The TIPS-Dividend Approximation

Research on Safe Withdrawal Rates

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JWR1945
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The TIPS-Dividend Approximation

Post by JWR1945 »

The TIPS-Dividend Approximation

TIPS and dividends share an important characteristic. They both produce steady streams of income. This is in striking contrast to the stock market as a whole. The most widely known studies of retirement portfolios have made us acutely aware of the damage caused by price volatility. Selling when prices are low destroys retirement portfolios. To maintain safety, we must reduce the amount of income that we withdraw. Dividend-based strategies can allow us to withdraw more because the income is steady. There is no need to sell in a down market.

Our calculators do not allow us to examine most dividend-based strategies directly. But we can take advantage of the similarities between TIPS and dividends to examine dividend-based strategies indirectly.

What I have done is to look at the 30-year balances of pairs of portfolios of stocks and TIPS. Each pair consists of a 20% TIPS / 80% stock portfolio and an 80% TIPS / 20% stock portfolio. The high-TIPS portfolio provides a steady income at its (real) interest rate. This is similar to a dividend-based income stream with the same yield, provided that it grows enough to match inflation. Even if it fails to do so, it is likely to behave in a manner more readily acceptable to retirees than alternatives. Any shortfall in matching inflation is because dividends have failed to catch up. It is not because of selling shares. Financial adjustments are natural.

There is a crossover point. At some interest rate, requirements for growth favor owning more stocks. At another interest rate, requirements for safety favor owning more TIPS.

Crossover occurs when a high stock portfolio and a high TIPS portfolio produce comparable results. We make our comparisons by requiring a high level of safety. For reasons identified in previous investigations, I limited my analysis to 1923-1975.

General Conditions

My procedure was to look at 30-year portfolio balances using withdrawal rates of 3%, 4% and 5% of the initial balance with adjustments to match inflation. I looked at TIPS interest (real) rates of 0%, 2%, 4% and 6% initially. Later, I took data at 2.5% and 3.0%.

I set the initial balance to $100000. I set expenses at 0.20%. I included annual rebalancing. I reinvested all dividends and interest. I did not remove a fixed percentage of portfolio gains. [Withdrawals are made separately. They are applied to the entire balance, not to individual components.] I used the CPI for inflation adjustments.

The 30-year balances are in column AB, rows 15-124.

[I used my latest calculator version. These data could have been taken with the basic Retire Early Safe Withdrawal Calculator, Version 1.61 of 7 November 2002.]

Analysis

I made plots of the 30-year balances for each pair of allocations (20% and 80% TIPS) versus earnings yield. As might be expected, the 30-year balances with 80% TIPS grew slowly from their base and showed very little scatter. Portfolios with 80% stocks and 20% TIPS had considerable growth and a large amount of scatter.

Focusing on safety, I noticed that the high stock portfolio failed once [in 1966] when the withdrawal rate was 4% and TIPS had a 2% interest rate. The low stock portfolio did not fail under those same conditions.

[Do not be surprised that TIPS at 2% interest are safe at a 4% withdrawal rate. Remember that TIPS at a 0% real interest rate allow you to withdraw 3.33% safely every year for 30 years. The final balance is zero.]

Taking a more general view, the high TIPS portfolios were much better than the high stock portfolios when interest rates were 4% and higher. The high stock portfolios were better most of the time when the TIPS interest rate was 2% or lower.

Looking at 2.5% and 3.0% interest rates, preferences were a toss up. The Great Depression favored stocks while the 1960s favored TIPS. All in all, I consider interest rates of 2.5% to 3.0% to be a transition region (when looking at 3%, 4% and 5% withdrawal rates).

Conclusions

TIPS become more attractive than stocks when interest rates are 3.0% and higher. They are less attractive when interest rates are 2.5% and lower.

The crossover point is 2.5% to 3.0%.

Here is the TIPS-Dividend Approximation: At high levels of safety, a dividend strategy is better than a high stock strategy if it can provide an initial yield of 2.5% to 3.0% and grow enough to keep up with inflation.

Have fun.

John R.
Last edited by JWR1945 on Wed Aug 18, 2004 7:40 pm, edited 1 time in total.
JWR1945
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Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

0% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   0%-20%   0%-80%
1871    7.5    357180     12852
1872    6.9    356413     12850
1873    6.5    307344      2400
1874    7.2    277581        17
1875    7.4    301414       538
1876    7.5    338610     10322
1877    9.4    370361    (11694)
1878   10.3    281015    (3444)
1879    9.3    329878     32233
1880    6.5    205313    (5562)
1881    5.4    156009      6958
1882    6.4    173383    (2544)
1883    6.5    151334    (11349)
1884    6.9    138511    (14867)
1885    7.6    163388    (1951)
1886    6.0    124698    (3985)
1887    5.7    111835       784
1888    6.5     86743    (9027)
1889    6.3     75903    (10445)
1890    5.8     71971    (3120)
1891    6.5     71909    (11108)
1892    5.3     68429      1153
1893    5.6     51959    (27383)
1894    6.4     90847    (10392)
1895    6.1    110675    (3417)
1896    6.0    119188    (9061)
1897    5.9    139948    (701)
1898    5.2    135587    (5495)
1899    4.4    153227     10085
1900    5.3    143389    (11299)
1901    4.8     85028    (7764)
1902    4.5     53077    (484)
1903    4.9     35015    (17249)
1904    6.3    118227    (3173)
1905    5.4     47573    (11896)
1906    5.0     33349    (10107)
1907    5.8     40757    (18316)
1908    8.4    128753    (476)
1909    6.8     81951      2561
1910    6.9     27581    (23007)
1911    7.1     43470    (12326)
1912    7.2     54484    (166)
1913    7.6     55369    (5462)
1914    8.6     90215    (3411)
1915    9.6    142049      3419
1916    8.0    132516     11423
1917    9.1    144071     21953
1918   15.2    256930     31097
1919   16.4    294464     33787
1920   16.7    308131     13847
1921-1980

