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Old 09-09-2007, 10:43 AM   #21
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In the greater world of "safe withdrawl rate" literature, 5.1% isn't all that aggressive. Guyton has a 6.2% plan but, of course, withdrawls can drop dramatically with a Guyton plan.

The problem I saw with the article was it was too dependent on a specific investment style. You buy those great dividend stocks and they keep increasing the dividends to meet your higher spending needs. That will work great until it doesn't and then there will be the proverbial "great awakening."

I could create an even greater withdrawl by recommending Canadian oil trusts. They pay in the 12 to 15% range and will be increasing their dividends as the price of energy continues to go up. We all know that oil will never drop in price for the next 50 years so our retirements are well covered with a 10% or higher SWR.
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Old 09-09-2007, 10:53 AM   #22
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Old 09-09-2007, 11:14 AM   #23
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I see nothing wrong with a dividend strategy.

Here in the UK where our main stock index yields nearly 3.4% its easy to pick a very diversified portfolio of stocks yielding over 4%. It would contain a good mix of oils, pharmas, telcos, banks, oils, industrials and consumer goods.

Its a popular strategy here as there is no extra tax to pay on dividends until your annual income is about $80,000 (£40,000). So a 4% yield on a $1,000,000 portfolio delivers $40,000 with no more tax to pay.

On the UK based Motley Fool boards we spend more time discussing high dividend strategies than any other. Probably because our stockmarket delivered less than the steller performance of the 20th century Dow.

My own strategy is:

1. My pension plus the dividends from my portfolio meet my (comfortable) living expenses.

2. I hold some index linked bonds, some of which i sell if the dividends do not go up in line with earnings.

3. I hold an international mix of equity funds. I treat this as my bonus pool. If they increase in value from the previous year I sell 4%. If the portfolio decreases, I don't get a bonus.

Worked for me over the last 7 years. Maybe not in America, though, eh?
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Old 09-09-2007, 11:21 AM   #24
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... what is wrong with his idea?

...it's a long way from a hope and a prayer, which is what the "total return" approach is.

... I believe we would be likely to learn more if people were to critique the arguments rather than attack the presenter.[
Fair enough, on points one and three quoted above, with a minor note that on point two, you do what you seem to want to properly caution us ALL against -- the use of emotional terms (hope and prayer) and dismissal of a whole regime of thinking with a single arm wave; rather than using objective financial terms and arguing from comparison and fact.

I do admit to being captive to my own past history, and yes, admitted biases, relative to this particular source, but I will grimly attempt to reign in my own emotional response to knowing exactly where this is coming from and the techniques behind it, to just comment on particulars, IF I decide to comment at all beyond this one reply.

So, to be clear: I readily admit that there is nothing inherently bad in the idea of trying to manage AA to reduce SD and preserve alpha sufficiently that a backtested historical sequence could look to support 5.1% SWR going forward (assuming things remain much the same as they are today).

I would just caution: "Consider the source", preferably in their own words, and leave it at that:

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Old 09-09-2007, 02:13 PM   #25
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I see nothing wrong with a dividend strategy.

Here in the UK where our main stock index yields nearly 3.4% its easy to pick a very diversified portfolio of stocks yielding over 4%. It would contain a good mix of oils, pharmas, telcos, banks, oils, industrials and consumer goods.
This sounds quite promising. Could you suggest where to look? Or post some interesting candidates? Most of these we should be able to buy in US, either as ADRs or as ordinaries in the pink sheets. I have owned Diageo since it was known as Guiness, at the time of the United Distillers merger. Lately it has gotten expensive, but most of these years it has been a high paying but steadily growing dividend payer.

Quote:
My own strategy is:

2. I hold some index linked bonds, some of which i sell if the dividends do not go up in line with earnings.
What are index linked bonds? Is this inflation indexed bonds, or some sort of structured product?

Thanks, Ha
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Old 09-09-2007, 02:19 PM   #26
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Fair enough, on points one and three quoted above, with a minor note that on point two, you do what you seem to want to properly caution us ALL against -- the use of emotional terms (hope and prayer) and dismissal of a whole regime of thinking with a single arm wave; rather than using objective financial terms and arguing from comparison and fact.
I have writing about this for 4 years on this forum. Briefly, if one's liabilities are not matched to his assets as to duration, correlation of fluctuations, etc., one is really operating on faith, a rather touching trust in correlations sometimes but not always observed. Nice if cash in can be relied on to match cash out over any time period. Also, note that cash dividends are much more stable than securities prices.

