Subject: Re: Dividend investing
Oh, those dividends are costing you a lot. A lot lot.
That's a very laborious way to underperform a simple buy & (mostly) hold.

Well, it depends.

If the backtest were indicative, always a dubious assumption, it beat the S&P 500 by 4.9%/year 2000-2024. The lift was all in the first half, but the absolute returns have been fine. To generalize, that breaks down roughly into 13%/year beating the market by ~13% 2000-2009, then 13%/year tracking the market 2010-2024. That's a fine result, if it were representative of the future results. Admittedly a big "if".

But the main point of the thread is not about maximizing CAGR.

The notion is this: if the principal purpose of a particular portoflio is to fund some ongoing spending, you can do that two ways. Either sell some stock periodically, or take dividends, or some mix of the two.

Generally I am in favour of selling stock periodically. You get the amount of income you choose rather than always too much or too little, you can choose your selling dates, and you can hold all the best quality firms you can pick. This is emphasized by my personal and unusual tax situation, which is a very low tax on capital gains and a very high tax on dividends, the difference being about 30 cents on the pre-tax dollar.

But...if one imagines that a long bear market is a possibility, the capital value of your portfolio might be flat or in drawdown for quite a number of years. Note that the S&P 500 had a negative nominal total return in the first decade of the century, and after inflation -3.3%/year compounded. Without sounding like a permabear, I think that the prospects for the broad US market are extremely poor right now, perhaps no real total return from the S&P for the average ending point 5-10 years out. I estimate the trend earnings yield is about the same as it was at the start of February 2000 or Hallowe'en 1998.

If there is a long bear, a dividend portfolio has its charms: dividends typically fall VERY much less than stock prices in any economic downturn. You don't end up selling stock over and over at low valuation levels. As the stock market falls, most of the dividend cash amount remains and the dividend yields on offer rise. Look at the series of numbers up thread of the estimated rolling year cash dividends from the screen: there is essentially no dip in the credit crunch or pandemic. Ignoring the weird spike in April 2020 which is almost certainly a data error I haven't bothered to find, the worst drawdown of a rolling year's income was -12% from the highest prior rolling year. The same metric of a plan selling a constant fraction of your SPY each month would have had a rolling-year drawdown of -36% in the tech bear (worse after inflation), and the drawdown from rolling year peak would have lasted six years. Then another rolling-year drawdown of -36% in the credit crunch.

A dividend-oriented portofolio will generally not do as well as an intelligently constructed "do your best" portfolio measured by CAGR. But it may still be market beating (or at least tracking), and may do a lot better on some other metrics.

Jim