# How would 3% or even 4% Inflation Affect You?



## canew90 (Jul 13, 2016)

The Dow dropped because inflation for Jan was up 0.5% when they expected 0.3%. What if inflation for the year was 3% or more per year (though many say the costs to average people are already 4% a year) affect you?

Anyone living on FI or needed to sell capital to meet their needs should be worried.


----------



## Just a Guy (Mar 27, 2012)

You assume the talking heads who said the crash was inflation related are correct...


----------



## sags (May 15, 2010)

One year of 3% may look trivial, but consider the effect of a 10 year period where inflation has risen 3% per year compounded.

Unless people have a cost of living indexed income or annual increases, they would experience a 30-40% reduction in purchasing power.

That outcome is very undesirable for the economy. People would have to severely cut back on discretionary spending and a broad spectrum of industries would suffer.

Recessions start with austerity measures. People cut back spending and the reduced demand for goods and services means that companies reduce their workforce.

It can become a vicious cycle that is very difficult to get out of, which is why analysts and central bankers monitor inflation closely.


----------



## Just a Guy (Mar 27, 2012)

Where have you been living for the past 10 years? 3% was probably on the low side of actual inflation in Canada. Yet we all survived.


----------



## OptsyEagle (Nov 29, 2009)

I think the human factor plays a bigger role. Some of us have the human tendency to find more and more things to spend money on, as time goes by and others have the human tendency to find more and more ways to save money and stretch each dollar, as time goes by.


----------



## like_to_retire (Oct 9, 2016)

Just a Guy said:


> Where have you been living for the past 10 years? 3% was probably on the low side of actual inflation in Canada. Yet we all survived.


Yeah, funny stuff. I remember in the fall of 1981 when I signed my next 5 year term mortgage on my house for 21%. I wonder how that would work today for those that are use to sub 3% mortgages? I seem to remember inflation was between 12% and 13% at that time. The prevailing attitude was to buy something today, because tomorrow it would be a whole lot more expensive.

As far as how I would do if inflation jumped from the present 2% to 3% or 4%, I think I would be fine, in fact I would welcome the increase in my pitiful fixed income yields. I've been retired for about 12 years now, and my DB pension is fully indexed, so it tracks up with inflation, as does my CPP, so that's not a problem. All my dividends seem to increase greater than inflation, so I don't see that a as a problem. Fixed income, is starting to climb, but it always lags inflation.

ltr


----------



## Just a Guy (Mar 27, 2012)

What was your house price (you need to put things into perspective). I’d be your house payment is pretty close (as a portion of income) to people today.


----------



## livewell (Dec 1, 2013)

For someone not carrying a mortgage and normal or low spending I don't think I would notice the difference very much. I agree I would welcome the improvement in the fixed income portion of my portfolio. Where I worry is whether the dividend growth stocks that have been doing so well in the last few/many years will dramatically fall out of favour if the bond interest rates increase. That would be negative for me.


----------



## like_to_retire (Oct 9, 2016)

Just a Guy said:


> I’d be your house payment is pretty close (as a portion of income) to people today.


Hilarious.

ltr


----------



## lonewolf :) (Sep 13, 2016)

like_to_retire said:


> Hilarious.
> 
> ltr


 Years ago when interest rates were high the cost of the house was less so end result was paying a lot more then asking price when interest payments are factored in. Of course if never had to borrow the money the cost of the house was less expensive back then, then compare to today.

Now rates most likely going up as home prices fall. Though this time property tax could go through the roof as higher interest rates will make it harder for towns & cities to service the debt as they are so deep in dept now.


----------



## BigMonkey (May 31, 2016)

I'm of the opinion that the inflation measure generally used by government is flawed as it doesn't seem to include a lot of items (like tuition and house prices). A lot of items that comes to mind seem to rise faster than 3% a year: gasoline prices, housing price, tuition, prescription drugs, electricity rates.


----------



## Mukhang pera (Feb 26, 2016)

BigMonkey said:


> I'm of the opinion that the inflation measure generally used by government is flawed as it doesn't seem to include a lot of items (like tuition and house prices). A lot of items that comes to mind seem to rise faster than 3% a year: gasoline prices, housing price, tuition, prescription drugs, electricity rates.


You got that right BM. I receive a BC government DB pension, touted as being indexed for inflation. This is what is on the pension BC website:

"The Cost-of-Living Adjustment for 2018 is 0.78 per cent on base pension. This increase is effective as of January 1, 2018. The adjustment will automatically be applied to your pension."

I would love to know where inflation came in at less than 1% last year. As you point out, gasoline alone will put the figure above that.

A 3% adjustment would be great! Government will always use grossly distorted figures. I expect that If I live to be 80, my monthly pension payment won't be enough to buy a cup of coffee. I do not yet get CPP, but I expect the same will prevail there and ditto for OAS for those whose incomes are low enough to qualify. In short: Don't count on it. It's up to the individual to come up with investments that will well and truly track inflation.


----------



## livewell (Dec 1, 2013)

Just a Guy said:


> What was your house price (you need to put things into perspective). I’d be your house payment is pretty close (as a portion of income) to people today.





like_to_retire said:


> Hilarious.
> 
> ltr


Why hilarious? I recall my first mortgage in the eighties was at a very high interest % (Don't recall the actual amount). I do recall the amount of mortgage relative to income was capped to 30% which I believe is lower than the ratio's used today. And at the time the maximum mortgage term was 25 years.


----------



## like_to_retire (Oct 9, 2016)

livewell said:


> I do recall the amount of mortgage relative to income was capped to 30% which I believe is lower than the ratio's used today. And at the time the maximum mortgage term was 25 years.


Sure, but I was extended somewhat 5 years earlier when the mortgage was at around 10%. To resign 5 years later at 21% is shocking. There were people losing their homes during those 20% days.


----------



## Just a Guy (Mar 27, 2012)

There will be again as interest rates hit mortgage renewals.


----------



## kcowan (Jul 1, 2010)

Stay tuned. The Millenials are about to learn a lesson in economics!


----------



## Beaver101 (Nov 14, 2011)

BigMonkey said:


> I'm of the opinion that the inflation *measure generally used* *by government is flawed *as it doesn't seem to include a lot of items (like tuition and house prices). A lot of items that comes to mind seem to rise faster than 3% a year: gasoline prices, housing price, tuition, prescription drugs, electricity rates.


... +1. I just ignore it as that's a theoretical one (or rather a model-simulated biased one). :sleeping: :sleeping: :sleeping:

Now if you asked "how does 13% or 14% inflation affects you?", then I can realistically answer it.


----------



## sags (May 15, 2010)

It is a strange dichotomy that having bad credit early in adulthood may have saved some people from being buried under debts their peers obtained through better credit scores.


----------



## agent99 (Sep 11, 2013)

Beaver101 said:


> Now if you asked "how does 13% or 14% inflation affects you?", then I can realistically answer it.


Inflation doesn't reach those rates all of a sudden. It moves up gradually. Like some others here, we lived through such a period when we were young, and really hardly noticed it. Our first home had an existing 8% mortgage. I then went to 9.5% and renewed 5 years later at close to 11%. Some friends had 14% mortgages while one other had a fixed 5% for 25 years. (The bank kept trying to get them to pay that off in full!) At the same time, I recall having one 5yr GIC that IIRC paid 16%. I also bought a boat for $8000 and sold it 3 years later for $14,000. Strange times, but we got though them without hardly noticing.

Right now, if inflation picks up to 3 or 4%, it would likely be good for us. No debt so no worries there. Better returns on fixed income. I would love to have a ladder of 5-6% GICs again. Dividend stocks may drop in value, but cash flow from dividends will continue and likely increase. CPP/OAS are indexed so should increase. Maybe some of our assets (like boat) will go up in value and we can finally sell!

For our kids and younger families - Maybe not so rosy, but they will cope, one way or another.


----------



## Mortgage u/w (Feb 6, 2014)

canew90 said:


> The Dow dropped because inflation for Jan was up 0.5% when they expected 0.3%. What if inflation for the year was 3% or more per year (though many say the costs to average people are already 4% a year) affect you?
> 
> Anyone living on FI or needed to sell capital to meet their needs should be worried.


If a 3-4% inflation affects someone where they need to sell capital to survive, you know they are living beyond their means. 

If one particular item gets too expensive, you should find an alternative item. As one builds their career, income rises as well - sometimes beyond inflation rates. So there is always an alternative.


----------



## sags (May 15, 2010)

I remember wages rising swiftly during those days to keep aligned with inflation and rising interest rates.

Pierre Trudeau's government introduced wage and price controls to try to break the cycle.

We were receiving 10%+ annual increases, so were able to pay our 19% mortgage rate and 10% auto payment.


----------



## Mukhang pera (Feb 26, 2016)

sags said:


> I remember wages rising swiftly during those days to keep aligned with inflation and rising interest rates.
> 
> Pierre Trudeau's government introduced wage and price controls to try to break the cycle.
> 
> We were receiving 10%+ annual increases, so were able to pay our 19% mortgage rate and 10% auto payment.


And we were getting 19% on CSBs.


----------



## james4beach (Nov 15, 2012)

I already live in an area with over 4% inflation (both according to published regional inflation and what I calculate of my cost of living). I think I calculated 4.5% rate of increase in my core expenses -- housing, food, and essentials.

It's pretty rough. The only way it doesn't bother me is when my salary is increasing along with it. In the last couple of years my salary has gone up, just about preserving my real wages. If the company can't keep increasing my pay then I will have to move elsewhere.


----------



## olivaw (Nov 21, 2010)

I'm retired with no pension and no debt. I will eventually need to sell capital to cover living expenses but it is the combination of ROI and inflation that truly matters. If my portfolio beats inflation by a point or two, then my nest-egg will probably outlive me. 

I suppose that I could try to avoid selling any assets by moving from broad based index and bond funds to dividend funds but I am not convinced that dividends are always a superior strategy. Ignoring tax, do I really care if my earnings come from dividends, interest or appreciation? 

My response to the new inflation figures is to do nothing - at least for now.


----------



## Beaver101 (Nov 14, 2011)

agent99 said:


> Inflation doesn't reach those rates all of a sudden. It moves up gradually.


 ... agree that those rates come about all of sudden but disagree that it moves "up" gradually. I think those 13%-14% rates moved down gradually and got stucked there - depending on what you apply it for. Eg. more realistic for utility, food and housing prices. 



> Like some others here, we lived through such a period when we were young, and really hardly noticed it. Our first home had an existing 8% mortgage. I then went to 9.5% and renewed 5 years later at close to 11%. Some friends had 14% mortgages while one other had a fixed 5% for 25 years. (The bank kept trying to get them to pay that off in full!)


 ... yep, and my dad went to a private lender for a business loan for a whopping 22% whereas the bank was charging 18% but said "no" due to it being a "business" loan. 


> At the same time, I recall having one 5yr GIC that IIRC paid 16%


. ... try 18% and a 10 year GIC was insured but can't recall what it was paying at, same as 5 year???



> I also bought a boat for $8000 and sold it 3 years later for $14,000. Strange times, but we got though them without hardly noticing.


 ... yep, rising inflation, not decreasing inflation rates so 3 or 4% is theoretical. Maybe it's realistic for an average Joe's salary increase and CPP/OAS.


----------



## Beaver101 (Nov 14, 2011)

kcowan said:


> Stay tuned. The Millenials are about to learn a lesson in economics!


 ... no need if one can get a bailout from the bank of dad & mom. :excitement:


----------



## like_to_retire (Oct 9, 2016)

olivaw said:


> Ignoring tax, do I really care if my earnings come from dividends, interest or appreciation?


Yeah, you do. During accumulation, it matters not. But when you have to fund your retirement, it matters plenty. 

A prolonged downturn in the market when your income is derived from selling stocks that are suffering from low share prices can be devastating to a portfolio. Look up sequence of returns risk.

Most companies in a downturn will retain their dividends and are loath to reduce them, so the dividend investor hardly notices the downturn with respect to their income. The growth/appreciation investor is hit hard. Dividend-paying Canadian companies that enjoy a track record of generating strong revenue, earnings and cash flow, generally have stable and relatively predictable businesses that are resilient when the economy is in a downturn, and so provide downside protection. A lot of these larger dividend paying companies have operations outside Canada and as such weather downturns somewhat better than smaller growth companies.

I think during withdrawal, it's a good idea to depend on dividends rather than selling shares into a down market that can persist for years.

ltr


----------



## agent99 (Sep 11, 2013)

Some things may be different now compared when us old fogeys experienced high inflation.

In particular, cost of home relative to family income. Our first home cost us $30,000. At that time, my income was probably about 1/2 of that. Say $15,000. Today, in same area, an equivalent home (3 bedroom sidesplit with attached garage and basement in new middle income suburb) likely lists at about $300k. I doubt many young couples have $150k in salary, unless they are both working and even then, not too likely in our area)

Increases in Mortgage interest will no doubt have a greater effect on recent home buyers.


----------



## Just a Guy (Mar 27, 2012)

One nice thing about real estate and inflation one buys in today's dollars but pay with tomorrow's dollars. With inflation, houses actually get cheaper with age. Say I buy a house today for $100k, with hyper inflation (to illustrate the point) that may be the price of bread before lunch. You pay off the mortgage, but the house's value increases with inflation so it's probably worth billions if not trillions after lunch.


----------



## agent99 (Sep 11, 2013)

Just a Guy said:


> house's value increases with inflation so it's probably worth billions if not trillions after lunch.


So you think house prices would go up with inflation? Somehow I doubt it. 

