Confused about dividend investing, market downturns and early retirement

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ipdiddly
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

coachd50 wrote: Sat May 08, 2021 8:33 am
But don't the traders factor in that a company just reduced its assets by ________ (amount of the dividend)? After the ex-dividend date, a buyer is not entitled to the dividend that will be paid. That is accounted for in the prices by traders.
On the market open on the ex-div date the share price is momentarily adjusted to reflect the dividend. Then the share price trades like every other stock based on market sentiment (supply/demand - buyers/sellers).

It's the same as non-div payers. On any given day the share price goes up or down based on a myriad of factors, including nonsense market information like some famous trader just sold his shares, some analyst upgraded or downgraded, the 10 year treasury yield notched up a fraction, or the Fed chair might have said something but could have been misquoted.

Day to day market adjustments say nothing about long-term performance. And the fact that a company retains cash vs paying some out to shareholders says nothing about whether management will wisely deploy that cash. It's entirely possible to do both - pay out some cash to the owners of the company and wisely deploy remaining cash to build the business. Imagine the owner of a pizza parlor paying himself a salary and investing remaining profits to build his business. Is he hurting the future prospects of the business by paying himself a salary?
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

I recall reading a paper I can't find now in which an attempt was made to document the actual drop in share price ex div against market noise. The result was that the authors believe the data shows that stock prices drop by the after tax value of the dividend, given some effort taken to estimate what the average tax cost of a paid out dividend is across the whole market. That is a reasonable conclusion in that it supports the idea that the market is not going to allow anyone to arbitrage the payment of dividends and obtain free money. Also note that a common quarterly dividend is of about the same magnitude as the standard deviation of daily returns for stocks, around 1%. These days the dividend change is even less than the daily volatility.

A more relevant test for retail long term investors is to determine if the expected return of a dividend fund or a high dividend fund is greater than that for the total market or the risk is less and that this cannot be explained by other factors. The answer is that there is no benefit to dividend investing except perhaps as a surrogate for a value tilt. VHYAX, for example, has a value loading of .33, a size loading of -.14, and a market loading of .83. The expected return and volatility of that fund (as VYM) compared to VTSAX is 8% +/-15% compared to 1% +/-16% for the period 2007 to 2021. The max drawdowns were 52% and 51%. There is lots of more comprehensive information than this.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Astones »

ipdiddly wrote: Sat May 08, 2021 9:00 am Is he hurting the future prospects of the business by paying himself a salary?
Salaries are a cost, and like all costs they limit the future prospect of a business. I'm not sure how the fact that it's the owner who receives it should change this basic fact.
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Re: Confused about dividend investing, market downturns and early retirement

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I removed a contentious post. As a reminder, see: General Etiquette
We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.
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Re: Confused about dividend investing, market downturns and early retirement

Post by MishkaWorries »

I-Know-Nothing wrote: Fri May 07, 2021 5:53 pm
Where did you see that medical expenses aren’t included? I don’t think it would be appropriate to take business travel expenses out of non-business portfolio.
Then in what sense are they retired and living on $40,000 per year? They are clearly still working for a living.

Of course it's entirely possible to live overseas on (net) $40,000 per year. One could comfortably live in just about any country in the world. Even living in Paris on that kind of money if you're willing to scrimp to get by.

Go to eastern Europe or Asia and live pretty well.
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Re: Confused about dividend investing, market downturns and early retirement

Post by imflyboy »

Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
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Re: Confused about dividend investing, market downturns and early retirement

Post by Astones »

imflyboy wrote: Sat May 08, 2021 10:08 am Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
It's actually much worse if instead they insist in giving you dividends despite the downturn, maybe even getting loans to pay for it.
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

MishkaWorries wrote: Sat May 08, 2021 9:52 am
I-Know-Nothing wrote: Fri May 07, 2021 5:53 pm
Where did you see that medical expenses aren’t included? I don’t think it would be appropriate to take business travel expenses out of non-business portfolio.
Then in what sense are they retired and living on $40,000 per year? They are clearly still working for a living.

Of course it's entirely possible to live overseas on (net) $40,000 per year. One could comfortably live in just about any country in the world. Even living in Paris on that kind of money if you're willing to scrimp to get by.

Go to eastern Europe or Asia and live pretty well.
They retired from their traditional jobs, with a portfolio of about 1.1 million (portfolio A). The plan was to live on a slightly less than 4% SWR, using the yield shield and cash cushion. Then she found success with a blog and a book. So, yes she is still working at a side hustle, though that wasn’t her plan. She keeps any money earned from her blog and book in a separate portfolio (portfolio B) and takes all living expenses from portfolio A and all business expenses from Portfolio B. The idea is to see if she would have been “successful” in her retirement if she hadn’t worked at all and only had Portfolio A. So far, she would have been successful.

I could have probably given all of these details in my initial post, but I was most interested in whether her ideas about yield shield had any validity, not whether the concept of retiring early had any validity. I wasn’t as clear as I should have been when I asked my questions, and of course people are free to respond however they’d like.

I like the idea of retiring early, though definitely not as early as she did. I might feel differently if I had a fulfilling job and not a dead-end one, but that’s a topic for another time.
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Re: Confused about dividend investing, market downturns and early retirement

Post by TN_Boy »

I-Know-Nothing wrote: Sat May 08, 2021 10:37 am
MishkaWorries wrote: Sat May 08, 2021 9:52 am
I-Know-Nothing wrote: Fri May 07, 2021 5:53 pm
Where did you see that medical expenses aren’t included? I don’t think it would be appropriate to take business travel expenses out of non-business portfolio.
Then in what sense are they retired and living on $40,000 per year? They are clearly still working for a living.

Of course it's entirely possible to live overseas on (net) $40,000 per year. One could comfortably live in just about any country in the world. Even living in Paris on that kind of money if you're willing to scrimp to get by.

Go to eastern Europe or Asia and live pretty well.
They retired from their traditional jobs, with a portfolio of about 1.1 million (portfolio A). The plan was to live on a slightly less than 4% SWR, using the yield shield and cash cushion. Then she found success with a blog and a book. So, yes she is still working at a side hustle, though that wasn’t her plan. She keeps any money earned from her blog and book in a separate portfolio (portfolio B) and takes all living expenses from portfolio A and all business expenses from Portfolio B. The idea is to see if she would have been “successful” in her retirement if she hadn’t worked at all and only had Portfolio A. So far, she would have been successful.

I could have probably given all of these details in my initial post, but I was most interested in whether her ideas about yield shield had any validity, not whether the concept of retiring early had any validity. I wasn’t as clear as I should have been when I asked my questions, and of course people are free to respond however they’d like.

I like the idea of retiring early, though definitely not as early as she did. I might feel differently if I had a fulfilling job and not a dead-end one, but that’s a topic for another time.
I have not read the book. Exactly what years does it cover (I note published in 2019) -- i.e.when did they they "retire?"

The stock market has been kind for the last 12 years.

A strong stock market makes a lot of strategies work. It's really really important to understand that :-).

I think somebody earlier in the thread pointed to ERN's take on the "yield shield." I'd read that.

