Letters to the Editor

Dow Jones Utility Index

I received this letter from Unclemick. He refers to himself as Unclemick - the Norwegian widow dividend guy. The Norwegian widow lived on dividend checks. She was the one person in his neighborhood who always paid the kids with cash as soon as they finished mowing her lawn.

Given the current 'discovery by financial media' of dividends - one more time - presumably propelled by the recent tax cut and somewhat lackluster 5-year performance of the more 'popular' indexes.

Data started on Dow Utilities January 1929.

Have you lent any creative thought to examining any portfolio survival examinations incorporating said index?

The usual suspects: gold, commodities, international and the 'newer dividend products rolled out by Wall Street' have seen media.

Any way to look at something with a reasonably long string of data like Dow Utilities and glean some insight.

This is my response:

Thanks for a great suggestion.

I intend to put the Dow Jones Utilities average into some calculators, probably those that use Gummy’s database. This opens up all sorts of possibilities. You may be familiar with Lowell Miller’s recommendation in The Single Best Investment to use utilities and/or other stable, high dividend stocks as a substitute for bonds in a traditional portfolio. I would like to know what the numbers say about his approach.

I was able to download a complete set of prices from Yahoo Finance, but NO DIVIDEND DATA. The best dividend information that I have found so far is a chart of yields:

Dow Jones Utilities Dividend Yields

What I would prefer is a TABLE of dividend AMOUNTS. If anyone can provide me with a publicly available source, I would appreciate it.

If necessary, I will manually translate dividend yields on the chart to approximations of annual dividend amounts. I would prefer something less tedious and more accurate.

In any event, I looked at what I had done already with the S&P500 and I have identified at least one gap. Until now, I had examined dividend yields and portfolio prices but not dividend amounts as such. Since the Norwegian widow held onto her stocks, she was more interested in dividend amounts than in capital gains from trading.

We know that dividend amounts should grow with earnings, correlated with the overall economy, and especially with smoothed earnings. We know that this should keep up with inflation, as a minimum. From experience, we know that dividend amounts grow faster than inflation.

In theory, dividend amounts should not depend on prices, BUT THEY DO. I will be trying to take advantage of the Dow Jones Utilities average in the near future. But for now, read this article about Dividend Growth Projections.

Dividend Growth Projections

I have followed up my initial investigation by looking at NOMINAL dividends. The growth of nominal dividends has been virtually independent of valuations.

Nominal Dividend Growth

Unclemick is onto something.

Check out the Dow Jones Utilities average at CBS Marketwatch. They have assigned it a symbol of 26099801.

Compare its prices at 5 years and with ALL DATA to those of the S&P500 and the Dow Jones Industrial Average. It beats both of them! This is without counting dividends!

Lessons from the Dow Jones Utilities

Here is how you can achieve a 4.0% to 4.8% (plus inflation) perpetual safe withdrawal rate.

Lessons from the Dow Jones Utilities

Thanks! from BillW.

I received this letter from BillW.

I just came across your website. Congratulations on creating an excellent resource for persons (like me) interested in early retirement. I remember Peter Lynch publishing an article many years ago that advocated a very high withdrawal rate (and a subsequent debate where Lynch reconsidered and recommended a 5% withdrawal rate versus his initial recommendation of 7% (if I remember correctly)).

Although I have the utmost respect for Lynch's stock-picking ability, something struck me as wrong, having lived through the late-60s bubble and subsequent unraveling, especially after 1974. Your focus on the level of valuation at the start of retirement is what I've been looking for. Three questions:

1. To avoid substantial stock declines early in retirement, I've been thinking about maintaining at least 5 years worth of cash in a money market account (or TIPS ladder) to satisfy living expenses. And to replenish the cash safety net by a combination of dividends, TIPS coupons, and slow liquidation of dividend-paying stocks. Thus maintaining 5 years worth of liquid funds over time. What are your thoughts?

2. At the current time, what would be the necessary value of the S&P 500 index that would indicate a purchase point, based on the PE10 criteria? I tried to work through it and got a value of 845, but I didn't know if I was doing something wrong.

3. What are your thoughts on taking Social Security benefits at age 62 (75% of full benefits) versus age 66 (full benefits)?

Here is my response:

I had originally thought along the same lines as you. I had thought that the best idea was to draw down the cash holdings to make it through. I was wrong.

I have extracted this from Current Research A. Fundamental Breakthroughs associated with TIPS.

