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.
Augmented Dividends Strategy

Required Growth Rates

If we start with a 3.0% dividend yield:

Dividend Growth Baselines shows that a 1.0% real dividend growth rate is sufficient for you to withdraw 3.5% to 3.6% of your original portfolio balance (plus inflation) far into the indefinite future.
Dividend Growth Baselines

Dividend Growth to the Rescue shows that a 2.5% real dividend growth rate is sufficient for you to withdraw 4.0% of your original portfolio balance (plus inflation) far into the indefinite future.
Dividend Growth to the Rescue

Since inflation averages around 3.0% per year, the required nominal dividend growth rates are 4.0% and 5.5%.

Simple Calculations

Growth terms correspond to multiplication by (1+growth rate)^(number of years).

If your dividends grow by 4% per year, after 5 years, the multiplier is 1.04^5 = 1.217. After 10 years, the multiplier is 1.04^10 = 1.480.

If your dividends grow by 5.5% per year, after 5 years, the multiplier is 1.055^5 = 1.307. After 10 years, the multiplier is 1.055^10 = 1.708.

In my studies, I assumed an initial dividend yield of 3.0%.

An initial 3.0% dividend yield becomes 3.0%*(the multiplier) in the equations. At 4% nominal growth, the dividend amount increases to 3.0%*(1.217) = 3.65% of the original balance at Year 5 and 3.0%*(1.480) = 4.44% of the original balance at Year 10. Similarly, at 5.5% nominal growth, the dividend amount increases to 3.0%*(1.307) = 3.92% of the original balance at Year 5 and 3.0%*(1.708) = 5.12% of the original balance at Year 10.

Applications

If you can get an initial yield of 3.65% or more, you do not need any dividend growth prior to Year 5 to satisfy the requirements for withdrawing 3.5% to 3.6% (plus inflation) throughout the first 5 years.

If you can get an initial yield of 3.92% or more, you do not need any dividend growth prior to Year 5 to satisfy the requirements for withdrawing 4.0% (plus inflation) throughout the first 5 years.

If you can get an initial yield of 4.44% or more, you do not need any dividend growth prior to Year 10 to satisfy the requirements for withdrawing 3.5% to 3.6% (plus inflation) throughout the first 10 years.

If you can get an initial yield of 5.12% or more, you do not need any dividend growth prior to Year 10 to satisfy the requirements for withdrawing 4.0% (plus inflation) throughout the first 10 years.

Conclusions

Even the most conservative investor can realistically withdraw 3.5% to 4.0% (plus inflation) for the first 5 to 10 years. All that he has to do is get an initial dividend yield in the range of 3.65% to 4.44% (for Year 5) and 3.92% to 5.12% (for Year 10). Any dividend growth is a bonus.

These levels are within the reach of income investors in today’s market.

Have fun.

John Walter Russell
January 4, 2007