I notice a lot of FIRE folks (particularly in America vs. Canada) plan to follow the 3 or 4% rule rather than simply live off dividends for a period of time (say 10 years or so to avoid sequence of return risk) and thus never sell (at least initially) and stocks before eventually living off of a mix of continuing dividends and selling st…
I notice a lot of FIRE folks (particularly in America vs. Canada) plan to follow the 3 or 4% rule rather than simply live off dividends for a period of time (say 10 years or so to avoid sequence of return risk) and thus never sell (at least initially) and stocks before eventually living off of a mix of continuing dividends and selling stock (to "die with zero").
I think this is probably the result of the fact that index funds generally have a lower dividend yield than individual stocks (in Canada it's easier to re-create the TSX index of stable dividend paying stocks from the pipeline, railway, financial, and telecomm industries).
It is one of those things that sounds good in theory, but ends up not being very effective. ERE looked at this in detail as part of his safe withdraw rate series that I would highly recommend reading (the dividend areas are part 29, 30, 31, 40). Here is a quote that highlights the issue with using it to buffer sequence of return risk: "People in the FIRE community call it “Yield Shield” but, alas, that label is extremely deceptive because the whole thing doesn’t work very reliably. It would have backfired really badly during the 2007-2009 bear market. Instead of shielding yourself from the downturn, you would have aggravated the Sequence Risk."
Perhaps I'm missing something or misunderstand something but here is my thinking:
- In a bear market, my stock portfolio goes down 20+% but I don't care. I sit back and continue to collect dividends and never have to sell a stock in a down market and eventually my stock portfolio overall value returns in the next bull market. (Others following the 4% rule, may be forced to sell depressed shares of stocks if they don't have sufficient cash cushion or "timed" their sales poorly).
- While some companies can cut dividends, it's actually rare. In Canada, I own stable and safe paying dividend stocks with motes around them (Canada is a highly regulated oligopoly across industries I invest in).
- I'm talking here of Canadian banks (literally have been paying growing dividends for hundreds of years and there are only a few of them so take your pick, unlike the USA), railways (there are two in Canada so take your pick and they aren't building new railways), pipelines (Enbridge or Pembina take your pick - they aren't building new pipelines), insurance (there are a few in Canada so take your pick), telecoms (there are a few companies in Canada so take your pick between Bell and Telus or Rogers essentially)., and utilities (stable long term contract dividend payers).
1. This newsletter is focused on FAANG workers who tend to be in the higher income tax brackets. This alone makes dividend investing in a taxable account very unattractive and the preference would be towards lower dividend paying assets overall focused on growth (or my preference index funds not focused on dividend payouts).
2. As you say during FIRE, the biggest risk is sequence of return risk and the first 5-10 years of early retirement. The links I shared showed that a dividend portfolio does not achieve this and in fact does worse. Less diversification, dividends can be cut, the assets underperform. If you only read one article, you should read https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/
Looking for strategies that reduce sequence of return risk is an important area of study within FIRE and that is why ERE has so many posts on the subject. I definitely encourage a read.
I notice a lot of FIRE folks (particularly in America vs. Canada) plan to follow the 3 or 4% rule rather than simply live off dividends for a period of time (say 10 years or so to avoid sequence of return risk) and thus never sell (at least initially) and stocks before eventually living off of a mix of continuing dividends and selling stock (to "die with zero").
I think this is probably the result of the fact that index funds generally have a lower dividend yield than individual stocks (in Canada it's easier to re-create the TSX index of stable dividend paying stocks from the pipeline, railway, financial, and telecomm industries).
Thoughts?
It is one of those things that sounds good in theory, but ends up not being very effective. ERE looked at this in detail as part of his safe withdraw rate series that I would highly recommend reading (the dividend areas are part 29, 30, 31, 40). Here is a quote that highlights the issue with using it to buffer sequence of return risk: "People in the FIRE community call it “Yield Shield” but, alas, that label is extremely deceptive because the whole thing doesn’t work very reliably. It would have backfired really badly during the 2007-2009 bear market. Instead of shielding yourself from the downturn, you would have aggravated the Sequence Risk."
Link: https://earlyretirementnow.com/safe-withdrawal-rate-series/
Perhaps I'm missing something or misunderstand something but here is my thinking:
- In a bear market, my stock portfolio goes down 20+% but I don't care. I sit back and continue to collect dividends and never have to sell a stock in a down market and eventually my stock portfolio overall value returns in the next bull market. (Others following the 4% rule, may be forced to sell depressed shares of stocks if they don't have sufficient cash cushion or "timed" their sales poorly).
- While some companies can cut dividends, it's actually rare. In Canada, I own stable and safe paying dividend stocks with motes around them (Canada is a highly regulated oligopoly across industries I invest in).
- I'm talking here of Canadian banks (literally have been paying growing dividends for hundreds of years and there are only a few of them so take your pick, unlike the USA), railways (there are two in Canada so take your pick and they aren't building new railways), pipelines (Enbridge or Pembina take your pick - they aren't building new pipelines), insurance (there are a few in Canada so take your pick), telecoms (there are a few companies in Canada so take your pick between Bell and Telus or Rogers essentially)., and utilities (stable long term contract dividend payers).
A few thoughts:
1. This newsletter is focused on FAANG workers who tend to be in the higher income tax brackets. This alone makes dividend investing in a taxable account very unattractive and the preference would be towards lower dividend paying assets overall focused on growth (or my preference index funds not focused on dividend payouts).
2. As you say during FIRE, the biggest risk is sequence of return risk and the first 5-10 years of early retirement. The links I shared showed that a dividend portfolio does not achieve this and in fact does worse. Less diversification, dividends can be cut, the assets underperform. If you only read one article, you should read https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/
Looking for strategies that reduce sequence of return risk is an important area of study within FIRE and that is why ERE has so many posts on the subject. I definitely encourage a read.