When generating income for retirement, we take what we call a “total return” approach. Simply put, this is using both the income derived from the investments (from interest and dividends) as well as the investment’s potential gain in price over time. When going about it this way, we can diversify across many investments and we can also put you in the driver’s seat by customizing your income to meet your goals.
One strategy that we hear of often is solely living on an investment’s “dividend”, and attempting to not sell any shares along your retirement journey. However, while dividends can be important, we think they’re just one piece of the overall income puzzle. Recently, Dimensional Fund Advisors (a company that we use when implementing portfolios) released an interesting piece that highlighted some of the fallbacks with relying solely on dividends, and we thought it could be helpful to share with you. It only takes a few minutes to read, and as a fair warning, it is slightly technical. Therefore, we’ll highlight some of the takeaways here:
-Dividends can be a useful way to receive income without potentially triggering taxes, and without trading costs
-The proportion of firms paying dividends in the US was about 52% from 1963 through 2019, meaning an investor could miss out on almost half of investable US companies
-Dividend payments are not guaranteed and can reduce your income at a critical point in your life
-High dividend yields may not lead to high total returns
It is with some of this knowledge in mind that we prefer to have income in the form of dividends, yet also systematically sell small amounts of shares (from various asset classes) to generate income across your retirement years. By doing this, you have more flexibility with your income and we believe that we’re more diversified. Please click here for more details from DFA’s article: Yields of Dreams A Closer Look at Dividends. And of course, if you have any questions, feel free to reach out to us.
Source: Dimensional Fund Advisors. Past performance is not a guarantee of future results. Diversification or Asset Allocation does not eliminate the risk of market loss. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.