# Do Dividend Stock Funds Belong In Your Portfolio?



## gaspr (Mar 24, 2014)

An excellent new blog post from Mike Piper. I totally agree with his conclusions.

http://www.obliviousinvestor.com/do-dividend-stock-funds-belong-in-your-portfolio/


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## gardner (Feb 13, 2014)

Do the Americans have a comparable dividend tax credit system, with the possibility to generate sizable low/no tax incomes using eligible dividends?


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## My Own Advisor (Sep 24, 2012)

http://www.investopedia.com/ask/answers/12/how-are-capital-gains-dividends-taxed-differently.asp

My understanding is, this is still true in 2017 for U.S. investors holding U.S. stocks:

"Meanwhile, the preferential treatment given to qualified dividends is set to disappear completely. As of 2013, individuals will have to pay their income tax rate on all dividend income they receive." In a taxable account....


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## james4beach (Nov 15, 2012)

gaspr said:


> An excellent new blog post from Mike Piper. I totally agree with his conclusions.
> 
> http://www.obliviousinvestor.com/do-dividend-stock-funds-belong-in-your-portfolio/


The author says the same thing that I've repeatedly said here on the forums, which is


it’s total return that matters, not income. A dollar of dividends is no better than a dollar of capital appreciation — even for a retiree​

In other words, make sure you're getting the best total return. This is especially important if you're consider some of these exotic ETFs with high distributions like the covered call ETFs. Those have consistently underperformed the market, so they don't have any advantage to anyone (retired or not).


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## MrsPartridge (May 15, 2016)

Many value stocks have about 3% dividends which isn't all that impressive. However when the company raises it's dividends year after year like say, the banks, or Enbridge, won't you now be getting 7-8% dividends down the line on your old investment from years ago? After holding the stocks for over 10 years, aren't you getting a nice return?

I'm trying to mix my stocks with value dividend stocks plus some growth stocks. I don't buy stocks with no dividends, at this time.


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## My Own Advisor (Sep 24, 2012)

Agreed, re: total return.

Yet as we all know some investors might choose to favour dividend payers (over a total return stock or ETF that pays no dividends or distributions) in retirement because while dividends are never guaranteed, from a basket of such stocks they can be depended on upon and in addition to that, capital gains are never guaranteed although they are certainly hoped for long-term. That's why you invest in equities to begin with - the expectation of long-term returns (over bonds, cash, etc.).

Just my take.


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## agent99 (Sep 11, 2013)

james4beach said:


> The author says the same thing that I've repeatedly said here on the forums, which is
> 
> . A dollar of dividends is no better than a dollar of capital appreciation — even for a retiree​


Unless you are retired and living off your investment income, you probably don't realize how this theory does not work too well in practice for retirees. 

Most good dividend stocks keep paying the same dividend regardless of how their share price is doing. A stock's Total Return may be zero in a down market period, but if it pays it's 5% dividend while stock price declines, retirees still have a flow of income to live off without selling off shares at low prices.


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## Pluto (Sep 12, 2013)

james4beach said:


> The author says the same thing that I've repeatedly said here on the forums, which is
> 
> 
> it’s total return that matters, not income. A dollar of dividends is no better than a dollar of capital appreciation — even for a retiree​
> ...


Well yeah, in the US because I think the article explained that taxes are the same for cap gains and dividends. But in Canada there is the dividend tax credit. So their conclusions don't apply. "Total return" isn't the same as "after tax total return". Some Canadians don't pay any tax on their dividends.


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## Eder (Feb 16, 2011)

Pluto said:


> Some Canadians don't pay any tax on their dividends.


Don't let this dirty little secret spoil a decent argument!


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## AltaRed (Jun 8, 2009)

Taxtips.ca has a MTR table where folks with taxable incomes in the 6 figure range are ambivalent about the DTC and cap gains rates. IOW about the same.


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## Pluto (Sep 12, 2013)

^
True, I think. If somone has 6 figure income from employment, yes. 

But if somone is retired and their primary source of income is dividends, they don't pay tax on the first 40,000- 50,000....(I forget exactly the level they start paying tax.)

I'm all in favour of young working people investing in non-dividend paying stocks and going for cap gains. that's what I did and it makes sense. What makes sense for younger folks doesn't apply well to the retired.


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## milhouse (Nov 16, 2016)

The amount of tax credited dividends is dependent on province. It's just under $52k in BC IIRC. 

I've built up the dividends in my non-registered account in part due to my company stock program. 
One tax issue I expect to face in ER is bumping up against the $52k dividend level (and it growing) while trying to extract dollars from my RRSP and DC pension.


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## Koogie (Dec 15, 2014)

Probably the next thing that this government will go after once they are done with small biz.


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## Oldroe (Sep 18, 2009)

When you get that diaper off maybe 30-40 years .


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## janus10 (Nov 7, 2013)

I disagree with the conclusion that dividend income is preferable to capital gains simply because, for the majority of people, they don't have their holdings in non-registered accounts. If you have your dividend payers in your RRSP you still will be paying tax at your MTR once you withdraw. Obviously, if in a TFSA there is no difference in tax.

Theory does not equal reality for most Canadians. Even at CMF, where we are more sophisticated than the average Canadian, how many of us have a substantial portion of our investments in non-registered accounts? My wife and I are probably the rare situation where we are about 55%/45% split between non-registered and RRSPs/TFSAs. Even if we switched our entire non-registered investments to an average of 4% dividend payers, it would not be enough to cover our entire living expenses.

Most people here are lauded if they can possibly max their RRSPs and TFSAs (and, for some, RESPs). I'm not seeing any posted evidence that there's more than a smattering of people having non-registered accounts.

Thus, almost none of us are realizing any benefit to having dividend income because it isn't being held in the type of account that makes a difference.


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## gardner (Feb 13, 2014)

janus10 said:


> how many of us have a substantial portion of our investments in non-registered accounts?


I can only speak for myself, but I am probably 60% non-registered and that is leaving out real-estate.
I think anyone who has flogged off the family home to live in a condo is likely heavily non-registered.
I also think that folks with a DB pension, who are hit with large pension adjustments to their RRSP room, might wind up mostly non-registered in their overall savings, leaving aside the pension commuted value.


