HDBR50 Returns versus Earnings Yield

Research on Safe Withdrawal Rates

Moderator: hocus2004

JWR1945
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Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

HDBR50 Returns versus Earnings Yield

Post by JWR1945 »

These are the final balances of the HDBR50 portfolio at years 10, 14, 18, 22, 26 and 30 when there are no withdrawals and when the initial balances are all $100000.

The HDBR50 portfolio consists of 50% stocks and 50% commercial paper. It is rebalanced annually. Expenses are 0.20%. In this case, all dividends were reinvested. There were no withdrawals. The initial balances were all $100000.

Curve fit equations

These are the equations for fitting a straight line to the final balances as a function of Professor Robert Shiller's P/E10.

P/E10 is the current value of the S&P500 index (in real dollars) divided by the average of the most recent ten years of (real) earnings.

Excel calculated the curve fit equations as a function of the percentage earnings yield 100E10/P.

The calculator has dummy data with heavy stock market losses after 2002. I excluded all sequences that ended after 2002.

Curves from sequences beginning in 1923-1984
At year 10: Final balance = 1100700/[P/E10] + 70098 and R-squared equals 0.3845.
At year 14: Final balance = 2064500/[P/E10] + 32820 and R-squared equals 0.6136.
At year 18: Final balance = 2558900/[P/E10] + 21155 and R-squared equals 0.6437.

Curves from sequences beginning in 1923-1972
At year 22: Final balance = 2120100/[P/E10] + 77317 and R-squared equals 0.5745.
At year 26: Final balance = 1372700/[P/E10] + 170189 and R-squared equals 0.3949.
At year 30: Final balance = 1049600/[P/E10] + 252306 and R-squared equals 0.2108.

Predictability

Look at R-squared. We see that P/E10 (actually, 100E10/P) predicts a portfolio's return best in the medium-term.

There is considerable randomness in the short-term.

We cannot rely upon significant portfolio gains prior to year 22. [Put today's P/E10 of 28 or so into the equations. While you are at it, put in a P/E10 of 44 to see what happened at the top of the bubble (in December 1999).]

Valuations always matter. We can take best advantage of them in the medium term.

Relationship with previous findings

In the New Tool we found that knowing a portfolio's total return at year 14 allowed us to estimate its 30-year Historical Surviving Withdrawal Rate with the greatest accuracy. R-squared was around 90%. When we waited much later to make estimates, R-squared was much lower. There was almost no variation of Historical Surviving Withdrawal Rates at year 30 based upon a portfolio's 30-year total return.

These results help to explain why. We have only a limited ability to estimate total returns as a function of earnings yield before year 10 and after year 26. Year 18 is the best, but year 14 is also good.

Considering only the predictability of returns, we would expect the best estimates at year 18. But Historical Surviving Withdrawal Rates are most sensitive to the returns during the earliest years. This pulls the best number of years for predicting Historical Surviving Withdrawal Rates forward slightly, favoring 14 years over 18.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Year, P/E10, 100E10/P, balance at year 10, balance at year 14, balance at year 18

