I understand your point about dividends not being additional money in an investment. before I was retired I reinvested dividends to grow wealth. now that I'm retired I take dividends as a paycheck. it's a sort of reverse dollar cost averaging... I don't have to decide when to sell stocks funds this way.
That's my plan too, although I have a mix of income and growth funds in my pension. Ideally I want my portfolio to pay me enough dividends so I don't need to sell any funds...let's see how that works out in coming years.
And if stock prices drop, you probably won't really care all that much because you're still getting the dividends and you're not selling shares anyway.
He doesn't mention that reinvesting dividends is a nightmare in terms of tracking cost basis. I had reinvested for decades on a couple of my stocks, now I have no idea what the cost basis is for those shares purchased by the DRIP. I don't know I can ever sell those stocks now. So that's something to consider.
No disagreements and thanks for the clarity of all your videos. I like dividends for the following reasons. I'm retired and get some income from consulting and rental properties, so I don't always need my dividend income, depending on the month. I do not reinvest; them. I park dividends in a high interest money market fund. More importantly, as I age, I am following the influential advice of William Bernstein (per a Money magazine interview from 9/2012) to carefully consider taking money "off the table" from equity investments and put that money in safer categories. Thus, when stocks pay me dividends, I put that money in safer investments (money markets, bonds, CDs), so I can continue slowly reducing my risk level without having to go through the trouble of deciding which equities to sell in order to put those funds into safer investments. It's a lot easier to allow my dividend payments to do that for me.
I love your approach. I will put 10% of my dividends into cash reserves. I look for other investment opportunities such as stocks that do not pay dividends for capital appreciation.
A distinction between ordinary dividends and qualified dividends would have been good to discuss. I beleive if you receive ordinary dividends, it will be treated as ordinary income vs a capital gain. In this case the ordinary dividend would calculated the same as interest. Please weigh in if Im mistaken. Im continuing to educate myself
Private credit involves loans to private companies, often offering higher returns and diversification. Due to its complexity and risks, a financial adviser can help with due diligence, access, and risk management, ensuring investments fit your strategy and comply with regulations.
In the realm of private credit, diversification and a deep grasp of market dynamics are essential, particularly in volatile times. Balancing potential opportunities with prudent risk assessment can guide investors effectively through the complexities of private credit investments.
Certainly, I’ve been working with a specialized financial adviser to navigate private credit investments. Starting with an initial allocation of $100k, my adviser has strategically managed my investments, optimizing entry and exit points. This approach has grown my private credit portfolio to approximately $500k.
Profitable companies can also increase dividend payouts thus, holding the company over time allows you to inflate your yield on cost as the dividends increase…hence you get some inflation protection on your income which a bond doesn’t do as it’s payout is fixed through out it’s time period.
Rob, I've got about $1500 a month coming in interest in dividends---> For my stock portion I got VOO with minor positions in VBR and POGRX, for my bond portion I've got BIV, VCIT and PONAX. Yeah, I know, a bit overcooked but it's just historically how it happened. I mean it comes to an average of ~$1500 ($18k/Yr), most of it is paid quarterly, but I manage and keep a good reserve. About $1600 a month is coming in from SS, so about $3100 per month total. I don't go by the 4% rule, I just spend interest and dividends without touching the rest of the portfolio. House is paid off, so $3100 pretty much covers living expenses. Sound like a plan?
Good analysis. Something worth mentioning is that, with index funds that pay dividends, there is no need to sell shares of those funds to get the dividend money. Someone with a large enough portfolio could live off of dividends without ever selling shares, running out of money, or drastically changing their plan. That perpetual withdrawal strategy is much more appealing to me than a strategy that requires selling shares and hoping to have enough money to last the rest of one's life.
Reinvesting a dividend is equivalent to a stock buyback. Keeping a dividend is equivalent to selling stock of the same value. This is ignoring potential tax inefficiencies and any inconvenience of receiving an amount of money you can't control.
@@davec3974 equivalent at the time of dividend payment, yes, and when it comes to NAV and total returns. There are other benefits to dividend payments over buybacks, the least of which is that buybacks are at their core price manipulation whereas dividends are a company returning a share of profits to investors. Does that manipulation usually work out in one’s favor, while padding CEO compensation and allowing for book cooking? Yes, until it doesn’t.
I may have missed this, but for me the biggest difference is dividends align your interests with the interests of the company and its management whereas bonds put your interests in direct conflict with the interests of the company and its management. management. Just the difference between being an owner and a creditor. This leads to the situation where, if interests drop, the company will not hesitate to call the bond or CD. This is why I'd go for Treasuries or non-callable CDs. The second biggest difference, or maybe it's the first, is dividends are part of a growth/equity plan and interest is part of a bond/ballast plan. Not an original thought. Got it from David Swensen.
I have a comment, i am retired and live off of dividends, to me this is a much better strategy than using just growth stocks and selling shares...at some point you will run out of shares to sell..with dividends as long as you pick solid companies that are consistent in maintaining and growing thier dividends you will have a constant stream of ever growing income. Also i believe they smooth out the down years in the market...for example let's say you had 1 million and you pull your 40k now you have 960k that year the narket loses 20% now you have 768k the next year and now have to pull 40k leaving you with 728k. If you are using dividends the first year is paid to you in dividends so still q million thenbyou lose 20% so you have 800k but, guess what ypu dont need to pull abother 40k and sell shares because dividends will give you your income....just my 2 cents
Hi Rob, great episode as usual. I am one that will disagree with you on the dividend explanation, and here is why: Your definition does not take into account the increase value of the company or the profits. That is where the $$ for the dividend payment really comes from. So to take your example, you have 100$ invested in Co., 'A. After a year the Co. made say 10% profit. It keeps 5% for itself and distribute the other 5% to you. You now have 100$ invested (or maybe the value of the Co has even increased and your investment is worth more than 100$!) AND you have 5$ extra from the dividend paid. Cheers, a.
If a company made 10% earnings, then your $100 invested would increase to $110. If it paid a 5% dividend and maintained the other 5%, then your stock would be worth $105 and you eould get $5 cash. This is assuming no other changes to your stock value (related to the company or overall economy).
well the 'bird' you receive as a dividend is given after the birds in the bush are captured...Disney, a dividend king, is a striking example. When they did not see the short-mid term number adding-up they cut the dividends.
@@Coyotehello the bird means you got paid. The bush means you trust company that they will manage the money better than you. Dividend cut is normal and can happen, so as failure to grow as expected. Nothing is certain in the future. To get paid first, got your bird, to make your own decision what to do with that money or decided to leave the capital for so-called "professional", leave your bird in the bush, both have risks, your call
So, when it comes to the 4% rule. I understand that the first year of retirement you may take out 4% and in following years it’s 4% + inflation. Question 1) where do you look for the rate of inflation? Is this something the government calculates? 2) should you take out your money for the year all at once ? Or would it be better to make withdrawals in increments? Maybe quarterly. Allowing your money to earn interest. Thank you.