I am not addressing the problems of people with jobs or good pensions, only the use of a portfolio to fund regular withdrawals.

However I will grant that total return investing has been a successful method for quite a long period now.

Ha
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Old 09-09-2007, 05:19 PM   #27
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Could you suggest where to look? Or post some interesting candidates? Most of these we should be able to buy in US, either as ADRs or as ordinaries in the pink sheets.
I don't know your asset allocation but we've owned food producer Tate & Lyle (TATYY, makers of Splenda) for a few years, and its current dividend is just shy of 4%. It's also down 22% this year so I hope that makes it a bargain.

I've also been lusting in my heart after defense contractor BAE Systems (BAESY). They snapped up Armor Holdings earlier this year and they've apparently decided that the U.S. is their best expansion market, but they're also doing well with Middle Eastern countries. However it's attracting attention and investors are bidding up their price.
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Old 09-09-2007, 06:38 PM   #28
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Heh heh heh heh heh heh - me and the Norwegian widow are staying in the bleachers on this. My little dividend chain pulling of late are a few posts over at the Bogleheads forum.

BTY - we're swearing off the microwave popcorn with the 'cancer causing' butter flavor ingredient.

I may never go back to webtv - but I may pull -dividend stock ladders - out of the attic in time for the antique forum show.

IMHO - with the tax cut Wall Street is feeding the dividend ducks too hard right now. I don't care how you tortue the numbers - my bellybutton says 5% is a stretch(5% varible ala Gummy type rules ok).

heh heh heh heh - It's ok to be paranoid if 'they' are out to sell you. or something like that.
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Old 09-09-2007, 06:48 PM   #29
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... note that cash dividends are much more stable than securities prices.

I am not addressing the problems of people with jobs or good pensions, only the use of a portfolio to fund regular withdrawals.

However I will grant that total return investing has been a successful method for quite a long period now.

Ha
Well, at the risk of turning this into a lovefest, let me tell you, that I am a huge fan of dividends! Always have been. Dividends are part of my online 'handle, and a big part of why I feel I am on the verge of FI/RE, and a tremendous part of the engine driving very pleasing returns in my Employee Stock Plan, as the company I have worked at for nearly twenty years has a consistent history of increasing it's dividends, and investors grow to expect it and institutions especially seem to hold the stock at least in part because of that fact.

But, like the commercials tell the kids about Capt. Crunch, I feel they are only part of your healthy portfolio breakfast. They are not a panacea, and in fact, can be a bit of an albatross if a company would like to have (needs) more flexibility, but knows it would be a break of faith to mess with a dividend.

I like to try to look for uncorrelated methods of generating return, a bit like I might look for the same lack of correlation in return trends from different investment classes. Dividends, stock appreciation, M&A, market share growth, utility expansion, efficiencies through restructuring/ Lean, better idea frequency [think HP or IBM through the 60s/70s - Microsoft in 80's/90's -- an IP bank is almost as good as a cash bank]...

I just think it is completely artificial to have this 'don't ever touch (or change!) the principal, live strictly on the dividends only' mindset to the extreme, but I don't begrudge anyone else from exploring or using it.
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Old 09-09-2007, 07:14 PM   #30
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Stocks that pay a high dividend do so for a reason. They are either cash cows that are high risk or no longer growing or in very cyclical businesses that may dramatically cut their dividend.

There ain't no free lunch.
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Old 09-09-2007, 10:11 PM   #31
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Stocks that pay a high dividend do so for a reason. They are either cash cows that are high risk or no longer growing or in very cyclical businesses that may dramatically cut their dividend.

There ain't no free lunch.
Wow, that is a pretty cynical view. I don't know which risk you mean when you conjoin:

"...are either cash cows that are high risk or no longer growing or in very cyclical businesses that may dramatically cut their dividend..."

Consumer goods and medical diagnostic devices are two sectors that traditionally have exceptional div yields as a proportion of their overall returns.