More likely the market will determine house prices. If people can't handle their new high mortgages, perhaps they will sell? Fewer will be in market as buyers because they can't afford the new higher payments. Prices may go down. Input costs for NEW homes may affect new house prices (lumber, labour etc) and in time this may influence house prices but this may take some time if there is a glut of used homes on the market.


----------



## Just a Guy (Mar 27, 2012)

We were talking in hyper inflation where bread is worth $100k (because cash is meaningless). Shelter will usually preserve its actual buying power because people need shelter. 

By the way, if you don't think houses increase in value with inflation then why aren't houses before the last 20 year boom not priced at the 10k they were in the 1950's?

Maybe read up on Germany after the war when they went through hyperinflation...people with assets survived, people with cash perished. There are even stories about people stealing the wheelbarrows others used to carry cash with and left the cash because the wheelbarrow was worth more.


----------



## BigMonkey (May 31, 2016)

agent99 said:


> Some things may be different now compared when us old fogeys experienced high inflation.
> 
> In particular, cost of home relative to family income. Our first home cost us $30,000. At that time, my income was probably about 1/2 of that. Say $15,000. Today, in same area, an equivalent home (3 bedroom sidesplit with attached garage and basement in new middle income suburb) likely lists at about $300k. I doubt many young couples have $150k in salary, unless they are both working and even then, not too likely in our area)
> 
> Increases in Mortgage interest will no doubt have a greater effect on recent home buyers.


More like 300k for a 300 sq foot studio in Toronto or Vancouver. lol just kidding. its more than 300k


----------



## agent99 (Sep 11, 2013)

Just a Guy said:


> We were talking in hyper inflation


We were? I thought this thread was about 3% or 4% inflation and how it might affect us.


----------



## james4beach (Nov 15, 2012)

4 pages into an inflation discussion and nobody has mentioned gold? Shows you how out of favour it is. Look through this thread and there are several mentions of stocks/bonds/fixed income, and not a single mention of gold.

I hold gold as protection against a sharp/high inflation period. 25% of my net worth is in gold, which somewhat compensates for the fact I don't own any real estate (which would also be a hard asset that helps preserve wealth during high inflation). This is not just inflation protection but also protection against catastrophic currency depreciation.

Stocks also offer protection against inflation but don't save you from a home currency collapse. For example people who lived in Iceland or Argentina as those economies collapsed suffered horrendous losses in stocks. This is a case where gold saves the day.


----------



## agent99 (Sep 11, 2013)

BigMonkey said:


> More like 300k for a 300 sq foot studio in Toronto or Vancouver. lol just kidding. its more than 300k


I am sure you are right about Toronto/Vancouver. I quoted pricing from a similar development and area to one where we bought our first home. Maybe $350k max. today.

Housing in our area has, as mentioned earlier, increased at a higher rate than inflation. As a result buyers need to earn more to buy the same value of home. Also as a result, first time home owners tend to be older. 

Inflation since we bought our home in 1972 has averaged 4%. Home prices have increased about 11 fold or at an average of 5.35% (if my math is correct!)


----------



## Just a Guy (Mar 27, 2012)

agent99 said:


> We were? I thought this thread was about 3% or 4% inflation and how it might affect us.


If you look, the quote was taken out of context, I was specifically talking hyperinflation to demonstrate an idea.


----------



## olivaw (Nov 21, 2010)

like_to_retire said:


> Yeah, you do. During accumulation, it matters not. But when you have to fund your retirement, it matters plenty.
> 
> A prolonged downturn in the market when your income is derived from selling stocks that are suffering from low share prices can be devastating to a portfolio. Look up sequence of returns risk.
> 
> ...


Thanks. 

I know dividends are popular around here but I am still unclear why so many people think they will preserve capital in a bear market. Is there a historical chart somewhere that demonstrates that a bias towards dividends will protect my portfolio better than a broad based index investment strategy?

My own simulations suggest that I will seldom need to sell equities at the bottom. If stocks decline I will be underweight equities and overweight bonds. If anything, I would sell bonds and buy equities at my next biennial rebalance. When equities are up I will be overweight equities and sell them.


----------



## BigMonkey (May 31, 2016)

agent99 said:


> I am sure you are right about Toronto/Vancouver. I quoted pricing from a similar development and area to one where we bought our first home. Maybe $350k max. today.
> 
> Housing in our area has, as mentioned earlier, increased at a higher rate than inflation. As a result buyers need to earn more to buy the same value of home. Also as a result, first time home owners tend to be older.
> 
> Inflation since we bought our home in 1972 has averaged 4%. Home prices have increased about 11 fold or at an average of 5.35% (if my math is correct!)


Where in Ontario do you live? $350k seems like reasonable amount for 3 bedroom home by Canada standards. In general Canadian real estate is very expensive compared to the states.


----------



## james4beach (Nov 15, 2012)

like_to_retire said:


> A prolonged downturn in the market when your income is derived from selling stocks that are suffering from low share prices can be devastating to a portfolio. Look up sequence of returns risk.


Taking dividends during sharp years of decline is just as destructive as selling shares. The dividends are just a mechanism to extract cash from the equity value, they don't change the fact you are withdrawing from from the equity value. It is a widespread misconception that extracting cash via dividends is less destructive to the portfolio.

Whether you take out the dividend as cash, or sell shares to provide cashflow, the effect is the same -- yes even during down markets. This is misunderstood by many advisors and book authors.

If you _were_ correct, and if it was true that dividends were not as devastating as selling shares, then there would be a whole section of the Sustainable Withdrawal Rate research that would say: "or ignore all the above and use dividends to provide cashflow". But there isn't such an 'easy out', because dividends are a red herring.

If you take dividends out of a depressed portfolio, you are causing capital destruction. Each and every dividend *immediately* removes cash from the corporation. The share price is immediately adjusted to reflect this. Reinvesting the dividend is the only way to preserve equity, otherwise you have eroded capital.

Although this is a "law of the stock market" (it's fundamental in accounting), I think people tend to not see this for two reasons: (1) share prices decline on the ex- date but the dividend cash appears much later, so people don't link the two, and (2) daily stock volatility masks the steady drop in share price on the ex- date. But it just masks it; the prices still drop.

This misunderstanding of dividends is dangerous actually because it leads people to think that dividends are free money that don't impact the equity. Imagine we had a sharp downturn at a time the investor doesn't really need extra cashflow. The misinformed dividend investor would probably keep taking the dividend as cash, thinking it's a "freebie" thus eroding their capital. The more informed investor would realize that dividends directly come out of equity, and would reinvest the dividend, to avoid eroding capital.



> Most companies in a downturn will retain their dividends and are loath to reduce them, so the dividend investor hardly notices the downturn with respect to their income.


This is true, but that's just about cashflow. As I describe above, equity is still being eroded just as badly as if you were selling shares instead.

It's true that companies try to resist cutting dividends as much as possible and I agree that the cash stream from dividends tends to remain stable. However there are still periods in history where dividends significantly declined, in real terms. A recent period was the high inflation period of the 70s, where dividends did not provide constant cashflow (in real terms)

http://canadianmoneyforum.com/showthread.php/128553-Historical-dividends-during-turbulent-markets

And in the 1930s, dividends declined 40%. It took 20 years for them to increase back to previous levels.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> This is true, but that's just about cashflow. As I describe above, equity is still being eroded just as badly as if you were selling shares instead.
> 
> It's true that companies try to resist cutting dividends as much as possible and I agree that the cash stream from dividends tends to remain stable. However there are still periods in history where dividends significantly declined, in real terms. A recent period was the high inflation period of the 70s, where dividends did not provide constant cashflow (in real terms)



Thanks James, and for sure I understand the math behind where a dividend comes from, and I do realize there have been times where dividends declined in real terms. 

But, most downturns are temporary, and as we both agree, companies tend to maintain dividends as not to suffer further share price erosion. The dividend investor continues to receive their stable income, but the growth investor who sells shares to derive their income is at a disadvantage during this downturn. This can deplete a portfolio, which is hard to recover from, especially during the initial years of retirement withdrawal that the dividend investor doesn't suffer.

ltr


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> Taking dividends during sharp years of decline is just as destructive as selling shares. The dividends are just a mechanism to extract cash from the equity value, they don't change the fact you are withdrawing from from the equity value. It is a widespread misconception that extracting cash via dividends is less destructive to the portfolio.
> 
> Whether you take out the dividend as cash, or sell shares to provide cashflow, the effect is the same -- yes even during down markets. This is misunderstood by many advisors and book authors.
> 
> ...


What a pile of nonsense. You are confused beyond belief.

Let's say you own a business. Business earns $100K in total earnings per year. You - business owner - make an informed decision that you need to reinvest $80K back into the business to fully maintain its long-term competitive position and earning power. 

The remaining $20K is what Buffett calls *owner earnings*. This is the real dollar amount that you - the owner of the business - can safely withdraw from the business without affecting its long-term value. This is where dividends come from. They do not erode the equity value because you already reinvested part of the earnings to maintain business value.

This is easy to prove empirically. Many companies have a 50+ year history of paying dividends. A dozen or so companies in NA have been paying dividends for 100+ years. If your reasoning was true, their equity value would be fully eroded by now.

In some cases, management teams choose to maintain an unsustainable dividend even though the business doesn't generate enough owner earnings. They either under-invest in the business, or pile on debt to maintain the dividend, or both. By and large, these cases are a small minory. And they usually don't last long. Market punishes the stock, management team gets the message, and the dividend is cut.


----------



## Beaver101 (Nov 14, 2011)

^ I think J4B's is not entirely a load of nonsense, or it's applicable in the case where dividends are paid as ROC.


----------



## GoldStone (Mar 6, 2011)

Beaver101 said:


> ^ I think J4B's is not entirely a load of nonsense, or it's applicable in the case where dividends are paid as ROC.


Entities that pay ROC is a special, narrow case. I was talking about regular dividends.


----------



## gardner (Feb 13, 2014)

james4beach said:


> Whether you take out the dividend as cash, or sell shares to provide cashflow, the effect is the same


This all makes perfect sense if the stock price is set by an analytical function of the true value of the company. The problem is that the stock price is actually controlled in large part by sentiment, fear, greed and herd instinct. There is no good reason that VTI and VEA should move in exact lock-step with one another: they represent completely disjoint groups of businesses in disjoint economies, yet the effects of sentiment, fear, greed and herd instinct cause them to make significant moves together in response to who knows what capricious rumour.

For my part, I look at dividends as a stream of payment that is ACTUALLY linked to the health and strength of the company, even when the price is buffeted by the winds of fashion. Yeah, taking out that payment diminishes the companies value a little, but the price would likely make a larger change on the back of a tween from some idiot in another country.


----------



## hboy54 (Sep 16, 2016)

GoldStone said:


> What a pile of nonsense. You are confused beyond belief.


Indeed!

Consider a share of market value $10 and book value of $10. We have 100 shares.

The company pays $1 dividend. We now have (perhaps) market value of $9 and have (definitely) book value of $9. We still have 100 shares. Therefore in the aggregate we have market value of $900 and book value of $900.

Consider at some other time, perhaps during one of those irrational phases. On this day we have market value $5 and book value $10. The company decides to not pay the dividend for some reason, but you still want to extract $100.

So instead sell 20 shares of market value $5. We now have have 80 shares remaining. Therefore in the aggregate we have market value of $400 and book value of $800 (remember no dividend paid so BV still $10).

The irrational phase passes as they are wont to do and the market value returns to $10. Therefore in the aggregate our remaining 80 shares have market value of $800 and book value of $800 at this time.

For the same $100 extracted to the shareholder, the company situation is very different. The personal situation is very different too.

So yes taking a dividend removes capital from the business. But so does paying interest on a bond. Both of these are entirely different from selling shares to generate your cash flow.

hboy54


----------



## Beaver101 (Nov 14, 2011)

GoldStone said:


> Entities that pay ROC is a special, narrow case. I was talking about regular dividends.


 ... some companies (rarity) and ETFs pay dividends in the from of 100% ROC (or close to it). I just want to identify that as it may be missed from J4B's mind/post.


----------



## Just a Guy (Mar 27, 2012)

I can think of several examples where James is wrong. There are a number of companies set up in the restaurant industry where they take a percentage of each store's top of line sales for use of the logo and company's intellectual property then redistribute this money as a dividend to shareholders. Taking out the dividends in no way impacts the operation of he traded company, many of these have close to 100% payouts as well...again, no impact on the company since its sole purpose is to redistribute he money it collects after a sale occurs. 

Another good example would be companies with insane profits like Apple. It's bringing in so much profit every quarter that there is no way it can spend it. When it pays out it's dividends he stock price doesn't even reflect it on the day of payout.


----------



## agent99 (Sep 11, 2013)

BigMonkey said:


> Where in Ontario do you live? $350k seems like reasonable amount for 3 bedroom home by Canada standards. In general Canadian real estate is very expensive compared to the states.


Our first home was in Kingston, so used that for pricing. In the US, some areas are very depressed and house prices very low. Where we are now, in SC, housing market is strong. There is a lot of new house construction and many northerners moving here. For a similar 3-bedroom house in a new development here, prices are in mid $200s. Definitely cheaper than in Canada, but 2x4 walls, no basement, no furnace (but heat pumps with ducts so they have A/C as well as heat - and it IS needed!) Taxes are VERY low and so are utility bills.


----------



## GoldStone (Mar 6, 2011)

Just a Guy said:


> I can think of several examples where James is wrong.


Several examples are good but generalized reasoning is better.