Thanks Rob for answering my question and going above and beyond to give us invaluable education around dividends and interest! As a follow up, what inflation rate are you using in 2024? Are you going with 3.1% that ended the year or 2.5% that is projected for 2024? Always appreciate your time and talents!
I agree with Rob about dividends. The only advantage I see with taking all your dividends and interest for cash to be used is that it saves some shares from being sold. Why would that be important? Shares that are passed down to heirs are stepped up in basis so if maximizing your bequests is important to you that may be an option.
Hi Rob, thanks so much for the tutorials Can you please clarify how interest /dividends affect the 4% rule. Is it safe to assume one can withdraw the interest and dividend income and also 4% of the portfolio balance in year one of retirement?
I started investing in the stock market because of dividends. What matters, in my opinion, It implies that you can pass that on to your children, giving them a head start in life. I've invested over $600k in dividend stocks over the years; I continue to buy more today.
I find it more productive and safe to buy growth/blue-chip stocks rather than tech and visible.Stock owner see the dividends. If the company reinvests the money in itself that it would sent out as dividends, almost nobody sees it.
Rob, absolutely love your videos. You break things down in a very simple to understand manner. My comment concerns dividends. I feel there is a distinct difference between receiving dividends as a payout, verses reinvesting them. When reinvested, I am in the exact same position as the day prior, more shares, albeit at a lower price per share. However, in a tax advantaged account, HSA, there is no taxable event. I know there are a million different ways to discuss dividends. Most of what I have seen from you discuss how dividends are "not" free money, which I agree. Can you do a video which describes the best way to take advantage of dividends? Thank you .
All excellent points. None if these should be controversial at all. Its It's just exactly dividends work. Of course there can be capital appreciation on a dividend paying stock, but $1 of dividends vs $1 interest to Rob's point exactly true that it won't make you richer.
I think with dividends using them as income can work, but you have to reinvest some. For instance let's say your yield is 10%. You can spend half, but buy more shares with the rest. You'll still own shares that will continue to pay and increase your share count, while not selling shares. Most models show spending all the dividends, not reinvesting some.
Love your work and a long time follower. What ETF would you recommend in a taxable if you have no earned income? SCHD appears to have some years of non qualified dividends while VYM appears to always have qualified. Im trying to forward plan the best option to maximise qualified dividends. Thanks
@@greg5892 can you point me to this data on SCHD qualified dividend? I spoke directly to Schwab and they detailed the following: Thank you for chatting with me. As you may know, in 2022 the SCHD fund's Qualified Dividend Income (QDI) percentage was 100%. That being said, there is no guarantee that the QDI percentage for SCHD will be 100% in the future as it can be impacted by changes to the underlying holdings of the ETF. I think it will always fluctuate to keep the yield up. The only place I could find it provided alot of years with non qualified dividends. They may place in some reits or other vehicles to main or increase that growth. I really want an answer on this as I love SCHD alot, just for now I only putting into my 401k.
Great information. When I first heard the viewer question, I thought it related to the amount withdrawn. In other words is the, for example, $5000 dividends received part of the $40k withdrawal, or in addition to the $40 withdrawal. So withdraw $35k and receive $5k in dividends for a total of $40, or take $40k in addition to the dividends.
@@debbief6923 you would take 4% less the dividends. since dividends initially reduce the amount of the portfolio it counts as part of your portfolio withdrawal.
Hi Rob, Thanks for excellent video! As for whether investors should take dividends as income or reinvest it, my personal opinion is that it depends on the size of your portfolio and the time of your life. If you are young and the your portfolio is relatively small, you should reinvest the dividends and make your retirement fund grow. But if you already retired and have a sizable portfolio, taking dividends (or part of it) as income source shouldn't be considered as detrimental to your portfolio. Same thing can be said to the interests.
So if I buy shares in a company (I'm now an owner), I'm not expected to receive any of the profits (dividends)? I follow your logic. I still have the same number of shares although somewhat diminished in value. But I do see the difference between interest and dividends. Bonds vs Stock ownership.
In addition; 1) Dividends sometimes are given to buyers who are short term investors who buy and sell short term. 2) stocks/ETF value can go down or up while CD initial value remains the same
My wife and I just started watching your videos...they're great! Thank you for all the information. A question for you....We've never invested in the stock market, we've owned rental properties. We're starting to sell them now and plan to invest the proceeds in the market. We understand the basics of the 4% rule and index fund investing and agree with it, we just have seriously cold feet about diving in with the market at such a high point. We will need to live off the portfolio and are concerned that if the market goes down or just remains flat for an extended period we'll be stretched thin. Would love your input or a video on that theme or perhaps you've done one that I didn't see? Thanks for your input!
Rob - which makes shareholders richer: 1) $100 dividend. 2) $100 stock buy back. 3) the company does neither. You pointed out that #1 and #3 are the same. What about #2?
All three are the same. In a stock buy back the company has less cash but owns it's own stock instead. If they retire the shares then future profits would be divided by fewer shares.
So if i understand this, if I keep my AGI (total SS & withdraws from tax sheltered IRA/401K) and dividend cash outs under 94K then no taxes due on the dividends?
Even if the Dividends (LT Cap Gains) are in the 0% bracket they are included in the formula to determine the amount of Your Social Security is taxable. If your taxable SS plus IRA/401K withdraws are over the standard deduction there will be taxes.
I always look forward to your videos. I happen to agree with you that dividends don’t make you richer. Interests on the other hand do, or at least it does not reduce your principal the way dividends do. I will take interests any day over dividends. Unless of course, the stock that pays dividends increases in value substantially. Take care all.
In retirement, say post age 59.5, the order or distribution of investments should be first withdraw from a traditional IRA and then second sell for capital gain any non-tax deferred stock accounts and then third take distributions from a Roth IRA? Also, I have an HSA that I believe after age 65 I can take distributions as if it was a traditional IRA. No need to qualify the withdrawals for medical reimbursement unless I want ( where it would be tax-free thus). The HSA can be left untouched without ever needing to a RMD on it. How does an HSA figure into the chronology of taking distributions or capital gains?
In retirement, the average retiree has an income source consisting of social security and investments. Your tax rate should be very low and taking standard deductions into consideration, there should be no capital gain or interest liabilities.
But what about that gap between taking a social security payment (taxed at regular income) versus a qualified dividend (up to 80k+ for married filing jointly) in a taxable brokerage account. It would push back your SS until later (which increases your payment) and have a relatively consistent additional income source. Not taking that zero percent capital gains seems like a waste no?
For non-US persons there is another major difference you haven’t mentioned: US-sourced dividends are subject to withholding tax. Interest payments are not.