Code: Select all

1871   13.3     7.52    277710    392896    451662
1872   14.5     6.90    241678    389434    458749
1873   15.3     6.54    239898    354898    418159
1874   13.9     7.19    243399    359901    460238
1875   13.6     7.35    232884    356052    406945
1876   13.3     7.52    250144    311995    390992
1877   10.6     9.43    284516    385542    440500
1878    9.7    10.31    232003    320116    381436
1879   10.7     9.35    206331    280548    331405
1880   15.3     6.54    220278    289514    343904
1881   18.5     5.41    176458    246225    321137
1882   15.7     6.37    218354    274256    300117
1883   15.3     6.54    204123    278828    324096
1884   14.4     6.94    201051    291967    324692
1885   13.1     7.63    200943    241728    293603
1886   16.7     5.99    174039    231907    241440
1887   17.5     5.71    170200    232687    254102
1888   15.4     6.49    188477    231835    293617
1889   15.8     6.33    197455    210026    267662
1890   17.2     5.81    158107    215708    225127
1891   15.4     6.49    185934    249197    267836
1892   19.0     5.26    171715    209309    226410
1893   17.7     5.65    168021    196973    245094
1894   15.7     6.37    154466    213721    240065
1895   16.5     6.06    164123    198162    221093
1896   16.6     6.02    178588    205693    209015
1897   17.0     5.88    166645    203225    193351
1898   19.2     5.21    144199    186126    202127
1899   22.9     4.37    147170    160258    167684
1900   18.7     5.35    164728    176690    149850
1901   21.0     4.76    154366    173895    122527
1902   22.3     4.48    148650    150783    108415
1903   20.3     4.93    151316    123374    110266
1904   15.9     6.29    150666    117689    134314
1905   18.5     5.41    129508     99278    137370
1906   20.1     4.98    129749     87064    123730
1907   17.2     5.81    123701    105392    142774
1908   11.9     8.40    105240    131623    168381
1909   14.8     6.76     85059    115119    159421
1910   14.5     6.90     82225    131990    193753
1911   14.0     7.14     75592    135321    228521
1912   13.8     7.25     86422    141926    213174
1913   13.1     7.63    101973    173658    210491
1914   11.6     8.62    105718    224889    196546
1915   10.4     9.62    123054    224060    214761
1916   12.5     8.00    120124    193827    235357
1917   11.0     9.09    139918    187842    233654
1918    6.6    15.15    212989    253227    365212
1919    6.1    16.39    287904    334029    442573
1920    6.0    16.67    292286    324964    392051

Code: Select all

1921    5.1    19.61    288854    408627    431834
1922    6.3    15.87    220474    387792    369511
1923    8.2    12.20    202470    283338    299939
1924    8.1    12.35    246806    303866    255650
1925    9.7    10.31    202440    272764    227746
1926   11.3     8.85    228262    234461    223559
1927   13.2     7.58    236135    184607    217590
1928   18.8     5.32    166379    155147    208752
1929   27.1     3.69    142844    132383    132144
1930   22.3     4.48    149802    144867    125131
1931   16.7     5.99    145307    172223    133340
1932    9.3    10.75    137509    151199    161974
1933    8.7    11.49    130494    130549    163720
1934   13.0     7.69    114102    109811    140604
1935   11.5     8.70    130299    130217    161274
1936   17.1     5.85    121743    113519    131059
1937   21.6     4.63     85962    106120    142511
1938   13.5     7.41     93289    133677    191827
1939   15.6     6.41     89191    124016    179712
1940   16.4     6.10     96644    149561    166587
1941   13.9     7.19    110517    181210    209446
1942   10.1     9.90    135740    213606    253147
1943   10.2     9.80    143354    199517    255176
1944   11.1     9.01    133816    219659    259387
1945   12.0     8.33    154656    214775    239917
1946   15.6     6.41    152889    189650    227714
1947   11.5     8.70    194264    259856    308353
1948   10.4     9.62    199433    277757    353381
1949   10.2     9.80    228243    294117    326474
1950   10.7     9.35    214910    287840    313748
1951   11.9     8.40    203389    281783    302153
1952   12.5     8.00    210496    254975    268668
1953   13.0     7.69    193837    253328    251790
1954   12.0     8.33    211527    261714    262607
1955   16.0     6.25    185999    200063    230245
1956   18.3     5.46    171855    175464    179016
1957   16.7     5.99    162029    181220    147003
1958   13.8     7.25    182018    206712    175717
1959   18.0     5.56    159436    154882    151322
1960   18.3     5.46    144062    124041    135076
1961   18.5     5.41    141452    137390    136182
1962   21.2     4.72    135477    128146    123474
1963   19.3     5.18    148422    120921    134849
1964   21.6     4.63    120192    113418    117376
1965   23.3     4.29     92613    104054    123169
1966   24.1     4.15     99167    105991    128251
1967   20.4     4.90    105791    105743    138719
1968   21.5     4.65     92524    112998    145052
1969   21.2     4.72     91669    119605    161580
1970   17.1     5.85     96740    131649    168762
1971   16.5     6.06    103812    145937    181056
1972   17.3     5.78     94545    161030    188108
1973   18.7     5.35     99500    146639    169111
1974   13.5     7.41    123122    177463    216172
1975    8.9    11.24    152898    231893    262940
1976   11.2     8.93    150253    198941    242948
1977   11.4     8.77    170243    221258    238598
1978    9.2    10.87    179989    241460    297853
1979    9.3    10.75    188063    245102    324173
1980    8.9    11.24    206395    247625    371693
1981    9.3    10.71    186132    267088    398438
1982    7.4    13.48    221360    313242    446993
1983    8.7    11.51    197709    314010    376884
1984    9.8    10.25    187853    329283    315246
1985    9.9    10.07    181962    340734    268810
1986   11.7     8.57    189992    293601    213608
1987   14.7     6.78    183912    233353    162988
1988   13.7     7.28    213066    209696    146465
1989   15.2     6.60    228452    172176    120258
1990   17.0     5.88    224663    139527     97454
1991   15.6     6.42    221746    127002     88706
1992   19.6     5.11    179549     98724     68955
1993   20.4     4.90    156312     85947    
1994   21.5     4.65    132107     72638    
1995   20.5     4.89    116295     63944    
1996   25.4     3.93     88507       
1997   29.2     3.43     69766       
1998   33.8     2.96     54115       
1999   40.9     2.44     41440       
2000   44.7     2.24     34148       
2001   37.0     2.70          
2002   30.3     3.30          
2003   22.9     4.37 


