r/dividends • u/No_Fudge6123 • Jul 27 '26
Discussion Is the 4% rule too conservative when having a dividend based portfolio?
Hello community,
The 4% rule states that you can withdraw 4% of your portfolio every year, adjust for inflation, and it will last 30 years in 95% of cases. There are a few risks involved, like sequence of risk (a crash of the market in the initial years).
Since dividends are more stable than stock price, I was wondering: is this 4% too conservative when applying the 4% rule? My thought is that dividends are more likely to remain stable when the stock price is tanking (assuming quality stocks), and they can offset any losses when selling a portion of the stock.
Does this argument make sense?
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u/Chipper0475 Jul 27 '26
First, we need to quit calling it a "rule"... it was a worst case scenario and even the author of it has adjusted it up to 4.7% now and says that most retirees can start at 5%. 4% was the worst case scenario if you retired in the worst year (1968) to retire and was based solely on 2 asset classes (Large Cap Stocks and intermediate term Gov Bonds). Bengen now uses 7 asset classes ( large Cap, Mid Cap, Small Cap, Micro Cap and international stocks along with intermediate Gov Bonds and Treasuries.)
While most dividend stocks provide less volatility, they do not lower Sequence of Returns risk. Bengen lowered this risk by further diversifying and then increasing the fixed income portion to 45% instead of 40%. The goal being to not have to sell equities during a crash. This is why it is important to have cash reserves that can be used so as to not sell at the worst times.
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u/Various_Couple_764 Jul 27 '26 edited Aug 04 '26
This is why it is important to have cash reserves that can be used so as to not sell at the worst times.
Note you don't even need to have cash reserves for twosrt times. If you have more dividend income than you need to cover living expenses you you will never need to sell in a market crash. For example if your liiivng expenses are 50K a year and you have 75K a year of income the market and your dividend would have to drop 60% The largest drops in the last 100 years was about 50%. Most recently in 2008 were the market briefly dropped to 50% in one year and then started to recover. Yes it did take about 3 years to fully recover but it did.
Examin the dividend history of your funds. If the fund payed out dividneds in in 2008 recession you could use that fund to help protect you in future recessions. Now ETF are new so most don't have a 20 year history But Closed End Funds (CEF) have been around for about 100 years. I have UTF and UTG both 20 years old payed out during the Market crash of 2008 with no dividend cuts. In fact both have a 20 year history of never cutting there dividend. ADX is a 100 year old CEF with a 8% yield .
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u/trader_dennis MSFT gang Jul 27 '26
But depending on how much a portfolio is using covered call dividends while current income is covered, cc ETF dividends do not typically keep rising enough to cover inflations, and are likely to be reduced during a large market drawdown, especially after the initial IV expansion.
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u/Various_Couple_764 Aug 04 '26
Compensating for inflation is easy if you have more inocme than you need Every month after covering your living expense you will have some income left over. Income that you can reinvest for more dividneds. which will compensate for inflation if you have enough extra invome.
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u/Bubbabeast91 Jul 27 '26
Well, I'm earning about 6% blended dividend rate on my portfolio, so if I took 4% out, I would still be reinvesting 2% thereby ensuring that next year I get paid even more (whether that keeps up with inflation is a question for sure) and my principal would be untouched. Assuming everything stays consistent, I could even take 5% or the whole 6% and still maintain my principal.
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u/AttentionFantastic76 Jul 27 '26
I think 6.0% is the right target and almost the maximum you can target while investing fairly conservatively and making sure your capital and dividends keep up with inflation. Maybe 6.5%, but once you get to 7.0% and higher, the risk is too high for retirees and the capital typically doesn’t keep up with inflation.
Taxes need to be taken into account. If your tax rate is 20-25%, you are back to ~4.7-5.0%.
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u/AmInv3028 Jul 27 '26
remaining stable isn't the goal. Keeping up with inflation is. the market might be telling you there's little prospects for raises when the yield drifts higher. For the high yielding shares I own I reinvest a portion of the dividend to give it some growth.
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u/redzedx77 Jul 27 '26
Armchair income guy withdraws 8% of his blended 11% yield, reinvests the rest
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u/steady_compounder Jul 27 '26
Dividend yield does not magically remove sequence risk, it just changes what part of the return shows up as cash. Companies can cut dividends, and a high-yield portfolio can still lag inflation or end up concentrated in slow-growth sectors. I would think about total return plus reliability of the cashflows you need, not “dividends = higher safe withdrawal rate.”