Hey Rob, thanks for the info very helpful…Question I have pertains to including Dividend passive income in my New Retirement plan that’s in tax deferred account…Did I hear U right not include it in your plan income?…Please clarify for me…Thanks👍😎👌
Love the channel but that last segment about how dividends affect the 4% rule wasnt clear, you even verbally stumbled abit because it doesn't make sense. Did the original Trinity study include reinvested dividends in its historical look back periods?
Hello Rob, I very much enjoy your videos. Not trying to be confrontational in any manner, but I do have a question. Is it better to receive dividends for your necessary income, or sell shares of a company to get the same income? To my small brain it seems better to maintain the same number shares in a good company that pays dividends, rather than sell shares in another good company that doesn't pay dividends, ultimately resulting in less shares you own. If you could explain the reason for / against, I would very much appreciate it. Thanks!
@@BlksrBLKSR I understand the principle, but if dividends don't drop the price of the stock too much, I think at worst you might break even, especially if the company is a good one and even after paying dividend stock price continues to rise. Also, if you or anyone else knows, is the price drop in the stock automatic the day dividends are paid out? In other words, not just a reactionary consequence of the dividends, but something that takes place without outside influence? Hope that makes sense ..
If you can fund your life with dividends as long as the stock doesn't cut the dividend if really doesn't matter if your capital investment goes down in value...this is what makes living off dividends so great.
I think it depends.. If the company is growing their earnings per share you own, and subsequenty they are growing the dividend you get paid, yes, "dividends" make you richer. In reality is the underlying investment that makes you richer.
Morning Rob, Great video and explanation of this. I have a little different question. I have both IRA FIA and a NQ FIA 9 7yr into 10yr contract)say approx $500k in each. 64yo MFJ. Do i do conversions for IRA with free WD amount until 73yo, or do I cash in NQ for a small CL and invest? Converted all IRA already except for Annuity. Thanks Al
Dividends do make one richer, especially if DRIPPED. Accumulating more shares off the dividend without having to invest more money. Compounding is the magic at work. My monthly paying largest holding is MAIN stock, and has made my account richer by the month. Also special dividends dripped over the years, help even more.
When a company pay interest its stock value also goes down because without the interest expense the company would show more earnings per share and its stock price would go up all other things being equal.
Would it be correct to say that one doesn't have to worry about a safe withdrawal rate if one is only living off the dividends? eg: SCHD has a dividend yield less than 4% and with a million dollars in it, can one expect at least $30k per year that keeps pace with inflation?
One thing, I couldn't figure out taxes how long-term qualified dividends (also capital gain) are calculated and reported in 1040. All I see in my 1040 is that adjusted gross income (includes ordinary w2 income , dividents, capital gains etc), standard deduction, taxable income, and tax. I don't know where/how ordinary income was taxed separately, and dividends taxed separately and added together..
Also, I think dividends are important for another reason. They are obvious, up front and visible. Stock owners see the dividends. If the company reinvests the money in itself that it would have sent out as dividends, almost nobody sees it
Question for you that might seem a bit dumb but can you give an example of what you would take out of a million dollar portfolio using the 4% Rule and and the inflation is at 3% am I taking out 7% then
no, you are only taking out 4% in that current year's dollar. The inflation is inherent in the growth of your portfolio, or rather you should account that your porfolio grows x% because of inflation.
Thank you for that excellent explanation of dividends During my working years at the hospitals that I worked at, I have had many lively discussions about this very point and yet people still don’t get it So I appreciate your explanation and it was right on. Thank you.
re: Qualified Dividends: You state most etf and fund dividends are qualified. What about holding period? If a person owns an etf or fund for a short term and a qualified dividend is received , would that dividend be considered qualified for tax purposes or not?
@Rob Berger you are correct that dividends don't make you richer. This is something to keep in mind for those that are in love with dividend producing stocks. Dividend stocks may be best (in a taxable acct.) for those in lower marginal tax brackets. Rob's comments about reinvesting dividends is spot on. It's a difficult concept for some to get. 4% rule...Rob is correct here. Nice video Rob.
You don't mention the fact that tracking the cost basis of reinvested dividends is a nightmare. I did it for years and then I stopped and just take the cash. Trying to keep track of the dividend payments is too much. So that's something to consider.
@@rob_berger I haven't re-invested for a long time I guess. I found this: "...if you didn't keep accurate records of the price and share amount of a reinvested dividend, then the broker doesn't know and neither do you. Only dividends before 2011 are in this situation. After that, the brokerage or fund has to track this for you." I guess now its no longer a problem.
Lots of talk about withdrawal rates and a 30 year projection. But how about a 69 year old retiring in average health and the time tables show about 14 years to go ( ouch). No male in my family has lived to 85 so the SS projections might be on track or certainly more realistic than my planning to live to 99. What is the best site or advice ( it has to be more than 4%) for somebody planning for a 1-18 year retirement, I cannot believe I am alone in this situation.
I believe you erred when you said the US government is contractually bound to pay you interest, and you could sue the US government for breach of contract. The US government isn't like other entities. The US does not waive sovereign immunity on its debt instruments (e.g. US treasuries), would never get past the Political Question Doctrine, and there would be no enforcement mechanism to force the holder of the fisc to pay when the the holder already said it would/could not pay. The one time the US purposely defaulted in 1933 and the case went to SCOTUS, SCOTUS upheld soverign immunity. The three other times the US chose to default weren't challenged.
#8 is controversial because it is confusing book value with market value. Yes, paying a dividend (reducing cash on hand) is going to lower the book value of a company because their assets are reduced. Market value, however, which is the value derived from the stock price, is generally unaffected by dividends. Market price is typically determined based on expected future earnings for the company. The adjusted and of day values that the brokers post is meaningless as all that matters from an investors perspective is what the price opens at the next day. I'm not arguing for a high dividend portfolio, because the other points you make about taxes are real, but the point you and others have made about it being a zero sum game just isn't true.
As as subscriber, I enjoyed watching the video as usual. I think that I understand 80% of the content. The information about dividends and how they directly impact the stock price is still something I need to look into further.
Clear explanation, please note yr 8 points are for a US situation. People from other countries can be in another situation. And of course, l don’t agree with yr last point 😂!
It looks like the marginal rate for ordinary income is lower than the capital gains rate if a married couple filing jointly make around $90,000 after taking the standard deduction $120,000-$30,000 = $90,000 (approx). What am I missing here?
point: you either pay 0%, 15% or 20% tax rate on LT Capital Gains, depending on your income. If you are in the 12% tax bracket, you pay zero on LT cap gains.
@@howardfriedman7077I agree. Also, if your AGI is above 250,000 for married filing jointly, you'll owe another 3.8% tax on investment income (section 1411).
There is no controversy in your explanation - it's a fact. On the day the stock pays a dividend you can see the adjusted share price to compensate for paying the dividend.