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## milhouse (Nov 16, 2016)

janus10 said:


> \Even at CMF, where we are more sophisticated than the average Canadian, how many of us have a substantial portion of our investments in non-registered accounts? My wife and I are probably the rare situation where we are about 55%/45% split between non-registered and RRSPs/TFSAs. Even if we switched our entire non-registered investments to an average of 4% dividend payers, it would not be enough to cover our entire living expenses.


51:49 split non-registered vs RRSP/DC Pension/TFSA here (not including my wife's accounts). Dividends from my non-registered currently can cover half our combined annual spend.


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## like_to_retire (Oct 9, 2016)

janus10 said:


> I disagree with the conclusion that dividend income is preferable to capital gains simply because, for the majority of people, they don't have their holdings in non-registered accounts. If you have your dividend payers in your RRSP you still will be paying tax at your MTR once you withdraw. Obviously, if in a TFSA there is no difference in tax.
> 
> Theory does not equal reality for most Canadians. Even at CMF, where we are more sophisticated than the average Canadian, how many of us have a substantial portion of our investments in non-registered accounts? My wife and I are probably the rare situation where we are about 55%/45% split between non-registered and RRSPs/TFSAs. Even if we switched our entire non-registered investments to an average of 4% dividend payers, it would not be enough to cover our entire living expenses.
> 
> ...


My non-registered account is about 76% of my total portfolio of Non-Registered/RRSP/TFSA. 

Another aspect of dividends in a non-registered account is that once they are grossed up, they increase the clawback of OAS and the age benefit. Even so, dividends are still a better deal than interest income.

ltr


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## Pluto (Sep 12, 2013)

janus10 said:


> I disagree with the conclusion that dividend income is preferable to capital gains simply because, for the majority of people, they don't have their holdings in non-registered accounts. If you have your dividend payers in your RRSP you still will be paying tax at your MTR once you withdraw. Obviously, if in a TFSA there is no difference in tax.
> 
> Theory does not equal reality for most Canadians. Even at CMF, where we are more sophisticated than the average Canadian, how many of us have a substantial portion of our investments in non-registered accounts? My wife and I are probably the rare situation where we are about 55%/45% split between non-registered and RRSPs/TFSAs. Even if we switched our entire non-registered investments to an average of 4% dividend payers, it would not be enough to cover our entire living expenses.
> 
> ...


I have had zero interest in RRSP's for decades. TFSA is great for me. Everything else is non registered. 

Your post points to a weakness in rrsp's. With RRSP you give up cap gains tax rate and div tax credit to get what? The benifit to RRSP only materializes if your retirement marginal tax rate is substantially lower than your working tax rate. I'm guessing, but I suspect lots of retired folks, especially savers, investors, and those with a work pension plan, don't have a lower marginal tax rate in retirement. 

My impression is there are lots of retired people on this forum who are happy with dividend stocks. Also I did a 15 year test of a dozen or so dividend stocks - banks, utilities, piplines, telecom - the usual suspects. With dividends reinvested the compound annual return was about 15%. That's not bad. So even a young investor looking for capital appreciation would do fine with that appraoch.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> The author says the same thing that I've repeatedly said here on the forums, which is
> 
> it’s total return that matters, not income. A dollar of dividends is no better than a dollar of capital appreciation — even for a retiree​





agent99 said:


> Unless you are retired and living off your investment income, you probably don't realize how this theory does not work too well in practice for retirees.
> 
> Most good dividend stocks keep paying the same dividend regardless of how their share price is doing. A stock's Total Return may be zero in a down market period, but if it pays it's 5% dividend while stock price declines, retirees still have a flow of income to live off without selling off shares at low prices.


Yeah, you're correct agent99, and I've tried to get james4b to understand this a few times, but to no avail so far. I'll keep working on it. 

If james4b retired, and started living off his "total return" capital appreciation by having to sell stock in a bear market to create his income, he'd realize pretty quick the difference between growth stocks and dividend stocks. If the market tanks by 40%, for example, and you had to create your retirement income by selling shares that were depressed by 40%, it wouldn't be long before you realized how rapidly you were eating into your capital, and that the investor that was receiving their income from dividends still held onto all their shares and was continuing to receive their dividends, you'd probably change your tune.

During accumulation, sure, who cares. It's a different world in retirement.

ltr


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## like_to_retire (Oct 9, 2016)

Pluto said:


> Your post points to a weakness in rrsp's. With RRSP you give up cap gains tax rate and div tax credit to get what? The benefit to RRSP only materializes if your retirement marginal tax rate is substantially lower than your working tax rate. I'm guessing, but I suspect lots of retired folks, especially savers, investors, and those with a work pension plan, don't have a lower marginal tax rate in retirement.


Yeah, I'm certainly one of those _"retired folks, especially savers, investors, and those with a work pension plan, don't have a lower marginal tax rate in retirement". _I always maxed out my RRSP through my career, but in retirement my marginal rate is significantly higher than the MTR of the deposited funds. Yeah, I realize the tax free compounding effect over time tends to soften the blow, but I suspect I've been duped. 

If I had to do it over, I would not have deposited a cent into RRSP's. Once the mandatory RRIF withdrawals start in a few years for me, all my OAS and age credit will be lost. It puts the total MTR over 50%. I can assure you the MTR on deposit through my career wasn't 50%.

Such is life. I sure wish they had TFSA's when I was in my 20's.

ltr


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## My Own Advisor (Sep 24, 2012)

Asset accumulation years are totally different than asset preservation years. There _can be_ different strategies for both.

ltr - sorry to say, you have a GREAT problem to have in retirement - a tax headache


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## humble_pie (Jun 7, 2009)

like_to_retire said:


> Yeah, I'm certainly one of those _"retired folks, especially savers, investors, and those with a work pension plan, don't have a lower marginal tax rate in retirement". _I always maxed out my RRSP through my career, but in retirement my marginal rate is significantly higher than the MTR of the deposited funds. Yeah, I realize the tax free compounding effect over time tends to soften the blow, but I suspect I've been duped.
> 
> If I had to do it over, I would not have deposited a cent into RRSP's. Once the mandatory RRIF withdrawals start in a few years for me, all my OAS and age credit will be lost. It puts the total MTR over 50%. I can assure you the MTR on deposit through my career wasn't 50%.
> 
> ...




the problem is that when one is in one's 30s - around the age when one begins to think about saving for retirement - the future is still far too unknown to be able to even guesstimate what one's income might be in 40 years.

most people therefore do the prudent thing & they start up an RRSP.

probably starting around age 55+, folks can do a ballpark income projection & can then adjust down or even stop RRSP contributions if the forecast turns out looking good.

