Dividends ??

[rkser]

We just got the year end dividends,

are they looked at/calculated as part of the 4% withdrawal of the total assets or are they on top of 4% ??

Thank you

 

[lemming]

They are a part of your portfolio and are included in the 4%.
Also that 4% is supposed to be based on the beginning balance adjusted for inflation. Not the current value.

 

[frayne]

They are wherever you want to put them.

 

[donheff]

If you reinvest them, they remain part of your portfolio. If you spend them, they are part of this year's expenses.

 

[VanWinkle]

Dividends are part of the 4% withdrawal unless reinvested as indicated by donheff

 

[Healthy Lifestyle]

It is additional spending money to do as I please.

 

[Koolau]

Just one more part of your portfolio that you can choose to reinvest or spend as part of your Safe Withdrawal Rate (SWR.)

You mention 4% but in reality, it should be your "Safe Withdrawal Rate" which is usually in the 4% range the first year. You need to calculate your SWR although 4% is a good first approximation for most of us, depending upon our portfolio and other factors (like age and expected longevity.)

 

[rkser]

Thank you , appreciate the feedback.

 

[rayvt]

It is additional spending money to do as I please.

Yeah! Another person who thinks that dividends are free money.

 

[MarieIG]

If they are withdrawn, I count them as a portion of my withdrawal rate.

 

[marko]

We live exclusively on dividends. Ours run about 6% our portfolio and we set them aside and withdraw them as needed.

By setting them aside when they're paid we don't have to sell shares in a downturn. A major market downturn usually still returns the same dividend. You're paid on the number of shares, not the price of those shares.

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

 

[HammerDown]

We live exclusively on dividends. Ours run about 6% our portfolio and we set them aside and withdraw them as needed.

By setting them aside when they're paid we don't have to sell shares in a downturn. A major market downturn usually still returns the same dividend. You're paid on the number of shares, not the price of those shares.

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

Thank you for this! I never thought about having 4% of portfolio as an average dividend to live on and not have to sell any equity in a market downturn.

 

[Koolau]

We live exclusively on dividends. Ours run about 6% our portfolio and we set them aside and withdraw them as needed.

By setting them aside when they're paid we don't have to sell shares in a downturn. A major market downturn usually still returns the same dividend. You're paid on the number of shares, not the price of those shares.

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

Thank you for this! I never thought about having 4% of portfolio as an average dividend to live on and not have to sell any equity in a market downturn.

Nothing wrong with this method that I know of. Having said that, I don't think of my dividends separately from my equity stash. I don't think in terms of taking dividends. I just sell when I need money. YMMV

 

[Koolau]

Thank you for this! I never thought about having 4% of portfolio as an average dividend to live on and not have to sell any equity in a market downturn.

HammerDown please introduce yourself here when you get a chance.

Hi, I am...

Introduce yourself here! (But hey -- start a new thread, so we can see your post!)

www.early-retirement.org

We look forward to hearing from you.

 

[marko]

Nothing wrong with this method that I know of. Having said that, I don't think of my dividends separately from my equity stash. I don't think in terms of taking dividends. I just sell when I need money. YMMV

Yes. Not separating them adds shares to your total number of shares and it can be a wash. For me, it's been ingrained since childhood to "never touch the principal". I know there's different methods but this works for us.

 

[Koolau]

Yes. Not separating them adds shares to your total number of shares and it can be a wash. For me, it's been ingrained since childhood to "never touch the principal". I know there's different methods but this works for us.

What "w*rks" is better than what is "perfect" (if there is such a thing.)

 

[mrfeh]

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

This sounds like you are a believer in "dividends are free money". I hope you aren't, and I hope this statement doesn't lead others to think they are.

The only thing that matters is total return. Dividends are not special, other than they may be taxed at a higher rate.

 

[marko]

This sounds like you are a believer in "dividends are free money". I hope you aren't, and I hope this statement doesn't lead others to think they are.

The only thing that matters is total return. Dividends are not special, other than they may be taxed at a higher rate.

Sorry, you're way off on that one. We all have that discussion here from time to time. I may not have stated things clearly enough.

 

[mrfeh]

Sorry, you're way off on that one. We all have that discussion here from time to time. I may not have stated things clearly enough.

