Tons of threads - if you do a search - on dividends and dividend paying stocks throughout Bogleheads forum.Of all my investments, my bond funds have been my biggest disappointment.
I have rotated into money market mutual funds for my fixed income and capital preservation for the past few years.
The yield curve is not inducing me to rotate back into intermediate or long term bond funds with the fingers crossed hope that interest rates will decline.
I do however do not know the future. In anticipation of some decline in interest rates, or inflation staying the same, or heaven forbid increasing I am now cautiously moving some of my money market funds into solid blue chip dividend payers. The equity dividend funds are not attractive to me as the yield is still too low. I also recognize that individual issue higher yields merit caution with risk.
SO.... My choices so far, KHC, XOM, RIO, LYB .... you get the drift.
What are your critical thoughts?
What happens to dividends (not to mention the underlying stock prices) during bear markets?
We all get to deal with dividends and make decisions on what to do with them. Do we reinvest them in the same equity holding/fund? Do we diversify into other investments with them? Do we use them to dynamically rebalance? Do we spend them? Do we leave them in cash equivalents?
Your question surrounding replacing bond interest with dividends includes a need to look back at what has happened in an attempt to forecast what could happen going forward in terms of reliability. Since more than 400 companies in the S&P 500 pay dividends, we'll look at that index for an example strictly from a dividend standpoint.
Most of us would agree with how severe the dividend cuts were when it comes to talking about big black swan events such as the 1930's Great Depression bear market which you can see depicted in this graphic - a time period when only 10% of the US population actually owned stocks...
https://www.youralgo.com/how-to-trade-a-bear-market/If we look at the subsequent bear markets, we can see the change in the S&P 500 dividends were certainly not quite as dramatic outside of the GFC due to the conditions of the banks being bailed out by the government.
The end of the WWII rationing which was followed by a major recovery in consumer spending on regular goods, allowed earnings and dividends to rise substantially over the 1946-49 time period to the tune of +46.3%.
As mentioned above, the other exception was the financial crisis of 2008-09. This resulted in the S&P 500 dividends being cut by -23.1%. That was largely due to the banks being forced to accept a bailout from the Federal Government. Even the relatively healthy banks like Wells Fargo and JPMorgan Chase remained profitable during the crisis, but were required to accept the bailout so that financial markets wouldn't see which banks were actually on the brink of collapse. One of the conditions of the bailout was that nearly all strategically important financial institutions were pressured to cut their dividends substantially, whether or not they were still supported by current earnings.
Even if we exclude the post World War II +46.3% dividend bounce back, and the financial crisis required dividend cuts that resulted in a -23.1% dividend cut for the S&P 500 as a condition of the bail outs, we can see from the table above that average dividend cuts during recessions represented an average smaller pullback (-1.9%, or -.05% if we include both the post WWII bounce back and the GFC cuts).
It is within reason during recessions/bear markets that a household husbands their expenses from their potentially lower income streams much as if your salary was lower - or didn't rise - for a few years during a segment within your working career. This probably leads one to cut back and adjust to the new level of income. If your passive income dipped -1% to -9% in a normal business cycle recession, would you still call that reliable?
Although you say your bond funds have been a disappointment, what will they be in the future? You don't like dividend paying ETFs or funds due to their yields, but want to increase your idiosyncratic risk of individual stock ownership with higher yields as well as a group of assets that do the same. Do you feel they would act as ballast if and when needed such as bonds? What are your thoughts and study on the difference between total return investing where you can use both dividends + the underlying shares as capital that can be sold to cover your expenses compared to only relying on the dividends produced from the underlying shares (regardless of the share price)? What about location and placement of the bonds/equities regarding taxation? Are they in a Roth account, a traditional IRA, a taxable account? What yield are you seeking? What percentage of your household income (beyond SS and pension streams) needs to come from the equity assets vs. bond assets? Have you considered something such as the purchase of an SPIA to provide a monthly income for a set period?
CyclingDuo
Statistics: Posted by CyclingDuo — Tue Jul 09, 2024 10:03 am — Replies 4 — Views 295