.


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## like_to_retire (Oct 9, 2016)

humble_pie said:


> the problem is that when one is in one's 30s - around the age when one begins to think about saving for retirement - the future is still far too unknown to be able to even guesstimate what one's income might be in 40 years.
> 
> most people therefore do the prudent thing & they start up an RRSP.
> 
> ...


You're absolutely right humble_pie. There's no way to predict the future, so it's a smart move to always make your RRSP maximum deposit every year. People have to be aware though, that the RRSP isn't always the panacea it's promoted to be. I agree, it's smart to start making ballpark income projections at some point as you near retirement, and give yourself license to not make RRSP deposits if it looks like the marginal rate in retirement will cause you problems. I retired at 55 and saw fairly quick that I had made a mistake. I should have taken the time earlier to predict this situation, but the career always got in the way. I tried some scenarios of burning the RRSP down each year, but it just bumped me into the next bracket, so it was a wash in the end.

I'm not really complaining. As "My Own Advisor" says, it's a good problem to have.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> Yeah, you're correct agent99, and I've tried to get james4b to understand this a few times, but to no avail so far. I'll keep working on it.


I keep arguing on this matter because I think many people are incorrect about this, including authors of books who write about dividend-based approaches for retirement. I am quite certain that there is no difference, both in theory and practice, taking dividends vs selling shares. The dividends are equally 'destructive' to the portfolio. If a company worth $500 million pays out a $20 million dividend from its cash stores, how much is the company worth after the dividend payment?

Every time you get a dividend, money is being removed from your equity investment. It's as if a mini sale has happened. Sure it's convenient and sure it's great that it's automatic, but make no mistake -- the money is not free. The idea that dividends are beneficial during down markets is purely an emotional/psychological thing.

Take a look at the discussion, and numbers illustrating this, here:
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=222643



> If james4b retired, and started living off his "total return" capital appreciation by having to sell stock in a bear market to create his income, he'd realize pretty quick the difference between growth stocks and dividend stocks. If the market tanks by 40%, for example, and you had to create your retirement income by selling shares that were depressed by 40%, it wouldn't be long before you realized how rapidly you were eating into your capital


I think you're wrong on this point. Taking a dividend during a 40% stock drop is just as destructive as selling shares at depressed share price. In both cases, cash comes out of equity. As a thought experiment, consider what happens if you were to immediately reinvest that dividend you receive at the depressed share price. But you're not reinvesting it, you are removing it as cash. Obviously, taking the dividend out is eroding capital.

Each dividend payment bleeds value out of your investment. It's only a psychological effect that makes you think this is not happening, which I agree is comforting during a bear market, but it does not change the outcome.

You can see some discussion in this other forum on this matter, including some actual numbers based on strategies of selling shares vs relying on dividends during a down market. This is a very broadly misunderstood aspect of dividends.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=222643


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## Eder (Feb 16, 2011)

I agree that the RRSP can be a real pain but I stopped contributing in my 40's so only about 15% of my net worth ended up in the RRSP. It's a good problem to have but I feel sorry for those that end up with all retirement funds in an RRSP. I think its best to start a RIFF as soon as retired...in my case it was 53 ... and burn that sucker up ASAP.
Now the TSFA...mmmm...I'm jealous of young people that start using it right away....that one is free money. Hopefully the contribution limit will be raised again in the future.


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## Koogie (Dec 15, 2014)

Eder said:


> Now the TSFA...mmmm...I'm jealous of young people that start using it right away....that one is free money. Hopefully the contribution limit will be raised again in the future.


More likely to be capped. Probably at a lifetime limit of 100K or some such. To much foregone future revenue for future governments.


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## humble_pie (Jun 7, 2009)

like_to_retire said:


> I tried some scenarios of burning the RRSP down each year, but it just bumped me into the next bracket, so it was a wash in the end.
> 
> I'm not really complaining. As "My Own Advisor" says, it's a good problem to have.



i know 2 couples who moved to costa rica for several years while they withdrew & emptied their RRSPs. Eventually they returned to canada.

everything seems to have worked out very well. No taxes on RRSP, or so they said. They bought beautiful houses in CR. Once the retirement plans had transformed themselves into costa rican seaside villas, they returned to canada, while renting out the CR properties for most of the year.

one of the houses really looks tempting. Pink bougainvillea everywhere. Howler monkeys & birds with colourful plumage in the state protected forest zone next door. Sand beach at end of village street.

the pièce de la résistance - a massage school just down the road. Low cost student rates from loving hands. When in residence, they go every day.

.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I keep arguing on this matter because I think many people are incorrect about this, including authors of books who write about dividend-based approaches for retirement. I am quite certain that there is no difference, both in theory and practice, taking dividends vs selling shares. The dividends are equally 'destructive' to the portfolio. _If a company worth $500 million pays out a $20 million dividend from its cash stores, how much is the company worth after the dividend payment?_
> 
> Every time you get a dividend, money is being removed from your equity investment. It's as if a mini sale has happened. Sure it's convenient and sure it's great that it's automatic, but make no mistake -- the money is not free. The idea that dividends are beneficial during down markets is purely an emotional/psychological thing.
> 
> ...




what is a company worth? public market share price x shares outstanding, is what it's worth.

to me, it's no more relevant that a stable company has paid a dividend than that it has paid any other bill. Share prices of public companes do not fluctuate with a company's daily cash position.

conversely, did a company suddenly receive a windfall profit? _tonnerre!_ did its shares soar concomitantly? _non, pas du tout!_

jas4 another killer argument which others have advanced to quash your sustainable withdrawal selling theory goes that your theory fails to take dividend tax credits into account.

i'm with them. Dividend tax credits only go to those who have received actual dividends.

