Living off dividends?

Linton

MK62 said:

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....

The main problem with MUT for income is that it currently has a yield of close to 4%.  So if one requires a fairly stable £10K a year a 100% investment in MUT would cost £250K.  There are a fair number of sensible investments yielding say 5.5% with a resultant pot size of £182K.  So do you go for MUT or for something with a higher yield and put the £68K money saved into long term growth?

Ok you may say that MUT has given better capital growth but then you are trying to meet two not necessarily compatible aims with one fund.   I find it much easier to manage if you have separate focussed portfolios, one of which is prepared to sacrifice some growth in order to meet income needs and the other to provide long term growth without any worries about meeting day to day needs during a crash.

Thrugelmir

Linton said:

  You need the diversification which would come from living off both dividends and growth.

Diversification is achieved by holding uncorrelated asset classes. Simply holding more of the same, i.e. just equities,  fails to achieve this. 

Linton

Thrugelmir said:

Linton said:

  You need the diversification which would come from living off both dividends and growth.

Diversification is achieved by holding uncorrelated asset classes. Simply holding more of the same, i.e. just equities,  fails to achieve this. 

Diversification is about far more than holding uncorrelated asset classes as those who were highly invested in growth stocks have found out in recent months.   Companies that pay high steady dividends very broadly have different characteristics to those that dont and can behave very differently.

Plus there are other ways of getting income than dividends.  In this discussion "dividends" should include tradable fixed interest and any other tradable asset that provides an income.

MK62

Alexland said:

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.

Murray Income Trust was just an example offered to illustrate that a retiree, fully invested in that 22 years ago, at the start of this century/millenium, might not share the view that it's poor investing. It wasn't a recommendation to invest or not invest in it now......someone considering it today would need to evaluate it for themselves.

As for the others mentioned......I haven't really looked at those recently either, but someone looking at living off dividends might baulk at something returning 1.51% or 2%, even if the total return has been good......that might not be what they are after.

Long term performance vs a global tracker?....you might find Murray Income Trust compares quite favourably over the 22yr period mentioned....of course nobody really knows if that will repeat over the next 22 years or not, but that's investing. It might not compare as favourably over the last 5 years though.....and that's fair enough.

Thrugelmir

Linton said:

Thrugelmir said:

Linton said:

  You need the diversification which would come from living off both dividends and growth.

Diversification is achieved by holding uncorrelated asset classes. Simply holding more of the same, i.e. just equities,  fails to achieve this. 

Diversification is about far more than holding uncorrelated asset classes as those who were highly invested in growth stocks have found out in recent months.   Companies that pay high steady dividends very broadly have different characteristics to those that dont and can behave very differently.

When there's a downturn doesn't matter what attribute your equity holdings have. Share prices will be marked red across the board. Companies in the main trade B2B.

High dividend payers do so for a reason. Progressive dividend payers aren't necessarily high yielders. As the market has identified that the company has stable attributes. 

tebbins

Haven't read the whole thing, just a few points as I've seen some generic narratives in here around growth.
1. "Growth" stocks tend to have high buybacks, on aggregate S&P 500 buybacks exceed dividends, and combined exceed profits. So the idea that low dividends = more retained earnings = higher growth is an unsubstantiated myth. There is a degree of retention that is necessary, beyond which the marginal return on retained earnings necessarily tends to 0 as economically viable opportunities for returns on capital exceeding the companies cost of equity become more scarce.
2. Higher yielding, and higher dividend payout stocks have been shown, in very long-tern aggregate data to outperform lower yielders, so the assumption that high dividends = lower capital appreciation may also be unsubstantiated. Low dividends indicate higher capital intensiveness and a high cash burn rate (due competition, R&D, repairs & maintenance etc.), high dividends are the strongest indication from management of confidence in earnings and (if consistent and sustained) a sustainable business model that can consistently generate excess cash for distribution (think big tobacco vs just another social media marketing company).
3. Particularly in the UK dividends have tended to be very resilient, and have been good at keeping pace with inflation. It is obviously preferable though not necessary to have the total return to fall back on in dividend cut years, or years of bumper spending.
4. There are valid concerns around the FTSE 100s dividend concentration, with around half of the payout coming from 10 companies, and 3/4 coming from 20. This is a fair bit more concentrated than the index itself. The same is true of buybacks, particularly in the US where they are so popular.
5. I always look at the company first before trying to second-guess what the market thinks, or why the market thinks what it thinks. Early this year I bought BATS, DLG, IMB, MONY, NG. & UU. These are all at least fairly reliable and increasing dividend payers with sound business models I can understand, bought at prices I considered cheap. I don't chase yield, I just buy companies I know and "get", that I think are good and cheap at the time.

