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Touching The Principal!
#11
(01-24-2014, 11:18 AM)fiveoh Wrote: On a side note, how many of you guys are planning for SS in your calculations? The consensus among financial planners seems to be, it wont last a long time in its current state.

I'm saving as much as I can in any case, so it is not as if I am saving less than I could because I am "counting" on Social Security. If there is some Social Security in my future, then things will be that much easier; if there is not, then I'll have to make do with what I've saved.

(01-24-2014, 09:40 PM)Robandcindy2 Wrote: Why I wasn't "briefed" on the time value of money as a high school student is beyond me....you can bet my kids hear about it like a broken record.

Amen!
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#12
(01-23-2014, 09:20 PM)hendi_alex Wrote: For a pure growth portfolio, selling shares does not equate to drawing down the principal. If growth is greater than the value of liquidation each year, then the growth portfolio could also fully fund retirement without drawing down the principal from its initial value at the start of retirement. Personally, I don't really see any difference. Dividends paid out are essentially 'return of capital'. Either way, spending dividends or selling shares moves the portfolio from the accumulation phase to the distribution phase. To me the real problem with the growth portfolio comes when distributions must be taken during a harshly down market. During those times, IMO a dividend portfolio is clearly superior.


Unless you are taking profits in all the up years and taking more than what you need then you end up selling in down years quite often. Also, up years after even one down year can still be far from you breaking even.

The DJIA counting dividends, was down -5.23%, -4.6%, -16.54% in 2000, 01, 02. In 2003 it was up 31.54%. looks great but if you were needing to take principle in addition to dividends or just principle then you are hurting pretty badly.

If you spend a fixed $50K per year and started with $1M in 2000 by then end of 2003 you be down to around $648K. Well, $648K needs a 54.3% return year just to reach your original investment. in 2003 you got 31.94, or you went up to $854,970 but you took out $50,000 so net $805K, or still needing a 24% year to break even. With 2004, 2005 giving you 7.1% and 1.75% you are down even more again.

That is the problem that is over looked by the principle only arguments. It can work if you happen to own all the right stuff but that is much more often NOT the case. If people owned the right stuff most of the time then investors would not do so horribly on average.

My spreadsheet that I have has the DJIA and S&P 500 back to 1958 thru end 2013 including dividends and you often have two years or more of poor performance. And, even after the poor years when you have a good year or years in a row it is often not even close enough in performance to reach par let alone perform well enough to also compensate you for inflation.

Since nobody can predict the future, I would suggest trying to get 80% or more of your retirement income from dividends alone in order to minimize selling of capital until you are in your late 70s or early 80s. Waiting that long you will probably have your money, even taking principal, outlive you. Starting that as part of a regular retirement in the early to mid 60's....ouch! you could live another 30+ years and half of those being broke.
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#13
I'm fortunate in that my work should provide a pension when I retire. Got about 8 years to go. I'll be 64 so I factor in social security and dividends from my portfolio. When I do, I use 75% of what the pension and SS tells me will be available - better to plan for the downside. At least for the next 20 years, SS should be OK even if benefits are reduced.
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#14
For most retirees, I don't think that a majority growth portfolio is a very sound move. But IMO there is room for some weighting, perhaps 10%-20% for lower yielding growth oriented stocks, especially if call writing is used in conjunction with a portion of these holdings.
Alex
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#15
(01-27-2014, 05:23 PM)hendi_alex Wrote: For most retirees, I don't think that a majority growth portfolio is a very sound move. But IMO there is room for some weighting, perhaps 10%-20% for lower yielding growth oriented stocks, especially if call writing is used in conjunction with a portion of these holdings.

I don't either but according to you, dividend portfolio is the same as growth. Are you changing your mind already?

"Personally, I don't really see any difference. Dividends paid out are essentially 'return of capital'. Either way, spending dividends or selling shares moves the portfolio from the accumulation phase to the distribution phase."

You are clearly wrong in your opinion.
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#16
I'm saying that it doesn't matter where the cash flow comes from. Whether it comes from selling appreciated shares or comes from dividends is irrelevant. But, as expressed earlier, dividends do IMO have an advantage in down markets. That key difference is why most of my holdings are in fact dividend stocks. However, IMO, the love of dividend stocks should not preclude someone from allocating some weighting to growth stocks which will likely perform better over the long haul.

A retired investor who has the right risk profile may very well be better off with a portfolio which has an emphasis on growth stocks, or at least one where dividend yield is only a minor consideration. One must keep in mind that the main reason that growth stocks pay far less in dividends is because reinvesting in the business is the smartest and best use for that cash. The biggest total return will always come from companies with the greatest sales and earnings growth. The paying of dividends takes away from that effort and therefore hurts overall performance, except in more mature companies which can't find a productive home for the cash.
Alex
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#17
(01-27-2014, 08:12 PM)hendi_alex Wrote: I'm saying that it doesn't matter where the cash flow comes from. Whether it comes from selling appreciated shares or comes from dividends is irrelevant. But, as expressed earlier, dividends do IMO have an advantage in down markets. That key difference is why most of my holdings are in fact dividend stocks. However, IMO, the love of dividend stocks should not preclude someone from allocating some weighting to growth stocks which will likely perform better over the long haul.

A retired investor who has the right risk profile may very well be better off with a portfolio which has an emphasis on growth stocks, or at least one where dividend yield is only a minor consideration. One must keep in mind that the main reason that growth stocks pay far less in dividends is because reinvesting in the business is the smartest and best use for that cash. The biggest total return will always come from companies with the greatest sales and earnings growth. The paying of dividends takes away from that effort and therefore hurts overall performance, except in more mature companies which can't find a productive home for the cash.

