How to Account for Dividend Income: FireCalc?

[Kempotrader]

Hello!

It is unclear to me if I should include dividend income in the pension income section.

As of this moment, I will get get ~$51k in div inc annually and ~ 24k SS. So. ~75k of spending avail before I need to sell any assets.

I do not see any way to account for this other than to use the divs as pension income. Am I missing something?

Thanks!
(apologies if this is such a basic question)

kempo

 

[youbet]

Don't account for divs. Divs are included in investment returns by FireCalc.

 

[braumeister]

Don't account for divs. Divs are included in investment returns by FireCalc.

That is correct.

It can be quite helpful to carefully read the first page of FIRECalc and follow up with the more detailed "How It Works" section.

But feel free to ask questions here about anything.

 

[Kempotrader]

Don't account for divs. Divs are included in investment returns by FireCalc.

That is correct.

It can be quite helpful to carefully read the first page of FIRECalc and follow up with the more detailed "How It Works" section.

But feel free to ask questions here about anything.

Thanks. Ain't that a kick in the pants!

kempo

 

[mathjak107]

If you pulled money out of your portfolio , would you count that as additional income ?

No , it is a withdrawal from what you had invested so all you did is switch pockets .

Dividends are no different…

They are a withdrawal from your existing invested balance .

If you reinvest them you have your original balance working for you that you had


If you don’t and spend them , then at the ring of the bell markets are starting out their compounding on a lower balance
So the total return is what matters

 

[Kempotrader]

Thanks, mathjak107. It's finally sinking in on how look at that. What if my goal is to use the dividend income and then slowly sell off shares (thus decreasing dividend income) and hope to die on zero dollar day?

Trying to figure that out.

Kempo

 

[mathjak107]

Then portfolio value is the factor

 

[corn18]

Assume 0% real growth.

$1,000,000 portfolio paying 5% dividend

Year 1: $50,000 in dividends and a portfolio balance of $950,000
Year 2: $47,500 in dividends and a portfolio balance of $902,500
Year 3: $45,125 in dividends and a portfolio balance of $857,375
etc....

That's the same as having a $1,000,000 portfolio with zero dividends and withdrawing 5% each year.

Not sure why folks think their portfolio balance stays the same if they only take the dividends.

Firecalc uses total returns which include dividends.

 

[mathjak107]

Most do not understand dividends are not like interest .

There is a mandatory roll back when a stock goes ex div and just like with a mutual fund if you spend the dividend in effect you made a withdrawal…

They don’t get the fact it is not free money , it’s a deduction from what you had before the adjustment

 

[Kempotrader]

So, not arguing here, but just trying to understand:

Let's assume no dividends get cut or increased and 0% real growth (as above) and everything as above by corn18

Year 1: $50,000 in dividends
Year 2: $50,000 in dividends (Haven't sold any shares, so dividends remain the same)
Year 3: $50,000 in dividends (again no shares sold)
etc...

Portfolio value will fluctuate with the market and as dividends are paid, but the income does not change due to having the same number of shares

Realistically, some companies will go through rough times and cut divs and some will raise divs. It's not set it and forget it, but I can live with that.

What am I missing?

Thanks,
Kempo

 

[ERD50]

So, not arguing here, but just trying to understand:

Let's assume no dividends get cut or increased and 0% real growth (as above) and everything as above by corn18

Year 1: $50,000 in dividends
Year 2: $50,000 in dividends (Haven't sold any shares, so dividends remain the same)
Year 3: $50,000 in dividends (again no shares sold)
etc...

Portfolio value will fluctuate with the market and as dividends are paid, but the income does not change due to having the same number of shares

Realistically, some companies will go through rough times and cut divs and some will raise divs. It's not set it and forget it, but I can live with that.

What am I missing?

Thanks,
Kempo

What you are missing is that $50,000 dividends and the underlying stocks maintaining zero real growth is *not* zero real growth.

The $50,000 comes out of the value of the underlying stocks. So those stocks need to grow by $50,000 (plus inflation) to maintain zero growth.