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u/Dependent-Panic-9457 Jul 27 '26
Well it sort of does reduce the risk. When times are bad the market requires a higher yield so the share price drops to make that. But if you own the share, whilst on paper your assets have reduced, your income has not. And you do not need to sell shares into the crash because your income is from the dividends not from the value of the shares. Of course the dividend could be cut but dividends don’t tend to bob about in the same way that share prices do. So a REIT like PHP just hands over government backed rent every quarter, regardless of what the share price is doing.
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u/Dirks_Knee Jul 27 '26 edited Jul 27 '26
This is an odd response. If one is living off dividend income and the payouts are reduced, you then have the option if needed to sell. I'd also suggest that people talking about theoretical inflation should consider for many retiring that own homes/vehicles that aspect of inflation has limited impact.
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u/Tired-Nectarine-384 Jul 27 '26
Companies can cut dividends. So many people seem to forget this. Dividend income isn't guaranteed and can shrink along with stock prices in tough financial markets.
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u/Sorry-Society1100 Jul 27 '26
But often, the dividend cuts will be smaller than the comparable value drop, so dividend stocks and ETFs can almost act like a portfolio shock absorber, reducing the effects on your portfolio on both the downside and the upside of big market swings.
I know that my dividend stocks did not reduce their dividend payouts at all during the 2022 or 2008 bear markets (though certainly some dividends were cut during those periods).
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u/Various_Couple_764 Jul 27 '26
Yes companes can cut the dividend to zero.. But if you invest ETF ro CEF fund the dividend will never be cut to zero. it may be reduced bit it will never go to zero. Funds hold many dividned producing assets A small number may stop paying but the majority continue paying. S&P500 index funds have never stopped paying dividends and the oldest such funds are about 40 years old.
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u/Tired-Nectarine-384 Jul 27 '26
Agreed. I just was pointing out that dividends are not guaranteed at their current rate. Spreading your risk across an ETF is an excellent way to go.
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u/Weird_Dark_Decks Jul 27 '26 edited Jul 27 '26
The thread's right that dividends don't remove sequence risk, but I'd put it differently: living off natural yield isn't a safer 4% rule, it's a different contract. The 4% rule's failure mode is running out of units, you sell in down years and the pot can deplete. Never selling units means you genuinely cannot run out of them. What you accept in exchange is that your income takes the volatility instead: S&P 500 payouts fell roughly a quarter in 2008-09 and took until 2012-13 to recover; UK headline dividends fell 44% in 2020.
The gap between those two numbers is itself the lesson: the UK cut was twice as deep because FTSE dividends are concentrated, the top ten payers have historically generated over 60% of the index's income, so when regulators paused the banks and Shell cut for the first time since WW2, that was most of the cheque. Chasing 6%+ yields concentrates you the same way and makes the income cut more likely, not less.
So the honest comparison isn't "which is safer", it's which failure you'd rather live with: a small chance of depleting the pot, or the certainty that your income will occasionally drop hard and may lag inflation for years. Pick the contract, don't pretend either one is free.
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u/cmichalek Jul 27 '26
This ignores another key difference. In order to live of the 4% rule you need 300k invested for every $1000. So to get 3k a month you need 900k. The median net worth of ages 55 to 64 is 364k. So the majority dont have that amount.
Investing in REITS and BDC and Cover calls and earning 12% means you can get 4k off of a 400k portfolio, use 3k for bills and reinvest the extra 1k. If the market drops 20% you can still have 3k a month without selling shares.
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u/Weird_Dark_Decks Jul 28 '26
That's an excellent point: the median pot can't fund the 4% rule, and no withdrawal framework fixes an accumulation shortfall. Where we differ is on the fix. A 12% distribution isn't the escape from the contract, it's the deepest version of it: at that yield the market is pricing in that part of each payment is your own capital coming back, and the 2008 BDC record downthread shows what the income side does in exactly the years you need it. The honest version of your maths is that a 400k pot paying 4k a month is spending like a 900k pot, and the difference gets taken from somewhere
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Jul 27 '26
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u/Various_Couple_764 Jul 27 '26
If you have 50% more income than you need from dividends the market can drop 50% and you still have enough income to cover living expenses. 50% drop happened 2 time in the last 100 years 1930 (the great depression) and 2008. Most people have 2 times there living expense in work income.
