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  • #16
    While only total return matters in the accumulation phase, volatility matters in retirement. This is why the trinity study showed you have to withdraw several percent under the historical geometric mean return to be safe. If dividend stocks reduce volatility. (I have no idea if they do, but it seems plausible) then you could have a higher safe withdrawal rate than a total market fund even if the total return ends up being the same over the long run. (If you assumptions about future volatility are correct at least)

    I'd also add that if a high dividend gets you to hold onto your stocks during a crash, they might make a lot of sense. Probably less of a concern for people on this forum, but I could see certain relatives being persuaded by that.

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    • #17




      While only total return matters in the accumulation phase, volatility matters in retirement. This is why the trinity study showed you have to withdraw several percent under the historical geometric mean return to be safe. If dividend stocks reduce volatility. (I have no idea if they do, but it seems plausible) then you could have a higher safe withdrawal rate than a total market fund even if the total return ends up being the same over the long run. (If you assumptions about future volatility are correct at least)

      I’d also add that if a high dividend gets you to hold onto your stocks during a crash, they might make a lot of sense. Probably less of a concern for people on this forum, but I could see certain relatives being persuaded by that.
      Click to expand...


      The answer to volatility smoothing of stocks is not more stocks, no matter the type, its usually bonds. More than 80% of the sp500 companies have a dividend, there is no special powers to fight market forces allotted to them, and in crashes all correlations go to 1 as they say. Certain sectors have historical had lower volatility such as utility and telecom, but these now obvious to everyone factors has resulted in a whole plethora of low beta/volatility etfs and such, that likely over time will end up in the elimination of that beta factor as a source of alpha.

      Most of what we used to call alpha has been studied to death and is now what we call beta and factors. Part of the reason why hedge funds went from amazing even net of fees to terrible, they have fewer advantages over the average person and much more costs.

      I dont think a puny in relation to overall drop dividend gives people too much good feelings. Maybe in the days you werent inundated with "market meltdown", "black xday!" every 10 seconds. Its hard to hold on no matter what, and impossible to know how you'll react until you're in that moment.

      I do think it is not a terrible plan if you're slightly under funded for retirement (lets be honest this is most people) and using dividends and selling some to try to keep your SWR down while overall economic growth allows you to use dividends only is definitely a plan I have seen people do. It just shouldnt be something anyone on this board needs to rely upon.

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      • #18
        I recently talked with someone who is doing this and it renewed my interest.  He pays zero management fees on his portfolio.  He looked into mutual funds and ETFs focused on high yields but decided he didn't need to pay a management fee and didn't need to own 400 stocks to be diversified.  He bought about $100k each of about 30 different stocks.  He chose large cap stocks with a lower P/E, Debt/Equity <50, long track record of dividend payment and growth, Payout ratio <60 and a dividend yield 2.5 - 3.5%  His list contains many household names of large companies.  Nothing radical there.  Each pays about $3K per year in dividends (which is around 3% on average).  His total dividends pay 90K per year and that is what he lives on as an early retiree.  He has seen some growth in the underlying stocks.  Although he knows they won't always go straight up it should at least beat inflation.

        What do you guys think?  There are some downsides I suppose.  He has to monitor those stocks.  And there is some individual company risk that isn't diversified in that way.  He has 3M all in equities which is a bit risky for someone who is not working and relatively young.  He is basically using a 3% withdrawal rate but without ever having to sell any securities.  Not having to sell shares in a down market may be the best part of his plan.

        I think to implement this I would need to sell shares from my index mutual funds.  In the tax-sheltered accounts that isn't a problem.  Most of that is in a taxable account and I wouldn't want to pay all of that capital gains right now so I'm not sure how to do this if I do decide to.  Thoughts?

