The Mystery of Spending Only Dividends Behavior

[NW-Bound]

Companies with a higher dividend yield than that of the market tend to be stodgy companies. Their share prices are usually less volatile than that of the growth companies, and some people prefer that stability.

 

[Ronnieboy]

If you want to "live of the dividends" then you will need to accumulate more than if you live off the total return of investments. Accumulating enough to do that is in a way at odds with retiring early-it will delay your ability to retire, by definition.

I don't see why you would need to accumulate more to live off dividends.

If you have $1m and need 4% withdrawal to fund your $40k year in retirement you would still only need $1m if you are generating a 4% dividend.

 

[NW-Bound]

I don't see why you would need to accumulate more to live off dividends.

If you have $1m and need 4% withdrawal to fund your $40k year in retirement you would still only need $1m if you are generating a 4% dividend.

The total market is paying only a bit more than 2%. In order to get 4%, you have to be concentrated in companies that pay high dividends, and that increases the risk.

If you want to stay diversified and still live off only dividends, then you need twice the investment.

 

[Dash man]

I don't see why you would need to accumulate more to live off dividends.



If you have $1m and need 4% withdrawal to fund your $40k year in retirement you would still only need $1m if you are generating a 4% dividend.

+1
We didn’t delay retirement at all. Some of our growth stocks were sold and funds were used to buy dividend stocks as we approached retirement.

 

[Dash man]

The total market is paying only a bit more than 2%. In order to get 4%, you have to be concentrated in companies that pay high dividends, and that increases the risk.



If you want to stay diversified and still live off only dividends, then you need twice the investment.

Not necessarily. You are only thinking of the dividend yield as related to today’s stock prices. Dividend stocks grow in value too, and dividend distribution grows. So a stock I invested in 15 years ago may have doubled or tripled in price, and the dividend distribution grew accordingly to keep the yield approximately the same. Many of my dividends are paying much more as related to my initial investment.

 

[Badger]

I think the charm of dividends is the pension-like, annuity-like aspect - The amount may go up and down a little, but you can predict the approximate amount and you get them periodically without you having to do anything - no selling of anything, or having to decide on anything. Automatic and hands-free. I like them for these reasons.

+1 The auto-pilot and annuity-like aspect is why I like them too. When dividends are about the same amount as our SS and small pensions there is enough to take care of our needs and wants without having to spend our retirement worrying about which bucket, stock, bond, or account to pull from or adjust. IF we want to spend more for something special then we can draw from our cash reserves that is constantly increasing from the unused dividends.


Since this works for us and since I don't have the financial background/expertise that many of you have and since the stocks and mutual funds have increased beyond our expectations and since we won't outlive our investments regardless then I don't need to make life any more confusing.



Cheers!

 

[marko]

Your share price/NAV dropped when that MF cap gain was paid out. That reduces the principal you had invested in that MF. It may not reduce the number of shares that you own of the MF, but it DOES reflect a reduction in the number of underlying company shares owned by the MF on your behalf. You would have to reinvest that cap gain distribution to stay even.

A capital gain distribution represents realized gains from company shares sold by the MF. If the MF didn't sell any shares they wouldn't have capital gains distributions. Now depending on inflows and outflows), the MF probably bought shares in another company from the proceeds. However, they are still required to distribute the capital gain to MF holders. So if you take that capital gain as income, you've spent some of your principal = gain from shares the MF sold. If you reinvest the cap gain distribution, you maintain your principal in that MF.

Thanks. Always appreciate you taking the time for me.

Yes. I know that. But dividends reduce the NAV as well. Despite the source of the money, I don't see the difference. Over time however, sometimes as soon as a month, the NAV returns to its original price.

The way I look at it, my principal is/was my starting balance way back 20 years ago and not only has it not gone down, it has tripled despite my spending dividends and CGs all that time. On top of that, with only a few exceptions, my year-over-year Dec balance has been greater than my previous Jan balance, again despite spending/setting aside my div/CGs.

I haven't sold a share in 20 years, my balance is a lot more than what I started with, and I've lived quite well just withdrawing dividends and CGs. Somewhere in there is the principal.

Maybe it's word play at the point, but to me, my principal has not been touched.

Again, however I always appreciate the help in trying to educated this thick head.