I'll take each of your elements in turn, and apply them to these two sectors:

* "Cash Cows" - Yes, P&G and Abbott have a lot of money. They operate on a 'recurrent consumer' model, i.e. 'razor -- razor blade'. You don't just buy one tube of shampoo from P&G, you buy again and again and again. That behavior is called a 'reagent trail' in the medical diagnostics business, so they concentrate on getting 'placements' of proprietary gear, even if it is a loss, so that the stream of revenue of tiny margins but big volume on 'test kits' or 'consumables' is common, as opposed to big ticket one-time capital items like a new skyscraper sold or a helicopter. So, adding up those pennies, and not having to buy inventory for helicopters can indeed make for a cash-heavy business.

* "High Risk" - I am not sure what context you mean this in. If you don't mean 'volatility', but instead mean a dog of a company trying to entice purchasers to an otherwise unhealthy balance sheet, I think that is simply not the case with most dividend producing stock. They simply are in the earning and paying the owners phase of corp lifecycle, not necessarily as much in the new R&D and speculative risk spot of a young start up with NO div provided.

*"Cyclical" - the two examples I gave can indeed be cyclical; one based on the economy in general, the other on health care regulation and other influences. I think again, though, this is a canard as to whether these stocks are an attractive purchase or not -- was there not a recent RE 'cycle' that was quite speculative? Was there not a high tech sector 'cycle' in 2002?

* "May dramatically cut their dividend" -- again, it just wasn't clear to me how you were tying this together - does it mean that the companies tend to cut and then establish dividends to match the business cycle? For annual or other predictable cycles, for established and healthy businesses, this may not be true at all - for a certain category of business, again, the constancy and upward arc of div is considered a harbinger of health, so those companies that establish that typically will do cost cutting, layoffs, divest unprofitable segments, put off capital improvements, etc to preserve that div "story", esp if it has been developed over decades, even as their stock price or other business indicators may flag. Example:


Dividend History
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Old 09-09-2007, 10:24 PM   #32
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Wow, Abbott's payout ratio is 100%. I don't think I've seen that before in a non-REIT/MLP. What's up? Did they start out at such a high payout ratio at the start of your graph?
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Old 09-10-2007, 05:05 AM   #33
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Wow, Abbott's payout ratio is 100%. I don't think I've seen that before in a non-REIT/MLP. What's up? Did they start out at such a high payout ratio at the start of your graph?
Nice reply. You beat me to it. ABT also has a P/E of 41. I'd be careful with this one on any kind of down draft.

DRiPGuy,

I know you're a zealot on dividend stocks but I've seen various cycles where different investment styles work and others don't. Stretching for dividends where they are 75+% of the companies earnings tells me that the company is not investing in growth which is needed to support the dividend long term. And, yes, sometimes long term is measured in decades.

I won't come back on your point by point but I suggest you look carefully at what is behind your dividend. I have bought many high yielding stocks only to be terribly disappointed with the 5 or 6% yield when the stock falls 25%.

Dividends make up a large part of the stock markets total returns this century and paying a dividend has somehow gone out of fashion.

One I can't figure out is Bank of America (BAC). It has a P/E of 10, yields 5.2% and pays out about 50% of its earnings. I've owned it for years and it just keeps on like the monolith it is.
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Old 09-10-2007, 05:25 AM   #34
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Nice reply.
I know you're a zealot on dividend stocks but I've seen various cycles where different investment styles work and others don't.
One I can't figure out is Bank of America (BAC). It has a P/E of 10, yields 5.2% and pays out about 50% of its earnings. I've owned it for years and it just keeps on like the monolith it is.
When div.'s are in cycle and WallStreet is feeding the ducks - watch out for duck do do! My Moody's Handbook of Dividend Achievers became Mergent's and in recent years they have been selling/franchising their research - dividend products.

Those of us who are hooked - drool over things like ABT in a rough patch - knowledge of their record and faith in RTM starts the greed molecules salivating.

Likewise my BAC DRIP plan is doing stellar - even though I should cancel and move to my Vanguard broker account to simplify.

Dang! - I couldn't stay in the bleachers. Down to one file cabinet instead of two - if discipline doesn't fail me - the last of my DRIP plans will be canceled and stock put in my Vanguard broker account by years end - maybe.

heh heh heh - some drugs are hard to kick(DRIPs since 1989).
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Old 09-10-2007, 08:36 AM   #35
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It is good to hear from you again, unclemick. Your advice to study dividend strategies has paid off handsomely.

