Reading "Get Rich with dividends" and let me say...

[OldShooter]

Lol. How many investing books does a younger person need to read? ...

As many as they want to. I don't recall that the OP asked us for advice on that.

 

[Math]

bought this book awhile ago and haven't gotten around to it...pretty thick book... value investing seems dead though...

Value investing tends to do better in high interest rate environments rather than what we have now. One explanation of this point is on “The Long View” podcast 11/20/2109 with Charles de Vaulx. Portfolio Visualizer data still trends to including value index funds but they definitely have not performed as well over the past ten years.

 

[ESRwannabe]

Nope. Not even that complicated. The problem with selecting for dividends is that you are rejecting the majority of the market, including companies that will generate better returns than the dividend payers. They might be growth companies, small companies, value companies, ... There's no way to know. So the winning total return strategy is to buy the market. Don't "aim" for anything.

This is not correct. Investing for dividends is a withdrawal strategy. Not a portfolio construction strategy.

For example, in my portfolio I own VT which I believe you also own. It is 30% of my portfolio. I plan to only withdraw the dividends which is a withdrawal strategy, not a portfolio strategy.

 

[ESRwannabe]

OP - 6 stocks is far too high a concentration, instead think SCHD ETF
It pays 3.39% dividend, it is made of 98 securities, so if 1 company stops paying a dividend, you won't even notice.

Problem with preferred shares is: they can stop paying dividends, they can disappear just like regular stocks when a company goes bankrupt, they basically never appreciate in price (which is where most stockholders make their money).

I also recommend SCHD. A very high quality ETF. I also like DGRO.

I also recommend using a covered call strategy as a replacement for fixed income. In particular I recommend QYLD.

 

[OldShooter]

This is not correct. Investing for dividends is a withdrawal strategy. Not a portfolio construction strategy.

For example, in my portfolio I own VT which I believe you also own. It is 30% of my portfolio. I plan to only withdraw the dividends which is a withdrawal strategy, not a portfolio strategy.

Well, I will half-agree. A lot of the discussion here about things like a "Dividend Aristocrats" fund is in fact about portfolio construction -- selecting dividend payers according to some criteria and excluding non-payers. So that is what I was addressing and why I specifically said "selecting for dividends."

But as you point out, dividend withdrawal can be the spending strategy for any portfolio. I guess you spend your VT dividends. Nothing wrong with that. I reinvest my dividends in VT and pay absolutely no attention to them. I couldn't even tell you when they are paid. When I want cash from VT I simply sell some.

In that Ken French video I linked, though, French points out a risk with a spend-the-dividends-and-the-interest strategy: An investor who wants more spending money can be tempted to skew his portfolio towards more risk. At that point it becomes a portfolio construction strategy, not just a withdrawal strategy.

 

[HI Bill]

This is not correct. Investing for dividends is a withdrawal strategy. Not a portfolio construction strategy.

For example, in my portfolio I own VT which I believe you also own. It is 30% of my portfolio. I plan to only withdraw the dividends which is a withdrawal strategy, not a portfolio strategy.

It seems like you are splitting hairs, as if the goal is to generate dividends (withdrawal strategy), you have to choose the right equities or funds that will regularly pay dividends, at the cost of growth. Be default, you have to construct your portfolio to have dividend-paying assets. That said, I'm a total market investor. One problem with dividends in taxable accounts, is that you can't stop them, and there are tax consequences. If you're getting more dividends than you need, you're also paying more taxes that you'd otherwise have to pay. They work better (IMHO) in tax-deferred accounts, where everything is taxed upon withdrawal, and not until then.

 

[pb4uski]

DW and I live off the dividends. Many years ago we focused on that strategy and it works for us. The amount of dividends generated in our total investment portfolio is greater than what we live on year to year. We live on 3% and dividends generate about 3.5%. We have way more than a handful of stocks and some are ETF's. Do we sometimes have capital gains and losses? Yes. Our thought is... money is money regardless of how it arrives in our hands - fungible as they say. From the 20,000 ft. perspective we live off the dividends.

Our dividends and interest and my small pension exceed our expenses, especially since I paid of our mortgage and a small car loan that we had in December so we no longer have a mortgage or car payment. Excluding the pension our dividends and interest are 90-95% of our spending. However, living off passive income was never a goal, it has just worked out that way.