.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I keep arguing on this matter because I think many people are incorrect about this, including authors of books who write about dividend-based approaches for retirement. I am quite certain that there is no difference, both in theory and practice, taking dividends vs selling shares. The dividends are equally 'destructive' to the portfolio. If a company worth $500 million pays out a $20 million dividend from its cash stores, how much is the company worth after the dividend payment?
> 
> Every time you get a dividend, money is being removed from your equity investment. It's as if a mini sale has happened. Sure it's convenient and sure it's great that it's automatic, but make no mistake -- the money is not free. The idea that dividends are beneficial during down markets is purely an emotional/psychological thing.
> 
> ...


Yep, and I've read all the reasons before that you have offered, and I understand the math behind it, but I take a different opinion as outlined below.

The dividends that are paid, (that determine my income), are decided by the company and its accountants and bean counters. They know what they can afford, and they're usually quite reluctant to reduce dividends in tough times because it can signal a sell off in the market. They'd rather avoid this. Either way, they generally know what they're doing.

Now we examine the market share price, (which determines your income since you feel selling shares is the same as taking dividends). The share price, rather than being established by accountants and bean counters, is subject to the vagaries of the market, which is made up of crazy people. Maybe you believe in the efficient market hypothesis, but during a bear market it all goes out the window. The share price often has little to do with the actual value of a company and is pulled up and down by fear, rumour, shorts, and any number of crazy people.

You're betting your income on that share price and I'm betting my income on accountants and bean counters. It's as simple as that, and I'll take the dividend every time, becuase there's math behind it rather than what the market feels my income should be.

I know you've made up your mind, so I'll leave it at that.

ltr


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## milhouse (Nov 16, 2016)

The psychological aspect does play into it for me. I think I'd feel more confident going in retirement, taking the yield from my basket of dividend paying companies rather that having to sell shares at a depressed valuation. But as stated above, the other aspect of it is that companies may have solid earnings and cash flow but their valuations just get caught up in overall market sentiment.


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## My Own Advisor (Sep 24, 2012)

like_to_retire said:


> You're absolutely right humble_pie. There's no way to predict the future, so it's a smart move to always make your RRSP maximum deposit every year. People have to be aware though, that the RRSP isn't always the panacea it's promoted to be. I agree, it's smart to start making ballpark income projections at some point as you near retirement, and give yourself license to not make RRSP deposits if it looks like the marginal rate in retirement will cause you problems. I retired at 55 and saw fairly quick that I had made a mistake. I should have taken the time earlier to predict this situation, but the career always got in the way. I tried some scenarios of burning the RRSP down each year, but it just bumped me into the next bracket, so it was a wash in the end.
> 
> I'm not really complaining. As "My Own Advisor" says, it's a good problem to have.
> 
> ltr


The thing is, and it's nice to have a tax problem in retirement ltr, I would think most Canadians would benefit from the mantra to strive to max out TFSA, RRSP, RESP for their kids. Even if they can do 2 of 3 - they are doing well. 

Forget the TFSA vs. RRSP vs. RESP vs. other debates. Just save!  

Unfortunately most Canadians couldn't a) give a [email protected]#$ about saving and b) don't have the discipline to do so - even $25 a week.


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## Pluto (Sep 12, 2013)

james4beach said:


> I keep arguing on this matter because I think many people are incorrect about this, including authors of books who write about dividend-based approaches for retirement. I am quite certain that there is no difference, both in theory and practice, taking dividends vs selling shares. The dividends are equally 'destructive' to the portfolio. If a company worth $500 million pays out a $20 million dividend from its cash stores, how much is the company worth after the dividend payment?
> 
> Every time you get a dividend, money is being removed from your equity investment. It's as if a mini sale has happened. Sure it's convenient and sure it's great that it's automatic, but make no mistake -- the money is not free. The idea that dividends are beneficial during down markets is purely an emotional/psychological thing.
> 
> ...


1. I'm not aware that anyone said dividends were free money. 
2. I'm not aware that anyone said a dividend payment didn't come from equity. 
3. In the bogleheads thread they are comparing two funds an s&P fund and a high dividend fund. they both pay dividends, but one is a higher yield. maybe all of the s&p stocks pay dividends, although I wouldn't know off hand. If I read the thread correctly they saw not much difference between the two given a specific withdrawal rate. Given no difference, I'm not sure why you are against people wanting to own dividend stocks and use the dividends for their retirement income. 
4. I believe that a portfolio of low or no dividend growth stocks will outperform the usual collection of CDN dividend payers. This is great for young people seeking to accumulate assets. But there can be lots of drama and losses too. many reitred folks simply do not want the drama assoicated with high growth high p/e stocks. They would rather have 20 or so conservative dividend payers and collect the income. Many don't care about shopify, amazon, nvidia and the like. To much drama and too much can go wrong that was unforseen. They don't want to have to decide which shares - shopify, amazon, facebook, netfilx etc.. to sell this month to pay the bills. And the same thing next month and the month after. They want somthing more predictable even if it isn't free money and theoretically selling shares is the same as getting dividends.


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## bgc_fan (Apr 5, 2009)

james4beach said:


> I keep arguing on this matter because I think many people are incorrect about this, including authors of books who write about dividend-based approaches for retirement. I am quite certain that there is no difference, both in theory and practice, taking dividends vs selling shares. The dividends are equally 'destructive' to the portfolio. If a company worth $500 million pays out a $20 million dividend from its cash stores, how much is the company worth after the dividend payment?


I like simple examples. If I understand your position, you feel that dividends gradually deteriorate the value of the company. So my simple example would be this:

Say you had a company and pay yourself a decent salary. However you want to make use of the profits that are being locked up in the company. You have 2 choices: take out a portion of the profits as dividends or reinvest that amount of money into the company to grow it and then start selling the equity of the company, say 10%/yr. 

From my POV, the first option means you still retain 100% of the company regardless how long you hold it. Under the second option you will gradually no longer own anything.

Now which gives the most value? Hard to say, but the money that you get from selling parts of your company is dependent on Mr Market, whereas the money you get from dividends is dependent on how well the company profits.

Personally I would think that dividends is more sustainable.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> You're betting your income on that share price and I'm betting my income on accountants and bean counters. It's as simple as that, and I'll take the dividend every time, becuase there's math behind it rather than what the market feels my income should be.


We also know, from actual market data, that we end up in exactly the same place doing either one. A dividend-focused portfolio fell just as much as a regular portfolio during the 2008 bear market. What you got in dividends, you sacrificed in share price.

