Dividend Yield vs Total Return Income in Retirement

[Gumby]

I have owned Altria for a very long time, though not as large a position as the OP. I recall that the dividend was cut by 60% during the Great Recession of 2007-09. While I enjoy receiving that currently fat dividend every quarter, my retirement plans do not require it, and I don't count it as "income", just an increase in my portfolio value. I only count as "income" our pensions and social security.

 

[CabinLifeAt50]

Is this a REIT? REIT dividends are NOT qualified. This means REIT dividends are taxed at your normal income tax rate (10%, 12%, etc.)

This may help clarify for those holding reits or interested in them for taxable... not exactly that clear cut and may not be as bad in some cases as it sounds: https://www.reit.com/investing/investing-reits/taxes-reit-investment

 

[OldShooter]

... we have lived exclusively on dividends and cap gains (and SS) for 18 years now.

Despite the 'the price adjusted to reflect paid dividends', we've doubled the value of our portfolio over those 18 years. ...

A 4% return doubles a portfolio in 18 years. Have you tried to do a total return calculation and compare it with a benchmark like S&P total return? That comparison is really the important one.

 

[marko]

A 4% return doubles a portfolio in 18 years. Have you tried to do a total return calculation and compare it with a benchmark like S&P total return? That comparison is really the important one.

I haven't. But note that that is our net return after significant withdrawals. I'd guess the S&P total return is notably higher, but our total return is about 7% and I'm fine with that.

 

[Flyfish1]

Diversify, diversify, diversify.

I shifted my buy and hold/momentum portfolio to a dividend portfolio a couple of years ago. At present that portfolio holds about 80 positions, all about 2-3% of total.

Anyways, there are lots of resources out there to peruse- not just bogleheads, which tends to be favored by this site. Keep reading and learning. Feel free to contact me if you have questions.

 

[ncbill]

A dividend approach is riskier than a total market approach, so returns should be higher but in backtesting the total return approach results in a higher ending portfolio balance.

Now that's comparing indices...once you start picking a limited number of dividend stocks instead portfolio risk goes even higher.

Those chasing higher dividend yields usually end up with significant sector concentration, i.e. more risk.

Most people will ignore the higher risk and focus just on the total return, which given the extra risk should be higher versus a market portfolio, but...

Another dividend approach downside is the income that must be realized, lowering ACA subsidies & limiting headspace for Roth conversions.

 

[Alex The Great]

I do have 66 positions in a dividend portfolio equally distributed, each is 2-3% of total for a few years. Recently the total return has been higher than index, but it is likely due to the market downturn we experienced lately. But in a long term, I definitely expect it to underperform index. It is a part of retirement income I plan for. I don't have a problem in income realized regularly as I need this income anyway.

 

[marko]

A dividend approach is riskier than a total market approach, so returns should be higher but in backtesting the total return approach results in a higher ending portfolio balance.

Now that's comparing indices...once you start picking a limited number of dividend stocks instead portfolio risk goes even higher.

Those chasing higher dividend yields usually end up with significant sector concentration, i.e. more risk.

Most people will ignore the higher risk and focus just on the total return, which given the extra risk should be higher versus a market portfolio, but...

Another dividend approach downside is the income that must be realized, lowering ACA subsidies & limiting headspace for Roth conversions.

All good points, but as far as ACA for me, that horse has not only left the barn, it was never even close to being in the barn

 

[Northforker]

Quality stocks like AVGO, ABBV, PRU, JNJ, O, MAIN, ENB, SPG, VZ, BCE , LYB, BNS, DOW, PM, IRM, TU, IP, KHC, CNQ, BMO, MMM, TD, INTC, RY, XOM, DUK, SO, VLO, JPM, MMP, VGR, PEP, KO all pay good dividends, and are diverse across the sectors. For further diversification, the following ETFs will help spread the risk. VYM, VYMI, HNDL, SCHP, UTF, IDV, SPHY, USHY, VWOB, SPY, SPYD, KNG, XLE, VDE, SPHD, DHS, SCHD, HDV, SDY, will provide growth and income. My dividends exceed my expenses, I have about 20 more positions than I listed. ENR, ITW, CAT, LMT, TXN, TSN, GPC, CVS, ETN, TSM, MCD, HRL, QCOM, LOW ADM, PH, WMT, COST, MSFT are all quality companies that are a little lower dividend payers that provide growth opportunities.

