New Posts starting from December 2, 2006

Updated: January 14, 2007.

Slowly Rising Earnings

Today’s market is expensive. P/E10=27.6.

There are lots of ways for earnings to return to historical levels. What if prices remained stagnant while earnings continued to grow?

Would it happen? Could it happen? What would be the consequences?

Slowly Rising Earnings
Edited: Slowly Rising Earnings

Guessing the Future

Prices are high. P/E10=27.6. There are many ways for valuations to return to normal. Yet, discerning the best course of action is remarkably straightforward.

Guessing the Future

Sideways Market Sound Bite

If stock prices remain steady and if valuations return to reasonable levels through earnings growth, the best stock allocation for dividend investors will be a toss up.

Dividend investors who own TIPS as well as stocks will do well if prices drop faster. They will be able to replace their TIPS with stocks at more attractive yields.

Sideways Market Sound Bite
Edited: Sideways Market Sound Bite

Maintenance Stage Survey

The maintenance stage occurs after you have accumulated enough funds but before you make withdrawals.

I conducted a brief survey using three approaches: switching allocations in accordance with P/E10, maintaining a fixed 50%-50% allocation of stocks and TIPS and keeping everything in stocks. I made an excursion by introducing Latch and Hold.

Careful analysis shows that varying allocations is best. Latching onto bargains and holding them for several years is better than mindlessly cutting back as soon as prices rise.

Maintenance Stage Survey
Edited: Maintenance Stage Survey

Returns, Not Equity Premiums

The Stock-Return Predictor determines the real, annualized, total return of the S&P500 as a function of P/E10 (actually, 100E10/P).

This is superior to estimating nominal, annualized, total returns. This is vastly superior to estimating equity premiums.

Returns, Not Equity Premiums
Edited: Returns, Not Equity Premiums

Elements of Success

I have had a tremendous amount of success. Why me? Why weren’t all of my findings discovered years ago?

Elements of Success

Time Needed to Assure a Gain

We are assured that stocks will show a gain, eventually, even after adjusting for inflation.

How long do we have to wait? So far, the longest delay for the S&P500 has been 18 years. How about a confidence interval?

Time Needed to Assure a Gain
Edited: Time Needed to Assure a Gain

Time Needed Applications

The early 1990s sequences will be interesting. Even the 1993 sequence may end up with a long term loss. The outer confidence limit occurs in 2013.

The odds are 50%-50% that the January 2000 returns will show a net long term (real dollar) loss at some point between 2032 and 2036.

Time Needed Applications

Dividend Growth Baselines

What is the absolute worst case withdrawal rate when you own TIPS and high quality dividend stocks?

Between 3.5% and 3.6% of the original balance (plus inflation). It lasts indefinitely, far into the future.

You may choose an initially high stock allocation that emphasizes a growing dividend income stream. You may prefer to start with a lower initial stock allocation, which leaves you with the ability to pick up bargains in the future. All tradeoffs are attractive.

Dividend Growth Baselines

Dividend Growth Rates

I have collected real, annualized 5, 10, 15, 20, 25, 30, 40, 50, 60 and 100 year dividend growth rates of the S&P500. Dividend growth has been more volatile than I expected.

Dividend Growth Rates
Edited: Dividend Growth Rates

Addendum:

I examined the single-year payout ratio [D/E], the average of five years of single-year payout ratios [Average (D/E)] and the ratio of the average of five years of dividends to the average of five years of earnings [Average(D)/Average(E)]. All three conditions produce similar results in the modern (post 1950) era.

The scatter increases with the payout ratio. As long as the payout ratio is below 50%, the downside risk is quite limited. The worst case loss at 5 years was less than -2% per year annualized. The worst case loss at 10 years was -0.6% with a single-year payout ratio. The worst case was 0% when using the averages.

Today’s single-year payout ratio is around 30% to 35%.

Because of today’s low payout ratio, I expect today’s dividends to grow faster than inflation, reliably.

Subdued Dividend Growth

Dividend growth can rescue retirement portfolios. In this investigation, I looked at history to identify failure mechanisms. I looked for conditions that have subdued real dividend growth.

I found that today it is not a matter of business fundamentals. It is a matter of discretion: how corporations treat their shareholders.

Subdued Dividend Growth
Edited: Subdued Dividend Growth

Augmented Dividends Strategy

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.

Augmented Dividends Strategy

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.

Guaranteed Augmented Dividends

The Delayed Purchase Concept

Dividend based strategies provide a continual, growing income stream. They start at a low percentage of the original portfolio balance. The failure mechanism is gentle.

Liquidation strategies provide a higher initial income stream. They can run out of money in a finite number of years. Studies usually report 30-year withdrawal rates. The failure mechanism is abrupt: portfolio bankruptcy.

The delayed purchase concept is to start with a liquidation strategy and later switch to a dividend based strategy when conditions are right.

The Delayed Purchase Concept