Total Return Strategy vs. Income and Dividend Strategy for a Nestegg

[mathjak107]

Quote:

Originally Posted by Gone4Good +1 There's no evidence high dividend paying stocks, or stocks paying any dividend at all, perform better than any other stock on average. So all else being equal, it's total returns that matter. It doesn't matter how those returns arrive, either through dividends or capital gains, just so long as they arrive. One area that matters a great deal, though, is whether the income constraint imposes more discipline on the retiree. It's easy for a total return investor to say "Hell, I can pull 4% real out of my portfolio forever" and hope for the best. If you have to generate your spending needs from dividends and interest you may come to the conclusion that you can't spend 4% because it's hard to get that kind of income from most stock / bond portfolios in this market. On the other hand, trying to generate 4% income could cause some folks to build risky, high income, death machine portfolios (like that guy several years back who was going to live off High Yield Bond fund distributions or folks who loaded up on the juicy yields of the big banks pre-2008.) In that case, you'd be better off going the total return route with a more traditional asset allocation.

exactly my view . in the end it is all about your total return .

as an example a 6% total return does not care if it is 2% dividends and 4% appreciation or 6% appreciation .

income can be the same in either case .

[marko]

Quote:

Originally Posted by audreyh1 Because they were 100% stocks? What if they were 50% bonds? Wouldn't they just sell some from their bond funds if they needed cash for withdrawals or rebalance the portfolio?

My false assumption was that a total return investor didn't set aside dividends but mostly/always reinvested them and, when cash was needed that the equities/bonds would be sold vs banked dividends.

[mathjak107]

it amounts to the same thing in the end for the most part .

there are study's that show if tax advantaged reinvesting the dividends and letting them grow while spending lesser producing assets can have a tiny advantage but in the end it is really just a question of which pockets you want to spend from .

[audreyh1]

Quote:

Originally Posted by marko My false assumption was that a total return investor didn't set aside dividends but mostly/always reinvested them and, when cash was needed that the equities/bonds would be sold vs banked dividends.

Even with that assumption (reinvesting all dividends), what would such an investor sell after a big equity market drop to fund a withdrawal? - from their bond funds.

[mathjak107]

it is amazing how even being 100% equity's and spending directly from that 100% resulted in excellent success rates .

the bigger up years from the higher allocation cushion the down years more then smaller allocations.

i cant imagine doing it in retirement but the facts say you would have been good to go as is .

drawing equally from the pie regardless if markets are up or down has worked just as well as a little bucket system has which uses cash first , then bonds .

spending cash first then bonds makes my mind happier but in dollars and cents really does not do much over spending equally from all your assets whether up or down .

[marko]

Quote:

Originally Posted by mathjak107 it is amazing how even being 100% equity's and spending directly from that 100% resulted in excellent success rates . the bigger up years from the higher allocation cushion the down years more then smaller allocations. i cant imagine doing it in retirement but the facts say you would have been good to go as is . drawing equally from the pie regardless if markets are up or down has worked just as well as a little bucket system has which uses cash first , then bonds .

It sounds like you're saying that it doesn't really matter a whole lot which path you choose.

[mathjak107]

yep , study after study pretty much concludes that . some rides mentally are just easier .

spending cash first , then bonds , then equity's seems to ease the mind more then systematic withdrawals equally from the pie in down markets but in the end they are pretty much just switching pockets .

[marko]

Quote:

Originally Posted by mathjak107 yep , study after study pretty much concludes that . some rides mentally are just easier . spending cash first , then bonds , then equity's seems to ease the mind more then systematic withdrawals equally from the pie in down markets but in the end they are pretty much just switching pockets .

Your comment makes my ride mentally easier!

[Gone4Good]

Quote:

Originally Posted by audreyh1 Even with that assumption (reinvesting all dividends), what would such an investor sell after a big equity market drop to fund a withdrawal? - from their bond funds.

Yup. Even just for rebalancing purposes you'd want to spend from your over-allocated asset class which, after a big market drop, wouldn't be equities.

[GTFan]

Quote:

Originally Posted by marko Right! I came from a "whatever you do, never ever touch the principle" family so I already have a certain predisposition.

With your income from divs and SS, that's pretty easy to do. Kind of hard to relate that to those that haven't gotten there yet and don't have pensions to live on. I know that I could easily live on divs and SS, for example, but I'm 13+ years from that age.

Selling is going to be a part of the strategy, in other words, as a bridge to that end. But that's always been part of the plan so why should I or anyone else doing TR be worried about it? That's why we all ran FireCalc, Fido RIP etc. and are willing to adjust expenses to meet market conditions.

But nothing is ever guaranteed, including divs and SS.

[sanfanciscotreat]

Quote:

Originally Posted by mathjak107 exactly my view . in the end it is all about your total return . as an example a 6% total return does not care if it is 2% dividends and 4% appreciation or 6% appreciation . income can be the same in either case .

After tax net will not be the same in most cases unless all dividends are qualified.

