High Dividend Strategies

Research on Safe Withdrawal Rates

Moderator: hocus2004

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

Post by unclemick » Sat Nov 20, 2004 3:51 pm

Walter gets favorable mention - including his track record from 1956 - to 1984 by Warren Buffett in his 1984 Columbia speech - reprinted in appendix 1 of the Ben Graham's 4th ed. of The Intelligent Investor.

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

Post by JWR1945 » Sat Nov 20, 2004 7:31 pm

ForeignExchange wrote:Obviously, from what you've said, there may be some years where dividend growth may fall behind inflation. An investor may have to hold on to his portfolio until better times arrive. Thanks for the data. Do you have any info on dividend growth during the U.S. banking crisis from the late 80's to about 1990?

My source is Professor Robert Shiller's website and database.
http://www.econ.yale.edu/~shiller/
http://www.econ.yale.edu/~shiller/data.htm
http://www.econ.yale.edu/~shiller/data/ie_data.htm

Professor Shiller of Yale has complied detailed monthly information on the S&P500 index including both real and nominal prices (index values), dividends and earnings.

Professor Shiller's data provides the inputs to historical sequence Safe Withdrawal Rate calculators. These include the FIRECalc, the Retire Early Safe Withdrawal Calculator and my calculators, which are modifications of the Retire Early Safe Withdrawal Calculator. My calculators add several new capabilities and they ease data reduction tremendously. The data reduction modifications make it easy to make tables of stock market total returns, both nominal and real. [My calculators may be downloaded from this site.]

Have fun.

John R.

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

Post by hocus2004 » Sat Dec 04, 2004 10:06 am

I discovered this week that there is a board at the Motley Fool site called "Dividend Growth Investing." Here is a link to the "Most Recomended Posts" page:

http://boards.fool.com/Messages.asp?bid ... mendations

BabyFrog: "Because of the value of dividends to ensuring decent corporate governance, companies that pay and grow their dividends often make worthwhile investments for reasons beyond just the current income from the dividends. The purpose of this board is to research, analyze, and discuss companies that fit into the dividend growth strategy."

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Sat Dec 11, 2004 3:04 pm

Siegel: How to invest now

Professor Jeremy Siegel still thinks stocks are a solid long-term investment -- with a twist.

November 30, 2004: 12:50 PM EST

Interview by Pablo Galarza, Money Magazine

In his forthcoming book "The Future for Investors," Siegel says that stock pickers do better when they ignore the fastest-growing businesses and focus instead on big, boring companies with fat dividend yields.

Q. So which stocks should we be looking at?

A. I can't emphasize enough the importance of dividends and reinvesting those dividends. You'll find that dividend payers that trade at reasonable valuations are the stocks that did the very best for investors over the long run.

One of the things I note in the new book is that the 100 highest-yielding stocks in the S&P 500 have done better than the index as a whole over the past 50 years.

Again, no one can guarantee in the short run that this works, but over the long run, I think you can accrue a little better return on the market by focusing on dividend payers. I think we need more index funds that track just stocks with dividends.

There's only one: Barclays' iShares Dow Jones Select Dividend Index (DVY (Research)) exchange-traded fund.

http://money.cnn.com/2004/11/30/markets ... /index.htm

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

Post by JWR1945 » Sat Dec 11, 2004 4:31 pm

ForeignExchange wrote:Siegel: How to invest now

Professor Jeremy Siegel still thinks stocks are a solid long-term investment -- with a twist.
..
Again, no one can guarantee in the short run that this works, but over the long run, I think you can accrue a little better return on the market by focusing on dividend payers. I think we need more index funds that track just stocks with dividends.

There's only one: Barclays' iShares Dow Jones Select Dividend Index (DVY (Research)) exchange-traded fund.

Thanks!

Let us not forget unclemick's thread The Dividend Duck dated Thu Aug 19, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2899

unclemick wrote:Wall Street never fails to feed the ducks:

NYSE,BDV, Black Rock Dividend Achievers Trust, picked from top 100 highest yield Mergent's Dividend Achiever's, will hold 60-90 issues with rebalancing to stay diversified, expense 0.85%, yields 6.75% bought below 13.75/share - fixed div .90/shr.

Hmmmm - looks like I got me a benckmark for my dividend hobby stocks...
Blockheadedness prevents me from abandoning my hobby stocks and leaping on this opportunity - after all they are 'hobby' stocks...

Alec added another choice.