 

[pb4uski]

....Is it a bad idea to want to live off the dividend income?...

No, but it's not a good idea either. If you only live off of dividends and interest it is likely that your retirement is overfunded and you worked longer than you needed to... all else being equal.

The effective yield of a diversified stock and bond portfolio is probably going to be around 2-3% (dividends and interest divided by beginning of year balance). Equities yield about 2% on average and the 10 year Treasury has been in the 2.5% range until very recently.

So for example, let's say you spending needs are $40k a year... a $1 million portfolio would do the trick. But if your portfolio only generates 3% in dividends and interest then you need $1.33 million. How much longer would one have to work to save another 1/3?

 

[JoelT1]

Dividends are not free money—Share prices are reduced by dividends. There is no difference between taking dividends and selling shares.

 

[Zathras]

I’ve been retired 14 years, living off dividends.
However, as many others have stated, 4-6 stocks is way to small.

We have 16-20. Not all are dividend payers, but most are.
I don’t like ETFs, as you don’t control the cap gains and can do without the fees.

The biggest thing is you need to research and follow the companies. Generally there are plenty of warning signs that a div cut is looming.
And to agree with many others, don’t chase dividend yields!

 

[pb4uski]

.... I don’t like ETFs, as you don’t control the cap gains and can do without the fees. ...

How do you figure that?

Most ETFs (or broad based stock index funds for that matter) don't make capital gain distributions so you can easily control cap gains since you can control sales and pick purchase lots sold. And the ER for VTI is a whopping 0.03%... 3c a year for each $100 invested.

 

[target2019]

I’ve been retired 14 years, living off dividends.
However, as many others have stated, 4-6 stocks is way to small.

We have 16-20. Not all are dividend payers, but most are.
I don’t like ETFs, as you don’t control the cap gains and can do without the fees.

The biggest thing is you need to research and follow the companies. Generally there are plenty of warning signs that a div cut is looming.
And to agree with many others, don’t chase dividend yields!

Your ideas are important for newer dividend investors to understand. I think the time required to manage the portfolio initially is much more than some would guess. Once you "get there" (as you have) would you say it requires less time now to manage? I'm curious about that.

 

[ERD50]

The posts that essentially say "I live off dividends, it works for me", simply aren't helpful at all.

I can drive a nail in a board with a rock, that works too. But it's not better than using the hammer that's in your tool chest, so why do it? To be helpful, we should try to find what works best among available options, all things considered.

As has been said many times, money is fungible. Whether dividends are distributed, or that value is retained within the stock is immaterial as far as value. But as has been pointed out, there are differences to the investor:

A) Dividend paying stocks are a sector, you are losing some diversity if you focus on that sector.

B) There's no evidence that I have seen that shows the dividend sector outperforms or has lower volatility in down times, compare to a Total Market fund/ETF.

C) You are taxed on those divs if you use them or not. I wish my Total Market funds payed zero divs, then I could withdraw only what I need (in effect I have this, since the divs from my TM funds in taxable accounts are less than my withdrawals, at least until RMD time).

D) Dividends can and do vary over time. So unless you have an excess of dividends coming in, so that you can still handle a drop, you are going to need to do some selling. And you also (as mentioned earlier) are going to need a bigger stash to provide that cushion. And what do you do with the excess divs in good times - investing that offsets any claimed simplicity (my next point).

The only (perceived?) advantage that I can see for a div sector focus is people who claim it is simpler for them - they don't need to sell anything. OK, maybe. But you might need to rebalance? And doing a once/year sale (if needed), really isn't any sort of chore, and it can just be part of rebalancing.

Why give up diversity and likely have worse performance over maybe avoiding a few mouse clicks once/year?

I just don't get it. I don't see anything to get.

-ERD50

 

[target2019]

MacGyver never tried to outperform anyone else. He developed tremendous troubleshooting ability and solutions to seemingly impossible problems. He probably used a rock to hammer a nail when nothing better was within reach. He did not get to expert status in a day, but built up applied knowledge as he tried everything under the sun.

 

[FIREarly]

@GGekkoNCo This is a post about the benefits of dividends and they are great. I agree with that proven method.