I'm considering investing around $700,000 in stocks as I've learned that savvy investors can still profit during challenging times. Do you have any solid stock market strategies for this year?
It's ok if the dividends don't make us richer - we are in retirement and the dividend money makes us stay afloat month to month (or qtr to qtr). At least we are not poorer for it!
The issue that I have with dividends is that let’s say I have one million, the company pays a 10% dividend, at the end of the year, I still have one million, if the shares don’t appreciate in value. Whereas, with interest, I have one million plus 50,000 with a high yield of 5%, and there is the 8 wander of the world with compounding. Take care.
@@Stashmo not necessarily - because for now we get the dividends every month, so a bit extra in our pockets while we wait say for BND to get 15% up or higher (now it’s around $72-73 usd per share, lowest it has ever been)…just bought that and will let it ride at least one year before we sell, but hoping we won’t need to sell in a year and can let it go more.
@@edv1261 well we buy stocks that we hope appreciate in time, while paying dividends… yet the dividends give us income in the meanwhile which is emotionally comforting. Besides dividends we have tbills, tips, treasury notes, and hysa… so it’s not just one thing but trying to hedge our bets from different angles. Harder to manage, true, but so happy when the dividends get dropped in our account! Those are good days! Not sure what it is about it, but it makes me happy - forgot who of the financial gurus out there said a similar thing…
Well, my portfolio provides me with good passive-income and capital-appreciation. My brokerage adds another 5% APY on top of my free-cash-flow. How is this not winning?
I disagree that interest payments make you richer in a way that is any different from dividends. When you buy the bond, the interest payments coming in the future are priced into the bond - this is obvious in how the market works in terms of discount or premiums on the bonds relative to market interest rates. When you receive that interest payment the only improvement in your wealth is the reduction in risk that the interest payment wouldn't have arrived - yay the company survived - this is no different from how the earnings of a company into the future are priced into the stock price. When you receive an interest payment on a bond it is worth less the day after you received it than the day before, because there is less interest and principle coming in the future, and the market is constantly repricing bonds (though less efficiently in many cases) based on the timing and amounts of interest payments - every day that bond price is going to vary, just like a stock price. Also I think comparing interest payments to dividends is a bad comparison. You compare interest payments on a bond to earnings of a company - the difference between a dividend payment (for most companies) and a bond is that the company doesn't usually choose to give you all the earnings it made - you have the benefit of owning a portion of retained earnings. When you have a bond, you lose that benefit - you only get the interest, you have no further ownership value of earnings the company made above that interest rate.
The difference is, when you get the interest from the bond, you don't have to be affected by the bond depreciation if you hold it until maturity. In which case that interest actually makes you richer. For a dividend, the payment is coming at the expense of share appreciation.
@@mguti090 Both are equally impacted, one just has a fixed period and the other is a perpetual cash flow stream. In the case of the dividend, you now have earnings in the company and earnings in hand. If inflation or interest rates affect the value of cash, both the cash in the company and the cash in your hand is going to change in relative value. That money in your hand has value based on how it can be invested vs how it will depreciate and so does the cash sitting on the company balance sheet and so does the principle sitting in the bond as well as the future payments due from the bond. Both are just streams of cash and the difference is risk profile. I will also add that in my view a lot of people put way too much emphasis on how they can "hold bonds til maturity". What the value of the bond is telling you, if it drops is that if you had NOT invested in that bond, if you had that money right now, you could make more money - and frankly the person saying this is ignoring the risk that they in fact may need that money. Tomorrow you get hit by a bus, tomorrow you lose your job, whatever happenstance - assuming you own't need to cash out that bond is an assumption mingled with all sorts of endogenous and exogenous risks. If the bonds value goes down, you have lost money and if it goes up you have gained money relative to some measure - you can ignore it but it happened. In fact if you live in a world where you bond value dropped but inflation dropped more, you may in fact have gained total purchasing power even though the value dropped - but your value dropped relative to not having the bond terms locked in on the same effective cash in hand and when it goes up it's because your interest rate is going to mean you've locked in an investment better than non-committed cash in hand, because the market rates have shifted - but neither is truly a way to measure how your wealth has changed relative to yesterday without also considering inflation etc.
@@johnyjsl9219 but technically speaking assuming you were taking those dividends as cash if you had reinvested those dividends how much greater would your capital gains be? Much more than tripled.
@@RJD1308 yes you are right. Do you think it is better than bond interest though? The other thing I was thinking is when the market is tanking, taking dividends makes you feel better than selling falling shares. So if you need cash to live on and the market is tanking and stays tanked, I wonder if dividends can be a life saver. Do you have any opinions about this?
Rob is correct. Dividends are a zero-sum game. Your dividend comes out of the NAV/share price. The company could use that money to grow the business or pay the employees a livable wage, but they decided to pay themselves and 1%-ers with dividends. Say NO to Dividends.
I understand your point about dividends not being additional money in an investment. before I was retired I reinvested dividends to grow wealth. now that I'm retired I take dividends as a paycheck. it's a sort of reverse dollar cost averaging... I don't have to decide when to sell stocks funds this way.
That's my plan too, although I have a mix of income and growth funds in my pension. Ideally I want my portfolio to pay me enough dividends so I don't need to sell any funds...let's see how that works out in coming years.
@stevegeek yes me too, hoping to get enough from interest on t bill ladder, equity dividends plus social security
And if stock prices drop, you probably won't really care all that much because you're still getting the dividends and you're not selling shares anyway.
He doesn't mention that reinvesting dividends is a nightmare in terms of tracking cost basis. I had reinvested for decades on a couple of my stocks, now I have no idea what the cost basis is for those shares purchased by the DRIP. I don't know I can ever sell those stocks now. So that's something to consider.
No disagreements and thanks for the clarity of all your videos. I like dividends for the following reasons. I'm retired and get some income from consulting and rental properties, so I don't always need my dividend income, depending on the month. I do not reinvest; them. I park dividends in a high interest money market fund. More importantly, as I age, I am following the influential advice of William Bernstein (per a Money magazine interview from 9/2012) to carefully consider taking money "off the table" from equity investments and put that money in safer categories. Thus, when stocks pay me dividends, I put that money in safer investments (money markets, bonds, CDs), so I can continue slowly reducing my risk level without having to go through the trouble of deciding which equities to sell in order to put those funds into safer investments. It's a lot easier to allow my dividend payments to do that for me.
I love your approach. I will put 10% of my dividends into cash reserves. I look for other investment opportunities such as stocks that do not pay dividends for capital appreciation.
A distinction between ordinary dividends and qualified dividends would have been good to discuss. I beleive if you receive ordinary dividends, it will be treated as ordinary income vs a capital gain. In this case the ordinary dividend would calculated the same as interest. Please weigh in if Im mistaken. Im continuing to educate myself
Private credit involves loans to private companies, often offering higher returns and diversification. Due to its complexity and risks, a financial adviser can help with due diligence, access, and risk management, ensuring investments fit your strategy and comply with regulations.