Good to hear. The "the stock price falls to equal the dividend paid, but in most cases it's a temporary thing" section might lead a reader to think that the dividend doesn't permanently reduce the share value.

 

[Dalton]

If they stop reading where you ended the quote, then they could get the wrong impression. But, if they keep reading, they should have enough information to figure it out, even if it could be clearer.

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

In response to OP, I include my taxable dividends and interest in with my withdrawal. My taxable account is relatively large compared to my tax deferred, due to reasons. So, since I'm paying taxes on those dividends, I go ahead and withdraw and spend them, rather than paying taxes on them and reinvesting them, only to then withdraw from somewhere else and pay tax on that also. But, my taxable dividends don't exceed my spending, like Marko's do.

 

[Flieger]

This sounds like you are a believer in "dividends are free money". I hope you aren't, and I hope this statement doesn't lead others to think they are.

The only thing that matters is total return. Dividends are not special, other than they may be taxed at a higher rate.

Here we go again. He (no-one) says it is free money, jut part of the return. No-one here is giving professional advice (or paying for it), just stating what THEY are doing to provide their own income.

Flieger

 

[Flyfish1]

We live exclusively on dividends. Ours run about 6% our portfolio and we set them aside and withdraw them as needed.

By setting them aside when they're paid we don't have to sell shares in a downturn. A major market downturn usually still returns the same dividend. You're paid on the number of shares, not the price of those shares.

Yes, the stock price falls to equal the dividend paid, but in most cases it's a temporary thing as the stock's total return usually far exceeds the dividend number.

@marko : We do the same. We live solely on dividends, bond interest and real estate income. No SS yet. Every month I reinvest a portion of those dividends into more dividend paying assets/bonds, etc. Thus every month, every year we are increasing the number of shares we own and thus increasing our income. Yep, this has been discussed ad nauseam on this forum and never fails to illicit firm opinions, which is why I try to jump in and keep it lively...

It is clearly a different method than buy and hold index funds/bonds and sell at 4% SWR. And there is absolutely nothing wrong with that method, but there are other ways to skin a cat and I prefer the dividend approach.

 

[marko]

Here we go again. He (no-one) says it is free money, jut part of the return. No-one here is giving professional advice (or paying for it), just stating what THEY are doing to provide their own income.

Flieger

Right. For me this is solely about a withdrawal methodology rather than mindset.

 

[thepalmersinking]

Dividends are part of the 4% withdrawal unless reinvested as indicated by donheff

Interesting, I have VYM which has provided over 6% CAGR over more than 10 years without reinvesting dividends so I take my dividends as income while letting the ETF continue to go up and sell less than 2% annually to get to 4%. In a slow year, like 2022 I was able to sell covered calls to make up the difference and didn’t sell hardly any shares. Dividends are not free money but dividends act a a shock absorber that keeps you from having to sell to pay for food when the market is down 20%. In rough numbers over 10 years of history I have taken 4% out a year in dividends and selling a few shares while still getting another 4% growth on the base. Everyone is different but I try to hold onto share count as much as possible. Afterall, you have to sell a lot more shares if the market is down 20% to make up the difference.

 

[Retired Expat]

Dividends are part of the 4% withdrawal unless reinvested as indicated by donheff

I must disagree. I consider the dividends income earned during the year. Similar to rent on rental property or your share of profits if you were a part owner of a business. I always took the 4% rule to be your withdrawal of principal not income. But that could explain why many are saying that 4% is outdated with 10 year returns being 10%

Of course it depends on where and how one is invested and it you want to die with what you have now or spend it down? I have no intention of leaving millions and millions to my heirs as I have no children of my own. YMMV!

This is a very subjective topic and we all may have a different approach. I really don’t like these hard and fast rules that are all really shortcuts and back of envelope calculations.

FA who wanted my business looked at my numbers and said “you are spending 8% of your investment portfolio annually and will run out of money way too early!” So I had to show him that my other income and assets were such that my withdrawal from my investment accounts and IRA was ZER0 and that my net worth actually grew every year. Just short sighted and taught to look at things only one way. What is your spending as a %age of investment accounts. This sh…. Stuff is more nuanced than that!