Dividend Baseline (Edited)

Here is a baseline for dividend strategies.

It dramatically outperforms fixed allocation, liquidation strategies.

S&P500 Baseline

Here are the ingredients of the total return of the S&P500:

Historically, the dividend yield has been 4% to 5%. Today’s low dividend yield is unusual.

The S&P500 nominal dividend growth rate has been remarkably stable at 5% per year since 1950 (actually, since the 1940s).

My Dividend Baseline

If we were to purchase every stock in the S&P500 index that pays dividends and none of the others, we would receive exactly the same dividend amount at the same dividend growth rate. This would increase our initial dividend yield.

[Technically, this is an approximation. It is not exactly true. Some companies add new dividends. Others stop paying dividends.]

Today’s S&P500 dividend yield is just below 2%. A reasonable dividend baseline has a yield of at least 3%. It retains the S&P500’s 5% per year nominal dividend growth rate.

With a dividend strategy, you do not sell shares to increase your income. There is no Speculative Return adjustment to the income stream.

There is still a 3% to 4% adjustment for inflation.

The dividend baseline has a 3% to 4% initial dividend yield. The nominal dividend growth rate is 5%. The real dividend growth rate is 1% to 2%.

My Income Stream Baseline

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).

Have fun.

John Walter Russell
Original: February 18, 2007
Edited: December 23, 2007