The Mystery of Spending Only Dividends Behavior

[COcheesehead]

I know this topic has been discussed a bunch, but I thought the article was interesting.

https://talkmarkets.com/content/the...the-spend-dividends-only-strategy?post=216612

 

[pb4uski]

A mystery to me too.... I wonder if some of it might be Depression era thinking... my grandmother would have been in the don't touch principal camp. My view is that if one has a well diversified portfolio and a sensible WR then there may be years that income (including stock appreciation or depreciation) will be less than withdrawals but those instances should be rare. IOW, in most years the portfolio would increase since average returns (say 6-7%) exceed average withdrawal rates (say 4%) but there will be that occasional "bad" year where the portfolio balance will decline (like 2018).

 

[Mdlerth]

Sell some of your stocks? BOHICA!

Perhaps there is a lingering memory of the time when there were significant transaction costs associated with buying and selling stocks, whereas the dividend checks just arrived in the mail without having to pay stifling commissions.

And God forbid you sold an "odd lot"*. You might as well just hand it all over to the brokerage, along with a jar of Vaseline.

Charles Schwab, et al, began changing that game decades ago, but I think it's part of the human psyche to cling to paradigms long after their applicability is gone.

*For the younger folks who weren't around before the 1970s, an "odd lot" meant a quantity of shares that wasn't an integer multiple of 100.

 

[Ready-4-ER-at-14]

I am in the spend dividends rather than sell stock camp.

It is easier to predict on my spread sheet passive dividend flow of dividend habitual payers (10+ years) than what the stock price will be say out two years.

When I sell stock it is because the price has gone logarithmic and I can substantially beat the dividend yield with fixed income. I tend not to sell all of it and consider rebuying when price dividend yield and the chart is better.

 

[target2019]

I do Dividends.

 

[RunningBum]

My late neighbor, who was born toward the end of the Depression, told me in a sad way that he was having to touch his principal. He said his dad told him "Never touch the principal!", imitating him in a stern, warning voice. I think he was trying to make something political out of it as he liked to do especially from 2009-2016 so I didn't bite. In any case, they liked to travel, eat out, give gifts to their fairly large family, drive nice cars, etc, so I'm glad he didn't feel totally constrained to not touch the principal.

Years ago someone here likened it to owning land, and living partly on proceeds from the land (farming or whatever), and also selling bits and pieces of land along the way. The more you sold, the less you had to farm with, so you'd progressively have to sell more and more and it wasn't sustainable. I think I'm representing that correctly. The problem with the analogy is that stock isn't a fixed and limited resource. A better (not perfect) analogy might be a lake. You can take buckets out, and the lake will likely replenish through feeding streams and rain as long as you don't take out too much at once.

I think there are still some valid reasons for such a strategy. If you feel value stocks are safer, that will probably lead you to dividend stocks. But unless you really want to leave a lot to heirs, I think you've overshot the mark if you work and save until you can live on dividends alone. You should be able to live off dividends plus slight withdrawals and time it to easily last your whole life. But not everyone is in a situation where they regularly accumulate until they can retire. Some have windfalls, or business sales, or pensions they have to qualify for, and may suddenly find themselves richer than they need to be.

The odd lot theory has some merit too. I think people used to own a lot more individual stock than mutual funds. Paying the price for selling shares, plus just trying to decide which shares to sell (especially for widows who might not have been involved in investment decisions) was probably scary. Some of the last part still probably hold true; I've read where some here have spouses who are uninterested or unwilling to learn about their finances and basically need a fool proof plan.

 

[Andre1969]

There might be some credence to that old fashioned thinking, about odd lots and such. We used to have a secretary here at work, who retired a few years back. She must be about 84 by now. Anyway, we were talking stocks one day, and she said that she was told you had to buy or sell at least 100 shares of a stock, for it to really be worthwhile.

I told her that wasn't true, that it didn't really matter that much. But, I guess the whole "odd lot" thing is where she got that mindset from.

Anyway, when I retire, I'm hoping to keep from touching the principal and just live off the dividends, at first, at least. But, I think once I get a little bit older, and don't have to plan for as many years out, I might be more comfortable digging into the principal.

 

[wmc1000]

We are fortunate that we are in the spend neither dividends nor principal until about 80 or so. Then spend dividends only as necessary until about 90.

If we are fortunate enough to make it that far then we may need to spend some of the principal depending on health, etc.

We view principal as our longevity insurance in case of health needs, assisted living, nursing home care, etc.

 

[scrabbler1]

The backbone of my ER plan is living off dividends as a stand-in for my former biweekly paycheck. Most (74%) of my dividend income is from one big bond fund which pays monthly. The rest is from two smaller bond funds (6%) and one stock fund (20%). If I use principal to cover occasional big expenses, I replenish it (or most of it) later. Market gains have also offset principal withdrawals.