Both approaches, looking net of capital gains + dividends, ends up in the same place. This isn't hypothetical, just look at XDV vs XIU performance during the bear market. And in the bogle thread I linked, people did the same calculation for Vanguard funds that were either normal, or dividend focused.

It's not about efficient markets, irrational stocks, or theory vs reality. You can look at actual returns and it will show you that both dividend-based approaches and sell-off approaches give the same result.


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## humble_pie (Jun 7, 2009)

james4beach said:


> We also know, from actual market data, that we end up in exactly the same place doing either one. A dividend-focused portfolio fell just as much as a regular portfolio during the 2008 bear market. What you got in dividends, you sacrificed in share price.
> 
> ... You can look at actual returns and it will show you that both dividend-based approaches and sell-off approaches give the same result.



the above does not seem logical to me. In the first paragraph you say that all portfs fell equally during the 2008 crash, then you say that the dividend portf "sacrificed." I'm left wondering how it especially "sacrificed" if everybody fell evenly.

moreover, i don't believe that dividend withdrawal strategies necessarily produce the same results as sell-off withdrawals. This assertion - that they will yield the exact same/same - ignores the famous canadian dividend tax credit that will serve to lower income taxes every year along the dividend route.

in addition, your argument that dividends will inexorably deplete a company's value doesn't hold up. Companies are not valued on public markets by their daily cash positions. Cash flow is only one of the criteria & then only for certain kinds of companies.

we also know that - as like-to-retire says - senior companies take their dividend payout histories very seriously, especially when there is no dominant insider shareholder & instead shares are widely held in the public hand.

boards of directors do not frivolously change dividend patterns at big banks, telcos, utilities. In the past, one of the arguments raised to oppose your view, jas4, is that ordinary retail shareholders appreciate having this thin quarterly line of communication directly to the board of directors. If a board holds or possibly raises a dividend, it's a message to shareholders.


* * * * *

jas4 to look at things from your perspective, it must appear that all the auld phartz on the forum are ganging up on a spunky young man who keeps on airing what the APs believe is a quirky view.

i for one deeply respect a strongminded young person who sticks to his guns when he believes he's right. So even if you feel a wee bit put upon on the div-vs-sell issue, please know that forum members are extremely grateful to you for your fine work as moderator of this forum. Thank you!

.


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## OnlyMyOpinion (Sep 1, 2013)

^+1 Especially your last paragraph.


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## Oldroe (Sep 18, 2009)

And the first to bounce ?

Yes div stocks. Then you go back and look at the 5 correction before 2008 and the div stock did correct to a lesser degree and did bounce back quicker.

Your worry's are running out money. I will be 85 before I might sell a core holding.


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## Puppito (May 18, 2017)

It doesn't need to be one or the other - that is a dividend paying stock vs non-dividend stock. Realistically, very few companies on the TSX (and even south of the border) pay no dividend. One could maximise total return by still investing in dividend stocks by finding companies whose stocks have the highest yield but have the lowest payout ratio (inverse relationship I know, but they exist). The investor then receives a steady stream of dividends while holding the stock and the company retains profits to grow the company. The key is to make sure management is prudent with reinvesting those profits to increase shareholder value, i.e. reducing debt or investing in productive assets. The assumption that a company's growth rate is fastest when no dividends are paid assumes management is rational with reinvesting those profits, in practice this isn't always the case.


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## My Own Advisor (Sep 24, 2012)

^ Agreed. It's not a one-or-the-other debate - at least for me. 

I'm a hybrid investor for that very reason - a blend of individual stocks and low-cost ETFs, so I indirectly hold hundreds of equities via the ETFs I own whether the company pays a dividend or not. 

I think the best way to look at dividends is from the perspective of optionality. 
http://www.pragcap.com/why-do-corporations-pay-dividends/

"In order to understand this thinking it’s useful to go back in time to the origin of dividends. The word dividend is derived from the Latin word “dividendum” meaning “things to be divided”. The Dutch East India Company was the first entity to issue common stock and pay a dividend on that stock. The reason they did this was because their company was divided among different owners serving different trade routes. So, the owner of a share of DEIC was diversifying their risk across businesses, but equally important, they were diversifying their risk across time. The payment of dividends gave the current owners access to profits and gave them the optionality of how they would be exposed to the risk of those profits over time.

The world has changed quite a bit in the last 500 years, but not by much when it comes to why corporations pay dividends. The tax treatment has complicated the payment of dividends (which is why share repurchases have soared in popularity), but the thinking is still largely the same. Shareholders like optionality and the payment of a dividend gives the shareholder the option to increase or decrease their exposure to that entity across time. Again, share repurchases provide much the same optionality (perhaps in a superior manner depending on the taxes), but as the old saying goes, a bird in the hand is worth two in the bush."

Shareholders tend to favour "optionality". Board of Directors know this and so it becomes part of company policy in many cases.


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## james4beach (Nov 15, 2012)

humble_pie and others, I'm not upset -- thanks for the continued great discussions around these issues.



humble_pie said:


> the above does not seem logical to me. In the first paragraph you say that all portfs fell equally during the 2008 crash, then you say that the dividend portf "sacrificed." I'm left wondering how it especially "sacrificed" if everybody fell evenly.


I mean that since *total return = cap gain + divs*, that a dividend-heavy approach will sacrifice on the cap gain part of the equation, and boost the dividends. Again I'm not saying it puts you further behind, just that it's equivalent. The bogleheads thread shows exactly this tradeoff in the equation, using historical prices from Vanguard funds.

In the sell off approach, cap gains are higher. In the dividend approach, the dividends are higher. But the net outcome is the same, and that's the point I'm trying to make. (Ignoring taxes). The bogleheads thread with the Vanguard example shows the same thing, and Buffett shows the same thing in his investment letter.

Dividend approaches are fine, but it's not any better than selling off shares, even at market lows. When you take dividends at the market lows, you end up in the same place -- as the Vanguard fund example proves. Exact same final balance after withdrawals using the two methods.

The whole reason I started making this argument is because someone said in an earlier post that if I was in retirement, I would see how selling shares erodes capital. I am saying that, yes I realize it feels that way, but dividends erode capital in the same way. You're not protecting yourself in the way you think. You are just as exposed to the bear market, and just as exposed to stock volatility.

