Strategy for a (substantially) higher withdrawal

>>So, now that you know this can really be done, (because I did it), what are the risks that I am missing here?

What you are mising is the very obvious risk that none of these companies can guarantee(or even be likely) to continue to pay you 10-12% for the rest of your life (unless you plan on dying real soon).

To look at the short-term performance of a few stocks paying an unsustainable dividend, and spend accordingly then you are almost guaranteed to fail with your ER strategy.

I for one wouldn't want to take myself out of the labor market...allow my skills and marketability to wither, and then in 15 years find that I have run out of money at the age of 55 or so....but thats just me.

To me, if your ER plan *requires* you to make 8-12% on your investments to be workable, then you are either spending too much money, or have to little to consider retiring yet. My advice, work until you can save enough, or else lower your expense levels.

Sounds to me like you have already decided on a plan, and now just want to convince yourself that it will work, and are looking for others here to validate your decision...my guess based onthe almost *unanimous* tone of this thread is you will find very few people here that think your plan is workable....but nobody here is going to stop you....

But, if it was me, and a whole bunch of smart people, all of which were savy enough to ER(some at very young age), all have doubts about your plan, then that should give you some cause for reflection.

[BUM]

hank,

Your approach is among my favorites (I also like selling naked puts in a bull market). But for retirement income I need secure, simple investments that:

Don't risk principal beyond my tolerance level
Provide regular, predictable returns
Don't require my constant attention

In January I gave up those strategies and shifted the funds to vanguard where they still sit in a money fund waiting for me to make my fund picks. In the meantime the Dow lost 700 points.


I really dislike the motley fool stuff but they recently ran a pretty good commentary on high yield investments. Its a fun debate. On one side you can say "this is where your principal goes to die" on the other (as you point out) "At these rates,who cares?" Hey, look at who owns some of these royalty trusts...BANKS! Conservative banks like Citi, BONY, Wachovia, etc.


http://www.fool.com/news/commentary/...ce=y&bounce2=y


Bottom Line - For me; Annual portfolio balancing... Daily fishing and woodworking.


BUM

[eytonxav]

While I wholly support the advice/comments that have been given, I did notice that Hank indicated HCP in his list of stocks, a healthcare REIT. I do allocate ~ 10% of my portfolio to preferred stocks/REITS that tend to pay > 7% dividends just to spice up the yield of the overall portfolio. Most of the stocks in this category do not exceed 8% div, and I don't feel they are overly risky, but going into stocks that are paying out >10%, risk certainly moves up proportionately. Once I start drawing from my stash in a few years, I don't plan on exceeding more than a 3-4% WR.

Doug

[unclemick]

Hank

What you are missing is dividend growth - invest 45 bucks or so in Mergents Handbook of Dividend Achievers. You want a growth kicker to go with current dividend. Also since I don't spend all my dividends - I buy dividend stocks that have DRIP plans via Moneypaper.

Again, I do this as a hobby in lieu of golf or fishing. When it beats my balanced index(hasn't in the last ten years) - Then I'll turn pro. Or if becomes 'work' in my mind - I will quit and go back to fishing, never was any good at golf.

[BUM]

I'm with unclemick. This is a great time to fatten up or jump in to those large cap balanced funds.

BUM

[haha]

Quote:

We know that any one of the individual stocks could reduce, or stop the dividend or worse go backrupt. *It is the average yield of the portfolio (based on original price) and the growth of that yield to match or beat inflation that matters. *okay guys what am I missing? *Hank

You may be OK. But it is risky. At the same time, 70% S&P 500 allocation is not only risky, it is like laying 3:5 at the track on a horse with a limp.

VNO for one is very unlikely to disappoint when bought to yield 8%. I did it (@$38.75), and sold it around $50. probably shouldn't have sold, but it may get back to that 8% yield. AIV is a large national apartment REIT. While there may be problems in that industry now, it has to recover and probably AIV with it. Some expect AIV to cut it's dividend which is why it yields more than other quality apartment REITs. I would be sure to take good look at their balance sheet and cash flow, not just the dividend.