Businesses exist to generate *owner earnings*: real cash that can be withdrawn from the business without affecting its long-term value.

A business that has to reinvest every last dollar back into the business in order to maintain its current value is not a business. It's an undertaking for the benefit of management, employees and customers. That's a lot of running just to stay in the same place. If you were a 100% owner, you wouldn't tolerate this for long. You would surely intervene:

- pressure the management to improve operations, or
- hire a new management team, or
- take the helm yourself, or
- sell the business to another owner who can run it better
etc

This is a simple concept that even a 5 year old can understand. Would you run a lemonade stand that has to reinvest every dollar back in the stand just to keep it going. What's the point if you can't spend any cash on toys?


----------



## canew90 (Jul 13, 2016)

I think too many investors seem to think company earnings are affected by the price of the stock. Certainly it affects the paper value to the company, but the Cdn Banks, Telecoms, Pipelines, Utilities and all the rest of those solid companies will continue to sell their products and services to generate huge earnings. This enables them to continue to distribute dividends even during extended market corrections. If they continue to generate earnings and pay a growing dividend, their price will rise because investors will recognize the growing value of the company.


----------



## FI40 (Apr 6, 2015)

GoldStone said:


> What a pile of nonsense. You are confused beyond belief.
> 
> Let's say you own a business. Business earns $100K in total earnings per year. You - business owner - make an informed decision that you need to reinvest $80K back into the business to fully maintain its long-term competitive position and earning power.
> 
> ...


I really think you're misinterpreting what he was saying. His post is making a very simple point, just that whatever you think a company is valued before the dividend date, then you better believe it's valued at that amount minus the dividend after the dividend date. That's all. He didn't say anything about dividends making companies go bankrupt or whatever.

IMO I want the companies I buy to be well-managed.
If good management means they invest everything they earn plus go into debt to invest even more to put back into the business because that's the best way to become more valuable in the long term, then great.
If good management means they pay out every dollar they earn in dividends, that's great too.
To me it really doesn't matter obviously since all investors should care about with regard to dividends is good management decision on the amount, leading to the highest possible total return in the medium to long run. However that happens, via dividends or me selling shares when I want to, is not important to me. But good management does not mean you pay a dividend necessarily, which is what you seem to be implying.


----------



## james4beach (Nov 15, 2012)

GoldStone said:


> What a pile of nonsense. You are confused beyond belief.


No, you just have no idea how dividends work.

This has nothing to do with "ROC". *Every* regular dividend removes equity value. They are a convenient method to automatically extract cash from equity, and can provide a reasonably steady cashflow, but they absolutely dig into the equity value.

Really there is no difference from selling shares.


----------



## GoldStone (Mar 6, 2011)

FI40 said:


> I really think you're misinterpreting what he was saying. His post is making a very simple point, just that whatever you think a company is valued before the dividend date, then you better believe it's valued at that amount minus the dividend after the dividend date. That's all. He didn't say anything about dividends making companies go bankrupt or whatever.
> 
> IMO I want the companies I buy to be well-managed.
> If good management means they invest everything they earn plus go into debt to invest even more to put back into the business because that's the best way to become more valuable in the long term, then great.
> ...


No. I don't care if a company pays dividends or not.

My point was, a business can choose to return excess cash to the shareholders without eroding its long-term value. I was talking about the intrinsic value of the business, not the quoted share price.

Yes, the share price is supposed to go down on the ex-date by the value of the dividends paid. And then it is supposed to creep up again because the business continues to generate excess cash that can be returned to the shareholders. In practice, share prices trade in very wide ranges for X number of reasons not related to dividends.


----------



## FI40 (Apr 6, 2015)

GoldStone said:


> No. I don't care if a company pays dividends or not.
> 
> My point was, a business can choose to return excess cash to the shareholders without eroding its long-term value. I was talking about the intrinsic value of the business, not the quoted share price.
> 
> Yes, the share price is supposed to go down on the ex-date by the value of the dividends paid. And then it is supposed to creep up again because the business continues to generate excess cash that can be returned to the shareholders. In practice, share prices trade in very wide ranges for X number of reasons not related to dividends.


I was referring to this specifically:



GoldStone said:


> This is easy to prove empirically. Many companies have a 50+ year history of paying dividends. A dozen or so companies in NA have been paying dividends for 100+ years. If your reasoning was true, their equity value would be fully eroded by now.


So if by equity value you mean intrinsic value, whatever, my point stands. Of course the long term value is eroded. That doesn't imply some day it will be fully eroded. Of course over time the company could grow its intrinsic value faster than the dividend rate. Nobody said that was impossible.


----------



## olivaw (Nov 21, 2010)

Again: Is there a chart that has demonstrated that dividend investing has historically been better at preservation of capital than broad based index investing? 

Profitable companies may repatriate part of the profit to shareholders in the form of dividends. Others repatriate it as share buybacks. Some reinvest it into the company (which should generate higher future profits in a well managed company).


----------



## FI40 (Apr 6, 2015)

james4beach said:


> Really there is no difference from selling shares.


Well maybe some accounting/tax differences but in the main, agreed.


----------



## FI40 (Apr 6, 2015)

olivaw said:


> Again: Is there a chart that has demonstrated that dividend investing has historically been better at preservation of capital than broad based index investing?


On the contrary:


----------



## cainvest (May 1, 2013)

james4beach said:


> Really there is no difference from selling shares.


With the company value aside, are there any differences from an investor's standpoint?


----------



## OnlyMyOpinion (Sep 1, 2013)

FI40 said:


> On the contrary:
> View attachment 17993


It appears that your plot only includes unit price, not price+dividends.
I'm not sure what your start date is, but on a 10yr plot I see 171.5% for SDY:US (SPDR S&P Dividend), and 155.4% for VTI:US (Vanguard Total Stock Market).
On price only it flips, 75.1% for SDY and 109% for VTI.
Which is to say - yes, dividends matter.


----------



## james4beach (Nov 15, 2012)

cainvest said:


> With the company value aside, are there any differences from an investor's standpoint?


Dividends are convenient and automatic, which is great. You don't pay a commission to sell shares, so it seems like a very efficient way to steadily extract value out of equity holdings. In a taxable account it's also nice that dividends provide cashflow without adding to your ACB record keeping headaches. Nice, simple accounting and tax reporting is a nice feature.

I agree that dividends are an excellent cash delivery mechanism.

Just remember that 'living off dividends' does not make your capital last any longer than if you were selling shares to extract the same amount of $. One of the reasons that 'living off dividends' has appeared, historically, to be sustainable forever is because the level of extracted cash (3% ish) has been so low. If you had a low dividend portfolio and sold shares to extract the same amount of cash, you'd be in exactly the same place. It's not the dividends that make this a sustainable practice; it's the low level of cash extraction.

It bothers me when people make claims like: dividend stocks are safer during down markets, lose less value during down markets, or dividend based approaches are less destructive to capital during down markets. It's not true. But it's these misconceptions that lead people into thinking that dividends are some kind of solution to the retirement problem, or even that they somehow get you around the portfolio depletion and sequence of return problems.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Just remember that 'living off dividends' does not make your capital last any longer than if you were selling shares to extract the same amount of $.


That is nonsense. Better to be forgotten. J4B has read too many books


----------



## OnlyMyOpinion (Sep 1, 2013)

> What a pile of nonsense. You are confused beyond belief.





james4beach said:


> No, you just have no idea how dividends work.
> This has nothing to do with "ROC". *Every* regular dividend removes equity value. They are a convenient method to automatically extract cash from equity, and can provide a reasonably steady cashflow, but they absolutely dig into the equity value.
> Really there is no difference from selling shares.


An imperfect exercise I know, so help me out here:
-If I owned 100 shares of BCE a year ago and collected a year's worth of dividends, I'd have $71.75 x 4qtrs= $287 of dividends, plus 100sh x $58.11= $5,811 of share value on Jan.15, for a total of $6,098.
-If BCE had not paid out dividends and I had to sell shares on a quarterly basis to realize the $287 through the year (and if I could sell fractional shares), I'd be down to owning 95.09 shares on Jan.15. At $58.11 they were worth $5,525.75. 
-Of course we should argue that if a dividend had not been paid, the share value would be more than $58.11. That is, the $287 of dividends should be captured in an increased price. So let's add the $287 back in. $5,525.50 plus $287 is a total of $5,812.75.... 
-Hmmm. The share price would have to be up to $64.13 for my 95 shares to be worth $6,098. I'd be depending largely on market sentiment to get me the same value, no?


----------



## james4beach (Nov 15, 2012)

The BCE share price dropped exactly by the dividend amount on the ex date's open. The dividend was not free money. It's not theoretical. The exchange itself (or market makers perhaps) make that adjustment on the ex dividend day opening. Your share price would absolutely be higher today if the stock had not been paying out dividends.

After the ex adjustment is made, the stock trades for the rest of the day and is subject to the normal stock market volatility, including usual up or down biases depending on what mood the stock market is in.

Let's look at the BCE ex dividend dates over the last year. Here is each ex date, followed by previous day's close, the ex day's close, and the difference:

2016-12-13 ; 58.85 ; 58.07 ; -0.78
2017-03-13 ; 58.59 ; 57.77 ; -0.82
2017-06-13 ; 60.60 ; 59.45 ; -1.15
2017-09-14 ; 58.25 ; 57.68 ; -0.57
2017-12-14 ; 62.80 ; 61.69 ; -1.11

At each of these dates, BCE paid out approx 0.70 in dividends.

For this last series of dividends, the resulting drop (right column) is about the same as dividends... a bit more actually. This varies over time as there is stock market volatility involved. But you get the point.... I hope???? The share price drops when a dividend is paid out. This is Stock Investing 101.

The stock market volatility masks the effect, but yes the price drops on an ex date. The effect is nicely visible over the time frame I gave above because BCE stock has moved mainly sideways. You can see the same thing if you pull out any dividend paying stock (especially a high div payer) and look over a period where the stock has been relatively flat. Look at each ex date, the price change on the ex, and you'll see that the average price decline is the same as the average dividends paid out.


----------



## carson (Apr 28, 2011)

OnlyMyOpinion said:


> An imperfect exercise I know, so help me out here:
> -If I owned 100 shares of BCE a year ago and collected a year's worth of dividends, I'd have $71.75 x 4qtrs= $287 of dividends, plus 100sh x $58.11= $5,811 of share value on Jan.15, for a total of $6,098.
> -If BCE had not paid out dividends and I had to sell shares on a quarterly basis to realize the $287 through the year (and if I could sell fractional shares), I'd be down to owning 95.09 shares on Jan.15. At $58.11 they were worth $5,525.75.
> -Of course we should argue that if a dividend had not been paid, the share value would be more than $58.11. That is, the $287 of dividends should be captured in an increased price. So let's add the $287 back in. $5,525.50 plus $287 is a total of $5,812.75....
> -Hmmm. The share price would have to be up to $64.13 for my 95 shares to be worth $6,098. I'd be depending largely on market sentiment to get me the same value, no?


This scenario would only be true if all equities were priced on their book value which they are not. When you sell shares to extract capital you are always exposed to sequence of return risks as you can't predict what the price will be when you need to sell. With dividends it doesn't matter what the stock price is as long as the company continues to pay them.


----------



## james4beach (Nov 15, 2012)

Why not read this article by Wade Pfau (expert in portfolio planning and SWR) -
https://www.forbes.com/sites/wadepf...otal-return-or-income-portfolio/#23a36b155e96

Another good description of this dividend fallacy
http://www.etf.com/sections/index-i...-investors-odd-affection-dividends?nopaging=1

Please do yourselves a favour... read these sources, study and think about dividends some more. You will be helping your retirement and avoiding dangerous capital misallocation mistakes.


----------



## james4beach (Nov 15, 2012)

And by the way that second source in my above post cites several papers and studies. Excerpt:



> One frequently expressed explanation for the preference is that dividends offer a safe hedge against the large fluctuations in price that stocks experience. But this ignores that the dividend is offset by the fall in the stock price. It’s what can be called the “fallacy of the free dividend”—the only free lunch in investing is diversification, not dividends.
> . . .
> What they fail to realize is that a cash dividend is the perfect substitute for the sale of an equal amount of stock whether the market is up or down, or whether the stock is sold at a gain or a loss. *It makes absolutely no difference*. It’s just a matter of how the problem is framed. It’s form over substance.
> . . .
> The bottom line is that both theory and historical evidence demonstrate that dividends are just another source of profit, along with capital gains, and that dividends mechanically reduce the price of stock. Yet many investors treat the two sources of profit very differently, with negative consequences both in terms of lower returns and greater risk.


A dividend based approach does not make your capital last longer (vs equal amounts of share selling). But it helps you feel better, and maybe that's more important. I can't argue with what makes people feel good. As the article points out, older investors tend to feel even more strongly about this perceive benefit of dividends.

But it's all in the mind.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> Why not read this article by Wade Pfau (expert in portfolio planning and SWR) -
> https://www.forbes.com/sites/wadepf...otal-return-or-income-portfolio/#23a36b155e96
> 
> Another good description of this dividend fallacy
> ...


Poor article. Not really what we're talking about.

ltr


----------



## agent99 (Sep 11, 2013)

When a dividend is paid, it doesn't disappear into thin air. It just moves from the company to the shareholder who can then re-invest it as he/she sees fit. The share price does not matter. What matters, is the total of company and the shareholders equity. This does not change when the dividend moves from one entity to the other.


----------



## james4beach (Nov 15, 2012)

like_to_retire said:


> Poor article. Not really what we're talking about.