Code: Select all

1921   19.6    423901      4877
1922   15.9    409914     18481
1923   12.2    341787     17948
1924   12.3    349213     15897
1925   10.3    369316     17336
1926    8.8    330392      5174
1927    7.6    293617      5608
1928    5.3    142376    (3310)
1929    3.7     26716    (13527)
1930    4.5     46799    (21191)
1931    6.0    126378    (19903)
1932   10.8    425190    (5036)
1933   11.5    489117     19388
1934    7.7    296517      7779
1935    8.7    429327     12437
1936    5.8    211750       497
1937    4.6     85892    (8183)
1938    7.4    284806       614
1939    6.4    236457    (678)
1940    6.1    220886      3950
1941    7.2    327095     23065
1942    9.9    479471     27481
1943    9.8    474269     21243
1944    9.0    317522     16006
1945    8.3    207734     12489
1946    6.4    192085     23853
1947    8.7    302199     25328
1948    9.6    293037     18058
1949    9.8    284064     13370
1950    9.3    255768     22350
1951    8.4    215035     13878
1952    8.0    158690     6333
1953    7.7    164237     5620
1954    8.3    185743     4500
1955    6.3    102402    (4062)
1956    5.5     73969    (6368)
1957    6.0     91677    (5309)
1958    7.2    113847    (4373)
1959    5.6     52605    (12891)
1960    5.5     54074    (12659)
1961    5.4     47186    (13729)
1962    4.7     26415    (16726)
1963    5.2     46054    (13891)
1964    4.6     13382    (18440)
1965    4.3    (6518)   (19303)
1966    4.1    (16884)   (19190)
1967    4.9     19380    (15448)
1968    4.7      1553    (16359)
1969    4.7      4205    (13936)
1970    5.8     83516    (8942)
1971    6.1     81439    (9891)
1972    5.8     53147    (9603)
1973    5.3     36391    (3079)
1974    7.4    107510      7927
1975   11.2    173470     11426
1976    8.9     92009      3526
1977    8.8     74258      4977
1978   10.9     88303     11477
1979   10.8     72440     14706
1980   11.2     58503     12625
30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

2% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   2%-20%   2%-80%
1871    7.5    414189    64972
1872    6.9    414054    65337
1873    6.5    359145    50978
1874    7.2    324025    46503
1875    7.4    352379    48562
1876    7.5    394274    62095
1877    9.4    430812    34560
1878   10.3    327111    41872
1879    9.3    380575    88584
1880    6.5    244152    38548
1881    5.4    187152    52339
1882    6.4    207468    40988
1883    6.5    182911    29179
1884    6.9    167686    23802
1885    7.6    193694    39990
1886    6.0    151689    37068
1887    5.7    136060    42124
1888    6.5    106019    27602
1889    6.3     93640    25251
1890    5.8     88644    34075
1891    6.5     88359    23626
1892    5.3     84597    39308
1893    5.6     69710     5050
1894    6.4    112129    27233
1895    6.1    135356    37578
1896    6.0    146721    31743
1897    5.9    170062    43067
1898    5.2    168533    38670
1899    4.4    190647    60411
1900    5.3    180535    33047
1901    4.8    111452    34084
1902    4.5     70475    39353
1903    4.9     51475    17984
1904    6.3    147660    40834
1905    5.4     67083    26506
1906    5.0     54987    31014
1907    5.8     67450    22961
1908    8.4    159162    44680
1909    6.8    106880    47244
1910    6.9     48211    14004
1911    7.1     63100    26349
1912    7.2     72112    40236
1913    7.6     73993    34120
1914    8.6    114214    38700
1915    9.6    172786    49303
1916    8.0    163532    60433
1917    9.1    172307    72256
1918   15.2    297515    86211
1919   16.4    339642    90783
1920   16.7    357524    66741
1921-1980

Code: Select all

1921   19.6    489470    58505
1922   15.9    473228    75574
1923   12.2    397341    73659
1924   12.3    405460    71082
1925   10.3    431443    75022
1926    8.8    391738    60114
1927    7.6    349811    59611
1928    5.3    178355    43825
1929    3.7     52870    29752
1930    4.5     76523    20850
1931    6.0    165309    23830
1932   10.8    499781    47573
1933   11.5    566397    78439
1934    7.7    352816    60597
1935    8.7    501944    68876
1936    5.8    259093    49595
1937    4.6    115817    34701
1938    7.4    338230    49526
1939    6.4    283590    46731
1940    6.1    262718    50993
1941    7.2    379146    76814
1942    9.9    549380    85073
1943    9.8    544478    77343
1944    9.0    366537    66830
1945    8.3    241130    58665
1946    6.4    223856    73342
1947    8.7    347246    77964
1948    9.6    336340    68119
1949    9.8    326649    62167
1950    9.3    294252    72759
1951    8.4    249445    61313
1952    8.0    185675    49579
1953    7.7    193034    49736
1954    8.3    218035    49586
1955    6.3    124732    35648
1956    5.5     93937    32343
1957    6.0    115693    35647
1958    7.2    139750    37042
1959    5.6     71993    24397
1960    5.5     74724    25414
1961    5.4     66018    23135
1962    4.7     44947    20002
1963    5.2     66732    24054
1964    4.6     30642    17353
1965    4.3      7413    14826
1966    4.1    (1581)   16394
1967    4.9     40997    23450
1968    4.7     23559    23134
1969    4.7     29539    27827
1970    5.8    118936    36098
1971    6.1    113854    33599
1972    5.8     78253    31457
1973    5.3     54759    36835
1974    7.4    131112    51057
1975   11.2    203026    56107
1976    8.9    110322    42230
1977    8.8     89100    42332
1978   10.9    103824    50443
1979   10.8     85241    53136
1980   11.2     69191    49275
More follows.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

4% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   4%-20%   4%-80%
1871    7.5    478479    155084
1872    6.9    479077    156069
1873    6.5    417673    136052
1874    7.2    376508    128234
1875    7.4    409962    132857
1876    7.5    457096    151832
1877    9.4    499000    117037
1878   10.3    379164    121929
1879    9.3    437687    183927
1880    6.5    288206    116699
1881    5.4    222552    131407
1882    6.4    246183    117870
1883    6.5    218839    101747
1884    6.9    200899     93495
1885    7.6    228075    114043
1886    6.0    182433    109763
1887    5.7    163663    114798
1888    6.5    128015     93110
1889    6.3    113899     89219
1890    5.8    107680     99844
1891    6.5    107128     85910
1892    5.3    103051    106258
1893    5.6     90071     64766
1894    6.4    136377     94375
1895    6.1    163432    109845
1896    6.0    178047    104228
1897    5.9    204273    119870
1898    5.2    206039    116660
1899    4.4    233243    147482
1900    5.3    222892    112066
1901    4.8    141735    108559
1902    4.5     90483    109692
1903    4.9     70501     82054
1904    6.3    181289    118697
1905    5.4     89596     95593
1906    5.0     80063    104640
1907    5.8     98371     97692
1908    8.4    193921    124415
1909    6.8    135546    125853
1910    6.9     72208     81920
1911    7.1     85843     96147
1912    7.2     92450    111736
1913    7.6     95483    104719
1914    8.6    141753    113420
1915    9.6    207856    129787
1916    8.0    198979    145432
1917    9.1    204450    158353
1918   15.2    343346    179612
1919   16.4    390582    187118
1920   16.7    413270    158050
1921-1980

Code: Select all

1921   19.6    563313    151959
1922   15.9    544528    173580
1923   12.2    460021    169349
1924   12.3    468906    166100
1925   10.3    501590    174207
1926    8.8    461199    155873
1927    7.6    413525    153787
1928    5.3    219485    127151
1929    3.7     83260    107468
1930    4.5    110966     97219
1931    6.0    210001    103065
1932   10.8    584145    140721
1933   11.5    653530    180155
1934    7.7    416715    152803
1935    8.7    584031    166874
1936    5.8    313113    136212
1937    4.6    150341    111501
1938    7.4    398891    135828
1939    6.4    337228    130558
1940    6.1    310279    133660
1941    7.2    437939    168972
1942    9.9    628013    183359
1943    9.8    623483    173670
1944    9.0    421833    154557
1945    8.3    278897    138663
1946    6.4    259810    157769
1947    8.7    397970    167611
1948    9.6    385079    154026
1949    9.8    374589    146301
1950    9.3    337581    158686
1951    8.4    288261    142919
1952    8.0    216184    124710
1953    7.7    225599    126397
1954    8.3    254526    128007
1955    6.3    150119    105681
1956    5.5    116729    100879
1957    6.0    143077    107964
1958    7.2    169217    110111
1959    5.6     94235     91194
1960    5.5     98425     93582
1961    5.4     87665     89373
1962    4.7     66362     86315
1963    5.2     90545     92270
1964    4.6     50681     82320
1965    4.3     23704     77048
1966    4.1     16320     81160
1967    4.9     66104     93656
1968    4.7     49237     94513
1969    4.7     59092    102969
1970    5.8    159773    116495
1971    6.1    151244    111488
1972    5.8    107331    105161
1973    5.3     76095    107888
1974    7.4    158102    126473
1975   11.2    236538    133793
1976    8.9    131211    110340
1977    8.8    106034    107860
1978   10.9    121449    117973
1979   10.8     99776    119294
1980   11.2     81333    112470
30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

6% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   6%-20%   6%-80%
1871    7.5    550902    305848
1872    6.9    552347    307850
1873    6.5    483721    279619
1874    7.2    435744    266528
1875    7.4    474948    275319
1876    7.5    527914    302206
1877    9.4    575828    257870
1878   10.3    437879    257810
1879    9.3    501960    341084
1880    6.5    338101    249603
1881    5.4    262725    264416
1882    6.4    290090    248356
1883    6.5    259650    226064
1884    6.9    238643    213430
1885    7.6    267025    239733
1886    6.0    217391    233391
1887    5.7    195061    237817
1888    6.5    153072    205294
1889    6.3    136996    198922
1890    5.8    129373    211638
1891    6.5    128507    192784
1892    5.3    124074    219482
1893    5.6    113375    169131
1894    6.4    163958    209173
1895    6.1    195316    232363
1896    6.0    213631    227737
1897    5.9    243076    249647
1898    5.2    248660    248973
1899    4.4    281644    293185
1900    5.3    271094    246921
1901    4.8    176354    235577
1902    4.5    113435    229083
1903    4.9     92424    192995
1904    6.3    219633    250988
1905    5.4    115498    214331
1906    5.0    109020    230759
1907    5.8    134066    226674
1908    8.4    233572    259738
1909    6.8    168423    258968
1910    6.9    100017    200287
1911    7.1    112104    216404
1912    7.2    115850    233354
1913    7.6    120213    225420
1914    8.6    173282    240707
1915    9.6    247796    265829
1916    8.0    239409    288010
1917    9.1    240982    301492
1918   15.2    395046    333793
1919   16.4    447966    345827
1920   16.7    476118    310660
1921-1980

