Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Formula for a 5% Dividend
Old 05-20-2016, 10:16 AM   #1
Recycles dryer sheets
 
Join Date: Mar 2008
Posts: 103
Formula for a 5% Dividend

I saw this at Bogleheads but not much commentary. I didn't understand the title as there is no 5% dividend discussed.

My questions are:

1) Why is this different than a 5% SWR?

2) Anybody think this will work?

Here's the link:

Forbes Welcome
__________________

__________________
frank2009 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-20-2016, 11:06 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Gone4Good's Avatar
 
Join Date: Sep 2005
Posts: 5,381
My first response to the question of "Will it work" was "It's Forbes, so no."

My second response is well, it depends on the meaning of "works." It's a % of portfolio approach so by definition it can't ever go broke. But whether it maintains purchasing power with a 5% WR and a 100% equity portfolio at what may be the tippy top of an overvalued equity market is far more uncertain.

At the very least, someone taking this approach should be prepared to weather a 1/3 drop in annual income [(2%*.75 + 3%*.6)/5%-1] to accommodate a 25% dividend cut plus a 40% equity market drop similar to what happened in 2009. If that sounds like a workable scenario, then this just might be for you.
__________________

__________________
Retired early, traveling perpetually.
Gone4Good is offline   Reply With Quote
Old 05-20-2016, 11:16 AM   #3
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,061
Quote:
Here’s the formula. You spend your dividends, and you also spend the proceeds from selling 3% of your shares annually. Total payout, 5%. The 3% liquidation rate just balances the 3% dividend growth rate, leaving the payout, over the long term, where it started.
I think the flaw? is that you are liquidating 3% of your entire portfolio, and only getting a 3% growth on your dividend stream.

So I think you are depleting principal faster than the dividend actually grows in relation to your entire portfolio.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Formula for a 5% Dividend
Old 05-20-2016, 11:27 AM   #4
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,934
Formula for a 5% Dividend

I'm such a stick-in-the-mud - - I'm not excited enough about it to turn off AdBlocker so that I can see the article.

My thoughts about dividends are that if they are high, share price increases will suffer, and if they are low, share price increases will be higher.

My portfolio is mostly in broad index funds, although I also have 30% Wellesley.

As a game that I play with myself, I try to spend less than the dividends that I received the previous year. I have done that in every year of retirement so far, except for last year when I bought my dream home. This year will be a little dicey, too.

If I arranged a portfolio that gave me 5% dividends instead of my present, abysmal 2.x%, that would be cheating on this game. I admit it - - I cheat at solitaire!!! But I'm not inclined to cheat on my "living off my dividends" game.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 05-20-2016, 01:09 PM   #5
Full time employment: Posting here.
Sojourner's Avatar
 
Join Date: Jan 2012
Posts: 732
Quote:
Originally Posted by W2R View Post
I'm such a stick-in-the-mud - - I'm not excited enough about it to turn off AdBlocker so that I can see the article.
+1

It stinks that Forbes.com is now completely unusable for those of us who choose not to disable our ad blockers. Oh well... guess I'll just have to get my fill of financial articles & news from the other 500+ personal finance websites that don't use such heavy-handed tactics.
__________________
Sojourner is offline   Reply With Quote
Old 05-20-2016, 01:54 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
Quote:
Originally Posted by frank2009 View Post
I saw this at Bogleheads but not much commentary. I didn't understand the title as there is no 5% dividend discussed.

My questions are:

1) Why is this different than a 5% SWR?

2) Anybody think this will work?

Here's the link:

Forbes Welcome
it is not really different . if a portfolio grows by the same total return then pulling the same amount is the same thing , but 5% is likely not a safe withdrawal rate in either case .

don't forget in both cases you need to make up either what you spent down or what was payed out in dividends and the resulting drop in the investment if you spent it .

the effect is the same .
__________________
mathjak107 is offline   Reply With Quote
Old 05-20-2016, 02:20 PM   #7
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 69
Quote:
Originally Posted by frank2009 View Post
I saw this at Bogleheads but not much commentary. I didn't understand the title as there is no 5% dividend discussed.

My questions are:

1) Why is this different than a 5% SWR?

2) Anybody think this will work?

Here's the link:

Forbes Welcome
Ridiculous fluff piece.

The author's premise is that taking the S&P dividend yield (which varies to some degree with the overall state of the economy) and adding 3%, you get a variable withdrawal strategy that protects your nest egg from overwithdrawing during downturns.

Here's the primary (glaring, IMO) flaw with the article: "For history we’ll go back 28 years, an interval that is not far from the plausible investment horizon of someone just now retiring. Also, it makes the arithmetic easy."

Sure - if you cherry-pick a specific portion of history that includes a nice secular bull market, you can justify an effectively higher withdrawal rate.

Fundamentally the author misdirects the audience with a lot of detailed numbers, while glossing over the fact that the only time period his strategy was "tested" against (and therefore can be said to be valid for), was the very specific time period from 1988 to today.
__________________
ulrichw is offline   Reply With Quote
Old 05-20-2016, 05:13 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Sep 2006
Posts: 1,695
Quote:
Originally Posted by ulrichw View Post
Ridiculous fluff piece.