Current Research A

UPDATE

I have extracted this from my TIPS Ladder Survey:

We need to change our statement about what kills retirement portfolios. It is selling stocks at depressed prices during the short-run that kills retirement portfolios.

Over longer periods of time, you are better off adjusting your allocations in accordance with the intrinsic value of your holdings. In our investigations into switching stock allocations, we found that P/E10 is the best among several good indicators of intrinsic value over the intermediate-term.

In this case, you should add to your stock holdings when P/E10 is low and/or dividend yields are high. You should reduce your stock holdings when P/E10 is high and/or dividend yields are low.

But you should look for good prices when you make your shorter-term changes. Allow yourself two or three years to get a reasonable stock price. Stay away from panic selling. Wait for prices to recover to a reasonable level, but possibly substantially lower than when you started.

What you are trying to do in the short-term is to get something close to an average stock price (when measured over one or two years). You are not demanding a good price. You are only avoiding a bad price. By waiting a year or two, if necessary, you are taking advantage of volatility in the market. You are waiting for prices to recover somewhat.

Your are not demanding that they recover completely.

Regarding your concern about an entry point:

Consider Current Research B. Keeping In Tune with the Human Element. There is little penalty for following Benjamin Graham’s recommendation to maintain stock and bond allocations between 25% to 75%.

I wrote an article about this recently.

Historical Perspective

Newspaper columnist Scott Burns recently wrote about Social Security payments. He favors waiting as long as you can. You get an outstanding rate of return with little risk.

Scott Burns's Web Site

I refer you to his December 13, 2005 column. The archives list the date as December 11, 2005.

Scott Burns about When to Receive Social Security

“If we look at the lost immediate benefits as an investment, a year of benefits gives us a lifetime inflation-adjusted annuity equal to 8.0 percent of the benefits we opted not to take. That's figured by assuming we give up $1,000 a month in benefits for a year ($12,000) to receive a lifetime benefit increase of $80 a month ($960 a year).”

“Can we get that from a conventional investment?”

“Not a chance. As I pointed out in the earlier column, an 8 percent initial withdrawal rate, adjusted upward for inflation each year, is likely to destroy an investment portfolio well before life expectancy.”

Dividend Theory vs. Dividend Reality

I received this letter from Rob.

You say in response to a recent letter: "In theory, dividend amounts should not depend on prices, BUT THEY DO." Can you point me to an article at your site at which the mismatch between dividend theory and dividend reality is discussed in more detail?

I'm always interested in discovering how it comes to be that people believe things that are not so because those discoveries often point to fundamental analytical errors and corrections of fundamental analytical errors often generate big pay-offs.

Here is my Response.

The best discussions are the Dividends section and in the Books section. Refer to this article in particular:

Dividend-Based Strategies

I am especially partial to the writings of David Dreman, Lowell Miller and James O'Shaughnessy.

The following is from pages 214 and 215 of Lowell Miller’s The Single Best Investment:

“..Interestingly, though many academics had suggested that companies that raise their dividends would decrease their capital expenditures (or at least not increase investments), the authors [Denis, Denis and Sarin] found that just the opposite is true. Companies that increase their dividends are more likely to increase their reinvestment in the business, and companies that decrease their dividends are more likely to reduce capital expenditures. The conclusion is inescapable: companies that increase their dividends are companies that are making money—enough to run a thriving business and enough to share with stockholders in the here and now as well.”

There is a huge gulf between what people typically assume and to what the data actually reveal.

Breakthrough!!!

All of this discussion about dividends, getting started and separating fact from fiction has led me to write a Dividend-Based Design Example.

This was my first attempt at dividend-based design. I made a breakthrough along the way.

This approach delivers 4.0% (plus inflation) far into the future. The downside risk is a four year reduction of 5%, which would be a withdrawal rate of 3.8% (plus inflation), followed by 4.0% or more (plus inflation).

How is that for today's early retiree? Or for a traditional retiree?

I have followed this up with the Dividend-Based Design Outline and the Dividend Sound Bite. The withdrawal rate is up to 4.8%, safely and perpetually, starting with today's market.

Dividend-Based Design Example
Dividend-Based Design Outline
Dividend Sound Bite

More for BillW

I have better numbers for S&P500 thresholds. I am very specific in my second article.

What Should You Do?
What Should You Do: Addendum?

Dow Jones Utilities Follow Up

I have built a new calculator, the Deluxe Calculator V1.1A08aUM01. I call it the Unclemick 01 Calculator for short.

See the SWR Calculators section for details.

I will be using this calculator in a new Current Research section.

Have fun.

John Walter Russell
January 21, 2006