Remember, dividends do not just appear out of nowhere. A dividend is the company handing you part of the value of its stock. The total worth of a stock you own is essentially the same before and after the dividend is paid. Before, that dividend was included in the value of the stock - after, you now have the dividend in your hand, and the stock doesn't. Same toal value to you, but the stock price is lower now - it just changed hands.

-ERD50

 

[SecondCor521]

What am I missing?

Thanks,
Kempo

ERD50's answer is correct.

A more immediate and simpler way to understand things is that FIREcalc includes the dividends already when figuring out how much your portfolio would have grown each year.

If you add the dividends as a separate income stream in addition to your portfolio size, you're double counting. Thus the results that FIREcalc gives you based on that double counting are going to be more optimistic than history would have been.

You can retire early based on analyses or assumptions that are rosier than the actual past, but you should understand the risk you're taking in doing so.

 

[corn18]

So, not arguing here, but just trying to understand:

Let's assume no dividends get cut or increased and 0% real growth (as above) and everything as above by corn18

Year 1: $50,000 in dividends
Year 2: $50,000 in dividends (Haven't sold any shares, so dividends remain the same)
Year 3: $50,000 in dividends (again no shares sold)
etc...

Portfolio value will fluctuate with the market and as dividends are paid, but the income does not change due to having the same number of shares

Realistically, some companies will go through rough times and cut divs and some will raise divs. It's not set it and forget it, but I can live with that.

What am I missing?

Thanks,
Kempo

You're right, dividends are paid per share not a percentage. I reran the numbers and assumed 0% real dividend growth (dividends just keeps up with inflation) and 0% real stock price (stock price just keeps up with inflation).

After 20 years, you are out of money. Just like withdrawing $50,000 each year. It's a distinction without a difference.

 

[RetiredHappy]

OTOH, if portfolio grows at 5% per year and dividend is 2% and you only withdraw on the dividends, your portfolio will still grow 3% a year and not run out of money. Let's say inflation is also at 3%, so your portfolio remains intact after decades.

 

[corn18]

OTOH, if portfolio grows at 5% per year and dividend is 2% and you only withdraw on the dividends, your portfolio will still grow 3% a year and not run out of money. Let's say inflation is also at 3%, so your portfolio remains intact after decades.

Again, it's a distinction without a difference. That's the same as 5% growth without dividends and withdrawing 2%.

 

[Kempotrader]

Thanks for the answers and guidance! I better understand how to look at my dividends.

Greatly appreciated!

 

[mathjak107]

Here is another illustration as to why a dividend is a wash without share price growth

you have 100 dollars in a stock paying a 10% dividend .

the stock goes ex div and a mandatory drop by the same amount has to happen before the stock trades , no different then a fund .


so you have 90 dollars left working for you for markets to work on and 10 dollars in hand .

great news , your stock doubled , they cured covid so you have 180 dollars invested .and 10 dollars in hand ...

so that is 190 dollars .


if instead of keeping the 10 dollars you reinvest it , you have more shares at a lower price which now equals the 100 dollars you had before the stock went ex div . if it doubles you have 200 dollars

if the stock didnt payout and still had the same 100 and it doubled you have the same 200 dollars .


there is no difference , its a wash,


here is at&t as an example

https://finance.yahoo.com/quote/T/history



on 4/12 it closed at 19.56 ... it paid a .278 cent dividend , the price was adjusted down to 19.28 ....

the stock opened at 19.12 which is the dividend less market action over night or after hours once it went ex div . .

so if you had 1000 shares you closed on 4/12 at 19,560 dollars .

the price was adjusted down to 19,280 dollars and you had the dividend in hand .

if instead of falling , markets doubled your stock price , you would have 38,560.00

if you reinvested you would have approx 39,120


if the stock never went ex div you would have no adjustment and the same 39,120 if it doubled.

of course while funds reinvest over night stocks usually lag so your reinvested price may vary a bit but the mechanics are the same .... for the most part its a wash reinvesting , you are only penalized if you dont reinvest so you have the same amount compounding for you.


anyone can create the same exact cash flow from non div payers or a portfolio

 

[Rianne]

That is correct.

It can be quite helpful to carefully read the first page of FIRECalc and follow up with the more detailed "How It Works" section.

But feel free to ask questions here about anything.

What if Bill, Betty, and Bob had used Firecalc? How would that have helped?