Tell me about using Dividend Funds in retirement.

[TheQuestionGuy]

Never focused on Dividend Funds when investing but am learning that investing prior to retirement differs then when in retirement and it seems like it may play a role.

What are you gaining by being in Dividend Funds over a Growth Fund when officially retired.
What are you losing by being in Dividend Funds over a Growth Fund when officially retired.?

I would have the ability to use either pre/post tax fund in case that is part of the decision making.

 

[MichaelB]

The search function is your friend. In addition to responses in this thread there are countless previous discussions on dividend strategies you may find interesting and informative.

 

[Midpack]

Or an AI chatbot even better…

 

[TheQuestionGuy]

I found a URL in another thread and does appear some Fidelity Dividend Fund did well compared to Index Funds (if I read the chart correctly).

This chart

 

[target2019]

Never focused on Dividend Funds when investing but am learning that investing prior to retirement differs then when in retirement and it seems like it may play a role.

What are you gaining by being in Dividend Funds over a Growth Fund when officially retired.
What are you losing by being in Dividend Funds over a Growth Fund when officially retired.?

I would have the ability to use either pre/post tax fund in case that is part of the decision making.

The surprising moment is when you realize that dividend and growth are complementary. You don't have to make it an either-or argument.

When I decide to give the brokerage a bit of dividend-focus it's a choice that delivers cash periodically from SCHD and others to pay real estate taxes, as an example. Of course this can be done in other ways, too.

And I use a growth fund among others in various accounts as well.

 

[target2019]

I found a URL in another thread and does appear some Fidelity Dividend Fund did well compared to Index Funds (if I read the chart correctly).

This chart

The chart you really need shows the next ten years.

If one fund outperforms a benchmark for 5 years, is that enough data for you?

 

[latexman]

Total return is most important, and is the sum of growth (capital gains) and dividends from your pre and post tax funds with their different tax treatments. It's not simple growth or dividends; it's both, the total. Remember, money is fungible. It doesn't matter where it comes from; it's all spendable.

 

[VanWinkle]

Dividend funds are mostly Value funds. If you want to split your portfolio into Value and Growth and don't mind the extra work of rebalancing, go for it. Growth will beat Value (some of the time) and Value will beat growth (some of the time). Which will win more during your retirement is the unknown. I just buy the complete market in one fund so I always own the winner and loser.

Good luck in your choices,

VW

 

[Time2]

I have a friend that has a high percentage in bonds, he is either 60/40 or 40/60 I can't recall. He regrets it! He has way to much forced income and gets hit with all the add on taxes, IRMAA and others. He also has to withdraw 6.25% this year as RMDs. He has been complaining about this for at least 8 years at our weekly breakfast. It was a good warning to me to structure my assets so I control the income and have limited forced income.

 

[jimbee]

I buy the haystack.

 

[Al18]

Not all dividend funds/ETFs are the same. Historically they have have been composed of mostly Value stocks that have paid increasing dividends for many years. Good examples are NOBL, SCHD and VYM. Dividends are usually qualified, meaning you pay no taxes on the dividends if you're in the 0%-12% tax brackets. Typically these dividend funds do not cut dividends - ever. You can view their performance at https://www.portfoliovisualizer.com/fund-performance?s=y&sl=5RXZbuTnwvraemR8sbwsYv

NOBL is made up solely of the Dividend Aristocrats, which have increased their dividends at least 25 years. Many of these companies don't grow much. SCHD and VYM own stocks that have grown their dividends at least 10 years, but these funds focus on dividends and growth.

In the past 5-10 years, a new type of dividend funds have appeared, owning only growth stocks. Many growth companies, especially technology don't pay dividends. The funds use covered calls and other financial tricks to manufacture dividends. Examples are JEPI and JEPQ. Some of these funds charge 1%-4% in fees. The dividends are typically not qualified, meaning you pay the same taxes as income. These funds are so new, they were not financially tested over time.

Lastly, check the top 10 companies that make-up each fund - to see if they will perform diffently. I prefer to own a few types of funds for diversification.

 

[marko]

I've been living on dividends for the last 20 years. I may have lost a little bit on growth but I like the idea of not having to sell shares, particularly in an extended down market.

Dividends are paid monthly and set aside for regular monthly withdrawal.

Yes, the price drops with each dividend payment but remember that it doesn't stay down permanently

At this point, I have 3X annual needs set aside in a MM fund and my overall portfolio has grown almost 4X.

There's 100 ways to skin the income cat, but this is what I do. For me, mentally, my monthly dividends are simply replacing my paycheck. It's predictable and reliable and fairly immune to market swings.