Warning: there are dummy data from 2003-2010 with heavy losses in stocks.

More follows.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Year, P/E10, 100E10/P, balance at year 22, balance at year 26, balance at year 30

Code: Select all

1871   13.3     7.52    573867    725450    911156
1872   14.5     6.90    561101    716211    906163
1873   15.3     6.54    563112    761009    822779
1874   13.9     7.19    544871    632573    755885
1875   13.6     7.35    514436    646125    768034
1876   13.3     7.52    499078    631442    777482
1877   10.6     9.43    595307    643627    806973
1878    9.7    10.31    442831    529156    630542
1879   10.7     9.35    416240    494775    599590
1880   15.3     6.54    435113    535746    573707
1881   18.5     5.41    347203    435320    506468
1882   15.7     6.37    358621    427333    557357
1883   15.3     6.54    385245    466857    518971
1884   14.4     6.94    399786    428114    467900
1885   13.1     7.63    368117    428281    427109
1886   16.7     5.99    287700    375238    403276
1887   17.5     5.71    307931    342305    350853
1888   15.4     6.49    314421    343642    286024
1889   15.8     6.33    311408    310557    247178
1890   17.2     5.81    293626    315566    214152
1891   15.4     6.49    297734    305168    216962
1892   19.0     5.26    247451    205961    220595
1893   17.7     5.65    244423    194541    259261
1894   15.7     6.37    258003    175088    246035
1895   16.5     6.06    226614    161113    261554
1896   16.6     6.02    173970    186331    278346
1897   17.0     5.88    153892    205088    288430
1898   19.2     5.21    137169    192751    323222
1899   22.9     4.37    119216    193538    360403
1900   18.7     5.35    160497    239755    395892
1901   21.0     4.76    163288    229644    337056
1902   22.3     4.48    152346    255467    283234
1903   20.3     4.93    179009    333346    312416
1904   15.9     6.29    200643    331308    393116
1905   18.5     5.41    193193    283556    322620
1906   20.1     4.98    207481    230033    355768
1907   17.2     5.81    265870    249177    408702
1908   11.9     8.40    278036    329906    372938
1909   14.8     6.76    233987    266222    349809
1910   14.5     6.90    214812    332227    360022
1911   14.0     7.14    214173    351288    317276
1912   13.8     7.25    252943    285936    262007
1913   13.1     7.63    239489    314682    269425
1914   11.6     8.62    303977    329408    297714
1915   10.4     9.62    352252    318146    324588
1916   12.5     8.00    266056    243791    333816
1917   11.0     9.09    307015    262861    284016
1918    6.6    15.15    395766    357687    330585
1919    6.1    16.39    399722    407816    366803
1920    6.0    16.67    359241    491899    423157

