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

[Montecfo]

But lost in our overall discussion here, is a beguiling question: what about those celebrated "dividend aristocrats"? Have they beaten the Essen Pea Five Hundred over the long-term? Or QQQ? A casual internet search says "yes". Is that true?

No. It may have once been true, but certainly not true over the past 10-15 years.

What did you find from your casual internet search?

 

[FD1000]

Not everyone that owns CEF's tries to churn them. Buy at a good discount to premium and sit back and collect the income. I have many that I have owned for several years. My income goes up every year as does my overall account value. Of course I don't own only CEF's, I have dividend stocks, ETF's, preferred's , REIT's, etc.. but I do have quite a bit of bondish CEF's. And I am buying more and more shares almost every month.

I really don't understand the animosity on this forum towards dividend investors and particularly people that own CEF's. CEF's predate mutual funds, it isn't some new fangled scheme. ADX has been around since 1929, with a total return very close to SPY. The bondish CEF PTY has been paying consistent dividends since 2003, with a total return around 7% per year. ADX,SPY,PTY Stock Chart (Dividends Reinvested, Inflation Adjusted) | Total Real Returns
Is it that people don't understand CEF's? Or that the prevailing tone and attitude here is that of bogleheads? I seriously don't get the attitude- so please explain to me what the issue is?

Like many of you I was a buy and hold index investor for decades, but in retirement I transitioned to an income investor. In sailing when you go and buy a powerboat they call it going to the dark side. Is that what the forum considers income investing? Exhausting sometimes.

First, just because CEFs (Closed-End Funds) came before mutual funds doesn’t automatically make them superior.
Second, anytime someone claims that their investment selection is primarily driven by income, it’s worth questioning. There are often several factors at play, and income shouldn’t be the sole deciding factor. I don’t typically challenge this on the CEFs forum, as it’s not the right place, but in open discussions, I’m more than happy to address it.
Third, Dick—who I consider the best CEF analyst on any board I've participated in over the last 15 years—agrees with this point.
Fourth, diversification doesn’t mean you should invest in other categories just for the sake of it. It’s about risk-adjusted performance. If a new category doesn’t improve that, there’s no need to add it.
Personally, I’ve never owned another category "just in case."
Fifth, CEFs are generally worse than stocks for the average investor, in my opinion. You can just buy the SP500 and go sleep. To truly benefit from CEFs, you have to actively trade. And if you're a skilled trader, why bother with CEFs at all?

 

[joejetski]

I don’t understand why some use this thread on dividends to pick on PIMCO bondish CEFs. All investments are tools in the toolbox (portfolio). Each position serves a purpose, whether it be income, growth, SORR insurance, what have you. Furthermore, this is the ER board, and most have done well enough to retire early and than some, so who cares if folks switch to an income based approach in retirement. Many folks like the simplicity of income investing. Generally, buy and hold, collect your monthly paycheck. Maybe decide where to reinvest the extra.

 

[Montecfo]

You gotta let the boggleheads boggle, lol.

So it seems LOL.

 

[Onda]

I don’t understand why some use this thread on dividends to pick on PIMCO bondish CEFs.

SCHD is built on quality dividends from profitable companies that have a record of paying and growing earnings-backed distributions, while many PIMCO bond CEF payouts come from leveraged bond income and active portfolio churn rather than from underlying business growth.

There is a vast difference between 2 payouts.

If you can support yourself on the yield from SCHD, you can usually sleep well because that income comes from a diversified group of profitable companies with real earnings, dividend discipline, and a long record of growth. On the other hand PMI comes with a lengthy record of NAV erosion.

 

[Elle_N]

So your view is that the actual paying of the dividend which is then reinvested in company stock creates value?

Hopefully respectfully, I am trying to provide one explanation of why dividends often end up making up over one-third of the total return of a dividend growth stock.

Are you talking about "Dividend Irrelevance Theory"? Fine. I just do not think the latter theory has any relevance to actual, diversify-buy-and-hold-for-the-long-run investing.

