Dividend Baseline: Expanded

Here are variations around my Dividend Baseline.

There are no purchases or sales. All income comes from dividends and interest. The TIPS account allows you to stabilize the income stream.

Original Findings

This is what I did previously.

I made an analogy with the S&P500 index. I raised the yield from just under 2% to 3% or 4% by eliminating stocks that pay no dividends. I included a 3% adjustment for inflation. The nominal dividend growth rate was 5%, the same as the S&P500 since the 1950s. The real dividend growth rate was 1% to 2%.

I brought up my TIPS Income Stream Allocator B. I used 2% TIPS. I allocated 80% to Stock A and 20% to TIPS and 0% to Investment B.

I discovered that an initial Stock A dividend yield of 3% supports continual withdrawals of 3.95% of the initial amount (plus inflation).

I discovered that an initial Stock A dividend yield of 4% supports continual withdrawals of 4.95% of the initial amount (plus inflation).

Dividend Baseline

Expanded Baseline

Here are additional conditions base on an initial dividend yield of 3.0%.

Stock A allocation=50%, TIPS allocation=50%.
Withdrawal rate: 3.9%.

Stock A allocation=60%, TIPS allocation=40%.
Withdrawal rate: 4.0% through Year 32. Temporary drop to 3.6%, then growing to 3.8% at Year 40.

Stock A allocation=70%, TIPS allocation=30%.
Withdrawal rate: 4.0% through Year 30. Temporary drop to 3.9%, then growing to 4.0% at Year 35 and 4.4% at Year 40.

Stock A allocation=80%, TIPS allocation=20%.
Withdrawal rate: 3.9% through Year 18. Then jumping to 4.1% at Year 19 and growing to 5.0% at Year 40.

Stock A allocation=90%, TIPS allocation=10%.
Withdrawal rate: 3.7% through Year 15. Then jumping to 4.0% at Year 16 and growing to 4.1% at Year 21 and 5.7% at Year 40.

I have posted pictures of the truncated spreadsheets in the “Income Stream Pictures K” file the “Allocators” folder in my Yahoo Briefcase. They are available to Everyone as a free download.

Yahoo Briefcase

Observations

None of these conditions allowed me to increase the continual withdrawal rate to 4.0% (plus inflation) throughout the entire period. With effort, I can get 3.95% (plus inflation). Arguably, a 70% initial allocation is a little bit better than 80%.

The cash flow management account is necessary to allow dividends to grow. You can see what happens when it is too small. It was responsible the 90% stocks - 10% TIPS results.

These are baseline conditions. Adding a high yield Investment B would have helped tremendously.

Have fun.

John Walter Russell
March 4, 2007