Code: Select all

1921    5.1    19.61    369728    399484    463868
1922    6.3    15.87    333959    308655    411525
1923    8.2    12.20    306013    275237    378759
1924    8.1    12.35    350054    301135    376841
1925    9.7    10.31    246075    285734    407949
1926   11.3     8.85    206620    275483    424866
1927   13.2     7.58    195707    269316    394332
1928   18.8     5.32    179580    224726    309544
1929   27.1     3.69    153441    219071    290791
1930   22.3     4.48    166835    257302    311137
1931   16.7     5.99    183491    268667    326621
1932    9.3    10.75    202695    279198    392901
1933    8.7    11.49    233747    310272    362609
1934   13.0     7.69    216848    262218    322975
1935   11.5     8.70    236137    287073    374816
1936   17.1     5.85    180524    254042    319876
1937   21.6     4.63    189166    221075    270580
1938   13.5     7.41    231962    285708    338641
1939   15.6     6.41    218477    285254    324567
1940   16.4     6.10    234430    295181    299215
1941   13.9     7.19    244775    299587    317957
1942   10.1     9.90    311802    369570    387097
1943   10.2     9.80    333169    379086    412425
1944   11.1     9.01    326605    331069    340213
1945   12.0     8.33    293641    311646    266409
1946   15.6     6.41    269902    282703    260559
1947   11.5     8.70    350849    381705    332994
1948   10.4     9.62    358210    368104    335866
1949   10.2     9.80    346492    296198    333582
1950   10.7     9.35    328628    302887    299510
1951   11.9     8.40    328726    286776    298665
1952   12.5     8.00    276088    251909    269618
1953   13.0     7.69    215241    242408    286256
1954   12.0     8.33    242038    239340    313024
1955   16.0     6.25    200862    209190    263381
1956   18.3     5.46    163338    174820    256067
1957   16.7     5.99    165557    195504    291819
1958   13.8     7.25    173759    227252    303121
1959   18.0     5.56    157595    198421    274859
1960   18.3     5.46    144572    211761    287643
1961   18.5     5.41    160815    240041    273325
1962   21.2     4.72    161487    215400    283532
1963   19.3     5.18    169782    235187    291975
1964   21.6     4.63    171925    233533    277990
1965   23.3     4.29    183848    209340    257665
1966   24.1     4.15    171068    225179    283090
1967   20.4     4.90    192158    238556    331231
1968   21.5     4.65    197029    234538    354826
1969   21.2     4.72    183984    226455    393839
1970   17.1     5.85    222143    279273    448574
1971   16.5     6.06    224773    312094    428474
1972   17.3     5.78    223918    338760    375768
1973   18.7     5.35    208149    362002    307496
1974   13.5     7.41    271767    436518    305548
1975    8.9    11.24    365089    501230    323552
1976   11.2     8.93    367550    407703    252660
1977   11.4     8.77    414956    352477    218436
1978    9.2    10.87    478417    334876    207528
1979    9.3    10.75    445057    287291    178039
1980    8.9    11.24    412298    255507    158342
1981    9.3    10.71    338446    209740    
1982    7.4    13.48    312880    193897    
1983    8.7    11.51    243285    150767    
1984    9.8    10.25    195363    121069    
1985    9.9    10.07    166586       
1986   11.7     8.57    132376       
1987   14.7     6.78    101006       
1988   13.7     7.28     90767       
1989   15.2     6.60          
1990   17.0     5.88          
1991   15.6     6.42          
1992   19.6     5.11          
1993   20.4     4.90          
1994   21.5     4.65          
1995   20.5     4.89          
1996   25.4     3.93          
1997   29.2     3.43          
1998   33.8     2.96          
1999   40.9     2.44          
2000   44.7     2.24          
2001   37.0     2.70          
2002   30.3     3.30          
2003   22.9     4.37          
Warning: there are dummy data from 2003-2010 with heavy losses in stocks.

