Another Total Return vs. Income/Dividend Investing article

[UnrealizedPotential]

Without answering it directly, I look at it like this. One can buy almost pure dividend stocks that provide monthly income, but they are not always good for long term returns and can be lousy in that regard. The returns are in the dividends which you are either spending each month or reinvesting.

The other way is buying a stock or investment that has tremendous growth potential but pays very low or no dividends. Which one is better? I am not taking sides, but for myself I have both. I have some of each. Some of my needs require income and some require growth.

If one can find a property reit at a very low price you can have both, but one would have to be very lucky to find such a gem and the opportunity probably wouldn't last long and it would come with a lot of risk.

 

[JoelT1]

I'm pretty late to this post as I don't check this message board very often anymore.

Here is why I prefer investing for dividend income. Dividends are determined by individual companies. The people determining what amount of dividend can be paid out are paid professionals. Its their job to figure out how much money the company can distribute back to shareholders. They base their recommendations on current data, and they have an incentive (their jobs) to get it right.

IMHO, spending dividend income is much safer and much more logical than looking at past historical data on the S&P 500 and extrapolating from that into the future that taking 4% a year, or whatever, is safe. The fact is, there are many countries where taking 4% a year would not have worked. There is also the fact that the S&P 500 of the past, was composed of companies that may not even exist anymore. So, why would I base my withdrawal rate on companies that no longer even make up the S&P 500 today?

Investing for dividend income is not about picking stocks. It is not about tilting to value. The fact is you do not need to deviate from the total stock market at all. Investing for dividends is a withdrawal strategy, its not an investing strategy. All of my money could be in the etf, VT (Vanguard Total World Stock Index) and I can still be investing specifically for dividend income. Choosing to only spend the dividends is a withdrawal strategy.

I personally prefer to use the two etfs VYM and VYMI (Vanguard High Div Yield Indexes). I do this because it is the closest option available to what I want. What I want is a total world stock index like VT that excludes all non-dividend paying companies. I want to exclude them because if they are not paying a dividend then there is no point in me owning them.

I refuse to pay for non-dividend paying stocks in the same way that some people choose to only use one of those "ecologically sustainable" etfs. In other words, I am voting with my wallet for philosophical reasons. I see so many people on the internet hating on dividends and saying they are a tax waste. I completely disagree with these people. IMHO the entire reason to buy a stock is for the dividend income. If there is no dividend income I might as well be buying a baseball card or some kind of collectible.

Ok, I will now stop posting and wait for the inevitable stream of comments telling me I am wrong about everything. Which is why I don't bother reading hobbyist investing forums anymore. There is only one train of thought allowed. Basically investing has become just as toxic as politics. Just another thing to avoid discussing like the plague.

Are Vanguard and Fidelity hobbyists? Because, they advocate total return investing.

 

[Oz investor]

i prefer to invest for dividend returns BECAUSE

1 . i have no idea what the actual inflation rate is currently , all governments polish up the figures and therefore no guide on future inflation pressure

2. i will be strongly resisting drawing down on my portfolio , pay my bills

3. an increasing portfolio value is a pot of money my government will eventually attempt to tax , even if i don't crystallize those gains

i am no longer working so have plenty of time to watch and learn about the various stocks

total return if inflation rockets will still not be a winning strategy in many cases

(imo) TSR is just another catch phrase for investment managers to make their fund seem more attractive , i would rather a fund that can grow it's dividend return most years

 

[Montecfo]

I advocate total return investing. Any other approach which does not seek to maximize total return would appear to be less optimal. Why follow a strategy which does not attempt to maximize total return?

I am ok with people only spending the dividends and interest. In fact, I fall into that category in that withdrawals are less than dividends and interesr. But it is not a religious view for me, since I recognize money is fungible and stating which portion of your total return you have spent can be accurate only in a mental sense.

I do share the stated view that there is a prevailing insularity here when in it comes to investing approaches. Index investing could never have been discovered if folks were unwilling to analyze different approaches.

I view the insularity as part of the charm. I can't expect people "raised" on one approach to adopt another en masse.

Investment approaches cannot be "settled science" since science is never actually settled. And markets constantly change.

I admire the various viewpoints here because virtually everyone here is seeking or has achieved some measure of financial Independence. Doing so at least for most requires single-mindedness and determination that few possess. For that reason, I welcome this community's views on many topics.