The perception that dividends protect you from stock volatility is just an illusion. I know that many of you won't ever believe me on this one.

And I think you're right that the dividend tax credit changes things, by the way (for after tax return).


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## Oldroe (Sep 18, 2009)

And you don't understand why Vangaurd would pay for and publish this study.

And why I question everything you write.


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## Puppito (May 18, 2017)

james4beach said:


> The perception that dividends protect you from stock volatility is just an illusion. I know that many of you won't ever believe me on this one.


I would agree from a stock price perspective, but dividends do reduce total return / investment recovery volatility. Let's use an example where one purchases a stock with the intention to hold until retirement. If one purchases a dividend-paying stock yielding 5%, one could recover their investment in 20 years without selling off any principal, ignoring dividend increases and capital gains. If the stock does not pay dividends then the investor relies on the share price doubling over the same time frame to recover their investment in the same manner. Of course there's uncertainty with both scenarios: dividends are not guaranteed, but buying shares in a company with a low payout ratio reduces the risk the dividend will be cut or suspended during a recession. Similarly, buying shares in a company paying no dividend does not guarantee shareholder value will increase at a faster rate - the opposite could be true if the company reinvests profits in non-productive assets or non-value add expenses, like lavish G&A or marketing expenditures. Dividends do reduce the company's value, but it provides some return to investors today rather than betting on earning the return solely through capital gains in the future.


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## humble_pie (Jun 7, 2009)

james4beach said:


> In the sell off approach, cap gains are higher. In the dividend approach, the dividends are higher. But the net outcome is the same, and that's the point I'm trying to make. (Ignoring taxes).



och laddie tis nae canny to ignore taxes.

in addition, i can see another instance in your post of what i believe is a projection mistake that you keep on making. You are always assuming that a company's managers will be able to achieve the same capital gains record as they have in the past, are you not? 

you are assuming that managers who don't pay dividends will instead be able to invest the money in such a way that their previous success will be replicated, forever & ever, world without end, are you not? 

alas this idea makes me somewhat nervous. I don't believe mere business mortals are such olympians. I'd never count on any company's spectacular performance going on forever. The most i'd agree is that they have a good probability of success.

still, it seems more prudent to extract bits of equity at intervals - dividends will do this job nicely - in order to invest the extractions into a counter-balancing business, or at the very least something that will add balance to a portfolio. In effect, one is hedging or insuring the main business. Me i'm a big fan of hedges.





> You're right that the dividend tax credit changes things, by the way (for after tax return).


see, the first little tiny crack in the fortification. After tax return is what matters. Jas i suspect we're going to be able to reform you, in the end.


.


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## gardner (Feb 13, 2014)

humble_pie said:


> assuming that managers who don't pay dividends will instead be able to invest the money in such a way that their previous success will be replicated


This is the core assumption that I have trouble with as well. There are businesses that generate cash, but where growth is not so easy. Utilities, for example, generate cash steadily, but to grow, especially to grow faster than the general economy, is pretty hard. I believe it is entirely reasonable for that type of business to pay dividends rather than grow cash in it's own bank account.

The alternative that some companies use is to do share buybacks with free cash, thus un-diluting the share float and raising average stock price. I don't know what the long term effects of continuous buy-backs by a steady income earner would be. Because so much of share price day-to-day is based on sentiment, I would be uncomfortable with having me day-to-day income tied to that, even with the assurance of share buy-backs pumping the stock price up.


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## agent99 (Sep 11, 2013)

Oldroe said:


> And you don't understand why Vangaurd would pay for and publish this study.


What I don't understand is why Vanguard or any other funds would enter the discussion.

As Canadians with a need for retirement income, some of us buy a portfolio of Canadian dividend stocks. Maybe a few solid bank, pipeline, utility, industrial, consumer stocks. How could anyone buy the equivalent of those in non-dividend stocks? I can only assume that James is using etfs or some other source that does not reflect what many of us retirees are actually doing. 

Besides, this discussion is getting old.


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## janus10 (Nov 7, 2013)

If you are selling stocks during market retracements to fund retirement, then you've probably not structured your portfolio correctly. If you use a cash wedge set up (laddered GICs spanning 5 years), then you replenish the wedge during good times on the stock market. You strive to have enough in GIC's that, with potentially other income streams such as CPP/OAS/Pension, that you cash out a portion of your GIC which has recently matured. 5 years worth of GICs is typically enough to weather a severe market downturn so that you don't have to liquidate your equities at the worst time.

More details here: http://www.boomersblueprint.com/blog/2014/06/the-cash-wedge-an-income-delivery-process-–-part-1/


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## james4beach (Nov 15, 2012)

Well janus, that's only for people who use the old traditional idea of keeping fixed income in their retirement allocation. A lot of people in the last few years have decided to go to 100% equities out of desperation for higher returns. This exposes them to stock market volatility, but many (mistakenly) think that dividends insulate them from stock volatility. Some people have gotten used to treating dividend stocks as if it's fixed income. But of course, stocks are nothing like bonds, whether or not they pay dividends.

A bear market will help straighten that out.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Well janus, that's only for people who use the old traditional idea of keeping fixed income in their retirement allocation. A lot of people in the last few years have decided to go to 100% equities out of desperation for higher returns. This exposes them to stock market volatility, but many (mistakenly) think that dividends insulate them from stock volatility. Some people have gotten used to treating dividend stocks as if it's fixed income. But of course, stocks are nothing like bonds, whether or not they pay dividends.
> 
> A bear market will help straighten that out.


Completely agree.

ltr


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## Oldroe (Sep 18, 2009)

Agent I guess you don't read.

I own 10 core div. stocks. And get in out of opportunity's.

I've play the high flier non div game. They are just old scars now.

And I live for bear markets. That's opportunity but you need a set. 

Bonds had 1 good year about 20 years ago have fun.


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## Eder (Feb 16, 2011)

Well I would welcome another bear ...its been 18 months since the last 23% drop and was a great buying opportunity. The constant dividend flow remained uninterrupted for all my stocks though.

Enbridge at $41
TransCanada at $44
Royal Bank at $68...yum


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## james4beach (Nov 15, 2012)

So far I'm hearing that all of us are eagerly awaiting the bear market


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## like_to_retire (Oct 9, 2016)

james4beach said:


> So far I'm hearing that all of us are eagerly awaiting the bear market


No, not all of us.