The author's premise is that taking the S&P dividend yield (which varies to some degree with the overall state of the economy) and adding 3%, you get a variable withdrawal strategy that protects your nest egg from overwithdrawing during downturns.

Here's the primary (glaring, IMO) flaw with the article: "For history we’ll go back 28 years, an interval that is not far from the plausible investment horizon of someone just now retiring. Also, it makes the arithmetic easy."

Sure - if you cherry-pick a specific portion of history that includes a nice secular bull market, you can justify an effectively higher withdrawal rate.

Fundamentally the author misdirects the audience with a lot of detailed numbers, while glossing over the fact that the only time period his strategy was "tested" against (and therefore can be said to be valid for), was the very specific time period from 1988 to today.
No you can never over withdraw as you are only taking 3% of the portfolio principal, so there is no way to get to zero. Gone for Good summarized it pretty well. I think if you require a 5% withdrawal rate you should use the method outlined in my thread of the 5% withdrawal rate, payouts are more certain for at least the next year I think.

5% Withdrawal Rate Portfolio
__________________
Running_Man is offline   Reply With Quote
Old 05-20-2016, 08:48 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,515
Quote:
Originally Posted by Sojourner View Post
+1

It stinks that Forbes.com is now completely unusable for those of us who choose not to disable our ad blockers. Oh well... guess I'll just have to get my fill of financial articles & news from the other 500+ personal finance websites that don't use such heavy-handed tactics.
Funny thing is - I don't have an adblocker turned on, and Forbes tells me I have to turn off my adblocker. Well, Safari must be doing something Forbes doesn't like. But screw Forbes - that's so obnoxious!
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 05-20-2016, 09:26 PM   #10
Recycles dryer sheets
 
Join Date: Jan 2013
Posts: 69
Quote:
Originally Posted by Running_Man View Post
No you can never over withdraw as you are only taking 3% of the portfolio principal, so there is no way to get to zero. Gone for Good summarized it pretty well. I think if you require a 5% withdrawal rate you should use the method outlined in my thread of the 5% withdrawal rate, payouts are more certain for at least the next year I think.

5% Withdrawal Rate Portfolio
You're right - I misread the original article to be suggesting the Trinity-study like inflation adjusted withdrawal rate based on the initial portfolio, vs. a running adjustment. This means that "failure" rather than being a complete depletion of principal is not being able to withdraw enough to meet non-discretionary expenses.

I'll still stand by my criticism that looking at this strategy in light of one period is a fatal flaw.
__________________
ulrichw is offline   Reply With Quote
Old 05-21-2016, 07:37 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,646
I have an add blocker on in Firefox and the Forbes article did not open when I first clicked on it. I clicked "allow" (once, not permanent) and re-clicked on the link and the article opened.

Gone4good's analysis seems right to me but the overall result appears to be very similar to a fixed percentage of portfolio approach. Is there any advantage to this one over a standard volatile fixed percent approach? Applying this approach to a 60/40 portfolio would you just go with this fluctuating ~5% of the equity portion plus actual dividends from the bond portion?
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 05-21-2016, 07:46 AM   #12
Thinks s/he gets paid by the post
Tadpole's Avatar
 
Join Date: Jul 2004
Posts: 1,174
Quote:
Originally Posted by Sojourner View Post
+1

It stinks that Forbes.com is now completely unusable for those of us who choose not to disable our ad blockers. Oh well... guess I'll just have to get my fill of financial articles & news from the other 500+ personal finance websites that don't use such heavy-handed tactics.
I disabled mine and even tried adding Forbes to the adblocker allow list. Forbes still thinks the adblocker is on even with it off. I concluded they wouldn't be happy until it was uninstalled. I removed them from the allow list and won't go there.
__________________
Tadpole is offline   Reply With Quote
Old 05-21-2016, 07:55 AM   #13
Thinks s/he gets paid by the post
target2019's Avatar
 
Join Date: Dec 2008
Posts: 3,709
Quote:
Originally Posted by Sojourner View Post
+1

It stinks that Forbes.com is now completely unusable for those of us who choose not to disable our ad blockers. Oh well... guess I'll just have to get my fill of financial articles & news from the other 500+ personal finance websites that don't use such heavy-handed tactics.
I have adblocker enabled. The stupid quote appears for about five seconds, and then the story appears.
__________________

__________________
target2019 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Dividend Growth / Dividend Income Investing for RE CabinLifeAt50 Stock Picking and Market Strategy 43 05-20-2016 08:01 AM
Ultimate Dividend Playbook; Dividend Harvest Portfolio FUEGO FIRE and Money 22 08-12-2008 12:16 PM
Nice baby formula deals cute fuzzy bunny Other topics 0 03-20-2005 10:30 AM
 Compound Interest Formula!  : ( Tommy_Dolitte Young Dreamers 5 09-13-2004 02:18 PM
The "Gordon Formula" charlie FIRE and Money 4 02-20-2004 07:40 PM

 

 
All times are GMT -6. The time now is 04:24 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.