 

[marko]

Years ago someone here likened it to owning land, and living partly on proceeds from the land (farming or whatever), and also selling bits and pieces of land along the way. The more you sold, the less you had to farm with, so you'd progressively have to sell more and more and it wasn't sustainable. I think I'm representing that correctly. The problem with the analogy is that stock isn't a fixed and limited resource. A better (not perfect) analogy might be a lake. You can take buckets out, and the lake will likely replenish through feeding streams and rain as long as you don't take out too much at once.
.

You may have been thinking of a comment I made a while ago and yes, you have represented it correctly. Your lake analogy is better.

But I think my bold above is the key. I was brought up with 'never touch the principal' and tragic stories of lost fortunes that ended with "they had to dip into the principal" as if that explained everything.

More of a old money mindset than a Depression one. (the 16th amendment threw everybody a curve as well but that's another story)

My view is that only spending dividends/interest is a way to force those in a certain demographic to live within their means. We all know of too many situations where fortunes large and small were squandered by overspending.

If it's drilled into you at an early age to only live off your dividends you're more likely to find a way to stay within the guardrails.

Having said that, we just find that setting aside the dividends/interest is an easy, mindless way to access funds without having to think about it. Every month we get a dumping regardless of price and that is what we live on. Meanwhile, the principal continues to grow same as the lake refilling.

I would hate to have needed money for expenses in late 2008/early 2009 and be forced to have to sell shares, yet our dividends and interest for that period came in at an acceptable level.

 

[Montecfo]

If you want to "live of the dividends" then you will need to accumulate more than if you live off the total return of investments. Accumulating enough to do that is in a way at odds with retiring early-it will delay your ability to retire, by definition.

Having said that, it is more conservative and also prioritizes heirs. That may be more important to some than others. It can also lead to a portfolio too heavily tilted toward slow growth and high dividends, in my view.

I do like the lake analogy. Imagine a lake that grows larger on average, every year, producing more and bigger fish. Some years you sell water too. But the lake remains far larger than when you started and continues to grow.

How about a grove of cherry trees? You live off the cherries, but some years you trim trees or cut down the least productive trees and sell the valuable wood. You still have the land which can be replanted and the managed grove produces more each year on average.

To me investing for total return will produce the most and makes the most sense for me. I like dividends but will not try to live off of them alone, but it may happen.

 

[marko]

If you want to "live of the dividends" then you will need to accumulate more than if you live off the total return of investments. Accumulating enough to do that is in a way at odds with retiring early-it will delay your ability to retire, by definition.

True if you're starting out cold. If the dividends were bequeathed to you by someone four generations ago (and you're expected to pass on the same) it's a different thing.

Some people I know never retired early as they never went to work at all.

 

[audreyh1]

I think it comes down simply to how much you have amassed before retiring.

Once upon a time, dividends and interest easily paid out around 5%, well above someone’s planned 4% withdrawal rate.

That totally changed in the 80s and 90s bull market. Companies became able to buy back their own stock and preferred to do so. Stocks also lost their risk premium as they became very popular (more trusted) and PE ratios rose. By 2000 S&P500 had dropped dropped to almost 1%. During the 2000s interest rates dropped extremely low as well. S&P500 dividend yield did recover to closer to 2% since 2000, and interest rates around 2.5%.

These days with low interest rates and even lower S&P500 dividend yield you have to have a pretty big pile = low withdrawal rate to live off dividends only.

How many extra years does one work to be in such a pretty position? I personally have no trouble potentially spending down most of the nest egg.

If someone has the funds and prefers to live off dividends and interest only, I’m not going to argue with them. VYM is yielding around 3.3% so it’s not as tough to do now as it was a few years ago.

 

[CRLLS]

I am not in the "live off the dividend" camp. That being said, I can see how it might simplify the annual tax season without having to report, or keep track of the basis on the stocks or funds you sold. Maybe I'm overthinking that. I don't currently have stock or MF's outside an IRA or Roth

 

[scrabbler1]

If you want to "live of the dividends" then you will need to accumulate more than if you live off the total return of investments. Accumulating enough to do that is in a way at odds with retiring early-it will delay your ability to retire, by definition.

In general, I suppose this is true. But for me it was careful waiting combined with some very unusual market conditions which encouraged me to wait a little longer and give my ER at age 45 (pretty early, don't you think?) an extra boost at its onset.

In 2008, as the markets were tumbling, the company stock I owned was still rising in value while the NAV of the big bond fund I planned to buy into was dropping like a rock. Watching my ability to "Sell Higher" and "Buy Lower" at the same time was increasing throughout the year. Had I tried to ER earlier, I would have had less in company stock to cash out and fewer shares to buy because the bond fund's NAV was still high. Had I ERed later, the company stock fell some while the bond fund's NAV fell a little more before rising again.

 

[jimbee]

Math is hard, and behavioral economics is a thing. Interesting article.