 

[OldShooter]

Quality stocks like AVGO, ABBV, PRU, JNJ, O, MAIN, ENB, SPG, VZ, BCE , LYB, BNS, DOW, PM, IRM, TU, IP, KHC, CNQ, BMO, MMM, TD, INTC, RY, XOM, DUK, SO, VLO, JPM, MMP, VGR, PEP, KO all pay good dividends, and are diverse across the sectors. For further diversification, the following ETFs will help spread the risk. VYM, VYMI, HNDL, SCHP, UTF, IDV, SPHY, USHY, VWOB, SPY, SPYD, KNG, XLE, VDE, SPHD, DHS, SCHD, HDV, SDY, will provide growth and income. My dividends exceed my expenses, I have about 20 more positions than I listed. ENR, ITW, CAT, LMT, TXN, TSN, GPC, CVS, ETN, TSM, MCD, HRL, QCOM, LOW ADM, PH, WMT, COST, MSFT are all quality companies that are a little lower dividend payers that provide growth opportunities.

Makes my head hurt.

 

[Flyfish1]

A dividend approach is riskier than a total market approach, so returns should be higher but in backtesting the total return approach results in a higher ending portfolio balance.

Now that's comparing indices...once you start picking a limited number of dividend stocks instead portfolio risk goes even higher.

Those chasing higher dividend yields usually end up with significant sector concentration, i.e. more risk.

Most people will ignore the higher risk and focus just on the total return, which given the extra risk should be higher versus a market portfolio, but...

Another dividend approach downside is the income that must be realized, lowering ACA subsidies & limiting headspace for Roth conversions.

Soooo much to disagree with here. One big point I think total return investors miss is that dividend investors are not that concerned with total return. We want the income, not necessarily a valuation increase since we have no intention of selling shares ...ever. In fact by reinvesting a portion of income we can be net buyers of shares throughout retirement, thus increasing our income to keep pace with inflation.

Secondly, the statement that dividend investors end up with more concentrated risk is complete and utter nonsense. That depends on portfolio construction.

It's been discussed numerous times that income investing actually lowers your risk. Bear markets are nothing more than buying opportunities. You are not forced to sell shares in a down market. Yes, dividends can be cut, but dividends can also increase.

In the end these are two very different approaches. So, I use both...

 

[target2019]

Soooo much to disagree with here. One big point I think total return investors miss is that dividend investors are not that concerned with total return. We want the income, not necessarily a valuation increase since we have no intention of selling shares ...ever. In fact by reinvesting a portion of income we can be net buyers of shares throughout retirement, thus increasing our income to keep pace with inflation.

Secondly, the statement that dividend investors end up with more concentrated risk is complete and utter nonsense. That depends on portfolio construction.

It's been discussed numerous times that income investing actually lowers your risk. Bear markets are nothing more than buying opportunities. You are not forced to sell shares in a down market. Yes, dividends can be cut, but dividends can also increase.

In the end these are two very different approaches. So, I use both...

There are two extremes mentioned every time the word dividend appears in a thread here. So it's interesting to hear your ideas which are somewhere in the middle. Yes, we can use different approaches in our portfolio.

How do you feel about investing in dividend ETF's for example (SCHD), vs. individual companies (many are mentioned in previous posts by others) vs. broad index (VTI, total return)?

Having used all of those, I find that there's time required which one may or may not have, depending on the approach. Of course it varies. One extreme (one fund only until the end of time) says use VTI for its simplicity and ultimate diversification. I'm pulled towards that recommendation for many who show up here looking for advice.

And now I place this card on the table, and will listen in silence to other responses.

 

[Northforker]

Makes my head hurt.

You should probably buy an annuity then. Simple, but ineffective.

 

[Flyfish1]

There are two extremes mentioned every time the word dividend appears in a thread here. So it's interesting to hear your ideas which are somewhere in the middle. Yes, we can use different approaches in our portfolio.

How do you feel about investing in dividend ETF's for example (SCHD), vs. individual companies (many are mentioned in previous posts by others) vs. broad index (VTI, total return)?

Having used all of those, I find that there's time required which one may or may not have, depending on the approach. Of course it varies. One extreme (one fund only until the end of time) says use VTI for its simplicity and ultimate diversification. I'm pulled towards that recommendation for many who show up here looking for advice.

And now I place this card on the table, and will listen in silence to other responses.

Love the card!
I know it's almost as bad as stating you are a hardcore Democrat or Republican and the other side is wrong. I use both so what does the make me??lol

SO, for total return/buy and hold I use an index. Personally I use SPY for no significant reason. For dividends I don't hold a lot of individual companies but mainly dividend funds, equity, bonds, REIT's, preferred's, etc..

