Tell me about using Dividend Funds in retirement.

[marko]

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.

Here's the thing: it doesn't have to be all or nothing.

My portfolio is 30% dividend heavy and 70% growth stocks/funds. The dividend side delivers about 7% in dividends BUT!! the growth side brings in 5% in additional dividends.

That, plus gravy from year-end MF cap gains from both sides of the portfolio more than cover my income needs and still deliver a nice total return yoy.

 

[Montecfo]

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.

No, you didn't. Glad we can have a friendly discussion.

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.

Yes. I meant comparing equities to equities.

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, but those yields are achieved by leverage, return of capital etc. In my opinion, such a fund would be a niche investment, appropriate for a small portion of your portfolio. Not most or all, in my opinion. I follow closely the trading threads which are focused on this type of investment.

But I know reasonable minds may differ.

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

I am surprised they are not in taxable to take advantage of low rates on dividends. You are converting capital gain to ordinary or income.

 

[Flyfish1]

I am surprised they are not in taxable to take advantage of low rates on dividends. You are converting capital gain to ordinary or income.

They are also in taxable accounts it's just that the IRA is much bigger than taxable.

 

[Dash man]

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.

Why do you assume dividend investors “stretch” for yield? The best investments are dividend growth strategies. My dividend growth averages for 10% per year for my entire portfolio. Not bad for what you call lower growth industries. I bring in close to $250,000 in dividends each year, mostly in Roth accounts. Any capital gains or taxable dividends will be wiped out with charitable contributions bringing our taxable income low enough to pay zero taxes in 2026.

 

[Montecfo]

Why do you assume dividend investors “stretch” for yield?

I did not assume that, if you look at what I actually said.

The best investments are dividend growth strategies. My dividend growth averages for 10% per year for my entire portfolio. Not bad for what you call lower growth industries.

I do not know what you hold. I did not say you hold lower growth industries.

I bring in close to $250,000 in dividends each year, mostly in Roth accounts. Any capital gains or taxable dividends will be wiped out with charitable contributions bringing our taxable income low enough to pay zero taxes in 2026.

I am not sure your point here. If all your or most assets are in Roth accounts, you paid a lot of tax to make that so. No way to evaluate whether that seems right or wrong.

But more to the point your individual tax situation has nothing to do with my accurate comments about the negatives of dividend investing.

Look, I really want to avoid these types of exchanges. The points I cited do not indict your strategy. If it works for you I would think that is enough.

 

[RunningBum]

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.

True up to a limit, until you reach $98,900 ($49,451 single) of taxable income, including QDivs. And LTCGs get the same tax treatment.

 

[SteveTX]

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.

Morningstar says the following:

SPY standard deviation over 3 yrs = 11.47 Tot Rtn = 22..22
SCHD standard deviation over 3 yrs = 13.59 Tot Rtn = 12.94

 

[Dash man]

I did not assume that, if you look at what I actually said.


I do not know what you hold. I did not say you hold lower growth industries.


I am not sure your point here. If all your or most assets are in Roth accounts, you paid a lot of tax to make that so. No way to evaluate whether that seems right or wrong.

But more to the point your individual tax situation has nothing to do with my accurate comments about the negatives of dividend investing.

Look, I really want to avoid these types of exchanges. The points I cited do not indict your strategy. If it works for you I would think that is enough.

You started the exchange with your novice assumptions about dividend investing. If you don’t like people criticizing your critiques, then don’t comment on subjects you know little about.

 

[Montecfo]

You started the exchange with your novice assumptions about dividend investing. If you don’t like people criticizing your critiques, then don’t comment on subjects you know little about.

If you notice, the name of the thread is a question. My posts have provided answers, from the standpoint of experience and well validated.

I'm ok with you disagreeing. I am fine with opposing views. I have been very clear about that. But your insults are out of bounds.

 

[marko]

So, an interesting discussion but here's what I'm thinking at the personal level:

As noted earlier, there's more than one way to skin the income cat. My dividend focused portfolio delivers 140% of my spending needs in dividends.