There is so much data that says you are wrong, but ok.

"Whether it comes from selling appreciated shares or comes from dividends is irrelevant." So not true no matter how much you think that. End up with a few down years in a row and if you are using pure capital you are screwed.

"One must keep in mind that the main reason that growth stocks pay far less in dividends is because reinvesting in the business is the smartest and best use for that cash." An assumption that is not always true.

"The biggest total return will always come from companies with the greatest sales and earnings growth." Always? Pretty big stretch. You might want to reread the part of The Future for Investors about the growth trap.

"However, IMO, the love of dividend stocks should not preclude someone from allocating some weighting to growth stocks..." Nobody said that so why bring it up. I think pretty much anyone you would ask here already agrees with the point of some growth stocks is a good thing.

But you are trying to speak both sides of the argument. You believe that where income cash-flow comes from does not matter when clearly it does. Having to sell to cover all your expenses with a bad down year, a few down years, or even a few flat years in a row is a journey to hoping you die before running out of money.

Typically growth stocks are obviously already known and their PEs are high. The return of high PE stocks over time is lower than that of lower PE stocks. The returns of non and low dividend payers is typically lower than that of higher dividend payers. Stocks for the Long Run has five decades of data to back this.

For example, the S&P500 broke into quintiles from 1957 to 2006 shows that the highest dividend payers had a annual compound growth rate of 14.22% compared to 9.69% of the lowest / non dividend payers.

The stocks in the quintile with the lowest PE ratios compounded at 14.3% for those five decades while the stocks in the "middle" range of the PE ratios were down to 11.11% per year. The highest PE stocks returned 8.90% compounded per year.

Really, the best way to play growth stocks is to be there before people find them. The high PEs mean one of two things - people already found them so the price has already been run up and thus, you miss much of the return. Or, the stock in question just barely started making a tiny profit and was priced high due to people's anticipation of this occurring. I suppose you could add that if your "growth" portion was focused on the small cap sector then you are probably going to be ok, but even then you can still have several years in a row of low or negative performance that murders the principle.

The beta on the highest yielders is 0.9 while the beta on the lowest quintile pe stocks is 0.63. Higher return for boring, lower pe dividend payers with less risk.
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#18
The tone of a board often steers individuals in extreme ways. Obviously there is a love of dividends on a dividend investing board. IMO it is healthy to have some discussion of growth allocation, growth candidates, other investment vehicles outside of the typical DG exposure. It would seem prudent to me, that for diversification sake, a person should view DG exposure as an investment class whose portfolio weighting should be determined based upon the individual's circumstances.

For our portfolio there is an emphasis on dividend stocks. The stocks are usually chosen based upon yield and distribution coverage rather than DG considerations. I visually scan the dividend history, but don't attempt to quantify growth rates. For me, current yield is more important than dividend growth. Stocks with 3% and lower yield simply hold no interest, as my target is to average near 6%. It has now become very difficult to do that without taking on too much risk. Any lower yielding positions are generally used as covered call plays in order to boost the cash flow yield above 6%. Because of our focus, very few DG stocks are under consideration, and even if they are, just as covered call plays. I will eventually buy some DG stocks, but only when the yields generally move into the 4%-5% range or higher. IMO we will see single digit p/e's again, and that will be the time to make a significant adjustment to our portfolio structure.
Alex
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#19
This is a fantastic topic and I'm so glad I found it, because I was going to start a similar thread before I decided to do a search.

There's a healthy discussion here about the danger of drawing from your growth portfolio, due to down years, but it seems to me there's an equal concern about dividends that get cut. We've seen BP and Dominion cut their dividends in recent years. I'd hate to see someone get that minimum $1,125,000, retire, average out to 4%, but then have certain key stocks cut their dividend rates and the average falls to 3%. I guess that would force you into the hybrid approach described where you get the dividends you can, and supplement with liquidating principal to supply the rest. (To be honest, I think you'd want double that - $2.5 million - at age 60 to feel confident that you can retire and weather future financial storms. Also the 4% dividend is taxed, and the $50,000 expenses are presumably after-tax, so even without financial storms $1.125 million is too low, though I realize Kerim was just proving a point not trying to showcase an example nest egg amount.)

Also ...

"The stocks I hold have consistently provided an increase in the dividends paid and I am currently receiving over $60,000 annually." - wow! And that was back in 2014. Cannew if you're still around I'd love to know how much you are receiving now. That's the highest total I've seen someone mention here so far.
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#20
Indeed a great thread.

I've been thinking about this a bit lately, and I came to the conclusion that while I absolutely cannot reduce the portfolio value with withdrawals (too long of a retirement time... hopefully), with a 10% average dividend growth for the portfolio, and inflation being around 2% (average), I should be able to comfortably sell 2% or 3% of my portfolio every year. (in addition to withdrawing the dividends)

The dividend growth would account for the inflation and the tiny reduction in share count, so even while selling 2% yearly from my portfolio my buying power from dividend income should still increase slightly on average.

And the additional 2% of total portfolio value would be quite a handsome addition to my budget... my portfolio currently yields around 3.5% so that would increase my income by over 50%, with the downside of limiting buying power growth.

This is my strategy for potentially withdrawing tiny amounts annually without completely compromising inflation adjusted dividend growth. It works in theory, as long as my holdings keep bumping up the dividend and inflation doesn't skyrocket.
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