Have fun.

John R.
hocus2004
Moderator
Posts: 752
Joined: Thu Jun 10, 2004 7:33 am

Post by hocus2004 »

"We have only a limited ability to estimate total returns as a function of earnings yield before year 10 and after year 26."

Say that I currently own no stocks but plan sometime in the not-too-distant future to put $10,000 into an S&P index fund. Say that my intent would be to hold this investment for a minimum of 26 years. Is the data saying that I do not gain much if any advantage by waiting for S&P valuation levels to come down before making the purchase?
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

hocus2004 wrote:"We have only a limited ability to estimate total returns as a function of earnings yield before year 10 and after year 26."

Say that I currently own no stocks but plan sometime in the not-too-distant future to put $10,000 into an S&P index fund. Say that my intent would be to hold this investment for a minimum of 26 years. Is the data saying that I do not gain much if any advantage by waiting for S&P valuation levels to come down before making the purchase?
I have checked the graphs. The answer is no. There is a definite advantage to waiting.

At years 26 and 30, there is a lot of scatter in the data. Waiting four years, from year 22 to year 26, pays off if the earnings yield falls from valuation around 4% (with P/E10 = 25) to 6% to 8% (P/E10 = 12 to 17). It does not pay to wait eight years, from year 22 to year 30.

My own interpretation is that one should start buying when P/E10 falls below 20 and start buying heavily when P/E10 falls to 15. Others may decide differently even though using the same set of data.

P/E10 can vary enough to be exploited if one patiently waits for a good buying opportunity. For example, even though P/E10 is now around 28, it dipped to 21 last February and March. The S&P500 index for those two months stood at 837 and 846 (nominal, that is, without special adjustments for inflation).

In terms of what we can see in the equations, the slopes are biggest around 14, 18 and 22 years. (The slopes are the numbers just before the "/[P/E10]" terms.} They are big enough for you to pay attention at other times, even at year 30.

Have fun.

John R.
hocus2004
Moderator
Posts: 752
Joined: Thu Jun 10, 2004 7:33 am

Post by hocus2004 »

"Waiting four years, from year 22 to year 26, pays off IF [my emphasis] the earnings yield falls from valuation around 4% (with P/E10 = 25) to 6% to 8% (P/E10 = 12 to 17). It does not pay to wait eight years, from year 22 to year 30. "

I'm not trying to be difficult. I'm fascinated by these findings and I am trying to gain a better grasp of the implications.

I guess I can see how one would be better off waiting if one assumes that the earnings yield is going to fall. But do we really know that that is going to happen within four years? My gut tells me that it will. But the data says that short-term changes in price levels are unpredictable. So I am not sure that we can assume a significant drop in the earnings yield within four years.

One of the criticisms that you often hear of long-term timing strategies is that those who hold off on purchases of stocks when prices are high may "miss out" on gains that take place despite their expectations. This would not be a concern if you could use historical data to successfully predict long-term returns. But it seems to me that what the thread-starter is saying is that you can only predict intermediate-term returns, not long-term returns.

It seems to me that what you are finding is that the long-term benefits of owning stocks are great enough to overcome valuation concerns so long as you are sure that you can avoid selling any shares for at least 26 years. Perhaps I am overstating things a bit with that interpretation. That's the message that I am getting when I read the thread-starter, but my understanding of the data presented on this thread is definitely fuzzy.

I am going to continue trying to get it straight. I think this is potentially an important finding. I understand that you have been suggesting conclusions along these lines for some time. I've just been struggling to come to terms with the distinction between intermediate-term and long-term predictability and my hope is that this thread-starter is beginning to make it a little more clear (but obviously not entirely so) for me.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

At a 4% earnings yield (P/E10 = 25), the equations predict balances of $162K, $225K and $294K at 22, 26 and 30 years respectively. This works out to an increase of $63K to $69K for waiting an additional 4 years.

There is scatter around each line of about $70K on the downside. [There is more variation on the upside.]

The question is whether waiting for a higher earnings yield (i.e., a lower value of P/E10) gains enough in four years to overcome this hurdle.