 

[Closet_Gamer]

This is another one of those topics I find interesting and am personally conflicted on.

Like a lot of things, I think the current market circumstances may take a bit of the wind out of everyone's convictions.

Dividend investors because we are likely to take large dividend cuts from brand name companies that will make those income streams seem far less secure.

Total Return investors because if we do retest the depths of the lows and beyond, selling off part of the nest egg to fund living expense will feel/be much more painful. Particularly if fear drives a collapse in PE ratios and not just a downward pull of lower earnings themselves.

This will intersect with the myriad income annuity threads as people ponder their updated views of risk tolerance and the real meaning of secured income sources.

So, my personal un-analytic response to all of this is what I always do:
Try to take advantage of time and diversification.

Time:
I think most things in investing life are best done slowly & sustainably. I have set a completely passive dividend/interest income goal that I'm am slowly and steadily building towards. The number is what it would take to fund my basic living expenses. Currently 100% of divs are paid in cash and re-invested in my on-going balancing strategy.

Diversification:
My overall portfolio has a slight dividend tilt, but that is within large cap and international asset classes. Zoom the view out a bit, and you'll find a classic moderate to moderately aggressive portfolio construct focused on long term appreciation.

To above I will add another non-analytical point:
Dividends make me smile. In up/down/sideways markets, its always rewarding to see cash being deposited into the account.

 

[Oz investor]

my difficulty with total return is ...

is that aspiration for maximum 'share-holder return ' pursued at the risk of business survival , i would offer Boeing as an example , the MAX saga was basically self-inflicted then the virus added a massive complication , but where was the previous decade of company profits , gone in share buy-backs to boost the earnings per share ratio and therefore the share price

now share-holders are taking a big risk that now they will receive a government bail-out to save the company in it's current form ( if i was in charge i would demand a board restructure , before offering a helping hand )

i am sure others will offer even better examples

a sensible business pays dividends out of retained profits , not from borrowings made on forecast profits .

after all in my investment plan i am not planning to sell any share that i have bought

, although in real trading taking some profit is just sensible from time to time ( but that is opportunity , not the core plan )

'growth shares ' i HOPE will grow into sensible div. paying companies

please bear in mind , my current life expectancy is less than 10 years ( i plan to die with a reasonable proportion of my current portfolio ) , healthier members will most likely have a different investment plan

 

[thepalmersinking]

Dividend income for me. VYM paid out its dividend in March right on time. Had i I head to deal with total return to generate cash then i would had to sell stock at the bottom. My guess is the total return plan sounds great when it is all rainbows and sunshine out there.

 

[Montecfo]

Dividend income for me. VYM paid out its dividend in March right on time. Had i I head to deal with total return to generate cash then i would had to sell stock at the bottom. My guess is the total return plan sounds great when it is all rainbows and sunshine out there.

I think you may misunderstand total return investing. It is for the equity portion of your allocation. You still maintain bonds/cash for the fixed portion and living costs come from there, from dividends/interest or both.

No one advocates selling beaten down securities. That is pretty much universal as far as I can tell.

 

[audreyh1]

I advocate total return investing. Any other approach which does not seek to maximize total return would appear to be less optimal. Why follow a strategy which does not attempt to maximize total return?

I don’t think total return investing by definition seeks to maximize total return. It simply ignores which part of the total return comes from dividends versus capital appreciation, and has no concerns about trimming some assets to generate withdrawals/income.

I’m firmly in the total return camp as I maintain an AA via rebalancing which pretty much requires a total return approach.

 

[audreyh1]

Dividend income for me. VYM paid out its dividend in March right on time. Had i I head to deal with total return to generate cash then i would had to sell stock at the bottom. My guess is the total return plan sounds great when it is all rainbows and sunshine out there.

Your guess would be wrong. I’ve been through big bear markets already since retiring - now on my third - and I’ve never had to sell stock at the bottom. I’m usually selling bonds and buying stocks at the bottoms, and selling stocks to buy bonds at the top. It’s called rebalancing.

My moderately conservative AA has plenty of cash and other fixed income to weather long periods of down markets.