Code: Select all

1921   19.6    646391    309094
1922   15.9    624745    336703
1923   12.2    530663    328690
1924   12.3    540393    324575
1925   10.3    580698    339448
1926    8.8    539737    316863
1927    7.6    485656    312181
1928    5.3    266404    268618
1929    3.7    118434    240831
1930    4.5    150734    229318
1931    6.0    261177    239856
1932   10.8    679432    298967
1933   11.5    751661    349832
1934    7.7    489127    308053
1935    8.7    676702    331261
1936    5.8    374626    283103
1937    4.6    190054    243097
1938    7.4    467661    282218
1939    6.4    398165    272966
1940    6.1    364266    273554
1941    7.2    504274    322345
1942    9.9    716377    346365
1943    9.8    712302    334100
1944    9.0    484151    301231
1945    8.3    321562    272789
1946    6.4    300451    297832
1947    8.7    455036    316118
1948    9.6    439890    297079
1949    9.8    428511    286846
1950    9.3    386323    301104
1951    8.4    332001    279039
1952    8.0    250637    250874
1953    7.7    262383    255128
1954    8.3    295715    259756
1955    6.3    178935    224446
1956    5.5    142696    217408
1957    6.0    174242    230675
1958    7.2    202678    234019
1959    5.6    119689    205664
1960    5.5    125560    210349
1961    5.4    112482    203115
1962    4.7     91027    200567
1963    5.2    117888    209442
1964    4.6     73858    194672
1965    4.3     42676    184996
1966    4.1     37225    193384
1967    4.9     95152    214578
1968    4.7     79067    217573
1969    4.7     93413    232100
1970    5.8    206711    253895
1971    6.1    194241    244921
1972    5.8    140895    231648
1973    5.3    100788    229187
1974    7.4    188906    253719
1975   11.2    274485    264368
1976    8.9    155001    225794
1977    8.8    125324    218729
1978   10.9    141439    231301
1979   10.8    116261    229832
1980   11.2     95112    218185
More follows.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

30-Year Balances at a 3% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

2.5% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   2.5%-20%   2.5%-80%
1871    7.5    524206    134842
1872    6.9    528297    135597
1873    6.5    470576    122504
1874    7.2    421185    116566
1875    7.4    461160    120437
1876    7.5    505878    132709
1877    9.4    551384    112248
1878   10.3    416038    112385
1879    9.3    461113    150439
1880    6.5    337258    107861
1881    5.4    266236    114827
1882    6.4    293241    107334
1883    6.5    268561     97043
1884    6.9    247348     91351
1885    7.6    262247    103582
1886    6.0    225828    100478
1887    5.7    202011    102539
1888    6.5    159257     87603
1889    6.3    144294     84560
1890    5.8    134795     90334
1891    6.5    132780     81577
1892    5.3    128673     93816
1893    5.6    132813     70069
1894    6.4    169678     88704
1895    6.1    198314     99224
1896    6.0    219365     96818
1897    5.9    243327    106920
1898    5.2    258924    106275
1899    4.4    293737    126596
1900    5.3    289765    105125
1901    4.8    198812    100413
1902    4.5    129346     98016
1903    4.9    117162     81377
1904    6.3    232503    107875
1905    5.4    142014     91231
1906    5.0    151036     98692
1907    5.8    189357     96894
1908    8.4    247553    112790
1909    6.8    194824    112563
1910    6.9    149708     85821
1911    7.1    149540     93752
1912    7.2    139648    101838
1913    7.6    148150     98346
1914    8.6    198252    105546
1915    9.6    263234    117250
1916    8.0    263544    127417
1917    9.1    246338    133635
1918   15.2    368993    148404
1919   16.4    412442    153643
1920   16.7    447683    137219
1921-1980

Code: Select all

1921   19.6    599764    136275
1922   15.9    575780    148719
1923   12.2    496725    144744
1924   12.3    502409    142642
1925   10.3    548147    149065
1926    8.8    528589    138337
1927    7.6    480083    136208
1928    5.3    289913    116268
1929    3.7    184833    103471
1930    4.5    220736     98573
1931    6.0    315621    103950
1932   10.8    670191    131624
1933   11.5    707019    155215
1934    7.7    495705    135864
1935    8.7    657321    146721
1936    5.8    408425    124633
1937    4.6    246731    106621
1938    7.4    483201    125087
1939    6.4    424663    121103
1940    6.1    380605    121648
1941    7.2    485968    144077
1942    9.9    664295    155164
1943    9.8    665506    149440
1944    9.0    457852    134177
1945    8.3    306928    120952
1946    6.4    289458    132033
1947    8.7    419051    140293
1948    9.6    401313    131311
1949    9.8    391206    126222
1950    9.3    349889    132341
1951    8.4    306203    121682
1952    8.0    234289    108444
1953    7.7    246647    109942
1954    8.3    275869    111637
1955    6.3    178268     95198
1956    5.5    151105     91739
1957    6.0    182865     97544
1958    7.2    203533     99053
1959    5.6    137363     85879
1960    5.5    145620     87953
1961    5.4    131993     84772
1962    4.7    121436     83468
1963    5.2    143626     87718
1964    4.6    109707     81050
1965    4.3     82098     76948
1966    4.1     87413     80858
1967    4.9    144237     90776
1968    4.7    142236     92370
1969    4.7    168507     99352
1970    5.8    269799    109848
1971    6.1    252451    106273
1972    5.8    195087    100740
1973    5.3    143801    100093
1974    7.4    203602    111685
1975   11.2    265940    116742
1976    8.9    159499     99043
1977    8.8    128077     95796
1978   10.9    135471    101433
1979   10.8    109884    100497
1980   11.2     89566     94860
30-Year Balances at a 3% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