Waiting for better valuations is sufficient to overcome both the scatter and the different starting point among the lines only when the earnings yield falls into the 6% to 8% range (and P/E10 = 12 to 17) or better.

There is excellent predictability about price fluctuations in the short-term. Prices fluctuate a lot. It is only when you estimate returns (which involves the ratio of the final price to the initial price) that there is little predictability.

Stated differently, predictable returns require small price fluctuations. Unpredictable returns go along with large price fluctuations.

When we hope to get a good price in the short-term, we are hoping that short-term prices fluctuate a lot. When we hope to get good, reliable returns in the long term, we hope that long-term prices fluctuate little.

You can count on short-term price fluctuations of the order of 25%. [This corresponds to P/E10 = 21 and 28 inside of a year.] It is dangerous to depend upon larger fluctuations although they occur often.

With P/E10, the earnings are smoothed. Almost all of the fluctuations come from prices, not earnings.

Have fun.

John R.
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Post by JWR1945 »

hocus2004 wrote:One of the criticisms that you often hear of long-term timing strategies is that those who hold off on purchases of stocks when prices are high may "miss out" on gains that take place despite their expectations. This would not be a concern if you could use historical data to successfully predict long-term returns. But it seems to me that what the thread-starter is saying is that you can only predict intermediate-term returns, not long-term returns.
For unclemick: HELP! Benjamin Graham has a famous quote about prices always becoming attractive again within a reasonable amount of time. That is, you do not have to worry about having missed out on an opportunity.

The historical data do allow us to predict long-term returns. The historical data tell us that we can exploit the effects of valuations best during the intermediate-term.

This is consistent with capital preservation approaches such as varying stock strategies depending upon valuations.

Have fun.

John R.
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Post by unclemick »

????? You got me????

page 109 the 4th ed.

"Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."

Chapter 8: The Investor and Market Fluctuations.
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Post by JWR1945 »

Thanks, unclemick.

In this case we are trying to decide whether it is worthwhile to wait for a good opportunity to buy. We anticipate holding onto the index fund for a long time.

This is a great time "to sell wisely."

Back when Ben Graham wrote his comments, there was no such thing as an index fund.

How long will hocus2004 have to wait before he can buy wisely? He is not greedy. He just does not want to act rashly.

Have fun.

John R.
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Post by Mike »

How long will hocus2004 have to wait before he can buy wisely?
I would guess at least another 5 years, maybe longer. President Bush's Social Security private accounts may drive the market even higher.
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Post by JWR1945 »

I have posted tables that show the volatility of the S&P500 index in terms index levels (nominal prices) and valuations (P/E10).

There is less volatility than I had thought.

There is a real possibility that the market would continue to climb while you are waiting for a buying opportunity.

Have fun.

John R.
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Post by Mike »

The data on your new tables shows P/E 10 going over 20 in the early 90s, and never coming back. This is historically unprecedented. Data is not yet in on how this long period out of the S&P will affect long term switching performance.
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Post by JWR1945 »

Mike wrote:The data on your new tables shows P/E 10 going over 20 in the early 90s, and never coming back. This is historically unprecedented. Data is not yet in on how this long period out of the S&P will affect long term switching performance.
In view of what Mike has said, I have looked at what has happened with P/E10 around 21 to 22 in the past.

The relevant comparisons are in 1937 and in the decade of the 1960s, especially 1965. [Other Depression years turned out not to be too bad for retirees.]

The worst case annualized, real returns have been 2.7% to 3.3% at 26 to 30 years (almost always 3.3%, not 2.7%). This is better than long-term TIPS have been this year (around 2.5%). OTOH, these are data points that correspond to calculated rates, not to safe rates which are at a lower confidence limit.

Our research of switching stock allocations suggested that we make limited stock purchases with P/E10 up to 24.

Along those same lines and in view of recent history, it makes sense to purchase some (S&P500) index funds when P/E10 falls to 21 to 22. There is a significant chance of loss if sold at year 14 or earlier.