The sensible people would like an orderly and continuing rise in the market.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> No, not all of us.
> 
> The sensible people would like an orderly and continuing rise in the market.


Historically speaking, stock markets can be quite volatile and there are often periods of decline. The steadily rising stock market of the last few years is an aberration. It would be sensible to be prepared to deal with the (inevitable) volatility, including prolonged down-markets.


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## Eder (Feb 16, 2011)

like_to_retire said:


> No, not all of us.
> 
> The sensible people would like an orderly and continuing rise in the market.
> 
> ltr


Orderly is not reasonable...since I entered the market in the 80's there has been a lot of volatility and you need to be in your comfort zone with your investments. I deal with the stress by keeping cash to buy the inevitable bargains and owning quality businesses that are not likely to face bankruptcy or cut their payouts. 

Bear markets are inevitable...they can be a very good thing for investors. 

Oh....I consider myself sensible.


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## agent99 (Sep 11, 2013)

james4beach said:


> * A lot of people* in the last few years have decided to go to 100% equities out of desperation for higher returns.


Where did you find that information? 

I suspect some, perhaps early in accumulation stage, may have 100% equities. Others who have company pensions may do same, seeing pensions provide the equivalent of a secure fixed income cash flow. But "*A lot*" in general? I would be surprised!


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## james4beach (Nov 15, 2012)

Just going by what I'm seeing in this forum. Doesn't it seem like people around here have high stock allocations in general? Maybe it's because many people here have pensions.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> Just going by what I'm seeing in this forum. Doesn't it seem like people around here have high stock allocations in general? Maybe it's because many people here have pensions.


I think quite the opposite. If a person has a pension, they have no need to take risk, so they would have lower equity allocation?

That's certainly my own reasoning. I ony assign 40% to equities. My pension is fully indexed and covers all my expenses. Why would I bother taking risk?

ltr


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## bgc_fan (Apr 5, 2009)

like_to_retire said:


> I think quite the opposite. If a person has a pension, they have no need to take risk, so they would have lower equity allocation?
> 
> That's certainly my own reasoning. I ony assign 40% to equities. My pension is fully indexed and covers all my expenses. Why would I bother taking risk?
> 
> ltr


I think the reasoning is that with a guaranteed pension, you don't have to worry about stable cash flow/income from fixed income sources. You can afford to take risks and grow your investment account (assuming you want the bragging rights for biggest net worth) if the pension covers most, if not all expenses, i.e. you don't really need to draw upon your investments to live. Whereas if you didn't have a pension, you'd want to make sure you have some stable cash flow meaning that you should start loading up on fixed income investments.


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## like_to_retire (Oct 9, 2016)

bgc_fan said:


> I think the reasoning is that with a guaranteed pension, you don't have to worry about stable cash flow/income from fixed income sources. You can afford to take risks and grow your investment account (assuming you want the bragging rights for biggest net worth) if the pension covers most, if not all expenses, i.e. you don't really need to draw upon your investments to live. Whereas if you didn't have a pension, you'd want to make sure you have some stable cash flow meaning that you should start loading up on fixed income investments.


I guess we both look at in the opposite way.

I agree with James' thought a few posts above, where he said that: _"A lot of people in the last few years have decided to go to 100% equities out of desperation for higher returns"_.

I agreed with that thought, (although maybe not the 100%), when people require higher returns, they take more risk and assign more to equities, (although it seems James is postulating the opposite now).

ltr


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## agent99 (Sep 11, 2013)

like_to_retire said:


> I agreed with that thought, (although maybe not the 100%), when people require higher returns, they take more risk and assign more to equities, (although it seems James is postulating the opposite now).
> 
> ltr


Definitely not what we have done, and some others here have asked questions indicating that they may be at similar stage. 

What we have been doing, is looking at alternative fixed income investments. GICs, bond funds, gov bonds not attractive. Only higher risk investment grade corporates have acceptable yields. Otherwise have convertible debentures, split preferreds and the like. Would love to be able to go back to a GIC ladder yielding over 4%! In meantime trying to maintain portfolio yield by increasing risk on fixed income. But not adding to equities at this stage of the market. 

Despite above, we have maintained our fixed income allocation at over 60% in our RRIFS and almost zero in our taxable accounts where we hold dividend payers. Overall above 40+% depending on state of equity markets. These numbers would of course be higher if a market correction occurs.

No pension. Trying to maintain overall portfolio yield above SWR rate.


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## james4beach (Nov 15, 2012)

agent99 said:


> GICs, bond funds, gov bonds not attractive. Only higher risk investment grade corporates have acceptable yields. Otherwise have convertible debentures, split preferreds and the like. . . . No pension. Trying to maintain overall portfolio yield above SWR rate.


But remember, the purpose of fixed income exposure is not just to provide return (which admittedly is low) but also to reduce volatility of the portfolio. This is extremely important, because in the withdrawal stage, the "sequence risk" can really hurt you. Sequence risk increases with volatility. So a primary goal of portfolio design in retirement and withdrawal (SWR etc) is to reduce the volatility.

That's where fixed income comes in, and usually this is done with govt bonds or high grade corporates. XBB and VAB do the job. GICs will also do the job.

However, higher risk corporate bonds and other types of risky fixed income won't do the job. In the extreme, look at junk bonds. They correlate very highly with stocks, so when stocks plummet, so do junk bonds. The same goes for preferred shares. Corporate bonds in the BBB zone are teetering on the edge.

The SWR studies showed that there is very little difference in withdrawal outcomes between 30/70 and 70/30 allocations. Notice that the extra return of the higher stock allocation did not help. Why? Because of the volatility and sequence risk.

Trying to squeeze out extra fixed income returns with anything other than the highest rated corporate bonds, or with anything else like preferred shares, is a risky game. You are making your portfolio more vulnerable to volatility, and not protecting yourself from sequence risk.


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## james4beach (Nov 15, 2012)

Maximum drawdown is an easier way to visualize the sequence risk I'm talking about. The worse your drawdown (in total return) the more vulnerable you are to sequence risk.

For example here are junk bonds during the last bear market. Notice the 38% drawdown at the same time stocks fell. Someone with this kind of fixed income exposure is highly exposed to sequence risk:
http://stockcharts.com/h-sc/ui?s=JNK&p=D&st=2008-02-01&en=2010-01-01&id=p37115281863


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## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> ... Corporate bonds in the BBB zone are teetering on the edge...


