Another Total Return vs. Income/Dividend Investing article

[DawgMan]

I came across this article this am and found it interesting...

https://apple.news/AuryF6Y1KPwqvFHzGcDZl3Q

Key quote: "I want to start out by stating that I am confident that the strategy I’m about to share will outperform the market (S&P 500) over the long run on a total return basis. However, I do not necessarily believe that it will outperform the S&P 500 over the shorter run, although it is possible that it would."

So while I am not drawing down on my assets yet and currently subscribe to the Total Return approach, I am still intrigued by the Income/Dividend approach. I understand the attraction to creating a "reliable" income stream that allows you to somewhat "set it and forget it" as it relates to price fluctuations, but have always believed a Total Return/Rebalance approach would beat the Income/Dividend approach... apparently not according to this writer? He makes some valid arguments with his examples and for someone who perhaps only needs to draw down 3% or less of their assets, I can see how this approach may be that much more enticing. So I will ask a question that has been asked many times before... if 2 retired investors have the same objective (i.e. generate the same % of cash flow every year), who has the biggest balance at the end of 10, 15 yrs and at what cost (i.e. volatility)?

Total Return Investors, Dividend/Income Investors... pitch me!

 

[pb4uski]

Article is useless. Mostly motherhood and apple pie and on the one hand and on the other hand.

Just another shameless pitch for the author's services... last paragraph:

...If you’re primarily interested in investing in high-quality dividend growth stocks, I would like to respectfully suggest looking at The Dividend Kings. The service is dedicated towards identifying the highest-quality dividend growth stocks that can be purchased at sound and attractive valuations. Take advantage of our 14-day free trial and see how we can help you identify the most attractive blue-chip dividend growth stocks for your portfolios.

 

[DawgMan]

Article is useless. Mostly motherhood and apple pie and on the one hand and on the other hand.

Just another shameless pitch for the author's services... last paragraph:

Yes, sales pitch of course, but I found the arguments/examples interesting and I know many here profess the 2 approaches. I was hoping to hear any strong arguments from the 2 camps.

 

[pb4uski]

The other issue that I have with the approach advocated by the author is that to execute his strategy is investing in individual stocks and few retirees will want to take the time and effort to do the requisite research for stock picking.... I know that I don't care to... invex funds are much easier... after all, I'm retired.

 

[DawgMan]

The other issue that I have with the approach advocated by the author is that to execute his strategy is investing in individual stocks and few retirees will want to take the time and effort to do the requisite research for stock picking.... I know that I don't care to... invex funds are much easier... after all, I'm retired.

I would anticipate some of the Income/Dividend investors here might champion an alternative ETF/Mutual fund strategy which includes some combination of REIT/Dividend Stock/preferreds/utilities.

I’m staying my course for now with the Total Return approach, just wanted hear the sales pitch from the group on the other side.

 

[audreyh1]

An investor focusing on dividend and interest income will often structure their portfolio quite differently than a total return investor due to their focus on yield.

It’s true that if withdrawal rate needs are quite low, you may even get by with a more typical total return type portfolio and just withdraw interest and dividends.

I’m total return, maintain an AA, and don’t pay any attention to yield/income as I’m usually rebalancing anyway when I take my withdrawal. I have no compunction about trimming from my “winners” to fund my annual withdrawal.

I have no interest in managing individual securities as a retiree and am easily able to meet my goals using mutual funds.

 

[ncbill]

Another article that ignores risk and focuses only on return.

Holding only a handful of dividend-paying stocks is much riskier than holding the market...choosing that approach means giving up the "only free lunch."

If all one is concerned with is high yield, over on that site one can find investments touted that produce double-digit yields...at least for now.

 

[Sojourner]

I would anticipate some of the Income/Dividend investors here might champion an alternative ETF/Mutual fund strategy which includes some combination of REIT/Dividend Stock/preferreds/utilities.

I’m staying my course for now with the Total Return approach, just wanted hear the sales pitch from the group on the other side.

I didn't read the article yet, but my ingrained skepticism has me wondering:

If it's possible to construct an income/dividend portfolio that beats the S&P 500 over the long run, then wouldn't the fund managers at Fidelity, for example, be utilizing this approach (or a very similar one) in their high-yield dividend funds such as FEQTX? Wouldn't it be much easier (and cheaper) to simply buy FEQTX and let the professional fund managers do all the hard work?

