How are dividends for retirement

[GravitySucks]

While I do strive for overall returns, there is only a few things a company can do with its earnings.
1. Reinvest to maintain and grow the business. In fast growing and newer companies this will take most of the earnings.
2. Pay them out to the owners as dividends.
3. Buy back stocks. There was a reason this was made illegal as part of the SEC 1934 Act. Stock buy backs can be used to manipulate share prices. I get suspicious when I see buybacks announced. Another thing troubling about buy backs is they rarely happen when the stock is low. (Many companies canceled buyback plans in March 2020, just when it wss a great time to buy.)
4. Use the earnings to buy into other business lines. My least favorite use. I bought VZ to have a piece of telephone utility, if I wanted Yahoo/Huffpost/AOL I would have bought it.

Personally I'm hoping that due to the new tax changes more companies move the funds used for buybacks towards increasing dividend payouts.

 

[COcheesehead]

All true, but that wasn't what I was responding to... I was responding to your previous post where you claimed that bonds were superior to equities because they didn't decline in value when dividends were paid and pointing out that bonds work the same as equities.

Nice pivot though.... are you a retired politician?

You are putting words in my post that aren’t there. I said bonds are additive, they increase the value of your account the day they are paid and dividends are a maybe because a bond has a floor, a par value. An equity security or ETF or fund does not.

 

[all4j]

Since the government does not control stock prices there may never be a trade at that exact value. Based on exchange rules there is a market maker who is supposed to step in and take trades. I do not believe they have an obligation to be stupid. It is equivalent to a sale but you do not control how much or when, which is why some people do not like them.

FWIW my MBA finance professor would give you a big fat "0" on your exam if you tried to argue that paying dividends did not reduce the stock value

I had thought I was through since posts had gotten so repetitive. I haven’t read every word, so not faulting those who didn’t read some of my posts. But why post it again if they aren’t going to read?

Since you were (so far as I’ve read) the only one to come close to addressing the question as to what it really means & who does it, I felt I should post once more. I agree with some, disagree with some; will focus on just some of it.

I think we’re not far apart at all on this 1st part; key points being no trade at that “price” (more later) & not doing anything stupid. I’ll be honest regarding the market maker – I don’t know how that is now handled in the electronic markets. I assume they didn’t mechanize it to do something stupid. Which, imho, would include blindly requiring the price to be set based on arithmetic of subtracting the dividend. Every night, there is either something happening or potentially could happen to a given stock. So everytime the market opens, it may open with a “quote” that is different than previous close. Stocks go up & down through the day, cash is spent (& replenished)… I’d guess a quarterly div might average 0.5%? And many/most of those will fluctuate more than that in a day. Yet for some reason, this gets lots of energy around it & suddenly people don’t want the stock?

One might think that the example cited of HOG would help. After the div, it opened higher the next day. It isn’t the only example. No point in going into all the counterfactuals in my opinion. Kinda feel it would be insulting to point out how that gets to the point.

In particular, I disagree on the 2nd part about it being equivalent to a sale. See my previous mention of claim of future earnings, etc. & clearly there are other reasons as well.

I don’t recall saying anything about the stock value, so need someone to point that out. I likely slipped & meant stock price. I put price in quotes earlier in a place where you had value; are you distinguishing between price & value?

To add an observation…as might be expected, scenarios use favorable assumptions. For example, focus on up versus down market trends. But I wonder how dialog might change going forward if recent interest rate & inflation trends continue. If no dividend, the shareholder has limited access to earnings without selling. In recent years, the time value of money & erosive power of inflation were minimized. And what about the effect of p/e compression? Will investors be as patient? Idk, but they can buy/sell as they want.

Does it for me!

 

[ERD50]

Originally Posted by youbet View Post
.... In the end, as I understand your description, both stocks would have the same "penny stock" market price, but the owner of stock #1 would own more shares because she never sold any. She would have a bigger long term cap loss to declare partially offsetting the pain of paying taxes on the divs over the years. Or am I misreading your example? ...

I'm going to finish my coffee before tackling that one!

