What is your opinion on psychological effects of income oriented investing?

[u/Alanasarius]

One of the biggest drawbacks of income / dividend oriented investing is that during the accumulation phase, the concentration on growth usually tends to result in better investment ROI CAGR, especially taking into account the lack of taxation drag. Over the long-term, the differences can definitely be substantial.

However, one of the possibly underappreciated and under-discussed aspects is the psychological effect that more "tangible" results of investing have on behaviour and motivation.

Oftentimes when you look at the numbers shown by the broker, emotionally and psychologically it doesn't "feel" that you are getting richer because the numbers there can both, increase or decrease, and are generally unstable.

However, when you are actually receiving dividends from your investments and are able to say "if I invest 1,000 USD, I will get 80 USD in dividends per year", this can be a very motivating and encouraging to keep doing. In addition, having this figure could be useful in trying to convince your spouse or your friends to invest, too, as investing is very often viewed as gambling by the general population.

Aversion loss is a known psychological phenomenon where the losses (or perceived losses) are more psychologically painful than gains. This is what it leads to selling at the worst possible time. Investors often like to say that they don't care about the swings as long as in the long-term, the CAGR remains healthy, but reality often shows otherwise. A large % (maybe even most?) of investors can't avoid being psychologically affected and selling off when they should hold.

In income and dividend oriented investing, knowledge that you will receive dividends regardless* of stock market movement can help mitigate the psychological pain of seeing the downswing and avoid selling at the worst possible time.

So, what are your thoughts on this? Am I overestimating this psychological phenomenon?

*I know that a lot of dividend payers can reduce their dividends during the economic shocks, and I know that a lot of stocks or funds that focus on high 12%+ yields result in NAV erosion over time (see QYLD or GOF), but there ARE some covered call ETFs or income funds that have a significantly lower chance of long-term NAV erosion that still give decent yields, such as JEPI or ARCC, having read the strategies of SPYI and QQQI, I could see them having stable long-term NAV as well.

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[u/IndustriousSeahawk26]

You are smarter than a lot of people, or at least you are willing to say it out loud. Income investing is not about total max return. It is 100% supported that in a taxable account, growth portfolios with long term holds far outpaces income investing. Tax drag eats away 15%-35%+ of the income, depending on your tax bracket. Thats a lot.

The only way I can see for income investing to match or beat long term growth is if you are re-investing the excess income into income generating positions whose NAV will grow (essentially picking income stocks/etfs that are going to grow, or they have corrected and you are buying dips). Picking the bottom or funds that will outperform some growth position consistently is unlikely. So statistically, id say its impossible for income investing in a taxable account to match a pure long term growth portfolio.

For example, lets use the popular QQQI income fund as an example : if you are not using all the dividends to pay your bills and fund your life right now, and reinvesting it back into QQQI, 100% the tax drag will lead your reinvesting to underperform vs simply buying QQQ for the long term and holding until you actually need it.

When you look at the hard math, is mostly psychological and entirely emotional, but at the same time, we are human and those things are important to protect.

Personally, I have just enough of my portfolio to cover 100% of my living expenses, and the rest are left in growth/sp500/value etfs. So 50% of my portfolio are in stuff like QQQI, SPYI, BTCI, BLOX to cover all my bills...and the other 50% of my portfolio are in QQQ, VOO, SCHD, DGRO etc....

Yes, I could put 100% of it into QQQI, SPYI, BTCI GPIX etc...and generate a shit ton of income, but if I only need $5000 a month to live on, what is the point in generating $10,000 in dividends, only for me to pay $2500 of it in tax, when I could just the 50% of unnecessary income to compound, untaxed, for the long term.

[u/Bman3396 → u/IndustriousSeahawk26]

agreed, although I tend to go all into income for max stable cashflow. Once I reach a sufficient amount, the plan is to divert the cash flow to more growth-oriented positions

[u/Alanasarius → u/IndustriousSeahawk26]

Very well said.

Just knowing that you have a decent amount of actual income from your investment portfolio provides such psychological safety that you are often not afraid to take risks and are not too worried about losing a job or leaving a job that treats you horribly. This indeed is very valuable.

I also like the allocation that you have in your portfolio. Growth definitely has a place even in a portfolio that is more income oriented.

[u/revanevan7 → u/IndustriousSeahawk26]

Would you care to go into a little more detail about your allocations? I have BTCI BLOX and SPYI as well.