 

[TDub]

+1 The auto-pilot and annuity-like aspect is why I like them too. When dividends are about the same amount as our SS and small pensions there is enough to take care of our needs and wants without having to spend our retirement worrying about which bucket, stock, bond, or account to pull from or adjust. IF we want to spend more for something special then we can draw from our cash reserves that is constantly increasing from the unused dividends.


Since this works for us and since I don't have the financial background/expertise that many of you have and since the stocks and mutual funds have increased beyond our expectations and since we won't outlive our investments regardless then I don't need to make life any more confusing.



Cheers!

It’s comforting to know it really can be this simple. I’m all about keeping it simple, even if it means we leave some $ on the table (or rather, our strategy fails to be 100% optimized).

Half the time I read these threads my primary conclusion is, “I’ve so much reading to do...”

 

[OldShooter]

Not necessarily. You are only thinking of the dividend yield as related to today’s stock prices. Dividend stocks grow in value too, and dividend distribution grows. So a stock I invested in 15 years ago may have doubled or tripled in price, and the dividend distribution grew accordingly to keep the yield approximately the same. Many of my dividends are paying much more as related to my initial investment.

True enough, but there is a trap here:

A portfolio that is optimized for dividends is, almost by definition, not optimized for total return. So someone who is "not touching principal" but who is dividend-seeking is almost certainly touching his/her principal to the extent that it is not growing like it could/should.

A better strategy for a dividend-seeker would be to optimize the portfolio for total return then, if he/she prefers, draw and spend only whatever dividends ensue. Again, almost by definition, "dividend" mutual funds do not do this.

This trap is actually a problem for endowment funds that are limited to spending income only. Bad portfolio decisions can result. It is not just a problem for little guys.

 

[audreyh1]

Thanks. Always appreciate you taking the time for me.

Yes. I know that. But dividends reduce the NAV as well. Despite the source of the money, I don't see the difference. Over time however, sometimes as soon as a month, the NAV returns to its original price.

The way I look at it, my principal is/was my starting balance way back 20 years ago and not only has it not gone down, it has tripled despite my spending dividends and CGs all that time. On top of that, with only a few exceptions, my year-over-year Dec balance has been greater than my previous Jan balance, again despite spending/setting aside my div/CGs.

I haven't sold a share in 20 years, my balance is a lot more than what I started with, and I've lived quite well just withdrawing dividends and CGs. Somewhere in there is the principal.

Maybe it's word play at the point, but to me, my principal has not been touched.

Again, however I always appreciate the help in trying to educated this thick head.

For a thorough review you really should compare your remaining balance to inflation.

From inflationdata.com:

Total inflation from February 1999
to February 2019 is 53.66%
$1 after inflation is $1.54

So the remaining portfolio would have to grow 54% to actually break even after the last 20 years.

Otherwise the portfolio is shrinking in real terms. Which is not a problem as long as it is slow enough to last.

 

[OldShooter]

Checking a portfolio against inflation is, of course, the way to measure the purchasing power of a portfolio. But it IMO is not useful for evaluating portfolio performance because the results or lack thereof have no direct connection to inflation.

So in addition to looking at inflation as a sort of reality check, I think equity portfolios should be measured against total return of a broad index like the Russell 3000 or the ACWI. What history tells us is that it is relatively easy to get market returns (less a few bps) and nearly impossible to exceed market returns over a long period. So if the portfolio looks pretty good against a broad benchmark, regardless of whether it is ahead or behind inflation, that is about the best that can be done.

 

[audreyh1]

Marko has been harvesting dividends and capital gains distributions from his portfolio for 20 years. Comparing current value to the total return of a broad benchmark is not going to be useful to him. What might be useful is whether his portfolio is losing purchasing power.

 

[OldShooter]

Marko has been harvesting dividends and capital gains distributions from his portfolio for 20 years. Comparing current value to the total return of a broad benchmark is not going to be useful to him. What might be useful is whether his portfolio is losing purchasing power.

Well, the question is "useful for what?" To evaluate purchasing power, an inflation comparison is useful. But to evaluate portfolio performance, not so much. What if his portfolio has returned only about half of the Russell 3000? Seems like knowing this would also be "useful."

 

[deserat]

"My view is that only spending dividends/interest is a way to force those in a certain demographic to live within their means. We all know of too many situations where fortunes large and small were squandered by overspending."

