Do dividends psychologically make retirement easier even if total return theory says they shouldn’t matter?

[Diogenes]

Family A’s willingness to embrace growth stocks, particularly in the tech sector, led to a much larger portfolio by the time of retirement. Their decision to automate their withdrawals and focus on low-maintenance, diversified investing allowed them to live a comfortable, stress-free retirement. In contrast, Family B’s focus on dividends and old guard companies led to a slower-growing portfolio, leaving them working longer than they had hoped.

Interesting take! I was never pro-dividend, but have generally eschewed technology stocks, except of course how they automatically comprise the major indices. Why? I'm an aeronautical engineer, and observe a tawdry and fraught history of aerospace technologies as viable businesses. My biases, maybe my envy of computers/electronics vs. mechanical technologies, have engendered a skepticism in all things software-based. I didn't believe in technology during the dot-com boom/bust, and have vitriolically hated Apple in particular, with a burning passion. I was enthused about Apple going bankrupt and dropped into the dustbin of history circa year-2000. It would have been delicious!

So, the issue thus posed, is not about favoring dividend payers vs. companies that reinvest their profits into growth... but things like oil, insurance and consumer-staples vs. "software eating the world".

 

[marko]

Are you suggesting the price recovery is a result of the dividend payout? For example a $10 stock pays .25 dividend so price drops to $9.75 but rises at some point to $10.05. Would the .30 rise happen if they did not pay the dividend?

Stocks go up, stocks go down organically with or without dividends for any number of reasons.

 

[Handymike]

We are both 78, retired since 66. We live on SSA, some interest from savings accounts and brokerage accounts ( virtually all cash ). SSA pays all expenses and allows several meals out weekly, some travel and recreation ( I do alot of shooting which is kinda expensive ).
All our retirement is in ROTH accounts which throw off tax free income that is currently about an additional $80,000 per year and growing. All the ROTH income is dividends and a little capital gains. All that said the dividend income , while we don't need it is a powerful back up to our lifestyle here in Southern California. BTW home is paid for, vehicles are paid for. We have Kaiser as our medical provider.

 

[FD1000]

We are both 78, retired since 66. We live on SSA, some interest from savings accounts and brokerage accounts ( virtually all cash ). SSA pays all expenses and allows several meals out weekly, some travel and recreation ( I do alot of shooting which is kinda expensive ).
All our retirement is in ROTH accounts which throw off tax free income that is currently about an additional $80,000 per year and growing. All the ROTH income is dividends and a little capital gains. All that said the dividend income , while we don't need it is a powerful back up to our lifestyle here in Southern California. BTW home is paid for, vehicles are paid for. We have Kaiser as our medical provider.

Sure. My neighbor sold his company for over $15 million in the early '90s.
Now, he lives off municipal bonds (Munis).

Personally, I could live off CDs for the rest of my life.

I’ve said it many times: When you have enough money, a substantial portfolio, a solid pension, or you live frugally, you can do whatever you want. But right now, we’re focused on making smart investment choices based on risk-adjusted returns, not emotions or psychology.

I’m not against high income; I’m against the MYTH of income as your first and most important choice.
This holds true whether you’re 22 or 82, whether you have $100K or $10 million in your portfolio.

 

[RetiredHappy]

We classify our investments into buckets of aggressive/growth, "middle of the road" and safe where there is no direct correlation to the stock market. Dividend/income is never the focus.

 

[jazz4cash]

Stocks go up, stocks go down organically with or without dividends for any number of reasons.

I agree. That’s why I don’t follow your comment about price “recovery” after a dividend is paid. The rise (or fall) is driven by whatever sentiment and fundamentals influence stock prices.

 

[Lorenzo]

How can psychology be used as an excuse?

I don't think that "dividend investors" use psychology as an "excuse." Psychology is a real thing. Some investors may acknowledge that feeling good for reasons they cannot fully explain through math and investing logic has intrinsic value. A retiree with a hedonistic philosophy might say the entire point of being retired is to feel good until you die.

Below is a story. The story is about stocks to keep it simple.

I loved the story. I just wish I had Family A's crystal ball. I think back on how cool we thought the new IBM PC was in 1981, and how if I hadn't been a cash-strapped college student I might have bought IBM stock. And then there was the Apple Macintosh that one of us who had wealthy parents managed to acquire when it came out in 1984. But when Steve Jobs was booted from the company I stopped paying attention to Apple, thinking it was done-for. It came back from the dead while my head was turned away. I loved technology--I was an engineer--but I thought the iPod was a toy that wouldn't make Apple, a computer company. any money. I worked with a few Internet start-up companies, and I recall one founder saying, "The thing with the Internet is, nobody is sure how to make money from it." Along came Amazon. Had they figured it out? I did not trust the Internet enough to use it to buy stuff or to give out my personal information--would many people? Besides, Amazon was an online bookseller--was Barnes and Noble not good enough anymore? Pets made about as much sense to me as books, so if I had been an active investor it would have been just as likely I would have thrown money at pets.com. Google was a free search engine--how could it make any money? Similar for YouTube--how do they make money from cat videos? And so it went. I loved technology and understood how it worked, but I think if I had been an active investor I would more likely have put money into tech companies with longer track records, like IBM, or fell for infamous losers like pets.com. Family A either had a crystal ball or a deeper understanding of these companies, their technologies, and consumer behavior than your story reveals.

