Dividend Investing For Retirement

[Spartan_Warrior]

Thanks a ton, George! That's exactly the kind of starting point I needed.

My next question is probably pretty rudimentary, but forgive me. With capital gains-style investing, I "aim" for an APR of around 7%, so that I could maintain a post-ERE SWR of 3-4% after taxes and inflation. On the other hand, I can't help but notice the average dividend yield on these stocks is only ~2.5%.

Is the idea that, as long as the dividend growth rate is beating inflation, it's not as important for the actual yield to beat inflation? It makes sense to me, theoretically, that if I buy a stock yielding 2.5% and it increases the dividend by exactly the rate of inflation year after year, then I would simply have that same income of 2.5% (minus taxes) year after year. Am I thinking about this right?

(Obviously I'm totally new to dividend income investing!)

If I do have the right idea, I must admit it sounds more attractive than chasing capital gains, IMO, at least for my ERE strategy. On the other hand, I understand the dividend strategy has been very popular for the past several years and through the downturn... which makes me skeptical of its potential in the future just by default. (If only I had been so skeptical of the Permanent Portfolio strategy back in 2011... as gold neared $1900 an ounce. )

[Chad]

quote="Spartan_Warrior"]

On the other hand, I understand the dividend strategy has been very popular for the past several years and through the downturn... which makes me skeptical of its potential in the future just by default. (If only I had been so skeptical of the Permanent Portfolio strategy back in 2011... as gold neared $1900 an ounce. )[/quote]

This is why I don't use just one strategy. No strategy will be right all the time. Identify the good strategies, like investing for dividends, and use them after its obvious they have fallen out of favor (contrarian). They all have their place.

[George the original one]

> On the other hand, I can't help but notice the average dividend yield on these stocks is only ~2.5%.

That's why I (and most dividend growth investors) set a lower limit on the yield. My dividend portfolio averages 5% yield right now and I'm still over 10% cash. Used to be that I aimed for over 6% yield in the portfolio, but the richer REITs and non-dg components have been moved to other portfolios for tax efficiency.

> Is the idea that, as long as the dividend growth rate is beating inflation, it's not as
> important for the actual yield to beat inflation?

Correct. I like the average yield to be above 4% so its easier to imagine how one would use 4% as a SWR. Those with a longer time horizon tend to pick 3% average yield. Either way, the idea is that your income stream is rising faster than inflation. [note that if you only match inflation, then you will lose; you have to actually beat inflation by tiniest of margins]

The other item I'll note is that since the Great Recession, my capital gains have been 1x-4x the dividends, even with my high average yield. Those who think in terms of total return should not dismiss the power of dividend growth investing lightly!

[George the original one]

@Spartan_Warrior - forgot to mention David Van Knapp, who runs a demonstration portfolio. See http://seekingalpha.com/article/1707862 ... ual-review for his most recent update about the portfolio.

[workathome]

Dividend stocks may be overvalued

http://www.mebanefaber.com/2013/08/20/d ... vironment/

[workathome]

A nice little video from Oakmark’s Nygren:

“Investors have been overpaying for dividend stocks while undervaluing companies that are buying back shares, Oakmark Fund’s Bill Nygren said Tuesday.

“One of the things we think investors have gone a little excessive on is bidding up companies that pay high yields, good income generators,” he said.

“And we think it’s interesting that companies that have been large share re-purchasers — effectively, it should be the same to an investor whether the money comes back as money or share repurchasers. But those stocks aren’t as expensive, so we like the big share repurchasers.”

- See more at: http://www.mebanefaber.com/2013/09/28/d ... 4edHw.dpuf

[Dividend Growth Investor]

Share repurchases are great in theory, but corporate boards have terrible execution on them:

http://www.dividendgrowthinvestor.com/2 ... stock.html

Most boards therefore end up buyback stock when they are flush with cash and prices are high ( dumb move), and cancel buybacks them when things get rough (dumb move).

[Dividend Growth Investor]

Income doesn't really mater if we don't need it yet. Before I pull the trigger, I try to maximize ROI, emphasize on total return. Dividends come from the businesses profit. The total return still depends on the business ROI.
As I approach retirement, I would convert some investment to income for living expense using: Bond, cash, Real estate, dividend etc.

