Notes starting January 14, 2007
Updated: February 25, 2007.
The Delayed Purchase Concept
Dividend based strategies provide a continual, growing income stream. They start at a low percentage of the original portfolio balance. The failure mechanism is gentle.
Liquidation strategies provide a higher initial income stream. They can run out of money in a finite number of years. Studies usually report 30-year withdrawal rates. The failure mechanism is abrupt: portfolio bankruptcy.
The delayed purchase concept is to start with a liquidation strategy and later switch to a dividend based strategy when conditions are right.
The Delayed Purchase Concept
Dividends and the Gordon Model
Dividend yields vary all over the place because prices vary. Prices depend upon current human perceptions. Dividend amounts are stable. Dividend amounts depend upon business activity.
A retiree can reasonably expect to see his initial dividend amount grow by 2.8% each year in addition to inflation.
Dividends and the Gordon Model
Edited Dividends and the Gordon Model
Retiree Needs
A retiree needs a steady income stream that grows faster than inflation. He needs an income stream that is isolated from the whims of the market. He needs income that lasts indefinitely.
Dividend based strategies satisfy this need.
Retiree Needs
Understanding R-Squared
Here is a non-technical explanation of the correlation coefficient R and its square, R-Squared.
Understanding R-Squared
Disturbing Numbers
I have looked at my Gordon Model data to investigate Investment Returns. I do not like what I see.
Disturbing Numbers
Disturbing Numbers Follow On
I have continued looking at the data. I have established new standard values for use in studies.
Disturbing Numbers Follow On
Understanding R-Squared Version A
This is a non-technical explanation of the correlation coefficient R and its square, R-Squared.
In this version I have added material to assist readers with technical training.
Understanding R-Squared Version A
Dividend Growth Strategy
I have received a new Letter to the Editor that asks how to implement a Dividend Growth Strategy.
January 24, 2007 Letters to the Editor
S&P500 Dividend Growth
The best way to characterize S&P500 Dividend Growth is to make no adjustment for inflation. The best time period to use is post-1950. The best rate to use is from 4.8% to 5.0% per year.
S&P500 Dividend Growth
Dividend Failure Mechanisms
There are two failure mechanisms of concern to dividend investors: a failure to keep up with inflation and actual dividend cuts.
My investigation S&P500 Dividend Growth shows that nominal dividend amounts (i.e., before adjusting for inflation) have behaved very well since the middle of the twentieth century. Before then, severe dividend cuts were commonplace. The last severe cut was in 1943. Nominal dividends fell by 16%. Nominal dividend amounts have not fallen more than 5% since then. However, they still occur, even when looking at the stock market as a whole. There was a 5.0% dividend cut in the S&P500 from 2000 to 2002. There was a full recovery by 2004.
To an excellent approximation, nominal dividends of the S&P500 index grow from 4.8% to 5.0% annually.
Real dividend amounts have behaved badly. Expect S&P500 dividends to fall behind inflation whenever inflation exceeds 5.0%.
I have placed copies of the graphs and tables that back up S&P500 Dividend Growth into my Yahoo Briefcase. Download the “Dividend Growth Pictures” file from the “Graphs vs E and D Yields” folder. It is a 52KByte Microsoft Word document.
Yahoo Briefcase
FIRE By 40!
This is an interesting site for younger investors. FIRE stands for Financial Independence/Retire Early.
[FIRE is a shortened version of Financial Integrity, Financial Independence, Retire Early as developed in the book “Your Money or Your Life.”]
FIRE By 40! Site
Income Stream Allocator
I have built a spreadsheet to help with income portfolios. I have included a sample calculation.
January 30, 2007 UPDATE
I have corrected an error. As a result, I have two versions. One uses CDs or money market funds and the other uses TIPS.
Income Stream Allocator
Using the TIPS Income Stream Allocator B
I have built a spreadsheet to help with income portfolios. This tells you how to use it.
Using the TIPS Income Stream Allocator B
Income Stream Allocator Examples
I have run some numbers. They are impressive. Dividend strategies offer a tremendous potential.
Income Stream Allocator Examples
Dividend Based S&P500 Allocation
I am creating a baseline with my TIPS Income Stream Allocator B. Based on today’s S&P500 dividend yield, which is less than 2%, the best S&P500 stock allocation is zero.
Dividend Based S&P500 Allocation
More Income Stream Allocator Examples
I have collected another set of examples using my TIPS Income Stream Allocator B. I selected two holdings from the Morningstar Dividend Investor. I wanted to translate optimistic, but realistic, estimates of dividend yields and growth rates into information about income streams.
I included a sensitivity study related to income stream shortfalls.
More Income Stream Allocator Examples
Many Alternatives
I have developed many alternatives. A retiree can pick and choose among them to suit his personality and to satisfy his needs.
Many Alternatives
Botched Early Retirement
Suppose that you retire early. Suppose that you botch your withdrawals. What does it take to get back on track?
Botched Early Retirement
Botched Early Retirement Special Example A-1
Suppose that you retire early using a dividend strategy. Suppose that your investments do much worse than you had expected. You require a continual income stream of 5.0% of your initial balance (plus inflation).
Going back to work for 5 years solves your problem.
UPDATE (February 16, 2007): Special Example A-2
Withdrawing 4.0% of the original balance (plus inflation) for the first seven years accomplishes the same goal. Download the details from the Allocators folder in my Yahoo Briefcase. It is a Microsoft Word document. It is the Special Example A-2 file.
Botched Early Retirement Special Example A-1
Dividend Baseline
Here is a baseline for dividend strategies.
It dramatically outperforms fixed allocation, liquidation strategies.
Dividend Baseline
Dividend Growth versus Liquidation
Early retirees should adopt dividend strategies. They are vastly superior to the traditional, fixed allocation, liquidation strategies that depend on capital appreciation.
Dividend Growth versus Liquidation
Capturing the Investment Return
Dividend strategies are best. They allow you to capture the investment return.
Capturing the Investment Return
Capturing the Investment Return Follow Up
Initial Yield versus Dividend Growth
I have compared several combinations of the initial dividend yield and dividend growth rate while keeping their sum (the Investment Return) constant. In terms of generating an income stream, starting with a higher yield is better.
Closer examination reveals that a faster growth rate necessarily leads to capital appreciation. This clouds the issue. There is no clear cut winner.
Initial Yield versus Dividend Growth
Notes Index
Notes Index