Tell me about using Dividend Funds in retirement.

[Flyfish1]

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%

I think that's really up to the individual. I am 100% and I am not. Meaning I have other investments outside of the market. Also, we do hold a chunk of money in money market. I originally wanted a lot more in cash, but as @dobig stated above I came to the conclusion that I could have less in cash and stronger cashflow. If I need a new roof or something then I can pull from cash and then slowly pay myself back from cash flow.

 

[Montecfo]

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

Nothing about mechanics in the thread topic, much less about the thread being "dedicated" to it.

It appears to be a discussion about dividend investing.

I appreciate hearing about folks' strategies and I am not offended by those views. I don't know why anyone would be.

 

[olyveoil]

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

careful. Viktoriya has been kicked off you tube more than once for not disclosing relationships. IE funds - ETF's she shills.

 

[Lorenzo]

Indexing works in retirement in 3 cases:
. . .
2). You have a big chunk of cash-like positions (MM, STT, etc) to mitigate SORR, or
. . .
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.

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.

So, two alternatives are: (1) index investments plus "a big chunk of cash-like position" or "safe money," and (2) majority of portfolio in dividend ETFs. Isn't a fairly conventional third alternative to have index investments plus a bond ladder and a smaller cash-like position? And why not tweak that by replacing a portion of the index investments with dividend ETFs? Why do I get the sense that these discussions often focus on all-or-nothing approaches? I have not settled on my own approach yet, so I'm just probing here.

 

[Montecfo]

So, two alternatives are: (1) index investments plus "a big chunk of cash-like position" or "safe money," and (2) majority of portfolio in dividend ETFs. Isn't a fairly conventional third alternative to have index investments plus a bond ladder and a smaller cash-like position? And why not tweak that by replacing a portion of the index investments with dividend ETFs? Why do I get the sense that these discussions often focus on all-or-nothing approaches? I have not settled on my own approach yet, so I'm just probing here.

You make a very good point. I use dividend ETF's in the the way you describe.

 

[Flyfish1]

So, two alternatives are: (1) index investments plus "a big chunk of cash-like position" or "safe money," and (2) majority of portfolio in dividend ETFs. Isn't a fairly conventional third alternative to have index investments plus a bond ladder and a smaller cash-like position? And why not tweak that by replacing a portion of the index investments with dividend ETFs? Why do I get the sense that these discussions often focus on all-or-nothing approaches? I have not settled on my own approach yet, so I'm just probing here.

yeah - I think that is a very valid approach. Certainly doesn't have to be all or nothing.

 

[Lorenzo]

You make a very good point. I use dividend ETF's in the the way you describe.

There's a first time for everything. But seriously, I'm reading these dividend investing threads to try to determine if dividends should have a more prominent place in my portfolio, not necessarily to make a radical shift.

 

[dobig]

So, two alternatives are: (1) index investments plus "a big chunk of cash-like position" or "safe money," and (2) majority of portfolio in dividend ETFs. Isn't a fairly conventional third alternative to have index investments plus a bond ladder and a smaller cash-like position? And why not tweak that by replacing a portion of the index investments with dividend ETFs? Why do I get the sense that these discussions often focus on all-or-nothing approaches? I have not settled on my own approach yet, so I'm just probing here.

Absolutely.

For reference I'm 60% dividend growth etfs. The rest is made up of growth and quality etfs, international etfs along with a smaller amount of income funds.

We will have somewhere around $50k cash to start retirement and $20 - $25k emergency fund.

 

[dobig]

There's a first time for everything. But seriously, I'm reading these dividend investing threads to try to determine if dividends should have a more prominent place in my portfolio, not necessarily to make a radical shift.

Something to consider.

SCHD 10 year dividend growth - 250%
DGRO 10 year dividend growth - 220%

 

[dobig]

For those looking for predictable income, defensive low Beta and excellent growth in a dividend etf you might want to check out VIG. 10 year dividend growth rate of 8% and 10 year average return of 13.6%. Lower dividend of 1.61% because this is more growth oriented but look how well the dividend held up during the GFC in the chart below. Less then 5% decline and by the following year it's dividend was at a new high.

 

[Al18]

VIG high benchmarks well against competitors because it owns 60% Large Value stocks and 26% Large Growth stocks according to Portfolio Visualizer. Largest sector is 26% technology, so it performs similar to FDGFX which is 47% Large Value and 28% Large Growth and 26% in technology.