 

[youbet]

We are both 78, retired since 66. We live on SSA, some interest from savings accounts and brokerage accounts ( virtually all cash ). SSA pays all expenses and allows several meals out weekly, some travel and recreation ( I do alot of shooting which is kinda expensive ).
All our retirement is in ROTH accounts which throw off tax free income that is currently about an additional $80,000 per year and growing. All the ROTH income is dividends and a little capital gains. All that said the dividend income , while we don't need it is a powerful back up to our lifestyle here in Southern California. BTW home is paid for, vehicles are paid for. We have Kaiser as our medical provider.

Actually, any income is a powerful back up to your lifestyle. However you choose to get it (real estate, divs, interest, pension, SS, cap gains, etc.), it's all accepted at the grocery store!

 

[marko]

I agree. That’s why I don’t follow your comment about price “recovery” after a dividend is paid. The rise (or fall) is driven by whatever sentiment and fundamentals influence stock prices.

I didn't intend for it to be complicated. All I meant was the price goes down when dividends are paid but for the most part the price most often recovers at some point. Maybe I should have added that the recovery is "unconnected to the dividend action".

That's how my dividend stocks are now worth more than twice than what they were from when I received my first dividends years ago, but that has nothing to do with the dividends paid.

 

[sandvinsd]

As pointed out several times in this thread, why would one HAVE to sell stocks in a down market (assuming they need the money to spend)? Many investors who hold stocks for their growth potential ALSO hold some stable assets that they can turn to for income in a down market.

You don’t have to get huffy about this. The original post asked a question if about a difference in preferring dividends vs selling stock for cash. The assumption there is that you ARE generating money to SPEND every year, either from dividends or selling stock. My point was simply that in a down market, it would be better to have the income from dividends rather than selling stocks. Just making a statement of fact. Yes, the bucket strategy is what I pursue. Socks are down, draw down the cash bucket, stocks are up sell them to replenish the cash. We both agree, so not sure why you keep hounding me on this? Done with the back and forth.

 

[acksurf]

Sure. My neighbor sold his company for over $15 million in the early '90s.
Now, he lives off municipal bonds (Munis).

Personally, I could live off CDs for the rest of my life.

I’ve said it many times: When you have enough money, a substantial portfolio, a solid pension, or you live frugally, you can do whatever you want. But right now, we’re focused on making smart investment choices based on risk-adjusted returns, not emotions or psychology.

I’m not against high income; I’m against the MYTH of income as your first and most important choice.
This holds true whether you’re 22 or 82, whether you have $100K or $10 million in your portfolio.

We classify our investments into buckets of aggressive/growth, "middle of the road" and safe where there is no direct correlation to the stock market. Dividend/income is never the focus.

What is "safe" and what %? Do "safe" investments psychologically make retirement easier even though they likely impact total returns? My "safe" investments are VYM, SCHD, etc. My buckets are Growth, Income (Dividend oriented, not bonds) and "Alt" (Commodities, Hedging, Long Short, etc.)

 

[Elle_N]

So, if dividends and other approaches to weathering economic downturns, such as CD/bond ladders, money market accounts, rental income, etc., are all equally reasonable--perhaps even roughly equivalent math-wise--what is it about the dividend approach that seemingly gets it an outsized amount of love from investors? "I am a dividend investor," someone proclaims. "Well, I guess I am a total-return investor, another person shrugs. What is it about dividends? Is it in fact merely the "psychological" aspect that the OP suggested?

The above, self-described "total return investor" does not appear to have much experience with stock investing. Historically, value stocks have completed well with growth stocks. Hence for Bogle-types, the counsel is to hold both value stocks and growth stocks.

Value stocks are overwhelmingly dividend payers, typically with a long history of dividend increases.

To me, this also means the "psychological" aspect is but a small part of why some favor certain dividend stocks. Fact: Those partial to stocks with a history of increasing dividends know that these stocks' total returns, en masse, historically competes well with that of growth stocks, en masse.

 

[RetiredHappy]

What is "safe" and what %? Do "safe" investments psychologically make retirement easier even though they likely impact total returns? My "safe" investments are VYM, SCHD, etc. My buckets are Growth, Income (Dividend oriented, not bonds) and "Alt" (Commodities, Hedging, Long Short, etc.)

