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The TIPS-Dividend Approximation
Posted: Wed Aug 18, 2004 10:27 am
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.
Posted: Wed Aug 18, 2004 10:42 am
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.
Posted: Wed Aug 18, 2004 10:54 am
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.
Posted: Wed Aug 18, 2004 11:07 am
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.
Posted: Wed Aug 18, 2004 11:21 am
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.
Posted: Wed Aug 18, 2004 11:40 am
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.
Posted: Wed Aug 18, 2004 1:24 pm
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.
Posted: Wed Aug 18, 2004 7:39 pm
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.