IMHO, there is one non-dividend stock that is freaking AMAZING. It returned over 300% in 2019 and believe is over 150% for 2020 so far. Yes, there is definitely more risk in this stock but, again, IMHO this stock is the future. It is similar to my uncle telling my father in the 1980s to buy MSFT (he did not) and look at that today. This is not about Microsoft (love that stock too; with dividend) but about another data company, yes DATA company, that I believe will continue to make enormous results for years to come. There are probably multiple threads on here about this stock but IMHO the stock that will be "exploding" for the millennial generation is... {insert drumroll} TSLA - Tesla

Elon Musk, owner/CEO/genius/whatever you want to call him, is working to make life altering changes for society. He wants to provide sustainable energy to help our ecosystem and get humans to inhabit another planet. In regards to Tesla, he has SO MUCH data that every car sends to Tesla to continue to maximize their cars efficiencies and future self-driving features. They are working on releasing the cyber truck after releasing the Model Y and are pairing with Panasonic for possibly amazing batteries. They are working on electronic HVAC units and possibly Model M, electronic bike. There is an awesome picture of a prototype with a hole where the engine would have been (Elon Musk type move). They are also releasing (or just released) the semi-truck that will be an amazing benefit to truckers. YouTube has the Tesla semi-truck release video where they show the benefits of it and as a non-trucker it was pretty cool.

Please excuse the long post about a non-dividend stock and do believe dividends are extremely important. If you have multiple years to retirement this might be something to look into as part of a diverse portfolio.

*This statement is not written by a financial advisor and is only written IMHO

 

[OldShooter]

WADR, @FIREarly, remember that a good company is not necessarily a good investment. It depends totally on the price -- something you didn't mention.

With a company like Tesla there are always a number of buyers who feel that growth is worth buying at any price. With the dot-com crash we saw how that strategy sometimes turns out. There also, maybe the majority, who are momentum investors counting on a "greater fool" arriving to take them out at a profit. (https://en.wikipedia.org/wiki/Greater_fool_theory)

As usual, Bill Bernstein offers wisdom on this type or opportunity:

“Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”
​

Said another way, if you buy enough of any stock that its performance will have a meaningful effect on your portfolio you are by definition not well diversified and have thus substantially increased your risk. Having been there for the dot-com crash, though mostly on the sidelines, I would not touch Tesla with a stick. It may be the next Amazon or it may be the next JDS Uniphase. There's no way to know. (Never heard of JDS Uniphase? There's a reason for that.)

 

[ERD50]

MacGyver never tried to outperform anyone else. He developed tremendous troubleshooting ability and solutions to seemingly impossible problems. He probably used a rock to hammer a nail when nothing better was within reach. He did not get to expert status in a day, but built up applied knowledge as he tried everything under the sun.

And we have better things within easy reach. Total Market ETFs. That's my point, and why I was careful to include "the hammer that's in your tool chest" in my analogy. I put some thought into that post.

-ERD50

 

[pb4uski]

MacGyver never tried to outperform anyone else. He developed tremendous troubleshooting ability and solutions to seemingly impossible problems. He probably used a rock to hammer a nail when nothing better was within reach. He did not get to expert status in a day, but built up applied knowledge as he tried everything under the sun.

But if you need to drive a nail and both a rock and a hammer are within easy reach, which one are you going to chose? I'll take the hammer.

 

[Lawrencewendall]

I'm ok with dividends. They currently pay
Mortgage
Insurance
Property taxes
Water
Electricity
Auto loan
Auto insurance
Groceries
Cable/Internet

I have about half my portfolio in dividend payers (about 25 stocks, mostly BDCs and REITs). The rest of the portfolio is in a small and mid-cap index. Some dividend payers reduced/suspended/eliminated dividends due to Covid, some to bad business before covid. Most dividends payers are tax-deferred so I can't touch any of it for another 4 years. According to my spreadsheet, combined current forward yield as of today is 11.6%. These are the dividend payers (or at least used to):