The first article is weak but the second one describes it much better.

It's relevant to what's discussed, because even you wrote that selling shares depletes capital whereas dividends do not. The point here is that dividends cause the SAME depletion (if you want to call it depletion). You cannot avoid capital depletion or erosion by taking dividends. The equivalent effect happens every time an ex dividend date happens.

This is a dangerous misconception because by taking those dividends out, and not reinvesting them, you are doing something equivalent to selling shares. If you do that during a downturn you are hurting your portfolio. However with this widespread misconception, people think they are "leaving their shares alone".


----------



## GoldStone (Mar 6, 2011)

I own a business that sells 100,000 widgets a year and earns $10 per widget. Total earnings: $1M.

I reinvest $800K back into the business, to protect my long-term competitive position and earning power.

The remaining $200K is what Buffett calls *owner earnings*. Real cash that can be removed from the business without impairing business prospects.

Let's say I decide to pay out $200K as a cash dividend. Does it reduce shareholder equity on the balance sheet? Yes it does. Does it affect the stock price in the short term? Yes it does.

However:

Stock prices are almost always greater that shareholder equity. They reflect business intrinsic value or, in other words, its long term economic value.

Does $200K cash dividend reduce the intrinsic value of my widget business? Not if the $800K reinvested back in the business is doing its job. If the business continues to sell 100,000 widgets and earns $10 per widget, the economic value doesn't change.

By the time the next dividend payment is due, shareholder equity on the balance sheet recovers, all else being equal. This happens because the company retains earnings from selling more widgets.

===========

Note:

I didn't say that dividends are desirable. I didn't say that dividend payers are better investments than non-payers.

All I tried to do is address James's claim that dividends automatically erode company value. No they don't.


----------



## GoldStone (Mar 6, 2011)

^^^ Okay, so $800K and $200K are not realistic. 880K / 20K would be closer to reality. But the overall point still stands.


----------



## like_to_retire (Oct 9, 2016)

james4beach said:


> The first article is weak but the second one describes it much better.
> 
> It's relevant to what's discussed, because even you wrote that selling shares depletes capital whereas dividends do not. The point here is that dividends cause the SAME depletion (if you want to call it depletion). You cannot avoid capital depletion or erosion by taking dividends. The equivalent effect happens every time an ex dividend date happens.


James, I agree with you, and I said from the start that I completely understand the math behind this, but I'm afraid you are completely missing the point here that I and a multitude of others are making. 

ltr


----------



## OnlyMyOpinion (Sep 1, 2013)

james4beach said:


> ... Look at each ex date, the price change on the ex, and you'll see that the average price decline is the same as the average dividends paid out.


I'm aware that the exchange makes an ex-dividend adjustment to the price. As you note, none of the market close prices are -0.7175 because of market volatility. 
I provided a comparison to dividends versus sellling off shares and trying to realize the same value after a year - difficult to reconcile.
Your glib _"Really there is no difference from selling shares"_ is a simplification.



> Please do yourselves a favour... read these sources, study and think about dividends some more. You will be helping your retirement and avoiding dangerous capital misallocation mistakes.


Thanks for the links and the concern James. You appear to be focused on total return, and perhaps 'accumulation' mode (or at least not running out in retirement), for which those articles are helpful. Perhaps that is where the disconnect is. I have saved 10 or 20 thousand dollars for retirement and am in deccumulation mode with no risk of not having enough. I find dividends a useful part of my income plan. Warning me about making "serious capital misallocation mistakes" made me laugh out loud. Really, you don't need to lose any sleep over my finances.


----------



## carson (Apr 28, 2011)

james4beach said:


> And by the way that second source in my above post cites several papers and studies. Excerpt:
> 
> 
> 
> ...


I understand what you're saying but what about scenarios with market volatility when you sell shares as needed for income?

Say you buy a stock with the intention of providing $100 per year. Stock A is $10 per share and stock B is $10 per share. Stock A pays a $1 per year dividend and stock B does not. They are both identical in every other way and they both appreciate at exactly the same rate, say 10% per year. Both stocks swing +/- 50% in market price every year but always end up the same 10%.

So you buy 100 shares of company A. It pays you your $100 dividend every year, ex dividend date it drops by $1 per share and by the next year it has returned to it's original price. (Essentially a 10% increase in value as it has paid a dividend)

If you buy 100 shares of company B you have to sell $100 worth of shares once per year regardless of price. Now imagine that the stock price of both companies has dropped 50% on the day you need to withdraw. They're both at $5 per share now. You sell 20 shares of stock B to get your $100.

A few months later both have returned to their original price $10 per share and stock B increases a further 10% to $11 per share since it didn't pay a dividend and retained it's cash.

Stock A is worth 100 * 10 = $1000
Stock B is worth 80 * 11 = $880

This is how I believe dividends can mitigate sequence of returns risk in downturns. It's entirely possible that I'm missing something though.

Cheers!


----------



## livewell (Dec 1, 2013)

It is interesting that those in this thread that are in retirement living off of their portfolios (Myself included) overwhelmingly value the dividend income. I don't know that I can do any better than others have, but for me fundamentally it is the dividend income is much MUCH less volatile than the stock price. Come the next bear market I will be much happier taking my TD bank dividend (paying out 6-8% yield) than wanting to sell my some of my TD shares at 50-70% of their current price. Yes I also know that TD could cut their dividend, again historical trends would say that if the 20 blue-chip stocks I own all cut their dividend some very serious stuff would be happening that would be affecting us all !! 

(In a large downturn my asset allocation model would have me selling my bonds to buy stocks, I have yet to test my emotions vs model in that scenario)


----------



## james4beach (Nov 15, 2012)

The dividend income is definitely stable, that part I completely agree with. The part where I disagree from a few other people in this thread is the issue of capital longevity. My argument is that from the perspective of preserving your capital, there's no difference in outcomes whether you live off dividends or sell shares (assuming same $ amounts of withdrawals).


----------



## OnlyMyOpinion (Sep 1, 2013)

Well, it seems to me that how long you preserve your capital depends entirely on what price you are able to sell those shares at?


----------



## hboy54 (Sep 16, 2016)

james4beach said:


> The dividend income is definitely stable, that part I completely agree with. The part where I disagree from a few other people in this thread is the issue of capital longevity. My argument is that from the perspective of preserving your capital, there's no difference in outcomes whether you live off dividends or sell shares (assuming same $ amounts of withdrawals).


See my #46 and carson #74 which is basically the same argument I made. What is the error in our examples. We think they disprove what you are asserting.

Hboy54


----------



## livewell (Dec 1, 2013)

OnlyMyOpinion said:


> Well, it seems to me that how long you preserve your capital depends entirely on what price you are able to sell those shares at?


+1 QED


----------



## agent99 (Sep 11, 2013)

What would a Canadian retirement equity portfolio look like if it had no dividend paying shares? Isn't that what would be required to choose to sell shares on regular basis instead of collecting dividends?


----------



## BigMonkey (May 31, 2016)

James I see what you trying to get at. And I agree that dividends fundamentally really does extract cash/value out of a company. But the market doesn't seem reasonable and sometimes doesn't follow this math/logic.

In the real world it seems, if a company was worth $1 trillion dollar, and the company decides to issue 1 billion dollar of dividends. The share price would temporarily drop to ~$999 billion to reflect this. But generally it seems to quickly come back up to $1 trillion dollars again before the net income has replenished the $1 billion dividends it has issued.

I personally don't think the market is very reasonable and have no idea how they decide to value companies...lets take a look at some examples:
1) People are willing to pay $700 for something that makes $4 a year
2) $50 for something that loses $1.5 every year and has never made money. Sells 50,000 products but is worth the same as a company that sells 10 million products.
3) $5,000 for something that can rebuilt for $500
4) Double their company share price overnight by changing their company name


1) Amazon -> 700B cap with $4B NI
2) Tesla -> 50B cap vs GM 50B cap. 50k cars sold vs 10 million cars sold
3) Canopy Growth Corp -> $5B cap, there was study that found their facilities could be rebuilt for ~500m
4) Long BlockChain Corp (previously named Long Island Iced Tea Corp) -> doubled their share price from $33 to $70 overnight when they changed their name


----------



## james4beach (Nov 15, 2012)

hboy54 said:


> See my #46 and carson #74 which is basically the same argument I made. What is the error in our examples. We think they disprove what you are asserting.


The mistake is that you're not correctly simulating the sequences.



carson said:


> Say you buy a stock with the intention of providing $100 per year. Stock A is $10 per share and stock B is $10 per share. Stock A pays a $1 per year dividend and stock B does not. They are both identical in every other way and they both appreciate at exactly the same rate, say 10% per year. Both stocks swing +/- 50% in market price every year but always end up the same 10%.


Here's your mistake. You said that sequence is important, but then you completely ignored it in the handling of dividends. To be fair you have to give exactly the same sequence to both. Here's a schedule of events:

Year1.Jan: starting the whole thing with $1000 invested in each, A and B both have the same price $10
Year1.June: no return so far. A=$10, B=$10 when dividend and selling happens. Ex div, A=$9.00
Year1.Dec: the 10% return happens here. A=$9.90, B=$11.00 at year end.

I can hear you complaining here about A ending at $9.90. Let's pretend we reinvested dividends to check our total return. We got a $100 dividend and can use this to buy 11.111 shares at the $9.00 ex div price. By reinvesting we'd end up with 111.111 shares @ 9.90 at end of year = $1100 so yes ... we've gotten 10% total return. Reinvestment should always give you the total return because it preserves equity ownership. (Note for example that mutual fund performance figures are always quoted as total return assuming reinvestment of all distributions).

You probably expected A to end at $10. That doesn't work. With the reinvestment you would have ended up with over 11% total return. So hopefully I have proved to you that $9.90 is the correct ending price. Let's keep going:

Year2.May: no return yet, A=$9.90, B=$11.00, then 50% crash. A=$4.95, B=$5.50
Year2.June: dividend and selling happens. Ex div, A=$3.95
Year2.Dec: now we get 120% return, resulting in: A=$8.69, B=$12.10

Let's confirm again that the A ending price is correct. We started year 2 with 100*9.90 = $990 of equity. The $100 later lets us buy 25.316 shares ex dividend. At the end our theoretical reinvestment this year we end up with 125.316 * $8.69 = $1089 which indeed is a 10% return for the year.

Now let's see how many B shares we end up with through all this:

Year1.Jan: 100 shares B with $1000 investment
Year1.June: B is still $10 when we sell. We end up with $100 cash + 90 shares * $10 = $1000
Year1.Dec: still 90 shares B

Year2.May: we get the 50% crash, and B=$5.50
Year2.June: we sell 18.18 shares B. We end up with: $200 cash + 71.82 shares
Year2.Dec: still 71.82 shares

*Comparing the methods!*

With A, we've ended all this with $200 dividends + 100 shares * $8.69 = $1069
With B, we've ended all this with $200 dividends + 71.82 shares * $12.10 = $1069

It's EXACTLY the same result. It makes no difference which method you use. Which means that no, dividends don't protect you from sequence risk. They also erode your capital the exact same way as selling shares, if you do a fair comparison where both events land in exactly the same sequence.


----------



## james4beach (Nov 15, 2012)

Looking at that example, I think I see another more subtle benefit of dividends. The fact dividends are even and regular (quarterly like clockwork) offers some protection, in practice, from the capital erosion and sequence risk. When a human sells the shares, they seem more likely to choose bad points -- unless they have great discipline. The even spacing of dividends and automatic nature are a really nice feature.

But I hope I have finally proved beyond doubt that dividends and selling shares amount to the same thing, when it comes to the effect on the portfolio & capital.


----------



## cainvest (May 1, 2013)

james4beach said:


> Looking at that example, I think I see another more subtle benefit of dividends. The fact dividends are even and regular (quarterly like clockwork) offers some protection, in practice, from the capital erosion and sequence risk. When a human sells the shares, they seem more likely to choose bad points -- unless they have great discipline. The even spacing of dividends and automatic nature are a really nice feature.


I think there are a few more subtle benefits as well, again from an investors viewpoint. Continuous (monthly or quarterly), no intervention, no cost payouts are a good one though.


----------



## hboy54 (Sep 16, 2016)

james4beach said:


> Looking at that example, I think I see another more subtle benefit of dividends. The fact dividends are even and regular (quarterly like clockwork) offers some protection, in practice, from the capital erosion and sequence risk. When a human sells the shares, they seem more likely to choose bad points -- unless they have great discipline. The even spacing of dividends and automatic nature are a really nice feature.
> 
> But I hope I have finally proved beyond doubt that dividends and selling shares amount to the same thing, when it comes to the effect on the portfolio & capital.


No, you have not proved it in general.

I agree with your analysis in the particular case of using the dividends to immediately buy more shares of the same company. In this particular case yes the two are equivalent. This theoretical analysis though correct, has zero real world applicability to retirees.

This is not what a retiree does. He spends the money. My example illustrates this reality of how the outcomes are not the same. Like you say selling shares has sequence of returns risk that dividends do not. This has a huge effect on the "portfolio and capital."

Hboy54


----------



## GoldStone (Mar 6, 2011)

carson said:


> Say you buy a stock with the intention of providing $100 per year. Stock A is $10 per share and stock B is $10 per share. Stock A pays a $1 per year dividend and stock B does not. They are both identical in every other way and they both appreciate at exactly the same rate, say 10% per year. Both stocks swing +/- 50% in market price every year but always end up the same 10%.





james4beach said:


> Here's your mistake. You said that sequence is important, but then you completely ignored it in the handling of dividends. To be fair you have to give exactly the same sequence to both. Here's a schedule of events:
> 
> Year1.Jan: starting the whole thing with $1000 invested in each, A and B both have the same price $10
> Year1.June: no return so far. A=$10, B=$10 when dividend and selling happens. Ex div, A=$9.00
> ...