Even during the GR my dividends were barely impacted...maybe a 1% or 2% reduction. I was quite happy to not have to rely upon total return back then.

 

[Lorenzo]

What are you gaining by being in Dividend Funds over a Growth Fund when officially retired.

I would say you gain mainly a psychological benefit--a comforting belief that your nest egg remains intact while it periodically throws off spending money for you.

What are you losing by being in Dividend Funds over a Growth Fund when officially retired.?

I would say you risk losing perspective. A cool-headed or emotionless mathematics-oriented investor might say that "total return" is all that matters, and the throwing off of spending money for you while still maintaining your nest egg is an illusion.

 

[MRG]

I think it's a part of a balanced diet. We have almost half our assets in Vanguard under PAS with a 60/40 Boggleish AA. They send us money monthly from these assets.

I self manage the other half and my bonds are mostly CEFs, with a 70/30 allocation. They send another sum from there every month. To me its the best of both worlds.

 

[dobig]

Oh boy, here we go.

I get a chuckle how some view us dividend investors. No we don't believe dividends are free money that falls off trees. Dividends for many of us present a disciplined retirement strategy that takes emotion out the equation. We don't need to sell stocks or worry about what to do in downturns and we know our income will continue to grow and if invested right, outpace inflation by a good margin.

The major players in dividend etfs focus on good quality, value oriented stocks. That means low Beta and defensive during recessions. The chart below is an illustraion.

As you can see in major market downturns S&P dividend stocks performed much better then the index as a whole. Yes there were some periods of declining dividends but in the worst recession since the Great Depression, 2008, dividends were cut 23%. It took 22 months for those dividends to grecover to theirs highs. And in some recessions dividends actually increase.

Average drawdown in S&P dividends during a recession are around 2%. This is why for myself and others, dividends funds help us go into retirement feeling confident we'll be able to weather any storm. A far cry from index investors who retired in 1999 before the Dot.com bust where it took a decade for equities to get back to their previous highs.

 

[engineernerd]

One thing not yet pointed out by others: the less your portfolio resembles the assumed portfolio in FIRECalc, the less likely it is to behave like that portfolio in future.

Another thing not given much attention by some on these forums: stock-market crashes are not the only risk we face. SORR is the risk that's in-your-face. But the sneaky one, inflation, can harm you at least as much.

P.S. - I know relatively little about dividend investments, but did notice that VYM (Vanguard High Dividend Yield index ETF) has been both less volatile and lower-performing than VTI (Vanguard Total Stock Market index ETF) since VYM inception in November 2006.

 

[dobig]

There's also a misconception that dividend etfs are mainly old value companies that won't keep up with market runs during market disrupting events. Internet/Ai, etc,. This is no longer the case. There are many quality dividend etfs out there now that can pretty much diversify a portfolio across the entire market spectrum.

For growth with most near double digit dividend growth.

I own all. Backtesting shows many kept up with or outperformed S&P index.

VIG (dividends fell only 5% vs 21% in 2008 for the S&P)
FDVV (one of my favorites)
DGRW
CGDV
DTD
FDRR
DGRO
TDV
RDVY

 

[dobig]

...........................

Another thing not given much attention by some on these forums: stock-market crashes are not the only risk we face. SORR is the risk that's in-your-face. But the sneaky one, inflation, can harm you at least as much.

Which is why I don't want to invest in bonds or treasuries. Why would I buy a 4% ten year treasury that sees the value of my investment slowly erode rather than buy a high quality dividend etfs such as SCHD that gives off a 3.5% dividend and whose dividend has increased 300% in the past 12 years (not to mention a 300% increase in fund value)?

 

[engineernerd]

Which is why I don't want to invest in bonds or treasuries. Why would I buy a 4% ten year treasury that sees the value of my investment slowly erode rather than buy a high quality dividend etfs such as SCHD that gives off a 3.5% dividend and whose dividend has increased 300% in the past 12 years (not to mention a 300% increase in fund value)?

I would not hold 100% equities, though. FIRECalc shows that's also suboptimal. Best (maximum safe withdrawal rate for given portfolio size) seems to be in the neighborhood of 80-85% stock.

 

[TripleLindy]

We have almost half our assets in Vanguard under PAS with a 60/40 Boggleish AA.

This is similar to our situation, although we’re 65/35 and have the majority of our assets with Vanguard PAS. The thing I’ll add about dividend income is in relation to MAGI if you are trying to qualify for ACA subsidies. I love the income stream, as it covers a significant portion of our expenses and allows the portfolio to grow, but there is less flexibility in managing MAGI without retooling the AA. Dividends alone are pushing us over the cliff, so if you’re still pre-Medicare, it’s a consideration.

