The Mystery of Spending Only Dividends Behavior

[misanman]

We're in the dividends camp as SS + dividends + interest + small pension actually adds up to more than we earned the last few years of working. And even then we don't usually spend it all. Although, I follow with increasing interest the "blow the dough" topic.

 

[Midpack]

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.

Dividends are generating more than enough income for us, but we have no qualms about selling equity (funds) for rebalancing or tactical changes and taking $ out of equities and have. Our asset allocation and specific holdings were chosen without considering yields as a top priority.

As long as one doesn't over emphasize income producing holdings in asset allocation, I'm not sure what's wrong with spending taxable dividends first. But maybe I'm missing something...

 

[marko]

But MF cap gains aren’t dividends and taking them is eating principal, something a dividend investor seeks to avoid.

I must be missing something. My MF cap gains don't change my number of shares. I still own the same number of shares I bought 20 years ago.

Back to the farm analogy, I still own the same X acres; they may be worth less immediately because I sold some trees but eventually the value of the acres returns to--or exceeds--what I paid for them originally.

True, the share price goes down --same as a dividend payout-- but, like the lake being refilled, the price slowly goes back up over time.

If I understand your point, spending dividends also eats into principal no? Outside of the source, I don't see the difference between the two.

 

[scrabbler1]

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.

My bond funds rarely issue cap gain distributions. But if they do, I reinvest them which increases the number of shares I own, even slightly, and that boosts my monthly dividends. The NAV of my big bond fund matters little to me because its NAV doesn't determine my monthly dividend. Only the number of shares and the monthly dividends per share matter.

My stock fund does issue cap gain distributions once or twice a year, and sometimes they are large (like in 2017 and 2018). If I reinvest them, or even some of them, the number of shares rise which later boosts the fund's quarterly dividends the same way the bond fund's dividends rise following a cap gain distribution.

The main reason I sell any shares of either the stock or bond fund (usually from stock to bond) is to rebalance. This forces me to sell relatively high while buying relatively low.

 

[pb4uski]

Dividends and interest only cover about 62% of our spending over the last three years... pension is about 18% so rest is appreciation I guess. Despite spending much more than dividends and interest, our portfolio is 7 percent higher than three years ago... 15% higher if I include the value of our winter condo that was paid for in cash from the portfolio.

The way I view it, I started in 1977 with nothing but a degree and saved for my retirement... not to hoard money.... while it is very likely that our heirs and charities will get rich when we die if I die broke it wouldn't be the end of the world.

 

[foxfirev5]

Since a dollar is a dollar I don't really think it matters that much. Personally I am grateful the dividends and interest are sufficient for supplementing my SS and pension. No forecasts of the future are required. I just take what the market gives me. If that is not the case in the future my portfolio may have grown enough to take some off the table. Or not.

 

[RobbieB]

I spend dividends and interest first, then sell shares / bonds.

 

[Crabby Mike]

We live largely on a combination of dividends and Social Security, and as others here have said, the relatively steady cash flow makes for easy budgeting and quarterly estimated tax payments. We do sell and take a cap gain from time to time for major purchases or other reasons, but prefer to do so sparingly for one main reason -- capital gains tax can be avoided entirely through basis step-up when we leave stocks to our heirs. Also, some of our stocks are inherited (through a trust, and therefore without stepped-up basis), and would be over 90% subject to capital gains. Looking at the "big picture" through the next generation, avoiding taking cap gains now will leave more $ in the hands of our kids when we're gone.

 

[CyclingInvestor]

Dividends only here. Dividend flow is now 70% higher than final salary (12 years ago), so I am buying more stock each year, hence I like lower stock prices.

I do not think that dividend growth investing results in more profits than total return investing, I do it because it makes me feel better, and not care about current market prices.

 

[W2R]

This is my 10th year of retirement and despite my portfolio being mostly broad index funds, still I have never spent more than my dividends, even when buying my Dream Home; I had saved up enough dividends in the years prior to cover that expense. I re-invest capital gains as a measure to help keep up with inflation.

