Peak Fire?

[Arborbridge]

I imagine a strong plus-point of living off dividends is not having to think about what to sell.

Though I've traded a fair bit, I've never been a net seller of shares. So to start selling... well I don't know how I will get into the mindset. Do I sell the winners* or the losers? It would be important to minimise selling cost too. I suppose it will have to be a learning process.

*I suspect low yield winners will have to go first.

This would be a problem for me too, and one major reason I rely on income generated and not on selling down capital. Perish the thought! Watching dividends rolling in is by far the easier course.

THose who do it differently - good luck to them, but it isn't for me.
Arb.

[MrFoolish]

I suspect the optimal approach is to maximise total return during the accumulation stage, and to switch into higher yielding shares once you retire.

[Arborbridge]

I suspect the optimal approach is to maximise total return during the accumulation stage, and to switch into higher yielding shares once you retire.

Exactly - that is what I would recommend to people. I do not necessarily agree with those who say investing in dividend companies is the best way to achieve high TR.

[Dod101]

If any of you guys are happy to reveal such a thing, are you living off dividends, selling off the capital, or a combination of both?

I expect that when I take early retirement, I'll be taking dividends and some capital from my SIPP up to the tax free threshold (plus tax free lump sums), and taking whatever extra I need from my ISAs. Probably my SIPP will be pretty depleted by my mid 60s (though it depends on the performance), when I'll be taking my state pension and a smallish DB pension, again topped up from the ISAs. Does this sound like a sensible strategy?

I have no pension except the State one and I save that. I live entirely off my dividends. I do not spend capital. These days with inflation where it is spending capital would be dangerous to my mind. bad enough at any time because of course you are removing the source of dividends and are as likely as not to be selling shares just at the wrong time. I did take the 25% tax free from my SIPP to help on a new house purchase some years back, and occasionally take out some cash reserves for helping to buy a new car but that is all.

Dod

[Snakey]

I just checked my non-SIPP assets and they're:
1/7/21 (FIRE date) £522k
1/1/22 (i.e. just before everything kicked off) £550k
1/12/22 £515k

This includes cash at bank, premium bonds etc as well as stock market. I've had consultancy income at a level that I wasn't expecting and this has masked falls in investment values. I haven't had to cash anything in yet so it's all a paper loss.

The SIPP I look at less often, but the highest number I can see on my spreadsheet was £1.26m and the most recent was £1.14m. I did change all the funds when I moved from Standard Life to Interactive Investor, so I'm no longer comparing apples and apples. I can't touch that for another four and a bit years anyway.

A minor blot on the horizon is that it might make sense to pay off my mortgage when my fixed rate runs out, and that's going to require a chunk of cash that I hadn't been planning to spend - it might wipe out all my cash balances and premium bonds, at which point I will be at the mercy of the stock markets and perhaps start to take a strong interest in yields and total returns and all the stuff that glazes me over at the moment.

Not that I'm a blogger or anything, but I don't post much because so far my (minimal) living costs are met out of earned income which is not "FIRE" even though it sure feels to me like I've given up work (a 2-3 day project every six weeks or so is an interesting diversion, not a ball and chain).

[kempiejon]

I suspect the optimal approach is to maximise total return during the accumulation stage, and to switch into higher yielding shares once you retire.

Exactly - that is what I would recommend to people. I do not necessarily agree with those who say investing in dividend companies is the best way to achieve high TR.

If one can maximise total return with whatever strategy and that yields greater returns than another a strategy why change? If you've already got a winning strategy that you've honed in accumulation stage why would you try a new way once you've retired?
Of course I have no idea what strategies will work, my greatest success were from a value bent but I found it time consuming and stressful. I run a HYP that's closed to new money usually I buy global trackers now.

[DrFfybes]

If any of you guys are happy to reveal such a thing, are you living off dividends, selling off the capital, or a combination of both?

A combination, although this is largely down to circustmance rather than need.

MrsF has a DB pension that meets circa 50% of our needs, but then went back to work 3 days/week so the total more than covers our needs. I was taking some income to cover the gap, which I still do, although this tends to go on toys/house stuff (new boiler, shed, lawn tractor, motorcycles), given away to family/charity, and into cash savings as a buffer. MrsF stops work next year and I'll take a small DB pension, and top up as required from unsheltered pots. Also mum died 12 months ago, and as she only lasted a short time in a care home there was an inheritance that was larger then we had expected, but also we'd not relied on getting anything. We continue to transfer assets to ISAs ad SIPPs where possible. We probably only need 2% from our total assets once MrsF stops work, so sheltered accounts are currently TR.