VYM and SCHD are not truly safe because they go down when the stock market goes down.

Safe would be something like MYGA and possibly HOSIX/HOSAX.

 

[youbet]

VYM and SCHD are not truly safe because they go down when the stock market goes down.

Safe would be something like MYGA and possibly HOSIX/HOSAX.

Actually, "SAFE" is a relative term. When someone calls an investment "SAFE," it's implied that it is safe to them. You may feel differently but everyone's outlook and circumstances are different.

 

[Diogenes]

... I just wish I had Family A's crystal ball. I think back on how cool we thought the new IBM PC was in 1981, and how if I hadn't been a cash-strapped college student I might have bought IBM stock. And then there was the Apple Macintosh that one of us who had wealthy parents managed to acquire when it came out in 1984. But when Steve Jobs was booted from the company I stopped paying attention to Apple, thinking it was done-for. It came back from the dead while my head was turned away. I loved technology--I was an engineer--but I thought the iPod was a toy that wouldn't make Apple, a computer company. any money. I worked with a few Internet start-up companies, and I recall one founder saying, "The thing with the Internet is, nobody is sure how to make money from it." Along came Amazon. Had they figured it out? I did not trust the Internet enough to use it to buy stuff or to give out my personal information--would many people? Besides, Amazon was an online bookseller--was Barnes and Noble not good enough anymore? Pets made about as much sense to me as books, so if I had been an active investor it would have been just as likely I would have thrown money at pets.com. ...

Exactly! You eloquently point out, the dangers of concentration. Concentrate in the wrong thing, and you get wiped out. Concentrate in the right thing, and you're handsomely rewarded. Do we feel lucky?

Apple was the quintessential example. By all reasonable reckoning, it should have failed. It had management turmoil. Its products were losing market share. It had no "moat", and the competition was strong. Why didn't Apple go bankrupt? What wasn't it bought for pennies on the dollar? Why didn't it go the way of Nokia? Instead, it turned itself around, flourished, and became the world's most valuable company. How? Who could have foreseen this?

Nvidia made graphics cards for high-end PCs, for "gamers". One day, I'm at an engineering conference, where an excited fellow tells me that these funky little graphics cards are now being used for scientific computing, running clever new algorithms much faster than conventional CPUs. Was that a signal to buy Nvidia? I laughed it off. Another dumb techie trick, another flash in the pan.

Circa 2010, a computer engineer told me about Bitcoin. "Digital currency". Huh? Sounded like bovine manure (still does). I had the opportunity to buy bitcoins at tiny fractions of a dollar. Maybe a wiser version of me, would have bought 10 or 100, for the price of lunch money?

 

[Onda]

VYM and SCHD are not truly safe because they go down when the stock market goes down.

Safe would be something like MYGA and possibly HOSIX/HOSAX.

SCHD protects long-term purchasing power much better.

 

[Dash man]

If you owned KODK longer then you would! I stand partially corrected but there are many past dividends where today's price is less, and in many cases much less, than the share price when the dividend was paid.

Those are rare relative to the good performers. There are plenty of non dividend payers that do poorly too. As with any investment, proper due diligence is required and monitoring along the investment journey is a must.

 

[audreyh1]

Those are rare relative to the good performers. There are plenty of non dividend payers that do poorly too. As with any investment, proper due diligence is required and monitoring along the investment journey is a must.

I didn’t want to monitor once retired. With individual stocks monitoring and review is necessary. Holding broadly diversified funds not so much. Particularly “buy the whole market” type index funds. The portfolio survival studies such as the Trinity study and the various models run by FIREcalc and even VPW show that historically you don’t need to monitor at all and you can simply withdraw and rebalance at the start of each year, otherwise ignoring market moves. Instead you select criteria such as withdrawal rate and asset allocation and simply decide if you can live with the projected survival rate or max drawdown.

 

[RetiredHappy]

SCHD protects long-term purchasing power much better.

Sure, but to ride the stock market, tech and S&P 500 do even better.

 

[Dash man]

I didn’t want to monitor once retired. With individual stocks monitoring and review is necessary. Holding broadly diversified funds not so much. Particularly “buy the whole market” type index funds. The portfolio survival studies such as the Trinity study and the various models run by FIREcalc and even VPW show that historically you don’t need to monitor at all and you can simply withdraw and rebalance at the start of each year, otherwise ignoring market moves. Instead you select criteria such as withdrawal rate and asset allocation and simply decide if you can live with the projected survival rate or max drawdown.

Approaching 70, I’m gradually shifting to ETFs. Our Roth accounts are mostly ETFs at this point. Our taxable accounts are largely stocks we hold because of the tax consequences from sales. So I agree with you on the idea of making things easier as we age. But all but one of our individual stocks pay nice dividends and are not likely to crash into oblivion anytime soon. I do keep an eye on them.
Our taxable account includes AAPL ADP APLD AVGO COR DUK HD LLY MSFT NVDA RPM SBUX and others including a couple of ETFs. So you can see there’s plenty of growth along with dividends.

