Living off dividends?

masonic

Audaxer said:

Prism said:

MK62 said:

The US is probably not the best market to compare growth v dividends tbh.....share buybacks seem to be becoming the preferred method of returning cash to investors on that side of the pond

Dividends have taken a bit of a hammering in general during the pandemic (though recovering now). Income focussed investment trusts could be an option here though......some have delivered steadily rising dividends for decades, and while I personally wouldn't want to rely just on that, if the level of those dividends is high enough, then it could be a viable option for some (ITs can only really do this by withholding income in good years, to establish a reserve to cover bad years, but if income stream stability is the goal.......of course, if you are disciplined enough, you can do this "smoothing" yourself from any income producing investments)

Most of the investment trusts will reinvest the dividends they receive rather than holding them in cash and therefore at dividend time need to sell some capital to pay their own - pretty much the same as an accumulation fund would. Some of them don't get enough dividends to cover their own and just pay out of capital growth. Regardless, as you say any of us can do that ourself just by taking regular payments so I don't really see the attraction of getting the IT to do it for us.

I know I could sell capital from growth or accumulation funds to create my own income. However for dividend paying equity income funds I feel a bit reluctant to sell capital to smooth out income, as it means I will have less units and therefore lower dividends in future from these funds, meaning I would need to keep selling capital. So not sure if that would work long term? 

It would depend on the nature of the funds themselves and your income requirement. In general they invest in sectors with lower total return in order to provide the convenience of a high income. That means there is comparatively less headroom with which to take an income without depleting the real value of your investment. There is going to be a continuum running from mixed asset through defensive equities to high yield equities and finally growth equities. Clearly long-term returns matter when considering whether capital can be drawn down while maintaining real value. Funds exist that pay out negligible income, but have consistently grown well in excess of inflation, while others focus on distributing a high level of income while not growing much in real terms. If you are agnostic about how you generate the returns that fund your retirement, then you probably wouldn't pick the same investments as someone wedded to natural yield.

This principle can be illustrated crudely by the following chart. In most years the market returns are higher than returns from the high dividend yield subset of the market (note chart basis is income reinvested). This provides more scope for a capital drawdown without depleting the portfolio. There is sequence of returns risk, so it would be prudent to have other provisions to draw on during market downturns in the early years, as would be advisable for either strategy.

masonic

CloesUnc said:

It would also mean that I could save any extra as cash, re-invest into ITs, OR re-invest into the INC funds. Somehow it doesn't seem right to me to drawdown from growth ACC funds, only to then re-invest the spare cash back into the ACC funds; INC funds though are a different matter. Maybe this is only psychological, but it seems to make sense.

I always prefer inc units. Even though I reinvest income, I want to choose where to reinvest it.

Prism

Audaxer said:

Prism said:

MK62 said:

The US is probably not the best market to compare growth v dividends tbh.....share buybacks seem to be becoming the preferred method of returning cash to investors on that side of the pond

Dividends have taken a bit of a hammering in general during the pandemic (though recovering now). Income focussed investment trusts could be an option here though......some have delivered steadily rising dividends for decades, and while I personally wouldn't want to rely just on that, if the level of those dividends is high enough, then it could be a viable option for some (ITs can only really do this by withholding income in good years, to establish a reserve to cover bad years, but if income stream stability is the goal.......of course, if you are disciplined enough, you can do this "smoothing" yourself from any income producing investments)

Most of the investment trusts will reinvest the dividends they receive rather than holding them in cash and therefore at dividend time need to sell some capital to pay their own - pretty much the same as an accumulation fund would. Some of them don't get enough dividends to cover their own and just pay out of capital growth. Regardless, as you say any of us can do that ourself just by taking regular payments so I don't really see the attraction of getting the IT to do it for us.

I know I could sell capital from growth or accumulation funds to create my own income. However for dividend paying equity income funds I feel a bit reluctant to sell capital to smooth out income, as it means I will have less units and therefore lower dividends in future from these funds, meaning I would need to keep selling capital. So not sure if that would work long term? 

It depends on the trust. If the trust generates enough income that you don't need to sell units then great but I wouldn't want to rely on that alone. The trusts themselves sell capital to pay the dividend so end up with less shares - no reason you couldn't do the same if you needed more than the dividend issued.

Obviously some trusts pay a high dividend in the first place but to do so have to either restrict themselves to high dividend equities or once again sell capital to pay you.

adindas

Audaxer said:

  ......for dividend paying equity income funds I feel a bit reluctant to sell capital to smooth out income, as it means I will have less units and therefore lower dividends in future from these funds, meaning I would need to keep selling capital. So not sure if that would work long term? 

