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Old 07-10-2020, 09:22 AM   #101
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A few points.
Mostly inaccurate, sorry to say.

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(1) "Dividend investing" is not a portfolio strategy. It is a withdrawal strategy. Two people can have exactly the same portfolio and one person can choose to only withdraw dividends where as the other chooses to go with the 4% rule or some other withdrawal strategy.
Partially true. In many, probably most cases though, the dividend investor has skewed his portfolio to emphasize dividend-paying stocks or dividend-oriented funds. That is a portfolio strategy.

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(2) Dividends are determined by the individual companies and are based on better data than the general public has access to. Dividends are based on current data and are adjusted up/down based on current data.
No. Dividend decisions are made with a much longer view than "current data." Consistency of dividends amd steadily increasing dividends are highly valued by some investors. A cut or eliminated dividend is considered to reflect very negatively on the company. The safe route and the route commonly taken is to hold the dividend steady regardless of "current data" and to even borrow cash if necessary to make the payment.

This is not tenable long-term of course, but companies these days are mostly run quarter-by-quarter and decision makers hold stock options. A passed or reduced dividend could cost them dearly. Better to kick the can down the road.

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(4) Almost every stock will eventually pay a dividend because that is how companies distribute profits to shareholders. Complaining that it is not tax efficient will not change this fact. If a company never pays a dividend *ever* then it is no different than owning a piece of art or a collectible. You might as well invest in gold or baseball cards.
No again. An increasingly common way to return value to the shareholders is via stock buy-backs. This is the most tax-efficient method. It often stirs up controversy because the increased stock price benefits the C-suite dwellers' stock options and they are the ones making the buy-back decision. (In a more perfect world, options would be adjusted to reflect the effect of each buyback.) But, regardless, it is not at all true that every stock will eventually pay a dividend. If it were not the case that a large number of retail investors really do not understand the tax situation, most companies might actually stop paying dividends altogether. Only Uncle Sam would suffer.
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Old 07-10-2020, 09:38 AM   #102
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We've always reinvested our dividends in both taxable and tax deferred accounts. Our AA is balanced. I figure we'll take our taxable dividends at some point, probably when we're 65 in 3 years.
Suggestion: One year prior to thinking you might possibly sell any shares for income, or if you might have to sell shares for some unexpected large purchase, stop having the divs reinvested.

The reason is, it can complicate your tax life with possible short term cap gains, or wash sales. Not the end of the world, but why add any complication to our lives? Better to reinvest as one or two "bunches" in a fund you don't plan to sell in the above cases.

If these are IRA/401K etc, never mind!

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Old 07-10-2020, 09:43 AM   #103
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Originally Posted by ERD50 View Post
Suggestion: One year prior to thinking you might possibly sell any shares for income, or if you might have to sell shares for some unexpected large purchase, stop having the divs reinvested.

The reason is, it can complicate your tax life with possible short term cap gains, or wash sales. Not the end of the world, but why add any complication to our lives? Better to reinvest as one or two "bunches" in a fund you don't plan to sell in the above cases.

If these are IRA/401K etc, never mind!

-ERD50
Thanks for that tip! Never a day goes by that I don't learn something from this forum. Or I learn from this forum everyday.
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Old 07-10-2020, 02:16 PM   #104
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Mostly inaccurate, sorry to say.

Partially true. In many, probably most cases though, the dividend investor has skewed his portfolio to emphasize dividend-paying stocks or dividend-oriented funds. That is a portfolio strategy.

No. Dividend decisions are made with a much longer view than "current data." Consistency of dividends amd steadily increasing dividends are highly valued by some investors. A cut or eliminated dividend is considered to reflect very negatively on the company. The safe route and the route commonly taken is to hold the dividend steady regardless of "current data" and to even borrow cash if necessary to make the payment.

This is not tenable long-term of course, but companies these days are mostly run quarter-by-quarter and decision makers hold stock options. A passed or reduced dividend could cost them dearly. Better to kick the can down the road.

No again. An increasingly common way to return value to the shareholders is via stock buy-backs. This is the most tax-efficient method. It often stirs up controversy because the increased stock price benefits the C-suite dwellers' stock options and they are the ones making the buy-back decision. (In a more perfect world, options would be adjusted to reflect the effect of each buyback.) But, regardless, it is not at all true that every stock will eventually pay a dividend. If it were not the case that a large number of retail investors really do not understand the tax situation, most companies might actually stop paying dividends altogether. Only Uncle Sam would suffer.
+1 He just keeps repeating the same wrong reasoning... probably thinking that if he repeats it long enough that it will somehow magically become truth. Remind you of anyone?

