This has been my strategy also. But when we talk of SWR aren't we talking about principle not income. eg If I earn 3% dividend yield isn't the SWR is on top of that? Also if we never sell anything aren't we going to leave a pretty big estate?
It depends...
I see Two answers...
If you have a $1 M portfolio the day you retire, and need $30k in income, that is 3% SWR. Its not "on top of" anything... my thought was to position as much of the base portfolio into dividend paying stocks, and have the dividends create the 30k... then use the balance to invest in cash as a fall back plan.
For example if I have a group of stocks which can yield 3.75% and need the 30k income and have the 1 M portfolio...
I would invest 800k into the stocks (yielding 3.75%) and then invest 200k into cash and bonds. (for safety). Considering in this example that 200k is almost 7 years expenses, the probability market goes down, takes the dividends with it, and does not recover for 8 years is minimal to non existant (and if this happens, there will be bigger problems than finances IMO).
The dividends are just one aspect of the equity portfolio- they should confidently payout 30k in dividends whether the 800k grows to 840k (5% gain) or shrinks to 700k (12% loss). The focus is on the 30k payout, and that payout should increase on average year over year.
My second answer would then mention using buckets
For example put 90k (3 years expenses) in cash- this is bucket 1
put 800k (the dividends) in bucket 2
put the balance 110k into a more diversified portfolio of stocks and bonds
So the 800k kicks off 30k in annual dividends, which is spent each year. If the 800 stops supplying enough dividends (market drop) a portion of bucket 3 is liquidated to add to bucket 2 so there are enough dividends coming out of bucket 2.
Bucket 1 has enough cash that there is a 3 year window for a 2008 type market event to spend that cash and wait for dividends to recover without selling anything at a 25-50% loss.