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        • #19
          I have ended up with a large taxable account as I near total retirement.  It throws off enough dividends and muni bond interest for me to live on without touching actual retirement accounts.  The only reason I will need to sell anything is to rebalance or a tax lot loss harvest.  The only individual stock that I have is apple.  It is paying a nice dividend and I have a huge capital gain so it is mine forever I think.  I used to own quite a few individual stocks.  You really have to invest a lot of time to monitor them.  Also the larger the dividend the greater the risk of bankruptcy.  I now use vanguard indexes and worry a lot less.

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          • #20
            The other issue is market and company structure. Dividends have been generally declining over time as they are tax inefficient for both the company and investor. It makes sense in a longer term view, especially without the helping hand of very low borrowing rates that they will decline over time on aggregate.

            Strategy is fine if you have enough money to not have to move up the risk scale, but to me its just not worth the effort. Grab an index, call it a day, there are now many at 0.03%, basically free. Dividends can be cut, the tax code changes (can be +/-) etc...

            I had this discussion last year with people who refused to sell their highly overvalued yet favorite REIT during the down turn and trade it off for the vanguard reit index. The index was getting annihilated like everything else but the fav was gaining like crazy as a bond proxy. It was all emotions, almost no one listened. They could have got a higher dividend (the supposed strategy they follow) diversified away from single company risk, over valuation risk, and into a beaten down index of the same type (even held the fav stock ofc) and reaped the arbitration rewards. It was free money, and came with lower risk. I had some of this stock back from when I had individuals and thats what I did and it worked out great. Ppl are a lot more ideological than they care to admit, even when they couch it in some seemingly robust strategy backed up by data.

            The dividend game is when boiled down to it just a preferred way of thinking about it, its no different than living off the growth only or drawing an imaginary line in the principal when you retire. Its the same money, and I cant really make myself see the difference anymore.

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            • #21


              I think to implement this I would need to sell shares from my index mutual funds. In the tax-sheltered accounts that isn’t a problem. Most of that is in a taxable account and I wouldn’t want to pay all of that capital gains right now so I’m not sure how to do this if I do decide to. Thoughts?
              Click to expand...


              I would not do that because you are making life more complicated as you approach retirement.

              I just looked at the dividends paid to me in 2016 as I was adding them up them to give to the CPA. I got $44K, on stocks worth #1.7M (2.58 %). I have 41 stocks held individually by me ( in addition I have individual stocks in TD and Schwab). All were obtained between 1988 and 2000. It is a mix of dividend and dividend + growth. A hodgepodge but overall decent. It is now too much of a hassle to sell and realize capital gains so I just keep it and hope to pass it on to my daughter.

              The problem is that today's darling stock can sometimes go down 10 years down the line. My two major losers are Kodak and Sprint. And I have had a few during the tech crash of 2000. I would not use this strategy as the only source of income in retirement.

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              • #22
                This isn't a bad strategy per se, just different and certainly not for everyone.  First, the stocks need to be appropriately diversified otherwise you're taking on unnecessary risk.  Second, you need buffer in the event a 2000 or 2008 happens and the corpus declines (with dividend declines to follow).  To some of the other points made, the cash drag of dividends is (we'll say) 2% x 15%, or 0.3%, if you're invested in something like the total stock market fund or a similar ETF.  While not completely insignificant, a common misconception is that this reduces the performance of the underlying initial investment.  It doesn't.  If dividends are reinvested you pay that 0.3% come tax time, which reduces the amount of cash invested in whatever marginal account (typically taxable for high earners) in the following year.  This "jumps" to 0.45% if you have a 3% dividend yield fund (or diversified stocks with this average).  Another point is that while total return matters, where is the evidence that the total return of, say, the S&P500 index with 2% dividends beats out a 3% dividend yielding collection of well-diversified stocks?  Also keep in mind the stock investor has no risk of paying capital gains while a fund-holder does.  What underpins these gains in either situation is whether or not the underlying companies have a better use for the money, combined with the human factor (shareholders getting antsy and wanting to keep managers honest).  I don't see this as a clear win for either the 2% or 3% portfolio.