From another recent thread:
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.... 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. ...
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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.
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Old 07-11-2020, 01:34 AM   #105
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A few points.



(4) Almost every stock will eventually pay a dividend because that is how companies distribute profits to shareholders. Complaining that it is not tax efficient will not change this fact. If a company never pays a dividend *ever* then it is no different than owning a piece of art or a collectible. You might as well invest in gold or baseball cards.
Berkshire? I'm sure Buffett likes that analogy [emoji4]
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Old 07-13-2020, 07:42 PM   #106
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Lots of opinions above pretending to be the only right answer. Topic is not that simple as the reason for dividends can vary by company.

They are part of a company's capital allocation strategy, which assumes a company has residual net cash inflow and includes reinvesting in business, acquisitions, stock buybacks or dividends. For a growth company, dividends should be last option as it means the company has no better use for the cash than return to shareholders. Its the BoD and C-suite that makes these decisions and thus it is part of how that collective group sets strategy for the company. Thus, will vary with the company's historical practices as its viewed as negative to reduce/stop dividends and the personality of the current group in charge.

In part of my portfolio, I like dividend paying stocks. However, for reasons above don't expect those same stocks to have the highest stock price appreciation over time.
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Old 08-15-2020, 08:25 AM   #107
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I know this. I enjoyed 100% of my dividend payout from VYM during the dip this year. It would have hurt to sell actual shares in a low yielding stock to get a check of equal size. I would diversify into a dividend ETF to spread exposure.
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Old 10-18-2020, 08:40 AM   #108
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It is not a bad idea. But if you reach for yield and take on more interest rate risk, you could reduce your capital sharply in a downturn. Also, most companies eventually cut dividends, which then leaves less capital for a replacement. Plus that is far too few stocks.



Investing for total return and with a balanced portfolio is your best bet IMHO.



Some folks differ and swear that spending a 4% dividend is somehow different and "better" than spending a 4 pct capital gain, but that is mental gymnastics.



I'm ok with mental gymnastics if it helps people sleep at night. Just don't reach for yield.


It isn’t really mental gymnastics if you need that cash in a down market. Selling shares at a depressed level when you can get cash from a dividend is key. In a up market, I agree.
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Old 10-18-2020, 09:07 AM   #109
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It isn’t really mental gymnastics if you need that cash in a down market. Selling shares at a depressed level when you can get cash from a dividend is key. In a up market, I agree.
As I've pointed out time and time again, if you have a typical balanced portfolio (likely around 60/40 for a 'conservative' investor), you will be very, very unlikely to ever have to be "Selling shares at a depressed level".

With a balanced portfolio, if stocks are down, you draw from the fixed side to help re-balance. You don't sell stocks while they are down, that just simply is not true. A conservative portfolio with a conservative 3.5% WR would probably already be getting ~ 2.5% from divs from broad-based stock/bond index funds/ETFs. So they on average, only need to pull ~ 1% per year, so that fixed side provides 40 years of withdrawals. Now that is an oversimplification, as the fixed side shrinks the math changes a bit, but close enough to make the point w/o a spreadsheet. It would be a long, long downturn before you ever need to sell any stocks at a depressed level.

IMO, supported by data, you are far better off with a diversified portfolio. A focus on hi-yield degrades the diversification, and the diversifies approach likely provides some tax advantages as well.

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Old 10-18-2020, 09:44 AM   #110
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As I've pointed out time and time again ... you are far better off with a diversified portfolio.
Remember the old joke about prisoners telling jokes by number?

Maybe we could standardize the dividend arguments pro and con, then assign numbers? Think of the savings in keyboard wear alone, not to mention typing time saved for individuals who will probably never convince anyone to change position anyway.

I am in the diversified portfolio/total return camp, but the plethora of funds with "dividend" in their names is strong evidence that this position will never triumph. (Despite being the correct one. )
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Old 10-18-2020, 10:11 AM   #111
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Remember the old joke about prisoners telling jokes by number?

Maybe we could standardize the dividend arguments pro and con, then assign numbers? Think of the savings in keyboard wear alone, not to mention typing time saved for individuals who will probably never convince anyone to change position anyway.

