The Dividends Don’t Matter In Retirement, Even Big Ones

• Dividends do not create value, not even big ones. They are a removal of cash value from a company.
• Big dividends do not matter in retirement, total return and risk level are key.
• Share sales and dividends of equal value are the same, with no added sequence of returns risk protection from dividends – big or small.

Here’s the thing, a dividend does not create value. A dividend is a permanent removal of value / cash from a company. At times, there is nothing wrong with a dividend. But a share sale and dividend of equal value are, well, equal. The only difference is the tax treatment. I recently penned how dividends don’t matter in retirement. In fact, the dividend does not add additional protection to reduce sequence of returns risk. How could they, when a dividend and a share sale are the same? In the comment section of that ‘dividends don’t matter’ article, a few readers challenged the notion, saying ‘ya, but what about those big dividends’? Well, sit tight. Even the big dividends don’t matter in retirement.

Some readers suggested that the over 1000 comments from the retirement article might have set a Seeking Alpha record this year. I think that’s just ‘awesome’ as the more retirees and near-retirees that know the simple truths, the better. And that’s the whole reason for writing these posts.

Get control of your retirement income and plan

When you come to terms with the fact that a dividend and a share sale are equal, you can do much better in retirement. You are in control, not your dividends. You’ll find some clear examples in those posts demonstrating how the dividends don’t matter.

So let’s move on to the little-known truth about big dividends and big income. They don’t matter. In retirement, portfolio success comes down to total return and risk level, that’s it.

For a demonstration, I will look to a sector known for the generous dividends – the telecommunications sector. We’ll take a look at the big dividend paying stock – AT&T (T . And we’ll examine a period of stress, creating retirement income, through and beyond the financial crisis. Of course, utilities (including telcos) and pipelines are popular with retirees, as they often pay very generous dividends. And I like the space, as it is one of the defensive sectors for retirees. I’m not gushing over my telcos and pipelines due to the dividends, I’m attracted to the lower volatility and solid total return potential. Ditto for consumer staple stocks.

Heading into 2007, AT&T paid a 4% dividend. It then went on a very strong run of dividend growth through the period that we’ll examine, from 2007 to the end of 2015. There was a 32.4% dividend increase for the period. You can check out the dividend history on the Seeking Alpha dividend page for AT&T. 

Generous dividends from AT&T vs dividend cuts

In 2007, the company paid $1.0725 in dividends. In 2015, AT&T paid $1.4197 in dividends. The dividend was increased each year. Compare that to the market (IVV that experienced dividend cuts. In fact, it took 4 years to recover from the dividend cut in 2007.

We’ll compare AT&T vs a Balanced Growth portfolio.

• S&P 500 (IVV at 75%
• Bond market (AGG at 25%

The Balanced Growth Portfolio is a very modest yield portfolio, again with those dividend cuts in the mix. On the bond front, AGG experienced massive income cuts from 2007 through 2015. From $4.9148 in 2007 to $2.6485 in 2015. It’s a terrible looking portfolio if you think that income is important in retirement.

Here’s the total return comparison using a hypothetical $1,000,000 starting value.

We see that the investments traded places for greater total return, with the Balanced Growth model coming out ahead at the end of 2015.

And here’s the decumulation (retirement) stage, providing income at a 4.1% spend rate – $3,400 per month.

Once again, we see the Balanced Growth Portfolio comes out ahead in retirement. The retiree with the better total return portfolio (with the terrible income) also leaves the period in better shape. You’ll see that the accumulation and decumulation chart trends look very similar. That’s because the dividends add absolutely no value over share sales in retirement.

As per the dividends don’t matter in retirement article, a share sale and a dividend of equal value are the same, except for tax treatment.

Success in retirement comes down to the total return and risk level. When paying yourself a dollar –

$20 – $1 = $19 whether that dollar comes from a dividend or a share sale.

You have the same remaining portfolio value (and share of earnings and free cash flow) no matter what route you take to create income.

That chart demonstrates that the dividends provide no additional protection from sequence of returns risk.

Share sales move on to be superior in every way because you have complete control over the income created and the risk level of the portfolio.

The dividend knows nothing about the appropriate spend rate, financial planning, risk, an optimized cash flow plan, or your estate plans.

Let’s go even bigger

Massive dividends and specialty income can be popular with many retirees. But as you’ll discover, even the bigger dividends and income ‘don’t matter’.

I’ll next use a recent pick from one of the more popular high-income writers on Seeking Alpha. We won’t name names, but the holding is Oxford Lane Capital (OXLC . The yield is showing as a ridiculous 19.53% the week of August 12, 2024. Of course, that kind of yield is not sustainable, as even the best companies in the world cannot pay out at that level. We will face destruction of capital over time.

Of course, we know where that ends if the trend continues – at zero. You’ll also see that the income has been cut dramatically over the last 10 years.

Here’s the total return comparison vs the U.S. stock market.

Of course, this makes no sense as an investment in the accumulation stage. The drastic income is of no use compared to a simple total return approach. And the goal in accumulation should be to create the largest portfolio value possible. More money creates more retirement income.

The high-income payments are of no value compared to a sensible approach in retirement as well. We’ll look at the recent performance during a period of stress, through the COVID correction and brief recession.

Here’s OXLC vs. the market IVV. We have a 4.1% spend rate, inflation adjusted.

The high-income payments are of no value. They don’t support the value, they don’t help with the price collapse. The income does not help with sequence of returns risk.

I think it’s obvious that few retirees would be comfortable spending from this holding when they watch the value collapse by 70%. From my experience observing retirees during the dot com crash and financial crisis, most of these retirees would sell the holding, fearing creating permanent losses.

That is the worst outcome. High-income chasing has destroyed a lot of retirements.

Total return and risk level

Retirement portfolio success comes down to total return and risk level – draw down in severe corrections. Given that, it should be no surprise that lower volatility defensive stocks can be a retiree’s best friend.

Once again, take a look at that defensive sectors through the financial crisis post (link above).

Look to consumer staples (XLP , healthcare (XLV and utilities (XLU . You can overweight those ETFs or your stocks from those sectors. I like the idea of the defensive stocks working in concert with cash and bonds and gold.

Dividends are not a consideration in retirement.

For added inflation protection, I like some exposure to oil and gas stocks. We can consider a sprinkling of commodities (DBC as well. It’s an important component of the …

Thanks for reading, we’ll see you in the comment section. I do try to answer or address all comments and questions.

I hope you’ll consider the optimal approach to retirement funding – dividends plus share harvesting while managing the risks. We should also embrace an optimized retirement cash flow plan.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.