 

[OldShooter]

As mentioned in the article, this question is really just another form of mental accounting. The dollars are the same however they come to the investor. An analogous situation, maybe, is that we think about emergency savings differently than we think about the dollars in our wallets. But the dollars are the same.

The question of whether a company should pay dividends versus the more tax-efficient stock buybacks is really a variation on this. In a world of super-rational "econs" companies would not pay dividends. All capital returned to shareholders would be via buybacks. But the world is heavily populated by "humans" who have the paradigm that "principal" dollars are different than "dividend" dollars, so companies respond to what their shareholders want, as do mutual fund companies selling "dividend" funds.

 

[marko]

I think it comes down simply to how much you have amassed before retiring.

Once upon a time, dividends and interest easily paid out around 5%, well above someone’s planned 4% withdrawal rate.

That totally changed in the 80s and 90s bull market. Companies became able to buy back their own stock. Stocks also lost their risk discount as they became very popular (more trusted) and PE ratios rose. By 2000 S&P500 had dropped below 2%. During the 2000s interest rates dropped even farther than that.

These days with low interest rates and even lower S&P500 dividend yield you have to have a pretty big pile = low withdrawal rate to live off dividends only.

How many extra years does one work to be in such a pretty position? I personally have no trouble potentially spending down most of the nest egg.

A very good point. If we're talking about dividends in the strictest sense sure.

If you broaden the word "dividend" to also include MF cap gains, (which are taxed, affect the share price and sort of behave the same) and bond interest (HY paying around 6% now) once can easily remain in the 5%+ range.

My personal dividends/interest and MF cap gains came to a little over 7% last year.

Forgive me if I lump them all together; maybe my comments are more about income investing than dividends per se.

 

[Dash man]

Dividends are our primary source of funds, along with interest from CDs, some bonds and savings. We’ve held most of our dividend stocks for years and watched the dividends grow. Not only from dividend increases, but by reinvesting them. Now we spend the dividends in our taxable account, but reinvest those in tax deferred accounts. Dividend increases are like getting a raise each year.
We will take capital gains if needed, especially if we can offset with a stock loss. But we’re far from any losses right now. I’d also sell if a company’s numbers showed weakness. But we do want to help family by passing this on. We’re far from depriving ourselves of anything.

 

[dtbach]

I mostly live off dividends, but certainly not adverse to selling if the price warrants it. When I do sell, I spend some and invest the remainder in bonds which then gives me more in dividends to spend the next year.

 

[audreyh1]

A very good point. If we're talking about dividends in the strictest sense sure.

If you broaden the word "dividend" to also include MF cap gains, (which are taxed, affect the share price and sort of behave the same) and bond interest (HY paying around 6% now) once can easily remain in the 5%+ range.

My personal dividends/interest and MF cap gains came to a little over 7% last year.

Forgive me if I lump them all together; maybe my comments are more about income investing than dividends per se.

But MF cap gains aren’t dividends and taking them is eating principal, something a dividend investor seeks to avoid. You can’t count them as part of your yield. They are not.

A dividend investor is more likely to own stocks directly, or invest in a dividend yield etf like VYM or SCHD that won’t pay out capital gains. Or if they do own other mutual funds will reinvest the cap gains.

Counting on high yield bond interest rates for income? That’s a risky strategy. Basically taking equity like risk highly correlated to stocks, you’re not getting diversification against stocks there.

But whatever strategy floats your boat.

 

[Ready-4-ER-at-14]

I believe the book the richest man in Babylon talked about the interest/dividends from your money as your golden servants slaving to bring us wealth and you should refrain from consuming them until they were multiplying so fast that the ones you consumed were not necessary or missed.

This may have to do with spend down your pot of gold or have it grow while you are consuming. My hope/intent is to have more to spend every year without regret. Old habits die hard though, spouse and I were recently sort of defending to our selves purchases that make life better that were close to but below our tell spouse before that purchase.

 

[38Chevy454]

I think the psychological aspect is there. If you only spend dividends, you will (theoretically) never run out of money. I agree that total return is what counts, the question is can a person separate the logical from the emotional?

 

[GravitySucks]

Wish I could live off dividends and could have if I worked that extra 16 years till 70 but I'll trade equity for time.
I do like companies that pay dividends for a few reasons though:
If the company returns earnings to investors it has less cash tempting them to diversify into side businesses. If I want to diversify I'll buy into that other industry. Companies can use earnings to continue and grow operations, pay out to investors, or expand into other areas. If I owned Facebook and Instagram is not have been happy Facebook bought Instagram.
Stock buy backs used to not be allowed because it is a way to easily manipulate share prices. <sarcasm> Of course people and companies are much more ethical now, so that won't happen.</sarcasm>

 

[carnivalday]

I retired last December at 65, and am living entirely on SS and dividends. I paid off my mortgage before retiring, so I am very comfortable with that income. I own mostly individual stocks, but also have a few ETFs, CEFs, and Preferreds. I think I will be just fine even if I need to liquidate some stocks for a purchase, such as a car.