(BTW, looking at the past nine years of data, FEQTX lags the S&P, the Russell 3000, and other benchmarks. It also lags the S&P 500 over the past 29 years.)

 

[pb4uski]

I was curious about what the data says... so I did some Portfolio Visualizer runs with a traditional 60/40 portfolio vs a 60/40 portfolio where the equities were tilted towards dividend payers.

Scenario was a $1m nestegg, with $40k (4%) initial withdrawal adjusted for inflation, rebalanced annually.

The results were pretty close IMO... interestingly the total return approach slightly outperformed the dividend tilt in terms of terminal wealth in most periods... except for the 27-years since inception. Rolling returns were similar with dividend tilt being slightly higher for longer periods. What is really odd is that despite rolling returns being consistently a bit higher for the dividend tilt that the ending balances were consistently higher for the total return portfolio.

FWIW, I keep coming back to... it doesn't really matter much.

	Total Return	Div Tilt	Div/TR
Ending balances:
2017-2019 3-year	1,203	1,149	0.96
2015-2019 5-year	1,203	1,169	0.97
2013-2019 7-year	1,523	1,437	0.94
2010-2019 10-year	1,815	1,777	0.98
2005-2019 15-year	1,587	1,563	0.98
1993-2019 Inception	4,330	4,459	1.03
Average rolling returns:
3-year	8.41%	8.42%	1.00
5-year	8.04%	8.12%	1.01
7-year	7.63%	7.78%	1.02
10-year	7.05%	7.37%	1.05
15-year	6.86%	7.19%	1.05

https://www.portfoliovisualizer.com...location2_2=40&symbol3=VEIPX&allocation3_2=60

I tried to stay within the Vanguard fund universe to keep things simple so I used the Vanguard Equity Income fund as a dividend tilt. As of today, it has an SEC yield of 2.68%, over 50% more than the 1.76% SEC yield fo Vanguard Total Stock.

 

[Midpack]

FWIW, I keep coming back to... it doesn't really matter much.

+1. That’s what I thought most investors (here at least) concluded long ago. I didn’t even open the thread the first few times I noticed it. I’ve always been a TR investor. But to each his/her own...

 

[DawgMan]

+1. That’s what I thought most investors (here at least) concluded long ago. I didn’t even open the thread the first few times I noticed it. I’ve always been a TR investor. But to each his/her own...

Wow! I can't even bait a Dividend investor to make his pitch here...

 

[foxfirev5]

I'm in neither camp. tIRA's for income producing investments and Roths in TR growth investments. Rather than "Never touch the principal" my credo is "Never touch the Roth". This helps minimize the RMD tax torpedo while funding LTC or legacy for the grandkids.

 

[OldShooter]

From time to time something comes along that works ... until it doesn't. It gets arbitraged away as increasing numbers of people try to take advantage of it.

@pb4's results also may be an artifact of the unusual interest rate period we've had for the last decade or so. No way to know.

Like @midpack I just don't pay much attention to this kind of thing.

 

[Running_Man]

Wow! I can't even bait a Dividend investor to make his pitch here...

Investing is settled science here, so no need to discuss anything anymore on the forum, even if the forum is titled STOCK PICKING AND MARKET STRATEGY. Any answers are met with the same stock 50 answers in response to a single discussion point. I would suggest you find another forum to discuss these types of issues.

 

[DawgMan]

Investing is settled science here, so no need to discuss anything anymore on the forum, even if the forum is titled STOCK PICKING AND MARKET STRATEGY. Any answers are met with the same stock 50 answers in response to a single discussion point. I would suggest you find another forum to discuss these types of issues.

Wow! Appears the Forum police have said enough on this matter. God forbid a subject matter resurfaces that may have been discussed before! I will standby for your approved list of subjects matters...

 

[target2019]

Naked link for them that's got...
（⌒▽⌒）

 

[pb4uski]

Blah, blah, blah, blah, blah.

 

[ncbill]

Blah, blah, blah, blah, blah.

Only 10 stocks...riskier than most other dividend strategies.

If you really want to roll the dice, IIRC, Paul Merriman's back-tested portfolio of 50% small-cap value and 50% large-cap value produced returns well above market, though with stomach-churning volatility, of course.

 

[ESRwannabe]

Wow! I can't even bait a Dividend investor to make his pitch here...

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.

 

[pb4uski]

....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.

...Ok, I will now stop posting and wait for the inevitable stream of comments telling me I am wrong about everything. ...

