Am I Just Getting Greedy? re: Dividends

[marko]

First of all, I fully realize how dividends reduce the NAV and how " it's all the same" etc etc etc.

I LIKE dividends and cap gains because, for the most part, like many here, I set them aside into a separate 'bank' and draw from them over the course of a year. My number one reason is that it saves me from having to make a "sell" decision when I need cash, which can often be the worst time to do so.

Background:
My dividends have been paying out surprisingly steady amounts over the past 10 years. Just a hair under 2%. Sources are MFs: a mix of Target Dates, HY, Bond funds, Growth funds, Mid-Caps etc. 60/40
My Cap Gains are lumpy but average about 1.7% (2017 will be an exceptionally good year, bringing in this year around 5.5% total Divs and CGs)
My Div/CG bank has about 2 years reserve.

Question:
My total Div/CG average is about 3.5% which generally covers my annual expenses; I haven't had to sell shares to cover expenses for over a decade.

Lately I find myself looking at funds/stocks with higher dividend payouts; trying to get that 2% to 2.5% or 3%. I'm not sure why I'm considering this for --as noted-- I don't really need the extra cash.

So. I'm wondering if my 2% dividends is what most folks here are happy with and am I just getting greedy or if my 2% is considered sub-par with this group. I fully realize that I'm chasing yield and the risks involved.

Yes, this is a first-world problem! I keep saying to myself "don't just do something, stand there!"

 

[GrayHare]

Dividends are wonderful up to the point at which they uncontrollably push one into higher tax brackets. By comparison cap gains are more easily controlled because at a time of your choosing they can be offset by the inevitable losses that come with investing.

 

[ERD50]

First of all, I fully realize how dividends reduce the NAV and how " it's all the same" etc etc etc.

I LIKE dividends and cap gains because, for the most part, like many here, I set them aside into a separate 'bank' ...

To be honest, your second sentence make me think you actually do not "fully realize how dividends reduce the NAV and how " it's all the same" etc etc etc. ".

..
My dividends have been paying out surprisingly steady amounts over the past 10 years. Just a hair under 2%. ...

I'm not sure why that would be surprising. A diversified investment like SPY pays ~ 2% in divs. I think that's pretty steady the past 10 years, but I didn't look it up.

... My number one reason is that it saves me from having to make a "sell" decision when I need cash, which can often be the worst time to do so. ...

Why would that be? The market on average goes up. So why would any particular point "often be the worst time to" sell?

I'm not drawing on my tax deferred yet, nor am I receiving SS or pensions yet. So when the divs are not keeping up with my withdraws, I sell something. I don't really worry about the timing (other than for tax reasons). I'm going to need to sell every once in a while - it will all average out.

And if I collect an extra marginal 2% in divs, that's all taxable. But if I sell an extra 2% to fund my expenses, only the gains (if any) are taxable.

Are you sure you understand?

-ERD50

 

[scrabbler1]

In my 9 years of ER, I have been living off the monthly dividends from a bond fund. Since 2014, I have been supplementing the monthly dividends with quarterly dividends from a stock fund. This bond fund pays about 4.5%, give or take 0.2%, depending on how I measure it. The stock fund pays about 2% a year.


My ER plan has always been to reinvest the more erratic cap gain distributions. This gives me more shares so the dividends pay a little bit more than they would have. The bond fund rarely has cap gain distributions, but it has a few whoppers over the last 9 years. In either case, I don't rely on CG distributions to fund my expenses.


I also have emergency funds invested in muni bond funds. The main one is an intermediate-term muni bond fund which has checkwriting privileges. It pays about 2-2.5% and it is mostly tax-free.

 

[marko]

Why would that be? The market on average goes up. So why would any particular point "often be the worst time to" sell?

Mid February 2009 comes to mind. Many would say that was a bad time to sell equities to cover expenses vs having cash set aside.

 

[marko]

And if I collect an extra marginal 2% in divs, that's all taxable. But if I sell an extra 2% to fund my expenses, only the gains (if any) are taxable.