This is very different than SCHD, which owns 74% Large Value stocks, no Large Growth stocks and only 3% technology.

I like overall diversification and already growth funds where the largest holding is technology stocks. I don't want a dividend fund who owns a lot of technology stocks.

 

[target2019]

SCHD and chill.

 

[Koolau]

If it w*rks for you and you're happy with it, it's a good play. There are many roads to Financial Independence.

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.

I think this is probably true. One has to "set it up" in order for it to w*rk for them. So, in my case, I chose considerably less than 100% indexed equities (for growth), a very good chunk of either bonds or cash-like investments for SORR insurance, a smattering of PMs (for "seasoning" - AKA something negatively correlated with almost everything else) and Pension/SS.

I know some here are near 100% equities but I could never live like that. I "pay" for my non-equity positions by having lower life-time growth but less volatility in my comfortable spending level.

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.

The Dividend investors also have to "set things up" (as you have done) to make Dividend investing w*rk for them. From what I'm learning, Dividend investing is very doable with appropriate set-up. What I have noticed (and commented upon) the "set up" for dividend investing seems (to me) more complicated than total-return set up and therefore more "w*rk." That's not a criticism. I'm impressed with many of our Dividend investor results here. I just never wanted to w*rk that hard when Total Return was so easy. So easy someone lazy and uneducated like me could do it.

If I went back 25 years and started my planning over, I just might go the Dividend Investing route like you have - especially if I had the expertise of our current Forum members to advise me. I'm too set in my ways to go back now and change everything.

Thanks for sharing.

 

[joejetski]

So, two alternatives are: (1) index investments plus "a big chunk of cash-like position" or "safe money," and (2) majority of portfolio in dividend ETFs. Isn't a fairly conventional third alternative to have index investments plus a bond ladder and a smaller cash-like position? And why not tweak that by replacing a portion of the index investments with dividend ETFs? Why do I get the sense that these discussions often focus on all-or-nothing approaches? I have not settled on my own approach yet, so I'm just probing here.

I guess you could include bond ladders under “safe money”. There are a number of ways to skin that cat too. I never learned how to buy/trade bonds, but I did have a CD ladder as safe money (last good ones ~ 5% are maturing between April and October). Anyway, I have figured out my SORR strategy in the following manner. I have purchased several “safe” positions (SGOV, CSHI, PAAA, BNDI) that more than cover my 3 yr SORR threshold I set for my portfolio. Also, when I start distributing from my portfolio at the end of this year, these investments (along with PIMIX, PYLD, and VWEAX) are also part of my “low” yield sleeve (~5.5 composite average).
If we go into a prolonged GFC style crisis with distribution cuts, I will start liquidating the SORR positions so I can reinvest in my higher yield positions.

 

[Lorenzo]

I guess you could include bond ladders under “safe money”. There are a number of ways to skin that cat too. I never learned how to buy/trade bonds, but I did have a CD ladder as safe money (last good ones ~ 5% are maturing between April and October). Anyway, I have figured out my SORR strategy in the following manner. I have purchased several “safe” positions (SGOV, CSHI, PAAA, BNDI) that more than cover my 3 yr SORR threshold I set for my portfolio.

Cash/cash-equivalents or "safe money" is where I want my year's supply for paying living expenses--I want zero volatility. Something like a MM or HYSA is safe money to me. SGOV, I suppose comes close. But the funds that use options don't sound like what I consider safe money. Maybe it's just that I don't understand them. You have no doubt done the research and are comfortable with them. A bond ladder (or CDs back when they were paying more) is what I think of as the engine for steady base income year over year to mitigate SORR. Bond ladders come with their own risks--reinvestment risk, mainly--so they don't fall under my safe money umbrella, either. Anyway, on the topic of this thread, I would consider adding a dividend fund to take on a portion of the income-generation role.

 

[dobig]

SGOV is as safe as buying short-term treasury bills from the US Government.


Someone else recently posted about another short term vehicle that paid a little higher of an interest rate but I cannot recall what it was.

If you have a Fidelity account you can just keep your money in SPAXX or FZDXX which are money market accounts. Yield of 3.3 - 3-5%. FZDXX which is the higher yielder requires $100k to open but you don't need to maintain that much after opened.