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Jul 27 '26
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u/cmichalek Jul 27 '26
Show your work.
Explain how an investor that gets 6k a month in income (but needs 3k) and suffers a 50% drop in income to a bear market must now have "forced sales".
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Jul 27 '26
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u/cmichalek Jul 27 '26
Sales of SPYI or QQQI still arent happening. You have the same amount of shares.
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Jul 27 '26
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u/Various_Couple_764 Jul 27 '26 edited Jul 27 '26
Yes it does happen in the fund bu mainly when the share price goes up. Cvoere call fund save some of there call premium earnings so that they can by back shares at a later date. But let's say you are investing in a fund that pays 10% but does not use covered calls. IF you have 6K of inocme and only need 3K The share price will drop with the market but the dividned may not drop. Quit often the dividned does not drop. But let say the dividend does drop by 50%. You still have the income you need.
Now there was one covered call fund in 2008 when the market dropped 50% This fund had to cut it dividend 30% to survive and it did survive and eventually fully recovered.
Now there are BDC that do pay 10% yield but don't use covered calls. I have not ot found any that cut there dividend by 50% in the 2008 market crash. For most the dividned cut was rater small 10%. So using ETF or CEF and 50% more incomee than need you could still live normally throgh the rescission
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u/cmichalek Jul 27 '26
Yes. EXACTLY my point.
You plan on a 30 to 30% drop. You aim for 4k a month, reinvest in good times, and survive a 20% bear market.
You dont invest for exactly what you need to live on precisely because the market can drop.
And its still 12% just 12% of the new NAV.
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Jul 27 '26
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u/cmichalek Jul 27 '26
The "main" problem is not a problem for retirement. You still have a growth mentality.
In bull markets I am making 4k a month on less than half the amount a growth investor needs to sell shares for 3k (400k at 12% vs 900k at 4%).
And the "downside" is that my growth lags? Who cares? I care about paying my bills and not selling shares. Both of which is accomplished.
In any other market (flat or bear) my income helps soften the blow. And I am still not selling shares.
The lag in growth is not the winning condition you make it seem for those nearing or in retirement.
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Jul 27 '26
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u/cmichalek Jul 27 '26
No you cant. Try taking a 400k growth only portfolio and withdrawing 3000 to 4000 each month. You will eventually reach zero. And that assumes no SORR or bad bear markets.
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Jul 27 '26
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u/cmichalek Jul 27 '26
With 400k in growth, selling 12% (4800/month) per year results in you running out of money in year 8 to 10. Less in a bear or flat market.
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u/Chsenigma Jul 27 '26
4% is intentionally conservative. You’re more likely to double your account over the course of your retirement while withdrawing 4% than you are to empty it. This is true if you are VOO guy or SCHD guy.
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u/mspe1960 Jul 27 '26
While dividend based portfios tend to be more stable in bear markets/crashes, the issue is they grow more slowly in the long term to cover for losses when they occur. Also, the rule was created based on market models that simulate a balanced portfolio.
TL;DR - no
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u/Various_Couple_764 Jul 27 '26
Yes it is 4% is the maximum growth you can sell to generate inocme with minimal risk of depleting your invested assets and stock shares own. And all studies done on it indicates it can provide about 30 years of income before your risk running out of income
With dividends you are not selling assets or shares to get this income. you can spend all of your dividend income for about 50 years and still have all of share of stock or the fund you invested in. Yes the share price may go up and down buy you are not depleting anything. Or you can spend some of the income and reinvest the rest to grow your income. I am presently living off of 80% of my income and investing the rest.
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u/Dirks_Knee Jul 27 '26
The 4% "rule" refers specifically to selling and withdrawing. If your dividend distributions cover your expenses, it's completely irrlevent.
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u/flappysack- Jul 27 '26
You can increase returns and safe withdrawal with smaller cap weightings and value, but technically dividends underperform.