Some of those royalty trusts are different. I have owned SJT on and off for almost 20 years, and I have probably had more total return from it than any other investment. But I bought it at $5, not $20. During the years I owned it, there were months with no payout at all, due to high capital expenses and low gas prices. There also was a time when BR was screwing SJT on the royalties. SJT is unusual in the the geology of the San Juan Basin pretty much guaranties a long reserve life. Couple that with high natural gas prices, and you have pretty good cash flow. MTR is I believe weaker- it has some San Juan gas, but much of it's production is from the Hugoton field, which has been producing for over 50 years, and is well on it's way to being depleted. You didn't say how old you are, but I don't think these RTs are for the lifetime of a fairly young person.

The tanker trusts are even more tricky.

Overall, royalty trusts are a way for insiders to capitalize an income stream at a retail rate. As such, over any long period, and without any special insight or skill on the part of the investor, they might be expected to provide a return that is at best pretty average when risk adjusted. If there is any fraud or optimism in their reserve reporting, the units could hit an air pocket. I can't rememnber the details, but in 1978 or '79 there was a trust, I think named Wilshire, that disappeared because it's reserves had been overstated.

I trade some of these things, over long swings, and I pay close attention to them. If we truly are in a permanent state of falling oil and gas production, and if the trusts that one owns can keep a decent production going, they should stay high priced. But it can get scary if you have your livehood riding on it. Furthermore, the accounting is very opaque, so you never really know what is going on. ( Although anymore that may describe just about any public business.)

As a very general rule, it is hard to get safe long term high yielding investments during a period of historic low interest rates. Maybe not impossible, but it tends to be fisihng in fished out water.

In any case, buena suerte!


Mikey

[charlie]

IMHO, buying a portfolio of stocks yielding 8-12% is
about as risky as buying a portfolio of junk bonds.
Risk and reward are two sides of the coin. You
can't have one without the other.

You think now that you will buy and hold and not worry about the market price, but life has a way of throwing curve balls. There will come a time when you need
cash. It always seems to happen at the worst time
from a market standpoint.

You might win at this strategy, for a time, if you are
very smart and very nimble and have balls of brass, but
please don't bet the whole ER ranch. As unclemick
might say, "it's a male hormone thing" to try to go
where angels fear to tread.

But whatever you do, God bless and good luck!

Charlie (aka Chuck-Lyn)

Hey Charlie! I have a bunch of bonds
(some junk).......mostly my "forever" money.
It is true that it is easy to say that you don't care about the NAV, and then find yourself in need of cash just
when the timing is worst. In my case, as long as the
interest checks keep coming, I can stand the NAV
slide. Truly, if I was ever forced to dip into my
original investment, my entire ER plan would be up
for grabs. I don't see this happening.

John Galt

[hankjoy]

Hey unclemick, et. al.:
"What you are missing is dividend growth"
please reread this from my second post;
"Our worry is will the portfolio as a whole (on average) continue to grow the dividend to at least keep up with inflation? We know that any one of the individual stocks could reduce, or stop the dividend or worse go backrupt. *It is the average yield of the portfolio (based on original price) and the growth of that yield to match or beat inflation that matters."
Several of these stocks came from Mergent's list. And most but not all grow the dividend over time.
What I look for is;
1. a company that has a history of consistantly paying a high yield,
2. with a history of regularly increasing the dividend,
3. then I look at the stability of the company and watch out for companies that are simply returning your capital to you.
4. I watch the price swings until I can capture the stock when it is low in price and lock in a higher yield.
5. I try to diversify in different industries, locations, and type of security (MLP, REIT, Royalty trust, stock)
My goal is for the portfolio to average a yield on original cost of 10% or more from the dividend alone, with a history of raising the dividend at least at the rate of inflation. If the long term average annual return of the market over long time periods is 10% from price appreciation and dividends combined (but with a lot of volatility along the way) and my portfolio can pay me 10% from dividends alone without selling any shares: then you should be able to withdraw 10% without selling and with substantially reduced risk.
Since I do not plan to sell to get enough to live on, just cash dividend checks, price volatility means little to me. However since I have asset classes that are not corralated, so far I have always had some of my assets up substantially in value so I could sell some in an emergency without taking a loss, or work part time, get a home equity line of credit, etc.
What do you think, Hank Joy

