The Mystery of Spending Only Dividends Behavior

[retiredgeek]

Since you seem to know what isn't a portfolio optimized for total return, how about you enlighten us as to what is. Preferably with something to back it up with.

Indexed ETFs have all the winers and losers. So, by definition, statistically, it cant be optimized. It is going to perform the average, and never on the wining tail of a curve. I am sure ETF portfolios arent optimized. Thats all I m saying.

 

[RunningBum]

Indexed ETFs have all the winers and losers. So, by definition, statistically, it cant be optimized. It is going to perform the average, and never on the wining tail of a curve. I am sure ETF portfolios arent optimized. Thats all I m saying.

OK. You're a picker, not an indexer. Many of us have found we cannot pick, or hire pickers (buy a managed fund) that beats an index, so for us, an index is optimized. But that's another topic.

 

[youbet]

No crystal ball... but my view that is it most likely to be the same as the past.... similar over long periods of time... rather than different. I certainly see no reasonable basis for claiming that dividend payers will outperform since they have failed to outperform in the past.

Well my view is that the sectors rotate over time and I'm less sure than you that we'll see a repeat of the growth vs value performance of the past 20 years in the next 20 years. Sooooo....... let's meet back here in 20 years and if you're right, I'll gladly buy you a beer.

 

[OldShooter]

My english makes expressing myself harder. I was agreeing with you on total return vs dividend optimization being very different, and that some people are not aware of this. ...

Got it. Thanks for the clarification.

For the ETF vs Stock Picking discussion, I know this is a heated subject. My country has about 300 stocks and 150 reits. So, it is not that hard to be a stock picker and have returns way above the local market. Actually, we barely have ETFs. Maybe less than 5.

Now I am a US resident, I might have to change my mindset.

For the US the discussion is only heated when you get someone who isn't aware of the decades of data or, more often, someone whose income depends on making people believe that stock picking works.

The S&P "SPIVA" reports on US stock pickers have been published semiannually for almost two decades. When I look for them, I see many similar SPIVA reports for different overseas markets. You might find interesting reading if they have a report for your country. Maybe look here: https://us.spindices.com/spiva/#/

 

[OldShooter]

Indexed ETFs have all the winers and losers. So, by definition, statistically, it cant be optimized. It is going to perform the average, and never on the wining tail of a curve. I am sure ETF portfolios arent optimized. Thats all I m saying.

Since I have been using the phrase "optimized for total return" let me address this.

Maybe I should have referred to the "portfolio chosen for total return." Decades of data beginning in the mid-1960 or before, show that buying the total market portfolio will beat all but a small single-digit percentage of stock-picking mutual funds. Further, the data say that it is impossible to identify the market-beating players ahead of time, though they are obvious retrospectively/in the rear view mirror. The way Nobel prize winner Eugene Fama says it is this: "We have to buy the market portfolio."

So technically you are 100% correct. The portfolio itself is not optimized. Picking it, however, optimizes the buyers' probability of obtaining optimum results. Sorry for being a little sloppy with the words.

 

[RunningBum]

Since I have been using the phrase "optimized for total return" let me address this.

Maybe I should have referred to the "portfolio chosen for total return." Decades of data beginning in the mid-1960 or before, show that buying the total market portfolio will beat all but a small single-digit percentage of stock-picking mutual funds. Further, the data say that it is impossible to identify the market-beating players ahead of time, though they are obvious retrospectively/in the rear view mirror. The way Nobel prize winner Eugene Fama says it is this: "We have to buy the market portfolio."

So technically you are 100% correct. The portfolio itself is not optimized. Picking it, however, optimizes the buyers' probability of obtaining optimum results. Sorry for being a little sloppy with the words.

Or put another way, I consider my portfolio optimized for the best total return with the acceptable level of risk and diversification I want.

Trying to pick a few stocks or high flying mutual funds/ETFs does not meet that. I know that not going that way keeps me from getting the highest possible return, but the risk is too high.

A total market index and a high yield dividend index both do. The total index gives me the full diversity. The HY div index is not as broad, but probably has more stable stocks, so it has acceptable risk avoidance to me. If I believed that would give me the best total return I'd do it.

If I really wanted to fully optimize my total return, I wouldn't drag my portfolio down with bonds and CDs, but I like the risk reduction they bring too, and that I can pull from them in a bad market and not sell equities low.

 

[retiredgeek]

Since I have been using the phrase "optimized for total return" let me address this.