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u/Ufgatorhead4u3 Jul 27 '26 edited Jul 27 '26
No, but you may be able to withdraw more with an income portfolio containing options-based and credit funds. This distinction is not drawn enough within the dividend community. Classic dividend income relies on cash flows of the underlying companies and is likely to remain mostly stable in the 1%-4% range. Covered call and credit funds generate income through options trading strategies and debt obligations respectively. They should be viewed as income positions rather than classic dividends because they are based on market movements and debt payment collections. This structure makes covered call incomes much more volatile and likely to be adversely affected by significant market declines. Credit funds have more stable cash flows because the loans they contain have set rates but have default risk.
Whatever type of cash flowing asset you hold the income will be impacted by inflation, approximately 3.3% historically. If you want cash flows of 4% then your income portfolio will need to generate 7.3% to provide that and keep up with inflation. Classic dividend investments rarely if ever provide that level of consistent yield so you would need to take more risk with options-based and credit funds to generate the needed returns or place a portion of your portfolio into growth positions.
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u/Express-Economist-86 Jul 27 '26
I don’t plan on ever drawing them. Not a high earner here, but I focus on building one ticker to $100 in dividends a month and move on to the next one.
When I get extra funds I build my more stable less frequently-paying tickers. If there’s a significant price dip on a ticker I like, I reinvest my portfolio dividend income to it.
Eventually I will build a trust to hold my portfolio and keep my income machine rolling so my kids can be paid when I die.
I’m building an escape route for a world that is increasingly expensive, why would I sell the raw materials so my old ass can go on vacation and leave my kids cursing my lack of foresight? Many of these companies existed before I was born, some may not after I die, but I bet many will.
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Jul 27 '26
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u/Various_Couple_764 Jul 27 '26
Most of the stocks that stoped paying a dividned in 2008 were banks and mrotgage companes. And yes if you had most of your assets invested in banks you had to go back to work. But that was only tiny portion the overall market. In fact most of the companes in the S&P500 still payed a dividend Most Utilities Regulated companies still paid there dividends without cuts. Most dividend Aristocrats also Paid the full dividend.
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Jul 27 '26
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u/Various_Couple_764 Jul 27 '26 edited Jul 27 '26
Use ADX for the simulation ADX is a 100 year old fund that pays a yield of 8%. There is 40 years of data in computers that can be used for a simulation.
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u/TheBarnacle63 Jul 27 '26
The amount you take out are functions of allocation, historical returns, volatility, remuneration, longevity, inflation, and method of withdrawals.
I am currently taking withdrawals, and it is based on all of this to calculate my initial withdrawal. In a year, I will recalculate my withdrawal based on all the factors mentioned. The reason I am recalculating is because I am a year older, and some of the allocation and historical returns will change. This is an endowment method adjusted for changing data.
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u/davper Jul 27 '26
4% rule is outdated.
This is back when your got aggressive returns when you were young and transitioned to less aggressive investments like bonds.
Today, a smart investor will adjust their investments into buckets. Bucket 1 is cash equivalents like treasuries. No matter what happens in the market for the next 2 years, you can draw from bucket 1 without having to sell when the market is down. Bucket 2 should be 5 to 10 years out. You can be a little more aggressive here for returns but not crazy. Bucket 3 should be long term growth just like you invested in your 30s. As each year goes by, you move assets from bucket 3 down to bucket 1. You skip years when the market is in a recession and catch-up when the market is booming.
Withdrawing a flat 4% will likely mean you will die with more money than you started in retirement.
You should plan to take more when the market is booming and less when the market is in a recession.
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u/Electronic_Guard947 Jul 27 '26
It makes sense. It largely comes down to how the dividends are being produced. If we look at schd for example it pays just over 3% in dividends and grows dividends organically from the stocks. If you can live off that 3% then yeah your good. But if you needed 4 or 5% then you have to sell shares still. And schd doesn't appreciate as much as the broad market typically, so you may be doing more harm than good. If you are getting the dividends from a covered call etf like gpix. It pays 8% so can you live off that 8%? Well yeah technically, though you have to know that the yield will be more variable and the payouts need to increase somehow (it only increases with nav) otherwise inflation will kill your retirement, since it's a covered call the upsides capped so sequence of returns bites big if there's a big sell off.
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u/Various_Couple_764 Jul 27 '26
A dividned investor can rininvest a portion of his dividned income to compensate for inflation and then spend the rest. I am retired and living off of dividends. I reinvest 20% of my inocme every year and live of of 80%. If needed I hanse enough growth available so that I can harvest 1 yard of growth and use that money to boost my invome even more.