By now I have SS, my mini-pension, and a paid off home and car, so the majority of my expenses are covered before even touching my dividends.

 

[jazz4cash]

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.

Good points. I often think of how much easier it is to trade stocks now compared to ‘back in the day’. Technically an odd lot was anything less than 100 shares and you’d pay a premium to buy or sell, I don’t think it had to be a multiple of 100 shares to avoid the premium IIRC.

 

[mickeyd]

I'm with Buffet on this one. Create your own dividends by taking out what you need when you need it.

 

[youbet]

Combination of div + int and total return here. I do not have divs or CG's auto reinvested and I opportunistically harvest some profits, sell some losers as part of tax loss harvesting and even retain some cash from rebalancing from time to time. From this pile of liquidity, I retain enough for spending needs and reinvest the rest in line with my AA plans.

 

[Clone]

Good points. I often think of how much easier it is to trade stocks now compared to ‘back in the day’. Technically an odd lot was anything less than 100 shares and you’d pay a premium to buy or sell, I don’t think it had to be a multiple of 100 shares to avoid the premium IIRC.

Folks that have only been in the market for the last 15 years have a very different experience than those of us who learned about the market 40-50 years ago. I was in an 'investing club' that would pool a few dollars each month and buy stocks. If it was your month to do a report, you went to the broker that we used (A.G. Edwards), and looked through their books and reports. You would schedule an appointment to talk with the club broker, and then you would condense this into a 10 minute talk. The Wall Street Journal was interesting, and you could sometimes find a person in the office that would let you look at theirs or give you an old one. The broker held the keys to access to most of the information and to the buy/sell opportunities. It is easy to see how the access to information and the on-line trading platforms has radically changed everything.

 

[audreyh1]

I must be missing something. My MF cap gains don't change my number of shares. I still own the same number of shares I bought 20 years ago.

Back to the farm analogy, I still own the same X acres; they may be worth less immediately because I sold some trees but eventually the value of the acres returns to--or exceeds--what I paid for them originally.

True, the share price goes down --same as a dividend payout-- but, like the lake being refilled, the price slowly goes back up over time.

If I understand your point, spending dividends also eats into principal no? Outside of the source, I don't see the difference between the two.

Your share price/NAV dropped when that MF cap gain was paid out. That reduces the principal you had invested in that MF. It may not reduce the number of shares that you own of the MF, but it DOES reflect a reduction in the number of underlying company shares owned by the MF on your behalf. You would have to reinvest that cap gain distribution to stay even.

A capital gain distribution represents realized gains from company shares sold by the MF. If the MF didn't sell any shares they wouldn't have capital gains distributions. Now depending on inflows and outflows), the MF probably bought shares in another company from the proceeds. However, they are still required to distribute the capital gain to MF holders. So if you take that capital gain as income, you've spent some of your principal = gain from shares the MF sold. If you reinvest the cap gain distribution, you maintain your principal in that MF.

 

[tmm99]

I think the charm of dividends is the pension-like, annuity-like aspect - The amount may go up and down a little, but you can predict the approximate amount and you get them periodically without you having to do anything - no selling of anything, or having to decide on anything. Automatic and hands-free. I like them for these reasons.

I have too much money in tax-sheltered accounts and I haven't started my SS yet, so I cannot live without withdrawing from my IRA currently, but I do enjoy my dividends. Canadian stocks pay very good dividends, major corps spitting out 4-5% div yield (banks, telecomm, energy), which I surrounded myself with when I moved here. They comprise less than 10% of my investable asset, but still, it's a good chunk of money as dividends.

 

[COcheesehead]

I think people are missing the point of the article. It’s not that dividends are bad, it’s that some people will spend ONLY their dividends.

 

[pb4uski]

I think the charm of dividends is the pension-like, annuity-like aspect - The amount may go up and down a little, but you can predict the approximate amount and you get them periodically without you having to do anything - no selling of anything, or having to decide on anything. Automatic and hands-free. I like them for these reasons. ...