 

[FD1000]

I find in most cases that Income investors use that as an excuse for under performance.
Just as very diversified portfolio lags the SP500 for years.
I don't believe in excuses because investing success has only 2 measures performance and/or SD/risk.
You can write whatever you want it all comes down to just these two.
I follow the above as much as I could. I believe is both which is risk-adjusted returns.
I started at 1995
95-2000 + 2011-2017 I invest it all in US LC tilting growth
2000-2010 in LC value, SC, and international.
In 2017 I became 95+% invested in special bond OEFs

I never made an excuse for myself and said during 2000-10 I used growth to be diversity, the market proved to me it was wrong to be in growth.
Same thing during 95-2000 and after 2010.

Another claim is...it worked for me and/or I don't worry, it must be OK.
Well, if you have a pension that cover all your expenses and more or your portfolio is big enough, you can be in 100% MM.
Some people don't worry when they have a portfolio of one million, others only when they get to 10 millions.

Why most investors own typical bonds? To smooth volatility. If it doesn't bother you, great for you, but it matters to many retirees or investors who have enough.
Basically, performance and volatility are main ways to measure success. Every thing else only matters after you achieve these two.
Lastly, you can create your own income.
Example: Fidelity let you create a monthly sell order on a specific day for a specific amount to run until cancellation. Mathematically, there is no income investing, after all , TR includes everything including the income. Income by itself is just a partial of the total.

 

[youbet]

This thread is confusing me regarding what an "income investor" is. I thought it was someone who held their investments overwhelmingly in stocks, funds, bonds, etc., whose performance was targeted to primarily throw off income rather than grow NAV. Yet, a number of posters here have been talking about portfolios where they are still holding significant amounts so-called "growth" investments such as a TSM index fund.

My portfolio is approximately 67/33. The equity portion is dominated by VTSAX, SPY and similar index MF's and ETF's. The fixed portion consists of a mix of bond/CD ladders, bond funds, CEF's, preferreds and MM.

Am I an "income investor? My portfolio generates our desired income.

I don't need or want more income, but if I did and wanted to convert index equity funds to income-orientated funds paying much higher divs, I'd pay significant LTCG tax since about 80% of the value of these index funds are LTCG as we've owned them for decades. I was thinking about just standing pat but, gosh, with all this positive talk about income investing I hate to miss out. (FOMO)

Unless both or one of us lives to 148 and develops some big spending habits, our DS will inherit at least the 67% equity portion of our investible assets and get a stepped-up basis. That would save a lot of money compared to us selling this stuff and converting to more income biased investments.

But, but, but........ don't want to miss out on this "income investing" craze.

What's a geezer to do? Comments?

 

[target2019]

But, but, but........ don't want to miss out on this "income investing" craze.

What's a geezer to do? Comments?

There's a lack of definition in most threads. If your bills are paid, go with your flow.

 

[Diogenes]

This thread is confusing me regarding what an "income investor" is. I thought it was someone who held their investments overwhelmingly in stocks, funds, bonds, etc., whose performance was targeted to primarily throw off income rather than grow NAV. ...

That is my understanding as well. Philosophically, an "income investor" seeks a certain amount of regular cash flow, with the expectation/assumption/estimate/hope, that the underlying assets that generate said income, are either stable, or growing with inflation, or perhaps exceeding inflation.

In contrast, a "growth" investor is seeking capital appreciation, meaning increase in the market-price of the underlying assets, and would then take annual distributions to fund living expenses.

The primary premise behind "income", as I understand it, is stability. The income-stream is low volatility, and the underlying assets are either themselves low volatility, or at very least, their own volatility isn't reflected (much) in the volatility of the income. The practical consequence is, or should be, that our income-investor enjoys robustness to bear markets. There is no need for belt-tightening during bear markets, and no fear of running out of money (depleting the portfolio).

The secondary premise behind "income investing" is something like a higher Sharpe ratio. That is, the gains might be lower than with a "growth" strategy, but gains normalized by standard deviation, are as good as with the growth strategy, or better.

For me, the biggest drawback with "income investing" is the complexity, the fees (likely) and the adverse taxable consequences. I am agnostic as to the cumulative growth, because I have yet to see reliable, long term data - pro or con! - for whether an "income oriented" strategy beats, matches or lags a "growth oriented" strategy.