There are multiple issues here.

1. Minor point: in North America, dividends are usually paid out quarterly, not once a year. 
2. You can't immediately reinvest the dividends at the ex-dividend price of $9.90. By the time you receive the cash payment, company price creeps up because it continues to retain earnings.
3. Most importantly: *you should not reinvest dividends back into the company to check total return.* It's a mistake to do so.

Company A starts the year at $10. It pays out $1 in dividends (10%). To have a total return of 10% on the year, the price has to end the year at $10.

*By reinvesting back into the company, you start to compound capital.* In your example, your compounded return ended up being 10%. If you remove the effect of compounding, the total return before compounding is less than 10%. Company A ends up having a lower total return than company B. Intentionally or unintentionally, you committed a sleight of hand. Your entire long example is not an apples to apples comparison.

You seem to be missing a simple point:

Share price does not equal shareholder equity.

Shareholder equity is an accounting metric: total assets - total liabilities. Total assets include retained earnings. Dividends are paid out of retained earnings. Ergo, they reduce shareholder equity. In the short term, you can see it in the stock price. However, shareholder equity (the accounting metric) starts to immediately creep up because the company continues to retain earnings.

Share price is a different animal. It is based on investor expectations of the future earnings. DCF and DDM are two popular models to estimate the present value. Let's look back at company A:

Run DCF or DDM in Q1. It estimates company value at $10. Company pays out $0.25 in dividend.

Run DCF or DDM in Q2. Simply shift the model one quarter forward and keep all the assumptions about the business. The model will spit out the same estimate of the present value: $10. The fact that the company paid a dividend in Q1 is irrelevant, if the assumptions in the DCF/DDM models stay the same.

Rinse and repeat in Q3, Q4, etc. You should still get $10 as the estimate of the present value.

Dividend payments reduce shareholder equity - an accounting metric at a given point in time. They don't reduce the long-term valuation.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Looking at that example, I think I see another more subtle benefit of dividends. The fact dividends are even and regular (quarterly like clockwork) offers some protection, in practice, from the capital erosion and sequence risk. When a human sells the shares, they seem more likely to choose bad points -- unless they have great discipline. The even spacing of dividends and automatic nature are a really nice feature.
> 
> But I hope I have finally proved beyond doubt that dividends and selling shares amount to the same thing, when it comes to the effect on the portfolio & capital.


On the contrary, your first paragraph appears to contradict the second one. 

I would still like to see a model diversified Canadian retirement equity portfolio that excludes all dividend paying stocks. 

Moving company earnings in part to dividends allows the investor to decided what to do with those earnings. spend them, re-invest in same company, reinvest in a different way. There is no way to compare what would have happened if the company had not paid the dividend. If you have to compare the dividend payer with a non dividend payer, you are comparing apples and oranges.

Time to give this discussion up, I believe. It it is totally theoretical with no practical application.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> But I hope I have finally proved beyond doubt that dividends and selling shares amount to the same thing, when it comes to the effect on the portfolio & capital.


No you didn't. See my post #86.


----------



## GoldStone (Mar 6, 2011)

Maybe this will help you, James.

Dividend payments reduce shareholder equity - an accounting metric at a given point in time. If you prepare the balance sheet on the record day and the ex-dividend day, you will see the reduction in shareholder equity. It's temporary.

Prepare the balance sheet once a quarter in a consistent manner -- you should NOT see any changes in shareholder equity, all else being equal.

Prepare the balance sheet in Q1 before the payment. Retained earnings include the unpaid dividend.
Do the same in Q2.
You should see the same shareholder equity on both balance sheets, all else being equal.

Or:

Prepare the balance sheet in Q1 after the payment. Retained earnings exclude the paid dividend.
Do the same in Q2.
You should see the same shareholder equity on both balance sheets, all else being equal.


----------



## Eder (Feb 16, 2011)

james4beach said:


> But I hope I have finally proved beyond doubt that dividends and selling shares amount to the same thing, when it comes to the effect on the portfolio & capital.


This would work if the market was capable of accurately pricing a businesses value. They can't in the short term...Fortis is worth 638 million more today than yesterday morning...did we pay all our dividends back?


----------



## GoldStone (Mar 6, 2011)

Eder said:


> This would work if the market was capable of accurately pricing a businesses value. They can't in the short term...Fortis is worth 638 million more today than yesterday morning...did we pay all our dividends back?


Great point but it's not really necessary to refute J4B's example.

He used 9% return for A (div payer), 10% return for B (non payer). To equalize the two, he reinvested the dividend and compounded it within the year. The compounded return ended up being 10%. He then compared compounded return of 10% to non-compounded return of 10%. That's apples to oranges. This mistake invalidates the whole example.


----------



## james4beach (Nov 15, 2012)

Ah and now we get to the core misunderstanding of dividend investors, the implicit faulty assumption that dividends are free / extra money.



GoldStone said:


> Great point but it's not really necessary to refute J4B's example.
> 
> He use 9% return for A (div payer), 10% return for B (non payer). To equalize the two, he reinvested the dividend and compounded it within the year. The compounded return ended up being 10%. He then compared compounded return of 10% to non-compounded return of 10%. That's apples to oranges. This mistake invalidates the whole example.


It's not apples to oranges. I am using the definition of a total return, which explicitly says you reinvest all dividends. The return for both A and B must be 10% total return in a year. That means both must return 10% per year with all reinvestments.

You seem to think that if you _did_ reinvest the dividend, that you get to *boost* the return up to 11.1% -- but no, you don't get to have an extra return on equities just by virtue of a dividend getting paid out.

Take the TSX Composite for example. The 2017 total return was 9.0%. That means that when all dividends are immediately reinvested, the return was 9.0%. GoldStone if what you're saying was true, that dividends boost the return, then all TSX companies should pay out big monthly dividends, since according to your math, this would accelerate the TSX total return far above 9.0% for the year... the magic of dividends. Maybe we'd get 13%, or hell 15% return! You seem to believe there is automatic, free compounding and boosting at every dividend.

No. Clearly that is not the case. Dividends do not boost the return; it's not free money.


----------



## GoldStone (Mar 6, 2011)

Stocks are not tickers on your screen. They are not pieces of paper. They are real businesses. They generate earnings from operations. They retain earnings. They reinvest part of retained earnings to sustain or grow the business. And, finally, they pay out some of the excess cash to the owners because it is not needed to sustain the business.

If a company pays out more than excess cash, then yes, it will permanently damage the business value and the stock price. This is why the discussion around the sustainability of the dividends is so important.

On the other hand, if a company limits the dividends to a sustainable payout ratio from excess cash, retained earnings and therefore shareholder equity is replenished by the time of the next dividend payment. No damage to the company value.

You have a HISA with $100,000. It pays 1%. You get $1,000 annually. Does the value of the account go down to $99,000? No, $1000 interest is internal return generated in the black box.

Businesses are similar in that sense. They generate excess cash that can be safely removed from the black box without damaging its value. Again, the important question is, what is the sustainable payout. That's why you don't see the companies paying out 13% or 15%. The market freaks out about business sustainability long before that. 

I suggest that you read my #70, #86 and #89 if you want to learn.


----------



## GoldStone (Mar 6, 2011)

Let's try this, maybe it will work.

Company A starts the year at $10. On Jan 1, it pays out $1 in dividends. Stock goes to $9 to reflect the change in shareholder equity. I spend the dividend.

In the course of the year, business operations add $1 to retained earnings. Stock goes back to $10 on Dec 31 to reflect the replenished shareholder equity.

James, please tell me, what is my total return in this case?


----------



## james4beach (Nov 15, 2012)

Hi GoldStone, apologies but I'm leaving for a work trip this week so I probably won't get to engage quite so thoroughly in the coming days. I spent a huge amount of time preparing that detailed calculation last night with the hopes of settling this.

I'm not familiar with looking at this with the method you suggested above nor am I sure that's the right way to look at it.


----------



## GoldStone (Mar 6, 2011)

No worries.


----------



## canew90 (Jul 13, 2016)

james4beach said:


> The dividend income is definitely stable, that part I completely agree with. The part where I disagree from a few other people in this thread is the issue of capital longevity. My argument is that from the perspective of preserving your capital, there's no difference in outcomes whether you live off dividends or sell shares (assuming same $ amounts of withdrawals).


1. Dividend Income is definitely stable (compared to the price of the shares?)
2. Once ones dividends exceeds ones expenses, than the withdrawals will be less than the total dividends paid
3. Once #2 is achieved and if the dividends are more stable, than they will continue to be paid at the same rate or higher
4. Should the price of the shares drop and stay down, than selling shares would affect ones capital much more than living off dividends


----------



## james4beach (Nov 15, 2012)

GoldStone said:


> No worries.


It would be great if we could find some detailed source online that shows differences between selling shares and dividends for effects on the portfolio, with calculations. I've googled but haven't found anything clear on this (which surprises me), only hand-wavy things.

Anyway... I have to catch a flight Sunday am, and currently am doing a draft of my tax return to figure out how much RRSP contrib I must make.


----------



## olivaw (Nov 21, 2010)

Not sure if anyone has providedd this previously: Debunking Dividend Myths: Part 1
http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

It's a six part series. I find the last of the sixth debunks the myth that a dividend growth strategy will eventually beat the market on yield alone. http://canadiancouchpotato.com/2011/02/02/debnking-dividend-myths-part-6/

-----


As I said upthread, the market may not be rational but it reflects earnings over the long run. Dividends are just one way to reward shareholders. Profitable companies may buy back shares which increases the share price by reducing outstanding shares. They may also choose to reinvest into the company which will grow future earnings and increase the share price. 

The importance of this discussion is that investors need to understand that there is nothing magic about dividends. It's just one on many ways to distribute earnings to shareholders.


----------



## GoldStone (Mar 6, 2011)

olivaw said:


> As I said upthread, the market may not be rational but it reflects earnings over the long run. Dividends are just one way to reward shareholders. Profitable companies may buy back shares which increases the share price by reducing outstanding shares. They may also choose to reinvest into the company which will grow future earnings and increase the share price.
> 
> The importance of this discussion is that investors need to understand that there is nothing magic about dividends. It's just one on many ways to distribute earnings to shareholders.


In general, you are right of course. This is not a controversial issue. There is no good reason to prefer dividend strategy over total return strategy in accumulation phase. IMO, this is not the contentious point in this thread.

The contentious point seems to be: should you prefer dividend strategy or total return strategy in retirement, in the withdrawal phase?

The problem with selling shares (total return strategy) is that you have to take the market bid for your shares. Sometimes the market is exuberant. It will bid more than the business is worth. Sometimes the market is in a depressive funk. It will bid 20% - 50% less than the intrinsic value of the business. You don't control the timing of the mood swings. There's of course a way around that: withdraw from cash or fixed income when the stock market is in a bad mood; withdraw from stocks when the market is exuberant.

Dividend strategy simplifies withdrawals. You don't need to worry about the mood swings in the market. You don't have to accept a bad bid. Dividends are more stable than capital gains. Therefore, they reduce the volatility of investment income and the sequence of returns risk. Bonds and GICs do the same, btw.

I doubt you will find any studies that prove with numbers that one withdrawal strategy is better than the other.

Here's a good article that recommends diversifying across four types of retirement income: interest, dividends, capital gains and principal.

*The Evolution Of The Four Pillars For Retirement Income Portfolios*
-- by Michael Kitces, a well known financial planner in the US.

From the executive summary, he notes this disadvantage of the dividend strategy:

_"The dividend strategy was popular until eventually retirees realized that owning stocks and focusing on the dividends, while ignoring the capital gains, just leads to large retirement account balances that could have been spent along the way."_

Financial planners see large retirement balances as a negative. The want your portfolio depleted at the time of your death and have your last cheque bounce. I doubt that many of us here see it as a worthwhile goal.


----------



## OnlyMyOpinion (Sep 1, 2013)

olivaw said:


> Not sure if anyone has providedd this previously: Debunking Dividend Myths: Part 1http://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/
> It's a six part series. I find the last of the sixth debunks the myth that a dividend growth strategy will eventually beat the market on yield alone. http://canadiancouchpotato.com/2011/02/02/debnking-dividend-myths-part-6/
> As I said upthread, the market may not be rational but it reflects earnings over the long run. Dividends are just one way to reward shareholders. Profitable companies may buy back shares which increases the share price by reducing outstanding shares. They may also choose to reinvest into the company which will grow future earnings and increase the share price. The importance of this discussion is that investors need to understand that there is nothing magic about dividends. It's just one on many ways to distribute earnings to shareholders.


I read your second link and it is not discussing the issue per this thread IMO. But there clearly are misconceptions around dividends, chasing yield, total return, etc.

I agree with Goldstone's comments, knowing the purpose for focusing on dividends would clarify some of the disagreement. Are you in accumulation or decumulation mode? Are you focused on long term growth with reinvested income, or on current income generation with long term capital preservation, accepting of modest growth, etc. Dividends for income rather than selling shares for income definately can have a place in some people's financial plan. 

Personally, in decumulation mode, dividends provide cash flow from a portion of my portfolio, for a period of my retirement. Total return is not the primary purpose - greater predictability of income divorced from the vagrancies of market sentiment is. Our annual dividends are tax-advantaged (non-registered acc), and as we have seen this month, tend to provide annual increases above inflation. It is not as tax-advantaged as CG's but I consider it more predicatable. 

