The No.1 Strategy For Retirement Income...

👉🏻 *Looking for help with Financial Planning?*

Dividend Investing seems like it's a perfect strategy for retirees. High sustainable passive income, what's not to love!

But all is not as it seems...

Sources from this video:

The Dividend Disconnect

A Five-Factor Asset Pricing Model (Fama & French)

The Decumulation Paradox

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[JamesShack]

Correction: For some brokers, not all, W8-BEN forms can reduce witholding taxes to 0% if the shares are held within a SIPP.

[christinaryan]

To manage investment risk, consider maintaining a broad diversification of your investments that reflects your personal risk tolerance, time horizon, and the nature of your financial goal. Remember, diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline. Because investing can be complicated, consider working with a financial professional to help guide you on your wealth-building journey.

[bobb]

Dividends do not make a lot of sense until you factor in one thing. What is the long term price of every stock? It is 0. Sooner or later the company will disappear. So getting some of your money back is a hedge. Also most good companies will continue to pay a dividend when times are bad. You do not want to sell your stocks when they are down. Picking good dividend stocks is not being lazy. It takes work and you need to stay on top of it.

[caldean]

James, first of all it's great that you take the time to answer so many of the comments on this video, so you should be applauded for that and some great content. What is also clear is the wide range of opinions on the subject which just shows that everyone's circumstances, experience and objectives vary greatly. There is no right answer - it just depends on the asking the right questions.

Your central premise is that reinvesting dividends and benefitting from compounded growth will lead generally to better overall returns than if dividends are taken and when buying a stock, you buy a quality company first and foremost based on fundamentals, with dividends being a secondary factor. After all, dividends can be cut or stopped, there may be insufficient dividend cover and there is usually a good reason why there's a high yield or low P/E (eg, it's a lower quality company or has less scope for growth) . And you are absolutely right in this respect to buy quality first and dividends second, if at all, and mathematically, reinvesting gives the best total returns. I think this is the message you were trying to convey but was perhaps misunderstood by some.

Taking dividends tends to be psychologically comforting - I watched another video shortly after yours by a US based CFA who was extolling the virtues of taking dividends so even the experts can't agree. So the decision comes down to one's personal view, experience and circumstances. Personally I like dividends from quality companies as it suits my investment, cashflow and tax planning where, outside my SIPP and ISA, I can offset the income actually received and taken against my personal tax allowances. I can also generate sufficient income to still allow my employment earnings to be invested into my SIPP and get tax relief on the contributions, I can create tax efficient income to generate excess income over expenditure, gift this to my kids, save 40% on IHT immediately in addition to some capital gifts ( I don't need to accrue more capital as I'm well into IHT already), they can reinvest into pensions and get tax relief on their contributions that they otherwise couldn't afford and I can also decide whether to spend any spare cash, reinvest or replenish my cash pot. And yes, I will sell at appropriate times to also use my CGT allowance, whatever that may be in the future.

If I was much younger, yes, I would reinvest my dividends to compound the growth. Share buybacks can help by reducing the shares in circulation and thus increasing the price, but one needs to understand why companies do this. Some CEOs are rewarded on increases in the share price, not profits or earnings, and often companies have leveraged their debt in times of low interest rates to buy back shares but place a huge burden on future profitability, especially when debt has to be renegotiated. Reinvested dividends are subject to bid / offer spreads and dealing charges as well as future gains and losses. A dividend received is cash in hand, not a number going up and down on a screen. It's definitely not straightforward as some like to think and one needs to do the right research before investing.

Diversification is also important. One commenter stated that he had been tracking the FTSE 100 index. If he invested in August 1999, the index was about the same as Oct 2022 (circa 6800) so only by reinvesting his dividends would he have been able to make money, otherwise his clever low cost strategy, investing in both good and bad companies alike ( however one defines this), would have been pretty abysmal and failed to keep pace with inflation - so for him dividends had to be reinvested and he was only saved by the rise in his one other investment, the S&P500 tracker. Not sure that the future will be quite so kind and further diversification may well be beneficial but that is for him to decide.

Do keep up the good work. This video has certainly promoted much debate, which is healthy as it means folk are thinking about investments and their financial strategy at a time when every penny counts.

[alasdairvaughan]

Hi James. New to the channel and investing in general. Appreciate this isn't the topic of this video, but just want to say a big thanks. I have traditionaly saved in cash ISAs, but want to build a pot of money to retire as early as possible. Learning about index funds and the life strategy funds is a game changer, rather than clinging onto the intrest earned from saving in cash alone. I have downloaded your income calculator to understand what I need to put away for a given income in retirement etc, and I glad to say that at 26 years of age, I am in a position to do so. Big thanks again, subscriber for life!