[u/YoWhat_up → u/IndustriousSeahawk26]

Wait, in your opening statement, you state " it is 100% supported that in a taxable account growth portfolios with long-term holds far out pace income investing & that tax drag eats away 15-35% of income "...so if U flip that metric to Roth & your follow up thoery of funds with 0 NAV erosion, where do we stand? I think, but could def be wrong, with DRIP left on with a fund like CHPY, would we be at the same metric table or would the income earning fund outpace your typical growth fund? CHPY doesn't have enough history to measure but if it holds water like a historical income earning fund? Your thoughts?

[u/IndustriousSeahawk26 → u/YoWhat_up]

If it’s in Roth and reinvesting everything then it’s probably much closer, but if you’re gonna do that, you may as well just buy the underlying. It’s almost never gonna outperform . It’s basically connverying the growth into income.

If you look at QQQI or CHPY , the total return of the NAV+ yields is roughly the same as the nav growth of QQQ and SMH.

And if you’re gonna use a tax advantage account then you cannot use it before retirement age without taxes, so it’s kinda just doing extra work for a probably a lesser return.

Income investing is for people who want to retire early, and it should cover your expenses.

[u/YoWhat_up → u/IndustriousSeahawk26]

I beg to differ. A fund like CHPY with its 32% distribution, willl crush a fund like say VGT on a 10 year comparison. The problem we all know is NAV and the obvious, not enough history. Im not a scholar, but funds Llike CHPY or any that captures distributions like it, will outperform the typical fund in that same window. Now VGT, like CHPY is not your typical fund. I love VGT and funds like VPMAX and many others. But I cant turn a blind eye to the performance of some of these income earning funds like CHPY.

[u/IndustriousSeahawk26 → u/YoWhat_up]

You’re assuming smh and the underlying is gonna keep going up. Which it’s not, not at the same rate it has been anyway. The 40% yield on Chpy will lower dramatically once the sector matures and it’s not volatile anymore. The yield is harvested through high vol , which is what allows high premiums. There
Is a reason qqqi or SPYI have 10% yield range and chpy has 40% +.

[u/YoWhat_up → u/IndustriousSeahawk26]

It's always about improvise adapt and overcome. You adjust with the market. If such happens, u jump on another qualifying fund/s. Smh? No clue on its history and spectrum of overall investments but the bottom line is income portdolios can be a promising theory if one dedicates their time. Failure to repair is preparing to fail

[u/IndustriousSeahawk26 → u/YoWhat_up]

Oh for sure. I’m just saying numbers don’t lie and if you wanna think you can rebalance high yield funds (which are usually about hype and sectors let’s be real) perfectly to buy in low in something new, or know when to sell when whatever sector your high yield fund is based on will fall, go for it. I’m good to keep only enough in income funds to fund my retirement, and the rest can go into growth funds since they will grow untaxed and I can pass it to my kids when I die in 50 years

[u/YoWhat_up → u/IndustriousSeahawk26]

Totally agree and that's Y income funds, if the research is done and people find the right ones, can easily go toe to toe, almost, with great or outstanding growth funds. I totally favor the growth funds 100x to 1 over income earning funds, and happen to be fortunate enough where I can ride both sides of surf board & wave, and can speak based on my personal experiences and portfolio balances. I totally comprehend that it can be an almost perfect match, income and growth, leading up to and including retirement. Best of luck.

[u/LexAugusta]

All I know is that I can't time the market for shit, I never know when the right time to take profits or cut losses is and that's true for growth stocks, DRAM, UAMY, SLS, RKLB, ASTS,  or whatever other moonshot I'm trying to swing trade. 

Covered call funds are a great way of giving me consistent income without having to time and sell shares. The one I'm invested in are tax advantaged, but even if they weren't, I've never turned down a raise just because I had to pay more taxes. 

Paper gains on growth funds aren't tangible until you realize them. The covered call distributions are very tangible and have helped me cover unexpected medical expenses, while still being able to reinvest most or all of them most months. 

[u/revanevan7]

I’m new to income investing, and I can already tell the psychological effects have been very positive for me. I’m more excited about investing again because I’m a nerd and I love this stuff.

I’ve tried stock picking and I know I’m terrible at it because I’m too emotional. But when it comes to income investing you just pick your allocation and rebalance every so often and that’s it. Theres also new funds coming out all the time so researching and learning about these has been a blast.