 

[Lorenzo]

My point was simply that in a down market, it would be better to have the income from dividends rather than selling stocks. Just making a statement of fact. Yes, the bucket strategy is what I pursue. Stocks are down, draw down the cash bucket, stocks are up sell them to replenish the cash. We both agree, so not sure why you keep hounding me on this? Done with the back and forth.

First, let me apologize for making you feel hounded; if I had replied previously to you, I had forgotten.

My point was simply that it isn't either-or proposition, which is equally a statement of fact. Now you mention pursuing a bucket strategy with two buckets, stocks and cash, and scenarios in which when the stocks are down you draw from the cash, and when the stocks are up you sell stock to replenish the cash. So, where do the dividends come into play in this strategy? What you describe is what many who do not consider themselves dividend investors do, as the stock bucket could very well be growth stocks not dividend stocks.

 

[Lorenzo]

The above, self-described "total return investor" does not appear to have much experience with stock investing. Historically, value stocks have completed well with growth stocks. Hence for Bogle-types, the counsel is to hold both value stocks and growth stocks.

Value stocks are overwhelmingly dividend payers, typically with a long history of dividend increases.

To me, this also means the "psychological" aspect is but a small part of why some favor certain dividend stocks. Fact: Those partial to stocks with a history of increasing dividends know that these stocks' total returns, en masse, historically competes well with that of growth stocks, en masse.

Maybe I don't understand what is meant by total-return investing. My impression is that, with a few exceptions, it means the investor doesn't care whether the portfolio's income comes from selling stock or from dividends, as it's all the same at its core. (Which is why the person in my post said with a shrug that he must be a total-market investor; dividends didn't carry any special weight to him.) So a total-return investor might very well hold both growth stocks and value stocks--a total-market portfolio. Am I incorrect?

 

[Onda]

Maybe I don't understand what is meant by total-return investing. My impression is that, with a few exceptions, it means the investor doesn't care whether the portfolio's income comes from selling stock or from dividends, as it's all the same at its core. (Which is why the person in my post said with a shrug that he must be a total-market investor; dividends didn't carry any special weight to him.) So a total-return investor might very well hold both growth stocks and value stocks--a total-market portfolio. Am I incorrect?

I’m also a total-return investor, but that does not mean dividends are irrelevant to me. I care very much about dividends — especially when they come from companies that also compound strongly, like Microsoft, where the dividend keeps growing while the business itself still delivers substantial capital appreciation. For me, the ideal holding is not high yield alone, but a company that can grow earnings, raise dividends consistently, and still produce strong long-term total return.

 

[Lorenzo]

Apple was the quintessential example. By all reasonable reckoning, it should have failed. It had management turmoil. Its products were losing market share. It had no "moat", and the competition was strong. Why didn't Apple go bankrupt? What wasn't it bought for pennies on the dollar? Why didn't it go the way of Nokia? Instead, it turned itself around, flourished, and became the world's most valuable company. How? Who could have foreseen this?

Nvidia made graphics cards for high-end PCs, for "gamers". One day, I'm at an engineering conference, where an excited fellow tells me that these funky little graphics cards are now being used for scientific computing, running clever new algorithms much faster than conventional CPUs....

Yep. I had the same awakening one day about two or three years ago when someone mentioned Nvidia stock. I said, "You mean the company that makes graphics accelerator cards?" And Nokia--I actually did some work for them when they were on top, and I could easily have been inclined to invest in their stock had I been doing that sort of investing in individual stocks. There were winners and losers in the tech game--always have been and will be--and I have never been good at distinguishing them.

Last night I saw a TV commercial for CDW, whose logo I recognized as Computer Discount Warehouse--known to me from decades ago as a place to buy computer hardware. I hadn't thought about them in, well, decades. The commercial was touting some kind of cloud services. I Googled "CDW" and found the company had reinvented itself. Just another example of how companies morph while I am distracted by other things. I am definitely not from Family A.

 

[Lorenzo]

I’m also a total-return investor, but that does not mean dividends are irrelevant to me. I care very much about dividends — especially when they come from companies that also compound strongly, like Microsoft, where the dividend keeps growing while the business itself still delivers substantial capital appreciation. For me, the ideal holding is not high yield alone, but a company that can grow earnings, raise dividends consistently, and still produce strong long-term total return.

To clarify, I didn't say dividends are "irrelevant" to a total return investor (as I understand the term) but rather that dividends do not carry special weight above the weight that selling stock would have in the total income-generating engine that is the portfolio. Dividends and capital appreciation can go hand in hand in the total-return investor's eyes. Or at least that's my understanding. I could have it all wrong.