In our case, selling non-reg shares for yrs 58-72 retirement cash flow is not part of our FP, but selling them off over time to crystalize gains and gift the proceeds before our RRIF income begins is. So rather an ugly mongrel of a plan I'm afraid (but still quite simple in execution).


----------



## GreatLaker (Mar 23, 2014)

GoldStone said:


> _"The dividend strategy was popular until eventually retirees realized that owning stocks and focusing on the dividends, while ignoring the capital gains, just leads to large retirement account balances that could have been spent along the way."_


That's the way I look at it. It's my money. I want to spend it, as much as practical without too high a risk of outliving it.



> Financial planners see large retirement balances as a negative. The want your portfolio depleted at the time of your death and have your last cheque bounce. I doubt that many of us here see it as a worthwhile goal.


Why is that? Lots of planners get paid based on assets, either trailer fees or a % of AUM. Plus many investment firms put a high value on total assets. I would think they want large balances. It's me that wants the last cheque to bounce.


----------



## GoldStone (Mar 6, 2011)

GreatLaker said:


> > Financial planners see large retirement balances as a negative. The want your portfolio depleted at the time of your death and have your last cheque bounce. I doubt that many of us here see it as a worthwhile goal.
> 
> 
> Why is that? Lots of planners get paid based on assets, either trailer fees or a % of AUM. Plus many investment firms put a high value on total assets. I would think they want large balances. It's me that wants the last cheque to bounce.


Sorry, that was sloppy wording on my part. I meant academic types who do retirement research such as SWR studies. Every SWR study assumes that retiree's goal is to extract the maximum possible income from a portfolio and have it depleted at the time of death. Ask people who rely on the dividend strategy if they have the same goal. I doubt it's a priority for many.


----------



## olivaw (Nov 21, 2010)

GoldStone said:


> In general, you are right of course. This is not a controversial issue. There is no good reason to prefer dividend strategy over total return strategy in accumulation phase. IMO, this is not the contentious point in this thread.
> 
> The contentious point seems to be: should you prefer dividend strategy or total return strategy in retirement, in the withdrawal phase?
> 
> ...


Interesting read. I was struck by the following comment.



> Unfortunately, though, capital gains may be one of the largest drivers of total return in the long run, but it’s also one of the least stable, forcing the retiree to periodically rely on the portfolio principal as well. Of course, in the end, retirement principal that is unspent is arguably a wasted spending opportunity – where the “optimal” retirement portfolio is for the last check to the undertaker to bounce. On the other hand, given the uncertainty of a retiree’s time horizon – not knowing when you’re going to die – means in practice, the principal can and should be used more dynamically, spending from it in some years but leaving it untouched in others.


I can certainly understand the sequence of returns risk associated with 100% growth portfolio because it forces you to sell frequently. Most of us hold a mix of bonds, cash and equities. Are you suggesting that one can increase equity allocation if one holds only dividend funds (or stocks) or that the equity portion should be in DIVIs during the drawdown phase? 

FWIW My wife and I are retired. 

I spent years accumulating so my portfolio is a fairly long list of ETFs and stocks. For the most part it is a blend of international, US and Canadian broad based ETFs. Much of it is in non registered accounts so major changes would trigger a major tax events. 

My wife follow a dividend strategy and holds individual shares in Canadian companies.


----------



## olivaw (Nov 21, 2010)

GoldStone said:


> In general, you are right of course. This is not a controversial issue. There is no good reason to prefer dividend strategy over total return strategy in accumulation phase. IMO, this is not the contentious point in this thread.
> 
> The contentious point seems to be: should you prefer dividend strategy or total return strategy in retirement, in the withdrawal phase?
> 
> ...


Interesting. I was struck by the following comment in the link. 



> Unfortunately, though, capital gains may be one of the largest drivers of total return in the long run, but it’s also one of the least stable, forcing the retiree to periodically rely on the portfolio principal as well. Of course, in the end, retirement principal that is unspent is arguably a wasted spending opportunity – where the “optimal” retirement portfolio is for the last check to the undertaker to bounce. On the other hand, given the uncertainty of a retiree’s time horizon – not knowing when you’re going to die – means in practice, the principal can and should be used more dynamically, spending from it in some years but leaving it untouched in others.


I can certainly understand the sequence of returns risk associated with 100% growth portfolio because it forces you to sell frequently. Most of us hold a mix of bonds, cash and equities. Are you suggesting that one can increase equity allocation if one holds only dividend funds (or stocks) or that the equity portion should be in DIVIs during the drawdown phase? 

FWIW My wife and I are retired. 

I spent years accumulating so my portfolio is a fairly long list of ETFs and stocks. For the most part it is a blend of international, US and Canadian broad based ETFs. Much of it is in non registered accounts so major changes would trigger a major tax events. 

My wife follow a dividend strategy and holds individual shares in Canadian companies. 

Certainly don’t want the last cheque to bounce because I hope to leave a legacy.


----------



## GoldStone (Mar 6, 2011)

olivaw said:


> I can certainly understand the sequence of returns risk associated with 100% growth portfolio because it forces you to sell frequently. Most of us hold a mix of bonds, cash and equities. *Are you suggesting that one can increase equity allocation if one holds only dividend funds (or stocks) or that the equity portion should be in DIVIs during the drawdown phase?*


The answer is... maybe?

Just to throw around some numbers, let's say that two strategies have the following expected returns:

total return strategy: 1.8% dividends, 4.2% capital gains, 6% total.
dividend strategy: 4% dividends, 2% capital gains, 6% total.

Dividends are more stable than capital gains. 6% from the div strategy should be less volatile than 6% from the total return strategy. If the difference in volatility is meaningful, one can increase equity allocation. I don't have any data to back this up.

I think that retirement portfolio structure is more art than science. There are too many moving parts to the equation: asset allocation, asset location (RRSP|TFSA|taxable), which account to draw first, when to take OAS/CPP, tax brackets, clawbacks, the list goes on and on. Total return strategy vs dividend strategy doesn't seem like a major issue. Either one can do the job. I'm a big believer in the total return strategy. At the same time, I can certainly see the attractiveness of the dividend strategy.

I suspect that vocal fans of the dividend strategy have one or more of the following in common:
- strong home country bias: large allocation to Canadian equities, little or nothing outside.
- large portfolio size (1): Canadian equities spill over into taxable account.
- large portfolio size (2): dividend income is large enough to cover a good chunk of retirement expenses
Dividend strategy makes a lot of sense when you put all of the above together.




olivaw said:


> FWIW My wife and I are retired.
> 
> I spent years accumulating so my portfolio is a fairly long list of ETFs and stocks. For the most part it is a blend of international, US and Canadian broad based ETFs. Much of it is in non registered accounts so major changes would trigger a major tax events.
> 
> My wife follow a dividend strategy and holds individual shares in Canadian companies.


We plan to retire within 5 years. I manage the combined portfolio for both of us. We own individual Canadian shares in her taxable account. Ergo, one corner of our portfolio is dedicated to the dividend strategy.


----------



## james4beach (Nov 15, 2012)

Again, apologies for ducking out of the thread (I'm writing from a bizarre little hotel room in San Francisco), but on the withdrawal and making-capital-last phase, I still keep thinking back to Trinity studies, SWR, etc.

I read most of those papers and don't remember anything specifically about dividends. There are at least 4 expert authors who wrote those papers, and another few dozen who reviewed them as usually several experts in the field will critique a paper before it's accepted for publishing.

If dividends were such an obvious work-around to the issues of capital depletion, draw down, sequence of turn, then why do these works not mention them? The concepts being argued in *this* thread about dividends immunizing you from portfolio draw down seem to throw SWR concepts out the window... which is why I seriously doubt that dividends give you these protections (e.g. from sequence of return).

Or maybe all the Trinity/SWR studies are faulty, and these authors & reviewers -- all experts in this field -- totally missed the key solution. "Oh, we should have used dividends!"


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> I read most of those papers and don't remember anything specifically about dividends. There are at least 4 expert authors who wrote those papers, and another few dozen who reviewed them as usually several experts in the field will critique a paper before it's accepted for publishing.
> 
> If dividends were such an obvious work-around to the issues of capital depletion, draw down, sequence of turn, then why do these works not mention them? The concepts being argued in *this* thread about dividends immunizing you from portfolio draw down seem to throw SWR concepts out the window... which is why I seriously doubt that dividends give you these protections (e.g. from sequence of return).
> 
> Or maybe all the Trinity/SWR studies are faulty, and these authors & reviewers -- all experts in this field -- totally missed the key solution. "Oh, we should have used dividends!"


A few thoughts:

1. Trinity/SWR studies were done in the US. There is much less emphasis on the dividends in the US than there is in Canada. Their market is broad and deep. They have tons of outstanding growth companies that don't pay dividends. This is not the case in Canada.

2. You need reliable historical data to do an SWR study. Total return data is readily available. Dividend data requires more digging. Also, which dividend strategy should you pick? Modest yield / high growth? High yield? Long history of payments? Something else? SWR studies have many other issues to sort out; they don't need these extra complications.

3. SWR studies don't concern themselves with the little pesky issues such as asset location, tax rates for different forms of cash flows, etc. They focus on the big picture: given portfolio size X, age Y and asset allocation Z, what is the maximum SWR? Us lowly DIY investors can't ignore the aforementioned pesky issues. In some cases, these pesky issues easily sway the choice towards dividend strategy. For example, in Ontario, you can receive about $56K in eligible dividends tax-free, if you don't have any other taxable income.

4. SWR studies essentially solve a math problem. Investor's psychology is not in the picture. As we all know, investor behaviour is a crucial consideration. Who cares about SWR math if dividend strategy gives someone a better piece of mind? And, therefore, a better chance to comply with the IPS.


----------



## agent99 (Sep 11, 2013)

GoldStone said:


> A few thoughts:
> 
> 1. Trinity/SWR studies were done in the US. There is much less emphasis on the dividends in the US than there is in Canada. Their market is broad and deep. They have tons of outstanding growth companies that don't pay dividends. This is not the case in Canada.


A lot of good points. Because of broader US market, more analysis can be done. There are many studies that show that dividend paying stocks outperform the over all market. But the overall market includes those dividend payers, so dividend payers must beat non dividend payers hands down. This is confirmed in some of the charts on this site: https://www.suredividend.com/dividend-stocks-vs-growth-stocks/ in particular, this chart:
https://i0.wp.com/www.suredividend....othetical-Growth-of-1-Million.png?w=710&ssl=1

For retirement income, what would be better?
- Draw our dividends plus perhaps a little capital from the highest peformer (quintile 4 dividend payers). 
- Or just sell off our holdings in the lowest performer (non-dividend stocks) ???

In Canada, we don't really even have that choice. A large proportion of companies that are worth owning pay dividends anyway. Should we exclude those from our retirement portfolios?


----------



## james4beach (Nov 15, 2012)

Pretty much every holding in XIU pays a dividend, and most are 'dividend growth stocks'. XIU itself steadily grows its dividend over time, nearly all eligible dividends. Even if I believed that dividend stocks were safer than other stocks, I don't see what I would do differently as a Canadian investor. As for whether dividend stocks perform better long term, I don't know if this can be done in practice.

In the US, 10 year S&P 500 to Feb 16 annual return is 9.65%. Popular dividend ETF returns are 9.35% for VYM and 9.43% for VIG so over the last 10 years at least, American dividend stocks have *underperformed* the broad index.

In Canada, 10 year TSX Composite to Feb 16 annual return is 4.62%. The only sector diversified dividend ETF with long term data is CDZ (Dividend Aristocrats Index), which returned 6.49%. So CDZ has in fact beaten the TSX.

... what to make of this? Dividend stocks underperform in the US, but outperform in Canada? Maybe with a few more years of portfolio performance we can say more firmly. If it's so clear that dividend stocks outperform the broad market then surely someone can put together an ETF that accomplishes that.

VIG by the way is a world-class dividend growth ETF run by Vanguard, and it's not beating the index.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Pretty much every holding in XIU pays a dividend, and most are 'dividend growth stocks'. XIU itself steadily grows its dividend over time, nearly all eligible dividends. Even if I believed that dividend stocks were safer than other stocks, I don't see what I would do differently as a Canadian investor. As for whether dividend stocks perform better long term, I don't know if this can be done in practice.
> 
> In the US, 10 year S&P 500 to Feb 16 annual return is 9.65%. Popular dividend ETF returns are 9.35% for VYM and 9.43% for VIG so over the last 10 years at least, American dividend stocks have *underperformed* the broad index.
> 
> ...


Instead of cherry picking time periods, you need to look at a series of periods. The article I linked to showed quite different results. 

If, as you agreed, we don't have much choice in Canada, what is this discussion about? We can't help but receive dividends if we buy an etf or hold a portfolio of dividend growth stocks. Maybe we could drip everything (if we can) and then sell an amount equal to the dividends every 3 months or so? Not sure what good that would do other than provide broker with fees.


----------



## james4beach (Nov 15, 2012)

agent99 said:


> Instead of cherry picking time periods, you need to look at a series of periods. The one I linked to showed quite different results.


I didn't cherry pick, I showed the full history available on these ETFs. They don't go back 15 years yet.

Those studies on theoretical performance don't impress me, because they are cherry picked as well in how they categorize stocks. I've seen similar studies that show greater performance from non-dividend paying stocks, something I've posted at CMF before.