 

[tdv2]

I'm a total return proponent also. Remember, retained earnings provide low cost capital for a business to expand and grow. Apple didn't get to where it is by paying a large chunk of earnings to shareholders during it's phenomenal growth years. Granted, some businesses don't have large growth opportunities in mature markets. Those dividends I end up reinvesting anyway. My strategy is to maximize my total return and liquidate the portfolio little by little over time to provide retirement income.

 

[Montecfo]

I don’t think total return investing by definition seeks to maximize total return. It simply ignores which part of the total return comes from dividends versus capital appreciation, and has no concerns about trimming some assets to generate withdrawals/income.

I’m firmly in the total return camp as I maintain an AA via rebalancing which pretty much requires a total return approach.

There is investment strategy and then there is withdrawal strategy.

A total return approach will seek to maximize (or optimize if you prefer) total return from the investments (investment strategy).

How those returns are then deployed is up to the investor. You can invest from a total return approach and still elect to spend only the dividends. That is withdrawal strategy which is separate from investment strategy.

A total return investor's portfolio will be different than a dividend investor's portfolio. It will contain different investments. It is not just how the investor thinks about returns from the portfolio, in my view.

 

[OldShooter]

There is investment strategy and then there is withdrawal strategy.

A total return approach will seek to maximize (or optimize if you prefer) total return from the investments (investment strategy).

How those returns are then deployed is up to the investor. You can invest from a total return approach and still elect to spend only the dividends. That is withdrawal strategy which is separate from investment strategy.

A total return investor's portfolio will be different than a dividend investor's portfolio. It will contain different investments. It is not just how the investor thinks about returns from the portfolio, in my view.

Nicely put.

I would only add: If a dividend investor recognizes that this approach is not optimal for wealth building, then all is well. But that fact does not seem to well understood.

 

[Montecfo]

Nicely put.

I would only add: If a dividend investor recognizes that this approach is not optimal for wealth building, then all is well. But that fact does not seem to well understood.

Well, if you prioritize dividends, then you are defacto not optimizing total return. But I think to dividend investors, that is not important.

Whether they would acknowledge that is a good question.

 

[tdv2]

I guess if the shareholder receiving the dividend can put that money to work and create a larger return than the company offering it, it would be advantageous to receive the dividend and do just that. That is if he or she doesn't need the funds for consumption.

 

[RobbieB]

I'm a dividend investor too. I take all the divi's in cash as soon as I get them, income stream #1.

 

[OldShooter]

I guess if the shareholder receiving the dividend can put that money to work and create a larger return than the company offering it, it would be advantageous to receive the dividend and do just that. ...

Yes, that is the classic fiduciary criterion for any Board. Can our investors make more money by investing their after tax dividend proceeds than we can make for them by investing that amount, pre-tax, for them?

The devil is in the details, of course. Start with the fact that one has to predict two future rates of return. If a cash return to shareholders is indicated, then consider that share buy-backs are more tax-efficient than paying dividends. But many shareholders want and expect dividends. And how much is management self-dealing with a buy-back that also improves the payoff on any stock options that they may hold? After the cost of those stock options are considered are the shareholders still better off vs receiving a dividend?

And the next level up also remains problematic. Companies with dividend history (and their dividend-seeking shareholders) value dividend consistency very highly. Companies are also concerned with what message they are sending if they reduce or increase dividends. So even if the original investment question is answered (either way) the real world of dividend decisions is complex. This is why you see the apparently-crazy scenarios where companies borrow the cash needed to pay their regular dividend.

 

[tdv2]

Yes, that is the classic fiduciary criterion for any Board. Can our investors make more money by investing their after tax dividend proceeds than we can make for them by investing that amount, pre-tax, for them?

The devil is in the details, of course. Start with the fact that one has to predict two future rates of return. If a cash return to shareholders is indicated, then consider that share buy-backs are more tax-efficient than paying dividends. But many shareholders want and expect dividends. And how much is management self-dealing with a buy-back that also improves the payoff on any stock options that they may hold? After the cost of those stock options are considered are the shareholders still better off vs receiving a dividend?

And the next level up also remains problematic. Companies with dividend history (and their dividend-seeking shareholders) value dividend consistency very highly. Companies are also concerned with what message they are sending if they reduce or increase dividends. So even if the original investment question is answered (either way) the real world of dividend decisions is complex. This is why you see the apparently-crazy scenarios where companies borrow the cash needed to pay their regular dividend.

I can see how it gets complicated when you consider stock options and share buy backs.