What about you are in the situation illustrated in the graphics I have shown previously in this thread in here
https://forums.moneysavingexpert.com/discussion/6342123/living-off-dividends/p4

In Figure 2. People who bought the share around 2002 paid for GBX500 per share, so If you bought 10.000 shares your initial investment cost is GBP50,000

Start form 2010 the share price have been swinging  around GBX 32.00 and hardly moving up ?? The value of your initial investment is now worth GBP3,200. You get hammered from both sides, the drop of your initial investment and the drop in dividend you receive.

IMO, this is the elephant in the room when relying on dividend for a stable income and making investment decision based on dividend.

Sometimes it is better to just cut your loss and move on rather then stay on the course just for dividend purpose and incur more losses.

Thrugelmir

MK62 said:

The US is probably not the best market to compare growth v dividends tbh.....share buybacks seem to be becoming the preferred method of returning cash to investors on that side of the pond

When making comparisons , domestic taxation rules need to be factored into why companies opt for certain policies.  Whether income or capital is better for shareholders and management remuneration. Dividend tax in Europe is high,  Denmark (27%), Germany (25%), France (27.5%) as examples. 

MK62

Thrugelmir said:

MK62 said:

The US is probably not the best market to compare growth v dividends tbh.....share buybacks seem to be becoming the preferred method of returning cash to investors on that side of the pond

When making comparisons , domestic taxation rules need to be factored into why companies opt for certain policies.  Whether income or capital is better for shareholders and management remuneration. Dividend tax in Europe is high,  Denmark (27%), Germany (25%), France (27.5%) as examples. 

Not making any comparisons......merely stating if you were to do that, the US may not be the best market to pick.

masonic

It is a very good point, and interesting to consider what might be screened out when selecting what to invest in. Perhaps a close cousin of 'tail wagging dog'.

Linton

Like others I get £10K+/year from dividends & fixed interest with a dedicated pot of around £200K.   Together with guaranteed income (SP, annuities, and Mrs Ls small DB pension) that covers all our day to day expenditure with some left over for one-offs.  Major expenditure is explicitly planned and taken from growth investments or cash/Wealth Preservation funds as part of rebalancing,

The advantage of managing one's finances in this way is that normal expenditure is financed by fairly stable income that turns up automatically in one's current account with no need for ongoing month to month management or decision making.  

The  advocates of "total return" ISTM really are raising a false dichotomy.  For sensible retirement investing one should diversify by holding both growth stocks priced on future prospects and stocks which make and distribute profits.  It seems appropriate  that one should take dividends from the companies that provide them and invest for long term growth in those companies that aim to provide that.  To do the reverse seems somewhat bizarre.

Many of the arguments for a total growth approach are really based on the higher returns that growth investments have provided since the GFC.  However that was not the situation in the previous decade and has not been in recent months.

If you do go for income investing to satisfy ongoing expenses diversification is important.  Because of historic culture and tax the UK is good for income, but the Far East cannot be ignored and neither can Europe.  You can get income from the US by investing in areas like infrastructure or fixed interest.  I would advocate also including corporate bonds in one's income portfolio.

PS to answer the question posed in the title of the thread - solely "living off dividends" would be poor investing.  You need the diversification which would come from living off both dividends and growth.

MK62

Linton said:

PS to answer the question posed in the title of the thread - solely "living off dividends" would be poor investing.  You need the diversification which would come from living off both dividends and growth.

In theory, yes, and in common with most around here, it's what I do.......but I'm not sure someone who'd retired at the start of this century, fully invested in something like Murray Income Trust, would agree there....

Alexland

MK62 said:

In theory, yes, and in common with most around here, it's what I do.......but I'm not sure someone who'd retired at the start of this century, fully invested in something like Murray Income Trust, would agree there....

While MUT does a good job of balancing the stable income and opportunity for capital growth I was disappointed by the minimal 0.25p pa dividend increases they have been doing to rebuild their reserve following the PLI merger. Yes technically it was another year of dividend increases but at a rate far below inflation. The AIC have calculated that MUT's average dividend growth over the past 5 years was only 1.36% pa. I asked about likely future dividend growth at a recent shareholder Q&A session and the chair's answer made me feel they lacked ambition.

DIG seems to be doing a better job in the UK market with a higher dividend yield and AIC calculated 5 year growth of 2.34% pa but then it's less liquid and is trading at par with NAV compared to MUT's circa 6% discount.

If investing long term for income needed later it might be better to look global and go with something with more growth like FCIT currently at a circa 10% discount to NAV and might only have an initial dividend yield of 1.51% but they have been able to increase it by an average of 5.38% pa over the past 5 years (and similar for the years before that) and the NAV that has seen a long term return ahead of a global tracker mostly I suspect due to the modest use of leverage and buybacks rather than any stock selection skill. The ongoing charges on FCIT are reducing so it seems reasonably attractive for sustainable growing income. Or maybe BNKR with a 2% initial yield but only 4% discount and 0.5% pa weaker dividend growth history.