[gianlucapagnoni]

Thank you for this interesting contribution! I'm focusing on Dividend Investing avoiding those dividend traps that looks so tempting in the market, like some builders companies for example.
For me Dividend investing means Expanding: within the 20k limit of ISA being able to generate extra money to buy more share, expand and diversify my portfolio is the keystone of my strategy at the moment

[RetiredPilot]

Dividends are like a personal pension, if invested in good companies it provides income and inflation protection as good companies increase dividends on a regular bases. I have been retired 13 years taken 400K out to spend and have increased my capital by 500K. We take the money we need and the one issue that needs discussion is cash flow. We keep a year of cash on hand at all times. We also tax plan and get the maximum government benefits every year. I know we will retire millionaires but who cares as long as we have the money and comfort it brings. Most people get too emotional and sell when markets go down. Holding good dividend paying companies we know our income is quite secure and just ride out the market fluctuations. cheers

[coling]

Great video as always, but gotta love those lazy dividends though😃. At retirement, in a few years time, my wife and I are planning on having a big part of our pensions in the iShares UK Dividend ETF (IUKD). Appreciate that we'd be able to better returns by not doing that but our outgoings are going to be low and the dividends will help us sleep at night, while the other part of our pension makes stonks in growth ETF's (hopefully🤣).

[g]

The problem with growth stocks is that we have no idea when to cash out. Look at how Tesla has lost value overnight.

[darrenbastin]

Really like your vids. As a cautious investor i love dividends, gives me peace of mind. Do not have to worry about sequence of returns, not fretting about Re balancing portfolio. Seems to compliment my final salary benefits.

[cossym]

Great video as always. Nothing gets people more excited than the perennial dividend debate 😁🍿

[ponys]

I beg to differ, I love my dividends, no messing about having to keep selling all the time.

[jbruck]

I am sorry, but it seems to me, you ignore a few things and also some mindsets:
As a retired person, you are kind of a *short-term* investor, you *need* X$ per *year*.
Stock prices perform well *in the long term*. This is good for the wealth accumulation phase.
Dividends are more stable, especially so in certain companies ('aristocrats'). Low volatility=>short term plans.
Tradeoff: worse performance, as always with low volat. investments.

Also, stock prices are not rational in the short term, while dividend payment decisions result decision of the management and will not ruin the company - if it is a good company.

I see a crucial difference between the two strategies easiest understood via thinking of Monte Carlo simulations ie. modelling many (we hope) realistic alterntive scenarios. Lets take it to the extreme for easier understanding - total loss:
A dividend strategy will never kill the portfolio of well managed companies (unless total bankrupcy occurs), they may lower dividends during huge crisis.
However, a "sell X$ regularly " strategy *can* damage or destroy the portfolio value when a sufficiently bad/long bear market of stock prices occurs - even without the companies suffering greatly, as stock prices are not really linked to that on the short term.

Regarding buying red cars....
No, I do not want to buy companies *because of dividends* - I want to buy *good* companies, sometimes only dividend paying ones!

Indeed, the tradeoff for low volatility is lower performance and lower diversification (risk) - at least the latter may be offset if you have some free cash to buy non-dividend companies.

[spartacusptolemaida]

you've no idea how much I appreciate your information! my favourite financial youtuber along with Andy clever cash.

[ricardcalonge]

Your channel is wonderful James. I am now very interested in financial / retirement topics and can't stop watching your videos. Regards from Barcelona! 👏👏👏

[aidankelly]

Thank you James for stopping me making a big mistake. Love the channel.

[robsalvv]

If you own shares, you are an owner of the company. As an owner of a business it’s a basic expectation that you would get some income from it without reducing your share of ownership. That’s not irrational. If one can accumulate enough of a portfolio that they can live a comfortable retirement at the budget they’ve determined is need for that, why sell down?

[neilsmith]

Great info James. Happy New Year to you

[johnforrest]

Your right about potentially hanging on to long to do a bit of spending, just brought two sipps into payment, one is Dividend based and will draw 95% of Divs Av over 12 months. The second is growth based over eight funds and will dispose of anything that outperforms the diversified eight base starting figures, indexed at equivalent of 3.6% per annum. Will see how it goes. Both SIPPs were sitting as essentially "life insurance" but it does make sense to use a bit, until the state pension kicks in, just over six years away. But then I'll probably want to use the state pension to buy more investment trusts for a while 😂.
Very good video, Thanks

[teamschmangled]

Thank you for another great video James. I am always fascinated by the psychological aspects of investing that you point out. There's a chimp in my mirror for sure!