I doubt that it is worthwhile to wait for TIPS yields to push into the 2.7% to 3.3% range. I doubt that it is worth holding short-term TIPS or ibonds at 1% real interest to fill the gap while waiting for P/E10 to fall into its normal range (12 to 17). I do think that it is reasonable to buy individual stocks (or one of the very few index alternatives) to implement a dividend-based strategy. The objective would be for a dividend yield around 3.3% (or at least 2.7%) that grows with inflation.

Have fun.

John R.
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Post by Mike »

The time tested live off the dividends, don't touch the principal strategy, only using high dividend stocks instead of the S&P. I am wondering if the high dividend indexes can grow dividends as fast as the S&P, when stripped of their higher growth company components. The S&P itself grows dividends faster than inflation, but there are long periods where it lags before catching up. I am wondering if the this lag might be magnified in high dividend stocks under certain economic scenarios.
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Post by JWR1945 »

Mike has brought up an excellent question.

I went to CBS.Marketwatch.com. I looked up the Dow Jones Utility Average Index, which they identify with a number instead of a symbol 260998 or 26099800. What I learned was not encouraging.

The index has become highly volatile. Within the last five years, the average peaked around 420, fell to 160 and recovered to 330. It used to be stable.

Looking at a graph, the (rolling) dividend amount peaked around 1987 at $4.00 per share and it has fallen almost steadily to $2.50 per share. In 1984 the dividend yield was close to 9%. Now it is 3%. [There was a spike to 6%+ in 2002 when the price of the utility average took a nosedive.]

More precisely, the current index level (or price) is $329.09. The dividend amount is $2.56 over the last year. The dividend yield is 3.11%.

I had expected to see some changes as a result of deregulation. I had not expected this kind of behavior. Dividend amounts have been falling since 1987.

Between these results and what has happened to the DVY's yield, it looks as if 3% is the highest dividend yield that an index fund buyer can purchase today. To do better requires buying individual securities.

I expect stock prices to fall enough in the next year or two to make it worthwhile to wait for better yields, at least when buying an index fund. I may be wrong. Dividends are becoming more and more popular these days. This growing popularity may cancel out any improvement in yields.

Have fun.

John R.
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Post by JWR1945 »

I have collected information on the dividend amounts of the S&P500 index.

I used Professor Robert Shiller's data. I thinned the data by excluding everything except the January levels for each year. I have attached tables with nominal and real dividend amounts from 1871-2003. Each amount is the average for the month.

I exclude the curve fit of the nominal data for 1871-2003 since it diverges around 1980. A straight line makes a good fit for the real dividend amount. The dividend amount y is estimated by y = 0.0879*x -161.45, where x is the calendar year. For example, in the year 1950, the value of x was 1950. R-squared is 0.8153.

A plot of the real dividend amount versus calendar year shows fluctuations similar to a sine wave above and below the trend line. The worst cases are plus $3.00 and minus $2.00.

Using 1921-2003 data, the curve fit for the nominal dividend amount is y = 6*[10^(-41)]* exp(0.0476*x). R-squared is 0.9518. Putting values x = 1921 and x = 2003 into this equation and taking the ratios, we find that the dividend amount (as estimated by the curve) has grown by a factor of exp(0.0476*82) or 49.56079 in 82 years. To find the annualized growth rate r, (1+r)^82 = 49.56079 or r = 4.875% (nominal).

The equation for the real dividend amount based on 1921-2003 data is y = 0.1298*x - 244.05. R-squared is 0.8101. Once again, there are oscillations around the trend line. They are heavily damped in recent years. Letting x = 1950 and x = 2000, the calculated real dividend amount increases from $9.06 to $15.55, which is $1.298 per decade.

[Dividend amounts got far ahead of the trend in the 1960s. They peaked in 1966. It took until 1991 before the real dividend amount returned to the 1966 level. The trend line did not catch up until 1993.]

Real dividend amounts were about $1.00 below trend in January 2003.

Have fun.