This strategy, the dividend blend, relies on dividend growth. It consists of a grower plus something to fill the income gap in the early years. A 3% or 4% initial yield is sufficient.

I have looked at a variety of alternatives (look under Income Allocator and Dividend Blend). Even TIPS (drawn down to zero) and mortgages work.

I use Josh Peters’ Morningstar Dividend Investor newsletter to estimate what is reasonable. So far, Josh Peters has routinely exceeded his goals.

It is good to see that your “hobby stock” allocation is still 15% as opposed to 10%. In view of demonstrated skill, I think that your income stream would be even safer if you were to increase it to 50%.

Have fun.

John Walter Russell
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Old 09-10-2007, 10:32 AM   #36
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Here is a strongly worded, early study along the same lines.

Retiree Needs

Retiree Needs

Have fun.

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Old 09-10-2007, 10:44 AM   #37
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Don't know if they're available over there but some of the big international and reliable big yielders here are:

BT - fixed telecom provider. 4.8%
BP - oil. 3.8%
Vodafone - mobile operator. 4.2%
United Utilities - electricity provider. 6.5%
Tomkins - engineering. 5.8%
GlaxoSmithKline - pharma. 3.8%
Lloyds - bank. 6.4%
HBOS - bank. 5%

You can pick another 20 or so solid companies in the UK before you would get to a cumulative dividend yield of less than 4.5%. And most of these are rising and none have fallen in the last few years.
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Old 09-10-2007, 11:14 AM   #38
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United Utilities - electricity provider. 6.5%
I used to own that one (as an ADR). They rather abruptly delisted themselves from the NYSE and now trade on the pink sheets here. Just another odd risk coming from left field for any retiree planning to hold a stock forever, I guess.
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Old 09-10-2007, 01:13 PM   #39
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I have bought many high yielding stocks only to be terribly disappointed with the 5 or 6% yield when the stock falls 25%.
By that logic we should be cheering & buying more shares.

I wasn't too happy about TATYY dropping from $64/share to $43 but then I realized that our cost basis is $33. Our yield is 5% and growing so there's little incentive to sell. OTOH we're already at our max allocation (2%) for that one, so there's no incentive to buy.

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Dividends make up a large part of the stock markets total returns this century and paying a dividend has somehow gone out of fashion.
They went out of fashion in the 1950s when companies started gobbling conglomerates and keeping the dividends to pay for acquisitions. Dividends also used to be taxed much more harshly, which made them a lot less attractive.

IMO dividend investing is a rediscovered fad brought about by reduced taxes on "qualified dividends" and by the realization that when a company pays a dividend it's hard to cook the books.

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One I can't figure out is Bank of America (BAC). It has a P/E of 10, yields 5.2% and pays out about 50% of its earnings. I've owned it for years and it just keeps on like the monolith it is.
I've been waiting years for them to fall off a cliff like Sunbeam/Chainsaw Al, Tyco, and Enron. No one can suck that much at customer service and still make buckets of money. Can they?

When a shipmate was running their nationwide computer network in the late 1990s he mentioned that BofA had over $66M in military govt charge card delinquencies. The contract didn't let them charge late fees to the servicemembers (I don't know if the govt had to pay anything) so BofA was basically subsidizing the military's antiquated travel-claim processing system. Admittedly $66M is peanuts to a company that big, but if that's how they contract with one of their biggest customers then how the heck do they make money with the rest of their assets?

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I used to own that one (as an ADR). They rather abruptly delisted themselves from the NYSE and now trade on the pink sheets here. Just another odd risk coming from left field for any retiree planning to hold a stock forever, I guess.
I bet the delisting was due more to Sarbanes-Oxley compliance costs than to any company misconduct. And again if we're long-term dividend investors then why would we care how the stock is traded? Put the paper certificates in UncleMick's file cabinet and go play!
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Old 09-10-2007, 01:17 PM   #40
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I used to own that one (as an ADR). They rather abruptly delisted themselves from the NYSE and now trade on the pink sheets here. Just another odd risk coming from left field for any retiree planning to hold a stock forever, I guess.
Within the past year, the SEC made it much easier for foreign companies to delist ADRs, allegedly to make it more attractive for new listings. I saw dozens of ADR delistings shortly thereafter.
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