Formula for a 5% Dividend

[frank2009]

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

 

[Gone4Good]

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.

 

[Senator]

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.

 

[W2R]

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.

 

[Sojourner]

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.

 

[mathjak107]

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 .

 

[ulrichw]

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.

 

[Running_Man]

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.

http://www.early-retirement.org/forums/f44/5-withdrawal-rate-portfolio-76091.html

 

[audreyh1]

+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!

 

[ulrichw]

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.

http://www.early-retirement.org/forums/f44/5-withdrawal-rate-portfolio-76091.html

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.

 

[donheff]

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?

 

[Tadpole]

+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.

 

[target2019]

+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.