Yep - that always gets me too. But I think a lot of folks want to buy funds/stocks, never actually sell anything, but live off the distributions.
If you are truly going to keep your principal intact, then you have to let it grow to keep up with inflation. This can mean you end up with a really low withdrawal rate to accomplish that preservation.
And then what are you going to do if your portfolio loses value due to a nasty event - like bond fund NAVs dropping due to rising interest rates? Do you just ignore it since you are not "selling any shares"? But your principal did just get hit.
And if you receive capital gains distributions - do you reinvest them? Do you not "count" them as part of the principal? Here you have to figure out how much needs to be reinvested to "preserve the principal".
Historically dividends have far outpaced inflation, this is true despite the dividend payout ratio (percentage of earning paid out in dividends) shrinking in recent years. There is some signs that dividend payout ratio is turning around now that dividends are more or less permanently treated the same as LTGC.
In fact I think for a 60/40 portfolio the dividend portion would keep up with inflation over almost any long period, although I have not checked that.
I am not sure if this would include reinvestment of capital gains or not of an s&p index fund. In my case with index funds,plus lots of individual stocks I take all taxable distributions in cash.
As M* Christina mentions in her article for a income investing logistically it is hell of a lot easier than total return for those in retirement. No worrying about when to sell (once a year, once a quarter), no fancy rules about I'll take X% withdrawal, except for when we are in the 3rd year of bear market and it is leap year. No need to keep a fancy bucket for spending during bear market. None of that crap.
I get $Y each from interest and dividends and spend less than $Y. No worry about running out of money. If it doesn't keep up with inflation so be it. My income is far more stable than I'll take 4 or 5% of my portfolio at the beginning of the year. This approach would have produced some wild income swings the last 5 years.
I realize that almost all of us using discretion in applying these rules and the other guys approach isn't as cut and dried as it sounds.
There are some significant disadvantages to the income approach. The most important one is it results in a withdrawal rate significantly below the 3.5-4% that is historically pretty safe. Last I checked (a few months ago) the yield on my portfolio is 2.8% despite some nice dividend hikes (include 35% hike from MMM) the yield has probably dropped.
As Christina says it is really hard to get to portfolio much above 3%, unless you are really chasing yield. Dividend stocks have become far more popular than when I first started getting serious about them a decade ago. I maybe wrong but I don't think Cramer was hyping them back ten years ago.
Brewer points out that in the bond market you are taking a huge risk for the extra 200-300 basis points of yield. MLP have had big price increases and lot more attention on them thanks to the Shale Oil/Gas boom. I think the risk of trying to assembly a portfolio with an average yield of 4% exceed the extra 1+%.
I think her point is rather than chase yield for either stocks or bonds, it is ok to take some of the gains off the table. So for me this is going to be a total return year, and while I'll spend far more than my dividend income produced, it is also considerably less than my portfolio was up.
). I will figure it out exactly after the year is over. The 2% figure was for 2011 and 2012.