 

[ncbill]

Soooo much to disagree with here. One big point I think total return investors miss is that dividend investors are not that concerned with total return. We want the income, not necessarily a valuation increase since we have no intention of selling shares ...ever. In fact by reinvesting a portion of income we can be net buyers of shares throughout retirement, thus increasing our income to keep pace with inflation.

Secondly, the statement that dividend investors end up with more concentrated risk is complete and utter nonsense. That depends on portfolio construction.

It's been discussed numerous times that income investing actually lowers your risk. Bear markets are nothing more than buying opportunities. You are not forced to sell shares in a down market. Yes, dividends can be cut, but dividends can also increase.

In the end these are two very different approaches. So, I use both...

Sure, some want a minimum level of income to SWAN and using dividend-paying stocks is one way to get there.

But yes, those chasing the highest dividend yields do indeed find themselves concentrated in certain sectors.

Hopefully that was by their choice & not by accident simply seeking the highest yields.

And IIRC "income investing actually lowers your risk" refers to fixed income.

As for bear markets, don't forget the Great Recession showed us dividends can be cut dramatically, or even eliminated entirely.

Before that the consensus among dividend fans was the above wouldn't happen short of actual bankruptcy.

 

[ncbill]

Soooo much to disagree with here. One big point I think total return investors miss is that dividend investors are not that concerned with total return. We want the income, not necessarily a valuation increase since we have no intention of selling shares ...ever. In fact by reinvesting a portion of income we can be net buyers of shares throughout retirement, thus increasing our income to keep pace with inflation.

Secondly, the statement that dividend investors end up with more concentrated risk is complete and utter nonsense. That depends on portfolio construction.

It's been discussed numerous times that income investing actually lowers your risk. Bear markets are nothing more than buying opportunities. You are not forced to sell shares in a down market. Yes, dividends can be cut, but dividends can also increase.

In the end these are two very different approaches. So, I use both...

Sure, some want a minimum level of income to SWAN and using dividend-paying stocks is one way to get there.

But yes, those chasing the highest dividend yields do indeed find themselves concentrated in certain sectors...hopefully that was by their choice & not by accident simply seeking the highest yields.

And IIRC "income investing actually lowers your risk" refers to diversification into fixed income investments, which at least in theory should have little correlation to equity investments though recently that has not been the case.

As for bear markets, don't forget the Great Recession showed us dividends can be cut dramatically, or even eliminated entirely.

Before that the consensus among dividend fans was that would never happen short of actual bankruptcy.

 

[Chuckanut]

And now I place this card on the table, and will listen in silence to other responses.

My response is that the banks that issued my two main credit cards pay me a lot more the $50 every year in cash-back. And, it's not taxable.

 

[Dash man]

Sure, some want a minimum level of income to SWAN and using dividend-paying stocks is one way to get there.

But yes, those chasing the highest dividend yields do indeed find themselves concentrated in certain sectors...hopefully that was by their choice & not by accident simply seeking the highest yields.

And IIRC "income investing actually lowers your risk" refers to diversification into fixed income investments, which at least in theory should have little correlation to equity investments though recently that has not been the case.

As for bear markets, don't forget the Great Recession showed us dividends can be cut dramatically, or even eliminated entirely.

Before that the consensus among dividend fans was that would never happen short of actual bankruptcy.

Dividend cuts are rare and companies that grow their dividends each year are even more rare. As with any stock you have to monitor it a get out when the fundamentals change for the worse. I haven’t looked it up, but I imagine more non dividend paying companies go bankrupt than dividend paying companies. Non of my dividend paying stocks have gone bankrupt and only one, MAIN, reduced its dividend, but has restored it and reinstated its special dividend in June and December.
Here are some charts showing my favorite dividend ETF and how it’s held up well in the recent down market.

 

[OldShooter]

... But yes, those chasing the highest dividend yields do indeed find themselves concentrated in certain sectors. ...

Yes. I use the word "sectors" to refer to any method of slicing the pie. Generally, dividend investors are implicitly avoiding growth stocks where the companies have ample and exciting investment opportunities for their cash. Think about Amazon in the early days, for example. Interestingly, too, dividend investors are also implicitly avoiding companies that return cash to investors via buybacks, a more tax-efficient way. Said another way, dividend investors' portfolios exclude somewhere between one-third and half of all stocks. That's a big sector to be ignoring.

Aside: While checking the market percentage of dividend payers I stumbled across this: https://money.usnews.com/money/blog...14/02/04/7-myths-about-dividend-paying-stocks

You should probably buy an annuity then. Simple, but ineffective.