A dividend focus does not result in improved portfolio success. A low withdrawal rate (which is forced by a dividend focus) makes for better portfolio survival chances. But that's sort of obvious.
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Re: Confused about dividend investing, market downturns and early retirement

Post by toomanysidehustles »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year.
Not sure I have anything to add, though I'm curious how you travel around the world on $40,000 a year. Methinks they are still working and selling books, or trying to at least.

I'm in my mid-40's and I can retire and live off my rental property income and have a set yearly budget of $60K, but I really enjoy my work, going out 3-4 times a week for food and margaritas and doing fun things. :sharebeer I guess I took a different approach to the typical boglehead philosophy and took a big risk with real estate, but I feel like I can weather any downturn with several single family rental properties and an AirBnB which is bringing in 4-5x normal single family rental income is right now. Not sure the stock market will crush it like it has the last decade but it would be nice!
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

imflyboy wrote: Sat May 08, 2021 10:08 am Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend. Not saying it can't happen, just that the odds are in your favor. How is it better to have a non-dividend payer during a downturn? My dividend payers give me a pay raise every year, often better than the raises I got while working. For example, PG increased its dividend by 10% this year and AAPL by 7%. Kaching!
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Re: Confused about dividend investing, market downturns and early retirement

Post by abuss368 »

Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
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Re: Confused about dividend investing, market downturns and early retirement

Post by Ferdinand2014 »

abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
Higher standard deviation and drawdown, only 78 holdings and lower total return then VFIAX since inception in 2015. I would personally stick with VFIAX/VTSAX. It’s prospectus states it’s index focuses on the top 80 dividend yield companies in the S&P 500. It does not focus on companies with history of consistent or rising dividends. Just yield. Dividend yield is a ratio. It can look good if earnings are bad.
Last edited by Ferdinand2014 on Sat May 08, 2021 7:27 pm, edited 2 times in total.
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Re: Confused about dividend investing, market downturns and early retirement

Post by abuss368 »

Ferdinand2014 wrote: Sat May 08, 2021 7:20 pm
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
Higher standard deviation and drawdown, only 78 holdings and lower total return then VFIAX since inception in 2015. I would personally stick with VFIAX/VTSAX.
Thanks.
Tony
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Re: Confused about dividend investing, market downturns and early retirement

Post by Ferdinand2014 »

abuss368 wrote: Sat May 08, 2021 7:22 pm
Ferdinand2014 wrote: Sat May 08, 2021 7:20 pm
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
Higher standard deviation and drawdown, only 78 holdings and lower total return then VFIAX since inception in 2015. I would personally stick with VFIAX/VTSAX.
Thanks.
Tony
It’s prospectus states it’s index focuses on the top 80 dividend yield companies in the S&P 500. It does not focus on companies with history of consistent or rising dividends. Just yield. Dividend yield is a ratio. It can look good if earnings are bad.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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Re: Confused about dividend investing, market downturns and early retirement

Post by abuss368 »

Ferdinand2014 wrote: Sat May 08, 2021 7:28 pm
abuss368 wrote: Sat May 08, 2021 7:22 pm
Ferdinand2014 wrote: Sat May 08, 2021 7:20 pm
abuss368 wrote: Sat May 08, 2021 7:07 pm
Ferdinand2014 wrote: Sat May 08, 2021 5:24 am Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
What are your thoughts on the S&P 500 High Dividend fund (SPYD)? The yield has been 4.50% - 5.00%.

Tony
Higher standard deviation and drawdown, only 78 holdings and lower total return then VFIAX since inception in 2015. I would personally stick with VFIAX/VTSAX.
Thanks.
Tony
It’s prospectus states it’s index focuses on the top 80 dividend yield companies in the S&P 500. It does not focus on companies with history of consistent or rising dividends. Just yield. Dividend yield is a ratio. It can look good if earnings are bad.
I also noticed it is an equal weight index and not a market weight index. Would you consider that a problem?

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Confused about dividend investing, market downturns and early retirement

Post by sambb »

cant dividends be cut, or rental prices go down in times of distress. cant rely on just one option maybe>
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

ipdiddly wrote: Sat May 08, 2021 2:37 pm
imflyboy wrote: Sat May 08, 2021 10:08 am Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend. Not saying it can't happen, just that the odds are in your favor. How is it better to have a non-dividend payer during a downturn? My dividend payers give me a pay raise every year, often better than the raises I got while working. For example, PG increased its dividend by 10% this year and AAPL by 7%. Kaching!
Can you provide historical total return data for these "Dividend Champions", preferably going back at least to the 90s or early 00s? I searched and only found websites that seemed to contain more marketing than real data. It's easy to say these are better than other, more diversified funds, but another thing to be true.

The research behind value, quality, and profitability factors is much more robust, and I would like to test my hypothesis that a value fund of similar market cap to these "Dividend Champions" would have performed better. If so, this would be a better way to invest in the philosophy you prefer.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

CuriousTacos wrote: Sat May 08, 2021 9:25 pm
ipdiddly wrote: Sat May 08, 2021 2:37 pm
imflyboy wrote: Sat May 08, 2021 10:08 am Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend. Not saying it can't happen, just that the odds are in your favor. How is it better to have a non-dividend payer during a downturn? My dividend payers give me a pay raise every year, often better than the raises I got while working. For example, PG increased its dividend by 10% this year and AAPL by 7%. Kaching!
Can you provide historical total return data for these "Dividend Champions", preferably going back at least to the 90s or early 00s? I searched and only found websites that seemed to contain more marketing than real data. It's easy to say these are better than other, more diversified funds, but another thing to be true.

The research behind value, quality, and profitability factors is much more robust, and I would like to test my hypothesis that a value fund of similar market cap to these "Dividend Champions" would have performed better. If so, this would be a better way to invest in the philosophy you prefer.
I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.

In an earlier comment, I also repeated data from a different posting relaying the outperformance of dividend paying SCHD vs VTI-BND over a nearly 10 year period (the life of SCHD), while withdrawing $24,000 per year. At the end of the period, SCHD was generating more than double the income vs VTI-BND. I know you are familiar with that prior post since you and others had many comments, including many negative comments. Those wishing to research various and sundry other scenarios are free to do so.

I am not one who suggests that one method of investing is better than another. There are many investment strategies and individuals are free to select the one that best fits their needs and comfort levels. I personally believe that having some dividend income can provide a level of comfort that may alleviate concerns over market downturns and suppress the urge to panic sell. But that's an individual preference. It's also a preference that may be more applicable to one over 60 vs one under 40.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CyclingDuo »

sambb wrote: Sat May 08, 2021 8:20 pm cant dividends be cut, or rental prices go down in times of distress. cant rely on just one option maybe>
True. Nice to have a diversity of income streams.

Yes, dividends can and do get cut. 2020 was no exception with lots of cuts. Yet, when the year was over and all was said and done, the dividends in the S&P 500 were actually up .7% from the record set in 2019. :beer

Dividends payments rose +0.7% to $58.28 per share from the previous record set in 2019, according to S&P Global.
https://www.reuters.com/article/us-usa- ... SKBN29421J
https://www.barrons.com/articles/s-p-50 ... 1609357661

Here are some of the historical perspective of dividend cuts (note the drastic drop in the Financial Crisis involved most of the financial sector with all of the dividend cuts)...

