Question about SWR

[surprising]

You aren’t using a safe withdrawal rate with an annuity. It’s a completely different setup.

Right, that's the point I'm trying to make. If I have (in a completely contrived example) a dividend that pays me until the day I die, it is basically an annuity, and shouldn't be counted as part of SWR.

 

[audreyh1]

To me you are just trying to mention SWR in situations where it doesn’t make any sense.

It only applies if you are trying to spend down a portfolio of investments over your retirement. It has nothing to do with other possible sources of retirement income such as pension, social security, or an annuity.

 

[ERD50]

Right, that's the point I'm trying to make. If I have (in a completely contrived example) a dividend that pays me until the day I die, it is basically an annuity, and shouldn't be counted as part of SWR.

But every retirement tool like FIRECalc, ficalc.app, etc does exactly that. The dividends are part of your SWR. Money is fungible.

If your expenses are less than the divs from the portfolio, there will be no selling of assets in any case. Doesn't matter how you 'think about it', it just is. And as I mentioned earlier, a dividend distribution is simply the company selling off some of its value to you (in a tax inefficient manner). Other than an unfavorable tax treatment, and possible unfavorable timing with divs, there is no distinction.

 

[Onda]

By living off dividends, you're not only sustaining your lifestyle but also enjoying the satisfaction of watching your income grow over time as your investments appreciate. This approach allows for financial security and peace of mind since your nest egg remains intact or even grows, ensuring a steady or increasing stream of passive income. It’s a rewarding feeling knowing that your wealth can continue to build while supporting your lifestyle without needing to dip into the principal.

That is our SWR.

 

[Al18]

Dividend paying stocks don’t work as you describe. Long before the value of the stock approaches zero, the company directors would have eliminated dividend payments. I’ve seen this happen many times in the past. For example, Ford suspended it’s dividend payments for over a decade, while it was refocusing the company.

 

[audreyh1]

By living off dividends, you're not only sustaining your lifestyle but also enjoying the satisfaction of watching your income grow over time as your investments appreciate. This approach allows for financial security and peace of mind since your nest egg remains intact or even grows, ensuring a steady or increasing stream of passive income. It’s a rewarding feeling knowing that your wealth can continue to build while supporting your lifestyle without needing to dip into the principal.

That is our SWR.

This is only true (safe) if the dividend payout% isn’t so high that the remainder of your portfolio is unable to mostly keep up with inflation over the long term.

 

[FlaMariner]

By living off dividends, you're not only sustaining your lifestyle but also enjoying the satisfaction of watching your income grow over time as your investments appreciate. This approach allows for financial security and peace of mind since your nest egg remains intact or even grows, ensuring a steady or increasing stream of passive income. It’s a rewarding feeling knowing that your wealth can continue to build while supporting your lifestyle without needing to dip into the principal.

That is our SWR.

That's the way we roll......Luckily, dividends and interest plus pension (and then ss in two years) produce enough income for us.....

Our plan is to spend/enjoy income and never touch principle.

If my investment portfolio spins off 3.5% of it's value in dividends/interest each year, and I withdraw/spend that money each year, my WR is 3.5% but it feels like 0%.

The investment portfolio also appreciates most years.......

 

[braumeister]

I'll try just once more.
When considering portfolio withdrawals, your portfolio projection into the future assumes that all dividends and interest will be either reinvested or maintained as cash, still within the portfolio.

If you take the dividends/interest out to spend, you are defeating the purpose of the projection.

So, saying that you just take the dividends and have a zero WR doesn't make sense in the traditional definition of WR. Anything removed for spending reduces your portfolio and introduces a completely foreign concept. What you remove, divided by the total, is your WR.

 

[Onda]

This is only true (safe) if the dividend payout% isn’t so high that the remainder of your portfolio is unable to mostly keep up with inflation over the long term.

That's absolutely right! For dividends to be a sustainable source of income over the long term, the dividend payout ratio must be balanced.

Dividends should ideally come from companies with strong fundamentals and growth prospects, ensuring that the portfolio grows in real terms, even after inflation. (IE: KO, MSFT, NVDA, SCHD, VTI, VOO) For us it does.

 

[Texas Proud]

So for an extreme example, let's say I have a portfolio of just dividend stocks. These dividends cover all my expenses, and also the dividends increase every year to match inflation. Assume I can live off these dividends my entire life without ever having to sell a single share of stock. You could calculate a withdrawal rate but it would be meaningless because the dividends received are independent of the value of the underlying stock.

Does it make sense then to separate out dividend stocks (and bonds) from non-dividend stocks and only include non-dividend stocks for SWR calculation?

That is extreme but you are taking money out of your portfolio... just as dividends and interest... so you can calculate your withdrawal rate...

 

[Koolau]

I think this is about the 10th time I've seen this discussion in the past 15 years.

I agree with those who look at dividends as just a part of the total growth of the portfolio. Taking only dividends is okay if you want to do that for some reason, but you're still reducing the total value of your portfolio and thus: Withdrawal Rate applies.

Looking forward to seeing this discussion in another year or so.

 

[FLSUnFIRE]

Dividends seem nice but are tax-inefficient (regular income and no control for the investor) under current law -moot if in a tax advantaged account perhaps. Generally, dividends are paid out when the company doesn't have a good place to invest excess cash flow which to me could indicate a company that is not going to grow much and could dwindle to irrelevance. Of course, I'd rather have the company pay out that cash to the investors than go on acquisition binges or otherwise poorly investing the cash and becoming an inefficient poorly conceived conglomerate . At the company level I would want to see what they are investing in their operations to maintain their competitive advantage that generates cash flow to pay the dividend as well as the capital structure to have confidence in the long term viability of the dividends I am counting on. A company with significant debt, especially if actively borrowing, that is then paying out a dividend is a warning sign to me. I'm not a hater but not a fan.... psychologically, I understand the appeal of being paid without selling anything but at the end of the day total return (after tax) is what I'm most concerned with.