[mickeyd]

I've always considered myself as a TR guy because I was always looking to the long term. A good part of my AA is in tax-deferred funds so RMD is where I am required to look as I just exchanged my IRA TSM for my taxable STB (less tax) and I look to see how many (few?) shares I was required to sell to meet the requirement.

[mathjak107]

Quote:

Originally Posted by sanfanciscotreat After tax net will not be the same in most cases unless all dividends are qualified.

even in a taxable account it will work out pretty close at the end . you may double pay taxes on dividends reinvested if you sell other assets but your cost basis will be that much higher in the asset you reinvested in and the taxes lower in the asset you sold off some of , since you no longer owe on that asset . . . you may be in a lower tax bracket now so it may be a good thing .

it is no different then tax loss harvesting would be . in some cases better then other cases .

so while yes there is a 2x tax you have to follow it through down the road .

[Markola]

+1 on Total Return strategy given that investors face a natural trade-off of yield versus growth. Part of the game is income but the other part is staying ahead of inflation.


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[Mulligan]

Quote:

Originally Posted by Markola +1 on Total Return strategy given that investors face a natural trade-off of yield versus growth. Part of the game is income but the other part is staying ahead of inflation. Sent from my iPad using Early Retirement Forum

While most people here I assume consider income to be dividends from higher paying commons, CDs, and bond funds, there is a subset of investors truly invested solely for income. I feel for them because many have had their head handed to them in capital losses stretching for yield in debt/preferred issues of Mreits, Hospitality Reits, shippers, and energy.
I reviewed the thread which started a ways back. I noticed a March post where I was 40% utility preferred. Im up to almost 80% now. Though I am mostly income invested, not stretching for yield has kept my head on my neck and very profitable the past 2 years since I started this. 500 basis points above present inflation with investment grade issues is good enough for me.


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[clifp]

Quote:

Originally Posted by Mulligan While most people here I assume consider income to be dividends from higher paying commons, CDs, and bond funds, there is a subset of investors truly invested solely for income. I feel for them because many have had their head handed to them in capital losses stretching for yield in debt/preferred issues of Mreits, Hospitality Reits, shippers, and energy. I reviewed the thread which started a ways back. I noticed a March post where I was 40% utility preferred. Im up to almost 80% now. Though I am mostly income invested, not stretching for yield has kept my head on my neck and very profitable the past 2 years since I started this. 500 basis points above present inflation with investment grade issues is good enough for me. Sent from my iPad using Tapatalk

Last year was pretty ugly for dividend investors. Although the M* dividend investor newsletter barely beat the S&P 500. I certainly didn't, although I haven't really calculated my performance in detail.

On the other hand, with the notable exception of KMI none of my stocks cut their dividends, in fact almost all increased their payouts. So the market correction doesn't bother me.

[mathjak107]

so the fact your investment may fall 40% but you get a dividend makes it ok ? ? not in my book

[marko]

Quote:

Originally Posted by mathjak107 so the fact your investment may fall 40% but you get a dividend makes it ok ? ? not in my book

You surprise me mathjak!

No one thinks it's ok to lose any money on their investments, but gains and losses are a fact of investing with a long term trend in looking at gains. One step backward, two steps forward.

While not pleasant, getting paid a dividend while you wait for your investment to get back to parity and then on to an eventual gain at least takes the sting off of the wait.

Many/most here rely on equities that pay dividends to create a 'paycheck'. The stock's monthly/annual value is of less importance than getting a fairly reliable/predictable paycheck every quarter or so without the stress of having to sell that equity in down times like now.

But you know that.

Now, I expect that you'll come back saying that the dividends only reduce the price of the equity; that you're actually eating into your own value (or however you have clearly explained it before) and that's true, but IMHO a dividend provides a regular and predictable income stream without trying to figure out market timing.

I think a lot of us are finding solace in getting that paycheck knowing that over time we'll get our investment back.

[mathjak107]

but that premise is false . all they pay out does is reduce the stock price by the same amount . there is no advantage at all in a down market .

all that counts is the dollars compounded on over each quarter not number of shares or anything else ..

giving you a 2% dividend and dropping the share price 2% leaves you no better off . there is no such thing as being paid to wait . your dollars invested are the same both before and after for the most part if you reinvest or you have less dollars compounding at the opening bell over the next quarter if you don't . .

it is not like rebalancing or adding more money where you are actually altering the dollars invested in your allocation .

just pulling the same 2% out of a portfolio would be the same thing regardless of dividends .

paid to wait does not exist . you are switching the money from one pocket to th other and are just as down .

[marko]

Quote:

Originally Posted by mathjak107 but that premise is false . all they pay out does is reduce the stock price by the same amount . there is no advantage at all in a down market . just pulling the same 2% out of a portfolio would be the same thing regardless of dividends . paid to wait does not exist . you are switching the money from one pocket to th other and are just as down .

Understood.

Question, not a challenge:
I haven't run any numbers (and I'm a self avowed math illiterate) but wouldn't selling SHARES that are down 40% in order to achieve an income of $X be worse than getting the same dollars in dividends and keeping those shares intact, knowing/hoping that those shares will be worth more in the future?
I expect you're going to say 'the same'.