Notes starting from February 26, 2007
Updated: March 24, 2007.
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
A Special Kind of Investment
This looks at a special kind of investment: high income producers that return capital. As part of a blended strategy, it lifts the income stream to 5.8% of the original balance (plus inflation).
A Special Kind of Investment
Dividend Baseline: Expanded
Here are variations around my Dividend Baseline.
Dividend Baseline: Expanded
Fluctuating Dividends
I examined the income stream with wildly fluctuating dividends. It is higher than expected.
Fluctuating Dividends
Fluctuating Dividends with a Growth Kicker
I added a growth kicker to an investment with wildly fluctuating dividends. This increases the income stream.
Fluctuating Dividends with a Growth Kicker
Income Stream Insights
I have used the Income Stream Allocator to look at a variety of conditions. Here are the key insights.
Income Stream Insights
A Special Kind of Investment Sensitivity Study
This extends my investigations into a special kind of investment: high income producers that return capital.
In this sensitivity study, I introduce a lower yielding Investment B that has a stable or slowly growing dividend amount. I examine three variants for Stock A.
A Special Kind of Investment Sensitivity Study
A Special Kind of Investment Addendum
I collected more data with the higher dividend yield version of Investment B. I looked at the effect of slower dividend declines.
This confirms earlier observations.
A Special Kind of Investment Addendum
Diversifying Risk
I have developed a variety of worthwhile approaches. You can combine them to diversify risk.
Diversifying Risk
TIPS Table
Here are TIPS Safe Withdrawal Rates and percentage balances for interest rates of 1%, 2%, 2.5%, 3%, 3.5% and 4%.
TIPS Table
How Did Common-Sense Investing Become Controversial?
Rob Bennett has done it again. He has gotten to the heart of an issue.
Here is an excerpt from his latest blockbuster article, “How Did Common-Sense Investing Become Controversial?”
“I reread Robert Shiller’s Irrational Exuberance not too long ago. It blew me away when he talked about how there was a version of the Efficient Market Disease -- I mean, Theory! -- going around in the late 1920s, just before The Great Crash. It’s like a bad guy in a bad horror movie. The good guys keeps killing him and yet he keeps coming back.”
How Did Common-Sense Investing Become Controversial?
Everyone CAN Be Above Average!
Here is how.
Everyone CAN Be Above Average!
Approaching Retirement?
The time to adopt a continuing income strategy is about ten years before retirement. Here is an old article with an up to date message.
Numbers for Transition Planning
“Preserving capital becomes more and more important as you approach retirement.”
From the Conclusions:
“When valuations are very high, as they are today, the stocks have a substantial downside risk and they are likely to do about the same as a 100% TIPS portfolio.”
and
“Translating this into plain language: you should pay attention to preserving capital as you approach retirement unless stocks are cheap. They are not cheap right now. They are expensive.”
Numbers for Transition Planning
Dividend Reinvestment Calculator
I have placed a "Dividend Reinvestment Calc" spreadsheet file into my "Dividends" folder in my Yahoo Briefcase. It allows you to see how your portfolio balance grows with reinvested dividends assuming a constant price to earnings ratio. You get to specify the earnings growth rate. The initial balance is a lump sum.
I have added my "Dividend Reinvest w DCA" spreadsheet file into my "Dividends" folder in my Yahoo Briefcase. This version allows you to dollar cost average. The initial balance is a lump sum but you can add to it annually.
Here are some sample calculations. The starting balances were $100000. All dividends were reinvested. P/E=constant.
P/E=10 and 65% payout: 6.5% dividend yield.
Earnings growth = 0% per year, Year 10 balance = 187714.
Earnings growth = 5% per year, Year 10 balance = 296995.
Earnings growth =10% per year, Year 10 balance = 460531.
P/E=20 and 65% payout: 3.25% dividend yield.
Earnings growth = 0% per year, Year 10 balance = 137689.
Earnings growth = 5% per year, Year 10 balance = 220942.
Earnings growth =10% per year, Year 10 balance = 347042.
Fast growth (10% per year) catches up with slower growth (5% per year) within a decade starting from one half of the initial dividend yield.
Yahoo Briefcase
Dividend Slices
I have opened up a new area of Current Research. It takes advantage of Professor Kenneth French's new dividend data. I have already built Dividend Slices A calculator, a modified version of my Gummy 03A01 calculator.
Kenneth R. French Data Library
Current Research K: Dividend Slices
Dividend Slices: Initial Investigation
I determined annual returns at Years 10, 20 and 30 for four major dividend slices using Professor Kenneth French’s database. I calculated regression equations in terms of the percentage earnings yield 100E10/P.
The relationship is strongest at Year 20. The Value weighted relationship is stronger than with Equal weighting.
R-squared values were lowest for the companies that paid no dividends. This is, in part, because they had greater scatter (i.e., a larger standard deviation).
Dividend Slices: Initial Investigation
Dividend Slices: Typical Returns
I calculated the returns of dividend slices B and D for today’s valuations (P/E10=28) and at typical valuations (P/E10=14).
This attaches some numbers to our traditional knowledge about the advantage of selecting high dividend stocks.
Dividend Slices: Typical Returns
Notes Index
Notes Index