Edited: E10 or D10?

Professor Robert Shiller’s P/E10 does a great job when calculating Safe Withdrawal Rates. Sometimes, using dividends (P/D10) is even better.

Background

The percentage earnings yield 100E10/P (or 100/[P/E10]) and Historical Surviving Withdrawal Rates are tightly related. So are dividends. Regression equations show a good fit.

P/E10 (actually, 100E10/P) does better than the initial dividend yield because of dividend cuts, especially before the 1950s.

New Data

I collected regression equations using 100E5/P, 100E10/P, 100D5/P and 100D10/P.

Because dividend cuts played such a prominent role in the past, I looked at 1923-1975 and 1941-1980 timeframes for the regression equations. Dividend cuts were commonplace during earlier periods. In recent times, dividend cuts have been punished severely.

Historical Surviving Withdrawal Rates

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Data Summary

At 30 Years: Using dividends is as good as or better than using earnings.

1923-1975 30-Year Historical Surviving Withdrawal Rates
Results are mixed. 100E5/P and 100D5/P are similar.
Results are mixed. 100E10/P and 100D10/P are similar.

1941-1980 30-Year Historical Surviving Withdrawal Rates
100E5/P is not as good as 100D5/P.
100E10/P is not as good as 100D10/P.

At 15 Years: Using earnings is better.

1923-1975 15-Year Historical Surviving Withdrawal Rates
100E5/P is better than 100D5/P.
100E10/P is better than 100D10/P.

1941-1980 15-Year Historical Surviving Withdrawal Rates
100E5/P is better than 100D5/P.
Results are mixed. 100E10/P and 100D10/P are similar.

Analysis

Smoothed dividends do at least as well as smoothed earnings when calculating 30-Year Safe Withdrawal Rates. They do even better when using the latter period because there were fewer dividend cuts.

Smoothed earnings do better when calculating 15-Year Safe Withdrawal Rates.

NOTE: Safe Withdrawal Rates are the lower confidence limits associated with the Historical Surviving Withdrawal Rate regression equations.

Averaging over ten years does better than averaging over five years.

Conclusions

Smoothed dividends and earnings complement each other. Dividend amounts provide a floor to withdrawal rates. Smoothed earnings tell us about the quality of dividends. They protect us against unpleasant dividend surprises, such as happened during the Great Depression.

Have fun.

John Walter Russell
September 10, 2006