“Dividends don’t pay you — the stock just drops.”This myth still lingers, but it crumbles in the real world. Here's why dividends remain the most reliable path to wealth—and why real business owners know better.
The "sequence of returns" simulations are always interesting to play with. It brings up the "4% rule". The idea is people ought to count on at least a 7% growth rate of their portfolio. Selling down 4% of the account leaves 3% of the growth untouched and available for compounding. That works fine during good years. What happens during the down years when a portfolio can sink 20%, 30%, or even 50%? The dot-com bubble brought the NASDAQ down 80%. Way more shares will need to be sold off at lower prices to get the same funds as before. Dividends, distributions, and coupon payments from bonds can provide a steady-eddy flow of income without needing to sell anything down.
It's true that dividends can be cut and suspended. That's where intelligent diversification and a cash reserve can help. An example of diversification would be 20 streams of income consisting of stocks, CEFs, and bonds. It's unlikely all 20 streams will get whacked at once in the same way. A doomsday example could be 5 streams are frozen, 5 streams are cut, and the other 10 keep marching along. The difference could be made up by pulling from cash reserves.
Dividends definitely have their place in a portfolio. Understand what they can and cannot do and everything will be just fine. 👍
The "sequence of returns" simulations are always interesting to play with. It brings up the "4% rule". The idea is people ought to count on at least a 7% growth rate of their portfolio. Selling down 4% of the account leaves 3% of the growth untouched and available for compounding. That works fine during good years. What happens during the down years when a portfolio can sink 20%, 30%, or even 50%? The dot-com bubble brought the NASDAQ down 80%. Way more shares will need to be sold off at lower prices to get the same funds as before. Dividends, distributions, and coupon payments from bonds can provide a steady-eddy flow of income without needing to sell anything down.
It's true that dividends can be cut and suspended. That's where intelligent diversification and a cash reserve can help. An example of diversification would be 20 streams of income consisting of stocks, CEFs, and bonds. It's unlikely all 20 streams will get whacked at once in the same way. A doomsday example could be 5 streams are frozen, 5 streams are cut, and the other 10 keep marching along. The difference could be made up by pulling from cash reserves.
Dividends definitely have their place in a portfolio. Understand what they can and cannot do and everything will be just fine. 👍
Sequence of returns shows how much it matters WHEN the 20%, 30%, or 50% drawdown happens.
Great point about diversification - it's not just between companies and sectors - it's between asset classes like bonds, CEFs, real estate, etc.
Love the emphasis on WHEN the market draws down. 😄