A total return investor could achieve the same end with a monthly automatic redemption of $x.... I have an elderly friend and we put her into Wellesley with a monthly automatic redemption... it was like a pension to her... so much so that when she was apply for Medicaid nursing home care she mistakenly referred to it as her "pension'.

I do the same thing with an automatic monthly transfer from my online savings account to the checking account that I use to pay my bills... the same online savings account that I replenish back to 5% when I do my annual rebalancing.

 

[Retire52]

With a grand total of 20 months of retirement under me, I'd feel comfortable pulling 4% from my investments irrespective of how the market is doing with one caveat, during a emotionally significant drop, i.e. a correction or worse, I'd shave that withdrawal rate or stop withdrawing all together. Fortunately we could live on our pensions indefinitely, not that we've actually tested this theory, but my spreadsheet says we can with the x factor being my DW and 4x DDs. They've never had to tighten their belts whole existence, so I maybe being too optomistic. I've realized with the fickleness of the market the last year or so where an 10% drop may only be a temporary hiccup, I just sit and wait to see if the market bounces back. If it doesn't, I get on line and tell Vanguard to cease fire with the monthly withdrawals and Div payouts.

With the vast amount of discussions, analysis here and elsewhere on the 4% SWR, I think just tapping dividends is way too convervative for me. I do want to leave my DDs the principal value I started with in my retirement, and I feel strongly a 4% WR will likely have me way overshoot that goal.

 

[free2020]

I'm with Buffet on this one. Create your own dividends by taking out what you need when you need it.

I too am in Buffett’s camp. But only to the extent of a shareholder oriented company like Berkshire Hathaway. Each $ of earnings retained has returned more than a dollar. So far. A dollar in the company’s hands is better than one given out as a divvy.

It eventually comes down to trust (or lack of) that management will deploy earnings on your behalf. It’s rare. If not just outright selfishness, or lack of sensible capital deployment opportunities, there are lots of idiots in charge. Your money is simply not in good hands. A divvy is better than seeing your $ frittered away by mediocrity.

 

[NW-Bound]

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

This!

I still remember when first looking into investing in my 20s, and reading someone who poopoo'ed stocks, saying that the market could spend decades going nowhere. And indeed, the Dow from 1927 (after the Depression crash) till 1982 went nowhere after adjusting for inflation. That's 55 years!

Only later, I discovered that it was a lie or at least half-truth. The stocks used to pay much higher dividends. Some years, the yield reached 10%. Yes, 10%.

Of course, when the dividend was that high and you still sold shares to live on, you would get bankrupt.

 

[RobbieB]

I think people are missing the point of the article. It’s not that dividends are bad, it’s that some people will spend ONLY their dividends.

That makes for regimented living.

 

[Montecfo]

The NAV of my big bond fund matters little to me because its NAV doesn't determine my monthly dividend. Only the number of shares and the monthly dividends per share matter.

Well if you notice, bond and equity prices fall as a business deteriorates. GE was and is a widely held stock that many held for the dividend. The price fell and the dividend was cut. There are many other examples. Prices do matter in fact

 

[Montecfo]

Canadian stocks pay very good dividends, major corps spitting out 4-5% div yield (banks, telecomm, energy), which I surrounded myself with when I moved here. They comprise less than 10% of my investable asset, but still, it's a good chunk of money as dividends.

I understand Steve Eismann of "The Big Short" fame considers Canadian banks to be in a bubble and is shorting them. FyI.

I agree some of the telecoms are interesting.

 

[Sunset]

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.

That would be fine IF companies could all be trusted to do the right thing, but some are slimy.

Some buy back shares, then award lots of those "free" shares to insiders. Nobody notices as the shares outstanding still declined.
With dividend payment only, they cannot hide the extra payment to insiders, by paying them extra cash, or giving away shares shows up as an increase in outstanding shares.