Tell me about using Dividend Funds in retirement.

[L-5Player]

Dividend investing is a lot more w*rk than (passive) index/Total Return investing.

I think you're probably right! Although it doesn't necessarily need to be, especially with a large portfolio of dividend aristocrat type stocks, all venerable companies reliably paying quarterly dividends and increasing them every year. These could distribute to cash and get transferred to your bank account automatically, with no work ever needed assuming the distributions continue to support your living expenses.

Notably, a (very popular) fund like SCHD is literally designed to do this with a single ticker!

The newer and more diverse options beyond these "old school" stocks, all with higher yields, do require some babysitting.

Most importantly, if something produces a 10%+ distribution, there's a good chance its underlying NAV is floating around neutral or even declining at times. Similarly, a closed end fund (CEF) may not raise its dividend for many years. So you need to reinvest a portion of the distribution with these things in order to have their underlying value keep up with inflation. That's the work involved.

Index investing is less work, but can be more stressful, as it's hard for some people to deplete shares when the market is in bad shape. It might work out historically per Trinity and Bengen and all the literature, but to dismiss the emotional component is not realistic.

Dividend investors don't usually need to worry about share price as long as the distribution doesn't get reduced. However, if a large sum is needed in excess of the dividend, they need something to sell that doesn't also result in depleted future income. And that's why a hybrid of both styles is most appealing to me.

 

[marko]

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.

I don't know. Once I find a series of funds/stocks that I decide are going to help fill the coffers, I might go years before making any changes. Literally sit back and watch the money roll in.

Even when I do make a change, it's more a matter of tweaking a single fund or two when I stumble upon something more interesting or the stock is no longer delivering.

I only have 9 or 10 holdings total which also include some growth/index funds and some of them I've held for 15 or twenty years. Not a lot of work but I do enjoy tracking and monitoring progress.

Note that I also include MF year-end Cap Gains as "dividends" so I reap benefits from a mid-cap and equity income fund which some years can roll in as much as 11% of gravy.

Inflation? SS and Medicare reduced our dividend withdrawals by $100k, so, I'm good for a long while.

For me, there's just something comforting in knowing that the first of every month there'll be $X arriving to my holding MM. Reliable, predictable and mindless.

 

[OldShooter]

Start here: Homemade Dividends: What it Means, How it Works
and here: Understanding Dividend Irrelevance Theory and Its Market Impact

Punch line is that a large number of investors (and Nobel prize winners) believe that investors benefit equally from a company via receiving dividends or via simply selling an equivalent $ values in shares. Also, selling shares allows the investor to optimize tax timing and, potentially, pay capital gains tax on the proceeds.

 

[Lorenzo]

Notably, a (very popular) fund like SCHD is literally designed to do this with a single ticker!

Is SCHD all that unusual? In post #17 above, dobig mentions a number of dividend funds.

Regarding @Koolau 's original comment, my impression is that a supposed benefit of dividend investing is that is can be LESS work than total return index investing, where you periodically have to make sell decisions.

 

[Flyfish1]

Regarding @Koolau 's original comment, my impression is that a supposed benefit of dividend investing is that is can be LESS work than total return index investing, where you periodically have to make sell decisions.

At this point I actually the "work" if I didn't I would have hired an FA. Like today I took a small profit on LYB and moved to a different play ( in IRA ). In so doing I increased my income. I could see as I age simplyfing the portfolio a bit. I also follow three different investment services for ideas. Many of my positions I haven't touched in 5 years just added shares.

 

[Spock]

Is SCHD all that unusual? In post #17 above, dobig mentions a number of dividend funds.

SCHD is rather unique in it's screening process.
"The index selects U.S. companies that have paid dividends consistently for at least 10 consecutive years, have a minimum float-adjusted market capitalization of $500 million, and meet liquidity criteria. Stocks are then evaluated based on four fundamental metrics: cash flow to total debt, return on equity, dividend yield, and 5-year dividend growth rate."

 

[youbet]

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.

+1 According to back-testing by FireCalc (and other calculators that use historical data) inflation beats recessions, depressions and SORR in causing portfolio failures. I agree inflation can be sneaky and, in fact, is sometimes pooh-poohed by what seem like otherwise savvy investors commenting here.

Of course, there are strategies within income investing, value investing, growth investing and index investing to potentially offset the impact of inflation so they can all work. But you do need to keep inflation in mind as you follow your chosen strategy.

 

[Montecfo]

I invest for total return. Money is fungible. Dividend are great. But folks who stretch for yield or try to "live off the dividends" I think can leave themselves at a disadvantage.

My dividends and interest exceed my spending. But I only check that once a year.

I buy and sell securities based on principles. Most of my portfolio is individual stocks and bonds, with a few funds. I don't qualify for a pension, so spending money comes from a "paycheck" that I crafted using these principles.

Overall probably a bit different than most here.

