I agree, with emphasis on the lack of any solid difference between 'live off the dividends' of a higher div selection fund vs. living off the same $ combination of dividends and liquidations from a TM fund. IOW you could just look up the payout of some reference high dividend stock fund and replicate it each quarter with a combination of (lower) divs and liquidations from a TM fund you actually invest in. There's no theoretical or past empirical reason to think actually investing in high div fund would give higher risk adjusted return, and at least one theoretical reason (some loss of diversification in the high div fund) and a tax reason (tax drag from the higher divs during accumulation phase, if there's taxable investing) to think TM is superior*.Sure. Every retirement withdrawal strategy is a tradeoff between a) amount of income, b) stability of income, c) risk of failure.No, although 4% comes with a risk of eventual portfolio depletion. Also, 4% is mainly based on retirement needs, which assumes people of a certain age with a certain life expectancy that don't care how much is left. The percentage would need to adapt to other circumstances.The thing that dividend fans may be missing is that "4% rule" withdrawals* would not have experienced any reduction at all.Dividends from the S&P 500 held up reasonably well through 2008. Some income reduction but not a total wipeout.
*4% of portfolio the first year. Thereafter, the same dollar amount, increased each year by inflation, with no further reference to portfolio value.
4%-rule withdrawals, followed literally, offer highish income, total stability, but a roll-a-two-on-the-dice risk of failure.
"Live off the dividends" offers lower income, moderate but imperfect stability, and almost no risk of total failure. (During the Great Depression, families living off stock dividends did experience total failure--Benjamin Roth writes about this in "The Great Depression: A Diary"--but they were living off the dividends of a single stock.)
You can get very low risks of failure in simulations just by choosing a sufficiently low value of X in "X%-rule withdrawals." For example, the long-term average dividend yield of the S&P 500 is 1.84%, so you could compare "live off S&P 500 dividends" with "1.84%-rule withdrawals."
And a big problem with all variable withdrawal strategies, including "live off the dividends," is the failure to quantify the degree of pain caused by any given statistical pattern of income fluctuation.
The most that can be said for a high div selection is that it can become a convenient heuristic in retirement ('live off the dividends') if you don't want to give it just a little extra thought (and do the exact same $ withdrawal from TM that a reference high div fund distributed), at cost of some diversification and tax drag during accumulation if there's any taxable investing.
So there must be a psychological effect. People who qualify as reasonable by normal standards don't usually waste effort coming up with logical Swiss cheese arguments for things they do or believe unless there is a psychological benefit to them to do/believe those things, which actually lack fully rational justification.
*risk is a little more complicated. Vanguard's VHYAX high div fund shows beta .75 v total market 1.0. But if you really believe beta is the right risk measure and the market reasonably efficient, that means lower expected total return for VHYAX than TM too. It's not valid to say 'I'll be 60% stock no matter what so I'm better off with lower beta to limit my risk'. % stock allocation should vary by beta of the stocks you own v TM for a given risk tolerance. Which means more VHYAX to get the same risk and expected return as TM, meaning more exposure in the real world to general stock tail risk in a true meltdown (not a big air pocket like 2008-9). And if one doesn't believe beta means much in the real world, fair enough, but also no reason to bring it up. If the argument is 'high div fund is less risky' a) define 'risk' b) explain how lower and higher risk in a reasonably efficient market could have the same expected total return.
Statistics: Posted by JackoC — Sat Jul 27, 2024 9:24 am