My net 20 year Personal Rate of Return (growth minus withdrawals) is 9% annually. That's my 20 year NET and if I must say so, pretty decent for an idiot like me. 13% average over the last 5 years.

Could I do better with a total return strategy or more tax advantaged approaches? Likely/maybe. Do I care? No!

I'm not invested to leave the biggest balance x years from now. I'm invested to maintain my lifestyle and to do so in the easiest way possible.

As long as my strategy works, I mostly value ease of use, automatic payments (dividends delivered to my MM) and reliable, repeatable payments month over month regardless of market conditions. .

That's it! YMMV!

 

[Al18]

Morningstar says the following:

SPY standard deviation over 3 yrs = 11.47 Tot Rtn = 22..22
SCHD standard deviation over 3 yrs = 13.59 Tot Rtn = 12.94

You’re picking and choosing years - not accurate. In 2022, SPY was down 18.2%, while SCHD was down just 3.2%. In a retirement portfolio, volatility is bad. Diversification works. In retirement, the goal is not to get rich, it’s not to go broke.

 

[SteveTX]

I wasn't picking years, it was just the only Std Dev column on my saved portfolio holdings and watch list. Just providing info from Morningstar.

 

[SteveTX]

You’re picking and choosing years - not accurate. In 2022, SPY was down 18.2%, while SCHD was down just 3.2%. In a retirement portfolio, volatility is bad. Diversification works. In retirement, the goal is not to get rich, it’s not to go broke.

You got me to dig further...
Portfolio Visualizer on SPY and SCHD from Jan 2017 to Feb 2026:

Avg Return......Std Dev.........Max Drawdown
SCHD...............12.6%...........15.5..................21.5
Spy...................14.8%...........15.4.................23.9

Btw, I like and have used SCHD off and on over the years. Just posting the info for the forum.

 

[Brat]

Subscribe to: Viktoriya M Finance on YouTube. She covers dividend ETFs. Another YouTube resource is Diamond NestEgg.

 

[Diogenes]

You got me to dig further...
Portfolio Visualizer on SPY and SCHD from Jan 2017 to Feb 2026:

Avg Return......Std Dev.........Max Drawdown
SCHD...............12.6%...........15.5..................21.5
Spy...................14.8%...........15.4.................23.9

Btw, I like and have used SCHD off and on over the years. Just posting the info for the forum.

Amidst our various exchanges of opinions, it is indeed welcome, to see some hard data!

The debate is contingent on our objectives. If the objective is to feel the least discomfited during bear-markets, while sustaining a 4% annual withdrawal, well... we'll have one strategy, yes? And if desiring to maximize (within reason) accumulation, while drawing essentially 0% over our lifetimes, we'll have a different strategy. Right?

The dilemma lives in the OP's usage of the phrase "in retirement". Does that mean, "while withdrawing 4%/year"? Or does that mean, "while no longer contributing to one's portfolio, and hence, no longer treating bear markets like a buying opportunity"?

 

[joejetski]

I did not assume that, if you look at what I actually said.


I do not know what you hold. I did not say you hold lower growth industries.


I am not sure your point here. If all your or most assets are in Roth accounts, you paid a lot of tax to make that so. No way to evaluate whether that seems right or wrong.

But more to the point your individual tax situation has nothing to do with my accurate comments about the negatives of dividend investing.

Look, I really want to avoid these types of exchanges. The points I cited do not indict your strategy. If it works for you I would think that is enough.

Then why are you posting on a thread dedicated to the “mechanics” of dividend investing?

 

[joejetski]

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.

Indexing works in retirement in 3 cases:
1). You have other sources of income and you are not dependent on your portfolio.
2). You have a big chunk of cash-like positions (MM, STT, etc) to mitigate SORR, or
3). Your portfolio is sufficiently large that you can take less out and still cover your expenses.
Otherwise, it is a crapshoot in retirement. I am a pre-retiree, less than 1 year from retirement. I used indexing to get here, but have transitioned to an income strategy for retirement in mid 2024. I took my time did my DD and have almost fully built out my income portfolio. My portfolio is not huge but big enough going in for my needs and wants. However, given the current uncertainty (or looking at the GFC in hindsight), I would be concerned going into retirement if I had to live off my current portfolio if I was in indexes vs my current build.

