exodusNH wrote: ↑Mon Jun 20, 2022 4:55 pm
As others have said, we're not antidividend. Most people ascribe special significance to them. There is no theoretical model where they alone are a factor that should make a wiser investment. It's mostly mental accounting.
If you need the cash, you should be agnostic as to whether you get the cash as a dividend or by selling an equivalent amount of your shares. If you merely reinvest the dividends -- meaning you don't need the cash -- then your total holdings of the company have not changed value. But you've incurred a taxable event that will leave you less wealth this year.
Not quite true. First of all, much of retirement investing is done in retirement accounts, so no taxable event on any gains including dividends.
The other factor is what happens on the down side of the market. Remember that retirees are on short timelines with much of their assets, needing income immediately and only having 10 to 20 years of "long term" before that will have to be converted to short term.
Simple example - assume the market is flat, then in one day it drops 10% and stays there for 2 years, then in one day it rebounds 11.1% to bring it back up exactly where it was pre-dip.
A typical retired couple will have $40k-$60k of Social Security income. Let's take the midpoint at $50k. If they have $500k in dividend stocks paying out 5%, they are taking in $25k there, for a total annual income of $75k. Let's look at a 2 year market dip of 10% (pretty mild). Before this dip the couple would take in $150k over two years and their portfolio would remain steady at $500k. During the dip if dividends decrease by the same %, the couple takes in $145k over those two years. At the end of the dip their total income goes back to where it was,
and their stocks are worth the full $500k again. They took a small
temporary decrease in income for two years and then rebound to where they were before.
Now another couple with $500k investment who sell $25k of it each year, and the stock goes up $25k (assume no taxes and no inflation). Pre-dip their income is the same as the dividend couple, $75k per year or $150k over two years. During the dip they now have to choose A) sell $25k of stock or, B) sell 5%.
Option A results in a portfolio value at the end of the dip before the rise of 500k*90%-50k = $400k. During the dip they kept their income level for a total of $150k. Now the market rebounds the full 11.1% and they have $444.4k portfolio. Their 5% annual take is now only $22.22k. Their post-dip total income is permanently reduced by $2.78k. They kept income level during the dip but have lower income after.
Option B results in taking $22.5k in year 1 of the dip, and then $21.375k in year 2, for a total gross family income across the 2 year dip of $143,875. This is less than their pre-dip income, and less than the dividend couple takes in during the dip. At the end of the dip their portfolio is valued at $406,125. Then it rises the 11.1% to become $451,205 which is slightly more than Option A for them but still significantly less than the dividend couple.
If these couples had a much longer timeline and were not depending on monies from their investments for daily expenses, yes they might do better looking out 20, 30, 40, 50 years being in different investments. But in the near term they did better in the down market.