I keep hearing this Dividend Aristocrat index mentioned for the US. OK, so where is the ETF that implements it and proves the outperformance? Where is the US Dividend Aristocrat ETF? Oh I see... NOBL uses that strategy and it only started in 2013 -- not surprising, that's around when the dividend investing mania began.

A fund's results, though, I can believe. This is an actual portfolio that implements and proves a strategy. So I take VIG, VYM, CDZ performance much more seriously.

Dividend investing continues to look like hype to me. Tons of web sites claiming that dividend investing will solve all your retirement problems. Tons of chart literature showing outperformance, with nobody proving this can be done in practice (a real fund with real performance). A ton of new dividend ETFs all appearing in these low interest rate years. And no solid data showing that div stocks are better either on performance, draw down, or sequence of returns. Lots of hand-waving arguments, but no solid, proven results.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Dividend investing continues to look like a hype to me. T.


OK, so why not suggest a retirement equity portfolio for Canadians that excludes all dividend payers?


----------



## james4beach (Nov 15, 2012)

agent99 said:


> OK, so why not suggest a retirement equity portfolio for Canadians that excludes all dividend payers?


I'm not suggesting that. I just don't think there's any firm reason to specifically pursue a dividend-focused strategy vs the regular index.

There can be harm from pursuing dividend focuses. We've already seen many CMF members who are extremely heavy on bank allocations, and in the past we've seen many income trust and energy trust investors / canroys. You don't hear from them any more.


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> I didn't cherry pick, I showed the full history available on these ETFs. They don't go back 15 years yet ...


Probably a small point ... but the last I checked, XIU which your post seems to mention will hit the 19 year mark in Sept of this year.


As for the "where are the ETFs proving performance" - aren't you building in a limited time period of about 20 years by requiring the proof be from an ETF?

I can recall Canadian Money Saver articles of "best of the invest" ten stocks in the 80's and 90's ... adding performance data for an additional twenty years to the ETF criteria.


Cheers


----------



## cainvest (May 1, 2013)

james4beach said:


> In Canada, 10 year TSX Composite to Feb 16 annual return is 4.62%. The only sector diversified dividend ETF with long term data is CDZ (Dividend Aristocrats Index), which returned 6.49%. So CDZ has in fact beaten the TSX.


Too bad there is only 10 years of data available.
How does CDZ and XIU compare against one of CDZ's better (best?) dividend churners like ENF during the same period?


----------



## agent99 (Sep 11, 2013)

Interestingly, XIU tracks the TSX 60. Of the ~60 stocks in the TSX60, ~53 are dividend payers! And ~40% are financials. Hard to get away from those banks and dividend payers


----------



## Eclectic12 (Oct 20, 2010)

cainvest said:


> Too bad there is only 10 years of data available ...


It probably takes a lot of effort. The first issue is how long whatever investment (particularly ETFs) have been around. Even some long term companies have changed names which messes up some financial web sites.

Then there is correctly adjusting for index changes. For example, the S&P TSX composite only runs from 2002 to today (i.e. sixteen years). I'd have to dig to be sure but I believe from 1977 to 2002, it was the TSE300 (not sure who designed ran it). 

Basically the longer period one want to look at, the more factors complicate the comparisons.

The S&P/TSX60 index was the first of the TSE changes in 1998 to collaborate with S&P.




agent99 said:


> Interestingly, XIU tracks the TSX 60. Of the ~60 stocks in the TSX60, ~53 are dividend payers! And ~40% are financials. Hard to get away from those banks and dividend payers


It is one of the reasons some build their own.


In any case, it seems to me to be more important to focus on good investment choices. From what I recall of another thread - something like 80% or better of companies in the TSX or S&P500 indexes pay dividends so it seems limiting to focus on "do they or don't they" versus evaluating the company itself.


Cheers


----------



## milhouse (Nov 16, 2016)

OnlyMyOpinion said:


> I read your second link and it is not discussing the issue per this thread IMO. But there clearly are misconceptions around dividends, chasing yield, total return, etc.
> 
> I agree with Goldstone's comments, knowing the purpose for focusing on dividends would clarify some of the disagreement. Are you in accumulation or decumulation mode? Are you focused on long term growth with reinvested income, or on current income generation with long term capital preservation, accepting of modest growth, etc. Dividends for income rather than selling shares for income definately can have a place in some people's financial plan.
> 
> ...


Wanted to build on OMO's comment around "greater predictability of income divorced from the vagrancies of market sentiment". 
A couple of retirement articles I've come across discuss the anxieties for some people on spending their retirement nest egg. There's a bit of psychological soothing by having an income stream that you know you can _spend to the cap and get another cheque the next month_. If you're not part of a DB pension plan, then your only option is an annuity from a equivalent safety perspective. Dividends kind of provide another (simple?) way for that steady steam of income though obviously with additional risk. But I think the hope is that you can still participate in some of upside growth while getting a somewhat predictable income stream (that's my hope at least) whereas with a DB plan or annuity it's essentially static except for indexing in some cases.


----------



## olivaw (Nov 21, 2010)

GoldStone said:


> I suspect that vocal fans of the dividend strategy have one or more of the following in common:
> - strong home country bias: large allocation to Canadian equities, little or nothing outside.
> - large portfolio size (1): Canadian equities spill over into taxable account.
> - large portfolio size (2): dividend income is large enough to cover a good chunk of retirement expenses
> Dividend strategy makes a lot of sense when you put all of the above together.


Is a home country bias a good idea? My US holdings have outperformed my Canadian holdings for many years. 

Canadian equities certainly offer attractive dividends vs their US counterparts but I always wonder if that should be taken as a positive or a negative. What would happen to our financials heavy portfolios if there was a real estate market crash in Vancouver or Toronto? Would our banks continue to pay dividends or would they slash the dividend like BAC did during the financial crisis. 
--------

Some Sears Canada pensioners and other creditors are looking to claw back dividends paid between 2005 and 2013. https://www.theglobeandmail.com/rep...paid-to-lampert-shareholders/article37935718/ and http://business.financialpost.com/n...t-of-the-3b-in-dividends-paid-to-shareholders


----------



## cainvest (May 1, 2013)

james4beach said:


> In Canada, 10 year TSX Composite to Feb 16 annual return is 4.62%. The only sector diversified dividend ETF with long term data is CDZ (Dividend Aristocrats Index), which returned 6.49%. So CDZ has in fact beaten the TSX.
> 
> ... what to make of this? Dividend stocks underperform in the US, but outperform in Canada? Maybe with a few more years of portfolio performance we can say more firmly. If it's so clear that dividend stocks outperform the broad market then surely someone can put together an ETF that accomplishes that.


Did a quick scan over a number the top CDZ holdings with greater than 10 years of data and it seems most easily beat CDZ performance for a 10 year period. Of course "cherry picking" the best of the group from recent history is far from making sure you'll get the same results going forward. Selection of a subset of stocks, say for dividend income streams in retirement, would likely be difficult but possible I guess with some risk from being less diversified.


----------



## olivaw (Nov 21, 2010)

milhouse said:


> Wanted to build on OMO's comment around "greater predictability of income divorced from the vagrancies of market sentiment".
> A couple of retirement articles I've come across discuss the anxieties for some people on spending their retirement nest egg. There's a bit of psychological soothing by having an income stream that you know you can _spend to the cap and get another cheque the next month_. If you're not part of a DB pension plan, then your only option is an annuity from a equivalent safety perspective. Dividends kind of provide another (simple?) way for that steady steam of income though obviously with additional risk. But I think the hope is that you can still participate in some of upside growth while getting a somewhat predictable income stream (that's my hope at least) whereas with a DB plan or annuity it's essentially static except for indexing in some cases.


I missed OMO's comment earlier. It was a well thought out comment but it appears to me that he is saying that going overweight dividends will reduce volatility. 

My question are:
- Are you giving up too much diversification. 
- Is the ROI higher or lower over a period of 30 or 40 years? 
- Are people mistakenly assuming that a dividend strategy can replace fixed-income or annuities in their portfolio? I know bond, annuity and GIC yields suck right now, but, IMO, that is the only way to reduce overall volatility. 

FWIW: My wife and I don't have DB Pensions. We retired early and CPP/OAS haven't kicked in yet. The discussion about 3-4% inflation and dividend vs growth vs FI is extremely relevant to us.


----------



## agent99 (Sep 11, 2013)

olivaw said:


> - Are people mistakenly assuming that a dividend strategy can replace fixed-income or annuities in their portfolio? I know bond, annuity and GIC yields suck right now, but, IMO, that is the only way to reduce overall volatility.


In same situation as you with no pension, we rode through the 2008/9 crash without a problem, despite our overall portfolio value having dropped by 50%. The dividends kept coming in! As did interest from fixed income in our registered accounts. So, dividends did reduce the _volatility in our income stream_ (as compared with perhaps being reluctant to sell off stock with prices at rock bottom)

When we first retired in 2003, advisers used a formula that said allocation to FI should be approx your age (65% if retiring at 65) I don't hear anyone saying that anymore. So perhaps some FI has been replaced with dividends? In our case, it has. We have about 40% in FI, all in registered accounts. But we do both collect CPP/OAS so maybe our real FI is higher. $34k/yr would add about $500k to our retirement nestegg - that would bring our FI % up quite a bit!


----------



## 1980z28 (Mar 4, 2010)

canew90 said:


> Anyone living on FI or needed to sell capital to meet their needs should be worried.


I am living of 100% dividends,no pension at all,no bond,no FI,100% dividends 
Did set up investing in dividends to more than cover living cost times 2,,,,my cost to live is low
For me going ahead i do not see a problem,,lots of others also do this i am sure
CPP and OAS will be extra,,,will collect in the next 8 years when at 65,,,hoping to live pass 80


----------



## james4beach (Nov 15, 2012)

cainvest said:


> Did a quick scan over a number the top CDZ holdings with greater than 10 years of data and it seems most easily beat CDZ performance for a 10 year period


I've played with that too (the basis for my 5 pack based off XIU) but this is actually tricky to do in practice. There's a survivor bias effect here, where stocks that did amazingly well _become_ the top holdings in CDZ or XIU. So it can be misleading to just look at the present holdings and then past performance of those. These kind of subtle mistakes in analysis are also very common. For example a web site that talks about amazing performance of dividend stocks will look at S&P 500 holdings today, but ignore various high dividend stocks (Citigroup, GE, etc) that were once excellent dividend stocks but which had horrible performance.

These kind of mistakes in analysis are not intentional or malicious, it's just really hard to accurately and fairly recreate a portfolio. The screening criteria people use also dramatically change the results. Much of that portfolio construction we see on web sites are really exercises in hindsight back testing and data mining.

I'm guilty of that as well. (As an aside, I have a methodology for market timing that I don't even talk about on here, because I'm running it in a real portfolio and am waiting for a few years of real data and portfolio performance before I even claim that I am onto something).

The reason I am looking for ETF or mutual fund performance is that theoretical portfolios are a totally different game than actually constructing and implementing. I see these same dividend evangelism web sites you all do, and they all talk about how amazing the resultant portfolios are (less risky, higher performance, etc) -- but seriously though, why can't anyone implement a mutual fund that proves this talk is for real? Especially if the dividend growth route is so powerful and promising, all someone has to do is create an ETF or mutual fund to prove it.

The dividend mutual funds that I *do* find either under-perform the index, or are very heavy in financials. CDZ is the one exception I've seen that outperforms the index.

I recognize that the theoretical portfolios are showing excellent backward-looking performance, but I still would say that a retiree shouldn't start basing all their retirement hopes on dividend strategies if there isn't even a long-lived mutual fund or ETF out there, that proves the validity of all these claims about safety & outperformance. Something that has good sector diversification and long term track record.


----------



## My Own Advisor (Sep 24, 2012)

canew90 said:


> The Dow dropped because inflation for Jan was up 0.5% when they expected 0.3%. What if inflation for the year was 3% or more per year (though many say the costs to average people are already 4% a year) affect you?
> 
> Anyone living on FI or needed to sell capital to meet their needs should be worried.


I've been thinking about this question for some time and my answer is - not much as long as I owned (which I do) dividend paying stocks that tend to increase their dividends by 5% or so per year.


----------



## My Own Advisor (Sep 24, 2012)

cainvest said:


> Did a quick scan over a number the top CDZ holdings with greater than 10 years of data and it seems most easily beat CDZ performance for a 10 year period. Of course "cherry picking" the best of the group from recent history is far from making sure you'll get the same results going forward. Selection of a subset of stocks, say for dividend income streams in retirement, would likely be difficult but possible I guess with some risk from being less diversified.


Although CDZ is a decent CDN dividend ETF, there are far better choices. First of all, why pay 0.66% MER? With all the choices around, that's crazy.

Second, Corus, AD, TransAlta are hardly great stocks. I wouldn't bother with any of them. 

Surprisingly though, CDZ has more than 2% more 10-year total return than XIU. I'm more a fan of XIU vs. CDZ but hard to argue; given many high-yielders have done well over the last decade.


----------



## james4beach (Nov 15, 2012)

My Own Advisor said:


> Surprisingly though, CDZ has more than 2% more 10-year total return than XIU. I'm more a fan of XIU vs. CDZ but hard to argue; given many high-yielders have done well over the last decade.


I also think more highly of XIU than CDZ, but yes the performance is impressive.

Perhaps these dividend stocks benefitted from declining interest rates, and responded similarly to bonds. But that makes me wonder, what happens now that interest rates are going up? Will dividend stocks now chronically underperform the index for the next 35 years? I would not rule out this possibility.