                As for the living off the dividend concept, it's not a bad one at all - but more likely for those of previous generations.  If you get the RMDs out of the way early from deferred accounts in early retirement, you could take $93K out in dividends a year for a couple and pay no tax.  After deductions and exemptions you're in a 15% tax bracket and pay 0% tax on qualified dividends.  That math requires $3.1M in your corpus if you're getting 3% dividend yield - less once you factor social security into the mix.  That jumps up to $4.65M with 2% dividend yield.  How many more years would you need to get to that total?  The 3% portfolio bought you more time - perhaps 5 years - if your goal is just to retire early and live comfortably.  With a home paid off and no debts I'd be able to live a ************************ comfortable life with $93K a year (without touching any Roth account).  To Zaphod's point, I agree that the high dividend stocks are overvalued which makes overall return from here on out likely to be lower.  So while this strategy may have worked for Mr. McDuff, it may not work for you.

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                • #23







                  I recently talked with someone who is doing this and it renewed my interest.  He pays zero management fees on his portfolio.  He looked into mutual funds and ETFs focused on high yields but decided he didn’t need to pay a management fee and didn’t need to own 400 stocks to be diversified.  He bought about $100k each of about 30 different stocks.  He chose large cap stocks with a lower P/E, Debt/Equity <50, long track record of dividend payment and growth, Payout ratio <60 and a dividend yield 2.5 – 3.5%  His list contains many household names of large companies.  Nothing radical there.  Each pays about $3K per year in dividends (which is around 3% on average).  His total dividends pay 90K per year and that is what he lives on as an early retiree.  He has seen some growth in the underlying stocks.  Although he knows they won’t always go straight up it should at least beat inflation.

                  What do you guys think?  There are some downsides I suppose.  He has to monitor those stocks.  And there is some individual company risk that isn’t diversified in that way.  He has 3M all in equities which is a bit risky for someone who is not working and relatively young.  He is basically using a 3% withdrawal rate but without ever having to sell any securities.  Not having to sell shares in a down market may be the best part of his plan.

                  I think to implement this I would need to sell shares from my index mutual funds.  In the tax-sheltered accounts that isn’t a problem.  Most of that is in a taxable account and I wouldn’t want to pay all of that capital gains right now so I’m not sure how to do this if I do decide to.  Thoughts?
                  Click to expand…


                  I’ll take the pro side…

                  In general, I think this is a good strategy to implement if that is your preference. Based on the criteria, looks like he is taking mature, solid, well known companies who are not in their growth phase and have a business model that spins off more cash than they can efficiently put to good use. He’s also taking companies that don’t have a very high dividend yield because the higher the dividend yield (i.e. > 5-6%), the less likely those companies are to have a solid business/exist. You probably wont get much price appreciation over time, but about half of total returns from the stock market come from dividends. The only other suggestion is to look for those with a good moat so that increases in inflation over time will have less impact on their earnings and consequently your dividend. IMHO, there are many positive aspects to a dividend stock including you know their earnings are somewhat real because they actually give out cash. In fact, dividends, and not earnings, were initially used by some to estimate intrinsic values. I don’t have a problem with companies that sacrifice dividends for growth as long as they put those earnings to good use. If their ROE or ROIC is average/poor, why should they keep your cash for themselves (and their bad business model) instead of paying out a dividend.  If you own the stock, you do have a claim on the companies earnings and the freedom to decide how to invest your profits.

                  As for right now, IMHO, moving from one equity based strategy to another equity based strategy won’t make much of a difference. I personally think we will have a massive firesale coming and have planned appropriately to maximize a return of capital rather than a return on capital and, hopefully, the associated liquidity to benefit. But that is just me and I have triggered enough people on this site in the past to avoid getting into further details on this.
                  Click to expand...


