The Mystery of Dividend Preference

Dividends are fine if they are an unintended consequence of a total return focus. Problems arise when you put the cart before the horse and let a dividend focus influence your diversification. Living of a 2.5% natural yield from a properly diversified portfolio is a completely different beast from a risk perspective to living of a forced 5% yield from a dividend driven allocation. Living off natural yield from diversification that arises from a total return focus is not what the dividend focused types seem to preach, so I don't understand their 'I can do it because I have enough argument'. It often seems what many dividend focussed internet guru types are advocating is unwitting risks through lack of diversification to reconcile income and capital preservation desires which are incompatible at their portfolio size.

 

Buy And Hold And The Snowball Effect - Buyandhold 2012 | Seeking Alpha
Dividend growth investing seems to work well for some people with long term horizon

 

The companies mentioned which only pay about 1% dividend arent what Australian would call or accept as dividend payers. It might seem to work well if you only tell half the story and ignore the results that dont fit the bias confirmation. Paying out $8B in dividends with earnings of $6B has seen Exon share price half and blown out of the SP 500 by Salesforce, whose share price doubled, and has $15 B in earnings used to further increase revenue.

 

I really don’t understand the aversion to selling. Regardless of how much one needs.

If one doesn’t sell international equities, due to the nature of returns they will soon, all things being equal occupy a larger portfolio position than intended, due to the difference in return profile (dividend / capital) between AU and Int’l equities.

Further, it is tax inefficient to take international dividends (income) when one can take capital at half the effective tax rate. So trimming international positions to return to SAA makes sense to me, rebalancing to AU equities with higher natural yield.

Obviously plenty of variables here, depending on situation, spending, cost base. Personally, I’ll be starting to trim within 3-5 years if required i.e. rebalancing with surplus won’t cut it.

 

After completely *******ising your quote I think you've helped me clarify my 'dividend philosophy'. Thankyou.

I think the old style LICs and the larger index ETFs are, over sufficiently lengthy time windows, all about capital preservation (or more likely, growth) - thus living of the dividend from a sufficient capital base becomes an 'intended consequence' with steadily rising / maintained corpus in perpetuity.

 

Yeh , the aversion to selling is hard to understand . It was expensive in Anne's example of XOM. I think it was meant as a PRO, but is a perfect example of the folly. If the investor really did have his eyes on the horizon instead of being excited and by a few peso's jingling in his pocket and blindly holding on he would have at least reduced and took some profit. The Balance sheet was shot in 2015 with rising debt, and still paying dividends. Now the 25 years growth has been lost, any reinvested dividends halved in value. May have got better return for most of that period from term deposit's. If leveraged which is how tomake money, make 0.

 

We had this dilemma last year, MSFT was going strong and dominating our portfolio and we were wondering if we should trim back (with the low AUD to USD helping) or let it (potentially) continue to run.

in the end we trimmed a good chunk (at around $US155) while the exchange rate was around .60c and moved the money into VDHG/VAS, with alot of market sentiment predicting another downturn we thought that it had rallied hard before another potential drop.

We then watched the shares continue to rise to $US230 (the gain partially offset by the higher AUD exchange rate and the gains from the newly purchased VDHG/VAS)

Overall I still believe it was the right decision to do at the time and I am happy with its current % of our portfolio, but some might argue that you should let a stock go hard until it flatlines before selling (as MSFT has done in recent months hovering around $212 for around 3 months)

As you say, there are alot of individual factors to consider, it is rarely an easy decision based solely on portfolio weighting

 

Ah yes, this is another kettle of fish, much more complex than managing passive investments, individual stock positions present a lot more variables.

 

Just having a quick look at some of Buy & Hold 12's shares

ABBV (AbbVie Inc) Dividend Yield 4.85%



ADP (Automatic Data Processing) NDQ Dividend Yield 2.11%



His list of stocks held per his profile (60) and by his own words in the linked article his net worth was around 25 million in July 2018

A,ABBV,ABT,ADP,APH,BR,CDK,CMCSA,CTL,DIS, JCI,KHC,MDLZ,MDT,MNK,MO,MRK,NOK,PM,PNR,T,TEL,VZ, FTR,GE,HPE,HPQ,HUBB,JPM,KEYS,WMB,WPX, XOM,ADNT,DXC,MFGP,WBA,NVT,PRSP,OZK,SHW UNH, AAPL, CI,WAB,BA,WINMQ,BRK.B, SLB, BIIB,GD,JNJ,CVS,BEN,NOC, ADBE,BKNG, HD, LOW, FB

 

My point was really more about the psychological aspect and how good a fit an investing approach is for each investor. I have very little interest in investing anymore and rarely look at the portfolio other than to determine where excess cash needs to be invested. Best thing ever to be honest and wealthier as a result. Over interest and enthusiasm has tended to lead to fiddling at times in my case.