You have obviously not been involved in a company's dividend policy.... it isn't nearly as scientific and precise as you seem to think. While dividend policy is responsive to earnings in the long run, it is based more on momentum than on current earnings. And there is no single right answer... it is more like holding up your right thumb and gauaging that it is close enough.

 

[Qs Laptop]

Investing is settled science here, so no need to discuss anything anymore on the forum, even if the forum is titled STOCK PICKING AND MARKET STRATEGY. Any answers are met with the same stock 50 answers in response to a single discussion point. I would suggest you find another forum to discuss these types of issues.

This is true. There is no STOCK PICKING to be done here, no MARKET STRATEGY. It was decided long ago that the answer to any investment question is Vanguard Index funds. If you're really smart you only need one fund for all your needs--the Vanguard Total Stock Index Market Fund. If you're not as enlightened you can go with the three fund solution--Vanguard, of course--consisting of Vanguard Total Stock Market Index Fund, Vanguard Total International Index Fund, and Vanguard Total Bond Index Fund.

Index funds are preferred because once you are retired and are totally dependent on your nest egg AND you have all day to do whatever you want, the last thing you want to trifle with is investment strategy.

 

[timemoveson]

Wow! I can't even bait a Dividend investor to make his pitch here...

Sure you can!

I'm mostly this type of investor. But I didn't get rich putting money into the stock market (either individual stocks or indexes) hoping for the stock market to grow. I got rich through business outcomes and the earnings they generated. I saved a lot of those earnings. Then, I put that wealth to work in the stock market to preserve it, grow it slowly over time, and pay for our lives at a very comfortable level (and pass on a fortune when the time comes too)

In short, if you are rich, you can afford to be any kind of investor you want to be. I choose to be a "dividend investor" because I can be and it suits me/my wife (who is fully involved in planning and execution).

If I couldn't afford to be a "dividend investor" and needed statistics to help me ascertain how much I could "withdraw" from total returns, I'd do that. But I don't have to.

Choice is fantastic and I hope everyone gets to their version of these kinds of choices. It is extremely liberating.

It settles the debate for me between the two approaches. I couldn't care less.

 

[triangle]

Why is a seekingAlpha article linked through an apple.news redirect.

I believe I read (skimmed) that article a few weeks ago, and although it might be geared towards relying on dividends I think it is also about using the Fastgraph tool to help identify undervalued companies to invest in. While I have not used fastgraphs and others might view it an advertisement I think that author and that website can be educational. (IIRC recently there was a backroom disagreement followed by a big public quarrel on the website, as the operator of Seekingalpha viewed his articles as being more about advertising his Fastgraph service than providing market or company analysis in a way that was complementary for seekingalpha users, and they stopped publishing for a little while).

I hate to admit I agree with some of the criticism here about this sub-forum. While everyone here is well intended and generally gives good advice, discussions about stock picking & alternate market strategies are not always well received. I think it is in part because we are discussing topics with big ramifications and do not know each others mindset as we are reading and discussing. Hopefully the free flow of information will continue (with disclaimers or not).

 

[Extra Medium]

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.

I have no problem with your approach, it makes sense to me, though I don’t feel the same way.

 

[JoelT1]

I came across this article this am and found it interesting...

https://apple.news/AuryF6Y1KPwqvFHzGcDZl3Q

Key quote: "I want to start out by stating that I am confident that the strategy I’m about to share will outperform the market (S&P 500) over the long run on a total return basis. However, I do not necessarily believe that it will outperform the S&P 500 over the shorter run, although it is possible that it would."

So while I am not drawing down on my assets yet and currently subscribe to the Total Return approach, I am still intrigued by the Income/Dividend approach. I understand the attraction to creating a "reliable" income stream that allows you to somewhat "set it and forget it" as it relates to price fluctuations, but have always believed a Total Return/Rebalance approach would beat the Income/Dividend approach... apparently not according to this writer? He makes some valid arguments with his examples and for someone who perhaps only needs to draw down 3% or less of their assets, I can see how this approach may be that much more enticing. So I will ask a question that has been asked many times before... if 2 retired investors have the same objective (i.e. generate the same % of cash flow every year), who has the biggest balance at the end of 10, 15 yrs and at what cost (i.e. volatility)?

Total Return Investors, Dividend/Income Investors... pitch me!

Read Larry Swedroe’s Illuminating articles regarding dividends, which are online. He says there is no difference between taking dividends as cash and selling shares.