In the realm of private credit, diversification and a deep grasp of market dynamics are essential, particularly in volatile times. Balancing potential opportunities with prudent risk assessment can guide investors effectively through the complexities of private credit investments.
Certainly, I’ve been working with a specialized financial adviser to navigate private credit investments. Starting with an initial allocation of $100k, my adviser has strategically managed my investments, optimizing entry and exit points. This approach has grown my private credit portfolio to approximately $500k.
Nicole Anastasia Plumlee the licensed advisor I use. Just search the name. You’d find necessary details to work with to set up an appointment.
He’s exactly right about the dividend NOT creating extra wealth. The share price is lowered by the amount of the dividend.
Profitable companies can also increase dividend payouts thus, holding the company over time allows you to inflate your yield on cost as the dividends increase…hence you get some inflation protection on your income which a bond doesn’t do as it’s payout is fixed through out it’s time period.
Rob, I've got about $1500 a month coming in interest in dividends--->
For my stock portion I got VOO with minor positions in VBR and POGRX, for my bond portion I've got BIV, VCIT and PONAX. Yeah, I know, a bit overcooked but it's just historically how it happened. I mean it comes to an average of ~$1500 ($18k/Yr), most of it is paid quarterly, but I manage and keep a good reserve.
About $1600 a month is coming in from SS, so about $3100 per month total.
I don't go by the 4% rule, I just spend interest and dividends without touching the rest of the portfolio. House is paid off, so $3100 pretty much covers living expenses.
Sound like a plan?
May I ask what size stock portfolio to achieve $1500 a month in dividends?
Good analysis. Something worth mentioning is that, with index funds that pay dividends, there is no need to sell shares of those funds to get the dividend money. Someone with a large enough portfolio could live off of dividends without ever selling shares, running out of money, or drastically changing their plan. That perpetual withdrawal strategy is much more appealing to me than a strategy that requires selling shares and hoping to have enough money to last the rest of one's life.
This. Plus dividend snowballing from owning more shares, which lots of people overlook because the NAV is the same.
Reinvesting a dividend is equivalent to a stock buyback. Keeping a dividend is equivalent to selling stock of the same value. This is ignoring potential tax inefficiencies and any inconvenience of receiving an amount of money you can't control.
@@davec3974 equivalent at the time of dividend payment, yes, and when it comes to NAV and total returns. There are other benefits to dividend payments over buybacks, the least of which is that buybacks are at their core price manipulation whereas dividends are a company returning a share of profits to investors. Does that manipulation usually work out in one’s favor, while padding CEO compensation and allowing for book cooking? Yes, until it doesn’t.
It doesn’t change how the corporations held by the fund payout dividends as Rob covered in this and other videos.
Sounds like you should watch the video again.
So glad I found your channel. You are an excellent teacher. I turn 60 this year and am investing for income.
As you mentioned in a previous video, you can avoid the tax issues associated with TIPS by buying them in a Roth or other tax-free account.
I may have missed this, but for me the biggest difference is dividends align your interests with the interests of the company and its management whereas bonds put your interests in direct conflict with the interests of the company and its management. management. Just the difference between being an owner and a creditor. This leads to the situation where, if interests drop, the company will not hesitate to call the bond or CD. This is why I'd go for Treasuries or non-callable CDs.
The second biggest difference, or maybe it's the first, is dividends are part of a growth/equity plan and interest is part of a bond/ballast plan.
Not an original thought. Got it from David Swensen.
I have a comment, i am retired and live off of dividends, to me this is a much better strategy than using just growth stocks and selling shares...at some point you will run out of shares to sell..with dividends as long as you pick solid companies that are consistent in maintaining and growing thier dividends you will have a constant stream of ever growing income. Also i believe they smooth out the down years in the market...for example let's say you had 1 million and you pull your 40k now you have 960k that year the narket loses 20% now you have 768k the next year and now have to pull 40k leaving you with 728k. If you are using dividends the first year is paid to you in dividends so still q million thenbyou lose 20% so you have 800k but, guess what ypu dont need to pull abother 40k and sell shares because dividends will give you your income....just my 2 cents
I prefer "preferred" stock to bonds. Some are qualified so LT cap gains rates.. and the dividend is safer than that of the common.
Hi Rob, great episode as usual.
I am one that will disagree with you on the dividend explanation, and here is why:
Your definition does not take into account the increase value of the company or the profits. That is where the $$ for the dividend payment really comes from.
So to take your example, you have 100$ invested in Co., 'A. After a year the Co. made say 10% profit. It keeps 5% for itself and distribute the other 5% to you. You now have 100$ invested (or maybe the value of the Co has even increased and your investment is worth more than 100$!) AND you have 5$ extra from the dividend paid.
Cheers,
a.
If a company made 10% earnings, then your $100 invested would increase to $110. If it paid a 5% dividend and maintained the other 5%, then your stock would be worth $105 and you eould get $5 cash. This is assuming no other changes to your stock value (related to the company or overall economy).
A bird in the hand is worth 2 (or even 3) in the bush
@@joeb1522well, no. The relationship is not linear.
well the 'bird' you receive as a dividend is given after the birds in the bush are captured...Disney, a dividend king, is a striking example. When they did not see the short-mid term number adding-up they cut the dividends.
@@Coyotehello the bird means you got paid. The bush means you trust company that they will manage the money better than you. Dividend cut is normal and can happen, so as failure to grow as expected. Nothing is certain in the future. To get paid first, got your bird, to make your own decision what to do with that money or decided to leave the capital for so-called "professional", leave your bird in the bush, both have risks, your call
So, when it comes to the 4% rule. I understand that the first year of retirement you may take out 4% and in following years it’s 4% + inflation. Question 1) where do you look for the rate of inflation? Is this something the government calculates? 2) should you take out your money for the year all at once ? Or would it be better to make withdrawals in increments? Maybe quarterly. Allowing your money to earn interest. Thank you.
Thanks Rob for answering my question and going above and beyond to give us invaluable education around dividends and interest! As a follow up, what inflation rate are you using in 2024? Are you going with 3.1% that ended the year or 2.5% that is projected for 2024? Always appreciate your time and talents!
I agree with Rob about dividends. The only advantage I see with taking all your dividends and interest for cash to be used is that it saves some shares from being sold. Why would that be important? Shares that are passed down to heirs are stepped up in basis so if maximizing your bequests is important to you that may be an option.
Hi Rob, thanks so much for the tutorials Can you please clarify how interest /dividends affect the 4% rule. Is it safe to assume one can withdraw the interest and dividend income and also 4% of the portfolio balance in year one of retirement?