Many people need physical or mental 'guardrails.' I know that if I have cash and there is a $100 or $50 bill I try very hard not to break it.....

The rules have changed and there is a bit more sophistication with regard to management of one's funds. One has to have an end goal in mind....if you wish to leave funds in perpetuity, then protection of principal becomes paramount - if you don't or that is not the primary constraint, then other means (i.e. touching principal) can be used for spending or resource allocation.

I'm not averse to the Depression era thinking as having that mindset can help one amass a nice little nest egg - and as they say, you will get what you've gotten if you keep doing what you've been doing....or the converse, to expect a different outcome with the same behavior or input is nuts....

 

[audreyh1]

Well, the question is "useful for what?" To evaluate purchasing power, an inflation comparison is useful. But to evaluate portfolio performance, not so much. What if his portfolio has returned only about half of the Russell 3000? Seems like knowing this would also be "useful."

I was simply pointing out to Marko that even though his portfolio has grown over the years in spite of his harvesting all dividends and capital gains distributions, it might not be keeping up with inflation and thus losing purchasing power.

Since he is harvesting dividends and capital gains it’s going to be tough to accurately compare it to some total return benchmark that reinvests everything.

 

[marko]

I was simply pointing out to Marko that even though his portfolio has grown over the years in spite of his harvesting all dividends and capital gains distributions, it might not be keeping up with inflation and thus losing purchasing power.

Since he is harvesting dividends and capital gains it’s going to be tough to accurately compare it to some total return benchmark that reinvests everything.

Right, and thanks.

My portfolio has tripled--almost quadrupled--over the past 20 years, despite distributions of dividends, interest and some CGs. Not all of those distributions are necessary to pay the bills and some does get reinvested or set aside for the occasional, unusual 'big year' of expenses.

To be fair, it is a sizable portfolio so I suppose it can sustain a certain level of inefficiencies. Also, at this point in my life, I just don't see how my continued current modus of dividend withdrawals will put anything to risk despite inflation or the net value of the overall portfolio. With 20 years to go (if I'm lucky) the 'money vs time left' analysis just doesn't come into play unless inflation were to go to Venezuela levels very soon.

But once again, thanks for the insight and kindness; I find your overall/general comments over time to be quite helpful.

 

[mickeyd]

I too am in Buffett’s camp. But only to the extent of a shareholder oriented company like Berkshire Hathaway. Each $ of earnings retained has returned more than a dollar. So far. A dollar in the company’s hands is better than one given out as a divvy.

It eventually comes down to trust (or lack of) that management will deploy earnings on your behalf. It’s rare. If not just outright selfishness, or lack of sensible capital deployment opportunities, there are lots of idiots in charge. Your money is simply not in good hands. A divvy is better than seeing your $ frittered away by mediocrity.

I do not limit myself to just BH. My index funds work well.

 

[Freedom56]

I think people are missing the point of the article. It’s not that dividends are bad, it’s that some people will spend ONLY their dividends.

There is nothing odd about what is discussed in the article. Many of us live on dividend/interest without touching our capital. Many people I know do the same and others I know that have many rental properties, live on rental income plus their interest income. In our case we have multiple income streams - A level income pension that covers all our expenses with a 20% margin, bond/CD interest income and qualified preferred share dividends, and deferred income in our retirement accounts that is re-invested. We use our bond interest and preferred share dividends to pay the excess income taxes due and the balance is a slush fund to pay for large ticket items or is re-invested. I retired in 2015 and my wife retired in 2010 and since our retirement we continued to grow our capital significantly in both our taxable and tax deferred accounts. When we hit our 60's, we plan to ramp up our spending even more.

 

[audreyh1]

Right, and thanks.

My portfolio has tripled--almost quadrupled--over the past 20 years, despite distributions of dividends, interest and some CGs. Not all of those distributions are necessary to pay the bills and some does get reinvested or set aside for the occasional, unusual 'big year' of expenses.

To be fair, it is a sizable portfolio so I suppose it can sustain a certain level of inefficiencies. Also, at this point in my life, I just don't see how my continued current modus of dividend withdrawals will put anything to risk despite inflation or the net value of the overall portfolio. With 20 years to go (if I'm lucky) the 'money vs time left' analysis just doesn't come into play unless inflation were to go to Venezuela levels very soon.