3.0% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   3%-20%   3%-80%
1871    7.5    541819    159358
1872    6.9    546156    160266
1873    6.5    486813    146001
1874    7.2    435702    139232
1875    7.4    477111    143780
1876    7.5    523138    157167
1877    9.4    570104    135561
1878   10.3    430276    134703
1879    9.3    476401    175554
1880    6.5    349595    129639
1881    5.4    276228    136366
1882    6.4    304156    128638
1883    6.5    278800    117491
1884    6.9    256826    111149
1885    7.6    271808    124090
1886    6.0    234595    120664
1887    5.7    209874    122525
1888    6.5    165545    105977
1889    6.3    150108    102539
1890    5.8    140226    108506
1891    6.5    138112     99084
1892    5.3    133911    112127
1893    5.6    138829     87441
1894    6.4    176538    107498
1895    6.1    206179    119155
1896    6.0    228168    117009
1897    5.9    252831    127987
1898    5.2    269489    127834
1899    4.4    305729    150070
1900    5.3    301813    127197
1901    4.8    207595    121131
1902    4.5    135191    117346
1903    4.9    122888     99630
1904    6.3    242081    129412
1905    5.4    148743    110686
1906    5.0    158738    119341
1907    5.8    198925    118204
1908    8.4    257523    134861
1909    6.8    203314    134209
1910    6.9    157324    105543
1911    7.1    156612    113627
1912    7.2    145818    121723
1913    7.6    154730    118212
1914    8.6    206485    126505
1915    9.6    273415    139563
1916    8.0    273998    150662
1917    9.1    255533    156756
1918   15.2    381458    173188
1919   16.4    426159    179103
1920   16.7    462873    162054
1921-1980

Code: Select all

1921   19.6    619684    162048
1922   15.9    594916    175181
1923   12.2    513692    170544
1924   12.3    519503    168315
1925   10.3    567176    175799
1926    8.8    547775    164571
1927    7.6    497762    161988
1928    5.3    301812    139384
1929    3.7    194486    125430
1930    4.5    231624    120518
1931    6.0    329140    126714
1932   10.8    693694    157743
1933   11.5    730667    182761
1934    7.7    513757    161204
1935    8.7    680011    173518
1936    5.8    424220    148736
1937    4.6    257516    128371
1938    7.4    500606    149200
1939    6.4    440321    144605
1940    6.1    394392    144665
1941    7.2    502277    168966
1942    9.9    685563    181594
1943    9.8    686973    175563
1944    9.0    473020    158081
1945    8.3    317367    142808
1946    6.4    299443    154608
1947    8.7    432725    164252
1948    9.6    414365    154487
1949    9.8    404036    149042
1950    9.3    361414    155239
1951    8.4    316631    143649
1952    8.0    242546    128864
1953    7.7    255467    130763
1954    8.3    285690    132946
1955    6.3    185308    114475
1956    5.5    157561    110663
1957    6.0    190585    117454
1958    7.2    211702    119135
1959    5.6    143795    104532
1960    5.5    152489    106975
1961    5.4    138292    103316
1962    4.7    127842    102143
1963    5.2    150628    106837
1964    4.6    115835     99459
1965    4.3     87263     94664
1966    4.1     93209     99295
1967    4.9    152029    110616
1968    4.7    150440    112607
1969    4.7    178015    120589
1970    5.8    282286    132418
1971    6.1    263945    128248
1972    5.8    204238    121598
1973    5.3    150620    119994
1974    7.4    211513    132395
1975   11.2    275261    137962
1976    8.9    165508    117893
1977    8.8    132934    113852
1978   10.9    140349    119760
1979   10.8    113871    118264
1980   11.2     92883    111836
More follows.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

2.5% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   2.5%-20%   2.5%-80%
1871    7.5    429547     83218
1872    6.9    429585     83708
1873    6.5    373117     68126
1874    7.2    336553     62955
1875    7.4    366125     65539
1876    7.5    409277     80249
1877    9.4    447100     51079
1878   10.3    339539     57959
1879    9.3    394224    108037
1880    6.5    254653     54237
1881    5.4    195584     68304
1882    6.4    216692     56439
1883    6.5    191465     43690
1884    6.9    175593     37705
1885    7.6    201889     54873
1886    6.0    159006     51663
1887    5.7    142629     56751
1888    6.5    111250     40707
1889    6.3     98457     38038
1890    5.8     93170     47285
1891    6.5     92823     36073
1892    5.3     88986     52791
1893    5.6     74543     16863
1894    6.4    117899     40675
1895    6.1    142041     52111
1896    6.0    154179     46279
1897    5.9    178212     58538
1898    5.2    177461     54345
1899    4.4    200787     78037
1900    5.3    190613     48877
1901    4.8    118643     49011
1902    4.5     75220     53489
1903    4.9     55979     30723
1904    6.3    155655     56473
1905    5.4     72415     40298
1906    5.0     60917     45738
1907    5.8     74764     37844
1908    8.4    167423     60705
1909    6.8    113679     63062
1910    6.9     53878     27460
1911    7.1     68479     40266
1912    7.2     76929     54592
1913    7.6     79083     48257
1914    8.6    120750     53690
1915    9.6    181128     65515
1916    8.0    171958     77622
1917    9.1    179959     89749
1918   15.2    308458    105255
1919   16.4    351811    110445
1920   16.7    370837     85238
1921-1980

