Notes starting from July 13, 2008

Updated: August 8, 2008.

Recent Dividend Growth

From 1950 to 2000 the S&P500 (nominal) dividend amount grew steadily at 5% per year. Now it has jumped to 11% per year. What is going on? What should we expect, looking forward?

Recent Dividend Growth

Worth reading again: Prices Matter

“Price discipline is central to another thought: how to exploit skill. I admit it. I am offended when I read studies that buy high and sell low. The investigators have people buying the hottest funds when their prices reach a peak. Then they wonder why investors do not do so well later on. I admit that many new investors fall into this trap. Serious researchers would have investors buying only on dips. Serious investing requires waiting for favorable prices.”

Prices Matter

Any Allocation

You can choose any allocation. But you need to match it with an appropriate strategy.

Any Allocation

RobCasts

Rob Bennett has started making podcasts (RobCasts) from his “A Rich Life” blog at PassionSaving.com.

His first is a winner: Why Buy and Hold Cannot Work.

A Rich Life Blog

Individuals Pick Winners

The myth about not being able to identify superior mutual fund managers ahead of time is only a myth. Individuals do it all the time.

Somebody has to get above average returns. Why not us?

From the past:

Individuals Pick Winners

Ahead of Its Time

This article was way ahead of its time. These days, we would add a variety of high yielding assets with limited dividend growth and lower yielding assets with rapid dividend growth. Here is Rob Bennett’s original article, actually a lightly edited series of emails. Retirees can do much, much better than to rely on the traditional asset classes of Large and Small Capitalization, Growth and Value. Even Preferred Stock shares, by themselves, can put the traditional S&P500/TIPS (or other cash equivalent) portfolio to shame.

Using SWR Analysis to Compare Asset Classes: Edited

Buyers and Sellers

For every buyer who expects his stock to go up, there is a seller who is equally convinced that the stock’s price will go down SO the adage goes.

It isn’t true.

I have often sold because I wanted funds, not because I thought that my stock would go down. I have often bought, not expecting my stock to be discovered for quite a while.

From 2005:

Many Different Objectives

The Downside of Dividends

Dividend strategies are great. They meet the needs of retirees right away. They carry minimal risk. They offer income for an unlimited amount of time.

But they do have a downside.

Dividend and income strategies do not protect you against price drops during the first decade. Valuation Informed Indexing and Delayed Purchases do that.

High quality dividend payers outperform other stocks. They do better on a relative basis. They do not lose as much through price cuts as other stocks. But they are vulnerable to the same downward forces as the rest of the market. Just less so.

Dividend and income strategies produce steady income streams. They do not necessarily preserve capital.

Failure Mechanism

Stock prices are falling. Do not be surprised. Expect further drops over the next 5 to 10 years. The Failure Mechanism is easy to understand.

Failure Mechanism

Almost 4%

Click on the "Year 30 SWR" button to get the Year 30 Retirement Risk Evaluator. Put in P/E10=20 with a TIPS interest rate of 2%. Look at 20%, 50% and 80% stocks with rebalancing. The Year 30 Safe Withdrawal Rates are 4.10%, 4.13% and 3.92%, respectively.

Because of falling stock prices, we are almost back to a withdrawal rate of 4% of the original balance (plus inflation) using the traditional S&P500-TIPS approach with a fixed allocation.

We are already well above 5.5% (plus inflation) with Valuation Informed Indexing, the Delayed Purchase approach, the Dividend Blend and a straight Income approach.

Year 30 Balance

Your original balance has two parts: that which you consume at Year 30 through withdrawals and that which is untouched. The untouched portion grows by a factor equal to the total return.

Year 30 Balance

Withdrawing 5% Safely at P/E10=20

Prices are high. You cannot withdraw 5% of your original balance (plus inflation) safely with a traditional fixed allocation strategy. You can with Valuation Informed Indexing.

I do not address dividend and income approaches in this study.

Withdrawing 5% Safely at P/E10=20

More about Withdrawing 5% Safely at P/E10=20

Prices are high. You cannot withdraw 5% of your original balance (plus inflation) safely with a traditional fixed allocation strategy. You can with Valuation Informed Indexing.

Previously, I examined what happens in a long lasting (secular) bear market. We are in such a market today. This time, I looked at what happens in a normal market.

More about Withdrawing 5% Safely at P/E10=20

Watch DVY

Watch the income stream produced by DVY over the next two quarters closely. This will tell us how well a dividend strategy is likely to hold up during unfavorable conditions. DVY was heavily weighted in financials, about 40%. If its income stream holds up, dividend strategies will be validated. A dip up to 25% would be acceptable, but only as a worst case outcome. A deeper loss would cause me to restate the risk associated with dividend and income strategies.

As always, the one thing that you can never avoid completely is fraud. This appears to be a factor in the sub-prime mortgage crisis. DVY provides diversification of companies, but not true diversification of risk. It is heavily concentrated in one industry. Some of the other dividend Exchange Traded Funds (ETF) have even less diversification.

I am not especially concerned about DVYs price behavior. That is a separate issue.

Bad Advice

Retirees beware. What sounds sophisticated is no more than bad advice.

Bad Advice

DVY Income Trend

Look at the trend of DVY dividend income payments.

DVY Income Trend

S&P500 Dividend Growth Chart

The nominal dividend amount of the S&P500 has grown steadily since 1940.

S&P500 Dividend Growth Chart

Notes Index starting from November 23, 2007