But once again, thanks for the insight and kindness; I find your overall/general comments over time to be quite helpful.

Well since it has almost quadrupled over 20 you are obviously well ahead of inflation.

 

[scrabbler1]

Well if you notice, bond and equity prices fall as a business deteriorates. GE was and is a widely held stock that many held for the dividend. The price fell and the dividend was cut. There are many other examples. Prices do matter in fact

In late 2008, bond fund prices fell because of the lack of demand for them. Nobody had any money to buy the underlying bonds. And back then, the monthly DPS was a lot higher than it is these days. Bond fund prices tend to work in an inverse relationship to interest rates. Thankfully, I have been able to buy more bond fund shares to compensate for the falling DPS, often using my gains on the stock side to buy those shares (i.e. rebalancing).

 

[scrabbler1]

I think the charm of dividends is the pension-like, annuity-like aspect - The amount may go up and down a little, but you can predict the approximate amount and you get them periodically without you having to do anything - no selling of anything, or having to decide on anything. Automatic and hands-free. I like them for these reasons.

I like this, too. Most of my finances are automated, from direct deposit of monthly and quarterly dividends to payments of my bills. This proved to be very useful when I was sick in 2015 and in the hospital for 12 days. Some bills came due and one of my quarterly stock fund dividends arrived in those 12 days. With everything on auto-pilot, I had nothing to worry about and didn't need anyone to access my account to make any payments.

 

[CRLLS]

I like this, too. Most of my finances are automated, from direct deposit of monthly and quarterly dividends to payments of my bills. This proved to be very useful when I was sick in 2015 and in the hospital for 12 days. Some bills came due and one of my quarterly stock fund dividends arrived in those 12 days. With everything on auto-pilot, I had nothing to worry about and didn't need anyone to access my account to make any payments.

I am not picking sides here. I am saying that deposit of dividends for paying bills is not the only way to get automated monthly payments. I have my Fidelity accounts set up to reinvest all dividends when paid and sell $x dollars of shares per month. This is transferred to my local checking account. I know exactly how much goes into it each month, down to the penny. Granted, it is from an IRA account so tax implications are a given.

Automatic monthly income is not limited strictly to dividends.

 

[scrabbler1]

I am not picking sides here. I am saying that deposit of dividends for paying bills is not the only way to get automated monthly payments. I have my Fidelity accounts set up to reinvest all dividends when paid and sell $x dollars of shares per month. This is transferred to my local checking account. I know exactly how much goes into it each month, down to the penny. Granted, it is from an IRA account so tax implications are a given.

Automatic monthly income is not limited strictly to dividends.

Another things which adds simplicity to using dividends and not selling shares is the ability to keep my tax return simple. Every time you sell shares, you trigger another somewhat annoying entry on Form 8949. Furthermore, if I make no redemptions/sales of any shares (in my taxable account), I can avoid Schedule D altogether. A few years ago, before the recent (screwy) tax law change, I made no redemptions and took the standard deduction, enabling me to switch to Form 1040A and end up with a very simple return. With the new tax law, making no redemptions can also save me from filing Schedule 1.

Dividends, whether taken as cash or reinvested, cause the same work on your tax return.

 

[MRSPOCK]

Living off Interest and Dividends

I am new to posting on this blog but have developed a system where my bonds , CDs and stocks allow me to live off interest and dividends along with my pension. Is there something wrong with this idea? I realize that CD rates may drop but as longs as i can get 2% returns on CDs and dividends I think I am ok. I invest in long term (10 year) CDs an short (2 year) CD ladders just in case we see high inflation again. I don't like risk.

 

[gwraigty]

I am new to posting on this blog but have developed a system where my bonds , CDs and stocks allow me to live off interest and dividends along with my pension. Is there something wrong with this idea? I realize that CD rates may drop but as longs as i can get 2% returns on CDs and dividends I think I am ok. I invest in long term (10 year) CDs an short (2 year) CD ladders just in case we see high inflation again. I don't like risk.

Hi and welcome!

There's nothing wrong with your idea at all. If you're not spending all the income and are able to continue investing the surplus, I see no reason why you shouldn't continue to profit from your system.