Code: Select all

1921   19.6    507119     77376
1922   15.9    490269     95469
1923   12.2    412312     93079
1924   12.3    420615     90350
1925   10.3    448193     95146
1926    8.8    408307     79450
1927    7.6    365001     78624
1928    5.3    188131     60566
1929    3.7     60050     45277
1930    4.5     84669     36041
1931    6.0    175915     39607
1932   10.8    519913     66279
1933   11.5    587214     99063
1934    7.7    368044     79203
1935    8.7    521536     88689
1936    5.8    271942     67009
1937    4.6    123995     50058
1938    7.4    352685     66875
1939    6.4    296360     63570
1940    6.1    274045     67634
1941    7.2    393182     95527
1942    9.9    568183    105065
1943    9.8    563367     96894
1944    9.0    379745     84601
1945    8.3    250142     74849
1946    6.4    232434     90514
1947    8.7    359370     96210
1948    9.6    347991     85557
1949    9.8    338109     79217
1950    9.3    304609     90243
1951    8.4    258717     77864
1952    8.0    192957     64764
1953    7.7    200805     65230
1954    8.3    226746     65430
1955    6.3    130778     49729
1956    5.5     99357     46103
1957    6.0    122208     50181
1958    7.2    146767     51733
1959    5.6     77273     37751
1960    5.5     80349     39045
1961    5.4     71153     36364
1962    4.7     50017     33221
1963    5.2     72377     37675
1964    4.6     35378     30278
1965    4.3     11252     27184
1966    4.1      2633     29266
1967    4.9     46930     37448
1968    4.7     29616     37358
1969    4.7     36511     42827
1970    5.8    128612     52194
1971    6.1    122712     49174
1972    5.8     85131     46183
1973    5.3     59801     51073
1974    7.4    137526     66264
1975   11.2    211016     71803
1976    8.9    115291     55931
1977    8.8     93127     55529
1978   10.9    108024     64101
1979   10.8     88704     66547
1980   11.2     72084     62078
30-Year Balances at a 4% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

3.0% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   3%-20%   3%-80%
1871    7.5    445373    104093
1872    6.9    445591    104728
1873    6.5    387521     87802
1874    7.2    349469     81848
1875    7.4    380296     85030
1876    7.5    424740    101031
1877    9.4    463884     70112
1878   10.3    352351     76456
1879    9.3    408284    130185
1880    6.5    265490     72286
1881    5.4    204289     86603
1882    6.4    226213     74202
1883    6.5    200299     60427
1884    6.9    183758     53764
1885    7.6    210346     71982
1886    6.0    166564     68453
1887    5.7    149414     73551
1888    6.5    116656     55817
1889    6.3    103435     52788
1890    5.8     97849     62476
1891    6.5     97436     50434
1892    5.3     93521     68270
1893    5.6     79544     30583
1894    6.4    123861     56166
1895    6.1    148945     68811
1896    6.0    161882     63014
1897    5.9    186626     76297
1898    5.2    186682     72365
1899    4.4    211260     98207
1900    5.3    201025     67114
1901    4.8    126083     66201
1902    4.5     80133     69741
1903    4.9     60648     45469
1904    6.3    163919     74459
1905    5.4     77941     56222
1906    5.0     67069     62719
1907    5.8     82349     55055
1908    8.4    175965     79127
1909    6.8    120718     81232
1910    6.9     59762     43072
1911    7.1     74058     56346
1912    7.2     81921     71106
1913    7.6     84358     64546
1914    8.6    127514     70942
1915    9.6    189747     84125
1916    8.0    180669     97304
1917    9.1    187861    109718
1918   15.2    319738    126947
1919   16.4    364351    132826
1920   16.7    384558    106395
1921-1980

Code: Select all

1921   19.6    525300     99005
1922   15.9    507824    118195
1923   12.2    427740    115266
1924   12.3    436233    112374
1925   10.3    465457    118140
1926    8.8    425397    101612
1927    7.6    380674    100419
1928    5.3    198238     79816
1929    3.7     67503     63195
1930    4.5     93118     53621
1931    6.0    186892     57853
1932   10.8    540673     87795
1933   11.5    608663    122638
1934    7.7    383761    100538
1935    8.7    541737    111380
1936    5.8    285220     87024
1937    4.6    132469     67770
1938    7.4    367604     86817
1939    6.4    309548     82934
1940    6.1    285740     86744
1941    7.2    407652    116898
1942    9.9    587546    127871
1943    9.8    582820    119228
1944    9.0    393356    104927
1945    8.3    259435     93374
1946    6.4    241280    110104
1947    8.7    371859    117016
1948    9.6    359992    105476
1949    9.8    349912     98714
1950    9.3    315276    110184
1951    8.4    268271     96780
1952    8.0    200464     82158
1953    7.7    208819     82978
1954    8.3    235726     83583
1955    6.3    137021     65912
1956    5.5    104959     61933
1957    6.0    128939     66890
1958    7.2    154012     68617
1959    5.6     82736     53156
1960    5.5     86170     54767
1961    5.4     76468     51633
1962    4.7     55272     48498
1963    5.2     78223     53400
1964    4.6     40293     45234
1965    4.3     15243     41500
1966    4.1      7017     44171
1967    4.9     53088     53623
1968    4.7     35910     53801
1969    4.7     43755     60147
1970    5.8    138636     70745
1971    6.1    131890     67138
1972    5.8     92265     63176
1973    5.3     65033     67471
1974    7.4    144158     83708
1975   11.2    219259     89785
1976    8.9    120425     71672
1977    8.8     97289     70678
1978   10.9    112358     79737
1979   10.8     92278     81879
1980   11.2     75070     76720
More follows.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