[hankjoy]

2nd part of very long post
Someone unwilling to identify themself wrote, "if your ER plan *requires* you to make 8-12% on your investments to be workable, then you are either spending too much money, or have to little to consider retiring yet.", assumed I don't have enough saved to live on 4% of my portfolio so I feel compelled to grasp for a higher return, this person does all readers a diservice by assuming things they don't know, and which in this case are not correct.
They also assume (again erroneously) and I quote "To look at the short-term performance of a few stocks paying an unsustainable dividend, and spend accordingly then you are almost guaranteed to fail with your ER strategy." Most of the stocks I listed as examples have sustained and raised their dividends over long periods of time.
Again they continue to reveal their habit of jumping to conclusions by writing "Sounds to me like you have already decided on a plan, and now just want to convince yourself that it will work, and are looking for others here to validate your decision..."
The opposite is true, I am specifically asking for constructive criticism to validate;
"will this plan work?
What are the risks?
What are the unknowns here?
I am most willing to be convinced that this is not a good plan but by facts and reason not by being told by "Justaguest"
"my guess based onthe almost *unanimous* tone of this thread is you will find very few people here that think your plan is workable"
Please "Justaguest" if you can't do any original thinking do yourself and the rest of us a favor by asking questions instead of revealing your ignorance by jumping to conclusions about things you don't know about. Don't make assumptions or guess, ask questions or just listen and learn.
I am neither interested in following the crowd or being a lone wolf, I want a plan that works because it does, not because many or few agree with it.
It appears to me (correct me if I am wrong) that there is less risk not more if you do not need to sell assets during a down market in either stocks or bonds. Also that investments that consistently pay a high yield tend to be less volatile than low yield investments. Do not confuse consistant high yield stocks with low yield ones that are suddenly in big trouble and are listed at a high yield just before they go backrupt or cut their dividend. I am talking about companies like HCP and VNO that are doing just fine but whose share price vary throughout the year which allows you to "capture" them at a high yield when the price is down.
I am 45, plan to retire next year with this plan, unless I find a better one. I can live on 4% of my portfolio but see no need to if 10% is possible as long as it is safe. I have been investing for 18 years, have read (not skimmed) over 100 books on investing, have skimmed many others including 4 pillars at the bookstore. I consider myself a novice, I consider Warren Buffett and Sir John Templeton as experts. I am not boasting that this plan is better or the best. I am suggesting that I have not yet found the fatal flaw in this plan and so far it looks like it works and because you don't sell in a down market it appears to be less volatile and risky than anything else I have seen at anything close to an 8-10 withdrawal rate. But I am very interested in being shown by reason (not following the majority) what unknowns am I not seeing here. The best book I have ever read is called "The Single Best Investment" by Lowell Miller. He has the resources and the money to research this plan going way back and in his book he does. I believe it requires a paradigm shift in one's thinking to get past the mantra "putting a high portfolio percentage in stocks is risky". It is if you have to sell in a down market, but in this plan you do not sell in up, down, or sideways markets. Okay this is a very long post, I need to be quiet and listen and learn, what do you guys think?
Hank Joy

[Michael]

Quote:

But I am very interested in being shown by reason...

If you can find reliable data on the long term performance of high yield stocks, you can insert the data into an Excel spreadsheet and calculate past safe withdrawal rates for this asset class. Without this type of information, any conclusions on how it would have performed in the past are just guess work.

The Schiller data base contains information for the S&P back to 1871, which has made it possible to calculate what withdrawal rates would have worked with the S&P back to that date. The French data base contains total return information for small caps back to 1927, allowing calculations on small caps back to 1927. I don't know of any reliable data on high yield stocks going back that far. If you find some in Excel importable format, please let me know and I will attempt to run the numbers to figure out what withdrawal rates high yield stocks would have supported in the past.