I have 3 unsheltered portfolios...
Pot 1 is TR and autosells a fixed amount of units each month, at a rate above what is considered a sustainable level. It is more of a PITA for CGT calc than I envisaged, although it is fluctuating around the buy price anyway. I kind of regard it as a DB pension, that will run out at some point, but with 10.5 years until State pension it should easily last until then.
Pot 2 is income - dividends into the bank. Not strictly HYP, some ITs including CTY, ATST, some income funds, but also some where I bought things that I thought took too much of a hit in 2020 - Shell, BP, and a couple of banks. I might cash these in this year to use my CGT and move the cash to VHYL.
Pot 3 is another TR, it is a Global tracker and BRKB. This was the inheritance from mum that I got in Feb.

We are very fortunate, once our DB pensions are discounted we only 'need' about 1.2% return from our other assets, which is amply covered from what I draw from pots 1 and 2.

I think the era of Global Trackers returning double digits has ended, and quality large dividend paying companies will outperform over the next few years, hence I'm making a gradual switch from Global trackers to VHYL. I could pick some ITs, perhaps even build my own HYP, but I'm rubbish at selecting the right ones, really can't be faffed with keeping an eye on it all, so VHYL seems a very simple way of achieving my aims.

Paul

[DrFfybes]

If one can maximise total return with whatever strategy and that yields greater returns than another a strategy why change? If you've already got a winning strategy that you've honed in accumulation stage why would you try a new way once you've retired?

Tax? Your divis from HYP can be offset against Income Tax and allowances, compared to selling your tracker fund units that have doubled over the last decade. More important now with the CGT allowance cuts.

[kempiejon]

Tax?

Ah, luckily I'm mostly removed from the tax system for my investments. Since April 2016 I've spent time moving unsheltered holdings, harvesting capital gains and reducing dividends.

[Steveam]

I’ve been living off my investments for over twenty years … a mix of dividends, interest and capital. I deferred taking the state pension for a long time but have just commenced taking it. I’m not a very strategic investor but have one or two “rules” (diversify and compound - I see inflation as a sort of negative inflation) and generally leave well enough alone. I sometimes lose interest in my investments (before Covid I had the excuse of super long holidays) and expect things to chug along ok without me.

I run my investment calendar as the tax year so can’t give accurate projections for dividend income being highest ever etc but it’s been a good year dividend wise (a lot of specials). I’d like to get more into sheltered accounts and do all I can every year.

When I “FIRE”d (long ago and the term wasn’t in use) I vastly underestimated my income returns and overestimated my expenditure. Every assumption was tweaked towards caution (my concern was an early large drop - sequence of returns and all that) but I’m now very comfortably set despite a rather extravagant lifestyle.

The debate about spending earnings or capital is mental gymnastics - the reality is that you’re spending wealth. How one manages the details depends on your mental setup.

Best wishes,

Steve

[DrFfybes]

I run my investment calendar as the tax year so can’t give accurate projections for dividend income being highest ever etc but it’s been a good year dividend wise (a lot of specials).

I work on tax year too - it is really the only period relevant to me. I tend to start looking at Divi and gains after Xmas so I can use allowances as needed before year end.
I wonder if people who invest for income simply spend more time checking and monitoring it. Presumably they enjoy it, after all, it is the route they chose. I probably couldn't guess my dividend income to within 30% for the year so far, but I probably know my capital to within 5%. Not sure which is the most (or least) healthy )

The debate about spending earnings or capital is mental gymnastics - the reality is that you’re spending wealth. How one manages the details depends on your mental setup.

This is exactly it, some people like to monitor, some like to 'tinker', some just want to go and leave the money to it and do other things. I think it is a lot easier to do the latter once you KNOW you are comfortable

[tjh290633]

I run my investment calendar as the tax year so can’t give accurate projections for dividend income being highest ever etc but it’s been a good year dividend wise (a lot of specials).

