Living off Capital vs Living off Dividends

Spot on. We don’t see it as selling in the normal sense but simply transferring income producing assets from Super to personal names. No / minimal CGT and transaction costs. Income stream continues as before but potentially in a higher tax environment.

 

Same here and likely till we kick the bucket.

 

If “avoid falling victim to yield trap” is not total return investing by another name – what is it?

Total return focus does not necessarily mean consuming capital to fund retirement.
You consume capital to fund retirement if your capital won’t support your spending.
Getting you to separate total return from consuming capital to fund retirement seems to be an impossible roadblock to get past. Maybe its this lack of understanding that brings scorn upon dividend focused investors.

The data is unequivocal. Australia has had a good run – will that continue?

History won’t give you the answer.

Say China takes a dislike to PM telling them how to suck eggs whilst he was in America and decides to treat us as a Trade war alley of US and direct (they are a centrally controlled economy, so not hard to do) their purchasing elsewhere as a precaution to others. Our tail wind of 20+ years goes pooffff. Probably won’t happen but anything can happen.

Nobody knows nothing about the future. You can continue to overweight Australia because it worked in the past. It might still work in the future – it might not.

If you want to pick the winner of the future – go for it. As the future plays out you will find out once your fate is sealed whether you were right or wrong. If you don’t want to pick winners at the risk of losing, pick them all and take average. It’s a pretty simple choice.

 

Not what I was getting at but apologies to other dividend investors if this is the case.

 

Your typical total return investor (often refered to, on this site as bogleheads) using the 4% rule of thumb for SWR would be looking for a well-diversified portfolio of 25X spending. If they wanted a 50K income they would be targeting 1.25M in a well-diversified portfolio to fund it.

I see people in Australia doing sums along the lines of ARG has a 33c fully franked yield. Grossed up that is 47.1c. 50K requires 106,157 shares and they cost $8.14 each. Therefore $864,118 capital is required to fund 50K from dividend income.

Who requires a bigger portfolio?
Who is best diversified to cope with an unknown future?
Who puts less pressure on their capital to fund spending?

 

Claiming deductions for personal super contributions

 

I don't fully comprehend the issue. Any income in excess of my requirements is converted to capital when it is placed in the share market. Then I am a very simple person.

 

It's been a good read this post ,from the debt -wary and the ones whose greatest strength is simple no--fuss worry free strategy ..
Myself I don't understand the question , and as this time of year the div's mount up if they are not reinvested in some way ..I reinvest on the div payments just before the payment date this start up XOS pre listing was 0.200 cents --went above the one dollar mark within a few days.
.So I guess it's no,we don't live off capital why burn everything that most spend a lifetime building up..

 

This is simple and for most people it is a good baseline to work from

Careful of tax considerations though...held in personal names (single? couple? tax threshold) may require a higher capital .

Also can anyone tell me if Argo dividends growth has tracked inflation?

In GFC-like times, dividends may be cut too..so a bigger portfolio would still be desired...

 

Otherwise known as Re-investing or Compounding I like!

 

Or, to create another label as we like doing that, my Personal Partial-Dividend Reinvestment Plan.

 

Sorry @willair. If I had known the moderators were going to create a new thread out of my spur of the moment thought in the LIC thread I would have been much more careful with wording and put more thought into explaining the question. My own fault for drifting off topic as usual. All it has done is given me a headache and I’m now finding it too exhausting / discouraging trying to explain some of the other messages obviously not made clear in my previous posts.

Heading back to the LIC thread before I have another panic attack.

 

Nodrog,post's like this makes people think I guess as everyone runs at different speed limit's..

Plus it's never going to be what investors wanted to hear ,at least within this site it's done in a kind a constructive way..
panic attack cure ..

 

The benefit of living off capital growth is that CGT is half the rate of income tax.

An individual could realised a capital gain of $40,000 and pay no income tax. That is $40,000 to live off.
Whereas if they earned $18k in dividends with these grossed up they may get around $26k without having to pay tax.

But there are other things to consider too such as deductibility of interest - which is not possible on shares that don't pay dividends.

 

No need to panic this is another great thread & me being a simpleton I understood what you were getting at.
I still work part-time through choice as I enjoy it, this income plus dividends outside super provide my modest yet a comfortable lifestyle for me. Pension from super gets re-invested outside super thus far invested capital is growing. i know i can continue my modest lifestyle on div's if/when I decide to do so.
.

 

It is a nonsensical question. Dividends are capital they are derived from capital with out capital there is no dividend So you can use capital to live. Dividends don't just magically appear the re You are fooling your self if you think dividend just magically appear ultimately it is capital. Dividends are often paid by consuming capital. Dividends are sometimes paid by selling overweight positions such as Hack does, when weighting exceeds mandate such as HACK does distributing CG. You need to grow capital to get dividends companies paying dividends generally aren't good for growing capital. To get capital you need to invest in entities with growing earnings and hence value. I pointed out how paying out dividends is bad for wealth creation about 2 years ago I gave Nodrog a whole bunch of companies that have high revenue growth reinvested, that have had 500%+ growth which have help give my portfolio 50%pa returns , even since kitdoctor proclaimed the market topped in June I have had 35% gains.

 

I think @dunno made his explanation quite clear.

Total return does not equal living off capital only or consuming dividends only, it just means you take both into account when you fund your retirement.

If your dividends are sufficient enough to cover your expenses AND you reinvest the surplus, that is a total return approach.

If your dividends are not enough and you have to consume capital, that is ALSO a total return approach.

Provided that you diversify broadly across countries and asset classes.

Dividend approach to my understanding is wanting to live off dividends purely and hence selecting high dividend yield or yield growth products/countries to achieve this goal. Basically sacrificing some diversification for comfort of consuming dividends only (such as an all AU portfolio, REITS, bank stocks etc). There is no right and and wrong, just what suits the investor.

To me it’s about your asset allocation and selection rather than how you fund your retirement. Total return investors take a broad view with diversification. Dividend investors sacrifice some diversification for comfort of consuming dividends only.

If you are invested in a broad allocation of domestic and international LIC’s and ETF’s, even if you live off your dividends, if you reinvest the surplus you’re a total return investor. I suspect some total return investors may mistake themselves to be a dividend investor.

This may be due to some people starting off as a dividend investor and then changing into total return after they achieve retirement, as they wish to reduce risk through better diversification.

P.S. The poll does not make sense to me. If there needs to be two options it should be 1. Total return investing (broad asset class and country diversification) 2 Dividend investing (focusing on dividend and dividend growth stocks only)

 

Thanks @SatayKing .

I was originally thinking non-concessional contributions back into an accumulation account but after further reading see that's not possible if you've reached TSB which I think is what @qak Is also pointing out. Thanks @qak

Seems once you've reached the TSB further non concessional contributions are off the cards full stop regardless of age, work test etc - is that right? Any other options?

Concessional contributions are up to $25k per year
< 65 no work test
65 to 74 work test
75 and over - not allowed
Is this about right?

I'm still some way off being able to access super but it's good to understand the rules of the game so to speak.

Ive noticed a theme that some of the retirees that have access to super don't re contribute excess pension funds or dividends from non super investments back into super accumulation accounts given the favourable tax rates inside accumulation accounts. I think I'm starting to understand that it's not that easy