Dividends, grit, and an interesting TIPS-ladder idea — Useful Finds #16

Hi from Stefan,

Welcome to the sixteenth issue of this biweekly newsletter.

Nothing here is sponsored or written for compensation.

Morningstar Interview

If you discovered The Best Third from my interview on Morningstar’s Long View podcast with Christine Benz, welcome! If you haven’t heard the interview yet, you can listen to the podcast or read the transcript. It was one of the best podcast conversations I’ve had to date. Christine is a sharp interviewer and her questions were excellent.

The lesser importance of dividends

The Wall Street Journal reports that Retirees Love Dividends, but the Stock Market Surge Is Making Them Think Again. Many people prefer dividends because they believe relying on dividend income is safer than selling shares to fund spending. But that distinction is more psychological than economic. What ultimately matters is a portfolio’s total return, not whether that return arrives as dividends or price appreciation.

Dividend yields are generally lower than they were decades ago, in part because many companies now return more capital to investors through share buybacks. Using a stock portfolio solely for dividend income sets aside a lot of wealth that could otherwise add to one’s quality of life. A better framework is to consider total return, using both dividends and periodic share sales to fund spending. Automatically reinvesting dividends generally makes sense while accumulating wealth.

In retirement, however, it may make more sense to stop reinvesting them and use dividends as the first portion of withdrawals from stocks. That’s the assumption The Best Third uses in its methodology.

And if you have enough wealth in stocks to support your lifestyle solely from dividends, you might consider using some of the surplus to help descendants and charities: “giving with a warm hand rather than a cold hand.”

What I’m reading

Grit: The Power of Passion and Perseverance, by Angela Duckworth. Duckworth is a psychologist who studies the traits associated with success.

Her central argument is that talent alone is not enough: sustained effort, passion, practice, and perseverance matter enormously. She calls this combination “grit.” Duckworth argues that grit often grows with age, and also that people can develop it rather than treating it as a fixed trait. This book would make a good gift for the young adults in our lives.

Answer to a user question

Aaron wrote:

if you’re retiring before 60, and want an income floor from a TIPS ladder, you’d have to put part of it in a taxable account … it occurred to me that you could just construct the entire thing in a tax-deferred account and have it work out just fine. After constructing it, income would arrive in that account each year.

Then, you could sell that same amount of some asset in a taxable account (any asset, really) and buy the same asset in the tax-deferred account with the proceeds from the ladder (with adjustments as needed to avoid wash sales). Then you’d effectively never be forced to sell an asset when you didn’t want to, but you’d still wind up with the regular chunk of cash in an account where you can spend it.

What do you think about this? Does it seem like a ridiculous idea?

It makes good sense and is in no way ridiculous. One thing to be careful about is that the sale of the taxable asset should be matched with the tax-deferred purchase not simply share for share. It should be considered net of taxes, both the immediate tax of selling the taxable asset and the eventual, likely higher tax rate, on withdrawing the proceeds from selling the tax-deferred asset. Avoiding wash sales, as mentioned, is also an issue.

The site doesn’t currently implement this approach, but it appears workable and is worth serious consideration as a future enhancement. Thanks for the suggestion!

Warmly,
Stefan Sharkansky, PhD
Founder of The Best Third