30-Year Balances at a 5% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

2.5% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   2.5%-20%   2.5%-80%
1871    7.5    334888     31593
1872    6.9    330874     31820
1873    6.5    275658     13747
1874    7.2    251921      9344
1875    7.4    271090     10642
1876    7.5    312677     27789
1877    9.4    342816    (10102)
1878   10.3    263041      3534
1879    9.3    327335     65634
1880    6.5    172049       613
1881    5.4    124931     21782
1882    6.4    140142      5545
1883    6.5    114369    (9675)
1884    6.9    103837    (15978)
1885    7.6    141531      6164
1886    6.0     92184      2849
1887    5.7     83246     10963
1888    6.5     63243    (6194)
1889    6.3     52619    (8492)
1890    5.8     51546      4236
1891    6.5     52866    (9444)
1892    5.3     49298    11766
1893    5.6     16273    (36533)
1894    6.4     66121    (7361)
1895    6.1     85769      4997
1896    6.0     88994    (4262)
1897    5.9    113097     10156
1898    5.2     95998      2416
1899    4.4    107838     29479
1900    5.3     91460    (7377)
1901    4.8     38474    (2392)
1902    4.5     21094      8963
1903    4.9    (5207)   (20000)
1904    6.3     78807      5070
1905    5.4      2816    (10652)
1906    5.0    (29319)   (7222)
1907    5.8    (40023)   (21275)
1908    8.4     87294      8620
1909    6.8     32534     13561
1910    6.9    (42229)   (31057)
1911    7.1    (12609)   (13248)
1912    7.2     14210      7346
1913    7.6     10016    (1832)
1914    8.6     43248      1833
1915    9.6     99022     13779
1916    8.0     80372     27828
1917    9.1    113580     45863
1918   15.2    247923     62106
1919   16.4    291180     67246
1920   16.7    293991     33257
1921-1980

Code: Select all

1921   19.6    414475     18477
1922   15.9    404758     42220
1923   12.2    327899     41415
1924   12.3    338822     38058
1925   10.3    348239     41226
1926    8.8    288025     20562
1927    7.6    249919     21040
1928    5.3     86348      4863
1929    3.7    (65281)   (12942)
1930    4.5    (51757)   (26600)
1931    6.0     36209    (24829)
1932   10.8    369636       933
1933   11.5    467409     42910
1934    7.7    240383     22543
1935    8.7    385751     30657
1936    5.8    135459      9385
1937    4.6      1259    (6510)
1938    7.4    222169      8663
1939    6.4    168057      6036
1940    6.1    167485     13619
1941    7.2    300396     46978
1942    9.9    472071     54965
1943    9.8    461227     44347
1944    9.0    301638     35025
1945    8.3    193355     28745
1946    6.4    175409     48996
1947    8.7    299689     52126
1948    9.6    294670     39804
1949    9.8    285011     32212
1950    9.3    259328     48145
1951    8.4    211231     34045
1952    8.0    151624     21084
1953    7.7    154963     20519
1954    8.3    177623     19224
1955    6.3     83288      4260
1956    5.5     47609       468
1957    6.0     61550      2819
1958    7.2     90001      4413
1959    5.6     17183    (10393)
1960    5.5     15078    (9876)
1961    5.4     10313    (12068)
1962    4.7    (21471)   (17072)
1963    5.2      1127    (12392)
1964    4.6    (39189)   (20565)
1965    4.3    (60167)   (22667)
1966    4.1    (83071)   (22409)
1967    4.9    (50727)   (15921)
1968    4.7    (83837)   (17705)
1969    4.7    (96498)   (13728)
1970    5.8    (12599)   (5463)
1971    6.1     (7034)   (7934)
1972    5.8    (24949)   (8384)
1973    5.3    (24343)     2052
1974    7.4     71450     20843
1975   11.2    156091     26864
1976    8.9     71082     12820
1977    8.8     58177     15261
1978   10.9     80576     26769
1979   10.8     67523     32598
1980   11.2     54601     29297
30-Year Balances at a 5% Withdrawal Rate. Year, Percentage Earnings Yield 100E10/P, 20% TIPS allocation, 80% TIPS allocation.

3.0% TIPS interest

1871-1920

Code: Select all

Year   100E10/P   3%-20%   3%-80%
1871    7.5    348927     48828
1872    6.9    345025     49190
1873    6.5    288229     29604
1874    7.2    263236     24465
1875    7.4    283482     26281
1876    7.5    326342     44895
1877    9.4    357665      4663
1878   10.3    274425     18209
1879    9.3    340168     84815
1880    6.5    181384     14933
1881    5.4    132350     36840
1882    6.4    148270     19766
1883    6.5    121798      3362
1884    6.9    110691    (3621)
1885    7.6    148883     19874
1886    6.0     98534     16241
1887    5.7     88955     24577
1888    6.5     67768      5657
1889    6.3     56762      3038
1890    5.8     55472     16447
1891    6.5     56760      1783
1892    5.3     53131     24414
1893    5.6     20260    (26374)
1894    6.4     71183      4834
1895    6.1     91710     18466
1896    6.0     95596      9018
1897    5.9    120421     24607
1898    5.2    103875     16896
1899    4.4    116792     46345
1900    5.3    100236      7032
1901    4.8     44570     11272
1902    4.5     25075     22135
1903    4.9    (1593)    (8702)
1904    6.3     85757     19505
1905    5.4      7139      1758
1906    5.0    (24685)     6097
1907    5.8    (34371)   (8103)
1908    8.4     94407     23393
1909    6.8     38122     28256
1910    6.9    (38026)   (19459)
1911    7.1    (8507)     (935)
1912    7.2     18023     20489
1913    7.6     13985     10881
1914    8.6     48543     15378
1915    9.6    106079     28686
1916    8.0     87339     43946
1917    9.1    120189     62681
1918   15.2    258017     80705
1919   16.4    302542     86548
1920   16.7    306243     50736
1921-1980