Maybe I should have referred to the "portfolio chosen for total return." Decades of data beginning in the mid-1960 or before, show that buying the total market portfolio will beat all but a small single-digit percentage of stock-picking mutual funds. Further, the data say that it is impossible to identify the market-beating players ahead of time, though they are obvious retrospectively/in the rear view mirror. The way Nobel prize winner Eugene Fama says it is this: "We have to buy the market portfolio."

So technically you are 100% correct. The portfolio itself is not optimized. Picking it, however, optimizes the buyers' probability of obtaining optimum results. Sorry for being a little sloppy with the words.

The vast majority of the actively managed funds (which we have a lot.. even more than stocks) in my country are consistently beaten by the market. So, it is not a surprise this is the same in US. It looks that, for some reason, when managing third party money, the "experts" are not so good.

 

[marko]

Yes, it is pretty much (with small caveat to follow) a moot point, and that is my point.

Some people keep trying to convince others that dividend paying stocks have advantages and characteristics that just don't stand up to scrutiny.




Well, if you like it, you like it! I hardly see any convenience factor. A balanced AA will provide most of a conservative WR with its somewhat lower dividends. I just have the divs deposited to that account, and I have an auto withdraw set up for $X,xxxx each month (an exact number, the same month after month unless I change it, known ahead of time, that I can plan on). If the balance is running low, I sell some of either/both Equity or Bond fund and rebalance at the same time. That's about once a year, I should be looking at least that often anyhow, so no real work.

And again (yes, this is beating a dead horse, but he keeps whimpering!) you will NOT be selling stocks at the worst possible moment! As I said, if stocks are down, you'll be selling from fixed. On average stocks are up, so on average it all works out anyhow.

Well, mine have grown in value, though I may have fewer shares. That's been shown in the graphs I linked. I'm having a little trouble assigning any importance to that. It's like saying ten $1 bills have more value than one $10 bill or vice versa? I don't pay my bills with 'shares', I pay with $.

Almost forgot the small caveat that others have mentioned - focusing on any subset of the market means you are less diversified. I'd bet that the higher-than-average div payers are concentrated in a few sectors. That may not be a big thing, but some day it might. I just can't see taking even that small risk, against the perceived advantages that just seem to be based on "I like", rather than anything tangible.

-ERD50

Ok. I'll take more more stab at it and I'll end it here.

More than anything it's a psychological thing for me. I have a number of monthly income streams and I simply VIEW monthly dividends as a piece of those streams.

At the same time, like those who prefer to stay with CDs, my portfolio is large enough that a certain level of inefficiency is ok with me. I'm not trying to wring every last dime out of it. I'm also not spending every dime of dividends...a portion does get reinvested (most years).

I do not consider myself a pure dividend investor; more of a hybrid approach. Most of my holdings are growth oriented but do pay dividends which are the dividends in question. As a result, despite my dividend withdrawals, my post-dividend growth over the past 15-20 years hovers around 6% annually.

So. As noted, I do appreciate the discussion and your inputs. Between you and audreyh1, you guys have taught me a lot and I'm a better investor for it! Sometimes I'm hard headed; sometimes I'm just stupid; but I do enjoy the discussion all along the way.

 

[ERD50]

....

So. As noted, I do appreciate the discussion and your inputs. Between you and audreyh1, you guys have taught me a lot and I'm a better investor for it! Sometimes I'm hard headed; sometimes I'm just stupid; but I do enjoy the discussion all along the way.

Thanks, and thanks for hanging in there. I know some people get frustrated with my persistence on some of these topics, but for me I like the challenge of trying to get a point across. Two reasons really - the first is, I'm a believer in the phrase that you don't really understand something until you can explain it to someone else. It forces you to get your thoughts together. Second, in that process, I sometimes find that what I thought was true isn't, and I learn something.

-ERD50

 

[marko]

I know some people get frustrated with my persistence on some of these topics, but for me I like the challenge of trying to get a point across.

-ERD50

We're alike in that regard!

Peace.

 

[pb4uski]

Well my view is that the sectors rotate over time and I'm less sure than you that we'll see a repeat of the growth vs value performance of the past 20 years in the next 20 years. Sooooo....... let's meet back here in 20 years and if you're right, I'll gladly buy you a beer.

Ok then, since you seem to think that they will not be similar in the long term like I do, which are you picking as the winner... growth or value?

 

[USGrant1962]

Thanks, and thanks for hanging in there. I know some people get frustrated with my persistence on some of these topics, but for me I like the challenge of trying to get a point across. Two reasons really - the first is, I'm a believer in the phrase that you don't really understand something until you can explain it to someone else. It forces you to get your thoughts together. Second, in that process, I sometimes find that what I thought was true isn't, and I learn something.