Image

Updating that above table would have a S&P 500 peak to decline drop in price of -33.9% for 2020 and the S&P 500 Dividend change would be +.7%.

Regarding the author's of the book Millennial Revolution which I have read, the combination of spending 15% less in 2020 and ending up with a 16% higher portfolio at the end of the year due to moving back to Canada for the pandemic as well as a parent's dire brain cancer diagnosis - I don't think we can discount such a random event when their SWR was below 3% as most of us experienced a similar year (spending less and portfolio growth) whether we were retired or not. A much longer, protracted bear market was avoided this time around which kept their plans in play. The growth in their portfolio and lower spend has put them in a better position going forward.

Many of us could say the same whether we are still working or retired.

CyclingDuo
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Re: Confused about dividend investing, market downturns and early retirement

Post by TN_Boy »

ipdiddly wrote: Sun May 09, 2021 8:31 am
CuriousTacos wrote: Sat May 08, 2021 9:25 pm
ipdiddly wrote: Sat May 08, 2021 2:37 pm
imflyboy wrote: Sat May 08, 2021 10:08 am Just curious, but what happens to dividends during a downturn in which you plan on using those dividends? If companies reduce or suspend their dividend to preserve cash aren’t you likely to see a lower payout just when you need it most?
If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend. Not saying it can't happen, just that the odds are in your favor. How is it better to have a non-dividend payer during a downturn? My dividend payers give me a pay raise every year, often better than the raises I got while working. For example, PG increased its dividend by 10% this year and AAPL by 7%. Kaching!
Can you provide historical total return data for these "Dividend Champions", preferably going back at least to the 90s or early 00s? I searched and only found websites that seemed to contain more marketing than real data. It's easy to say these are better than other, more diversified funds, but another thing to be true.

The research behind value, quality, and profitability factors is much more robust, and I would like to test my hypothesis that a value fund of similar market cap to these "Dividend Champions" would have performed better. If so, this would be a better way to invest in the philosophy you prefer.
I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.

In an earlier comment, I also repeated data from a different posting relaying the outperformance of dividend paying SCHD vs VTI-BND over a nearly 10 year period (the life of SCHD), while withdrawing $24,000 per year. At the end of the period, SCHD was generating more than double the income vs VTI-BND. I know you are familiar with that prior post since you and others had many comments, including many negative comments. Those wishing to research various and sundry other scenarios are free to do so.

I am not one who suggests that one method of investing is better than another. There are many investment strategies and individuals are free to select the one that best fits their needs and comfort levels. I personally believe that having some dividend income can provide a level of comfort that may alleviate concerns over market downturns and suppress the urge to panic sell. But that's an individual preference. It's also a preference that may be more applicable to one over 60 vs one under 40.
With respect to this "suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn."

No, that is not true. Consider the plethora of high quality studies which have been done on safe withdrawal rates. Pretty much all of them use a mixture of stocks and bonds (some of them will vary the bond percentage to show how different mixes would have fared) and withdraw using a total return strategy, usually rebalanced yearly. Total return means you use both dividends and sales to get the money out. I have never seen a reputable study which claims to show you can safely pull *more* from a dividend only portfolio than you can from an equivalent portfolio using total return.

Such studies include extended bear markets.

Your other post about "the outperformance of dividend paying SCHD vs VTI-BND" received justified criticism because, among other things, it is invalid to compare a 100% equity portfolio with a 70:30 portfolio. Especially during a period which featured outstanding stock market performance! What else could the result have possibly been??

Some dividend income is fine. If you buy a broad market index fund like VTI, you will get some dividends! Not as much as you'll get from SCHD for sure, but you'll get some.

I will agree with these two points about dividend-only investing.

1) It is simpler. You just take what they send you. This is probably not optimal, but it is very simple.
2) Dividends fluctuate less than stock prices.

Even a dividend investor should look at the world through a total return lens.
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Re: Confused about dividend investing, market downturns and early retirement

Post by MotoTrojan »

Your understanding is perfect. Best way to think about a dividend is a forced-sale of your stock. If dividend doesn't cover your expenses, sell some shares. If the dividend is more than you need, re-invest the excess. They are no safer in drawdowns, and could do even worse depending on the cause of the drawdown as they often tilt to value stocks (did worse during Covid for example, see below).

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

ipdiddly wrote: Sun May 09, 2021 8:31 am
CuriousTacos wrote: Sat May 08, 2021 9:25 pm
ipdiddly wrote: Sat May 08, 2021 2:37 pm If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend. Not saying it can't happen, just that the odds are in your favor. How is it better to have a non-dividend payer during a downturn? My dividend payers give me a pay raise every year, often better than the raises I got while working. For example, PG increased its dividend by 10% this year and AAPL by 7%. Kaching!
Can you provide historical total return data for these "Dividend Champions", preferably going back at least to the 90s or early 00s? I searched and only found websites that seemed to contain more marketing than real data. It's easy to say these are better than other, more diversified funds, but another thing to be true.

The research behind value, quality, and profitability factors is much more robust, and I would like to test my hypothesis that a value fund of similar market cap to these "Dividend Champions" would have performed better. If so, this would be a better way to invest in the philosophy you prefer.
I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.

In an earlier comment, I also repeated data from a different posting relaying the outperformance of dividend paying SCHD vs VTI-BND over a nearly 10 year period (the life of SCHD), while withdrawing $24,000 per year. At the end of the period, SCHD was generating more than double the income vs VTI-BND. I know you are familiar with that prior post since you and others had many comments, including many negative comments. Those wishing to research various and sundry other scenarios are free to do so.

I am not one who suggests that one method of investing is better than another. There are many investment strategies and individuals are free to select the one that best fits their needs and comfort levels. I personally believe that having some dividend income can provide a level of comfort that may alleviate concerns over market downturns and suppress the urge to panic sell. But that's an individual preference. It's also a preference that may be more applicable to one over 60 vs one under 40.
I'll take that as a no.

Perhaps technically you aren't suggesting that one method of investing is better than another, but you are making claims in favor of several dividend strategies that sound very appealing but either cannot be verified or are misleading (i.e. comparing returns without regard for risk, or focusing on dividends to the exclusion of total return).

It's also interesting that in each thread, your proposed strategy is different. There was the "10 dividend stocks" strategy, the "ditch bonds and go 100% SCHD" strategy, and now the "dividend champions" or "dividend contenders" strategies. How exactly would someone implement what you propose, and how could anyone evaluate the total return and risk of such a strategy over a long history (and 10 years is nothing)?

The irony for me is that I think the value/quality/profitability factors are real, and there is some correlation between those and dividends. But research suggests these factors are superior to dividend-based strategies and even they cannot promise to significantly reduce drawdowns or avoid long periods of under-performance or justify ditching bonds, so the alarm bells go off when I hear the claims you make.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

CuriousTacos wrote: Sun May 09, 2021 11:56 pm
Perhaps technically you aren't suggesting that one method of investing is better than another, but you are making claims in favor of several dividend strategies that sound very appealing but either cannot be verified or are misleading (i.e. comparing returns without regard for risk, or focusing on dividends to the exclusion of total return).

