Income Stream Allocator Examples

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

Early Examples

Here are some conservative examples. I have taken them from my Yahoo Briefcase. They are from my “Income Stream Pictures B” file in my “Allocators” folder. The file contains pictures of the (truncated) spreadsheets. It shows year by year results.

Here are my summaries.

The third investment type was TIPS at 2.5% (real) interest. The comparisons (“was x $s”) are with CDs or money market funds at a fixed 2.5% nominal interest rate instead of TIPS.

ETF initial dividend stocks, reasonable holdings, better allocation.

Stock A: 3% plus 6% growth.
50% stock A/40% Investment B.
Investment B yields 7% (no growth).
$4600 minimum (was $4300) real withdrawals.

ETF initial dividend stocks, reasonable holdings, late growth.

Stock A: 3% plus 6% growth.
55% stock A/35% Investment B.
Investment B yields 7% (no growth).
$4600 minimum (was $4100) real withdrawals.

High initial dividend stocks, reasonable holdings.

Stock A: 4% plus 5% growth.
50% stock A/40% Investment B.
Investment B yields 7% (no growth).
$4900 minimum (was $4700) real withdrawals.

Optimistic Mixture with ETF and annuity or preferred shares:

Stock A: 3% plus 7% growth.
35% stock A/65% Investment B.
Investment B yields 8% (no growth).
$5400 real withdrawals.

CHANGE: $5400 is now the minimum (was $5300). Most withdrawals are between $5400 and $5600.

Dividend investors can reasonably expect to receive perpetual income streams of 4.6% to 5.4% of the original balance (plus inflation).

New Examples

This is a more optimistic version except for the TIPS. This uses TIPS with a 2.0% (real) interest rate (as opposed to 2.5%).

These examples are in my Yahoo Briefcase. They are in my “Income Stream Pictures C” file in my “Allocators” folder. The file contains pictures of the (truncated) spreadsheets. It shows year by year results.

ETF initial dividend stocks, Investment B has a high initial yield.

Stock A: 3% plus 8% growth.
30% stock A/60% Investment B.
Investment B yields 8% (no growth).
$5600 real withdrawals.

Reasonable, but higher growth dividend stocks, high yield Investment B.

Stock A: 3% plus 10% growth.
20% stock A/80% Investment B.
Investment B yields 8% (no growth).
$6000 real withdrawals.

Reasonable, but higher initial dividend stocks, high yield Investment B.

Stock A: 4% plus 8% growth.
25% stock A/75% Investment B.
Investment B yields 8% (no growth).
$6200 ($6100 minimum) real withdrawals.

Optimistic but reasonable, high initial yield (and growing) dividend stocks, with growing high yield Investment B.

Stock A: 4% plus 8% growth.
20% stock A/80% Investment B.
Investment B yields 8% plus 2% growth.
$7000 minimum real withdrawals.

If dividend investors can reach their goals, they will be able to withdraw at least 5.6% of the original balance (plus inflation) indefinitely. The upside potential is 7.0% of the original balance (plus inflation), possibly higher.

Failure Mechanisms

The primary failure mechanism is that dividend amounts will not grow as well as expected. They may even fail to keep up with inflation.

This is a relatively gentle failure mechanism, much better than running out of money altogether.

Investment B’s high initial yield is problematic. There is a possibility that it may be reduced or even eliminated. A reasonable amount of diversification can mitigate this problem.

Conclusions

It is reasonable to plan for withdrawal rates exceeding 5.0%. Even under pessimistic assumptions, a carefully designed dividend focused portfolio permits continual withdrawals of 4.6% of the original balance (plus inflation).

The upside potential is a continual income stream of 7.0% of the original balance (plus inflation).

Failure mechanisms are gentle.

Have fun.

John Walter Russell
January 31, 2007

Yahoo Briefcase