----------



## agent99 (Sep 11, 2013)

james4beach said:


> Perhaps these dividend stocks benefitted from declining interest rates, and responded similarly to bonds. But that makes me wonder, what happens now that interest rates are going up? Will dividend stocks now chronically underperform the index for the next 35 years? I would not rule out this possibility.


If interest rates rise, maybe all equity will drop? _ I would not rule out this possibility._ The markets showed signs of this recently. We must be nearing the end of a long bull run. If that happens, dividends will likely continue to be paid on dividend stocks. For those in retirement, that matters much more than the stock value.


----------



## james4beach (Nov 15, 2012)

agent99 said:


> If interest rates rise, maybe all equity will drop? _ I would not rule out this possibility._ The markets showed signs of this recently. We must be nearing the end of a long bull run. If that happens, dividends will likely continue to be paid on dividend stocks. *For those in retirement, that matters much more than the stock value*.


I agree that the dividend stream (short term cashflow concern) is more important in the eye of the retiree, but portfolio depletion still remains a concern for all retirees. As your declining stocks pay out dividends, the share price drops further (as I showed upthread with BCE).

If I'm right about the math I showed in post 82, then retirees are just fooling themselves thinking that dividends immunize them from capital depletion.

If you wonder why I seem so vocal and persistent on this matter, I really am concerned about retirees being mislead into loading up on dividend stocks based on misinformation about their immunity to portfolio depletion. Some investors are disregarding SWR guidances because they think dividends change everything. In other words they are taking unsustainably high withdrawals using dividends and putting their capital at risk for the long term.


----------



## james4beach (Nov 15, 2012)

And let's be honest here, the reason "dividend investing" is incredibly popular is that traditional portfolio withdrawal methods tell someone they don't have enough capital to live off, but dividend investing seemingly provides a work-around. It tells people that their capital will last forever 'because they're just living off dividends'. _Sounds plausible_. Everyone likes good news and people don't ask many critical questions.

But in my opinion, it's hope with questionable evidence (at best) or false hope (at worst).


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> I agree that the dividend stream (short term cashflow concern) is more important in the eye of the retiree, but portfolio depletion still remains a concern for all retirees. As your declining stocks pay out dividends, the share price drops further (as I showed upthread with BCE).
> 
> If I'm right about the math I showed in post 82, then retirees are just fooling themselves thinking that dividends immunize them from capital depletion.


You are wrong. As I explained to you in post #93.

You still haven't answered my question in post #94:



GoldStone said:


> Let's try this, maybe it will work.
> 
> Company A starts the year at $10. On Jan 1, it pays out $1 in dividends. Stock goes to $9 to reflect the change in shareholder equity. I spend the dividend.
> 
> ...


----------



## OnlyMyOpinion (Sep 1, 2013)

To clarify, while I would argue that dividend income has some advantages to a sell-for-income approach, I wouldn't ever argue for a single, undiversified source of retirement income. I am big on the D-word. DIVERSITY of investments and DIVERSITY of retirement income! 

I'm hoping everyone looked at the link in GoldStone's post (#100):
_Here's a good article that recommends diversifying across four types of retirement income: interest, dividends, capital gains and principal. *The Evolution Of The Four Pillars For Retirement Income Portfolios* by Michael Kitces, a well known financial planner in the US._

These cash flow 'pillars' come from our registered and/or non-registered portfolios. We may also have sources from CPP/OAS, DC/DB pension, real estate, or even 'hobby' income. The more the merrier.

A few might be able to rely only on dividend income without any of these other sources. Their total wealth or their ability to 'cut back' may be enough to overcome risk, or of course they may simply stay lucky. Also, not many of us can assemble a portfolio of sufficient size to entertain not having to tap into the CG's/principal at some point.

Added: I mean 'stay lucky' in the sense that I don't think it is prudent to have all your eggs in one basket. I have no doubts that a stable of dividend payors will provide income within my plan that is preferable to a sell-for-income approach.


----------



## GoldStone (Mar 6, 2011)

James, here's another puzzle for you.

BCE closed trading on the first day of 2006 at *$27.87*. Since that day, BCE paid *$24.14* in dividends.

Please explain why BCE closed last week at $55.87. According to your theory, it should be trading around $3.73.


http://www.bce.ca/investors/stock-info/stockpricehistory
http://www.bce.ca/investors/dividendinfo/dividendhistory


----------



## agent99 (Sep 11, 2013)

james4beach said:


> And let's be honest here, the reason "dividend investing" is incredibly popular is that traditional portfolio withdrawal methods tell someone they don't have enough capital to live off, but dividend investing seemingly provides a work-around. It tells people that their capital will last forever 'because they're just living off dividends'. _Sounds plausible_. Everyone likes good news and people don't ask many critical questions.
> 
> But in my opinion, it's hope with questionable evidence (at best) or false hope (at worst).


Lets' be honest???? Where did you garner that information? Or did you just make it up to try and prove your point?

We have been retired for 15 years. The stocks we hold in our taxable accounts are almost all dividend payers. Stocks like the banks, telecoms, pipelines, RIO, etc. They have Total Returns in the 9-14% pa range. We live off the dividends (plus CPP/OAS). We draw about 4% of total portfolio. Our portfolio has grown by 50% despite our withdrawals. We could draw more, but we don't need to. 
This is REAL data, not Fake Data


----------



## OnlyMyOpinion (Sep 1, 2013)

^+1 Only 3 yrs of retirement here. Dividends alone are sufficient to cover our annual expenses. Dividend income has increased every year. 
And if it matters, underlying shares have a MV that is 60% greater than BV.


----------



## cainvest (May 1, 2013)

james4beach said:


> I've played with that too (the basis for my 5 pack based off XIU) but this is actually tricky to do in practice. There's a survivor bias effect here, where stocks that did amazingly well _become_ the top holdings in CDZ or XIU. So it can be misleading to just look at the present holdings and then past performance of those.


No doubt one has to be careful with selection, strong fundamentals are a key component for picking, not just past "semi-current" history of returns. There would be higher maintenance involved with keeping such a basket going, like with the 5 pack you mention.


----------



## cainvest (May 1, 2013)

My Own Advisor said:


> Although CDZ is a decent CDN dividend ETF, there are far better choices. First of all, why pay 0.66% MER? With all the choices around, that's crazy.
> 
> Second, Corus, AD, TransAlta are hardly great stocks. I wouldn't bother with any of them.
> 
> Surprisingly though, CDZ has more than 2% more 10-year total return than XIU. I'm more a fan of XIU vs. CDZ but hard to argue; given many high-yielders have done well over the last decade.


The higher MER doesn't bother me (I do own some CDZ) since it's taken care of by the higher return over XIU.


----------



## cainvest (May 1, 2013)

james4beach said:


> And let's be honest here, the reason "dividend investing" is incredibly popular is that traditional portfolio withdrawal methods tell someone they don't have enough capital to live off, but dividend investing seemingly provides a work-around. It tells people that their capital will last forever 'because they're just living off dividends'. _Sounds plausible_. Everyone likes good news and people don't ask many critical questions.
> 
> But in my opinion, it's hope with questionable evidence (at best) or false hope (at worst).


Thinking more about how to test this, even just to see how plausible it really is. Maybe for the sake of easy data gathering a simple test of two people that cover living expenses might work, something like this ....

Say we have a two retirements starting at 65, full CPP and OAS being taken by both but they need additional income. As a baseline 
lets assume both have a 250k cash, not invested yet at the start of 2008. For now let's leave taxes out of this, call them equal.
Also, to keep things simple (math wise) let assume the dividend payout value is exactly enough for both to live on with their CPP/OAS.
Person 1> Buys 250,000 in ENF - doesn't sell any shares, dividend payments only for income
Person 2> Buys 250,000 in XIU - sells shares to top up required income as dictated by 1's dividend payments, dividends reinvested (i.e. total return value used)

Other than cherry picking ENF, which of course is a massive ringer here and expected to win, is there anything wrong with seeing who's portfolio has more value after 10 years?


----------



## james4beach (Nov 15, 2012)

cainvest said:


> The higher MER doesn't bother me (I do own some CDZ) since it's taken care of by the higher return over XIU.


Yes I'd agree that CDZ appears to be worth its MER. Those performance figures are net of MER.


----------



## milhouse (Nov 16, 2016)

olivaw said:


> I missed OMO's comment earlier. It was a well thought out comment but it appears to me that he is saying that going overweight dividends will reduce volatility.
> 
> My question are:
> - Are you giving up too much diversification.
> ...


I don't think a dividend strategy reduces overall portfolio volatility but the hope is to reduce (some) income stream volatility as agent99 mentions. 
There is risk pending how you construct your portfolio and potential for giving up too much diversification. Personally, I'm not solely relying on the dividend stream as the other half of my portfolio is an index approach.


----------



## james4beach (Nov 15, 2012)

GoldStone said:


> You still haven't answered my question in post #94:


I don't know how to reason it with that kind of work-up, plus you didn't specify the timing of that $1 of earnings. Does it happen uniformly over the year? All in one shot? Before or after the dividend? Exact timing matters for all of this.

One disagreement here is about how total return applies to a dividend-paying stock. You said you can't reinvest dividends to check total return; I say that you absolutely can (and must). If we don't agree on what total return means, then we're never going to see eye to eye on this.

I created a thread specifically about total return so we can figure that piece out
http://canadianmoneyforum.com/showt...urn-of-a-dividend-stock?p=1868209#post1868209


----------



## olivaw (Nov 21, 2010)

agent99 said:


> In same situation as you with no pension, we rode through the 2008/9 crash without a problem, despite our overall portfolio value having dropped by 50%. The dividends kept coming in! As did interest from fixed income in our registered accounts. So, dividends did reduce the _volatility in our income stream_ (as compared with perhaps being reluctant to sell off stock with prices at rock bottom)
> 
> When we first retired in 2003, advisers used a formula that said allocation to FI should be approx your age (65% if retiring at 65) I don't hear anyone saying that anymore. So perhaps some FI has been replaced with dividends? In our case, it has. We have about 40% in FI, all in registered accounts. But we do both collect CPP/OAS so maybe our real FI is higher. $34k/yr would add about $500k to our retirement nestegg - that would bring our FI % up quite a bit!


Interesting. If I understand correctly, you have reduced FI and overweighted DIVIs. You have 15 years of positive experience with this allocation model. 

I had not previously thought in terms _volatility in our income stream_. I spent 35 years building my portfolio with a focus on total portfolio size. It is hard to focus on income when I spent so long thinking in terms of net worth.


----------



## FI40 (Apr 6, 2015)

OnlyMyOpinion said:


> It appears that your plot only includes unit price, not price+dividends.
> I'm not sure what your start date is, but on a 10yr plot I see 171.5% for SDY:US (SPDR S&P Dividend), and 155.4% for VTI:US (Vanguard Total Stock Market).
> On price only it flips, 75.1% for SDY and 109% for VTI.
> Which is to say - yes, dividends matter.


Wow this thread really blew up.

You're right - thought that was total return, my mistake. However, it turns out if I look at the total return since SDY's inception (Oct 2005) to today then VTSAX comes out ahead (188% vs 183%). It really depends on the time frame you're looking at. Of course dividends matter to total return.

The question olivaw had was whether dividend investing was better in terms of preservation of capital, I guess that's kind of like asking about the volatility as well as total return? In that case I'd say it's not better but probably not worse either.


----------



## My Own Advisor (Sep 24, 2012)

VIG and VYM by the way, are not designed to "beat the index"

VIG
"Seeks to track the performance of the NASDAQ US Dividend Achievers Select Index (formerly known as the Dividend Achievers Select Index)." Basically, mirror the returns of a large basket of dividend payers.

VYM
"Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields."

Both are great products at 0.08% MER but for any income-oriented investor who does not want to pick their own U.S. stocks, VYM is going to provide consistent 2.5% yield and growth.

Like millhouse and likely others in this forum, I gave up on trying to figure out which is the best approach for me. So, I own a number of CDN stocks (dividend payers) and will continue to own lots of VYM in my portfolio for broad U.S. diversification.


----------



## kelaa (Apr 5, 2016)

I think even in the accumulation mode, the dividend collector / dividend growth mindset can be helpful.

It is a relatively stable metric to evaluate your retirement readiness. In the face of +/- 10% market swings, how do you decide when you have enough capital to retire? From the dividend perspective, things are easier to plan. For example, the last few weeks might have set some people back 5 - 8% based on portfolio value. Does that set back your retirement timeline back a few years compared to the end of last year? Not from a cash-flow dividend perspective.
In the same vein, it can be helpful to know you are still making progress (growing your dividend income) when the market is going red. So you are not totally dependent on the fancies of the market.


----------



## MrMatt (Dec 21, 2011)

I'm not too concerned about inflation directly, I'm more concerned about why.

Ontario will push big inflation due to the minimum wage hikes, the effect of which hasn't even been completely captured.
This will put strain on the low end as they are seeing their income drop because of this.

The bank will see the inflation, and hike rates, which will hammer low and middle income families quite hard. 

It's going to get really tough, I just hope I can get a job that will keep up with inflation, a lot of private sector jobs aren't keeping up.


----------



## hboy54 (Sep 16, 2016)

MrMatt said:


> I'm not too concerned about inflation directly, I'm more concerned about why.
> 
> Ontario will push big inflation due to the minimum wage hikes, the effect of which hasn't even been completely captured.
> This will put strain on the low end as they are seeing their income drop because of this.
> ...


Yup. I know a young man last year of college working part time. He was already making over $14/hr. His hours have been cut so he now makes less money.

Hboy54


----------