Sorry. I should have mentioned that the dividends come from within my IRA. Setting aside the dividends is just a way for me to "sell" and set aside cash.

 

[marko]

I'm not sure why that would be surprising. A diversified investment like SPY pays ~ 2% in divs. I think that's pretty steady the past 10 years, but I didn't look it up.

I know. "Surprisingly" was a bad choice of words.

My basic question was if the group here felt that 2% is a satisfactory dividend or if they try to find places to improve upon that.

I'm not asking about the merits of dividends or how folks utilize them.

 

[foxfirev5]

On the equity side my dividends are in the 2.2 % range. Overall about the same as my dividend growth etc.
Fixed income, CDs mutual funds etfs are close to 3% overall.
Entire portfolio - 2.6%
Maybe I'm reaching for yield a tad in some areas like HY bond and Reits but only about 10% of the portfolio.

 

[ERD50]

...

My basic question was if the group here felt that 2% is a satisfactory dividend or if they try to find places to improve upon that.

I'm not asking about the merits of dividends or how folks utilize them.

OK, then I think you pretty much answered your own question:

"I fully realize that I'm chasing yield and the risks involved. "

Personally, I just accept whatever divs the broad based index funds provide, at my chosen AA. I tweak that a bit by keeping lower div payers (smaller cap and some BRK) in my taxable account while I try to maximize ROTH conversions and/or zero LTCG rates.

-ERD50

 

[Golden sunsets]

In my 9 years of ER, I have been living off the monthly dividends from a bond fund. Since 2014, I have been supplementing the monthly dividends with quarterly dividends from a stock fund. This bond fund pays about 4.5%, give or take 0.2%, depending on how I measure it. The stock fund pays about 2% a year..

May I ask what bond fund you use that generates a 4.5% yield?



Sent from my iPad using Early Retirement Forum

 

[scrabbler1]

May I ask what bond fund you use that generates a 4.5% yield?

Sent from my iPad using Early Retirement Forum

The fund is Fidelity Focused High Income Fund (FHIFX). It invests in long-term corporate bonds which are at or slightly below investment grade, meaning bonds rated BBB, BB (mostly), and B. I get a better return than investment-grade bond funds but without the added risk of bond funds with much lower-rated bonds (below B).

 

[ERD50]

The fund is Fidelity Focused High Income Fund (FHIFX). It invests in long-term corporate bonds which are at or slightly below investment grade, meaning bonds rated BBB, BB (mostly), and B. I get a better return than investment-grade bond funds but without the added risk of bond funds with much lower-rated bonds (below B).

Go to this link, and set the slider on the lower right to "ALL" to compare total returns of SPY, FHIFX and BND:

PerfCharts | Free Charts | StockCharts.com

I think you'll find that these high yield bond funds act pretty much the same as a blend of a SPY and BND. Eyeballing it, I'd say a 60/40 AA would give you ~ the same returns and the same volatility as the high yield stuff.

-ERD50

 

[hesperus]

Dividends are wonderful up to the point at which they uncontrollably push one into higher tax brackets. By comparison cap gains are more easily controlled because at a time of your choosing they can be offset by the inevitable losses that come with investing.

+1 You nailed it.
As an early novice investor, I also loved the fact that divvies piled up and I could draw from this pile. However, now they have pushed us into a higher bracket that I have no control over. Had I set up my early investments in holdings that did not pay out regular dividends, I could still easily create the cash flow we need, but could also exercise some control over taxation. Moving in that direction now, but it will take time.

 

[Lawrencewendall]

I know I'm on the aggressive side. My dividends YTD are sitting at 7.3% of current portfolio balance.

 

[GrayHare]

My basic question was if the group here felt that 2% is a satisfactory dividend or if they try to find places to improve upon that.

Can't find it now but within the past couple years there was a survey about what div rate people here were averaging. IIRC 2 point something % was the most common. If you're at 2.0% I could see you boosting that to 2.5% without diverging far from what people here average.