Dividend Income is the only direct link between the business operating performance, and investor return. By focusing on income in a diversified portfolio, I get a gauge of what my dividend income will be. But I also get very good total returns. A business with a growing EPS, purchased at attractive price, that grows DPS, will likely deliver capital gains as well.

http://www.dividendgrowthinvestor.com/2 ... -year.html

[workathome]

http://www.mebanefaber.com/2013/10/21/t ... challenge/

[George the original one]

http://www.mebanefaber.com/2013/10/21/t ... challenge/

Oh, please, he uses VIG as a proxy for "high yield"?!? VIG's yield is 2.36%. You could buy the DJIA in an equal weight portfolio and have a yield of 2.73%. Neither of these are "high yield".

[tommytebco]

To share my experience on the subject.

I have bought into Collin's theory that no one out guesses the market.

I have slept much better since moving into SDY ETF. (All the s&P 500 stocks that have never cut a dividend is the general rule.)
Yield is 2.4 ish and appreciation this year is very good. The fund has increased pretty linearly from 40 to 60 per share in 5 years.

Prior to that I tried to stick together a bunch of high yield no name stocks. That was a disaster. Many lost share price quickly, for various reasons, eating up multiple years of returns. Otello went bankrupt (A cable distribution company!!! who'd a thought?? Time Warner bought their own cables!)
I still have one REIT and another that now pays 11% but is 5 years worth of returns from share price loss.

[UrbanHermit]

Permanent Portfolio used to be big around here, now everyone is talking about Dividend Investing. I blame recency bias (for both).

[workathome]

Well, they're not incompatible.

[George the original one]

@UrbanHermit -

You also need to differentiate between Dividend Investing and Dividend Growth Investing. ERE dividend investors are usually referring to the latter.

[anomie]

Anyone want to comment on this --

https://www.google.com/finance?q=VYM

Vanguard High Dividend Yield Index Fund is an open-end investment company. The Fund seeks to track the performance of an index that measures the investment return of common stocks of companies that are characterized by high dividend yield. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. ETF Shares are purchased and sold through a broker. The Fund offers two classes of shares: investor Shares and exchange traded fund (ETF) Shares. The Fund focuses on investment approach designed to track the performance of the FTSE High Dividend Yield Index. The Fund's investment advisor is The Vanguard Group, Inc.

A Dividend Index Fund!

Feel free to be honest. I know many folks hate index funds. Am interested in any critique.

[UrbanHermit]

@workathome - good point

@George the original one

I concede the distinction but I don't think it applies to what I was trying to say: previously there was much interest in gold after its big run, currently there is much interest in stocks after their big run. The contrarian in me finds that worrying, and if I were considering a change in strategy at this point I would look long and hard at my motivation.

I don't have anything against either the PP or DGI, both are viable strategies. For the record I do the passive indexing thing myself.

[workathome]

@UrbanHermit - Good points! Dividend stocks have done quite well lately.

[jennypenny]

@urbanhermit--That a good point. If you've been around long enough, you might remember Dogs of the Dow was popular before the PP.

If you want to be contrarian around here, be a Boglehead

[George the original one]

Anyone want to comment on this --

A Dividend Index Fund!

Feel free to be honest. I know many folks hate index funds. Am interested in any critique.

As these things go, VYH is at least better than most index funds. It does appear to follow a dividend growth strategy, although that may be a built-in bias of following the FTSE.

My #1 complaint about it is yield = 2.97%... this is not high yield! IMNSHO, if the yield is not over 4% (and preferably above 5%), then a fund should not include "high" in the description.

By comparison, my regular brokerage account is yielding about 6%. You can look at my leveraged income account (as documented right here on ERE) and see a yield of over 10%.

[anomie]

@GTOO
So that is considering even its 5 year growth of 9.92%? The growth is not reflected in the yield, is that what one should conclude?

source for the growth:
https://advisors.vanguard.com/VGApp/iip ... undId=0923

Thanks for the comments!