I started investing in the stock market because of dividends. What matters, in my opinion, It implies that you can pass that on to your children, giving them a head start in life. I've invested over $600k in dividend stocks over the years; I continue to buy more today.
I find it more productive and safe to buy growth/blue-chip stocks rather than tech and visible.Stock owner see the dividends. If the company reinvests the money in itself that it would sent out as dividends, almost nobody sees it.
Would you please do a video covering perpetual withdrawal rates?
Rob, absolutely love your videos. You break things down in a very simple to understand manner. My comment concerns dividends. I feel there is a distinct difference between receiving dividends as a payout, verses reinvesting them. When reinvested, I am in the exact same position as the day prior, more shares, albeit at a lower price per share. However, in a tax advantaged account, HSA, there is no taxable event. I know there are a million different ways to discuss dividends. Most of what I have seen from you discuss how dividends are "not" free money, which I agree. Can you do a video which describes the best way to take advantage of dividends? Thank you .
All excellent points. None if these should be controversial at all. Its It's just exactly dividends work. Of course there can be capital appreciation on a dividend paying stock, but $1 of dividends vs $1 interest to Rob's point exactly true that it won't make you richer.
I think with dividends using them as income can work, but you have to reinvest some. For instance let's say your yield is 10%. You can spend half, but buy more shares with the rest. You'll still own shares that will continue to pay and increase your share count, while not selling shares. Most models show spending all the dividends, not reinvesting some.
Love your work and a long time follower.
What ETF would you recommend in a taxable if you have no earned income?
SCHD appears to have some years of non qualified dividends while VYM appears to always have qualified.
Im trying to forward plan the best option to maximise qualified dividends.
Thanks
SCHD is the better fund in my book. It tracks the DOW dividend index. And their dividends are almost always qualified.
@@greg5892 can you point me to this data on SCHD qualified dividend?
I spoke directly to Schwab and they detailed the following:
Thank you for chatting with me.
As you may know, in 2022 the SCHD fund's Qualified Dividend Income (QDI) percentage was 100%.
That being said, there is no guarantee that the QDI percentage for SCHD will be 100% in the future as it can be impacted by changes to the underlying holdings of the ETF.
I think it will always fluctuate to keep the yield up. The only place I could find it provided alot of years with non qualified dividends. They may place in some reits or other vehicles to main or increase that growth.
I really want an answer on this as I love SCHD alot, just for now I only putting into my 401k.
for a long time I didn't know what qualified dividends were and that they were taxed at capital gains rates and not income rates.
Great information. When I first heard the viewer question, I thought it related to the amount withdrawn. In other words is the, for example, $5000 dividends received part of the $40k withdrawal, or in addition to the $40 withdrawal. So withdraw $35k and receive $5k in dividends for a total of $40, or take $40k in addition to the dividends.
Personally, I would think of the $5 as part of the $40k so I would take $35k plus $5k
@@debbief6923 you would take 4% less the dividends. since dividends initially reduce the amount of the portfolio it counts as part of your portfolio withdrawal.
Hi Rob, Thanks for excellent video! As for whether investors should take dividends as income or reinvest it, my personal opinion is that it depends on the size of your portfolio and the time of your life. If you are young and the your portfolio is relatively small, you should reinvest the dividends and make your retirement fund grow. But if you already retired and have a sizable portfolio, taking dividends (or part of it) as income source shouldn't be considered as detrimental to your portfolio. Same thing can be said to the interests.
I do not understand the mechanism that causes a stock price to decrease upon issuing a dividend.
Aren’t stock prices based on supply vs demand?
Good explanation! I appreciate your thoughtful approach on so many topics.
So if I buy shares in a company (I'm now an owner), I'm not expected to receive any of the profits (dividends)? I follow your logic. I still have the same number of shares although somewhat diminished in value. But I do see the difference between interest and dividends. Bonds vs Stock ownership.
In addition;
1) Dividends sometimes are given to buyers who are short term investors who buy and sell short term.
2) stocks/ETF value can go down or up while CD initial value remains the same
My wife and I just started watching your videos...they're great! Thank you for all the information. A question for you....We've never invested in the stock market, we've owned rental properties. We're starting to sell them now and plan to invest the proceeds in the market. We understand the basics of the 4% rule and index fund investing and agree with it, we just have seriously cold feet about diving in with the market at such a high point. We will need to live off the portfolio and are concerned that if the market goes down or just remains flat for an extended period we'll be stretched thin. Would love your input or a video on that theme or perhaps you've done one that I didn't see? Thanks for your input!
Check out the bucket strategy
Rob - which makes shareholders richer: 1) $100 dividend. 2) $100 stock buy back. 3) the company does neither. You pointed out that #1 and #3 are the same. What about #2?
All three are the same. In a stock buy back the company has less cash but owns it's own stock instead. If they retire the shares then future profits would be divided by fewer shares.
So if i understand this, if I keep my AGI (total SS & withdraws from tax sheltered IRA/401K) and dividend cash outs under 94K then no taxes due on the dividends?
You should include the standard deduction.
Even if the Dividends (LT Cap Gains) are in the 0% bracket they are included in the formula to determine the amount of Your Social Security is taxable. If your taxable SS plus IRA/401K withdraws are over the standard deduction there will be taxes.
I always look forward to your videos. I happen to agree with you that dividends don’t make you richer. Interests on the other hand do, or at least it does not reduce your principal the way dividends do. I will take interests any day over dividends. Unless of course, the stock that pays dividends increases in value substantially. Take care all.
Thank you for posting this helpful video
In retirement, say post age 59.5, the order or distribution of investments should be first withdraw from a traditional IRA and then second sell for capital gain any non-tax deferred stock accounts and then third take distributions from a Roth IRA? Also, I have an HSA that I believe after age 65 I can take distributions as if it was a traditional IRA. No need to qualify the withdrawals for medical reimbursement unless I want ( where it would be tax-free thus). The HSA can be left untouched without ever needing to a RMD on it. How does an HSA figure into the chronology of taking distributions or capital gains?
In retirement, the average retiree has an income source consisting of social security and investments. Your tax rate should be very low and taking standard deductions into consideration, there should be no capital gain or interest liabilities.
But what about that gap between taking a social security payment (taxed at regular income) versus a qualified dividend (up to 80k+ for married filing jointly) in a taxable brokerage account.
It would push back your SS until later (which increases your payment) and have a relatively consistent additional income source.
Not taking that zero percent capital gains seems like a waste no?
For non-US persons there is another major difference you haven’t mentioned: US-sourced dividends are subject to withholding tax. Interest payments are not.
Hey Rob, thanks for the info very helpful…Question I have pertains to including Dividend passive income in my New Retirement plan that’s in tax deferred account…Did I hear U right not include it in your plan income?…Please clarify for me…Thanks👍😎👌
Love the channel but that last segment about how dividends affect the 4% rule wasnt clear, you even verbally stumbled abit because it doesn't make sense. Did the original Trinity study include reinvested dividends in its historical look back periods?