I am in the diversified portfolio/total return camp, but the plethora of funds with "dividend" in their names is strong evidence that this position will never triumph. (Despite being the correct one. )


I should get organized and bookmark a few responses, and just copy/paste.

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Old 10-18-2020, 10:36 AM   #112
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Old 10-18-2020, 12:48 PM   #113
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As I've pointed out time and time again, if you have a typical balanced portfolio (likely around 60/40 for a 'conservative' investor), you will be very, very unlikely to ever have to be "Selling shares at a depressed level".
+1

Yeah, I never will understand why folks with a diversified portfolio and conservative WR would sell equities during an equity downturn. It would be a strictly voluntary move on their part, so perhaps it's based on the belief that they panic and sell. In my current 56/36/8 AA, I would be a long, long time into a equity crash before being forced to sell equities to meet my WR.

I think the concept is promoted by sales people in certain areas of the financial products industry.
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Old 10-18-2020, 01:07 PM   #114
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Exactly. A total dividend approach is simply not doable or prudent considering yields today for most folks. What I am suggesting is that in a 2 or 3 year horrendous bear market, a commitment to an inflexible withdraw comittment (e.g 4% regardless of the situation) will costs you a lot of sleepless nights. Folks who are undiversified (hint: index equity funds and bonds is not diversified). Its these time when it may be prudent to either commit to a dividend only draw (if you can) or at least to include your dividend payout within the total payout that you have determined is appropriate. Best
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Old 10-19-2020, 05:43 AM   #115
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I would *STRONGLY* second everyone who said "Don't chase yields". I have lost my towel in my young days chasing the yields. Never again. Total market for me.
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Old 10-19-2020, 07:15 AM   #116
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... What I am suggesting is that in a 2 or 3 year horrendous bear market, a commitment to an inflexible withdraw comittment (e.g 4% regardless of the situation) will costs you a lot of sleepless nights. ...
It shouldn't. A conservative WR has historically weathered the worst of times, w/o any adjustments.

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... Folks who are undiversified (hint: index equity funds and bonds is not diversified). ...
Can you do more than hint? I don't follow you. Perhaps you want to add commodities, REITs, international, etc. Fine, but I don't think those have had any big effect over the long run.

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... Its these time when it may be prudent to either commit to a dividend only draw (if you can) or at least to include your dividend payout within the total payout that you have determined is appropriate. Best
I can't imagine a thinking person in the withdrawal phase not taking the divs as part of their payout. Otherwise they are just reinvesting them and then taking more out to compensate? That's a pretty crazy shell game. It makes no sense under any circumstances (unless maybe your divs alone exceed your needs).

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Old 10-19-2020, 09:16 AM   #117
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Quite a surprise this morning to find that I am in the category of "unthinking persons." But maybe that's right.

At this point, essentially 100% of our money is in IRAs and Roths. All dividends and interest from mutual funds are reinvested. When either of us runs short of cash, we draw from our IRAs. Probably a dozen times a year between the two of us, low $1Ks at at time except the December income tax withholding. I have no idea what amounts or when fund dividends are paid and I don't care. Why would I? What is there to think about? Unthinking seems to work fine.

Our TIPS interest payments, twice a year, can't be automatically reinvested but, again, we really don't pay much attention to them. They just sit in the accounts until the money get drawn out as we need cash. I recall that they pay in January and July, but we don't pay any attention to that either. Unthinking seems to work fine.

If we were getting dividends paid in taxable accounts we would have to think a little bit about a 3-way trade-off: reinvest for tidiness at the cost of having tiny share lots with different cost basis, reinvest for tidiness and plan to use average cost for tax purposes, or just take the dividends in cash and let them be part of are occasional cash draws. Regardless, again, I don't care much about the amounts or timing. Money is fungible.

I'm 99% sure that the dividends and interest total is not enough to cover our spending but I have never bothered to check. Unthinking seems to work fine.
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Old 10-19-2020, 09:37 AM   #118
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Quite a surprise this morning to find that I am in the category of "unthinking persons." But maybe that's right.

At this point, essentially 100% of our money is in IRAs and Roths. All dividends and interest from mutual funds are reinvested. When either of us runs short of cash, we draw from our IRAs. Probably a dozen times a year between the two of us, low $1Ks at at time except the December income tax withholding. I have no idea what amounts or when fund dividends are paid and I don't care. Why would I? What is there to think about? Unthinking seems to work fine.

