Dividend Based S&P500 Allocation

I am creating a baseline with my TIPS Income Stream Allocator B. Based on today’s S&P500 dividend yield, which is less than 2%, the best S&P500 stock allocation is zero.

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I am creating a baseline with my TIPS Income Stream Allocator B. I thought that the S&P500 would make a good choice for stocks.

It currently has a dividend yield just under 2% and, for the last half century, it has had an amazingly steady 5% nominal dividend growth rate.

I credited Investment B with a 6% initial yield and zero growth, similar to a corporate bond or a Single Payment Immediate Annuity for a younger retiree.

I used 2% (real interest rate) TIPS ladder in a side account to smooth out cash flows. I started with $100000. I set inflation at 3%.

I lived off dividends and interest and nothing else. I never sold anything (except TIPS).

I sought to deliver 30 years of income at the “traditional” 4.0% (real) withdrawal rate. Many advocates of conventional studies “claim” (incorrectly) that this is safe even at today’s valuations.

The best allocation was 0% stocks and 100% Investment B. This is in stark contrast to what happens when you consider a dividend oriented stock investment. Even an investment with 3% initial yield and 5% growth delivers $4000+ per year for 33 years. In that case, the best starting allocation that I identified was 45% Stock A, 45% Investment B and 10% TIPS.

The remaining income stream at Year 34 was $2262 (real). This compares very favorably to a 100% TIPS approach which, at 2% (real) interest, delivers 4% annually for 35 years before running out of money. At Year 34, the remaining principal would be just under 8%.

I have made pictures of both (truncated) spreadsheets. They are Microsoft Word documents. Download the Income Stream Pictures D and Income Stream Pictures E files in my Allocators folder.

Have fun.

John Walter Russell
February 1, 2007

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