Great video!! Which works out better in retirement, taking the dividend income to live on or selling some stock to live on? Thanks!
Depends on your tax status.
Hello Rob, I very much enjoy your videos. Not trying to be confrontational in any manner, but I do have a question. Is it better to receive dividends for your necessary income, or sell shares of a company to get the same income? To my small brain it seems better to maintain the same number shares in a good company that pays dividends, rather than sell shares in another good company that doesn't pay dividends, ultimately resulting in less shares you own. If you could explain the reason for / against, I would very much appreciate it. Thanks!
Fewer shares, but priced higher since divies were never paid out.
I don't think it should make a difference, but emotionally I am with you, it makes me feel better not to sell shares.
@@BlksrBLKSR I understand the principle, but if dividends don't drop the price of the stock too much, I think at worst you might break even, especially if the company is a good one and even after paying dividend stock price continues to rise. Also, if you or anyone else knows, is the price drop in the stock automatic the day dividends are paid out? In other words, not just a reactionary consequence of the dividends, but something that takes place without outside influence? Hope that makes sense ..
If you can fund your life with dividends as long as the stock doesn't cut the dividend if really doesn't matter if your capital investment goes down in value...this is what makes living off dividends so great.
I think it depends.. If the company is growing their earnings per share you own, and subsequenty they are growing the dividend you get paid, yes, "dividends" make you richer. In reality is the underlying investment that makes you richer.
Even if the dividend is maintained it does, since dividend reinvestment increases your shares
How is a Sale of A House you Built Value based on County Tax Value.Charged then increase pays Capital gains unless reinvested?
Great video. Thanks for the clear explanations.
Thank you. One of your best videos!
Morning Rob, Great video and explanation of this. I have a little different question. I have both IRA FIA and a NQ FIA 9 7yr into 10yr contract)say approx $500k in each. 64yo MFJ. Do i do conversions for IRA with free WD amount until 73yo, or do I cash in NQ for a small CL and invest? Converted all IRA already except for Annuity. Thanks Al
Dividends do make one richer, especially if DRIPPED. Accumulating more shares off the dividend without having to invest more money. Compounding is the magic at work. My monthly paying largest holding is MAIN stock, and has made my account richer by the month. Also special dividends dripped over the years, help even more.
When a company pay interest its stock value also goes down because without the interest expense the company would show more earnings per share and its stock price would go up all other things being equal.
Would it be correct to say that one doesn't have to worry about a safe withdrawal rate if one is only living off the dividends? eg: SCHD has a dividend yield less than 4% and with a million dollars in it, can one expect at least $30k per year that keeps pace with inflation?
There’s the risk that the dividends aren’t maintained, but yes.
Thanks Rob.. great advice
Dividend stocks okay for passive investors but stocks can and do go down. Can get 4.5% in no risk money market funds if passive is your style.
Great Video!
One thing, I couldn't figure out taxes how long-term qualified dividends (also capital gain) are calculated and reported in 1040. All I see in my 1040 is that adjusted gross income (includes ordinary w2 income , dividents, capital gains etc), standard deduction, taxable income, and tax. I don't know where/how ordinary income was taxed separately, and dividends taxed separately and added together..
Interesting final point
Also, I think dividends are important for another reason. They are obvious, up front and visible. Stock owners see the dividends. If the company reinvests the money in itself that it would have sent out as dividends, almost nobody sees it
equities paying dividends can increase in value due to market forces, bonds can not.
Can't argue with that.
Dividends reduce book or liquidation value not necessarily market value
Private mortgages pay interest too.
Question for you that might seem a bit dumb but can you give an example of what you would take out of a million dollar portfolio using the 4% Rule and and the inflation is at 3% am I taking out 7% then
No. You would take out $40k out of the million the first year for 4%. The second year would be 40k +3% for $41,200.
no, you are only taking out 4% in that current year's dollar. The inflation is inherent in the growth of your portfolio, or rather you should account that your porfolio grows x% because of inflation.
Thank you for that excellent explanation of dividends
During my working years at the hospitals that I worked at, I have had many lively discussions about this very point and yet people still don’t get it
So I appreciate your explanation and it was right on. Thank you.
re: Qualified Dividends:
You state most etf and fund dividends are qualified.
What about holding period?
If a person owns an etf or fund for a short term and a qualified dividend is received , would that dividend be considered qualified for tax purposes or not?
Haha yeah
If the fund reports it as a qualified dividend then yes.
@Rob Berger you are correct that dividends don't make you richer. This is something to keep in mind for those that are in love with dividend producing stocks. Dividend stocks may be best (in a taxable acct.) for those in lower marginal tax brackets. Rob's comments about reinvesting dividends is spot on. It's a difficult concept for some to get. 4% rule...Rob is correct here. Nice video Rob.
You don't mention the fact that tracking the cost basis of reinvested dividends is a nightmare. I did it for years and then I stopped and just take the cash. Trying to keep track of the dividend payments is too much. So that's something to consider.
Doesn't your broker track the cost basis for you?
@@rob_berger I haven't re-invested for a long time I guess. I found this: "...if you didn't keep accurate records of the price and share amount of a reinvested dividend, then the broker doesn't know and neither do you. Only dividends before 2011 are in this situation. After that, the brokerage or fund has to track this for you." I guess now its no longer a problem.
What if I'm interested in dividends?
or you have divided interests
Lots of talk about withdrawal rates and a 30 year projection. But how about a 69 year old retiring in average health and the time tables show about 14 years to go ( ouch). No male in my family has lived to 85 so the SS projections might be on track or certainly more realistic than my planning to live to 99. What is the best site or advice ( it has to be more than 4%) for somebody planning for a 1-18 year retirement, I cannot believe I am alone in this situation.
let me break it down simply. retail investors Love getting dividends. It's not exactly rational. But it's a fact.
I believe you erred when you said the US government is contractually bound to pay you interest, and you could sue the US government for breach of contract. The US government isn't like other entities. The US does not waive sovereign immunity on its debt instruments (e.g. US treasuries), would never get past the Political Question Doctrine, and there would be no enforcement mechanism to force the holder of the fisc to pay when the the holder already said it would/could not pay. The one time the US purposely defaulted in 1933 and the case went to SCOTUS, SCOTUS upheld soverign immunity. The three other times the US chose to default weren't challenged.
#8 is controversial because it is confusing book value with market value. Yes, paying a dividend (reducing cash on hand) is going to lower the book value of a company because their assets are reduced. Market value, however, which is the value derived from the stock price, is generally unaffected by dividends. Market price is typically determined based on expected future earnings for the company. The adjusted and of day values that the brokers post is meaningless as all that matters from an investors perspective is what the price opens at the next day. I'm not arguing for a high dividend portfolio, because the other points you make about taxes are real, but the point you and others have made about it being a zero sum game just isn't true.