It's also interesting that in each thread, your proposed strategy is different. There was the "10 dividend stocks" strategy, the "ditch bonds and go 100% SCHD" strategy, and now the "dividend champions" or "dividend contenders" strategies. How exactly would someone implement what you propose, and how could anyone evaluate the total return and risk of such a strategy over a long history (and 10 years is nothing)?

The irony for me is that I think the value/quality/profitability factors are real, and there is some correlation between those and dividends. But research suggests these factors are superior to dividend-based strategies and even they cannot promise to significantly reduce drawdowns or avoid long periods of under-performance or justify ditching bonds, so the alarm bells go off when I hear the claims you make.
I'm not sure how or why you conclude I am making claims. Nowhere do I make any claim or suggest that anyone choose any particular investment strategy. I simply present data and the reader can draw whatever conclusion they want. Unfortunately, there seem to be many on this forum who claim: "dividends are bad - very, very bad - stay away!" And they seem incensed that anyone would dare present any data that suggests dividends might be useful.

I've shown an example that SCHD outperformed VTI-BND over nearly 10 years and, at the end of that period, generated double the income. No one has to like that data. And anyone can deem that data insufficient to change their investment strategy. I do that all the time. I read an article with data presented by an author, then make my own personal decision about whether I like or dislike or remain neutral about it.

I don't fully understand the criticism about "total return." The data showing outperformance is "total return." If at the end of a particular study period, the final balance for SCHD is higher than VTI-BND, that represents greater total return. Now the data may also show that VTI-BND has lower volatility and that data point can be factored into one's decision making. It's perfectly OK to accept lower return in exchange for lower volatility. That is a personal decision.

My previous post illustrating that a portfolio of ten boring stocks significantly outperformed the indexes over a 20 year period served a similar but different purpose. I said several time in that post that I was NOT suggesting that anyone adopt a ten stock portfolio. My point was to illustrate that one could achieve successful performance without ever owning any of the high flying tech stocks that powered the major indexes over that period. Again, I was not proposing any specific strategy. It's simply information that an investor might find useful. But that investor is also free to dislike or ignore it.

Perhaps some would like a world where everyone marches to the same drummer and never has to hear a different viewpoint. Today's cancel culture seems to be going in that direction. I think we are far better off hearing many viewpoints and freely choosing our own path.
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Re: Confused about dividend investing, market downturns and early retirement

Post by TN_Boy »

ipdiddly wrote: Mon May 10, 2021 10:34 am
CuriousTacos wrote: Sun May 09, 2021 11:56 pm
Perhaps technically you aren't suggesting that one method of investing is better than another, but you are making claims in favor of several dividend strategies that sound very appealing but either cannot be verified or are misleading (i.e. comparing returns without regard for risk, or focusing on dividends to the exclusion of total return).

It's also interesting that in each thread, your proposed strategy is different. There was the "10 dividend stocks" strategy, the "ditch bonds and go 100% SCHD" strategy, and now the "dividend champions" or "dividend contenders" strategies. How exactly would someone implement what you propose, and how could anyone evaluate the total return and risk of such a strategy over a long history (and 10 years is nothing)?

The irony for me is that I think the value/quality/profitability factors are real, and there is some correlation between those and dividends. But research suggests these factors are superior to dividend-based strategies and even they cannot promise to significantly reduce drawdowns or avoid long periods of under-performance or justify ditching bonds, so the alarm bells go off when I hear the claims you make.
I'm not sure how or why you conclude I am making claims. Nowhere do I make any claim or suggest that anyone choose any particular investment strategy. I simply present data and the reader can draw whatever conclusion they want. Unfortunately, there seem to be many on this forum who claim: "dividends are bad - very, very bad - stay away!" And they seem incensed that anyone would dare present any data that suggests dividends might be useful.

I've shown an example that SCHD outperformed VTI-BND over nearly 10 years and, at the end of that period, generated double the income. No one has to like that data. And anyone can deem that data insufficient to change their investment strategy. I do that all the time. I read an article with data presented by an author, then make my own personal decision about whether I like or dislike or remain neutral about it.

I don't fully understand the criticism about "total return." The data showing outperformance is "total return." If at the end of a particular study period, the final balance for SCHD is higher than VTI-BND, that represents greater total return. Now the data may also show that VTI-BND has lower volatility and that data point can be factored into one's decision making. It's perfectly OK to accept lower return in exchange for lower volatility. That is a personal decision.

My previous post illustrating that a portfolio of ten boring stocks significantly outperformed the indexes over a 20 year period served a similar but different purpose. I said several time in that post that I was NOT suggesting that anyone adopt a ten stock portfolio. My point was to illustrate that one could achieve successful performance without ever owning any of the high flying tech stocks that powered the major indexes over that period. Again, I was not proposing any specific strategy. It's simply information that an investor might find useful. But that investor is also free to dislike or ignore it.

Perhaps some would like a world where everyone marches to the same drummer and never has to hear a different viewpoint. Today's cancel culture seems to be going in that direction. I think we are far better off hearing many viewpoints and freely choosing our own path.
Do you truly not understand why comparing SCHD to VTI + BND in a 70/30 ratio is totally invalid?
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Re: Confused about dividend investing, market downturns and early retirement

Post by vineviz »

ipdiddly wrote: Mon May 10, 2021 10:34 am I'm not sure how or why you conclude I am making claims. Nowhere do I make any claim or suggest that anyone choose any particular investment strategy. I simply present data and the reader can draw whatever conclusion they want. Unfortunately, there seem to be many on this forum who claim: "dividends are bad - very, very bad - stay away!" And they seem incensed that anyone would dare present any data that suggests dividends might be useful.
Perhaps the conclusion was reached based on your earlier post about receiving income being "better".
ipdiddly wrote: Sun May 09, 2021 8:31 am I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.
If by "better" you mean something psychological, like "more comforting", then that would be hard to dispute. At least for those investors who have an aversion to selling shares.

However, "better" might also be interpreted as meaning "safer" or "less risky". That meaning is not supported by the evidence.

And for the record, not once have I seen anyone say that "dividends are bad - very, very bad - stay away!" If you found one example of anyone saying that I would be shocked, much less "many" examples.
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

vineviz wrote: Mon May 10, 2021 10:47 am
ipdiddly wrote: Mon May 10, 2021 10:34 am I'm not sure how or why you conclude I am making claims. Nowhere do I make any claim or suggest that anyone choose any particular investment strategy. I simply present data and the reader can draw whatever conclusion they want. Unfortunately, there seem to be many on this forum who claim: "dividends are bad - very, very bad - stay away!" And they seem incensed that anyone would dare present any data that suggests dividends might be useful.
Perhaps the conclusion was reached based on your earlier post about receiving income being "better".
ipdiddly wrote: Sun May 09, 2021 8:31 am I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.
If by "better" you mean something psychological, like "more comforting", then that would be hard to dispute. At least for those investors who have an aversion to selling shares.

However, "better" might also be interpreted as meaning "safer" or "less risky". That meaning is not supported by the evidence.

And for the record, not once have I seen anyone say that "dividends are bad - very, very bad - stay away!" If you found one example of anyone saying that I would be shocked, much less "many" examples.
I continue to be astonished as to where the idea comes from that withdrawals from a portfolio have to be dividends. Note I just avoided use of the word "income" in that sentence for a reason. While in conventional financial terms dividends and interest on investments is income and is even taxed that way in the event of taxable holdings, I don't think that is a useful model to apply to retirement funding from a portfolio.

