Evaluating Something Simple

My Something Simple portfolio was supposed to provide a continuing withdrawal rate of 6% (plus inflation). Since then, we have experienced the October 2008 meltdown.

The Something Simple Portfolio

In mid-August, I wrote: “Split your money between a diversified dividend oriented Exchange Traded Fund (ETF) such as DVY and a preferred stock ETF such as PFF. Add a REIT or REIT fund, if you like.”

At that time: “DVY currently yields more than 5%. It should grow faster than the S&P500. Assuming that it only matches the dividend growth of the S&P500, it will grow at 5.5% per year (nominal). PFF yields more than 8%. It has no dividend growth.”

I also cautioned about the Price Risk of the market in general and the Overstated Diversity since both DVY and PFF were heavily concentrated in financial services.

Current Income

The August 19, 2008 DVY price was 49.75. As of April 3, 2009, it was 33.41. This is a price reduction of 33%. The DVY quarterly dividend payment in June 25, 2008 was 0.6309. Most recently, in March 26, 2009, it has fallen to a low of 0.4377. This is a reduction 31%. [The peak to valley reduction was 35% from March 25, 2008.]

The August 19, 2008 PFF price was 33.72. As of April 3, 2009, it was 23.70. This is a price reduction of 30%. The PFF monthly dividend payments have been:

2-Sep-08 $ 0.199 Dividend
1-Oct-08 $ 0.22 Dividend
3-Nov-08 $ 0.175 Dividend
1-Dec-08 $ 0.19 Dividend
29-Dec-08 $ 0.425 Dividend
2-Feb-09 $ 0.179 Dividend
2-Mar-09 $ 0.218 Dividend
1-Apr-09 $ 0.25 Dividend

The PFF income stream is holding up well. Eight month total dividend payouts: $1.856. This is in line with the original expectations.

Assuming an original allocation of 50% DVY and 50% PFF, the overall income stream has fallen from 6.5% of the initial investment to 5.7% (approximately). However, you need to save some of the excess in the early years to fill the gap until income growth from DVY fills the shortfall brought about by inflation.

[I got these prices and dividend amounts from Yahoo Finance.]

Actions

Using the Simplified Automatic Allocator: you should adjust your withdrawal amount down from 6% of your original balance (plus inflation) to 5.2%.

This is a reduction in your income amount of 13%, which is within expectations.

New Investors

For those who have waited, DVY is a much better purchase than before. Its allocation to financial services is down from 40% to 20% and its yield has jumped above 8%.

Although now about 80% in financial services, PFF is still looking good with a (distribution) yield above 14%. I believe that the perceived risk is overstated. The Government seems intent on maintaining preferred stock income while trashing common stock dividends.

Even acknowledging that the risk may be much greater than I estimate, this portfolio combination is highly attractive at today’s prices.

Have fun.

John Walter Russell
April 4, 2009

Something Simple