                  You have one kindred spirit here. I own some foreign equities (index funds) and LT treasury bonds, but the bulk of my funds are in cash or near-cash (e.g., BSV). I might be 100% invested in US equities (individual stocks) if I could devote myself to investing full-time, but that's not the case. We'll see what happens.
                  Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

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                  • #24
                    Two issues with most dividend believers:

                    # 1 If it gets you into individual stocks, then you start having uncompensated risk.

                    # 2 If it keeps you from spending any of your principle, you will end up spending far less than you safely could.

                    If neither of those bother you, knock yourself out. There are plenty of people who have done this and it worked out just fine. But with the advent of index funds? Why bother? You can just buy a value index fund and just spend the dividends and at least eliminate the uncompensated risk.
                    Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                    • #25







                      Two issues with most dividend believers:

                      # 1 If it gets you into individual stocks, then you start having uncompensated risk.

                      # 2 If it keeps you from spending any of your principle, you will end up spending far less than you safely could.

                      If neither of those bother you, knock yourself out. There are plenty of people who have done this and it worked out just fine. But with the advent of index funds? Why bother? You can just buy a value index fund and just spend the dividends and at least eliminate the uncompensated risk.
                      Click to expand…


                      Respectfully disagree with above advice (probably against my better judgement).

                      If someone is going to use a dividend approach to retire on as described above, an indexing strategy will not be the best way to do it. Take Vanguard Value Index (VIVAX): with a back of the envelope calculation, the dividend yield is ~2.5%. The expense ratio is 0.22%. So you basically are giving 10% of your yearly dividend retirement income away. What does someone get in return for this loss of income?

                      I don’t think they are getting better stock selection because this dividend approach, if done appropriately, is buying really solid well  known companies. In fact, if you just “clone” the top 20-30 stocks in VIVAX you probably have most of your list of dividend stocks that you can buy individually and can avoid the ER. As for issue #1, I also don’t see how much uncompensated risk you will have (compared to VIVAX or other index) with this approach if you buy stocks of 30 (diversified) companies that are really solid, well-established household names. If those companies as a whole are tanking, everything else is as well including the index funds. Also, another benefit of buying the stocks individually is that  the above criteria can be used to select the most ideal stocks that are contained in those index portfolios.

                      As for issue #2, if I ever find myself in a situation where I can retire and live comfortably off dividends (and interest) alone, I will consider myself extremely blessed. On the flip side, leaving your principle intact may give someone a nice inheritance down the line and more importantly help to protect against unforseen/unplanned events such as a medical issues, problems with kids and my fav…a market meltdown.

                       
                      Click to expand...


                      If you see buying the top 30 stocks as preferable to just buying a fund with a very low ER, I'm not sure anything I can say will change your mind. But let me just poke around a little bit on your theory for a minute.

                      First, the VIVAX ER of 0.22% is for the investor shares. That implies you are going to be investing less than $10K. That means you're buying less than $350 in each of your 30 stocks. Holy hassle batman! Hope you have free trades.

                      Second, the admiral and ETF shares classes have an ER of 0.08%. Practically speaking, an ER of less than 10 basis points is free. Free. For basically nothing, you get diversification into 324 stocks, professional management, pooled costs, and daily liquidity. That's quite a deal.

                      Third, the more of those 324 stocks you buy, the less uncompensated risk you are taking. It's very risky to buy 1-10 stocks, risky to buy 10-20, less risky to buy 20-50, almost the same risk with 50-100, and then you finally get to no uncompensated risk at 324. I'm not seeing a great reason to run any uncompensated risk though. It seems you're arguing to do it to save 0.08%. Heck, even if you're using the investor shares for $9,999, 0.22% is only $22 a year. I'm not sure what your time is worth, but not having to buy, sell, track, follow, select, or manage 30 stocks is definitely worth $22 for me. And that's just one asset class. Multiply that effort by 5 or 10 for the rest of your portfolio (unless you're planning to ignore all asset classes in the world besides large value stocks, which introduces a whole lot more risk.)

