5% is straightforward

[haha]

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

 

[Nords]

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.

 

[unclemick]

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.

 

[DRiP Guy]

... 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.

 

[2B]

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.

 

[DRiP Guy]

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

 

[twaddle]

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?

 

[2B]

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.

 

[unclemick]

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).

 

[JWR1945a]

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

 

[JWR1945a]

Here is a strongly worded, early study along the same lines.

Retiree Needs

Retiree Needs

Have fun.

John Walter Russell

 

[ashtondav]

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.

 

[twaddle]

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.

 

[Nords]

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.

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.

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?

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!

 

[brewer12345]

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.

 

[Hamlet]

There are enough REITs with a 5-7% yield to put together a decently diversified portfolio, as long as the REITs are only a portion. Obviously, it won't be risk-free, but neither is the alternative of using an index fund with periodic sales. The names I own in this category are O, FR, SNH, LTC, and NNN. While I wouldn't want to try a 5% withdrawl rate with them over the long haul (I suspect that some of the dividends will need to be re-invested to keep pace with inflation), I think they should be ok at 4%.

Currently, there are plenty of bank stocks that give a 5% yield. I would put a few names like BAC and UBS into this portfolio. Obviously, these stocks have risk as well. KRE is the diversified approach, but you give up some yield.

I would add some high-yielding drug companies like PFE at about 5% yield too. Hopefully, they come up with something to replace the Lipitor sales pretty quick

MO is yielding about 4.4%. I bet that one's dividend increases actually outpace inflation

There are some decent higher-yielding utilities.

I don't think that focusing on dividends is going to increase your SWR. It will allow you to avoid the unpleasant task of selling stocks in a down market, since your living expenses could come almost entirely out of dividends.

What is ScV?

The second link gives some context. He talks about preferreds, which I view as callable bonds with more BK risk. REITs might be better, but there are few with that kind of yield.

MLPs seem like the best fit, but you get both stock-like risk with the business cycle and bond-like risk with changes in interest rates.

No free lunch. If you reach for yield, you're increasing your exposure to risk.

If a retiree is willing to take on that much risk, why not just load up on ScV and increase your SWR based on expected returns of 14% or so? I think there's a thread here somewhere that suggests one could increase their SWR to something like 5-7% based on such a strategy.

If he presented some evidence that risk-adjusted returns should be better than more traditional approaches, that would be interesting to see. But I believe the academic consensus is that selecting high-yield stocks is nothing more than a poor way of gaining a value tilt.

 

[twaddle]

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!

Call me wild and crazy, but I like liquidity and rigorous reporting requirements in my stocks.

 

[twaddle]

I don't think that focusing on dividends is going to increase your SWR. It will allow you to avoid the unpleasant task of selling stocks in a down market, since your living expenses could come almost entirely out of dividends.

What is ScV?

ScV = Small-cap Value.

I like dividends. I own BAC, MO, and others as part of a diversified portfolio. Would I ever consider a 100% high-yield portfolio today? No, it's a risky non-starter for all of the reasons I've outlined.

 

[DRiP Guy]

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.

I appreciate your advice above, and take it to heart -- much wisdom.

 

[DRiP Guy]

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.

Very much agree -- I'd check the whole story, including recent M&A and regulatory issues.

I only used Abbott as a prototypical industry example of div payout profile, not as a stock recommend.



(disclaimer -- I neither work for ABT, nor hold ABT stock)

 

[DRiP Guy]

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).

he he he Yup, I was awash in quarterly statements, and spreadsheets tracking individual issues... all gone now, though for index. I took the tough love!

As to BAC, those rascals make me so mad! The DRiP never went wrong, it and XOM were a couple of my favs, and though I still bank with them, I hate their customer service, and attitude. If ever there was proof of the 'too big to fail' theory, I guess they is it.... ref recent cynically self-serving prop-up for ailing mortgage giant boneheads Countrywide... apparently they will make a silk purse out of that sow's ear...