A more helpful model, used by lots of people, especially here and in other discussions of retirement finance, is that household cash flow has income and expenses but portfolios don't have income. Portfolios have return and portfolios have contributions and withdrawals. Once you arrive at this picture the confusion of dividends as income while ignoring the concept of return starts to become hard to explain. A result of changing the model is that you stop identifying so-called portfolio income with personal cash flow income and you start identifying personal cash flow income with withdrawals. Once you make the step to withdrawals you quickly recognize that it doesn't matter how the withdrawal is arranged, whether by cashing a dividend check or by selling some shares and taking out the proceeds or by combinations of those.

It is also true that no one says that dividends are bad or that people should not get dividends or that people don't have dividends directed to their checking accounts to spend. The statement is to just not get tangled up over what is really going on and to not think that there is a special benefit to choosing investments according to the dividends they pay. Maybe if there are mantras to apply to this they would be "Think return and not yield." and "A withdrawal is a withdrawal is a withdrawal."
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

ipdiddly wrote: Mon May 10, 2021 10:34 am
CuriousTacos wrote: Sun May 09, 2021 11:56 pm Perhaps technically you aren't suggesting that one method of investing is better than another, but you are making claims in favor of several dividend strategies that sound very appealing but either cannot be verified or are misleading (i.e. comparing returns without regard for risk, or focusing on dividends to the exclusion of total return).
I'm not sure how or why you conclude I am making claims. Nowhere do I make any claim or suggest that anyone choose any particular investment strategy. I simply present data and the reader can draw whatever conclusion they want.
Here are just some examples of your claims:
ipdiddly wrote: Sat May 08, 2021 2:37 pm If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend.
The above is a claim that is either misleading (focusing on dividends without regard for total return) and/or one that I cannot find verification for since I can't find total return history, and when I asked you for that, you could not provide it either.
ipdiddly wrote: Sat May 08, 2021 2:37 pm My dividend payers give me a pay raise every year, often better than the raises I got while working.
The above is a claim that is either false since S&P 500 dividends dropped during the '09-10 financial crisis, or unverifiable since nobody could know how to test and implement your stock picking strategy.
ipdiddly wrote: Mon May 10, 2021 10:34 am SCHD outperformed VTI-BND over nearly 10 years and, at the end of that period, generated double the income.
The above is a claim that is misleading because it compares two strategies with drastically different risk profiles during a bull market (aside for a rapid crash/recovery at the end). After others pointed this out in your previous thread, you eventually acknowledged the difference in volatility, but then you posted the same claim in this thread without that consideration and you seem frustrated that others pointed it out again.
ipdiddly wrote: Mon May 10, 2021 10:34 am Perhaps some would like a world where everyone marches to the same drummer and never has to hear a different viewpoint. (politically oriented comment removed). I think we are far better off hearing many viewpoints and freely choosing our own path.
I think you misunderstand our intentions. Different viewpoints are a good thing, and this is a place where a variety of ideas and strategies are indeed respected and debated. But allowing and respecting different viewpoints does not mean allowing unverifiable or misleading claims. It is a good thing to hold ideas to a high standard and question claims that are made without sufficient detail, data, or accuracy.

I think if you honed your message, you could present a very reasonable argument for dividend investing and would find a lot of agreement with value investors here. It is perfectly reasonable to think that highly valued tech companies are too risky for your taste, and/or that the current concentration of such companies in total market funds is too much for you. But people around here will hold you to making claims that are verifiable, not misleading, and appropriately account for risk.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Thesaints »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.

Anyway, she talked a lot in the book about the Trinity study and using a 4% SWR. She said that she would have a 95% chance of not depleting her funds if she had a 4% withdrawal rate, but 95% wasn’t enough for her to feel secure. The 5% failure rate would usually occur because of sequence of returns risk - in situations where someone retired and then the market crashed and you had to sell equities during a downturn. If this happens during the first 5 years of retirement, early retirement can fail. In order to counter this, she said she implemented a “cash cushion” and a “yield shield” during her first 5 years of retirement. Basically, she keeps two years of expenses in cash and keeps her equities in index ETFs that throw off a lot of dividends. She said that even if there was a market downturn, she can just live off her dividends and cash until the market recovers, So she wouldn’t be forced to sell in a downturn. She acknowledged that the high-yield ETFs are not as diversified as total stock market indexes, but accepted the lower diversification in exchange for sequence of returns protection during the first 5 years of her retirement.

Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
There are numerous issues with what you read:
- "Travelling the World" on a 40k budget ain't that fun and certainly is not "like a millionaire".
- Her 5% chance of failure with a 4% withdrawal rate maybe a correct assessment only if she plans to die in her early 60's. That too might be questionable.
- There is no such thing as a "dividend shield", as others have already observed. Your doubts are absolutely appropriate.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

dbr wrote: Mon May 10, 2021 11:17 am
I continue to be astonished as to where the idea comes from that withdrawals from a portfolio have to be dividends.
. . . Once you make the step to withdrawals you quickly recognize that it doesn't matter how the withdrawal is arranged, whether by cashing a dividend check or by selling some shares and taking out the proceeds or by combinations of those.
I don't disagree. And I don't confuse dividends with withdrawals.

In my illustration of SCHD vs VTI-BND, it was set up with "withdrawals" of $24,000 per year ($2000/mo), as one might do if retired.
The withdrawals had nothing to do with dividends. In fact, in the early years, each portfolio would have to sell shares to meet the initial withdrawal rate. Any dividends or interest generated would be used to buy more shares. That's the only way Portfolio Visualizer would set it up. Unfortunately, PV would not let me set up the illustration to reflect annual increases in withdrawals because dividend reinvestment was also selected. Ideally, it would have been nice to set it up with escalating withdrawals (i.e., inflation adjustment) and sell shares or reinvest dividends as required. In any event, as set up, it is a reasonable approximation of how each portfolio would perform with monthly withdrawals, however achieved.

In my personal point of view, the interesting result was that, at the end of the almost 10 year period, the SCHD portfolio was, at that point, generating annual dividends of of $39K vs $17K in interest/dividends for VTI-BND. At that point, the retiree owning SCHD could turn off the initial $24K withdrawal rate and give him/herself a substantial pay raise by simply withdrawing annual dividends and not selling any shares. The retiree with the VTI-BND portfolio would still need to sell shares to meet the $24K withdrawal rate.

