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Income vs Total Return

Income vs Total Return

Some want reliable monthly income; others are fine with total return (TR) growth and selling as needed (that may be easier said than done). The TR formula shows that one cannot have high income and high growth:

%TR = %Dividend_yield + %Dividend_growth + %Change_in_P/D

For very long-term, the last term has a small contribution, so if dropped, we get the Gordon Equation approximation for multiple years (so, don’t create examples of annual exceptions):

%TR = %Dividend_yield + %Dividend_growth

I have seen this debate about income vs TR go on and on for years. My suggestion is for income-oriented posters to assume a fixed monthly/annual withdrawal rate, e.g. 5% annualized (not adjusted for COLA), and then compare the terminal balances using, say, Portfolio Visualizer (PV). In the example below, I will use utilities XLU, CEF PDI, REITs VNQ and VFIAX/SP500; the data will go back to 6/1/12 due to late-05/2012 inception for PDI; also, PV allows only 3 portfolios plus 1 benchmark at a time.


All 5% fixed withdrawal programs were successful in that the terminal values > initial values. The best for terminal values were, in order, SP500 (highest), PDI, XLU, VNQ (lowest).

Intrinsic portfolio income varied, but the withdrawals were full covered by PDI, only sometimes by XLU and VNQ; so often, the withdrawals consisted of intrinsic income plus some principal.

There were 3 equity funds and 1 leveraged CEF and their volatilities were high. The 3-yr volatility order was VNQ (highest), XLU, SP500, PDI (lowest).

Max drawdowns were for PDI (highest), VNQ, SP500, XLU (least). That this order was different from that for volatility was a bit surprising.

What happens to the withdrawn amount doesn’t matter. But it is most likely spent by the income-oriented investor. Some don’t need the income and reinvest it – but in that case, only a straight TR comparison (TWRR) matters, and the order then was SP500, PDI, XLU, VNQ.

The period under consideration included the Covid pandemic and Russia-Ukraine war.

As expected, there was no clear conclusion. It boils down to the current needs and volatility tolerance (comfort level) of the investors

It may be useful to add conservative/moderate-allocation funds into this mix but that is for another time.


  • @YBB. Thanks for that contribution. It might be useful to use different components that go back further than 2012. TR sounds great till one is forced to sell low during a prolonged bear market. And Income is challenging in times of Zero interest rates. So it all depends.
  • @larryB, you can play with that PV Run template to test other possibilities. Free PV database goes to 1985, so 38 years is the max that you can go back with this type of PV analysis (Paid PV may have longer database). PV also defaults the the shortest common period, so you have to use funds that have all existed for 38+ years (Paid PV will use similar funds to fill the time gaps).

    At some future time, I may add examples of some conservative- (VFINX) and moderate- (VWELX, PRWCX) allocation funds.

    Let us see how this thread develops. I don't want to spend lot of time cranking out numbers if there isn't much interest.
  • beebee
    edited June 6
    Wondering if you have consider the impact that Sequence of Return Risk has on a TR strategy verse a dividend withdrawal?

    I would seem to me that spending down dividends (say a collection of dividend aristocrats) would be less impacted by Sequence Risk since you are not selling out of positions during a down market period.

    Would a hybrid approach be helpful? Maybe a retiree sets up a withdrawal rule based on the returns of the market. Maybe relying a little more TR in up markets and a little less TR in down markets?
  • A simple hybrid approach may work - use alternate sources for withdrawals during market downturns. But that may not be possible for those on tight budgets.

    Free PV also has features on Monte Carlo, Portfolio Optimization, etc. Former may account for SOR risks. Interpretation of results may be tricky.

    I prefer to backrest specific funds & portfolios for specific periods, or long periods with several market cycles. That is a fair comparison tool although backward-looking.
  • @Bee. A hybrid like the bucket system? It seems to me that plans laid out before one retires are not so valid once the paychecks stop. So many variables. Since we retired we have experienced a pandemic, zero interest rates, somewhat higher inflation and a major land war in Europe. Not to mention historically significant political turmoil. It’s human nature to want predictable outcomes in personal finance but it’s hard to achieve.
  • Example - VWINX, VWELX, PRWCX, Benchmark VFINX (SP500)

    Terminal Balances PRWCX (highest), SP500, VWELX, VWINX (lowest)

    Intrinsic Income (including CGs) covered the withdrawals.

    3-yr SDs SP500 (highest), PRWCX, VWELX, VWINX (lowest)

    Max Drawdown SP500 (highest), PRWCX, VWELX, VWINX

    Total Return (TWRR) PRWCX, SP500, VWELX, VWINX

    These results were in line with expectations. Note that while PRWCX is often in the moderate-allocation category, it is a capital appreciation fund with the goal to beat the SP500 with less volatility, and it has been successful in that.

    PV run is from 01/1987 (without PRWCX, it could run from 01/1985) PV RUN2
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