                      Fourth, just in case you're not aware, the yield of a mutual fund is AFTER the ER has already been paid. So 2.35% for the investor shares and 2.49% for the admiral shares AFTER expenses.

                      Fifth, I totally agree that if you're going to oversave that you have less risk of running out of money in retirement and leaving more to heirs. It's important to realize that if this is your desired approach, that you will be oversaving relative to how much you could have spent and you need to be all right with that. We are not creating perpetual endowments here. We will all die eventually. It's okay to spend some principle in retirement.
                      Helping those who wear the white coat get a fair shake on Wall Street since 2011

                      Comment


                      • #26
                        Also, I find it fascinating to see people encouraging the purchase of individual stocks to get the dividends (people in this thread) at the same time other people are encouraging the purchase of individual stocks to avoid the dividends (such as Demuth.)
                        Helping those who wear the white coat get a fair shake on Wall Street since 2011

                        Comment


                        • #27
                          Wow.  I appreciate all of the detailed and thoughtful comments on this issue.  It was helpful to me and I hope to other readers.

                          Also, as a compromise I may look at high dividend yield funds or ETFs.  There are several domestic and international options - even a high dividend emerging market fund.

                          I think the option I like the most right now is:

                          VHDYX

                          It is low-cost, diversified, and paying nearly 3% dividend.

                          Comment


                          • #28
                            How does one define uncompensated risk? Like is there a formula/academic thought behind this or its one of those "hey I think its risky ... dont do it" things?

                            Comment


                            • #29
                              Its just too much of a pain, and very unlikely to be worth it in the end. I'd rather over save. I've pretty much moved wholly away from dividends whatsoever, theyre such a drag and like I said, that reality, especially in a marginal return world will eventually erode them away in general until only poor investments have them because they will have to. Trend is to less dividends, less shareholder benefits outsides shares. That can and may reverse given culture and laws, but as things are set now it makes very long term sense (nothing happens overnight). It has been the trend for decades already.

                              Comment


                              • #30







                                Two issues with most dividend believers:

                                # 1 If it gets you into individual stocks, then you start having uncompensated risk.

                                # 2 If it keeps you from spending any of your principle, you will end up spending far less than you safely could.

                                If neither of those bother you, knock yourself out. There are plenty of people who have done this and it worked out just fine. But with the advent of index funds? Why bother? You can just buy a value index fund and just spend the dividends and at least eliminate the uncompensated risk.
                                Click to expand…


                                Respectfully disagree with above advice (probably against my better judgement).

                                If someone is going to use a dividend approach to retire on as described above, an indexing strategy will not be the best way to do it. Take Vanguard Value Index (VIVAX): with a back of the envelope calculation, the dividend yield is ~2.5%. The expense ratio is 0.22%. So you basically are giving 10% of your yearly dividend retirement income away. What does someone get in return for this loss of income?

                                I don’t think they are getting better stock selection because this dividend approach, if done appropriately, is buying really solid well  known companies. In fact, if you just “clone” the top 20-30 stocks in VIVAX you probably have most of your list of dividend stocks that you can buy individually and can avoid the ER. As for issue #1, I also don’t see how much uncompensated risk you will have (compared to VIVAX or other index) with this approach if you buy stocks of 30 (diversified) companies that are really solid, well-established household names. If those companies as a whole are tanking, everything else is as well including the index funds. Also, another benefit of buying the stocks individually is that  the above criteria can be used to select the most ideal stocks that are contained in those index portfolios.

                                As for issue #2, if I ever find myself in a situation where I can retire and live comfortably off dividends (and interest) alone, I will consider myself extremely blessed. On the flip side, leaving your principle intact may give someone a nice inheritance down the line and more importantly help to protect against unforseen/unplanned events such as a medical issues, problems with kids and my fav…a market meltdown.

                                 
                                Click to expand...


                                I think that should a Principal.

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