 

[Montecfo]

Hopefully respectfully, I am trying to provide one explanation of why dividends often end up making up over one-third of the total return of a dividend growth stock.

Are you talking about "Dividend Irrelevance Theory"? Fine. I just do not think the latter theory has any relevance to actual, diversify-buy-and-hold-for-the-long-run investing.

I am only talking about exactly what you posted. You seemed to suggest that the mere receiving of a dividend and reinvesting it in the same stock results in some sort of "compounding" value creation. I do not see that personally, as I said, and I used an illustration to hopefully make my point clear.

I am just attempting to understand your point.

 

[Elle_N]

I am only talking about exactly what you posted. You seemed to suggest that the mere receiving of a dividend and reinvesting it in the same stock results in some sort of "compounding" value creation. I do not see that personally, as I said, and I used an illustration to hopefully make my point clear.

I am just attempting to understand your point.

Meant with respect: I am trying to understand your point.

Are you or are you not saying that you think dividends are irrelevant?

 

[Montecfo]

Meant with respect: I am trying to understand your point.

Are you or are you not saying that you think dividends are irrelevant?

Lol.
I can only assume you acknowledge your statement was nonsense.

But quite honestly I was looking forward to your defense.

 

[Elle_N]

?

Montecfo,

I guess you are in fact saying that you think dividends are irrelevant. I think the latter is a nice, late night chat topic. But I find no application of "dividend irrelevance theory" to actual diversify-buy-and-hold-stocks-for-the-long-run investing.

 

[dobig]

I am only talking about exactly what you posted. You seemed to suggest that the mere receiving of a dividend and reinvesting it in the same stock results in some sort of "compounding" value creation. I do not see that personally, as I said, and I used an illustration to hopefully make my point clear.

I am just attempting to understand your point.

You are right but for young investors who have the attention span of a 3 year old as well as us antsy older investors they present the illusion of compounding value creation.

As before, it goes back to the psychology for better investor behavior. For myself it works quite well and keeps me from jumping around with my core positions. Call it a trick of the mind or whatever you'd like. Anything that will keep myself and others on the right path.

 

[dobig]

A simple test to check this theory is to go over to Reddit under the subreddits Wallstreetbets and Dividends. The first is filled with young investors placing numerous out of the money short term options bets with the overwhelming majority significantly underwater. Many have lost everything multiple times. All chasing those handful of investors who got lucky and turned $2,000 into a million with lottery type option odds.

The second, Dividend subreddit, is filled with young investors all posting about their growing income streams and excited to see their monthly/yearly income grow. Is it compounding value creation? Of course not. But what it is teaching young people is the value of investing and the benefits of 'compounding growth'. Does it really matter that there's no real difference between what they're doing and a simple index investing approach?

Not in my mind if it keeps them from the first option.

 

[Elle_N]

The second, Dividend subreddit, is filled with young investors all posting about their growing income streams and excited to see their monthly/yearly income grow. Is it compounding value creation?

Dobig, I posted in part:

FWIW to me the sound bite explanation of the total return of value, dividend growth (DG) stocks goes like this:

Montefco responded in part:

So your view is that the actual paying of the dividend which is then reinvested in company stock creates value?

I was talking about value stocks that pay an increasing dividend and the basic arithmetic of their total returns. I was not talking about 'creating value.'

I presume you both know the broad categories known as "value stock" and "growth stock."

 

[Flyfish1]

To truly benefit from CEFs, you have to actively trade.

Respectfully disagree. I am benefitting from CEF's and I don't actively trade them like some do. Will I reposition/rebalance across sectors at times when there is a run up, of course. I don't consider that actively trading. And what is the benefit? Retirement is the benefit, having plenty of money to pay my bills, travel and reinvest the extra so that next year my income is even greater. I've said it before as have others. It's one tool in a portfolio and quite an effective one at that. There seems to be a presumption that all CEF's suffer NAV erosion. Not at all true. Just like some stocks and funds will suffer long periods of decline whle others prosper. OK they are not for everyone. Fair. Just like real estate is not for everyone. I get it. But don't tell me that the only benefit from a CEF is achieved by active trading because it's simply not true.