Code: Select all

1921   19.6    430915     35963
1922   15.9    420732     61208
1923   12.2    341788     59988
1924   12.3    352963     56434
1925   10.3    363739     60481
1926    8.8    303018     38654
1927    7.6    263586     38850
1928    5.3     94664     20248
1929    3.7    (59951)      960
1930    4.5    (45672)   (13303)
1931    6.0     44643    (11023)
1932   10.8    387651     17847
1933   11.5    486659     62516
1934    7.7    253764     39873
1935    8.7    403463     49241
1936    5.8    146219     25312
1937    4.6      7422      7170
1938    7.4    234602     24434
1939    6.4    178775     21263
1940    6.1    177089     28824
1941    7.2    313027     64830
1942    9.9    489529     74147
1943    9.8    478666     62892
1944    9.0    313691     51773
1945    8.3    201503     43940
1946    6.4    183116     65601
1947    8.7    310992     69780
1948    9.6    305618     56466
1949    9.8    295788     48385
1950    9.3    269139     65129
1951    8.4    219911     49911
1952    8.0    158383     35451
1953    7.7    162170     35192
1954    8.3    185763     34221
1955    6.3     88734     17350
1956    5.5     52356     13203
1957    6.0     67293     16326
1958    7.2     96323     18099
1959    5.6     21678      1779
1960    5.5     19851      2560
1961    5.4     14644      (50)
1962    4.7    (17341)   (5149)
1963    5.2      5817      (38)
1964    4.6    (35446)   (9003)
1965    4.3    (57299)   (11686)
1966    4.1    (80035)   (10972)
1967    4.9    (46147)   (3371)
1968    4.7    (79374)   (5009)
1969    4.7    (91425)    (295)
1970    5.8     (5016)     9071
1971    6.1      (166)     6028
1972    5.8    (19786)     4754
1973    5.3    (20656)    14948
1974    7.4     76803     35022
1975   11.2    163257     41609
1976    8.9     75342     25452
1977    8.8     61645     27505
1978   10.9     84367     39715
1979   10.8     70686     45493
1980   11.2     57256     41604
Have fun.

John R.
unclemick
*** Veteran
Posts: 231
Joined: Sat Jun 12, 2004 4:00 am
Location: LA till Katrina, now MO

Post by unclemick »

It'll take a couple more reads for what you posted to soak in.

My initial impression is - since 'my dividend portfolio' marked to todays market has a 4.2% yield - the prudent thing to do - is to evaluate each holding as to 'expected div. growth' recognizing that that's tough - But 2.5 - 3.0 % vs 4.2% provides a margin of safety to work with and it's the growth factor that has the chance of 'real dollars' keeping up with inflation.

Also - pushing too hard to get an immediate high yield without knowledge of div growth is only half the loaf - although for example a 10% yield issue with 0-1% growth could be split to 3% take out and 7% reallocated/reinvested to keep real dollars growing.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

What we have established are the requirements for a dividend-based strategy to become more attractive than an overall stock market strategy. Dividend yields need to be 3% or more assuming that their growth matches inflation. These requirements apply broadly for withdrawal rates of 3% to 5% at the 30-year point. Once these requirements are met, one can focus on factors other than safety.

These requirements apply to TIPS as well. Whenever yields equal 3% or more, a portfolio should be weighted heavily in favor of TIPS. When yields are between 2.5% and 3.0%, the weighting matters little. When yields are less than 2.5%, stocks become more attractive.

[These values include conditions that fail. That is, the dividend-based strategy has a similar likelihood of surviving or failing when yields are 2.5% to 3.0% as an overall stock market strategy. If the portfolio survives, the balances are similar at 30 years.]

Interestingly, a portfolio that emphasizes dividend income can have a better upside than one emphasizing the overall stock market. The reason is that the return from the holding other than stocks, especially if it is commercial paper, can drag the return of the total portfolio well below that of stocks. A dividend-based strategy is likely to come very close to matching the high, long-term return of the stock market because it can tolerate a very high percentage of stocks. If it were not for considerations such as liquidity and the redeployment of assets, the stock allocation could be 100%.

There is a higher potential upside with a dividend-based strategy than with TIPS. However, the safety falls below 100% and there is a much greater possibility of loss if some shares have to be sold.

The required dividend yield of 3% is modest. There are many quality stocks that meet this hurdle. The requirement for enough growth to match inflation is not too difficult either.

Now let us look at somewhat different dividend yields.

Consider a stock with a dividend yield of 4%, but without any growth. We start with the formula for compounded returns: [final balance / initial balance] = (1+r)^n, where r is the interest rate and n is the number of years. We adapt it to see what it takes for $3 to grow to $4 at the rate of inflation. If inflation is 3%, the equation becomes [4/3] = 1.03^n and n is 9.7 years. If inflation is 4%, the equation becomes [4/3] = 1.04^n and n is 7.3 years.

This tells us that such a stock exceeds our requirements for 7 to 10 years provided that inflation is 3% to 4%. It would take that long for dividends beginning at 3% to grow to the same dollar amount as initially thrown off by a stock yielding 4%. The surplus could buy additional shares of stock as well. Moreover, 7 to 10 years is a very long time for us to make dividend projections.

Now look at a stock that begins at a 2% dividend yield. If its dividends grow by 10% per year, they will double in 7.3 years. [For those using the rule of 72, the exact value of n is 7.2725409, which is very close to 72/10.] Notice that this is the same amount of time that it takes $3 to grow to $4 at an inflation rate of 4%.

This tells us that such a stock would need to grow its dividend by 10% or more for 7 years to catch up to requirements. It would be throwing off less than the required dividend amount throughout the entire amount of time. Even if the dividend growth rate were 20%, it would still take 3.8 years to catch up.

Have fun.

John R.
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