what % of the dividend is qualified, as well as what % foreign taxes are withheld. Generally, if the foreign taxes are 15% or more, it's held in my taxable.

Payment-in-kind shares - All holdings that issue shares in lieu of dividends are held in taxable (since they typically aren't taxed until you sell the dividend shares). A rare few stocks offer this, along with a few preferreds.

Tax-free distributions - There are a few piles of ashes (laughingly referred to as mortgage/finance REITs) left over from the 2008/2009 meltdown and are slowly trying to regrow from the disaster and (sometimes) reverse splits they did to try and barely tread water. Names like RAS and SFI. The "good" thing is that they are allowed to use their MASSIVE carryover losses to offset future profits. That means not only their common, but their preferreds as well, have distributions that are considered to be return-of-capital and non-taxable, since they don't have any taxable income with their carryover losses (and IRS regulations state that a REIT/mREIT must distribute at least 90% of it's taxable income each year....if they have no taxable income, it's considered a return of capital). And their preferreds have coupons of 8%-9%, and trade slightly under par - meaning you can pick up a preferred yielding 9% TAX FREE (with reduction in capital with each dividend payment).

MLPs - Somewhat related to the previous paragraph, these are more common/mainstream ones, which allow you to reinvest distributions this year without much of a tax-hit now, and then realize a capital gain later on when you sell it (in a lower income tax bracket).

Some new money I'll be freeing up in the next month or two will go almost all to Muni ETFs (for my taxable account holdings).

Overall, by including some preferreds and a majority of the business development companies, my overall gross portfolio yield for my taxable account is about 2.92%. if I factored in the effect of non-taxable MLP and other distributions, the net taxable effect is lower. And most of that is qualified dividends. So the tax hit isn't too unmanageable.

When I do retire, I'll simply reallocate the higher yielding qualified dividend payers to my taxable accounts to help provide more cash flow (while only being taxed max 15%) and keep the high non-qualified dividend payers in the tax-deferred.
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Old 12-27-2013, 07:02 AM   #88
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In Alberta (Canada) the max marg rate on divs is virtually the same as for cap gains(19%). This is the way it should be and makes one indifferent as to whether you get divs or realize cap gains. Taxes paid at the corp level serve to reduce those paid at the personal level such that total taxes are equal to what an individual would pay on other sourced income. At lower income levels the div tax credit mechanism actually allows you to get about $45k in divs without paying any tax. The cost base on my portfolio is so low in relation to current market, it is difficult to sell without big tax cost.
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Old 12-27-2013, 07:17 AM   #89
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Moorebonds -- thanks for your detailed explanation on how you keep tax hit manageable. My taxable portfolio is running about 2% (less if you include bonds) and even this little amount pains me. I don't think MLPs are for me but I will take a closer look at your foreign tax post.
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