I work on tax year too - it is really the only period relevant to me. I tend to start looking at Divi and gains after Xmas so I can use allowances as needed before year end.
I wonder if people who invest for income simply spend more time checking and monitoring it. Presumably they enjoy it, after all, it is the route they chose. I probably couldn't guess my dividend income to within 30% for the year so far, but I probably know my capital to within 5%. Not sure which is the most (or least) healthy )

The debate about spending earnings or capital is mental gymnastics - the reality is that you’re spending wealth. How one manages the details depends on your mental setup.

This is exactly it, some people like to monitor, some like to 'tinker', some just want to go and leave the money to it and do other things. I think it is a lot easier to do the latter once you KNOW you are comfortable

Where do you account for the dividends received? Does it roll up into capital? What do you do with it?

I'm in the fortunate position of only having to withdraw cash for exceptional expenditure, like paying for cruises or for repairs to the house. Normally I reinvest them in the most eligible share in my top up rankings. Working on an income fund basis that means notionally buying more units each month or selling them if withdrawing cash. With accumulation units some are sold if cash is withdrawn. Otherwise the cash rolls up in the unit value, reinvested or held notwithstanding.

Those who rely on the income entirely presumably withdraw all of the accrued dividends, and put any surplus into a reserve fund, or leave a cash float in their account, be it ISA or SIPP.

TJH

[kempiejon]

I work on tax year too - it is really the only period relevant to me. I tend to start looking at Divi and gains after Xmas so I can use allowances as needed before year end.
I wonder if people who invest for income simply spend more time checking and monitoring it. Presumably they enjoy it, after all, it is the route they chose. I probably couldn't guess my dividend income to within 30% for the year so far, but I probably know my capital to within 5%. Not sure which is the most (or least) healthy )

I work on tax year too as I look to both harvest gains and move larger dividend contributors to sheltered accounts with an eye on allowances. I just got my dividend below the threshold last year soa bit of work to do again.
Often I'll buy new shares with realeased cash rather than "move" the investments. Like you after the winter solstice I look at amounts and allowances. I try and improve my selling odds tly setting limit orders for 90 days out for shares I'm interested in divesting myself of.

I usally know my portfolio metrics, total return over 12 months and 3 year rolling periods, yield, value, historic and forecast income but I'm often a month or more out of date with record keeping unless it's in that year end period.

[ayshfm1]

Just retired. I pretty much always invested with an eye to dividends and it worked really well, especially now in retirement - you can see the cash rolling in, gives huge peace of mind. No trying to decide how many units to sell and when. That said, it's going to be more blended going forward ISA for growth and SIPP still income focused but I think I'm now going to be simple IUSA in ISA and VHYL in SIPP. At the moment by portfolio is very UK centric, so the US /World focus will bring a better balance.

I currently have the nice problem of dealing with the 25% lump sum, thus I am only taking 12.5K out of the SIPP this year, it will take me several years to channel that cash productively into my ISA and generally run it down and there is no point in creating any tax liabilities by removing anymore, but equally no point not using the 0% tax band.

I was also hit by the 2K dividend limit change. I'd literally just bought enough pref's to generate that amount, the best laid plans.... So will likely have to sell them now.

The game plan is to take circa 50K, just below where ever higher rate tax starts, out of the SIPP per year once the cash pile has been spent, this may or may not require selling a few of the VHYL I will have accrued over the next few years. I expect to be spending only dividend income with possible tax efficient top ups from capital in the medium term.

The ISA is a fall back hence the growth focus, it's unlikely I'll touch this until after 75 unless something untoward transpires.

I don't really like that the tax tail wags the investment dog, but there really is no choice.

[hiriskpaul]

I imagine a strong plus-point of living off dividends is not having to think about what to sell.

Though I've traded a fair bit, I've never been a net seller of shares. So to start selling... well I don't know how I will get into the mindset. Do I sell the winners* or the losers? It would be important to minimise selling cost too. I suppose it will have to be a learning process.

*I suspect low yield winners will have to go first.

I would say that was the only plus point. For many, quite a significant plus point though and I would not seek to dismiss it as it provides a very simple way to vary one's income according to market returns. If the market does well during retirement, you should see a rising income stream. If not so well, a gradual decline. No need to think too hard about what a sustainable withdraw rate is, just cut your cloth according to what arrives as dividends. With a cash buffer to handle (hopefully) short lived dry periods.

