Why dividends in retirement and not sell stock?

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stphnstevey
stphnstevey Posts: 3,224 Forumite
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in Savings & investments
Generally it seems recommended to move to dividend paying investments in retirement.

I understand this is to produce an income, but I am not quite sure how this might be better than simply liquidating stock

I suppose share prices are more volatile which leads to unpredictability in returns vs for example, "Dividend Aristocrats" that have produced fairly reliable dividend returns

Also the frequency is likely more regular, with minimal effort

There are no trading costs for dividends vs liquidating stock

Tax wise there seems to be a bigger capital gains allowance than for dividends, although at say 2% dividend it would still take £100k in holdings to fill the dividend allowance

Are there other reasons for this suggested move to dividends in retirement?
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  • Sea_Shell
    Sea_Shell Posts: 9,388 Forumite
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    We're keeping ours as ACC units. When DH starts drawdown he'll draw a fixed amount per month, which will exceed the actual pure growth (dividends), so units would have to be sold regardless.
    How's it going, AKA, Nutwatch? - 12 month spends to date = 2.31% of current retirement "pot" (as at end March 2024)
  • Aminatidi
    Aminatidi Posts: 556 Forumite
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    Google Terry Smith on investing for income.
  • TheTracker
    TheTracker Posts: 1,223 Forumite
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    edited 15 June 2019 at 1:02PM
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    90% psychology and self-promoting pundit babbling.

    Psychological behaviour is very important in investing. So I don’t mean to indicate people who take an income approach are are less sophisticated than those who don’t. Unless they are forgoing significant total return for the sake of their psychological need.

    Your post is entirely correct.
  • A_T
    A_T Posts: 959 Forumite
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    In essence dividends are almost the same as selling shares as it's taking money out of a company that might otherwise be invested for growth.
  • Audaxer
    Audaxer Posts: 3,508 Forumite
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    stphnstevey wrote: »
    Generally it seems recommended to move to dividend paying investments in retirement.

    I understand this is to produce an income, but I am not quite sure how this might be better than simply liquidating stock

    I suppose share prices are more volatile which leads to unpredictability in returns vs for example, "Dividend Aristocrats" that have produced fairly reliable dividend returns

    Also the frequency is likely more regular, with minimal effort

    There are no trading costs for dividends vs liquidating stock

    Tax wise there seems to be a bigger capital gains allowance than for dividends, although at say 2% dividend it would still take £100k in holdings to fill the dividend allowance

    Are there other reasons for this suggested move to dividends in retirement?
    You have given a lot of good reasons why some people in retirement prefer dividend paying funds. I can understand investors who insist Total Return is the way to go as I have a portfolio of VLS and also a portfolio of active income funds which will produces regular dividends - so I am a bit in both camps. It will be interesting to see which produces the best total return over time as both portfolios have similar ratios of equity to bonds.

    One of the main reasons I like income and growth dividend funds is that if we were to have a prolonged bear market of 3 to 4 years, I would feel more comfortable taking dividends from the income portfolio rather than selling capital from the VLS funds.
  • MaxiRobriguez
    MaxiRobriguez Posts: 1,780 Forumite
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    You can do both.

    You shouldn't need to access all your pot as cash upon retirement, so you can sell a small proportion - say 10% of your stocks and hold as cash, which should if you've been smart give you three years worth of living expenses, and anytime you actually take out some cash from that 10% then top up your portfolio cash holding so it's at a constant 10%.

    The rest of the 90% can be a mix of bonds, growth stocks and income stocks. The idea being that these will continue to generate growth and either slow down your pension liquidation or, hopefully, continue to grow it. Dividend stocks perhaps more favoured as they're less volatile but really keeping diversified is a good thing.

    Remember your portfolio can get inherited, so if you do find a way to grow it your beneficiaries will be thankful for it, but obviously if this is for retirement that is a secondary consideration.
  • cogito
    cogito Posts: 4,898 Forumite
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    A_T wrote: »
    In essence dividends are almost the same as selling shares as it's taking money out of a company that might otherwise be invested for growth.

    Agreed. Payment of dividends is a partial liquidation of the company. I know that others on here disagree with me.
  • Aminatidi
    Aminatidi Posts: 556 Forumite
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    Just to highlight a timely example of why dividends might be viewed as paying yourself.

    This week I purchased a bunch of shares in Capital Gearing Trust.

    I hadn't realised I'd done so the day before the XD date.

    The next day was the XD day and the share price dropped around 1% to allow for the dividend and I was £300 down on something I'd only purchased the day before.

    In a month or so I'll get the dividend.

    But it's basically part liquidation of my holding in the trust and if I choose to reinvest it will cost me more money to do so in (small) dealing fees and stamp duty.

    That feels a bit like paying twice so personally I'd be much happier with no dividend and simply grow the pot.
  • AnotherJoe
    AnotherJoe Posts: 19,622 Forumite
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    stphnstevey wrote: »
    Generally it seems recommended to move to dividend paying investments in retirement.


    Maybe it was years ago. I dont believe its the case now, not at least "generally" recommended.
  • Audaxer
    Audaxer Posts: 3,508 Forumite
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    Aminatidi wrote: »
    Just to highlight a timely example of why dividends might be viewed as paying yourself.

    This week I purchased a bunch of shares in Capital Gearing Trust.

    I hadn't realised I'd done so the day before the XD date.

    The next day was the XD day and the share price dropped around 1% to allow for the dividend and I was £300 down on something I'd only purchased the day before.

    In a month or so I'll get the dividend.

    But it's basically part liquidation of my holding in the trust and if I choose to reinvest it will cost me more money to do so in (small) dealing fees and stamp duty.

    That feels a bit like paying twice so personally I'd be much happier with no dividend and simply grow the pot.
    If you are at the accumulating and growing the pot that makes sense, but if you were retired and taking income it might be seen as a nice bonus to have invested just before ex-div date and get an early dividend.
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