General Topics starting from January 17, 2007

Updated: February 28, 2007.

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.

Dividends and the Gordon Model
Edited Dividends and the Gordon Model

Retiree Needs

A retiree needs a steady income stream that grows faster than inflation. He needs an income stream that is isolated from the whims of the market. He needs income that lasts indefinitely.

Dividend based strategies satisfy this need.

Retiree Needs

Understanding R-Squared

Here is a non-technical explanation of the correlation coefficient R and its square, R-Squared.

In Version A I have added material to assist readers with technical training.

Understanding R-Squared
Understanding R-Squared Version A

Disturbing Numbers

I have looked at my Gordon Model data to investigate Investment Returns. I do not like what I see.

Disturbing Numbers

Disturbing Numbers Follow On

I have continued looking at the data. I have established new standard values for use in studies.

Disturbing Numbers Follow On

S&P500 Dividend Growth

The best way to characterize S&P500 Dividend Growth is to make no adjustment for inflation. The best time period to use is post-1950. The best rate to use is from 4.8% to 5.0% per year.

S&P500 Dividend Growth

Using the TIPS Income Stream Allocator B

I have built a spreadsheet to help with income portfolios. This tells you how to use it.

Income Stream Allocator
Using the TIPS Income Stream Allocator B

Income Stream Allocator Examples

I have run some numbers. They are impressive. Dividend strategies offer a tremendous potential.

Income Stream Allocator Examples

Dividend Based S&P500 Allocation

I am creating a baseline with my TIPS Income Stream Allocator B. Based on today’s S&P500 dividend yield, which is less than 2%, the best S&P500 stock allocation is zero.

Dividend Based S&P500 Allocation

More Income Stream Allocator Examples

I have collected another set of examples using my TIPS Income Stream Allocator B. I selected two holdings from the Morningstar Dividend Investor. I wanted to translate optimistic, but realistic, estimates of dividend yields and growth rates into information about income streams.

I included a sensitivity study related to income stream shortfalls.

More Income Stream Allocator Examples

Many Alternatives

I have developed many alternatives. A retiree can pick and choose among them to suit his personality and to satisfy his needs.

Many Alternatives

Botched Early Retirement

Suppose that you retire early. Suppose that you botch your withdrawals. What does it take to get back on track?

Botched Early Retirement

Botched Early Retirement Special Example A-1

Suppose that you retire early using a dividend strategy. Suppose that your investments do much worse than you had expected. You require a continual income stream of 5.0% of your initial balance (plus inflation).

Going back to work for 5 years solves your problem.

UPDATE (February 16, 2007): Special Example A-2

Withdrawing 4.0% of the original balance (plus inflation) for the first seven years accomplishes the same goal. Download the details from the Allocators folder in my Yahoo Briefcase. It is a Microsoft Word document. It is the Special Example A-2 file.

Botched Early Retirement Special Example A-1

Dividend Baseline

Here is a baseline for dividend strategies.

It dramatically outperforms fixed allocation, liquidation strategies.

Dividend Baseline

Dividend Growth versus Liquidation

Early retirees should adopt dividend strategies. They are vastly superior to the traditional, fixed allocation, liquidation strategies that depend on capital appreciation.

Dividend Growth versus Liquidation

Capturing the Investment Return

Dividend strategies are best. They allow you to capture the investment return.

Capturing the Investment Return
Capturing the Investment Return Follow Up

Initial Yield versus Dividend Growth

I have compared several combinations of the initial dividend yield and dividend growth rate while keeping their sum (the Investment Return) constant. In terms of generating an income stream, starting with a higher yield is better.

Closer examination reveals that a faster growth rate necessarily leads to capital appreciation. This clouds the issue. There is no clear cut winner.

Initial Yield versus Dividend Growth

Simple Path to 5%

Even in today’s market, it is simple and straightforward to obtain a 5% withdrawal rate that keeps up with inflation. Here are the requirements.

Simple Path to 5%

Why It Works

Smoothing the Income Stream increases today’s Safe Withdrawal Rate to 5%, well above the 4% that is claimed traditionally. We can do even better. It doesn’t stop there.

This is why it works.

Why It Works

Flaws in the Traditional Theory

The traditional theory is hopelessly flawed. It leads to unnecessary and costly mistakes. It can lead to busted retirements.

Flaws in the Traditional Theory