Pragmatically, I spend dividends received as they are already being taxed and sell equities as required for my cashflow needs paying LTCG taxes. Any money taken out of the portfolio, dividend or not, is a withdrawal. If I had a concentrated "dividend or income" portfolio, I would want a lower WDR as it would be higher risk than a more broadly diversified portfolio.

 

[audreyh1]

Dividends from stocks are generally given the same tax treatment as LTCGs.

 

[mrfeh]

Dividends from stocks are generally given the same tax treatment as LTCGs.

Usually, but not always.

Also, in my state, all dividends are taxed as regular income, whether they are qualified or not.

 

[Koolau]

Usually, but not always.

Also, in my state, all dividends are taxed as regular income, whether they are qualified or not.

In my state, if they are taxed Federally, they will also be taxed by the state.

 

[ERD50]

By living off dividends, you're not only sustaining your lifestyle but also enjoying the satisfaction of watching your income grow over time as your investments appreciate. This approach allows for financial security and peace of mind since your nest egg remains intact or even grows, ensuring a steady or increasing stream of passive income. It’s a rewarding feeling knowing that your wealth can continue to build while supporting your lifestyle without needing to dip into the principal.

That is our SWR.

Which is no different at all from what happens with a balanced portfolio.

Whether I choose to sell a portion of the value of my portfolio some years to provide cash flow, or the company decides to sell off a portion of the value of its stock to issue a dividend - it's the same (other than likely tax advantages to LTCG) .

There's no evidence that a high-div paying portfolio is any more stable or protected against failure than a balanced, diversified portfolio. It's likely that by picking high-div stocks, you are less diversified, which could be a problem.

 

[ERD50]

Dividends from stocks are generally given the same tax treatment as LTCGs.

Usually, but not always.

Also, in my state, all dividends are taxed as regular income, whether they are qualified or not.

Another negative to dividends that I didn't think about. In IL, the state DOES tax ALL dividends as regular income, an added 4.95% tax hit for me.

For completeness, I'll re-iterate that Qualified Dividends are still at a tax disadvantage to LTCG from a sale. Because 100% of a Qualified Dividend is taxed at the 'preferred' 15% tax rate for most taxpayers, but only the GAIN from a LT sale is taxed. The gain will be less 100% of the sale in any normal situation.

As an example, if I sell $10,000 of a holding, the cost basis may be $5,000. So any 15% tax hit will be on $5,000, not the full $10,000 (as it would be for $10,000 in Q-Divs).

 

[Al18]

FYI article comparing dividends to stock buybacks Charted: The Rise of Stock Buybacks Over 20 Years

 

[PatrickA5]

My WR this year will be around 11%. Ooops! Probably need to reduce that a little.

It should be closer to 2% going forward, but had large expenses (roof, etc) and helped kids get into houses.

 

[Gumby]

I am indifferent as to whether my portfolio grows through dividend payouts that end up in my settlement account (if they are not automatically reinvested) or stock price increases. I just want it to get bigger. I am also indifferent as to the "source", if you will, of any money I withdraw from that portfolio. It doesn't matter if it is interest or dividends paid or capital gains from stock sales. By withdrawing anything, I am making my portfolio smaller. Calling increases or decreases by one name or the other does not change their essential character, nor the basic math of the 4% rule.

For the purists - yes, I acknowledge that tax considerations can make me care about the precise characterization. But, in general, I take a total return approach to both investing and disinvesting.

 

[GravitySucks]

FYI article comparing dividends to stock buybacks Charted: The Rise of Stock Buybacks Over 20 Years

I often see here that a problem with dividends is they might come when I don’t want them.
I see in the chart you shared the companies that do buy backs often do them when I wouldn’t. When the dips come buybacks fall.

Thanks for sharing.

Edit for grammer

 

[big-papa]

Same mindset here. I use VPW as a guide for spending each year. It works both ways. If things start going bad, I immediately have a small reduction. Small, because it's spread out over the rest of my life. And if things are good, my spending allowance increases.

Exactly. That's the thing I like about amortization methods. All risk is spread out over the remaining withdrawal periods instead of stacked up at the end. The one thing about having "more than enough" is that there is no reason to withdraw the entire prescribed amount calculated if you don't need the money. Any extra you leave in will de-risk future withdrawals if something really bad does happen. Otherwise, what should happen is that the margin for each withdrawal simply grows - a very good thing.

Cheers.

 

[Onda]

Which is no different at all from what happens with a balanced portfolio.

Whether I choose to sell a portion of the value of my portfolio some years to provide cash flow, or the company decides to sell off a portion of the value of its stock to issue a dividend - it's the same (other than likely tax advantages to LTCG) .

There's no evidence that a high-div paying portfolio is any more stable or protected against failure than a balanced, diversified portfolio. It's likely that by picking high-div stocks, you are less diversified, which could be a problem.

But balance diversified portofolio generating lets say 10-20k in dividends per month is quite well protected against failures.

 

[Koolau]

But balance diversified portofolio generating lets say 10-20k in dividends per month is quite well protected against failures.

Such a portfolio would need to be huge! Typical dividends are in the range of 2 to 5%. That would w*rk out to a portfolio of $2.4Million to $12Million (if my math is correct - heh, heh, no promises.)

 

[Onda]

Such a portfolio would need to be huge! Typical dividends are in the range of 2 to 5%. That would w*rk out to a portfolio of $2.4Million to $12Million (if my math is correct - heh, heh, no promises.)

I would say "diversified" portfolio of equities generates today under 2% in dividends.