 

[joejetski]

SCHD is built on quality dividends from profitable companies that have a record of paying and growing earnings-backed distributions, while many PIMCO bond CEF payouts come from leveraged bond income and active portfolio churn rather than from underlying business growth.

There is a vast difference between 2 payouts.

If you can support yourself on the yield from SCHD, you can usually sleep well because that income comes from a diversified group of profitable companies with real earnings, dividend discipline, and a long record of growth. On the other hand PMI comes with a lengthy record of NAV erosion.

That’s not the point of the thread. The question posed was “ do dividends help you psychologically make retirement easier”, not which dividend fund is best or worst. For those of us who are PIMCO enthusiasts, we have done the DD and purchase timing to position ourselves in the best manner according to our retirement goals, overall portfolio composition, and financial requirements. I own several PIMCOs including PDI in my high income sleeve along with NEOS (SPYI and QQQI) funds totaling about 15% of my income portfolio. I also have a taxable account and a ROTH that is in broad indexes in my TSP, as I won’t think about needing to potentially use the ROTH until RMDs kick in, about 13 years away.

 

[FD1000]

SCHD is built on quality dividends from profitable companies that have a record of paying and growing earnings-backed distributions, while many PIMCO bond CEF payouts come from leveraged bond income and active portfolio churn rather than from underlying business growth.

There is a vast difference between 2 payouts.

If you can support yourself on the yield from SCHD, you can usually sleep well because that income comes from a diversified group of profitable companies with real earnings, dividend discipline, and a long record of growth. On the other hand PMI comes with a lengthy record of NAV erosion.

Why do I need to support myself based on distributions?
We know that selling shares is as good as using distributions.

 

[rjsos5]

Why do I need to support myself based on distributions?
We know that selling shares is as good as using distributions.

Agree, you don't need to support yourself based on distributions. From tax perspective, for taxable accounts, selling shares probably much superior. Cap gains vs. virtually fully taxable distributions.

Appeal of fat distributions (e.g. bondish cefs) or dividends from investments which in fact offer poor/mediocre total returns after tax risk adjusted returns (so it is inclusive of distributions or dividends) is probably all psychological.

Yields (income) from carefully selected high grade individual bonds, which offer good risk adjusted returns because they are quite safe, not just in my view but by its history and bond ratings, outlook etc. And not only offer stability to a portfolio especially important during bear markets, (no one wants to have to sell equity for income during a bear market) but provides income as well, and rebalancing options with new monies.

 

[Montecfo]

You are right but for young investors who have the attention span of a 3 year old as well as us antsy older investors they present the illusion of compounding value creation.

Hey I am with you there.

As before, it goes back to the psychology for better investor behavior. For myself it works quite well and keeps me from jumping around with my core positions. Call it a trick of the mind or whatever you'd like. Anything that will keep myself and others on the right path.

Hey anything that encouraged discipline is a plus in my book.

I think I said this upthread: psychic benefits are benefits.

 

[TheWizard]

You are right but for young investors who have the attention span of a 3 year old as well as us antsy older investors they present the illusion of compounding value creation.

As before, it goes back to the psychology for better investor behavior. For myself it works quite well and keeps me from jumping around with my core positions. Call it a trick of the mind or whatever you'd like. Anything that will keep myself and others on the right path.

There's an analogy that might partially explain the fondness for dividends for some folks.
And that's a HY savings account or MM fund. There, you get interest/dividend paid monthly but the unit price stays fixed at $1.0000.

So when you graduate to investing in stock index funds, you still get dividends, usually quarterly, but the unit price (NAV) varies, almost always upward over time...

 

[Lorenzo]

Psychology and feelings should not be used for investment decisions. My neighbor that sold his company for millions invested most of his money in Munis. I can be in CD until death. We can claim psychology and feelings, or we can learn about markets, risk, and how it works.