The idea that book value does not contribute to share price is simply not credible.
As as subscriber, I enjoyed watching the video as usual. I think that I understand 80% of the content. The information about dividends and how they directly impact the stock price is still something I need to look into further.
Clear explanation, please note yr 8 points are for a US situation. People from other countries can be in another situation. And of course, l don’t agree with yr last point 😂!
What do you disagree with?
@@Stashmol see dividend as a kind of interest payment which was earned by the company the last year. But not every agree.
@@emphyrioIt’s certainly your option to see it that way, despite their differences.
The exchange does not lower the price of the stock; the market participants do
You missed his point about how dividend payments affect a stock's price.
Interest rates are too low for my taste but to each their own
It looks like the marginal rate for ordinary income is lower than the capital gains rate if a married couple filing jointly make around $90,000 after taking the standard deduction $120,000-$30,000 = $90,000 (approx). What am I missing here?
point: you either pay 0%, 15% or 20% tax rate on LT Capital Gains, depending on your income. If you are in the 12% tax bracket, you pay zero on LT cap gains.
@@howardfriedman7077I agree. Also, if your AGI is above 250,000 for married filing jointly, you'll owe another 3.8% tax on investment income (section 1411).
There is no controversy in your explanation - it's a fact. On the day the stock pays a dividend you can see the adjusted share price to compensate for paying the dividend.
Yes, true, but it doesn’t take into account the rest of the picture.
@@greg5892
Which is?
If in a Roth tax free.
I'm considering investing around $700,000 in stocks as I've learned that savvy investors can still profit during challenging times. Do you have any solid stock market strategies for this year?
It's ok if the dividends don't make us richer - we are in retirement and the dividend money makes us stay afloat month to month (or qtr to qtr). At least we are not poorer for it!
Selling shares would accomplish the same effect.
The issue that I have with dividends is that let’s say I have one million, the company pays a 10% dividend, at the end of the year, I still have one million, if the shares don’t appreciate in value. Whereas, with interest, I have one million plus 50,000 with a high yield of 5%, and there is the 8 wander of the world with compounding. Take care.
@@Stashmo not necessarily - because for now we get the dividends every month, so a bit extra in our pockets while we wait say for BND to get 15% up or higher (now it’s around $72-73 usd per share, lowest it has ever been)…just bought that and will let it ride at least one year before we sell, but hoping we won’t need to sell in a year and can let it go more.
@@edv1261 well we buy stocks that we hope appreciate in time, while paying dividends… yet the dividends give us income in the meanwhile which is emotionally comforting. Besides dividends we have tbills, tips, treasury notes, and hysa… so it’s not just one thing but trying to hedge our bets from different angles. Harder to manage, true, but so happy when the dividends get dropped in our account! Those are good days! Not sure what it is about it, but it makes me happy - forgot who of the financial gurus out there said a similar thing…
It’s a tough concept for many, but dividends reduce the value of the asset paying those dividends.
You seem to have a new football 🏈?
Well, my portfolio provides me with good passive-income and capital-appreciation. My brokerage adds another 5% APY on top of my free-cash-flow. How is this not winning?
Yes 5% interest on the cash balance, not your entire portfolio that pays a dividend.
They make 96% and give you the 4%. 😂😂😂
I disagree that interest payments make you richer in a way that is any different from dividends. When you buy the bond, the interest payments coming in the future are priced into the bond - this is obvious in how the market works in terms of discount or premiums on the bonds relative to market interest rates. When you receive that interest payment the only improvement in your wealth is the reduction in risk that the interest payment wouldn't have arrived - yay the company survived - this is no different from how the earnings of a company into the future are priced into the stock price. When you receive an interest payment on a bond it is worth less the day after you received it than the day before, because there is less interest and principle coming in the future, and the market is constantly repricing bonds (though less efficiently in many cases) based on the timing and amounts of interest payments - every day that bond price is going to vary, just like a stock price. Also I think comparing interest payments to dividends is a bad comparison. You compare interest payments on a bond to earnings of a company - the difference between a dividend payment (for most companies) and a bond is that the company doesn't usually choose to give you all the earnings it made - you have the benefit of owning a portion of retained earnings. When you have a bond, you lose that benefit - you only get the interest, you have no further ownership value of earnings the company made above that interest rate.
The difference is, when you get the interest from the bond, you don't have to be affected by the bond depreciation if you hold it until maturity. In which case that interest actually makes you richer. For a dividend, the payment is coming at the expense of share appreciation.
@@mguti090 Both are equally impacted, one just has a fixed period and the other is a perpetual cash flow stream. In the case of the dividend, you now have earnings in the company and earnings in hand. If inflation or interest rates affect the value of cash, both the cash in the company and the cash in your hand is going to change in relative value. That money in your hand has value based on how it can be invested vs how it will depreciate and so does the cash sitting on the company balance sheet and so does the principle sitting in the bond as well as the future payments due from the bond. Both are just streams of cash and the difference is risk profile. I will also add that in my view a lot of people put way too much emphasis on how they can "hold bonds til maturity". What the value of the bond is telling you, if it drops is that if you had NOT invested in that bond, if you had that money right now, you could make more money - and frankly the person saying this is ignoring the risk that they in fact may need that money. Tomorrow you get hit by a bus, tomorrow you lose your job, whatever happenstance - assuming you own't need to cash out that bond is an assumption mingled with all sorts of endogenous and exogenous risks. If the bonds value goes down, you have lost money and if it goes up you have gained money relative to some measure - you can ignore it but it happened. In fact if you live in a world where you bond value dropped but inflation dropped more, you may in fact have gained total purchasing power even though the value dropped - but your value dropped relative to not having the bond terms locked in on the same effective cash in hand and when it goes up it's because your interest rate is going to mean you've locked in an investment better than non-committed cash in hand, because the market rates have shifted - but neither is truly a way to measure how your wealth has changed relative to yesterday without also considering inflation etc.
I have shares that have tripled while paying me dividends for 15 years
@@johnyjsl9219 but technically speaking assuming you were taking those dividends as cash if you had reinvested those dividends how much greater would your capital gains be? Much more than tripled.
@@RJD1308 yes you are right. Do you think it is better than bond interest though? The other thing I was thinking is when the market is tanking, taking dividends makes you feel better than selling falling shares. So if you need cash to live on and the market is tanking and stays tanked, I wonder if dividends can be a life saver. Do you have any opinions about this?
Rob is correct. Dividends are a zero-sum game. Your dividend comes out of the NAV/share price. The company could use that money to grow the business or pay the employees a livable wage, but they decided to pay themselves and 1%-ers with dividends. Say NO to Dividends.
Taxation is extortion no matter how you categorize it.