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if you want to draw 2k a month from a portfolio and not have it reduce in value you need 2k appreciation on average a month .
taking 2k in dividends out of your stocks require's the same 2k in appreciation too or your portfolio value is reduced by 2k . if you draw 2k in dividends off you have 2k less working for you .
there is little to no difference reinvesting dividends in to your portfolio and drawing 2% off from cash or bonds vs 2% flowing in dividends or getting no dividends .in all cases you need 2% a month on average to see no principal hit .
in all cases it requires the same appreciation and will allow the same draw . .
if you really want to set up a safe secure portfolio for living off of an easier plan maybe to just do it like many retiree's using cash ,bonds and stocks . you want to spend the short term money first , bonds next and then refill later from stocks letting equity's grow with reinvested dividends as long as you can .
you are going about it the wrong way if the idea is to develop a safe , secure consistent cash flow that lasts as long as you do . if inflation goes up ,dividends do not track anyone's personal cost of living , and in fact may be cut as inflation eats in to the company bottom line . so to fill shortfalls you may end up selling at a loss regardless .
using cash ,bonds and equity's is how many retiree's who live off their portfolio's develop an income stream .
i use a variable method . i look at my portfolio balance each dec 31 and 4% of that balance is my goal posts for the year . if markets are down we draw the higher of 4% of the balance or 5% less than the year before regardless how far down markets fell .
how the portfolio value is arrived at ,whether dividends ,appreciation or both is irrelevant . all that counts when living off your portfolio is the order of the gains and losses , the TOTAL return and inflation .
mathematically to sustain a 4% draw rate inflation adjusted you need at least a 2% real return (after inflation return ) average over the first 15 years of a 30 year period .
Last edited by mathjak107; 02-11-2017 at 04:18 AM..
Food for thought.
My original question was about reinvesting dividends. With overvalued stock, I'm leaning to taking the cash.
We are drawing down $2,000 a month. The IRA is only $500,000. Losing $2,000 a month is hard to make up. Can't do it. I'd have to get $24,000 a year in dividends or buy spec stocks and trade them hoping to make $24,000 a year.
We can't take that chance.
Its a dilemma I have to figure out. I'm sitting on some dogs but hate selling them and taking the big hit.
I'd like growth stocks but they don't pay dividends. I'd have to trade.
I've been hoping for a market correction to do some buying but that isn't happening.
Chess game!
the "4%" rule people seem to go by include dividends, a 4% dividend means you are at limit, not that you take dividend plus sell an additional 4%.
at $24000, you are above 4% in either case if you are working with $500,000
now if you dont care about the 4% thing, have at it, it was just some study anyway so do what you want. if you want to take out $24000/year and when you find you fall below $x, and want to work again to fill it back up, go ahead
think of a dividend as the company selling the stock and handing you the cash instead of you initiating the sell yourself, the result is the same because either way. when company does it, their stock price goes down, when you do it, your portfolio goes down by same amount
most people lose money trading, if you are worried about money it isnt good to gamble. trading stocks is fine for extra cash if living needs are met, not a good way to raise cash for the living needs
the trinity study and bill bengan's safemax wasn't actually just a study . it set the ground work for later interpreting mathematically what caused all the worst case failures .
thanks to michael kitce's work he quantified in to numbers just what it would take to fail at 4% with no spending adjustments .
we can all monitor our retirement spending now and watch to see that we are getting at least a 2% real return over the first 15 years. every worst case failure had less than 2% real returns the first 15 years . so all those study's helped identify not only what time frames failed but at what level of draw did they fail as well as what allocations worked better and which failed far to much .
that was monumental work to figure out . but it took michael kitces to actually give us a number we can monitor for going forward since the past is just that , the past .
so 5 years in or so if you are not averaging at least a 2% REAL return , a red flag should go up in your head to watch your spending and monitor things carefully going forward .
but keep in mind that figure may make it through 30 years but you may be broke the 31st year .