 

[ncbill]

This recent video points out the advantages and disadvantages of (equity) dividend investing.

Including the newer, covered-call ETFs, which can be more tax-efficient (ROC) in taxable accounts.

 

[Al18]

Good video - thanks for posting.

 

[dobig]

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."

This is why I prefer SCHD to VYM for a core position.

From World of Dividends.

While VYM's diversification reduces risk, there are no business quality filters that go into creating the index that it follows – the only metric used is dividend yield. This can result in bigger payout reductions during recessions, leading us to give the ETF a "C" rating for dividend safety.
During the financial crisis, VYM reduced its dividend payments from $1.44 per share in 2008 to a low of $1.09 in 2010, representing a decline of 24%. For comparison, the S&P 500 Index saw its dividend payout fall by about 20% over the same period.

Beyond the above, VYM's 10 year average dividend growth is 7%. SCHD is 12%. I want dividend growth above all. This is why there is a lack of any of the higher paying dividend etfs that pay 5 - 6% in our portfolio. It's attractive at the beginning but there is very little dividend growth or stock appreciation. Those are the sucker funds to stay away from.

 

[Flyfish1]

I used indexing to get here, but have transitioned to an income strategy for retirement in mid 2024. I took my time did my DD and have almost fully built out my income portfolio.

Exactly what I did. Actually took me an extra year after retirement to fully transition to dividends.

 

[Flyfish1]

I want dividend growth above all. This is why there is a lack of any of the higher paying dividend etfs that pay 5 - 6% in our portfolio.

Yeah I get that - it's certainly nice to have dividend growth. My issue with retiring on dividends with assets that pay 2 or 3 % is then you need a large stash. More power to you if the math works for you. I certainly hold some individual stocks that are dividend growth companies but I hold more higher paying ETF's, REIT's, MLP' and CEF's. CEF's aren't known to be dividend growth so you have to focus on reinvesting to grow your income or take advantage of run ups and move things around at times. If I had a huge portfolio I would have a massive amount of munis. But...I don't.

 

[dobig]

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%

It's all up to an individual's goals and risk tolerance.

As I've mentioned multiple times we are heading into retirement this summer at age 55. Initially we were thinking about having 2 1/2 years in cash and 15 - 20% in safe money such as SGOV. But the more we thought about it, researched different scenarios and backtested we always came to the conclusion we would be better off having only 6 months cash and the majority of our PV in dividend etfs spread over a large spectrum of the market.

If we're unlucky and SORR hits at the worst possible time, say 6 months into retirement, we have zero worries since the income from our portfolio has us more than covered. Even in a once in a generation 2008 event where S&P dividends were reduced 22%. We'd rather be in this scenario rather then spending cash that will be gone forever or selling equities down 40%.

 

[dobig]

So, an interesting discussion but here's what I'm thinking at the personal level:

As noted earlier, there's more than one way to skin the income cat. My dividend focused portfolio delivers 140% of my spending needs in dividends.

My net 20 year Personal Rate of Return (growth minus withdrawals) is 9% annually. That's my 20 year NET and if I must say so, pretty decent for an idiot like me. 13% average over the last 5 years.

Could I do better with a total return strategy or more tax advantaged approaches? Likely/maybe. Do I care? No!

I'm not invested to leave the biggest balance x years from now. I'm invested to maintain my lifestyle and to do so in the easiest way possible.

As long as my strategy works, I mostly value ease of use, automatic payments (dividends delivered to my MM) and reliable, repeatable payments month over month regardless of market conditions. .

That's it! YMMV!

Could not have said it better myself!

 

[dobig]

lol

Did anyone expect this discussion to go any differently then it has?

Even when it gets hot I love hearing these debates. I want to hear those opposing viewpoints and see if I'm really as firm in my convictions as I believe.

....I am.