 

[panhead]

First of all, I fully realize how dividends reduce the NAV and how " it's all the same" etc etc etc.

I LIKE dividends and cap gains because, for the most part, like many here, I set them aside into a separate 'bank' and draw from them over the course of a year. My number one reason is that it saves me from having to make a "sell" decision when I need cash, which can often be the worst time to do so."

Yeah, from a behavioral perspective I "like" dividends as well, but I also understand they have a tax drag when not in advantaged accounts. I, like you, understand the divies are really the same as selling shares, except I have no control over them.

So, that being said, I tried to create a portfolio that had a reasonable asset allocation, but also fed my behavioral weakness for divies. I ended up with a portfolio similar to the coffeehouse portfolio. My portfolio divies/interest is usually around 2.5%/year. Reasonable AA with reasonable dividends and interest which keeps me from chasing yield (usually, though I do go through the mental exercise you are doing now from time to time). I at one point looked at putting the majority of my taxable portfolio into vanguard high yield bond and living off of its interest. Still kind of like the idea (it's basically what scrabbler does), but I'm comfortable with my diversified AA and the yield it provides.
Not sure this helped, guess I'm just saying I found a compromise to deal with my behavioral view of dividends.

Pan

 

[Rustward]

the fund is fidelity focused high income fund (fhifx). It invests in long-term corporate bonds which are at or slightly below investment grade, meaning bonds rated bbb, bb (mostly), and b. I get a better return than investment-grade bond funds but without the added risk of bond funds with much lower-rated bonds (below b).

er = 0.83% ?

 

[scrabbler1]

er = 0.83% ?

yes

 

[kgtest]

I know I'm on the aggressive side. My dividends YTD are sitting at 7.3% of current portfolio balance.

I'm at 6.3% with of course a few more days to report in 17. Last year DIV was 9.4%.

 

[Danmar]

I like divs too. The yield in my non tax advantaged accounts are about 3.5% but jump around a bit due to market fluctuations. I hold individual “blue chip” Canadian companies. Up until recently I have not liquidated any stock as the divs covered spending. Problem is the portfolio keeps going up and if I don’t start selling will get larger than desired for legacy purposes. So I am liquidating about 1-2% per year and upping spending temporarily. When the inevitable bear returns, I will revert to spending only divs.

My pension is big enough that it puts me into the top tax bracket(Canadian so we hit it at pretty low earnings). I understand the financial theory that proves that divs shouldn’t matter (I have a finance MBA, CPA, and a CFA).

Divs are taxed higher than cap gains in Canada so this is not optimal. Problem is, I have very large imbedded cap gains that I would like to continue deferring. Another issue is that most of the best companies in Canada pay divs so they are hard to avoid. Lastly I agree that regular divs sure make my life easier, reduce my stress, and reduce need to liquidate.

If I were to start from scratch, I might do it differently but will stay the course otherwise. My portfolio has outperformed the appropriate benchmark by about 3% on average for the last 20years too.

 

[Cobra9777]

On the equity side my dividends are in the 2.2 % range. Overall about the same as my dividend growth etc.
Fixed income, CDs mutual funds etfs are close to 3% overall.
Entire portfolio - 2.6%
Maybe I'm reaching for yield a tad in some areas like HY bond and Reits but only about 10% of the portfolio.

My numbers are very similar... 2.2% equity, 3.1% bonds, and 4.4% real estate (VNQ). 2.7% overall. HYG is 20% of fixed income and VYM is 20% of equity. International equity also yields 2.6%.

So yeah, I like dividends too. I've tilted the portfolio that way, but I think it's reasonably balanced with the broad index funds.

 

[kcowan]

...If I were to start from scratch, I might do it differently but will stay the course otherwise. My portfolio has outperformed the appropriate benchmark by about 3% on average for the last 20years too.

If someone said you can have a relatively safe total return of 12+% over ten years, why would you choose anything different. Even Bernie only promised 12%!