Living Off PP "Interest" Only

[TripleB]

One investing strategy that I've seen a lot of is to invest in dividend paying stocks and bonds so you can live off the interest without touching the principal. The plan fails because without re-investing dividends you are actually eating away at the principal, and without re-investing bond interest, you are losing to inflation.

Despite these flaws, how well does this work when applied to the PP?

The gold spits off nothing.
The LTTs spit off a few percent more than cash.
Cash spits off something (outside of the last few years) that matches inflation.
Stocks spit off 1% to 2% dividends.

Overall, you're getting probably around 2% getting kicked back to you each year in current rates and maybe a bit more in higher interest rate periods.

Anyone consider retiring off PP "interest" only?

[Alanw]

One investing strategy that I've seen a lot of is to invest in dividend paying stocks and bonds so you can live off the interest without touching the principal. The plan fails because without re-investing dividends you are actually eating away at the principal, and without re-investing bond interest, you are losing to inflation.

Despite these flaws, how well does this work when applied to the PP?

The gold spits off nothing.
The LTTs spit off a few percent more than cash.
Cash spits off something (outside of the last few years) that matches inflation.
Stocks spit off 1% to 2% dividends.

Overall, you're getting probably around 2% getting kicked back to you each year in current rates and maybe a bit more in higher interest rate periods.

Anyone consider retiring off PP "interest" only?

I can't live off of 2% interest only.  I need around  5%.  Maybe I could cut back my standard of living but that wouldn't be much fun.

[craigr]

There is nothing wrong with living off capital appreciation as well. Nobody cares where you get the money you spend.

Dividend strategies can be overrated. They toss a bunch of money into your lap whether you want it or not. Then it is taxed as income. Taking long term capital gains is usually more efficient for taxes.

Honestly, I try to avoid high dividend stocks and funds.

[BearBones]

Honestly, I try to avoid high dividend stocks and funds.

Sounds good. How does one do that and stay with an unadulterated HB PP?

[KevinW]

The plan fails because without re-investing dividends you are actually eating away at the principal

I can't say I agree with that point.  A healthy dividend company retains a lot of earnings for reinvestment.  For instance JNJ has a payout ratio of 64%, so about 1/3 of earnings are plowed back into capital investments. That ought to grow principal, albeit slowly relative to non-dividend stocks which reinvest 100% of earnings.

Overall, you're getting probably around 2% getting kicked back to you each year in current rates and maybe a bit more in higher interest rate periods.

Anyway, if you follow conventional advice and sweep dividends and interest into cash, and pull withdrawals from cash, then a "flat 2% withdraw rate" and "yield that works out to approx. 2%" are for all practical purposes the same thing.  Historically the PP can support a 3-4% SWR with a reasonable margin of safety, so 2% is extremely conservative.  It doesn't really matter whether the 2% figure is chosen arbitrarily or as a result of mathematical calculations; either way the portfolio is likely to continue to appreciate in real terms.

[craigr]

Honestly, I try to avoid high dividend stocks and funds.

Sounds good. How does one do that and stay with an unadulterated HB PP?

If you own a broad based total stock market index fund they tend to be very tax efficient and not throw off abnormally large dividends. Dividends from funds do basically nothing for taxable investors but make larger tax bills.

[stone]

Hi Clive. 

Don't you think the 2009 event with stocks may have given a somewhat atypical experience of buying a collapsed asset being a jackpot winner? Buying Japanese stocks straight after the initial 1990 collapse would have been less bad than buying just before but it still wouldn't have been a good thing to do. Imagine someone had been in Japan in 1980 and seen that stocks were doing nicely. One option would have been to have bought some stocks and had a pool of cash, bonds, gold or whatever to rebalance into. That would have allowed them to have harvested the rise in stock prices and remain somewhat protected when things popped in 1990. If instead they had bided their time waiting for an entry point and had watched the entire boom and bust enfold and then pounced and bought up lots of stocks in 1991, they would have been screwed as Japanese stocks continued to slump for the next couple of decades.

[stone]

TripleB, in the UK I think there is an annual allowance of dividends that you can get tax free. We also have annual capital gains tax free allowances. Those tax allowances might  skew things I guess if you wanted to always use the entire anual allowance for both (you said you love to gather all such things going ). The investment trust CTY has had dividend growth for the past 44 years and pays about 5% yield at the moment. It seemed to me an attractive way to cover the UK "dividend stock" part of the market.  

[stone]

Clive, surely everyone else is always also trying to "lock in" whatever they perceive to be best value at every moment in time? You're supposing that your perception is superior to theirs. I'm not saying that your's isn't. I'm just saying that everyone couldn't at once also become better than everyone else and that is what your advice amounts to .

[stone]

Clive, everyone who pounced into the stock and corporate high yield bond markets in the spring of 2009 did very well. But it is only with hindsight that we can say that prices then were bargins. The prices then reflected the widely held belief at the time that many stocks would go bust (total loss) and corporate bonds would be effected by major defaults (Lehmans corporate bonds suffered a total loss didn't they?). Perhaps you might say that any idiot could see that huge bailouts would be conjured up to save the day. The prices reflected the reality that many people didn't see that. Price volatility wouldn't exist if everyone had 20:20 foresight. Basically prices are what they are as a consensus prediction of the future.

[stone]

Clive, a global Greek style depression could cause massive waves of bankcruptcies with massive unemployment and demand collapse. Ofcourse having such an economy would be entirely a voluntary policy choice but the same could be said now for Greece and they clearly are making that choice.