A Special Kind of Investment Addendum

I collected more data with the higher dividend yield version of Investment B. I looked at the effect of slower dividend declines.

This confirms earlier observations.

Changes

Previously, I assumed a 13% initial dividend yield and a -5% per year dividend growth rate (nominal loss, annualized).

Investment B1
Yield = 13%.
Growth = -5% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 13-5-3 = 5% (annualized).

I have kept this version. I call it version C1.

I have introduced C2, which has a -3% per year dividend growth rate (nominal loss, annualized), and C3, which has a -1% per year dividend growth rate (nominal loss, annualized).

Variations

Growth Kicker 1: Stock A
Yield = 4%.
Growth = 6% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 4+6-3 = 7% (annualized).

Growth Kicker 2: Stock A
Yield = 3%.
Growth = 8% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 3+8-3 = 8% (annualized).

Growth Kicker 3: Stock A
Yield = 2%.
Growth = 10% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 2+10-3 = 9% (annualized).

AND

Investment C1=B1
Yield = 13%.
Growth = -5% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 13-5-3 = 5% (annualized).

Investment C2
Yield = 13%.
Growth = -3% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 13-3-3 = 7% (annualized).

Investment C3
Yield = 13%.
Growth = -1% per year (annualized).
Inflation = 3% per year (average).
Investment Return = 13-1-3 = 9% (annualized).

TIPS Account

I put money into and drew money out of a TIPS account to maintain a steady cash flow (after adjusting for inflation). The TIPS had a 2% real interest rate.

Results

There were no purchases or sales of either Stock A or Investment C. Any excess in dividends and interest was invested into the TIPS account. Any deficit needed for a withdrawal was taken from the TIPS account. The allocation percentages are initial allocations.

Baseline Combination:
Growth Kicker 1: Stock A: 60%.
Investment B1=C1: 40%.
2% TIPS: 0%.
Withdrawal Rate: 5.8% real.

Growth Kicker 1: Stock A: 70%.
Investment C2: 30%.
2% TIPS: 0%.
Withdrawal Rate: 6.0% real.

Growth Kicker 2: Stock A: 50%.
Investment C2: 50%.
2% TIPS: 0%.
Withdrawal Rate: 6.3% real.

Growth Kicker 3: Stock A: 40%.
Investment C2: 60%.
2% TIPS: 0%.
Withdrawal Rate: 6.2% real.

Growth Kicker 1: Stock A: 60%.
Investment C3: 40%.
2% TIPS: 0%.
Withdrawal Rate: 6.8% real.

Growth Kicker 2: Stock A: 50%.
Investment C3: 50%.
2% TIPS: 0%.
Withdrawal Rate: 7.0% real.

Growth Kicker 3: Stock A: 30%.
Investment C3: 70%.
2% TIPS: 0%.
Withdrawal Rate: 7.1% real.

I have placed pictures of the (truncated) Excel spreadsheet into my Yahoo Briefcase. They are Microsoft Word documents. They are in the “Income Stream Pictures P” file of the “Allocators” folder.

Yahoo Briefcase

Analysis

The TIPS balance should start at zero in all instances. Investment B has a high enough yield to permit this and it has a higher Investment Return than the TIPS.

Notice the interaction between Investment C and the Growth Kicker (investment type Stock A).

With Investment C1=B1 (13% yield, -5% dividend growth), Growth Kicker 1 was best. It has an initial yield of 4% and a 6% per year dividend growth rate.

With Investment C2 (13% yield, -3% dividend growth), Growth Kicker 2 was best. Growth Kicker 2 has an initial yield of 3% and an 8% per year dividend growth rate.

With Investment C3 (13% yield, -1% dividend growth), Growth Kicker 3 was best. It has an initial yield of 2% and a 10% per year dividend growth rate.

The highest withdrawal rate with Investment C1=B1 was 5.8% (real, including adjustments to match inflation). The highest withdrawal rate with Investment C2 was 6.3% (real). The highest withdrawal rate with Investment C3 was 7.1% (real).

The best combination of the initial dividend yield and growth rate of the Stock A type investment depends on the (initial dividend yield and) dividend growth rate of the type B or C investment. You can match a lower dividend loss rate in Investment type C with a higher dividend growth rate in investment type Stock A even at a lower initial dividend yield.

Additional Comments

This confirms earlier observations.

It is best to match investments in pairs: a Stock A investment type and an investment type B or C. The best choice for Stock A will vary depending upon the details of the higher initial yield investment, type B or C.

Have fun.

John Walter Russell
March 12, 2007