Dividend Blend Rule of Thumb

Invest 50% of your initial balance in high income investments returning 6% to 8% per year. Reinvest any amount greater than 8%.

Invest 50% of your initial balance in high quality (blue chip) companies that are growing dividends rapidly (around 10% per year) and which have an initial yield of 3% to 4%.

Withdraw 5% of your initial investment (plus inflation) each year. Take your withdrawals strictly from the income stream. Reinvest any surplus. Never sell any shares.

Increase withdrawals around Year 10.

The Mathematics

Your initial high yielding investments are likely to keep up with inflation (about 3% per year) or, at least, come close. With a 50% allocation and a 6% to 8% initial income stream (yield), this is 3% to 4% of your initial balance each year.

Your growth investments initially yield 3% to 4%. With a 50% allocation, this is 1.5% to 2.0% of your initial balance each year.

The combined annual income will be between 4.5% and 6.0% of your original balance. With care, you should be able to withdraw 5.0% per year initially and have enough growth to keep up with, or exceed, inflation.

At Year 10, your high yielding investments will still provide 6% to 8% per year after adjusting for inflation. Assuming an inflation rate of 3% (historically typical), your fast growing investment yields are likely to double in terms of the original amount invested (after adjusting for inflation). That is, they will now yield 6% to 8% of the original investment (plus inflation), twice as much as their original return on initial investment.

At Year 10, your high yielding investments will have held their own. Your fast growing investments will have caught up and started to deliver even more income.

Due Diligence

Due diligence is essential. High income investing is one area in which it makes sense to get professional assistance. I recommend Josh Peters’ Morningstar Dividend Investor newsletter and Ben Stein and Phil DeMuth’s books, including “Yes, You Can Be a Successful Income Investor!”

Diversification is a good idea.

Have fun.

John Walter Russell
July 31, 2007