-ERD50

OK, back after more coffee, a few other tasks, and the back of an envelope says:

I'm not sure what assumptions to make, but I'll go with this simple scenario first -

edit - I'm going to scratch this, I think I got some steps wrong....

more coffee....

more edit... OK, it's kinda complicated, as if we assume stock #1 earns $3 per it's $100 share price, and pays it out, maintaining $100/share, but stock #2 retains it, and we sell off $300, we have an ever changing stock price. A rough analysis says that after X years, if you sell, stock #1 never has any cap gains (it was all paid out as it was earned), but stock #2 does have gains, but on fewer shares. And there would be small cap gains along the way, as you'd be selling the shares with the ~ 3% gain compounded. I think it ends up being more of a deferral of taxes, but I need to do some more detailed spreadsheet work rather than back-of-an-envelope numbers.

But that deferral can have a lot of value. If I never sell (and tax laws don't change), those deferred gains would pass to my heirs un-taxed. Or I could use losses to offset gains and vice-versa

-ERD50

 

[mathjak107]

While I do strive for overall returns, there is only a few things a company can do with its earnings.
1. Reinvest to maintain and grow the business. In fast growing and newer companies this will take most of the earnings.
2. Pay them out to the owners as dividends.
3. Buy back stocks. There was a reason this was made illegal as part of the SEC 1934 Act. Stock buy backs can be used to manipulate share prices. I get suspicious when I see buybacks announced. Another thing troubling about buy backs is they rarely happen when the stock is low. (Many companies canceled buyback plans in March 2020, just when it wss a great time to buy.)
4. Use the earnings to buy into other business lines. My least favorite use. I bought VZ to have a piece of telephone utility, if I wanted Yahoo/Huffpost/AOL I would have bought it.

Personally I'm hoping that due to the new tax changes more companies move the funds used for buybacks towards increasing dividend payouts.

bigger dividends only mean an equal bigger subtraction from your other pocket by the same amount .

pretty irrelevant , nothing extra is gained if you follow the points in this discussion

 

[pb4uski]

You are putting words in my post that aren’t there. I said bonds are additive, they increase the value of your account the day they are paid and dividends are a maybe because a bond has a floor, a par value. An equity security or ETF or fund does not.

Whatever. We'll let people read the posts and make their own judgement.

 

[Winemaker]

HOG was down more than the dividend on Monday, it went ex dividend on Friday.



Here is another example of an big income stock MO Altria. Goes ex dividend today, article advising to purchase after today.


https://seekingalpha.com/article/4540977-altria-take-advantage-of-the-ex-dividend-drop

 

[ERD50]

... So everytime the market opens, it may open with a “quote” that is different than previous close. Stocks go up & down through the day, cash is spent (& replenished)… I’d guess a quarterly div might average 0.5%? And many/most of those will fluctuate more than that in a day. Yet for some reason, this gets lots of energy around it & suddenly people don’t want the stock?...

Yes, price will fluctuate due to all sorts of things. It's not that people "don't want the stock" the day after a 0.5% div is paid, it's that they are only willing to pay 0.5% less than they would the day before, plus/minus all those other fluctuations. The fluctuations can bury the ex-div delta, but it is still there.

Maybe we can find that study...

-ERD50

 

[mathjak107]

the bottom line is you gain nothing from the payment of a dividend then you do from a stock split itself .

if you took money out of your portfolio it is not a gain of any kind .

if you decided to put it back in would you call that a gain ?

of course not .

market forces could have that portfolio withdrawal recover the next day too .

but that does not mean that even if that stock doubled that those dollars taken out as a dividend didn't effect your balance . it sure did .

all one has to do is think of a fund payout .

you are no richer the next morning then you were before you went to bed if you reinvested and you have less dollars compounding if you didnt

 

[disneysteve]

the bottom line is you gain nothing from the payment of a dividend

all one has to do is think of a fund payout .

you are no richer the next morning then you were before you went to bed if you reinvested and you have less dollars compounding if you didnt

This is a great comparison which I don't think has been made previously in the thread.

A fund paying a capital gains distribution in December is very much like a stock paying a dividend. The next day, the fund drops in value to reflect the amount of the gains paid out, the very same way that a stock's value drops right after the dividend is paid/declared.

In retirement, there is nothing at all wrong with taking those dividend payments and capital gains distributions out instead of reinvesting them and using them to fund your living expenses. They constitute part of the income stream that you live on along with everything else like pensions, SS, etc. If it is a taxable account, you're going to be taxed on that money regardless.

In 2021, our taxable investments paid out a total of $46,000 in interest, dividends, and capital gains. It all got reinvested, but now we are planning to draw out those earnings instead to help fund our lives.

