Fluctuating Dividends with a Growth Kicker

I added a growth kicker to an investment with wildly fluctuating dividends. This increases the income stream.

The Income Stream

I added a Growth Kicker to the “Fluctuating Dividends” portfolio. I collected data on my Income Stream Allocator C 02 05 2007. It is TIPS Income Stream Allocator B extended to 50 years.

Fluctuating Dividends

Stock A is the S&P500 variant with an 8% or 0% dividend yield, alternating in four year segments, initially at 8%. Stock A has a 5% per year growth rate (nominal, annualized).

Investment B is a Growth Kicker. Investment B has an initial dividend yield of 4%. Investment B grows at 6% per year (nominal, annualized).

TIPS have a 2.0% real interest rate.

Inflation = 3.0%.

There are no purchases. There are no sales.

The investment return of Stock A = 4%+5%-3% = 6%, which is slightly less than the long term total return of the S&P500. NOTE: 4% = one half of (8% + 0%).

The investment return of Investment B = 4%+6%-3% = 7%, which is slightly more than the long term total return of the S&P500.

As in my earlier Income Stream studies, I neither bought nor sold any shares of stock. I used a TIPS account on the side with 2% (real) interest to steady cash withdrawals.

Withdrawal Rates

Initial Allocation: 50% Stock A, 50% Investment B, 0% TIPS.
Withdrawal Rate: 4.3% real, growing in 8 year increments, 4.8% from Years 9 through 16 and so forth.

Initial Allocation: 40% Stock A, 40% Investment B, 20% TIPS.
Withdrawal Rate: 5.2% real through year 24. Then it jumps to 6.0% and grows.

Initial Allocation: 30% Stock A, 50% Investment B, 20% TIPS.
Withdrawal Rate: 5.2% real through Year 20. Then it jumps to 5.5% through Year 28. Then it jumps above 7.0% and grows.

Initial Allocation: 35% Stock A, 45% Investment B, 20% TIPS.
Withdrawal Rate: 5.2% real through Year 24. Then it jumps to 6.0% and grows.

Initial Allocation: 50% Stock A, 30% Investment B, 20% TIPS.
Withdrawal Rate: 5.1% real through Year 24. Then it jumps to 6.7% and grows.

I have placed pictures of truncated spreadsheets into my Yahoo Briefcase. They are Microsoft Word documents. They are the “Income Stream Pictures M” file in my “Allocators” folder.

Yahoo Briefcase

Analysis

The Growth Kicker helped.

I was able to maintain a withdrawal rate of 5.2% of the original balance (plus adjustments for inflation) by including the Growth Kicker.

Without the Growth Kicker, I had been able to withdraw 4.9% (plus inflation).

Have fun.

John Walter Russell
March 6, 2007