Edited Important Posts Starting September 10, 2006

Updated: December 18, 2007.

Edited: 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.

Edited: E10 or D10?
E10 or D10?

Edited: Slowly Rising Earnings

Today’s market is expensive. P/E10=27.6.

There are lots of ways for earnings to return to historical levels. What if prices remained stagnant while earnings continued to grow?

Would it happen? Could it happen? What would be the consequences?

Edited: Slowly Rising Earnings
Slowly Rising Earnings

Edited: 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.

Edited: Sideways Market Sound Bite
Sideways Market Sound Bite

Edited: Maintenance Stage Survey

The maintenance stage occurs after you have accumulated enough funds but before you make withdrawals.

I conducted a brief survey using three approaches: switching allocations in accordance with P/E10, maintaining a fixed 50%-50% allocation of stocks and TIPS and keeping everything in stocks. I made an excursion by introducing Latch and Hold.

Careful analysis shows that varying allocations is best. Latching onto bargains and holding them for several years is better than mindlessly cutting back as soon as prices rise.

Edited: Maintenance Stage Survey
Maintenance Stage Survey

Edited: Returns, Not Equity Premiums

The Stock-Return Predictor determines the real, annualized, total return of the S&P500 as a function of P/E10 (actually, 100E10/P).

This is superior to estimating nominal, annualized, total returns. This is vastly superior to estimating equity premiums.

Edited: Returns, Not Equity Premiums
Returns, Not Equity Premiums

Edited: Time Needed to Assure a Gain

We are assured that stocks will show a gain, eventually, even after adjusting for inflation.

How long do we have to wait? So far, the longest delay for the S&P500 has been 18 years. How about a confidence interval?

Edited: Time Needed to Assure a Gain
Time Needed to Assure a Gain

The 4% Shocker

I need to bring this article out from obscurity. It is important. It is relevant still.

It predates this web site. It was my first Edited Post. It was buried inside of Apples and Pears in the Guidelines section.

The old adage, which I am guilty of repeating, that withdrawing 5% of a portfolio’s current balance is roughly equivalent to withdrawing 4% of its initial balance (plus inflation) is false.

The 4% Shocker

Edited: 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.

Edited: Dividend Growth Rates
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.

Edited: 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.

Edited: Subdued Dividend Growth
Subdued Dividend Growth

Edited Dividends and the Gordon Model

Dividend yields vary all over the place because prices vary. Prices depend upon current human perceptions. Dividend amounts are stable. Dividend amounts depend upon business activity.

A retiree can reasonably expect to see his initial dividend amount grow by 2.8% each year in addition to inflation.

Edited Dividends and the Gordon Model
Dividends and the Gordon Model

Edited: Taken At Face Value: Upside

Once again, I have taken the Morningstar Dividend Investor newsletter at face value. Last time, I was conservative. This time, I assume that they meet the upside of their growth levels.

Edited: Taken At Face Value: Upside
Taken At Face Value: Upside

Edited: Building On a 45-Year Retirement

Previously, I showed how to reach Year 45 with a traditional approach using my calculators. You could withdraw 4.5% of your original balance (plus inflation).

This time, I paid closer attention to the human element. I introduced Benjamin Graham’s constraint. I kept both stock and bond allocations between 25% and 75%. You can withdraw 4.2% (plus inflation).

Edited: Building On a 45-Year Retirement
Building On a 45-Year Retirement

Edited: Denial Is Expensive

Ignoring our cutting edge research can be expensive.

Note: We have advanced beyond this point using dividend and income strategies.

Edited: Denial Is Expensive
Denial Is Expensive