I do not think dividend stocks are a substitute for bonds. Dividend stocks are highly sensitive to higher interest rates, which is something you do not want from your safe-type money, in my view.

 

[joejetski]

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 too 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 limitedmy forced income.

Forced income includes, pensions, SS, and RMDs. Everything else is controllable. Need to be careful of the “cliffs” - threshold points where a little more income results in a lot more taxes, like IRMAA. IRMAA has a 2 year look back also, so plan that in to your finances.

 

[TheWizard]

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

That depends entirely on additional Ordinary Income...

 

[Dash man]

Start here: Homemade Dividends: What it Means, How it Works
and here: Understanding Dividend Irrelevance Theory and Its Market Impact

Punch line is that a large number of investors (and Nobel prize winners) believe that investors benefit equally from a company via receiving dividends or via simply selling an equivalent $ values in shares. Also, selling shares allows the investor to optimize tax timing and, potentially, pay capital gains tax on the proceeds.

If you rely on having to sell shares you can get severely burned if there is a deep and prolonged market drop. Dividend funds/stocks with histories of growing dividends rarely interrupt paying dividends or cutting them during market downturns. If you have to sell shares during this kind of downturn you lose those shares’ growth prospects when the market recovers.

 

[Montecfo]

If you rely on having to sell shares you can get severely burned if there is a deep and prolonged market drop. Dividend funds/stocks with histories of growing dividends rarely interrupt paying dividends or cutting them during market downturns. If you have to sell shares during this kind of downturn you lose those shares’ growth prospects when the market recovers.

Selling equity to fund spending is not a good plan in my opinion, for the reason you state.

You should be harvesting maturing bonds in my view or using proceeds of rebalancing (selling high).

 

[Diogenes]

That depends entirely on additional Ordinary Income...

A very important observation! By the time that we add Social Security, pension income, "Barista FIRE" W2 or 1099, ordinary dividends/interest, maybe RMDs and so on... one might be deep into 6-figures, even as a lowly individual, never mind as a couple.

Even for the quotidian Essen Pea Five Hundred, the dividend rate is something like 1.2%. So, for every single million dollars in a taxable account, that's $12K in dividend "income" - all taxable! - even if that's at the preferred dividend rate.

The point: in some cases, dividends are dearly expensive, in terms of federal and state income tax. If your dividends greatly exceed your annual expenses, you're paying taxes on "income" that you don't need. If instead one's holdings were in companies that magically paid 0% dividends, then until one actually took income - namely, withdrawals - one would not be generating a taxable event.

 

[Flyfish1]

I invest for total return. Money is fungible. Dividend are great. But folks who stretch for yield or try to "live off the dividends" I think can leave themselves at a disadvantage.

How so? At a disadvantage to what? Having a strong cash flow through the ups and downs of the market and not selling shares in stressed market situations? Seriously, what is the disadvantage? I would appreciate an answer to your statement.

 

[GrayHare]

I lean toward dividends or growth depending on secular trends such as long-term economic outlook. In general, dividend payers do better during inflation and higher interest rates, growth does better during lower interest rates. By leaning, I mean I adjust my allocation somewhat, rather than huge shifts back and forth.

The last time the US had debt levels this high relative to GDP happened after WWII. That was followed by a period of intentional inflation during the late 1940s and early 1950s to help service that debt. Last year, I began to shed some tech/growth and replace it with dividend payers. When all else is equal, I favor growth because for tax purposes cap gains are easier to control than dividends.

 

[Montecfo]

How so? At a disadvantage to what? Having a strong cash flow through the ups and downs of the market and not selling shares in stressed market situations? Seriously, what is the disadvantage? I would appreciate an answer to your statement.

Well where should I start? When you "stretch for yield" you are prioritizing yield over growth. So you are likely making less over time.

-Dividend focused portfolios often are within specific lower growth industries, hurting returns and sacrificing diversification.

-You are receiving income that is taxable even if proceeds are reinvested. This forced taxable income is not optimal. Total return investors have more flexibility.

I think some folks do some type of mental math to the effect that taking a 4% dividend is better than selling 4%. But that is what it is.

These are some disadvantages.

Now, flyfish, don't get mad at me. If you are comfortable spending dividends only in spite of these issues and more, I am fine with that if it makes you more comfortable. But you asked and I answered.

 

[Al18]

There are no taxes on qualified dividends if you’re in the 12% tax bracket. Dividend stocks and funds are very stable, and dividends don’t change much. There’s a lot more volatility in an SP500 fund. There’s no stretching for yield on dividend stocks and typical dividend funds, who primarily invest in stocks who grow dividends over many years.

 

[Koolau]

If you rely on having to sell shares you can get severely burned if there is a deep and prolonged market drop. Dividend funds/stocks with histories of growing dividends rarely interrupt paying dividends or cutting them during market downturns. If you have to sell shares during this kind of downturn you lose those shares’ growth prospects when the market recovers.