The other aspect is tax. Almost $100k of qualified dividend income is exempt for a couple.

 

[dobig]

This is similar to our situation, although we’re 65/35 and have the majority of our assets with Vanguard PAS. The thing I’ll add about dividend income is in relation to MAGI if you are trying to qualify for ACA subsidies. I love the income stream, as it covers a significant portion of our expenses and allows the portfolio to grow, but there is less flexibility in managing MAGI without retooling the AA. Dividends alone are pushing us over the cliff, so if you’re still pre-Medicare, it’s a consideration.

The other aspect is tax. Almost $100k of qualified dividend income is exempt for a couple.

That's the position we're in heading into retirement this year at age 55. We've moved some money in our taxable to covered call income funds such as SPYI and GPIX. These pay around 98 - 99% of dividends as ROC (return of capital) so it doesn't count towards MAGI and should keep us below that $86,560 ACA income limit.


Back To School rules!!

 

[Flyfish1]

Oh boy @TheQuestionGuy you went ahead and said the "D" word.
Just joking, but this board is certainly tilted towards buy and hold investors.
Although, lately there seems to be more and more dividend investors , which is a good thing IMO.

AS I have stated several times - I was a typical index buy and hold investor for all my working career but shifted to dividends a little before retirement and completed the shift after retirement. In my case I also have holdings outside of the market. I see it as @marko sees it. It nicely replaces my paycheck and I also agree with @dobig that this approach removes the worry of selling shares in a down market.

Some of us don't simply buy dividend stocks, but also REIT's and CEF's.

As far as inflation worries, it's mitigated a couple of ways in my mind. You can buy dividend aristocrats or you simply reinvest a portion of your dividends and keep increasing your number of shares held and your income. I do the latter and although I only retired 3 years ago my income has increased on average about 13% per year. Not worried about inflation with those numbers.

It's also a different mind set. TR investors will mentally focus on the value of the portfolio. Whereas at least IMO dividend investors are more focused on income and income growth. My portfolio value will increase due to the fact that I am buying more shares usually every month. Lastly, I don't let the tax tail wag the dog.

 

[Flieger]

It's also a different mind set. TR investors will mentally focus on the value of the portfolio. Whereas at least IMO dividend investors are more focused on income and income growth. My portfolio value will increase due to the fact that I am buying more shares usually every month. Lastly, I don't let the tax tail wag the dog.

I think bolded (by me) is true, but I have tried to also consider maintaining somewhat the capital value. A tall task, no matter which you are invested in today (other than interest bearing alone).

Flieger

 

[L-5Player]

My portfolio is a real mixed bag, with 42% in typical growth and index equities, 38% in a wide range of income-focused equities (dividend growth stocks, CEF, REIT, BDC, MLP, covered call funds), and 20% in bonds/cash.

Since I retired in 2021, I've managed a nominal CAGR a bit north of 9%. 70% of my returns have been from capital appreciation, the remaining 30% from dividends.

There are dividend assets that allow you to generate a higher amount of usable income with a smaller capital footprint, and this is naturally appealing for some investors. The trade-off is that growth is generally less robust, and some portion of the distributions need to be actively reinvested in order preserve asset value. However, volatility is usually moderate. And you don't have to deplete shares.

In contrast, a low yield, Boglehead approach generates only a modest amount of dividend income, but has better long term growth; however, volatility can be dramatic, and you need to deplete shares.

In between these is a traditional dividend growth profile, with companies or funds yielding 2-5%, but with a consistent record of increasing dividends every year. You need more capital to literally live off this amount of dividend, but there is also significant growth of the underlying as well. And you don't have to reinvest anything.

I like a blend for a variety of reasons. Live off mainly dividends, but growth assets can be sold for larger one-off expenses without compromising the golden goose (i.e. the dividend payers).

 

[Koolau]

I've been impressed by some of the reports offered in these pages by our Dividend Investors - especially those who've relatively recently come over from the FIDO Forums. I still have two issues (for me - not for anyone else, necessarily) with Dividend investing:

1) I simply don't understand it well enough - or perhaps more specifically I don't understand HOW to do it well enough. I have adopted a rule (because I was "led" into many things I didn't understand back in the day - and I always lost money on them): Never invest in anything I can't explain fully (sell) to my DW or a neighbor.

2) Again, though I'm impressed by our Dividend investors here (and though I DO appreciate them!) it seems (to me) that Dividend investing is a lot more w*rk than (passive) index/Total Return investing.

There it is. IOW it's a "me" thing not a "them" thing.