Actually, we own all the stocks you do plus thousands more. This is a proven effective portfolio strategy. In contrast, it's probably almost impossible for an individual to determine the total return on a complex portfolio like you describe. So you probably don't know whether your portfolio is effective or not.

What you can be sure of, I think, is that it involves a lot of work. We hold basically one fund and it is no work at all. Not working is a general goal of mine.

 

[Dash man]

Generally, dividend investors are implicitly avoiding growth stocks where the companies have ample and exciting investment opportunities for their cash. Think about Amazon in the early days, for example. Interestingly, too, dividend investors are also implicitly avoiding companies that return cash to investors via buybacks, a more tax-efficient way. Said another way, dividend investors' portfolios exclude somewhere between one-third and half of all stocks. That's a big sector to be ignoring.

None of this is true for dividend investors, with the possible exception of a few extremists. Do you not consider MSFT, AVGO, AAPL, LLY, HD growth stocks? They pay nice dividends that grow and most dividend investors likely own them.

 

[pb4uski]

...Here are some charts showing my favorite dividend ETF and how it’s held up well in the recent down market. ...

I dunno. Looks like SCHD underperforms VOO by a fair margin based on average rolling 3, 5 and 7 year returns. From Portfolio Visualizer.

......	Schwab US Dividend Equity ETF	Vanguard S&P 500 ETF.....

Roll Period	Average	High	Low	Average	High	Low
1 year	15.13%	67.92%	-10.88%	15.48%	56.46%	-10.59%
3 years	12.96%	23.91%	3.41%	13.76%	26.01%	5.08%
5 years	12.80%	17.27%	5.85%	13.55%	18.87%	6.70%
7 years	12.53%	14.18%	8.23%	13.24%	14.90%	9.61%
10 years	14.41%	15.34%	13.33%	14.81%	16.52%	12.93%

 

[ncbill]

Dividend cuts are rare and companies that grow their dividends each year are even more rare. As with any stock you have to monitor it a get out when the fundamentals change for the worse. I haven’t looked it up, but I imagine more non dividend paying companies go bankrupt than dividend paying companies. Non of my dividend paying stocks have gone bankrupt and only one, MAIN, reduced its dividend, but has restored it and reinstated its special dividend in June and December.

As I said, the Great Recession was the game changer.

https://www.barrons.com/articles/dividend-stocks-recession-51657285544

"Ben Snider, a senior equity strategist at Goldman Sachs , points out that during the 12 U.S. recessions since World War II, the median decline in dividends paid by S&P 500 companies was just 1%...

'The historical data alone would make you feel pretty comfortable in the trajectory going forward, even in the event of recession' says Snider."

However, that changed in the Great Recession:

"S&P 500 dividends per share dropped by 24% during that period, by far the worst result of any U.S. recession going back to the late-1940s, according to Goldman Sachs."

And even more recently:

"Consider the two-month economic contraction from February to April 2020 when the pandemic caused much of the U.S economy to shut down temporarily and gross domestic product shrank by a third.

That year, 42 S&P 500 companies suspended their dividends, and there were 28 cuts.

While many of the cuts came from companies most affected by Covid lockdowns, '2020 was particularly extraordinary in the speed with which the economy shut down and [corporate] cash flows slowed,' says Snider."

So now companies are prepared to cut dividends at the drop of a hat, and you as an individual investor will not know until the cuts are publicly announced.

COVID, of course, affected other investments negatively.

Consider how much riskier investing in residential real estate has become.

Investors now have to prepare for collecting zero rent for potentially years while having to maintain & pay taxes on their properties.

BTW, the dividend ETF you cited had essentially the same return as the stock index over a 10 year period, but with more risk.

 

[OldShooter]

None of this is true for dividend investors ...

Dividend investor portfolios don't exclude a large fraction of the market?

 

[Flyfish1]

I think I have learned my lesson: Never, ever type the words dividends or income investing on this website. In fact they should be banned.
Too many people have dogmatic views of investing and won't accept other viewpoints or opinions. I guess this website will be best to just look for Wordle hints....

 

[Montecfo]

Love the card!

I know it's almost as bad as stating you are a hardcore Democrat or Republican and the other side is wrong. I use both so what does the make me??lol



SO, for total return/buy and hold I use an index. Personally I use SPY for no significant reason. For dividends I don't hold a lot of individual companies but mainly dividend funds, equity, bonds, REIT's, preferred's, etc..

Exactly. The intolerance of differing investment approaches is stunning.