In the article 6 Problems with Dividends for Income [December 2013] you saw a long list of disadvantages of dividends when compared to selling from your investments to generate any required income. Yet, retirees still like dividends. Why is that? The reasons are psychological, and several are listed below:
- Disciplined spending: By limiting spending to dividends, you can resist the temptation to spend the principal. It gives structure.
- Avoiding selling at a loss: Dividends are given whether the investments are up or down. A dividend withdrawal at a decline doesn’t require actual selling at a loss.
- Avoiding regrets over missed gains: If you spent dividends, it feels like you spent cash. But, if you sold from your investments, and they gained substantially, you may regret the sale. People tend to regret action more than inaction.
Since income can be generated by selling from the portfolio instead of dividends, it is best to avoid focusing on high-dividend investments just for the sake of income generation. By sticking with selling, you gain control over the amount, timing and regularity of income, as well as investment choice and improved tax-loss harvesting.
The missing piece is the psychological comfort. That can be obtained by sticking to a conservative cap on withdrawals from the portfolio (typically 3%-4% of the peak value of the investments). Having an outsider (investment advisor, family member, close friend) track the withdrawals can strengthen the discipline. As a Quality Asset Management client, you receive the available withdrawal amount in your quarterly email, so you can view your investments very clearly as a sustainable income stream.Disclosures Including Backtested Performance Data