John R.
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Post by JWR1945 »

Year, S&P500 Nominal Dividend Amount, S&P500 Real Dividend Amount

Code: Select all

1871   0.260    3.52
1872   0.263    3.51
1873   0.303    3.95
1874   0.330    4.50
1875   0.328    4.80
1876   0.300    4.67
1877   0.291    4.49
1878   0.189    3.46
1879   0.182    3.71
1880   0.205    3.46
1881   0.265    4.75
1882   0.320    5.31
1883   0.321    5.42
1884   0.328    6.00
1885   0.304    6.20
1886   0.238    5.03
1887   0.223    4.70
1888   0.248    5.01
1889   0.229    4.84
1890   0.220    4.88
1891   0.220    4.76
1892   0.222    5.11
1893   0.241    5.15
1894   0.247    6.08
1895   0.208    5.36
1896   0.189    4.80
1897   0.180    4.70
1898   0.182    4.61
1899   0.201    5.02
1900   0.218    4.65
1901   0.302    6.61
1902   0.321    6.86
1903   0.332    6.47
1904   0.347    7.07
1905   0.312    6.21
1906   0.336    6.69
1907   0.403    7.69
1908   0.437    8.51
1909   0.403    7.61
1910   0.443    7.55
1911   0.470    8.60
1912   0.471    8.70
1913   0.480    8.27
1914   0.475    8.02
1915   0.421    7.03
1916   0.441    7.15
1917   0.571    8.24
1918   0.680    8.20
1919   0.567    5.80
1920   0.528    4.62

Code: Select all

1921    0.506     4.49
1922    0.464     4.64
1923    0.512     5.14
1924    0.532     5.19
1925    0.554     5.41
1926    0.608     5.73
1927    0.697     6.72
1928    0.777     7.58
1929    0.860     8.49
1930    0.971     9.58
1931    0.967    10.26
1932    0.793     9.36
1933    0.495     6.48
1934    0.441     5.64
1935    0.450     5.59
1936    0.480     5.87
1937    0.730     8.74
1938    0.793     9.43
1939    0.513     6.19
1940    0.623     7.57
1941    0.673     8.06
1942    0.703     7.56
1943    0.590     5.89
1944    0.613     5.95
1945    0.643     6.10
1946    0.667     6.18
1947    0.713     5.60
1948    0.843     6.01
1949    0.947     6.66
1950    1.150     8.26
1951    1.487     9.88
1952    1.413     9.00
1953    1.410     8.95
1954    1.457     9.14
1955    1.547     9.78
1956    1.670    10.52
1957    1.737    10.62
1958    1.783    10.53
1959    1.757    10.23
1960    1.867    10.75
1961    1.947    11.03
1962    2.027    11.40
1963    2.137    11.86
1964    2.297    12.55
1965    2.517    13.62
1966    2.740    14.54
1967    2.880    14.78
1968    2.930    14.50
1969    3.080    14.60
1970    3.163    14.13
1971    3.130    13.27
1972    3.070    12.61
1973    3.157    12.51
1974    3.400    12.32
1975    3.623    11.74
1976    3.683    11.18
1977    4.097    11.82
1978    4.713    12.73
1979    5.113    12.64
1980    5.700    12.37
1981    6.200    12.03
1982    6.660    11.92
1983    6.883    11.88
1984    7.120    11.79
1985    7.573    12.12
1986    7.940    12.23
1987    8.300    12.60
1988    8.857    12.92
1989    9.813    13.68
1990   11.140    14.76
1991   12.107    15.18
1992   12.240    14.96
1993   12.413    14.69
1994   12.623    14.57
1995   13.180    14.80
1996   13.893    15.19
1997   14.953    15.86
1998   15.550    16.24
1999   16.283    16.73
2000   16.573    16.57
2001   16.170    15.59
2002   15.737    15.00
2003   16.120    14.98
Have fun.

John R.
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Post by Mike »

Looking at a graph, the (rolling) dividend amount peaked around 1987 at $4.00 per share and it has fallen almost steadily to $2.50 per share.
That is grim news for the high dividend strategy. Thanks for the S&P real dividend data.
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Post by Mike »

$14.78 in 1967, $14.98 in 2003. Hmm.
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