Perhaps my real failure is not including the standby: "Past performance is not an indicator of future results." Then again, that advice would apply to any backtest one might illustrate.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

CuriousTacos wrote: Mon May 10, 2021 12:01 pm
Here are just some examples of your claims:
ipdiddly wrote: Sat May 08, 2021 2:37 pm If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend.
The above is a claim that is either misleading (focusing on dividends without regard for total return) and/or one that I cannot find verification for since I can't find total return history, and when I asked you for that, you could not provide it either.
If a company has a record of increasing dividends for 25 or more years, that proves itself. You don't make the list if you haven't done it. The statement is not misleading in any way. My statement did not say anything about total return of companies that have paid increasing dividends for 25 or more years. Again, I was answering the question about dividends being cut during a downturn. My personal belief is that if you own a portfolio of companies with long records of dividend increases, you reduce the odds that your dividends will be cut or suspended. Companies with long records of paying increasing dividends try to maintain that performance through thick and thin. Since no one can predict the future, there is no absolute guarantee that a company that has paid increasing dividends over 25 straight years might cut or suspend its dividend. We all agree: "Past performance is not an indicator of future results." In 2009, many banks had to suspend dividends or were required to do so. That was a highly unusual event, however.
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

vineviz wrote: Mon May 10, 2021 10:47 am
ipdiddly wrote: Sun May 09, 2021 8:31 am I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.
If by "better" you mean something psychological, like "more comforting", then that would be hard to dispute. At least for those investors who have an aversion to selling shares.

However, "better" might also be interpreted as meaning "safer" or "less risky". That meaning is not supported by the evidence.
I suppose one can try to interpret and reinterpret what "better" means. I guess I should learn to write more clearly. Given my druthers, in an investment environment that produced a 30% downturn, I would be more "comfortable" owning Stock A that has declined from $100K to $70K, but continues to pay me $3000 per year, then to own stock B that has declined to $70K and pays me nothing. Others may prefer stock B.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Thesaints »

ipdiddly wrote: Mon May 10, 2021 1:24 pm
CuriousTacos wrote: Mon May 10, 2021 12:01 pm
Here are just some examples of your claims:
ipdiddly wrote: Sat May 08, 2021 2:37 pm If you own a portfolio of Dividend Champions (>25 yrs div growth) or Contenders (>10 yrs div growth), you very greatly diminish the risk that one of those companies will suspend or reduce the dividend.
The above is a claim that is either misleading (focusing on dividends without regard for total return) and/or one that I cannot find verification for since I can't find total return history, and when I asked you for that, you could not provide it either.
If a company has a record of increasing dividends for 25 or more years, that proves itself. You don't make the list if you haven't done it. The statement is not misleading in any way. My statement did not say anything about total return of companies that have paid increasing dividends for 25 or more years. Again, I was answering the question about dividends being cut during a downturn. My personal belief is that if you own a portfolio of companies with long records of dividend increases, you reduce the odds that your dividends will be cut or suspended. Companies with long records of paying increasing dividends try to maintain that performance through thick and thin. Since no one can predict the future, there is no absolute guarantee that a company that has paid increasing dividends over 25 straight years might cut or suspend its dividend. We all agree: "Past performance is not an indicator of future results." In 2009, many banks had to suspend dividends or were required to do so. That was a highly unusual event, however.
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

ipdiddly wrote: Mon May 10, 2021 1:37 pm
vineviz wrote: Mon May 10, 2021 10:47 am
ipdiddly wrote: Sun May 09, 2021 8:31 am I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.
If by "better" you mean something psychological, like "more comforting", then that would be hard to dispute. At least for those investors who have an aversion to selling shares.

However, "better" might also be interpreted as meaning "safer" or "less risky". That meaning is not supported by the evidence.
I suppose one can try to interpret and reinterpret what "better" means. I guess I should learn to write more clearly. Given my druthers, in an investment environment that produced a 30% downturn, I would be more "comfortable" owning Stock A that has declined from $100K to $70K, but continues to pay me $3000 per year, then to own stock B that has declined to $70K and pays me nothing. Others may prefer stock B.
If A paid out a dividend while taking that capital loss and B did not pay out a dividend while taking the same loss, then A had higher (less negative) return for the period. Obviously A would be preferred to B. But in this case you are assuming the conclusion by assuming same capital loss and then with or without a dividend. Anyone would agree that if selecting on dividend paying also selects for higher return at similar risk, then selecting on dividend paying would be a good idea. If someone can really pick stocks that are higher return than an alternative without taking extra risk, then one would certainly want to invest in those stocks. Your example is really an illustration of assuming that dividends are free money.
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Re: Confused about dividend investing, market downturns and early retirement

Post by TN_Boy »

dbr wrote: Mon May 10, 2021 1:57 pm
ipdiddly wrote: Mon May 10, 2021 1:37 pm
vineviz wrote: Mon May 10, 2021 10:47 am
ipdiddly wrote: Sun May 09, 2021 8:31 am I was answering the question about what happens during a downturn and suggested that receiving income from dividend payers might be better than receiving no income from non-div payers during a downturn.
If by "better" you mean something psychological, like "more comforting", then that would be hard to dispute. At least for those investors who have an aversion to selling shares.

However, "better" might also be interpreted as meaning "safer" or "less risky". That meaning is not supported by the evidence.
I suppose one can try to interpret and reinterpret what "better" means. I guess I should learn to write more clearly. Given my druthers, in an investment environment that produced a 30% downturn, I would be more "comfortable" owning Stock A that has declined from $100K to $70K, but continues to pay me $3000 per year, then to own stock B that has declined to $70K and pays me nothing. Others may prefer stock B.
If A paid out a dividend while taking that capital loss and B did not pay out a dividend while taking the same loss, then A had higher (less negative) return for the period. Obviously A would be preferred to B. But in this case you are assuming the conclusion by assuming same capital loss and then with or without a dividend. Anyone would agree that if selecting on dividend paying also selects for higher return at similar risk, then selecting on dividend paying would be a good idea. If someone can really pick stocks that are higher return than an alternative without taking extra risk, then one would certainly want to invest in those stocks. Your example is really an illustration of assuming that dividends are free money.
Good illustration. ipdiddly would rather own stock A because it has a better total return than stock B :-)

Well, I would too.

Darn that circular logic.
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Re: Confused about dividend investing, market downturns and early retirement

Post by TN_Boy »

ipdiddly wrote: Mon May 10, 2021 1:09 pm
dbr wrote: Mon May 10, 2021 11:17 am
I continue to be astonished as to where the idea comes from that withdrawals from a portfolio have to be dividends.
. . . Once you make the step to withdrawals you quickly recognize that it doesn't matter how the withdrawal is arranged, whether by cashing a dividend check or by selling some shares and taking out the proceeds or by combinations of those.
I don't disagree. And I don't confuse dividends with withdrawals.

In my illustration of SCHD vs VTI-BND, it was set up with "withdrawals" of $24,000 per year ($2000/mo), as one might do if retired.
The withdrawals had nothing to do with dividends. In fact, in the early years, each portfolio would have to sell shares to meet the initial withdrawal rate. Any dividends or interest generated would be used to buy more shares. That's the only way Portfolio Visualizer would set it up. Unfortunately, PV would not let me set up the illustration to reflect annual increases in withdrawals because dividend reinvestment was also selected. Ideally, it would have been nice to set it up with escalating withdrawals (i.e., inflation adjustment) and sell shares or reinvest dividends as required. In any event, as set up, it is a reasonable approximation of how each portfolio would perform with monthly withdrawals, however achieved.

In my personal point of view, the interesting result was that, at the end of the almost 10 year period, the SCHD portfolio was, at that point, generating annual dividends of of $39K vs $17K in interest/dividends for VTI-BND. At that point, the retiree owning SCHD could turn off the initial $24K withdrawal rate and give him/herself a substantial pay raise by simply withdrawing annual dividends and not selling any shares. The retiree with the VTI-BND portfolio would still need to sell shares to meet the $24K withdrawal rate.

