Dividend-Based Strategies starting September 7, 2006
Updated: January 4, 2007.
Dividends versus Capital Appreciation
Which is more important to retirees? Dividends or capital appreciation? Or does it make a difference?
Answer: Dividends. They are much more reliable.
Dividends versus Capital Appreciation
E10 or D10?
Professor Robert Shiller’s P/E10 does a great job when calculating Safe Withdrawal Rates. Sometimes, using dividends (P/D10) is even better.
E10 or D10?
Edited: E10 or D10?
Capitalization Weighting of What?
This exposes the underlying fallacy related to Sharpe’s Theorem that capitalization weighting matches the return of the market as a whole. It incorporates Dr. Hussman’s observation that money can never enter nor leave the market as a whole.
What has been missing? What is the critical oversight? Dividends.
Capitalization Weighting of What?
Dividend Growth to the Rescue
Here is an alternative calculation of the worst case outcome of a 50% stocks-50% TIPS portfolio.
(Nominal) dividend growth rates of 5.0% to 5.5% are sufficient to support younger retirees.
Dividend Growth to the Rescue
Guessing the Future
Prices are high. P/E10=27.6. There are many ways for valuations to return to normal. Yet, discerning the best course of action is remarkably straightforward.
Guessing the Future
Sideways Market Sound Bite
If stock prices remain steady and if valuations return to reasonable levels through earnings growth, the best stock allocation for dividend investors will be a toss up.
Dividend investors who own TIPS as well as stocks will do well if prices drop faster. They will be able to replace their TIPS with stocks at more attractive yields.
Sideways Market Sound Bite
Edited: Sideways Market Sound Bite
Dividend Growth Baselines
What is the absolute worst case withdrawal rate when you own TIPS and high quality dividend stocks?
Between 3.5% and 3.6% of the original balance (plus inflation). It lasts indefinitely, far into the future.
You may choose an initially high stock allocation that emphasizes a growing dividend income stream. You may prefer to start with a lower initial stock allocation, which leaves you with the ability to pick up bargains in the future. All tradeoffs are attractive.
Dividend Growth Baselines
Dividend Growth Rates
I have collected real, annualized 5, 10, 15, 20, 25, 30, 40, 50, 60 and 100 year dividend growth rates of the S&P500. Dividend growth has been more volatile than I expected.
Dividend Growth Rates
Edited: Dividend Growth Rates
Addendum:
I examined the single-year payout ratio [D/E], the average of five years of single-year payout ratios [Average (D/E)] and the ratio of the average of five years of dividends to the average of five years of earnings [Average(D)/Average(E)]. All three conditions produce similar results in the modern (post 1950) era.
The scatter increases with the payout ratio. As long as the payout ratio is below 50%, the downside risk is quite limited. The worst case loss at 5 years was less than -2% per year annualized. The worst case loss at 10 years was -0.6% with a single-year payout ratio. The worst case was 0% when using the averages.
Today’s single-year payout ratio is around 30% to 35%.
Because of today’s low payout ratio, I expect today’s dividends to grow faster than inflation, reliably.
Subdued Dividend Growth
Dividend growth can rescue retirement portfolios. In this investigation, I looked at history to identify failure mechanisms. I looked for conditions that have subdued real dividend growth.
I found that today it is not a matter of business fundamentals. It is a matter of discretion: how corporations treat their shareholders.
Subdued Dividend Growth
Edited: Subdued Dividend Growth
Augmented Dividends Strategy
Even the most conservative retiree can design a portfolio to withdraw 3.5% of his original balance (plus inflation) far into the distant future. He can withdraw 4.0% of his original balance (plus inflation) comfortably at minimal risk.
Augmented Dividends Strategy
Guaranteed Augmented Dividends
You have read Augmented Dividends Strategy. I wrote:
“Even the most conservative retiree can design a portfolio to withdraw 3.5% of his original balance (plus inflation) far into the distant future. He can withdraw 4.0% of his original balance (plus inflation) comfortably at minimal risk.”
Satisfying the requirements may be easier than you think. You can lock in the first 5 to 10 years today, without risk.
Guaranteed Augmented Dividends
Dividend-Based Strategies through September 2, 2006
New Search Feature, Dividend-Based Strategies Overview, The TIPS-Dividend Approximation, Dividend Growth Basics, Books, Valuations and Dividend-Based Strategies, Dividends and True Buy-and-Hold Investing, Adding a Dividend-Only Extension, Refusing to See: Dividends, Dividend Growth Projections, Dividend-Based Design Example, Lessons from the Dow Jones Utilities, Historical Perspective: Dividends and Earnings, What Do I Really Think About Dividends?, What If There Is A Bubble?, Revisiting P/E10: Dividends, Dividend Calculators A and B, Dividend Growth Sensitivity Study, Three Powerful Advantages of Dividend Strategies, CTVR Calculator A, Dividend Investors, Why Dividends Are Better.
Dividend-Based Strategies through September 2, 2006