I think this is why some still use the "old" way of balancing a portfolio with bonds (and now - at least in my case - balancing with cash-like investments). This method "prevents" one from needing to sell depressed stocks. Also, periodic rebalancing gives a good chance of coming out ahead when markets recover.

The "trick" is balancing with something at least reasonably negatively correlated with your equities.

 

[Semi-Retyrd]

A bit of history for dividend investors.

It was in 1982, 44 years ago when dividend investing was forever changed. The SEC adopted Rule 10b-18, which provided a "safe harbor" from market manipulation liability for companies repurchasing their own shares, provided they adhered to specific volume, price, and timing. The adoption of Rule 10b-18 led to a massive increase in the use of buybacks as a means of returning capital to shareholders.
Prior to 1982 most stocks were dividend stocks and the overall yield of the S&P 500 was more like 5%. Government revenue declined as taxable dividends were replaced by lower taxed capital gains. Today the field of significant dividend payers is much smaller with fewer growth companies in the mix.

This makes dividend investing more challenging than in the past. Still possible of course, but more work than in the old days.

 

[Time2]

Forced income includes, pensions, SS, and RMDs. Everything else is controllable. Need to be careful of the “cliffs” - threshold points where a little more income results in a lot more taxes, like IRMAA. IRMAA has a 2 year look back also, so plan that in to your finances.

I suppose bond dividends can be controlled by keeping them in a tax deferred account, or with tax free bonds. With that, I'm guessing my friend has bonds in taxable accounts.

 

[Steelpony]

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.

Well I’m old school but I learned, evolved and improved my investing techniques along the way over 45 years. I also gained valuable experience handling my parents portfolio from 1982-2017.

There’s 3 income producing sources, cap gains, dividends and “distributions”. All can vary and have their good and bad traits. Learn about and use all 3 not just the first 2 to diversify your income stream.

Keep track of your personal inflation rate and use regular and reliable cash flow to fill the gaps but leave equity investments that provide cap gains alone and on dividend reinvestment asap.

For sure count on the need for income to increase, sometimes suddenly, if you live long enough. Income needs in retirement are definitely U shaped due to inflation and/or health issues.

I suggest you use dividends and/or distributions for the first 2 parts through the bottom of the U to supplement current needs. For most retirees they’ll need those cap gains in addition for part 3, the right side, after age 85.

 

[TheQuestionGuy]

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.

I guess the next question would be, how much of a retirement fund does one dedicate to Dividends.
Is there a specific percentage?
Does anyone do 100%

 

[joejetski]

I suppose bond dividends can be controlled by keeping them in a tax deferred account, or with tax free bonds. With that, I'm guessing my friend has bonds in taxable accounts.

Definitely want bonds in tax deferred or better yet Roth. There are also municipal bonds that may provide tax advantages in taxable accounts. For example, NPV is a Virginia Tax Free Municipal Bond fund. This fund may save you on both federal and state taxes, depending on your income situation. Income from these still count towards MAGI, so consult a tax professional or FA.

 

[Flieger]

Money is fungible, time is not.

As with anything, I think moderation (diversification) is good. How the split is done can be different over time. I used to be 100% growth, now I am not and based on my circumstance I am heavier Income than growth, but I do still hold some growth. To each his own.

Flieger

 

[Flyfish1]

Well where should I start? When you "stretch for yield" you are prioritizing yield over growth. So you are likely making less over time.

-Dividend focused portfolios often are within specific lower growth industries, hurting returns and sacrificing diversification.

-You are receiving income that is taxable even if proceeds are reinvested. This forced taxable income is not optimal. Total return investors have more flexibility.

I think some folks do some type of mental math to the effect that taking a 4% dividend is better than selling 4%. But that is what it is.

These are some disadvantages.

Now, flyfish, don't get mad at me. If you are comfortable spending dividends only in spite of these issues and more, I am fine with that if it makes you more comfortable. But you asked and I answered.

Oh , I'm not mad at you. Not at all. I appreciate the banter back and forth and I apologize if I came across as angry.

You raise some good points. But I disagree that a dividend investor is making less over time than a buy and hold 60/40 , 4% SWR investor. Obviously that depends on the details as to how that investor has structured their dividend portfolio. If they only hold div. stocks paying 4% in low growth industries and don't reinvest then yep I agree with you, they would end up in a worse position taking their 4% as opposed to a buy and hold investor withdrawing their 4%. No argument here.

But consider a CEF or a div. ETF investor. They can now have a very diversified portfolio using these investments, not just the low growth mid cap industries that make up a lot of dividend companies. A well constructed portfolio can yield 8-10% per year. Invest 25% of that and you can reasonably expect a 2% per year increase in income. Many of us are achieving income growth in the high single digits per year. So that portfolio can throw off 6% a year or more for income and continue to grow every year. So IMO a well constructed dividend portfolio can produce more income and still grow over time.

Yes taxes are an issue - but for me the vast majority of my div. assets are in a tIRA.