Alec wrote:Regarding the trading costs and taxes associated with high dividend paying stocks..
..
Do you really need to purchase ind stocks for the high dividend strategy? You could use Ishares DVY, see also M* portfolio breakdown of DVY. Lots of Banks and Utilities. Or even VEIPX (Vanguard's Equity Income fund) - shoots for stocks with above average dividends and below average valuations among other things. DVY is actually more mid cap value, which is a better diversifier of large caps than large value.

His choices are good.

JWR1945 wrote:For Alec:

Your selections make sense. Both Ishares DVY and Vanguard's VEIPX invest in companies with capitalizations of $1.0 billion or more with above average yields. Their fees are low. They satisfy other indicators of value as well.
..The choice is a toss up for VEIPX with its 2.8% dividend yield. The choice is clear-cut for DVY with its 3.9% dividend yield.

It is fun to posit this question: Has Professor Jeremy Siegel been reading our boards?

Have fun.

John R.

Mike
*** Veteran
Posts: 278
Joined: Sun Jul 06, 2003 4:00 am

Post by Mike » Sat Dec 11, 2004 6:23 pm

I can't emphasize enough the importance of dividends and reinvesting those dividends.

What does that mean for the future of the S&P, with its historically unprecedented low dividend yield? Even the "high dividend" stocks generally have paltry yields compared to their historic norms. I wouldn't expect a repeat of their historic total return at today's yield, although they may continue to outperform the S&P. John Templeton's evaluation that there are no equity bargains world wide is a bit sobering, along with his recommendation to just play it safe for now.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Sat Dec 11, 2004 11:12 pm

A new ETF to add to the list:

PowerShares High Yield Equity Dividend Achievers(TM) Portfolio (AMEX:PEY) is designed for investors who seek a relative low-cost, tax-efficient investment in high yielding companies committed to consistently increasing their dividend. The PowerShares High Yield Equity Dividend Achievers(TM) Portfolio is based on the Mergent Dividend Achievers(TM) 50 Index which is comprised of the fifty highest dividend yielding companies with at least ten years of consecutive dividend increases. The index has a current dividend yield of 4.1% and average annual returns of 21.12%, 11.63% and 17.93% over the last 1 year, 3 year and 5 year periods compared with the S&P 500 returns of 13.87%, 4.04% and -1.31(1).

http://home.businesswire.com/portal/sit ... ewsLang=en

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

Post by JWR1945 » Tue Dec 14, 2004 12:04 pm

This is good to see.

PowerShares High Yield Equity Dividend Achievers(TM) Portfolio is based on the Mergent Dividend Achievers(TM) 50 Index which is comprised of the fifty highest dividend yielding companies with at least ten years of consecutive dividend increases.
..
(1) Past performance is not indicative of future results. The return of the Dividend Achievers Index does not represent the return of the Portfolio. The Index performance results are hypothetical. The Dividend Achievers Index does not charge management fees or brokerage expenses and no such fees were deducted from the hypothetical performance shown. In addition, the results actual investors might have achieved would have been different from those shown because of differences in the timing, amounts of their investments and fees and expenses associated with an investment in the Portfolios. The S&P 500 index is an unmanaged index and is a broad measurement of change in stock market conditions based on the average performance of approximately 500 widely held common stocks.

My comments on unclemick's thread The Dividend Duck apply here. They were originally directed toward the NYSE,BDV, Black Rock Dividend Achievers Trust.

This competition is good. It may keep fees down.

Beware of the effects of (1) front running and (2) not having a capitalization weighted index.

Front running has to be possible because of the nature of the index. There is front running even with the S&P500 index. But with the S&P500, the capitalization of the 500th stock is minuscule compared to that of the rest of the index. Front running is a lot more important when there are only 50 companies.

Without capitalization weighting, there will have to be buying and selling to restore the index each year. It could be costly.

Have fun.

John R.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Fri Dec 17, 2004 1:41 am

I don't know what the turnover for PEY will be, but morningstar is showing a portfolio turnvover of only 2% for DVY.

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

Post by JWR1945 » Fri Dec 17, 2004 12:21 pm

I just checked out DVY. It is popular. Its price has risen, driving its yield down to 2.79%.

Its management expenses are 0.40%. This is important when making comparisons.

[As ForeignExchange said, its turnover is 2%.]

Have fun.

John R.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Wed Feb 16, 2005 12:41 am

Jeremy Siegel interview with Businessweek.

Growth Stocks, Stunted Gains?
In his new book, Wharton's Jeremy Siegel warns against overpaying for such shares and favors relatively cheap picks with high dividends.