But the reality is people do use psychology and feelings for investment decisions. It is not uncommon for people to buy things that they expect to BOTH appreciate in value and provide them some pleasure from whatever the experience may be that they get out of their ownership. Gold coins? A hobby farm? If the regular influx of dividends gives someone a warm and snuggy feeling, why should that feeling not be one factor in their decision of how they will generate their spending income?

Yes. FWIW to me the sound bite explanation of the total return of value, dividend growth (DG) stocks goes like this:

1. Reinvesting the dividends buys more shares of the stock. This increases the dollar value of one's stock position.
2. The fairly regular increase in the dividend buys still more shares of the stock. This increases the dollar value of one's stock position.
3. Over the years the price of the DG stock goes up. This increases the dollar value of one's stock position.

This is a trifecta compounding effect. It is a main driver of the performance of DG value stocks. I think it is one explanation of why DG value stocks compete well with growth stocks, over the long run.

When I reached the statement about a "trifecta compounding effect" I was about to disagree, but then when I read the final sentence I understood what you meant. "Trifecta" sounds like there is some special mojo, but it is just the other side of the same coin: Whether the company goes down the "dividend growth" path or chooses instead to be stingy with dividends, what we are talking about is a company whose underlying value is growing through its earnings. So I agree with your last sentence that DG value stocks can compete well with growth stocks over the long run. The investor who chooses DG value stocks and lets the growing dividends compound and the investor who chooses growith stocks and sells them as they appreciate ultimately experience the same level of success, just by different paths. I think this is what @Montecfo is getting at in post #298.

I really don't understand the animosity on this forum towards dividend investors and particularly people that own CEF's.

I'm here to learn about dividend investing (as in this thread) AND CEFs (as in the CEF threads), which are both approaches I came to this forum knowing little about. Any probing questions or counter-arguments I may put forth here are only in the interest of revealing more information that may be helpful to someone trying to learn more.

 

[dobig]

There's an analogy that might partially explain the fondness for dividends for some folks.
And that's a HY savings account or MM fund. There, you get interest/dividend paid monthly but the unit price stays fixed at $1.0000.

So when you graduate to investing in stock index funds, you still get dividends, usually quarterly, but the unit price (NAV) varies, almost always upward over time...

And that is why these high quality dividend funds are so appealing to me. Much more so than a treasury or MM that will always be bleeding value over time due to inflation.

Even at some point in the future when the market takes a major hit it's almost a sure bet I'll be making more off these dividends than I would from a bond or treasury. Especially in high quality and value oriented funds. The only exceptions I can think of is a period in the 70's and perhaps the lost decade but you would have had to timed the purchase of that fixed income just right.

 

[Onda]

Whether the company goes down the "dividend growth" path or chooses instead to be stingy with dividends, what we are talking about is a company whose underlying value is growing through its earnings. So I agree with your last sentence that DG value stocks can compete well with growth stocks over the long run.

Usually the strongest companies begin with earnings-first capital allocation and, as they mature, migrate toward increasingly aggressive dividend growth while still compounding internally.


For example: NVDA is still in an earlier stage where capital is overwhelmingly directed to growth; AAPL pays dividends but grows them at a more moderate pace; MSFT represents the especially attractive stage—fast dividend growth combined with still-strong earnings expansion. PM is in high dividend payout stage. They are all great companies, just at different points on the same quality curve.

 

[FD1000]

But the reality is people do use psychology and feelings for investment decisions. It is not uncommon for people to buy things that they expect to BOTH appreciate in value and provide them some pleasure from whatever the experience may be that they get out of their ownership. Gold coins? A hobby farm? If the regular influx of dividends gives someone a warm and snuggy feeling, why should that feeling not be one factor in their decision of how they will generate their spending income?


When I reached the statement about a "trifecta compounding effect" I was about to disagree, but then when I read the final sentence I understood what you meant. "Trifecta" sounds like there is some special mojo, but it is just the other side of the same coin: Whether the company goes down the "dividend growth" path or chooses instead to be stingy with dividends, what we are talking about is a company whose underlying value is growing through its earnings. So I agree with your last sentence that DG value stocks can compete well with growth stocks over the long run. The investor who chooses DG value stocks and lets the growing dividends compound and the investor who chooses growith stocks and sells them as they appreciate ultimately experience the same level of success, just by different paths. I think this is what @Montecfo is getting at in post #298.