On the edge of what?

I just looked up BBB (DBRS) corp bonds at TDW: Shaw, Rogers, Bell, Telus, Cogeco, Loblaws, Enbridge, Altagas, Pembina, Transcanada, IPL, Canadian Tire, Fortis. RioCan, Thompson, Fairfax, Calloway.

What I will say is that those of us with significant dividends from these companies should ensure that our fixed income is not also tied too heavily to these same companies. But I don't see them teetering on the edge - as in a default precipice?

My solution to the dribs of bond interest you might receive from individual bonds and have trouble effectively reinvesting is to buy strip bonds. Like my DRIPs, I'm a lazy investor.


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> On the edge of what?


I meant that BBB is on the edge of being considered riskier debt, and grouped in with stocks & other "risk assets". The lower grade the debt, the more of a "risk asset" it is and the worse drawdowns it will experience.

Let's say the world is in a selling mood -- wants to unload risk. Here is typically what the world will do:

AAA debt: won't sell it, might even buy it
BBB debt: kind of on the edge
// things below are definitely "risk assets"
BB debt: junk, will be sold
CCC debt: junk, will be sold
stocks: stocks are always sold


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## agent99 (Sep 11, 2013)

james4beach said:


> Trying to squeeze out extra fixed income returns with anything other than the highest rated corporate bonds, or with anything else like preferred shares, is a risky game. You are making your portfolio more vulnerable to volatility, and not protecting yourself from sequence risk.


James, you probably mean well and have no doubt read a lot of theory. But really, some of us have been around for a lot longer than you, have practical experience of navigating the ups and downs of markets and are quite capable of evaluating risk in our portfolios. No risk no gain!


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## Pluto (Sep 12, 2013)

james4beach said:


> So far I'm hearing that all of us are eagerly awaiting the bear market


one of the assumpions of this thread is that volatility is risk. 

But I don't buy that assumption, and some others don't either. High risk is investing in low quality companies. The ones here who don't fear a bear market and see it as an opportunity are ones who invest in survivors so they don't experience panic and sell low. They buy more instead. Volatility is a tool to buy low, and sell high if desired. Its not to be feared and treated as risk.


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## milhouse (Nov 16, 2016)

Is talking about SWR and sequence risk too theoretical in some discussions? You can compare theoretical apples to theoretical apples with consistent parameters, like an increasing spend based on inflation, but in reality, the consistent parameters are adjustable. 
I'm assuming the base goal of someone retiring is to be able to _generally_ maintain their standard of living through retirement. If market returns go through a rough stretch early in retirement, instead of following cookie cutter SWR, I would assume a retiree would adjust or scale down their spend for a few years with limited impact to their lifestyle. I'm also assuming that would correspondingly change the risk of ruin and the original SWR and sequence of risk assumptions no longer apply or at least need to be adjusted.


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## agent99 (Sep 11, 2013)

milhouse said:


> Is talking about SWR and sequence risk too theoretical in some discussions? You can compare theoretical apples to theoretical apples with consistent parameters, like an increasing spend based on inflation, but in reality, the consistent parameters are adjustable.
> I'm assuming the base goal of someone retiring is to be able to _generally_ maintain their standard of living through retirement. If market returns go through a rough stretch early in retirement, instead of following cookie cutter SWR, I would assume a retiree would adjust or scale down their spend for a few years with limited impact to their lifestyle. I'm also assuming that would correspondingly change the risk of ruin and the original SWR and sequence of risk assumptions no longer apply or at least need to be adjusted.


Agreed - good post!

In our case, our unregistered accounts are made up of dividend payers. Our day to day living expenses are funded by those dividends [plus CPP/OAS] Even when markets go up and down (or even crash like in 08/9), the dividends hardly change and our income is unaffected (This would not happen if we were having to sell stocks to maintain income). 

Our fixed income is all in registered accounts along with additional equities. So far, we have never withdrawn any of our fixed income securities. We just replace them when they mature. Yield is affected by low rates, but not really a problem because FI is the fail-safe part of portfolio. In other words, cushions the downside of any recession. 

Our required RRIF withdrawals consist mainly of equities (in-kind) along with accumulated cash. Once equities are moved to unregistered accounts, we rebalance a bit and sell a few dogs. Proceeds and cash withdrawn are put aside in savings account for future tax installments and property taxes. And to add to our TFSAs.

I should not really have used SWR earlier. I try to maintain our overall current portfolio yield above the often used 4% SWR . We try to match spending to our income so maybe 4% is our Safe Spending Rate.

Not everyone is in same situation. Each of us need to figure things out for ourselves. Common sense usually better than those theoretical apples


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## Eder (Feb 16, 2011)

james4beach said:


> I meant that BBB is on the edge of being considered riskier debt, and grouped in with stocks & other "risk assets". The lower grade the debt, the more of a "risk asset" it is and the worse drawdowns it will experience.
> 
> Let's say the world is in a selling mood -- wants to unload risk. Here is typically what the world will do:
> 
> ...


For every bond & equity that is "Sold" during a downturn there is someone on the other side of the trade buying....often the smarter people.


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## agent99 (Sep 11, 2013)

Eder said:


> For every bond & equity that is "Sold" during a downturn there is someone on the other side of the trade buying....often the smarter people.


Good point. The whole world can't possibly be in a selling mood!


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## janus10 (Nov 7, 2013)

Pluto said:


> one of the assumpions of this thread is that volatility is risk.
> 
> But I don't buy that assumption, and some others don't either. High risk is investing in low quality companies. The ones here who don't fear a bear market and see it as an opportunity are ones who invest in survivors so they don't experience panic and sell low. They buy more instead. Volatility is a tool to buy low, and sell high if desired. Its not to be feared and treated as risk.


Or, like me, you simply trade volatility as directly as you can (derivatives of VIX futures).


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## agent99 (Sep 11, 2013)

janus10 said:


> Or, like me, you simply trade volatility as directly as you can (derivatives of VIX futures).


Not a trader and don't think much about volatility, but as I understand it, markets have been at a historically low volatility level for some time. Apparently affects income from brokerage commissions at financial institutions including our major banks.


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