 

[dobig]

That is my understanding as well. Philosophically, an "income investor" seeks a certain amount of regular cash flow, with the expectation/assumption/estimate/hope, that the underlying assets that generate said income, are either stable, or growing with inflation, or perhaps exceeding inflation.

In contrast, a "growth" investor is seeking capital appreciation, meaning increase in the market-price of the underlying assets, and would then take annual distributions to fund living expenses.

The primary premise behind "income", as I understand it, is stability. The income-stream is low volatility, and the underlying assets are either themselves low volatility, or at very least, their own volatility isn't reflected (much) in the volatility of the income. The practical consequence is, or should be, that our income-investor enjoys robustness to bear markets. There is no need for belt-tightening during bear markets, and no fear of running out of money (depleting the portfolio).

The secondary premise behind "income investing" is something like a higher Sharpe ratio. That is, the gains might be lower than with a "growth" strategy, but gains normalized by standard deviation, are as good as with the growth strategy, or better.

For me, the biggest drawback with "income investing" is the complexity, the fees (likely) and the adverse taxable consequences. I am agnostic as to the cumulative growth, because I have yet to see reliable, long term data - pro or con! - for whether an "income oriented" strategy beats, matches or lags a "growth oriented" strategy.

This.

Your post should be a sticky. Very well laid out, explained and summarized in about as succint a manner as possible.

You must be related to COcheesehead.

 

[ERD50]

This thread is confusing me regarding what an "income investor" is. I thought it was someone who held their investments overwhelmingly in stocks, funds, bonds, etc., whose performance was targeted to primarily throw off income rather than grow NAV. ...

That is my understanding as well. Philosophically, an "income investor" seeks a certain amount of regular cash flow, with the expectation/assumption/estimate/hope, that the underlying assets that generate said income, are either stable, or growing with inflation, or perhaps exceeding inflation.
....

@Diogenes, that's not my understanding (please hit 'expand above, or it looks like I'm replying to 'youbet'). I get the drift that an 'income investor' is only concerned with their dividends, and that those dividends increase over time to provide an inflation hedge. There is little/no concern about the value of the underlying assets, as long as the cash flow is there. Am I wrong?

There is no need for belt-tightening during bear markets, and no fear of running out of money (depleting the portfolio).

And that's the case with someone who runs a FIRECalc scenario with a 70/30 AA. With an historically safe 3.x% withdraw (I forget the exact #, and too lazy to run it again), adjusted for inflation, that scenario survives all the historical scenarios. There is no 'belt tightening' in a bear.

The trouble is, I have no knowledge of a way to test the 'income investor' approach. We have index funds that should closely match history (even before index funds were available), but how can we run a test on the 'income investor'? Which stocks/funds would be selected (at the time, not in a rear view mirror)? How would they really perform over the 125 different scenarios we get from a 30 year run in FIRECalc? Some 'blue chip" companies that were long considered safe and could be counted on to pay a dividend, later faced bankruptcy or severe declines. How would this be accounted for, when to jump ship, what to buy to replace it?

These questions don't apply to "hold the market", rebalance, take your 3.x%. We know how that fared historically.

 

[target2019]

Be sure to ead the sub forum policy.

This isn't the place to argue about index investing vs. Active Investing.

 

[Flyfish1]

@Diogenes, that's not my understanding (please hit 'expand above, or it looks like I'm replying to 'youbet'). I get the drift that an 'income investor' is only concerned with their dividends, and that those dividends increase over time to provide an inflation hedge. There is little/no concern about the value of the underlying assets, as long as the cash flow is there. Am I wrong?

Agreed. The portfolio value is of less concern than the increase in income keeping pace or exceeding inflation. The goal is steady, reliable income and yes it requires more "work" than buy and hold , set it and forget index investing. But for me at least I find it enjoyable. Like yesterday, I took advantage of the run up of an individual preferred in the energy field and bought more Muni and REIT CEF shares. Did the portfolio value go up- no , but my income did and my taxable income will ever so slightly decrease.

 

[dickoncapecod]

Hi. The primary return driver of "equity income" investments is always the market value of the stocks. As long as you believe stock prices are going to advance, consider allocating a smaller % to higher yielding bond-ish income investments and a larger allocation to stocks --- same portfolio income AND more equity juice.
Regards, Dick