My guess is that a lot depends upon whether the dividend is supportable over long periods of time, and whether dividends reliably grow to keep pace with inflation. There is usually a reason that some stocks have higher yield. The market does not normally leave free money sitting on the table for decades at a time, the length of many retirements. Still, if you are unusually adept at picking value stocks, you might make it work. Buffet has outperformed the market for decades due to his skill. You may have a rare talent for picking high yield stocks that survive for the long term, and grow their dividends to keep pace with inflation. Then again you may not. You might start by comparing your past total return rates with the S&P. If you are consistently ahead over long periods of time, you may have reason to believe that you have unusual skill. There is still a chance the past performance was just luck, but only time will tell this. If you have enough skill in picking high yield, you might make it work. If you overestimate your skill, you might go broke.

[hocus]

Hankjoy: I am very interested in being shown by reason (not following the majority) what unknowns am I not seeing here....I believe it requires a paradigm shift in one's thinking to get past the mantra "putting a high portfolio percentage in stocks is risky".

Michael:If you can find reliable data on the long term performance of high yield stocks, you can insert the data into an Excel spreadsheet and calculate past safe withdrawal rates for this asset class. *Without this type of information, any conclusions on how it would have performed in the past are just guess work.

What I see here is two different people employing two different approaches to developing confidence in their Retire Early investing plan. Hankjoy wants to be sure that his approach makes sense, but, if it does, he doesn't really care whether there are lots of others who follow it or not. Michael is especially concerned with seeing a long track record for an approach before adopting it as his own.

My take is that we need as a community to think these issues through much more carefully in the future than we have in the past. I am skeptical of the Hankjoy approach because it sounds too good to be true. That doesn't mean that there is not a lot to be learned by exploring it, however. Hankjoy has kicked off a thought-provoking thread, and for that I am grateful.

In general, I like Michael's suggestion that we favor investing approaches that are supported by a good bit of data. It is easy to allow the emotions of fear and greed to cloud your judgment when assessing the merits of investing strategies. Rooting your stratagies in historical data is (at least in theory) a way to keep yourself honest, to look at how the various investment classes really perform instead of how you wish they would perform.

The flaw in Michael's argument, in my view, is in his use of the phrase "how it would have performed in the past." That's a slippery phrase that has been used by different people at different times to refer to two very different things. If stocks provide the same returns in the future as they have in the past, the conventional SWR studies are a good guide to the selection of withdrawal rates. If stocks perform in the future as they have in the past--that is, if changes in valuation levels continue to affect long-term returns as they have in every prior time-period that researchers have examined--then the conventional SWR study numbers are off by a country mile.

My bottom line is that I think that the idea of examining lots of historical data is a sound one; it is the only way I know of to try to remove emotion from the investment analysis process. In the real world, however, emotion often finds its way even into the examination of historical data. People see in the data what they want to see.

Some (including me) have raised questions as to whether Hankjoy is being realistic in expecting to realize as much of a "free lunch" as he is inclined to believe exists in purchases of stocks that have a track record of paying high dividends. But is the conventional SWR study appproach--assuming that for the first time in history valuation levels will have zero effect on long-term returns--any less of a free-lunch scenario? Aren't long-term stock returns dependent on the ability of the underlying companies to generate earnings? When you pay more for those earnings than has ever been paid for them at earlier times in history, is it reasonable to count on the same level of returns as applied for earlier investors who paid more reasonable prices?

Using data to inform your investing strategies is a good idea, in my view. But allowing your emotional attachment to one particular investment class to color your analysis of the data examined tranforms the analysis being performed into one every bit as emotional as any of the analytical approaches that do not call for the examination of much data.

Emotion-free investment assessments are a tricker thing to pull off than many investors using purportly data-based approaches realize, in my view.

[eytonxav]

Again, I have devoted about 10% of my portfolio to the type of stocks that Hank is referring to. While I don't believe in putting all my eggs in one asset class, I have wondered what sort of % to allocate here since the yields are quite good and like Hank, I don't plan on selling.

While most would not be comfortable with Hank's approach, what does everyone think in terms of capping a % of ones portfolio in this area; what % is reasonable for a moderate to conservative risk taker

Doug

[unclemick]

***** hit on a point that gets overlooked way too often - in my view if you depart from De Gaul - you are injecting emotion or possibly 'data mining' without knowing it.

