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Because most people think that dividends are like interest, doesn't it have an impact on the appreciation of the high yield stocks? It seems like the financial media is talking non stop today about the glories of dividend stocks and they are up ....
A lot of the high yield stocks are also pretty solid companies that simply don't have many investment opportunities in their core business, so they pay a bigger portion of their earnings out in dividends.
For the average investor, who doesn't have jillions of dollars in their portfolio, selecting dividends stocks ( or funds ) gets the convenience of the regular cash showing up without incurring commissions. If you just have a couple hundred shares of several stocks, it makes sense to have a lot of dividend payers.
As long as the underlying company is growing at a rate higher than the magical 4% bogey, then getting 3-4% dividends is no problem. The company's value won't go to zero and the investor can keep living off the company's growth.
I think people get confused by companies that grow at 8%, for instance and pay that 3-4% rate. The company's share price should then grow by 4-5% ( or more ). Those people think that you can treat the investment like it was an inflation-adjusted annuity when what they have is no different than a company growing at 8%, paying no dividend and the investor was just trimming 3-4% of their shares every year.
The zero dividend, 8% grower, would be splitting shares from time-to-time and the investor would tend to have the same number of shares over their 30-year retirement as the investor in the 8% grower that pays the 3-4% dividend.
It's important that the investor knows that company stock is not a bond ( I don't believe most people know this ... ). A company is like a living thing that grows and learns and even if they pay out almost all of their profits as dividends, can still grow sales and profits over time. That company's future is not necessarily to go to a value of zero.
drawing 4% while getting a 3% dividend and 1% appreciation in an average of 3% inflation will run out of money in 20 years . remember a 3% dividend and only 1% appreciation while drawing 4% is a loss every year .
does that sound okay to you ? not to me
No it does not. But I think growth will be 4 to 6% and since the 4% rule is for the worst results I think the OP has a good chance the he will come out ok.
no that is not what the op said . he said if he get a 3% dividend than all he needs is 1% capital appreciation rate on the stock .
that is a guaranteed loss . it will last 20 years pulling 4% inflation adjusted and that is without figuring any sequence risk . that is just a straight line calculator not figuring worst case scenario's at all .
a 3% dividend only means they pulled 3% off the share price and markets only increased him back by 1% by his calculation . if the dividend goes up they pull more off the share price so either way it is a wash
he needs at least enough gain to offset the payout so he can maintain a 2% real return over the first 15 years of a 30 year retirement . otherwise the math will not hold .
he needs at least enough gain to offset the payout so he can maintain a 2% real return over the first 15 years of a 30 year retirement . otherwise the math will not hold .
Don't worry the OP, is a money "guru" and should have no difficulty getting strong returns. Then again I am a bit confused how a money guru ends up needing to take social security early and in addition pull the maximum amount out of retirement funds just to get by. I am sure there is a story.
A lot of the high yield stocks are also pretty solid companies that simply don't have many investment opportunities in their core business, so they pay a bigger portion of their earnings out in dividends.
That is a textbook explanation, of course. I now have some personal real-world experience surrounding dividend paying decisions at the board level, and it doesn't always work that way.
Here are a couple real-world examples of F500 companies. I was there & saw it happen.
* One specific F500 company had never issued a dividend. The founder of the company wanted to buy & restore large estate that had fallen into disrepair and shabbiness. When faced with the prospect of selling about $20 Million in founders stock to accomplish this, CFO and board determined instead to implement a 10 cent dividend -- this gave the founder enough cash flow to accomplish his personal objective.
* Another specific F500 company borrows cash. How much? Just enough to fund the dividend. When they make a decision to increase the dividend, they then borrow just enough extra to fund the increase.
* Another specific F500 company with an excellent balance sheet never issues a dividend -- instead, with extra cash, it acquires other companies.
There are others, of course.
My point is the textbook explanation sometimes doesn't explain the actual actions of the company.
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Although it sometimes pains me to agree with anyone; Mathjak107, is correct. It is how I structured our retirement to avoid sequence-of-unfortunate-events and try to capitalize on favorable-sequence-of-events.
YMMV
So, for the sake of argument, I will change the question to a three percent annual withdrawal, only dividends.
Yes, I know dividends on mutual funds are not like interest and the money paid out is taken from the stock price. So a stock (or ETF) with a 3% dividend is a bit like a forced 3% sale of the investment every three months. Though with rising dividend yields every year, except around 2008, the amount of your pay off- without selling the stock- historically goes up an average of 4-7% a year, which is higher than bank interest. (Yes, I know many companies cut their dividends in the Great Recession, but if you are talking about hundreds of stocks in a index of dividend achievers, the amount was very small.)