I'm here to learn about dividend investing (as in this thread) AND CEFs (as in the CEF threads), which are both approaches I came to this forum knowing little about. Any probing questions or counter-arguments I may put forth here are only in the interest of revealing more information that may be helpful to someone trying to learn more.

I’ve said many times that people are free to do whatever they want with their money.
But here, we’re talking about maximizing outcomes based on risk and reward.
I could live off CDs for the rest of my life and say it brings me peace of mind—but that doesn’t mean it’s the most effective strategy.
The goal here is to broaden perspectives and keep learning, not just settle for what feels comfortable.

We’re probably going to add another 15 pages to this discussion, and still no one will provide data-based evidence showing that dividend investing is superior on a risk-adjusted basis.
I’ve seen this before. Years ago, we had a similar thread on Morningstar that went on for over a year—and the outcome was the same.
Most of the justifications come down to comfort and perception—it “feels” better to collect dividends. But claims like “dividend stocks are better in downturns” are often not supported by solid data.
Selling shares is not inherently worse than receiving dividends. In fact, in taxable accounts, selling long-term holdings can be more tax-efficient.

 

[Onda]

I’ve said many times that people are free to do whatever they want with their money.
But here, we’re talking about maximizing outcomes based on risk and reward.
I could live off CDs for the rest of my life and say it brings me peace of mind—but that doesn’t mean it’s the most effective strategy.
The goal here is to broaden perspectives and keep learning, not just settle for what feels comfortable.

We’re probably going to add another 15 pages to this discussion, and still no one will provide data-based evidence showing that dividend investing is superior on a risk-adjusted basis.
I’ve seen this before. Years ago, we had a similar thread on Morningstar that went on for over a year—and the outcome was the same.
Most of the justifications come down to comfort and perception—it “feels” better to collect dividends. But claims like “dividend stocks are better in downturns” are often not supported by solid data.
Selling shares is not inherently worse than receiving dividends. In fact, in taxable accounts, selling long-term holdings can be more tax-efficient.

A lot of money is made precisely when investors can think without emotion — neither fear in downturns nor greed in euphoric markets. The real advantage is not that dividends are mathematically superior in every model, but that dependable payers like The Coca-Cola Company, Philip Morris International, and Schwab U.S. Dividend Equity ETF give many investors a steadier psychological base from which to stay rational when markets fall.

If your income continues arriving from businesses that have long records of not cutting distributions, it becomes easier to treat downturns as opportunity rather than threat — to buy when others are fearful instead of selling under pressure. That behavioral advantage may not always appear neatly in risk-adjusted spreadsheets, but in real portfolios, over decades, it often matters more than theory.

 

[marko]

A lot of money is made precisely when investors can think without emotion — neither fear in downturns nor greed in euphoric markets. The real advantage is not that dividends are mathematically superior in every model, but that dependable payers like The Coca-Cola Company, Philip Morris International, and Schwab U.S. Dividend Equity ETF give many investors a steadier psychological base from which to stay rational when markets fall.

If your income continues arriving from businesses that have long records of not cutting distributions, it becomes easier to treat downturns as opportunity rather than threat — to buy when others are fearful instead of selling under pressure. That behavioral advantage may not always appear neatly in risk-adjusted spreadsheets, but in real portfolios, over decades, it often matters more than theory.

Very well stated!!

And, my philosophy exactly. As "inefficient" as my portfolio may be, its performance (~8-10%) is more than adequate. What that so-called inefficiency provides is a steady, worry-free, reliable paycheck during both the up and down markets.

That comfort allows me to be less emotional when making investment decisions.

It's not that "dividend stocks are better in downturns", its that dividends remain the same in downturns. I'm not investing to leave the largest pile behind. I'm investing to maintain my (relatively high) lifestyle regardless of market conditions.