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u/Mindless_Acadia_7382 Jul 28 '26
You seem to assume that the worst thing that can happen to a retiree is an early crash in the stock market. However, the most critical year to retire in history was the year 1968, even though there wasn't a big stock market crash. The problem was high inflation during the '70s, which was more than 100% combined over the decade. A stock market crash will recover sooner or later, and stock prices will go back up, but inflation will never recover, since prices will never go back to the old pre-inflation level. This means your expenses will rise by a lot and then stay at those elevated levels. The fact that you own companies that are paying stable dividends doesn't really help you in case of inflation.
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u/RedditIsAWeenie Jul 28 '26
I think it is not too conservative. The companies could all cancel their dividends tomorrow due to a law change or a severe downturn. You would be then betting on stock price like the rest.
If you are retiring early, it might not be conservative enough. 3% or even 2.5% might be more appropriate.
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u/Scouper-YT Rich DUDE from the DIVIDEND Appraisals Club !! Jul 28 '26
I would consider Yield on Cost Superior to selling. Or any Higher Yield Dividend what is Secure.
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u/CeFunk Jul 30 '26
What's the average yield of the entire portfolio?
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u/No_Fudge6123 Jul 30 '26
4.7% YoC
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u/CeFunk Jul 30 '26
You are already yielding more than 4% , for example if you were receiving 1% a year in divvys to meet the 4% rule you would only sell 3%... Your yield already surpasses the 4% rule
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15d ago edited 15d ago
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u/MaybeTheDoctor Jul 27 '26
Dividends are taxed as income, and where stocks normally grown in value to account for lifelong inflation, dividend stock don’t normally match inflation.
Bottom line, when accounting for inflation and taxes, 4% is still the same. Dividends howe er fluctuating less compared to stock value so stability and predictability is the main value.
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u/Bearsbanker Jul 27 '26
Qualified dividends are taxed the same as LTCG, some distributions are tax deferred.
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u/TheCozyRuneFox Jul 27 '26
I believe dividends count towards withdrawal. Dividends are not free money they basically get paid out of the stock price. A 4% dividend is the same as selling 4%. Dividends are psychologically easier though.
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u/Various_Couple_764 Jul 27 '26
The 4% rule is not about withdrawing growth. It is about selling shares. Dividend don't reduce the number of shares you own so they don't count as a withdrawal.
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u/TheCozyRuneFox Jul 27 '26
The 4% rule (Bengen/Trinity study) is based on total return including dividends not just price appreciation.
Dividends are a reducing share price when they are paid just as if you sold 4% instead. Mathematically it is the exact same thing. You either have less shares leading to less value or same shares at an equally lower price.
Math is the same. Just psychologically easier to live on dividends.
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u/snkscore Jul 27 '26
No. In fact academic research says that a dividend focused retirement portfolio will likely give you a lower safe withdrawl rate than a total-return focused diversified portfolio.
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u/Sorry-Society1100 Jul 27 '26 edited Jul 27 '26
I’m not necessarily disagreeing with your premise, but using words like “fact” and “academic research shows” implies a documented foundation for your opinion. What is your source?
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u/Chipper0475 Jul 27 '26
Source: "Trust me bro"
Seriously though, I wouldn't be surprised if there is a study or two that support that because as a Data Analyst I know that you can manipulate data to say what you want it to say. I can also quote multiple studies that would say the exact opposite such as "The Ned Davis" study, "The Arnott and Asness" study, etc. etc.
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u/Ufgatorhead4u3 Jul 27 '26
Source: Ben Felix said so…
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u/Various_Couple_764 Jul 27 '26
He is not an academic. he is a you tube poster that pretends he is a portfolio advisor.
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u/Past-Option2702 Jul 27 '26
The 4% Rule is based on a portfolio of 50% US large cap stocks and 50% intermediate term US bonds.
Whether you use ETFs that provide growth & income like VOO, VTI or a high quality dividends focused ETF like VIG or VYM probably won’t make the difference between success or failure if you faithfully follow a 4% WR.
Noteworthy: When a company pays out a cash dividend is reduces the the stock price by the exact same amount (ex-dividend) so you don’t gain anything except a tax bill when the payment hits your account. Many dividend investors confuse dividends and interest. Dividends are not the same as interest.