Perhaps my real failure is not including the standby: "Past performance is not an indicator of future results." Then again, that advice would apply to any backtest one might illustrate.
Tell us again why you didn't simply compare SCHD versus 100% VTI?

I compared the two from Jan 2012 to April 2021. Using 100,000 as the startvalue and pulling 4,000 a year adjusted for inflation, the 100% VTI portfolio would have ended up with a value of $323,273 versus $297,587 for the SCHD portfolio. Annual withdrawal frequency.

So .... you took out the same amount of money and wound up with more using 100% VTI ...... I am not understanding why I shouldn't like that better.

The fact that SCHD shows more *income* is simply irrelevant.

(Anyone can feel free to double-check my results in case I mishandled portfolio visualizer ...I haven't used it a lot)
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ipdiddly
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

dbr wrote: Mon May 10, 2021 1:57 pm
ipdiddly wrote: Sun May 09, 2021 8:31 am
I suppose one can try to interpret and reinterpret what "better" means. I guess I should learn to write more clearly. Given my druthers, in an investment environment that produced a 30% downturn, I would be more "comfortable" owning Stock A that has declined from $100K to $70K, but continues to pay me $3000 per year, then to own stock B that has declined to $70K and pays me nothing. Others may prefer stock B.
If A paid out a dividend while taking that capital loss and B did not pay out a dividend while taking the same loss, then A had higher (less negative) return for the period. Obviously A would be preferred to B. But in this case you are assuming the conclusion by assuming same capital loss and then with or without a dividend. Anyone would agree that if selecting on dividend paying also selects for higher return at similar risk, then selecting on dividend paying would be a good idea. If someone can really pick stocks that are higher return than an alternative without taking extra risk, then one would certainly want to invest in those stocks. Your example is really an illustration of assuming that dividends are free money.
I think you have confused loss in corporate income (capital loss) vs loss in stock price. Obviously, if companies A and B each have a 30% loss in profit, and company A pays out a dividend from that profit, then company A will have less money in the treasury than company B. But I was referring to stock price, which is what my portfolio sees. During a market downturn, one sees a change in stock price which reflects market sentiment at the time. Stock price doesn't necessarily reflect profit, at least in the short term. For example, a company's stock price may decline even if profit does not. This is reflected in the PE ratio - same E, but lower P.
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ipdiddly
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

JustinR wrote: Sat May 08, 2021 7:45 am
Yes, it's called mental accounting. By people who don't understand how dividends work.

A lot of uneducated investors think dividends are free money being deposited into their bank accounts, including the author you mentioned.
Most stock investors don't think dividends are free money any more than most bond investors think that bond interest is free money. Both are paid from the corporate treasury out of profits.

Interestingly, I have never heard anyone suggest that a stock price will go down on the day after bond interest is paid. That money coming out of the treasury should be treated the same as a dividend payment. It reduces the amount of cash in the treasury.

It's also interesting that many folks consider dividends as "tax inefficient," yet I never hear them say that bond interest, which is taxed at a higher rate, is "tax inefficient."
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vineviz
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Re: Confused about dividend investing, market downturns and early retirement

Post by vineviz »

ipdiddly wrote: Mon May 10, 2021 3:41 pm Interestingly, I have never heard anyone suggest that a stock price will go down on the day after bond interest is paid. That money coming out of the treasury should be treated the same as a dividend payment. It reduces the amount of cash in the treasury.
This is because stockholders didn't have a claim on that money BEFORE it was paid out any more than they had a claim on it AFTER is was paid out. The money was gone, in terms of shareholder value, when the debt was issued not when the coupon payment was made.

In other words, it's fundamentally a different accounting story than a cash dividend to shareholders.
ipdiddly wrote: Mon May 10, 2021 3:41 pm It's also interesting that many folks consider dividends as "tax inefficient," yet I never hear them say that bond interest, which is taxed at a higher rate, is "tax inefficient."
The people who contributed to this site's Wiki certainly have said that:
By contrast, bond funds can be extremely tax-inefficient, because the interest they produce every year is taxed at your full marginal tax rate. Other tax-inefficient investments are REITs, small value funds, and actively managed funds that frequently churn their holdings. Put tax-inefficient funds into tax-advantaged accounts to the extent possible.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Confused about dividend investing, market downturns and early retirement

Post by Marseille07 »

I-Know-Nothing wrote: Sat May 08, 2021 10:37 am
MishkaWorries wrote: Sat May 08, 2021 9:52 am
I-Know-Nothing wrote: Fri May 07, 2021 5:53 pm
Where did you see that medical expenses aren’t included? I don’t think it would be appropriate to take business travel expenses out of non-business portfolio.
Then in what sense are they retired and living on $40,000 per year? They are clearly still working for a living.

Of course it's entirely possible to live overseas on (net) $40,000 per year. One could comfortably live in just about any country in the world. Even living in Paris on that kind of money if you're willing to scrimp to get by.

Go to eastern Europe or Asia and live pretty well.
They retired from their traditional jobs, with a portfolio of about 1.1 million (portfolio A). The plan was to live on a slightly less than 4% SWR, using the yield shield and cash cushion. Then she found success with a blog and a book. So, yes she is still working at a side hustle, though that wasn’t her plan. She keeps any money earned from her blog and book in a separate portfolio (portfolio B) and takes all living expenses from portfolio A and all business expenses from Portfolio B. The idea is to see if she would have been “successful” in her retirement if she hadn’t worked at all and only had Portfolio A. So far, she would have been successful.

I could have probably given all of these details in my initial post, but I was most interested in whether her ideas about yield shield had any validity, not whether the concept of retiring early had any validity. I wasn’t as clear as I should have been when I asked my questions, and of course people are free to respond however they’d like.

I like the idea of retiring early, though definitely not as early as she did. I might feel differently if I had a fulfilling job and not a dead-end one, but that’s a topic for another time.
Thanks for the summary. This book is in my reading queue that I'll get to someday (already have the book purchased). While their FIRE is very much LeanFIRE, I think we can learn a thing or two from the book.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Financologist »

7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
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Re: Confused about dividend investing, market downturns and early retirement

Post by 7eight9 »

Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
I guess it all could be much worse. | They could be warming up my hearse.
coachd50
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Re: Confused about dividend investing, market downturns and early retirement

Post by coachd50 »

Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
I believe that argument has been flushed out on this message bored pretty thoroughly in other threads. It basically boils down to a (probably over-simplistic) thought process that without dividends, how can a company provide returns to those with ownership interest? The only way to get a return is to have someone buy the shares at a higher price than you paid for them, and the only reason that would happen is that the purchaser is hoping someone down the line would do the same thing. But it begs the question-why would someone pay more for shares than I paid for if they never will get any returns (unless they can find someone else to dump them on...the greater fool theory).

An equally over-simplistic example of that thought process:
I create a new company. - Call it Call it ACME. You invest say $10,000 in ACME and obtain an ownership stake. ACME has a great year and makes profits. I reinvest the profits and make even more profits next year. The same happens year after year. Huzzah! You have an ownership stake in a company that is booming. But if it becomes clear that ACME will NEVER pay a dividend to shareholders/owners... are you ever going to get a return on that $10,000? The thought process we are discussing says "no" unless you can find someone else to buy your shares. But as stated above, why would someone pay you to obtain stock certificates/ownership?