Last edited by mathjak107; 02-11-2017 at 05:14 AM..
the math is the math if you are trying to draw 4% inflation adjusted and have it last at least 30 years if we see some of the worst scenario's play out again .
after all the idea of a safe withdrawal rate is not to take a spending cut just because we hit bad times ..
every time frame failed when in the first 15 years . even the 1965/1966 group , who's time frame had the greatest bull market in history could not save them once the average return fell below 2% in real return by the 15th year . to much was spent down to soon . in fact it was inflation that wrecked a few worst cases not returns .
the 30 year returns in all cases were pretty decent and even better than average in some . but the first 15 years outcome determined if they lived or died financially with no adjustments .
there were actually 5 worst case failure groups . those who retired in : 1907-1929-1937 and 1965/1966
suppose you were so unlucky to retire in one of those worst time frames ,what would your 30 year results look like :
so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.
so lets look at the first 15 years in those time frames determined to be the worst we ever had.
1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%
1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%
1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%
it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a median swr down to just 4% to get through those worst of times.
while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .
so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.
which is why i always say if you have little discretionary spending you can cut from then you should not be in equities in retirement .
Last edited by mathjak107; 02-11-2017 at 05:38 AM..
Food for thought.
My original question was about reinvesting dividends. With overvalued stock, I'm leaning to taking the cash.
We are drawing down $2,000 a month. The IRA is only $500,000. Losing $2,000 a month is hard to make up. Can't do it. I'd have to get $24,000 a year in dividends or buy spec stocks and trade them hoping to make $24,000 a year.
We can't take that chance.
Its a dilemma I have to figure out. I'm sitting on some dogs but hate selling them and taking the big hit.
I'd like growth stocks but they don't pay dividends. I'd have to trade.
I've been hoping for a market correction to do some buying but that isn't happening.
Chess game!
This is all in your IRA?
Hell, that is easy! Sell it all! You will not pay any cap gains. Convert it all to a total stock market (TSM) index fund. That way you do not have to worry about dogs or what to sell, just sell a few shares of the fund.
VTI is a TSM fund. It costs $120/share now. It pays 1.8% dividend. So every year you would get about $9k dividend. You would have to sell about 125 shares to make up the remaining $15k. You would start with 4170 shares. But share price would go up every year so every year you sell fewer and fewer shares to make up the $15k. This is a gross simplification since inflation would need to be accounted for and you would probably own bonds also.
24k/year from a 500k portfolio = 4.8% draw down. That is on the high side.
I personally would not try to increase your return by increasing your risk. When you go for high-dividend stocks you are essentially increasing your risk. You can find some stocks that will cover that 4.8% but there is no guarantee they will continue to pay that and they may not keep pace with inflation either. Therein lies the risk. You are putting a lot of eggs in a small basket.
Food for thought.
My original question was about reinvesting dividends. With overvalued stock, I'm leaning to taking the cash.
We are drawing down $2,000 a month. The IRA is only $500,000. Losing $2,000 a month is hard to make up. Can't do it. I'd have to get $24,000 a year in dividends or buy spec stocks and trade them hoping to make $24,000 a year.
We can't take that chance.
Its a dilemma I have to figure out. I'm sitting on some dogs but hate selling them and taking the big hit.
I'd like growth stocks but they don't pay dividends. I'd have to trade.
I've been hoping for a market correction to do some buying but that isn't happening.
Chess game!
Your asking dividend reinvestment questions, to people who don't really believe in dividends. I do believe in them.
I think getting $24,000 out of $500,000 portfolio is fairly easy. If you are drawing down $2,000 a month I assume you are already retired. So you really can't take advantage of dividend reinvestment to build up a big yield on cost thru reinvestment. I have a moderate amount of AT&T. Pays 4.74% now, but because I have been reinvesting for almost 5 years my initial investment is yielding 7.75%. So you need to depend on stocks raising their dividend, and things that pay more then 4.8%.
1. All the IRA money must be devoted to income producing securities. No gambling on trying to hit home runs on stocks that pay no dividends. If you have some "dogs" you hate to sell because you don't want to take the hit, they sound like non-dividend paying stocks. You need to lose them anyway.