Speaking only for myself - there is no way I have been able to remove emotion AND MY 'personal history/learning curve' from 'my' investing. The best semi- defense against myself is balanced index funds - with computers doing the rebalancing. Even there, I am not pure since our Lifestrategy funds contain an Asset Allocation(25%) component. Also added REIT Index(10%) back around 98 after reeading Bernstein.

My male hormones(past and present) 'require' 10-20% of our total portfolio be in hobby stocks - there is no math or historical rationale for this - other than if I totally screw up - I believe based on FIREcal that pensions, SS, and balanced index at SEC plus 1% will carry us through.

My personal investing experiences from 1966 are going to 'filter' what I see when looking/reading investment 'stuff'.

Hence to get from Chevy to a Buick or to find that one great Monty Python stock to finance our move to Margaritaville - I bet a 'totally emotional' 10-20%.

I used to think "hobby stocks" was kind of a silly idea,
but really it's not much different than my putzing with
real estate, analyzing my options and running "what if"
scenarios. Hey, as long as we all are enjoying our ER,
that's what is important.

John Galt

[JWR1945]

Hankjoy has made some excellent points. My comments are meant to be helpful. I hope that he can build upon a sound approach.

Quote:

What if you shifted your paradigm from buying to sell a stock (hoping it went up), to buying to live off a rising stream of dividends without ever planning to sell? Wouldn't this free us from worrying about volatility of share prices going up or down? What would it matter if the market or your particular stocks or funds were down if you aren't going to sell but just cash your 8-12% dividend checks? Volatility should not matter then, the sustainability of the dividend and it's growing at least at the rate of inflation should be what we would watch for.

First, about the S&P500 index and the historical record, dividend yields used to be much higher than they are today. Yields of 6% to 8% were commonplace. They have been declining for the last three or four decades as stocks have become more popular. You can check this out by looking at Professor Robert Shiller's database (which is what FIRECalc uses). www.econ.yale.edu/~shiller/

Benjamin Graham recommended looking at a company's average earnings over the past 5 to 10 years when determining its attractiveness. Professor Shiller presents P/E10 in his data tables, where P is the index value (or price) and E10 is the average of the latest ten years of (trailing) earnings. Professor Shiller has shown that this has (a degree of) predictive power for S&P500 long-term returns (e.g., over the next decade or more).

I recommend that you (hankjoy) look at earnings yield based on the previous ten years of earnings (whenever possible). Dividends come out of earnings and looking at earnings yield (averaged) protects you from encountering surprise cuts in dividends. In addition, looking at ten years of earnings reduces the bad effects of many kinds of accounting gimmicks.

For unclemick: one big advantage to holding individual stocks is that you have control of the prices at which you buy and sell. If you look at the 52-week high and low prices of individual stocks, this ratio is typically between 1.5 and 2 and for many it is 3 or higher. That is not because a stock's price goes up-up-up or down-down-down. It is normal volatility and prices go both up and down. Provided that you are willing to let an opportunity to get away from you and provided that you are able to wait for your own price, you can assure yourself of getting a better than the median price. Your ability to do this with an index fund is much less.

Have fun.

John R.

[Bob_Smith]

Hankjoy, if what you are suggesting is workable, there would be stock mutual funds yielding 8% consistently, and we'd all be spending 8% of our assets instead of 3% or 4%. I wish it were possible, but there is no free lunch. Too many brilliant minds are analyzing every advantage imaginable, so it's very difficult to beat the market over a long period of time like 30 or 40 years. What you are describing is stock picking, and in that game there must be a loser for every winner. As a retiree, I'm not willing to risk being on the losing end. There's just too much at stake.

[cute fuzzy bunny]

Its not a stock dividend thing, but vangards high yield bond fund is creeping towards a 7% yield, and I expect that would go higher.

I know several people who have said this fund is pretty conservative as high yield bond funds go.

What are the risks of waiting until this puppy hits 8%, and buying in with the intention of taking only the yield and not touching the principal indefinitely? I know some downside price risk from interest rates, but that shouldnt change the net dividend, should it?

TH,

One risk would be inflation. If Inflation hits Double Digits again and interest rates rise to 14% again.

That bond fund would look a little weak.

[cute fuzzy bunny]

Everything except TIPS and Ibonds would stink in that case!