Ticker Dividend Yield
American Capital Agency Corp AGNC 11.42%
America First Multifamily Investors LP ATAX 6.00%
CBL & Associates Properties Inc CBL 0.00%
Cornerstone Strategic Value Fund CLM 22.16%
Colony Credit Real Estate Inc CLNC 0.00%
Consolidated Communications Holdings Inc CNSL 0.00%
Dynex Capital DX 13.40%
FIDELITY ASSET MANAGER 70% FASGX 5.84%
FIDELITY FREEDOM 2025 FFTWX 5.81%
Fidelity ZERO Total Market Index Fund FZROX 1.63%
Geo GEO 17.05%
Global Net Lease GNL 10.55%
Horizon Technology HRZN 11.43%
Communications Systems Inc JCS 1.71%
Nuveen Real Asset Income and Growth Fund JRI 10.12%
MFA Mortgage Investments MFA 0.00%
MFS Special Value Trust MFV 9.28%
Altria MO 8.50%
NEWTEK Business Services Corp NEWT 12.07%
NexPoint Strategic Op Fund NHF 10.80%
New Residential NRZ 5.50%
Oxford Lane Capital Corp OXLC 44.26%
PIMCO Dynamic Credit and Mortgage Income F PCI 11.24%
Pioneer High Income Trust PHT 10.86%
Prospect Capital Corp PSEC 13.74%
Uniti Group Inc. UNIT 6.77%
Janus Henderson Short Duration Income ETF VNLA 1.55%

 

[Chuckanut]

The dividend yield of the S&P500 is 1.96% the last time I looked. When I subtract that from the dividends of many 'dividend paying stocks' they no longer look quite so good to me as compared to funds that also have the potential to produce capital gains. Diversification and total return are my main goals in investing.

But, if a person can sleep better at night by following a dividend method of investing, that is fine with me. To each his own. Many roads can lead to FIRE.

There's more to life than worrying about were every last dollar is coming from and how to squeeze it out. Otherwise why FIRE?

 

[ERD50]

I'm ok with dividends. They currently pay
Mortgage
Insurance
Property taxes
Water
Electricity
Auto loan
Auto insurance
Groceries
Cable/Internet
...

An example of why I said these sorts of posts aren't helpful, about 5 posts back. I could just as easily say "I have all my money stuffed in my mattress. Each month, I pull some out to pay:

Mortgage
Insurance
Property taxes
Water
Electricity
Auto loan
Auto insurance
Groceries
Cable/Internet ..."

It could be a true statement, but is it the best of easily available options?

... There's more to life than worrying about were every last dollar is coming from and how to squeeze it out. Otherwise why FIRE?

It's not about worrying or squeezing at all. Using broad based ETFs provides diversity, and very likely more available money for no more (and maybe less) effort. There's no compromise, as I said, I've yet to see anyone provide evidence that a dividend sector performs better than a Total Market ETF. The div sector does not provide any relief from worry, diversification does that. There's no "there" there, in the div sector.

-ERD50

 

[OldShooter]

... It's not about worrying or squeezing at all. Using broad based ETFs provides diversity, and very likely more available money for no more (and maybe less) effort. There's no compromise, as I said, I've yet to see anyone provide evidence that a dividend sector performs better than a Total Market ETF. The div sector does not provide any relief from worry, diversification does that. There's no "there" there, in the div sector.-ERD50

I know many people who are completely uninterested in screwing with this. Often they are happy to pay an FA and make no effort to track the results. As long as they feel they are "up" in a year more often than they are "down" they don't care. Sheep to the slaughter IOW but they don't know and they don't care.

Really, @ERD50, you are wasting your time pounding on this. Even though you are right. The word "jeremiad" comes to mind.

 

[ERD50]

...
Really, @ERD50, you are wasting your time pounding on this. Even though you are right. The word "jeremiad" comes to mind.

Yeah, but I get to learn cool new (to me) words like "jeremiad".

A jeremiad is a long literary work, usually in prose, but sometimes in verse, in which the author bitterly laments the state of society and its morals in a serious tone of sustained invective, and always contains a prophecy of society's imminent downfall.

I'm gonna have to step up my game. Prose, a prophecy of society's imminent downfall? Sounds like I'd be trying to compete with Orwell or Bradbury!

-ERD50

 

[target2019]

Dividends from taxable account pay for 5/8 of our R.E. taxes. Coincidentally, we are on 5/8 acre.

 

[brokrken]

The div sector does not provide any relief from worry

This quote just isn't true. People worry about different things and get emotional about different investing scenarios. Sometime people can sleep better at night with a certain strategy that the math may not agree with. That's due to their worry.