I also believe it has been pointed out that this thought process seems to ignore stock buy backs.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Financologist »

7eight9 wrote: Sat Jul 24, 2021 1:02 pm
Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
Respectfully disagree. If I'm looking at Apple stock, there is cash on the balance sheet. There is debt. There is revenue and cost. Etc.. When I purchase Apple stock It's not in hopes there is a greater fool waiting in the wings. It's in hopes the company will grow profits and enhance its prospects so that a smart person down the road is willing to pay me more than I paid the the shares.
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Re: Confused about dividend investing, market downturns and early retirement

Post by coachd50 »

Financologist wrote: Sat Jul 24, 2021 3:39 pm
7eight9 wrote: Sat Jul 24, 2021 1:02 pm
Financologist wrote: Sat Jul 24, 2021 12:13 am
7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
Please expand on your statement that Non-dividend paying stocks are not that different from bitcoin.

Who cares whether a stock pays a dividend or not? You can sell traded stocks when you like..
Non-dividend paying stocks rely on the Greater Fool theory.
Respectfully disagree. If I'm looking at Apple stock, there is cash on the balance sheet. There is debt. There is revenue and cost. Etc.. When I purchase Apple stock It's not in hopes there is a greater fool waiting in the wings. It's in hopes the company will grow profits and enhance its prospects so that a smart person down the road is willing to pay me more than I paid the the shares.
As I mentioned, 7eight9's viewpoint thought process is that if a company does not regularly pay dividends to owners - then do the owners have any access to those grown profits?

In my hypothetical overly simplistic example above with ACME company- If you invested $10,000 in my company (lets say that is 10% ownership) and over say 10 years I grew the company such that I had profits of $10mm a year but it was known that I would never pay you a dividend...does it matter to you that you own 10% of such a profitable company? You haven't seen any benefit from the companies boom the past ten years, and so it makes some logical sense that someone would wonder why they should pay you money for those shares (because they wouldn't see any benefit either) I believe that is the underlying question to his thought process.

I would say there is a difference between pure theory and real world practice.
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Re: Confused about dividend investing, market downturns and early retirement

Post by JoMoney »

I was browsing through Mr. Bogle's book "Bogle On Mutual Funds", and ran across the below paragraph that reminded me of some of the argument in this thread:
John Bogle in his book Bogle on Mutual Funds, section Total Return on Common Stocks wrote:... I want to emphasize that stock returns are driven by two critical factors: dividends and earnings. Without dividends, which are made possible by earnings, an investment in any stock would be purely speculative in nature. Why are dividends and earnings so vital to stock returns? The most basic way to answer that question is to recall that a share of company stock represents a share in a business firm. If you are considering purchasing shares in a firm, you have two broad expectations for that firm: (1) it will pay annual dividends and the amount of these dividends will grow over time; or (2) rather than paying dividends, it will retain its earnings so as to build the business.
While the second expectation suggests that dividends need not always be a critical determinant of the returns on stocks, even when a company
does not pay a dividend, investors implicitly value the firm’s stock based on the presumption of future dividends. When the earnings of a business
are retained each year, investors expect that the earnings will increase over time, resulting in future dividends that will be higher than if they had been distributed currently. In sum, while the consideration of stock returns may encompass any number of qualitative and quantitative factors, any valuation judgment must ultimately rely on dividends and earnings.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Confused about dividend investing, market downturns and early retirement

Post by Spike Holland »

I agree that in most cases not involving tax-deferred accounts (e.g., IRA's), it is better tax-wise to go for total return rather than dividends. However, there may be certain circumstances where dividends are preferable. Case in point: consider a trust where the beneficiaries are entitled to the "net income" only and not principal. Unless the trust document specifies otherwise, capital gains are usually deemed to be principal. Therefore, the trust beneficiaries are better off with dividends than total return.

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Re: Confused about dividend investing, market downturns and early retirement

Post by seajay »

Nate79 wrote: Fri May 07, 2021 9:08 am Many problems with this. 4% SWR was not designed for someone doing early retirement. There is no magic that is going to make the 4% SWR suddenly able to do 5% or higher. If there was some magic like this then everyone would be doing it - this is a heavily researched area and don't you think if someone had such a great idea it would be a huge deal? Finally, holding cash in a separate bucket is just a mind trick - it's still part of your asset allocation and therefore didn't change anything.
Trick 1 : 4% SWR was derived from the worst peak to trough 30 year period. So instead of lumping in, run two sets, half started straight away, another run a year later, and the average of the two will be better than the worst alone. Bumps SWR from 4 to 4.4

Trick 2 : Swap out bond for precious metal. Bumps the SWR to around 5.5%. 75/25 or 67/33, both similar.

Trick 3 : Style diversify. A third targeting Bull, a third Bunny, a third Bear (that gold fits). Robert Lichello's AIM tends to do well across Bunny periods for instance. So if stock for Bull, AIM (approx 50/50 with over-rebalancing) for Bunny, gold for Bear ... 50 stock, 17 Treasuries, 33 gold. There's less need for Trick 1 with that as all bases are covered.

Be mindful however that if you mention gold many wont reason but instead simply shout 'speculative'. Similarly for averaging in/out many will simply say 'lower average rewards so bad' in disregard that lower average = lower risk = higher worst case (better SWR).

PS given that investment gold was outlawed in the US between 1933 and 1975 ... silver as a alternative was as good. Pre 1933 and T-Bills were better, as there was fixed price convertibility so might as well have earned interest via the state paying you for it to securely store your gold.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CuriousTacos »

seajay wrote: Sun Jul 25, 2021 7:42 pm Trick 1 : 4% SWR was derived from the worst peak to trough 30 year period. So instead of lumping in, run two sets, half started straight away, another run a year later, and the average of the two will be better than the worst alone. Bumps SWR from 4 to 4.4
Would you mind sharing your source/data for this? Maybe I misunderstood what you are trying to say, but I tried it at cFireSim and I'm not seeing that this strategy helps:

Start with 500k. Add 500k (inflation adjusted) after 1 year. Withdraw 44k (inflation adjusted) each year:
100% stocks: 92.6% success
80% stocks: 90.9% success
60% stocks: 88.4% success

And for comparison, using the same withdrawal rate but investing the full amount at the start:
100% stocks: 92.6% success
80% stocks: 91.7% success
60% stocks: 90.1% success

Setting aside half your money for the first year doesn't appear to increase the success rate for any of 100%, 80%, or 60% stock allocations over a 30 year horizon. And the above simulations generously assume that uninvested half can keep up with inflation for that first year despite current negative real yields on TIPS, CDs, savings accounts, etc. Taking away that inflation adjustment would result in 90.9%, 88.4%, and 84.3% success rate for the 100%, 80%, and 60% stock allocations, respectively.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Fat Tails »

climber2020 wrote: Fri May 07, 2021 9:11 am
7eight9 wrote: Fri May 07, 2021 8:56 am Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.
Are you asserting that Berkshire Hathaway stock is equivalent to investing in Pokemon Cards?
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