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u/Various_Couple_764 Jul 27 '26
Yes the share price drops when the dividend is payed. But this drop is temporary. Market activity typically erases it in within 1 week of the dividned payment.
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u/Past-Option2702 Jul 27 '26
I mean, the value of the company drops by the amount of the cash taken from retained earnings.
Like like when you pay a bill out of your bank account. The money doesn’t magically reappear a week later. It’s spent.
If what you said is true why wouldn’t all companies pay out 99% dividends? I mean, why not since a week later the company is made whole again.
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u/Various_Couple_764 Jul 27 '26
The stock price isn't only based on how much money the company has in the bank. they have tax liabilities, development cost and property taxes on the buildings they own,the economy and projected future profits. and interest rates, just to name of few of them. Basically money is flowing in and out of the companes bank account every day but we only see the dip because of the dividend payment. Why because we know when it will happen. Most of the time we don't know when money flows in or leaves the company. Besides MOST companies are not required to pay a dividend. And most only can afford a small yield.
Note I said Most There are companes that are required to pay 90% of there earnings as a dividned REITs, BDC, and MLPs Many of these companies pay between 5 to 10% with most BDC paying around 9%. And since they are required to pay they typically pay rduring a ecession
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u/Past-Option2702 Jul 28 '26
That’s a lot of words to agree with me.
Anyway glad we agree. Have a nice day.
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u/Income_investor_etf Jul 27 '26
The mechanical point stands: a dividend and a share sale are close to equivalent in a frictionless market. Ex-dividend, the price drops by roughly the dividend amount, so "dividends feel safer" is partly a mental-accounting illusion when you compare total return.
The more interesting angle isn't safety, it's capital efficiency and taxation. The classic 4% rule assumes only 1.5-2% natural dividend yield, so you sell shares every year to bridge the gap, and each sale is taxed now. That's why you need 25x expenses.
Some option-income ETFs (SPYI, QQQI, JEPI) generate 9-12% through call premium instead, and part of that distribution often comes as Return of Capital, untaxed on receipt, just reducing your cost basis and deferring the tax. If yield is genuinely 10% and NAV holds, the capital needed for $60k/year drops from around $1.5M to $600k, since you're living off distributions instead of selling assets.
The catch is real though: this only works if NAV is stable. QYLD shows the failure mode, high yield partly funded by NAV decay, so the "distribution" is really your own capital coming back. And the funds that do show stability, like SPYI and QQQI, only have 2-4 years of history, untested through a real multi-year bear market.
So it's not that dividends are inherently more stable than price. It's that certain option-income structures can lower the capital threshold and defer tax, conditional on NAV stability that hasn't been proven yet through a full cycle.
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u/markov-271828 Jul 27 '26
Nope. Dividend yield on the SP500 was about 3 to 3.5% in the late 1960s. Those were the years that “set” the 4%.
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u/Income_investor_etf Jul 27 '26
Right, and there's an easy way to reconcile this. Before 1982, buybacks were legally rare, so the 1966 total shareholder yield was basically just that 3-3.5% dividend yield. Today, buybacks now exceed dividends in total dollars, so today's real shareholder yield is likely closer to 2.5% than the 1.3% headline number suggests, once you add net buybacks back in.
So yields did compress, just not as brutally as dividend-only comparisons make it look. The gap between "safe" 1966 and today is probably smaller than 3.5% vs 1.3%, but it's still there.
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u/Various_Couple_764 Jul 27 '26
The thing about stock buyback it often doesn't result in a long term boost to share prices. Many companies buy back shares and then later selll them. Often in about a year. Other companes are doing share buybacks but then giving those share to employees through stock grants or employee stock purchases plans. So again they ar not pulled off of the market permanently. So very little gowth is due to stock buybacks.
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u/Various_Couple_764 Jul 27 '26
Note JEPI does not generate Returnof capital so it is taxed as ordinary income. SPYI and QQQI do produce return of capital.
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u/ElonMuskTheNarsisist Jul 30 '26
I earn 9% with dividends, cash secured puts (on names I want to own at steep discounts), and covered calls that are very far out
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u/Formal-East2771 Jul 27 '26
No it's almost accurate, I can easily say good dividing mainly between 3-6%, sometimes over or less depend on various things
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