 

[mathjak107]

like we are all saying .

dividends are just another means of taking a withdrawal .

it has nothing to do with adding gains

our fund distributions range from 29k to 69k a year . they are all over the map .

so we buffer them towards next year rather then try to fill shortfalls in real time on the fly

all year we have been collecting them in a bucket , since last january we funded this year .

in december we will see what we are short and add to it for 2023 .

wash and repeat .

but dividends are a withdrawal no different then any other withdrawal except you dont get to choose the amount .

 

[disneysteve]

dividends are a withdrawal no different then any other withdrawal except you dont get to choose the amount .

Exactly, just like capital gains distributions, which made that a perfect comparison. Some years we get nailed with a big tax bill because a couple of our funds have a much larger distribution. I wish I could control that but I can't. At least with dividends, the amount is pretty predictable. It is very unlikely for there to be a huge surprise.

 

[Oakster]

I appreciate the input.

My point was, I was under the impression bonds were almost as safe as CDs. I was instructed to put 150k into an 5 year annuities which we all know is safe but pays nothing. And I put 60 in alternating cd's last month.

I'm considering the short term 3.5% bonds because of how is like to have more growth and access.

I want safe, but I fear I was not steered in the over all best direction given my situation. That's why I'm questioning.

I retired at 43 so I have some time to learn, but I pay for a service. At this point I feel like I'm researching how to rebuild a transmission even though I took my car in for service.

You should never make financial moves that you do not totally understand, and do so only because you think they are a good move. If you get recommendations from a professional, you should also get enough explanation and discussion to fully understand and be in agreement than it is indeed a good move. Do not just follow someones advice and not understand it completely.

 

[sestein1]

3.5% is equal to a 6 month treasury with zero risk.

But there is no upside with Treasury’s. SCHD has a long term annual return over 10% (including the dividend)

 

[mrfeh]

But there is no upside with Treasury’s. SCHD has a long term annual return over 10% (including the dividend)

And there is no downside with treasuries.

SCHD is down 12% YTD.

 

[nap470]

Exactly, just like capital gains distributions, which made that a perfect comparison. Some years we get nailed with a big tax bill because a couple of our funds have a much larger distribution. I wish I could control that but I can't. At least with dividends, the amount is pretty predictable. It is very unlikely for there to be a huge surprise.

We began this year taking the taxable dividends and capital gains versus reinvesting them as we had been doing. The 2021 tax year really surprised me with the exceptionally large capital gains distributions, especially end of year. 2021 was my first full year without a paycheck and I figured our taxable income level would significantly decrease. I paid quarterly estimated taxes based on the previous year's investment activity. Got killed and ended up writing large checks to the fed & state. Our taxable income ended up being larger than when I was working. I don't think that will happen this year but I am paying estimated taxes based on TurboTax's recommendation from last year's tax return so I believe I will have overpaid.

 

[Al18]

FYI dividends for SCHD have not been cut for 2022.
SCHD dividends paid by year:
2017 - $1.346
2018 - 1.440
2019 - 1.725
2020 - 2.028
2021 - 2.250

 

[alaska55]

And there is no downside with treasuries.

SCHD is down 12% YTD.

Then how come when I go to look at bonds at TD people are selling bonds at a lost.

 

[mathjak107]

If you are holding a 2% treasury in a 4% world that is a loss in the financial world .
Getting your 1k back at maturity in 9% inflation buys a lot less then it did when you bought it so there is another loss going on too

 

[mrfeh]

We began this year taking the taxable dividends and capital gains versus reinvesting them as we had been doing. The 2021 tax year really surprised me with the exceptionally large capital gains distributions, especially end of year. 2021 was my first full year without a paycheck and I figured our taxable income level would significantly decrease. I paid quarterly estimated taxes based on the previous year's investment activity. Got killed and ended up writing large checks to the fed & state. Our taxable income ended up being larger than when I was working. I don't think that will happen this year but I am paying estimated taxes based on TurboTax's recommendation from last year's tax return so I believe I will have overpaid.

Why don't you pay taxes on what you actually receive during the year?

 

[mrfeh]

Then how come when I go to look at bonds at TD people are selling bonds at a lost.

I meant if you hold a treasury until it matures.

It doesn't make sense to compare SCHD to bonds in the first place. Apples to oranges.

 

[imnontrad]

Dividends can always be suspended or reduced. Ask the people who have General Electric or Boeing stocks.