2. Find as many stocks you can that you are comfortable with that pay nice dividends. 3% probably ought to be the floor. AT&T pays 4.75%, Verizon pays 4.81, Exxon pays 3.64%, GE 3.23, Coke 3.45%. (that was just a quick glance).
3. And then mix in investments that pay a bit more. REITS for example. You need to be careful because there are different kinds (most notably equity REITS versus Mortgage REITS. Mortgage REITS tend to be pretty speculative). You can get a little higher yield on equity REITS if you look around. STAG pays 5.82%, LXT pays 6.26%. I own STAG and HASI (6.95%) and OHI (7.92%) and some VER (6.5%) .
Another higher paying security type is preferred shares. There are several ways to play this. You can buy an individual company's preferred stock. For example you can buy Bank of America's preferred "c". It cost $25. It yields 6%. Starting in the year 2021 they CAN (do not have to) buy your stock back for $25. So they will either keep paying you the 6%, or give you back 97% of your original price. (For that reason many people strive to find a stock at or below $25). Most of the risk associated with this would be inflation risk. They keep paying you the 6% but since interest rates are higher they don't cash the stocks in, and price sinks below $25. (but they keep paying!)
Another way to play preferred stocks is to buy an ETF (Exchange Traded Fund) or CEF (Closed End Fund). These both have managers and they represent a bundle of preferred stocks). The biggest ETF is called PFF and pays about 5.72%. And example of the CEF would be HPI which pays 8.0%. The CEF's are almost all leveraged and have larger fees, but the 8% is after the fees.
I also like a couple of CEFs that invest in utilities. DNP (7.29%) and UTG (5.67%). Both are a little pricy right now, but you are still locking in the income even if the price retreats a bit.
And the other item is Baby Bonds. Baby Bonds are bonds that are issued at $25, trade on stock exchanges (ETD - Exchange Traded Debt). They are more protected than either dividends or preferred shares. Basically if they are not paid off on time, the company has to declare bankruptcy. The interesting thing about Baby Bonds is you can lock a lot of different dates. Want your money in 3 years? Find one that matures in 3 years. Want one that matures in 20 years? We can find those. When it matures you get your $25 back. Company has no choice. Here's an example: I bought my dad some Eagle Point Baby Bonds at $25.23. They are paying 6.86% (price now $25.50). They CAN be bought back in Dec 2017 for $25, and they MUST be bought back by December 2020. We've owned them a year and they've already paid $1.75 in interest.
So..... there are ways to generate that $24,000 which selling any of your stocks. If you want more information, let me know.
Your asking dividend reinvestment questions, to people who don't really believe in dividends. I do believe in them.
False statement. Many of us here are fine with dividends and "believe" in them. The difference is we see dividends as just one element of generating the maximum return on investment dollars. Tom chooses to only look at dividends. But that puts the investor at risk as it is narrowing your options for return to just one source - dividends. There are 3000+ stocks in the US stock market that are capable of contributing to a total return strategy. But there are only a handful that are capable of delivering dividends at 4.8% per year, as well as overcome inflation. Which is better - a handful or 3000+?
i am quite fine with my dividends . but what i am not fine with is the thinking that they are magical money that is immune to a fall in value in the stock or the fact they need the same appreciation as any other stock in order to support that income . .
dividend paying stocks need the same capital appreciation any stock does . it makes little difference whether they sell off a piece of your value or you do .
you need to overcome that payout just the same or you have less money invested and compounding by the amount you took out ..
not looking at total return is like getting obese but only measuring your finger size and going i haven't gained much weight ., see my ring still goes on and off . ..
you can have a strategy where your total return provides more or less in dividends or more or less in appreciation but in the end it is only about total return if you are compounding your money so you can provide a lifetime of income through thick and thin that is inflation adjusted to your personal cost of living . . .
Last edited by mathjak107; 02-12-2017 at 03:03 AM..
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