There is a lot of magical thinking when it comes to investing for dividends though. For example, the idea that you are not touching your capital if you just spend the dividends. You have a portfolio worth £1m, You take out £30k that has arrived as cash dividends, yet still expect to have capital of £1m?

Cum-div price = ex-div price + dividend

Basic arithmetic.

If you just spend dividends you have to be prepared to have an income stream that lags inflation. For example, dividends from the UK stock market reached a peak in 1965. In real terms it took until 1987 before that peak was surpassed, dropping by about 40% by 1976. But the decline was gradual and provided someone could do the belt tightening required over the decade of decline, they would have got through it without having to sell shares. Unlike some other simple drawdown strategies, the "just spend the dividends" one means it is impossible to run out of money by drawing too much.

A potential problem I see with the just spend the dividends approach is the increasing trend to distribute profits using share buy backs instead of dividends. In the US more than half of distributions are now done as buy backs. I guess you could compensate for buy backs by selling a matching proportion of shares. That would seem a logical thing to do if someone wanted to match their income to corporate distributions. It would also provide for greater diversification.

[DrFfybes]

I wonder if people who invest for income simply spend more time checking and monitoring it. Presumably they enjoy it, after all, it is the route they chose. I probably couldn't guess my dividend income to within 30% for the year so far, but I probably know my capital to within 5%. Not sure which is the most (or least) healthy )

Where do you account for the dividends received? Does it roll up into capital? What do you do with it?

I'm in the fortunate position of only having to withdraw cash for exceptional expenditure, like paying for cruises or for repairs to the house. Normally I reinvest them in the most eligible share in my top up rankings.

The Divis from unsheltered accounts (except the one with mum's inheritance in) drop into my bank account each month, an irreglualr amount that just keeps it topped up a bit, rather like the premium bond income.

It's been a slowly declining amount as we've sheltered assets over the last few years, but MrsF part time working has meant I could have easily set it to reinvest. What tends to happen at the moment is that excess we accrue in our current accounts goes into cash savings (currently a Santander 2.7% or thereabouts and a 123 current account) which we use for big purchases or the rolling house renovtions. It has meant we haven't actually had to touch the cash pot we'd set aside for this work yet.

There'll be a restructure after Xmas, move some VEVE into VHYL to top up for when MrsF stops work if we need it.

Paul

[ayshfm1]

The possible switch to buybacks is a concern. Dividends in the US are tax inefficient hence the preference for not returning cash that way.

It didn't use to be a problem here, but it is now. I can definitely foresee pressure to move to the US model.

[hiriskpaul]

The possible switch to buybacks is a concern. Dividends in the US are tax inefficient hence the preference for not returning cash that way.

It didn't use to be a problem here, but it is now. I can definitely foresee pressure to move to the US model.

There is a pay walled Bloomberg report saying that 2022 will see the biggest amount ever distributed by FTSE 100 companies by way of share buy backs - £51B. That is still lower than the expected dividends for the year of £81B.

[vand]

Inflation 11%, markets down c. 10%. Gap in real terms this year of 21%. Not a good year fo most stockmarket investors.

No wonder fire blog posts I follow are drying up. Is Fire peaked as a movement, and now on way out. Conversely could be a good buying opportunity as market drops have usually been a good time to buy and get in.

Despite the market being down, dividends are up. If you invest for income then things are fine. If you think in terms of TR you may be less happy. Horses for courses and all that.

TJH

While this may be true in 2022, orthodox FIRE does not condone a dividend heavy approach, but rather (correctly IMO) a total return one.

HYPers (of which I consider myself one) should be very aware that the natural yield approach has been falsified and proven not only sub optimal in terms of accumulation than a TR approach, but also more risky in decumulation.

see ERN SWR series 29/30/31

https://earlyretirementnow.com/2019/02/ ... s-part-29/

[swill453]

While this may be true in 2022, orthodox FIRE does not condone a dividend heavy approach, but rather (correctly IMO) a total return one.

What on earth is "orthodox FIRE"? That's not a concept I buy into.

As far as I am concerned this is a discussion between people with a shared interest in accumulating enough wealth to retire early by whatever means they consider appropriate.

Scott.