Being able to live off the natural yield of the portfolio is a wonderful fit for us. An automatic cash machine where the money magically appears in our account with no thought / effort on our part. Near set and forget. That’s investing heaven in our view.

I have no interest in selling unless for some reason we wanted to lash out on extravagant lifestyle expenditure. I’m not going to deliberately sell to rebalance the portfolio. However Super rules will likely result in forced selling at some stage. The resultant cash can then be reinvested in personal names and rebalanced if need be.

Yes all very unprofessional I know. But then again over time I’ve noticed many wealthier investors don’t get too hung up about ideal asset allocation, rebalancing and the like. Perhaps they’d be wealthier if they did? Maybe, maybe not? I think there is something to the suggestion that investing is like soap, the more one plays with it (can be a problem when it’s akin to a hobby) the less of it there is! Disinterest, neglect ..., such is the way of things for me now and I’ve never been happier. Anyhow enough said, back to more exciting endeavours.

 

This is key. Protecting mental capital is actually more important than $ capital. Having written rules, developed in calm periods, helps when emotions or doubts start to run high.

Strength often leads to more strength. It’s why value investing often underperforms.

 

The significant factor for people like me (very late starter to FI) is that I would have needed far more initially invested to live purely off divvies than using the drawdown method and letting my final cheque to the undertaker bounce.
I'd rather be retiring now and drawing down for he next 30 years till there is zilch left than have to work for another 5 years to just live purely off dividends.

Selfish? Unscientific approach? yep and yep .... don't care.

For the record - Mrs is retired now on her dividends and I will retire in under 3 years on Index fund drawdowns. Mrs portfolio took over 20 years to grow yet I did not start till 2017ish

 

@toozs

I have responded to you here in the dividend irrelevance thread because I don’t wish to continue with your specific thread, but your post is so indicative of the income belief arguments that a more general response seemed warranted.

You suggest that VHY because of its higher income payout is superior for ‘funding’ financial independence. I beg to differ and argue my case as follows.

Using last 5 years of data and VHY vs VAS as we have been discussing. I have set the starting balance at which “living off the investment” starts at 1 Million.

This is VHY. Bar chart is cash flows from distributions and line is corresponding capital value. The dotted lines are the respective trendlines.

Ending capital is $1,184,971 and $338,283 in distributions have been received over the 5 years.
Now if you are just a beliefs investor you can stop here and start investing. Its an acceptable outcome - much better than doing nothing. But if you want to test your beliefs, continue.

My first eyebrow raise is that the trend lines are sloping down towards diminishing capital and income over time (suggesting yield trap). But 5 years is not enough time to establish a statistically significant trend so alert not alarmed.

Putting aside hesitations about what the trend may suggest about the the structure of VHY lets move on to rubber meets the road stuff and compare historically to "create your own dividend" from VAS over the last 5 years.

This next scenario involves automatically re-investing VAS distributions and then withdrawing your own dividend each month. Withdrawals are $5,550 a month (61 months because of how software operates) + $20 to cover brokerage. total withdrawal = $338,550 to match VHY distributions + $1,220 to cover brokerage.


Ending capital is $1,246,109, which is $61,138 more than VHY and whilst the total amount received are the same, I would argue the cash flow timing and smoothness from creating your own dividend stream is much more user friendly.

Note the trend line for VAS' capital is up-sloping which suggests it can sustain the withdrawal of $5,570, but again not enough data points to be statistically relevant. ($5,570 per month from 1 Million is a 6.7% initial withdrawal rate but its not adjusted for inflation).

There are some tax implications to consider that vary by individual. VHY distributions are $338K whilst VAS distribution is $223K. you may incur a small amount of Capital Gains Tax to create the extra 115K in dividends for VAS (50% if held for over 12 Months of the profit component only), the tax implications after franking credits & CGT depends on whether you have other income and need to pay make up tax above 30% rate or if you are below 30% and can get a franking credit rebate. (even for a zero rate tax payer, tax implications are not going to even go close to making good the foregone capital gain if you didn't go VAS)

 

Quality post @dunno, very well done! Mrs pippen is on a similar path, no fuss VAS and VGS portfolio. Set and forget.

 

Mrs Pippen rules!

You know after a very long happy life she is going to have a very big "I told ya so" up her sleeve, so you had better be nice to her.

 

70%Vas and 30% VGS Split, she is trying to obtain that 1 mill outside of super with superannuation being the extra tap to turn on when that age comes along! Shes going well so far!!!

 

One spent his dividends, the other re-invested them

Schreiber and Stroik, All About Dividend Investing

 

Sits on the bookshelf in the study!

 

Well, readers of this site will know I’m a big fan of companies that reward shareholders with dividends.

And why not love dividends?
Just reading a couple of articles related to the thread

Weekend Reading – Keep calm and dividend on - My Own Advisor

Cont......

 

Living off of the dividends? You gotta sell shares to not sell yourself short. - Cut the Crap Investing