Thrugelmir

When it comes to share buybacks. Remember may executives are remunerated on the basis of EPS and the share price with the issue of new shares. 

masonic

tebbins said:

Haven't read the whole thing, just a few points as I've seen some generic narratives in here around growth.
1. "Growth" stocks tend to have high buybacks, on aggregate S&P 500 buybacks exceed dividends, and combined exceed profits. So the idea that low dividends = more retained earnings = higher growth is an unsubstantiated myth. There is a degree of retention that is necessary, beyond which the marginal return on retained earnings necessarily tends to 0 as economically viable opportunities for returns on capital exceeding the companies cost of equity become more scarce.
2. Higher yielding, and higher dividend payout stocks have been shown, in very long-tern aggregate data to outperform lower yielders, so the assumption that high dividends = lower capital appreciation may also be unsubstantiated. Low dividends indicate higher capital intensiveness and a high cash burn rate (due competition, R&D, repairs & maintenance etc.), high dividends are the strongest indication from management of confidence in earnings and (if consistent and sustained) a sustainable business model that can consistently generate excess cash for distribution (think big tobacco vs just another social media marketing company).

High dividend yield indices have been around for >15 years, so they provide a means of comparing returns without any active management component. The historic data from these suggest a lower beta than the market, with underperformance in rising markets and outperformance in falling markets, overall resulting in underperformance due to long periods of rising markets over this time period. If I'm understanding you correctly, this isn't backed up by the longer-term data and could be the result of a secular shift in P/E for the growth part of the market, captured in the whole market index but not the high dividend yield index? If so, it wouldn't be sustainable and runs the risk of a reversion to the mean.

Alexland

MK62 said:
someone looking at living off dividends might baulk at something returning 1.51% or 2%, even if the total return has been good......that might not be what they are after.

Sure they might baulk at only taking a couple of percent in dividends when 4%+ is available from income trusts but it allows a more style balanced portfolio capable of generating both capital and dividend growth to keep up with inflation which is critical when 'living off dividends' long term with no erosion to the capital spending power or reduction to living standards.
Even the 3-4% 'SWR' rates people talk about accept the capital may be sold down over a 20-30 year retirement. For those of us who reasonably expect a longer maybe 40 year retirement it's probably better to plan for a lower withdrawal rate with the option of selling down capital in the final decades if returns still fail to keep up with inflation.

adindas

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. 

If you buy European stock such as DE, DK, FR stocks from the UK platform, do you pay the dividend tax on stocks bough on foreign stock exchange ??. I am aware that you do not pay the stamp duty for stocks on these stocks. In the US you pay 15% withholding tax. I think this information is crucial If you want to buy European stocks through one of the UK Platform under S&S account, where you have two options to buy it from US-OTC market or direct from one of the stock exchange in Europe. For instance

1. Volkswagen AG
   VOW3 (or VOW) from DAX in Germany
   or you could get VWAGY from OTC Market in the US

2. Voestalpine AG
   VOE from Vienna Stock Exchange (Wiener Börse) In Vienna
   or you could get VLPNY from OTC Market in the US

Both stocks are paying dividends. From UK resident perspectives both involve currency exchange rates and exchange rate goes on both direction so this one could be excluded from decision making.

In term of cost of buying / selling them, withholding tax on dividend, stamp duty (if any) or other things that you think is relevant to decision making; Which one do you think is better, to buy them from the US OTC market or from EU stock market ??