Lets say you had all your money in high dividend ETF's, each that include hundreds of diversified stocks with a history of growing dividends, and the starting yield was 3%. You would never have to sell a share if you were happy with the three percent, plus the growing dividends. You would do fine as long as the dividend grew at least as much as inflation. The chance of the underlying value of these ETF's going to zero value in the next 30 years, like an annuity at your death would- would be is next to ZERO: Examples and current yield:
PEY 3.20%
VYM 2.99%
DEM 4.15%
DLS 2.98%
PID 3.81%
Last edited by Money Guru; 09-11-2016 at 05:44 AM..
One other thing to consider is that the timing of your income is more flexible with non-dividend paying shares. There may come a time in your retirement years when you're approaching an income threshhold and would rather push the income into the following tax year. The dividend can't be delayed but the sale of shares for income can.
So, for the sake of argument, I will change the question to a three percent annual withdrawal, only dividends.
Yes, I know dividends on mutual funds are not like interest and the money paid out is taken from the stock price. So a stock (or ETF) with a 3% dividend is a bit like a forced 3% sale of the investment every three months. Though with rising dividend yields every year, except around 2008, the amount of your pay off- without selling the stock- historically goes up an average of 4-7% a year, which is higher than bank interest. (Yes, I know many companies cut their dividends in the Great Recession, but if you are talking about hundreds of stocks in a index of dividend achievers, the amount was very small.)
Lets say you had all your money in high dividend ETF's, each that include hundreds of diversified stocks with a history of growing dividends, and the starting yield was 3%. You would never have to sell a share if you were happy with the three percent, plus the growing dividends. You would do fine as long as the dividend grew at least as much as inflation. The chance of the underlying value of these ETF's going to zero value in the next 30 years, like an annuity at your death would- would be is next to ZERO: Examples and current yield:
PEY 3.20%
VYM 2.99%
DEM 4.15%
DLS 2.98%
PID 3.81%
averages do not work when spending down . the exact same average return over a 30 year period have a 15 year difference in how long your money will last with the same exact return just based on the order of the gains and losses .
in fact the entire out come is based on just what happens the first 15 years .
every worst case scenario to date had very good 30 year returns but they all failed because the order of those returns sucked the first 15 years .
there will always be years you will be spending principal trying to make up for shortfalls in income .
dividends are usually cut at the worst possible times .
in fact just look at the group we call the dividend aristocrats .
you keep seeing just invest in this group and call it a day .
however what constitutes this group changes all the time so get ready for lots of selling trying to keep up as they get bumped and replaced AFTER THE FACT THEY DID NOT LIVE UP TO EXPECTATIONS . you could be behind the curve here very easily .
these dividend aristocrats are not somehow immune to all the things that effect company's and stocks . Just like other companies, their outcomes change.
in 2009 there were 52 stocks that met the group’s strict criteria.
As of 2012, there were 51.
But of those 51, 13 were different than the original set. So over the course of just 3 years, there was a 27% change in the group’s composition.
in fact going back to 1989's list :
Of those 26, seven are still on the list today, ten were removed because they either cut or froze their dividend, four were removed for an unknown reason, and the remainder were acquired at some point. So at least ten of the 26 had an outcome that is different from the assumption of dividend growth every year through thick and thin.
no that is not what the op said . he said if he get a 3% dividend than all he needs is 1% capital appreciation rate on the stock .
that is a guaranteed loss . it will last 20 years pulling 4% inflation adjusted and that is without figuring any sequence risk . that is just a straight line calculator not figuring worst case scenario's at all .
a 3% dividend only means they pulled 3% off the share price and markets only increased him back by 1% by his calculation . if the dividend goes up they pull more off the share price so either way it is a wash
he needs at least enough gain to offset the payout so he can maintain a 2% real return over the first 15 years of a 30 year retirement . otherwise the math will not hold .
This all assumes that the underlying company is not growing sales or profits.
You can pay out 100% of profits as dividends and still have price appreciation of the shares.
A company is a living, breathing entity so - to - speak.
It's even possible to pay out 100% of profits and then borrow money on top of that to pay an even bigger dividend and STILL not run out of money.
A company is not a straight line calculation. In order for your assumptions, above to be true, you have to make many other assumptions.
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