-ERD50

+1

 

[Mansderm]

I'm part of the mystery and can't explain it

A mystery to me too.... I wonder if some of it might be Depression era thinking... my grandmother would have been in the don't touch principal camp. My view is that if one has a well diversified portfolio and a sensible WR then there may be years that income (including stock appreciation or depreciation) will be less than withdrawals but those instances should be rare. IOW, in most years the portfolio would increase since average returns (say 6-7%) exceed average withdrawal rates (say 4%) but there will be that occasional "bad" year where the portfolio balance will decline (like 2018).

I'm 61, retired early, did not grow up in the great depression, but have told people for 30+ years, I feel like I did. At this point, I think its genetic. Both sides of family, German, poor, worked hard, saved and "don't touch principal." I've had a job since 6th grade and had a savings account. I began investing with dividend stocks, but then had a business with employees and retirement accounts run by financial planners. I always told the planner, "you need to do better than me, because I'm not an expert." I don't think they ever beat my mix of dividend stocks in my personal investment account that I managed myself. Once I got out of the business, I managed my own investments and retirement accts. So now, comfortable, I still want to exist on the dividends and not get into principal. I have days where I aim not to spend any money. Why? I just think it's in the genes. I can't see spending money just to spend money because " you have it, you earned it, you deserve it, you need to live more, you need to do more, etc. " I raised my 2 sons who never "wanted or needed" anything and they are the same way. They invest in dividend stocks and some tech stocks. If they need extra money, they try to stick to the dividends and save more to meet the goal. I never said to them or heard from my ancestors " don't touch the principal" but its definitely part of our mindset. I can't otherwise explain it.

 

[TunaJoker]

Depends on Family

How you spend down your retirement nest egg, to me, depends on what your family makeup is.

1) If you are single create a chart to withdraw enough every year to have 1 cent left at age 101.

2) If you have a spouse you care about but no children/important others you would leave money to, take out, depending on insurance: an amount leaving him/her enough for financial independence if you exit first.
3) If you have spouse and children you want to leave something to: Take out interest/dividends only plus additions for unexpected expenses, and leave an estate that they can grow.
4) If you don't care about your spouse, children, others. revert back to 1)


I like what my parents did: I have saved a nice nest egg and am in my mid 60s. I'm retired, I have 2 other siblings in their 60s, yet my parents (dad is 94, mom is 90) started gifting the max IRS gift (currently $15,000 per sibling) when dad was 85. My parents aren't extremely wealthy (currently net worth about 900K.) yet they wanted us to enjoy their estate before they passed. What gratitude they have received. For example I was able to help my son pay for his college with their gift. My sister went back to school at 59. My other brother, who has had problems, but has worked constantly for years, was able to pay his rent for each year and maintain a moderate lifestyle. Basically the amount they gifted was their dividends/interest on their monies. But as dad and mom has said; at their age they don't do much due to old age complications and don't want to do much but stay home and enjoy the great grand kids. I might add they do have some pensions that helps their daily expenses.

I guess what I'm trying to say is if you have others that you want to remember in your will, and they are responsible, give gifts they will remember you for now, and you will see the fruits before you pass.

Caveat: Don't give to a significant person that is on drugs, a bum, or just expecting a handout cause you have it and they don't. To much to go into here but you will regret it, if it's a relation to you. They don't appreciate it but expect it. If you stop payments they will hate you forever.

 

[JJpop]

Caution

A person retiring now might want to proceed with caution.As always after a good long run with stocks,people assume they will provide a good return going forward.I know I will get a 7 pct return the next 10 to 20 years.....Really?When I see a lot of comments about CDs and bonds are just holding me back I know it is time to worry.
As far as living off dividends,if it works for you no problem.

 

[Oz investor]

A person retiring now might want to proceed with caution.As always after a good long run with stocks,people assume they will provide a good return going forward.I know I will get a 7 pct return the next 10 to 20 years.....Really?When I see a lot of comments about CDs and bonds are just holding me back I know it is time to worry.
As far as living off dividends,if it works for you no problem.

do i have concerns about my future income ?

ABSOLUTELY

there is a chance of a market meltdown ( some companies won't make enough profit to pay dividends , while others will withhold the dividends so they can look for acquisitions or reduce any debt )

there is also a chance of runaway inflation where div. returns will fall behind rising costs .

hopefully i have a successful plan adjustment ready for each scenario when needed

if an annuity-style income was so easy to do , nobody would pay a fund manager to create annuities for them