Dividend vs. Growth Investing, Rising Interest Rates and Retirement Income Withdrawal Strategies

Listen to my new podcast with the incomparable Kornel SzrejberKornel is Canada’s #1 financial podcaster and the best interviewer I know.

This podcast “Dividend vs. Growth Investing, Rising Interest Rates and Retirement Income Withdrawal Strategies” includes these topics:

  • Dividend investing vs. growth investing.
  • Self-made dividends.
  • Retirement income withdrawal strategies to maximize your retirement reliably.
  • Rising interest rates and how it affects dividend and growth investors.
  • ETF portfolios.

This is a learning experience for me. I would love to hear your comments!

You can also watch my video interview with Kornel here: Ed Rempel Video Interview.

 

Ed

4 Comments

  1. Bernard Kruyne on October 5, 2018 at 5:38 PM

    Ed I listened to your presentation at the Toronto Money show. It was the best presentation I heard while there. unfortunately it was later in the day and I decided to limit my note taking since- as I understood it – I could afterwards view a video and on second hearing fill in any gaps in my understanding of your key points. Unfortunately I have not seen the video yet, but would very much want to or alternatively perhaps you can send a copy of your notes and slides?

    I think listening to this presentation again would be a good if not necessary step before I contact you for a more focused personal consultation. Trust you agree with that.

    Bernard



  2. Ed Rempel on October 14, 2018 at 5:49 PM

    Hi Bernard,

    I agree. The MoneyShow released the video. You can watch it again here: https://edrempel.com/the-6-best-strategies-to-minimize-tax-on-your-retirement-income-video-of-moneyshow-talk/

    Ed



  3. Guy Langevin on June 17, 2019 at 2:26 PM

    Hi Ed,

    I have been reading your articles and listening to your podcasts about dividend and growth investing. You position growth investing as the most favourable method for total market returns assuming a 100% equity portfolio, but what about portfolio safety in terms of depletion risks? Is growth investing riskier when using the 4% rule?

    Would higher-net-worth individuals, those with 2 million plus be better off using dividends? After all, they could technically invest in a global dividend ETF like XDG and collect close to 4% a year without touching their capital and their portfolio should never deplete. On the other hand, could investing for growth increase the risks of depleting the portfolio especially in a market crashed often followed by long bear markets.

    I honestly wanted to tell you that it has taken me a very long time to start appreciating the message you are conveying about growth investing and its benefits but I have been wondering about these questions and I was hoping you could provide some helpful insight?

    Guy Langevin



  4. Ed Rempel on July 3, 2019 at 11:18 PM

    Hi Guy,

    Great question. The key to successful equity investing is “total return investing”. We want the investment with the highest long-term, after-tax return.

    If I had a choice between a stock that makes 10%/year long-term with no dividend or one that grows 6%/year with a 4% dividend, the total return is the same, but the after-tax return is different. With the dividend, you have prepaid tax that you can defer by holding a more tax-efficient equity.

    The lowest taxed type of investment income is “deferred capital gains”. This is a capital gain that you pay tax on many years or decades in the future.

    Dividends can have a lower tax rate, but only if you invest only in Canada. Changing your allocation to invest only in Canada will likely lower your return more than any tax you might save. “Never let the tax tail wag the investment dog.”

    Dividends for retirees can be at a lower tax rate, but only if your taxable income is between $25-48,000. Under $25,000, you can get the Guaranteed Income Supplement (GIS) which is clawed back at 70% of any Canadian dividends you receive. (Yes, I know that’s shocking.) Above $48,000 taxable income ($35,000 in dividends), the tax rate on dividends is higher than on capital gains that are deferred by only a few years.

    There is a popular “conventional wisdom” that dividends are more reliable than capital gains. This is based on short-term thinking. Long-term, the stock market capital gains have been very reliable. For example, the worst 25-year return of the S&P500 in the last 90 years has been 7.9%/year. Both dividends and capital gains are based on how profitable the company you invest in is. If a company loses money, the dividend is not reliable either.

    To quote one of my mentors, “Rainfall and snowfall. They are both precipitation.”

    The popularity of dividends varies in different markets. Before 1950, most companies paid most of their profits in dividends. By contrast, in the 1990s, if a company announced a new dividend, it typically fell by 20% because that meant it was not a growth stock. Since 2008, investors are focused on yield, because many investors lost faith in investment growth.

    In today’s market, the “search for yield” means that you are quite likely to overpay for any stock that pays a higher dividend.

    Possibly the most important investing lesson I have learned is to always be aware of what is currently popular and be very careful not to overpay if you invest in it. This means investing the opposite of the herd is usually more effective over time.

    However, purely investing the opposite of the herd, is not the secret. Even more effective is total return investing. When you look for the equity investments with the highest long-term total return, you usually end up with lower allocations of whatever is currently popular.

    I believe that is why growth investing has outperformed value investing for almost all of the last decade. Investors are focused on yield, so the high-growth equities are often cheaper – at least given the growth you are paying for.

    Today, when I see dividend investors, they typically have mostly Canadian banks and Canadian resource companies or pipelines. “Total return investors” tend to have global technology, health care and consumer companies. It’s not hard to understand how the “total return investors” are trouncing dividend investors.

    The other reason dividend investing is popular is because we just finished a 35-year “bond bubble” and “dividend bubble”. From 1992-2015, interest rates fell from 20% to 2%. Bond returns were not much lower than equities. Dividend stocks are bought partly for the “fixed income”, so dividend stocks outperformed the broad equity markets for most of the 35 years.

    However, since 2015, the “dividend bubble” ended. Dividend stocks have widely lagged the broad market. This is a return to normal. Dividend stocks are generally more mature and slower growth, so you should expect lower long-term total returns.

    A global dividend ETF may pay out 4%/year and grow with inflation, but so does a broad equity portfolio. A 100% equity portfolio has reliably provided 4%/year cash flow growing by inflation 97% of the time in the last 150 years (https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/ ).

    This 97% success rate is without managing it at all. With effective management of your withdrawals, a 100% equity portfolio has reliably provided 4%/year cash flow 100% of the time in the last 150 years. Dividends are not more reliable long-term.

    Dividends from a global dividend ETF are fully taxable as income every year. You pay 1.2-2.0 of your investments in tax on the dividends every year (depending on your tax bracket). Therefore, you would need to make about 2%/year higher returns to have the same after-tax returns as a more tax-efficient global equity portfolio.

    In short, if you want fixed income, buy fixed income. If you want effective equity investing, focus on “total return investing” – the highest long-term after-tax return”.

    This is a great question, Guy. I think I’ll convert it into an article.

    Ed



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