Our TIPS interest payments, twice a year, can't be automatically reinvested but, again, we really don't pay much attention to them. They just sit in the accounts until the money get drawn out as we need cash. I recall that they pay in January and July, but we don't pay any attention to that either. Unthinking seems to work fine.

If we were getting dividends paid in taxable accounts we would have to think a little bit about a 3-way trade-off: reinvest for tidiness at the cost of having tiny share lots with different cost basis, reinvest for tidiness and plan to use average cost for tax purposes, or just take the dividends in cash and let them be part of are occasional cash draws. Regardless, again, I don't care much about the amounts or timing. Money is fungible.

I'm 99% sure that the dividends and interest total is not enough to cover our spending but I have never bothered to check. Unthinking seems to work fine.
I apologize, I did not provide enough context. I was thinking in terms of a taxable account. It does appear as a shell game to reinvest divs and then sell. Though I suppose even there, it could be a part of a re-balancing scheme. But the post I responded to was talking about drawing these to cover spending, at least, that's how I read it.

In an IRA, sure let them reinvest and draw what you want or are required, it really doesn't matter, it's all the same tax-wise.

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Old 10-19-2020, 12:36 PM   #119
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Fair questions that deserve some clarifying.
1. Depends on the size of your portfolio. I totally agree that a conservative WR is fine for someone with a large portfolio but for someone with a more modest size one committing to a rigid WR w/o any adjustments in ER may have serious consequences down the road. In this scenario, I will fully agree that not including your dividends as part of your WR makes no sense. You need them in a big downturn. E.G to address this and your last question. I have been fortunate to enjoy a 7 figure portfolio. One contributor suggested that dividends can go down. Well not necessarily. I only invest in the best of the best individual stocks that have not had a decrease in 30 years through both good and bad times and have been able to reinvest my dividends when prices are lower. I have friends with more modest portfolios and I realize that they need to include them as part of their WR. What I was suggesting is in a severe downturn unless they absolutely can't do it they might need to reduce their WR from say 4% to 3% including dividends. Now to get to your 2nd question, yea you need more than a hint but hey I was still on my first cup of coffee. I've have always been a fan of the late great Harry Browne, economic theorist, libertarion(ran for president once) social theorist etc. Before I owned my first stock, I was reading his works on the fiat money system we're now living with and the ramifications for this country. 1st hint in his book from the 80s, You can profit from a monetary crisis, he suggested the effects of totally removing the dollar completely from a hard money to a fiat system would have. He even predicted that gold could go as high as $600/oz. Have you seen it lately. Of course he would never have dreamed of the QE scam that has turned us all into speculator to a degree. In his book, Why The Best Laid Investments Plans Usually Go Wrong, he laid out how it is virtually impossible to predict with absolute certainty which way different markets will fare even if you think you can. His recommendation equitys(25%), Bonds LT Treasury(25%), Cash(25%), and precious metals(25%) and rebalance yearly. Yes it is flexible. I do 30-30-30-10 and have done well in bulls and limited losses in bears. He recommends growth equities, I prefer dividends although I would do growth in my 30's rather than 50s. A reasonable portion of your cash or even bond portion could be diverted to some international MF's to protect against falling dollar. He also suggests that any amount above the 100% can be put in a "variable portfolio" for things like REITS, bitcoin etc. No it wont make you a multimillionaire, but can provide some reasonable safety and income in ER. Sorry for being too vague. Best.
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Old 10-19-2020, 02:11 PM   #120
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On the behavioral finance track, I can see that risk aversion might cause a person to feel more comfortable with a perceived-steady stream of dividends rather than feeling totally at the mercy of the market. Lots of ways to logically attack that, of course, but so what?
I almost hate to say this but in some situations if a steady stream of income makes a person more amenable to investing, then why not get an annuity (sorry for the cuss word) large enough to cover the ongoing expenses of life. Hopefully, that would free one from the mental/emotional baggage that keeps them from investing the rest of their money into a basic total market index fund. Or, if it makes sense in one's situation, taking SS at 70 makes it easier to face the ups and downs of stock index funds. And the SS payment is inflation adjusted. Very nice.

I offer these ideas as a possible alternative to dividend stocks. It's good to have choices.
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