Still, to outperform the modest returns he expects for the broad market, he suggests:

1. Invest 60% of your stock portfolio in the U.S. and 40% in companies based overseas (in his earlier book he recommended a 25% foreign allocation).
2. Index half of your portfolio. For the U.S. portion, look for a fund that replicates the Wilshire 5000 Index, which includes nearly all publicly traded companies, small-cap as well as large-cap. For the international portion, invest in the benchmark international EAFE index (Europe, Australia, Asia, and the Far East).
3. With the remaining 50% of assets, stay broadly diversified, but emphasize stocks with high dividends selling for low price-earnings ratios.
4. Tilt toward industries that have performed the best over time, including brand-name consumer staples, pharmaceuticals, and energy stocks.
5. Without fail, reinvest your dividends.

http://www.businessweek.com/bwdaily/dnf ... _db014.htm

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

Post by JWR1945 » Wed Feb 16, 2005 5:20 am

From the article:
He found that anyone who had bought and held the original 500 stocks in the Standard & Poor's 500-stock index when it was created in 1957 would have made more money than someone who owned the updated index over that time. (The S&P 500 is reformulated by committee periodically to make sure it encompasses the 500 leading companies.)
I find this intriguing.

This is consistent with one of my tentative conclusions: rebalancing is not always a good idea.

Rebalancing helps on the downside, but only at the expense of the upside. In times such as these, when valuations are sky high, rebalancing helps. In normal times it can harm you significantly.

In 1957, stocks were very close to their normal range of valuations. P/E10 ranged from 13.7 to 16.9.

Have fun.

John R.

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

Post by JWR1945 » Wed Feb 16, 2005 5:37 am

ForeignExchange wrote:Jeremy Siegel interview with Businessweek.

Growth Stocks, Stunted Gains?
In his new book, Wharton's Jeremy Siegel warns against overpaying for such shares and favors relatively cheap picks with high dividends.

Still, to outperform the modest returns he expects for the broad market, he suggests:

1. Invest 60% of your stock portfolio in the U.S. and 40% in companies based overseas (in his earlier book he recommended a 25% foreign allocation).
2. Index half of your portfolio. For the U.S. portion, look for a fund that replicates the Wilshire 5000 Index, which includes nearly all publicly traded companies, small-cap as well as large-cap. For the international portion, invest in the benchmark international EAFE index (Europe, Australia, Asia, and the Far East).
3. With the remaining 50% of assets, stay broadly diversified, but emphasize stocks with high dividends selling for low price-earnings ratios.
4. Tilt toward industries that have performed the best over time, including brand-name consumer staples, pharmaceuticals, and energy stocks.
5. Without fail, reinvest your dividends.
I detect a strong shift toward value.

Currently, foreign stocks are less expensive in terms of traditional measures of values, such as P/E.

High dividend yields and low price-to-earnings ratios are traditional measures of value.

His preference for indexing and broad diversification is consistent with the outlook of much of academia. Because of costs, index funds are almost always among the best mutual fund choices available even when they are not the very best.

Have fun.

John R.

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

Post by JWR1945 » Wed Feb 16, 2005 5:54 am

Even better, at a current price-earnings ratio of 18 to 20 times earnings, he doesn't think they're badly overpriced. Whew!
Jeremy Siegel seems to have his own way of assessing valuations.

These days, there are many different ways to calculate P/E and many people mix them up with the intention of winning an argument instead of reporting the truth.

IIRC, hocus2004 has cited an article that makes this point.

I do not know today's single-year price-to-earnings ratio in terms that are consistent with the historical record. The best that I can do is to mention that it was 22.7 in January 2004 when the S&P500 index was 1132.52 using Professor Shiller's data (using the traditional definition). Earnings have improved sharply over the past year, but I am hesitant to accept that the price-to-earnings ratio has fallen to the 18-20 range using the traditional definition.

If you look at multiple year earnings, such as with P/E10, valuations remain exceedingly high.

Have fun.

John R.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Thu Feb 17, 2005 3:15 pm

Dividends count most in the long run

In their latest ABN-AMRO long-term study of investment returns, Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School accept that the role of dividends is bound to be played down in day-by-day talk about shares. Over a year, changes in a share's price dominates returns. Price is usually a lot more volatile than income. It follows that over the long run, shares with low dividend yields are riskier than ones with above-average yields.

Over a long period, average returns on shares are determined largely by dividends. ABN-AMRO's Global Investment Returns Yearbook finds that UK shares have returned a money average of 9.6 per cent a year since 1900. Of this, 4.9 per cent comes from dividends, 4.7 per cent from capital gains.

If you are saving to build up capital over decades rather than months, reinvesting dividends will make a vast difference to the size of the pot you end up with.

Not surprisingly, given the key role of dividends in equity returns, it has paid over the long run to invest in stocks with above average yields. In the UK, an index of high-yield stocks has delivered a money return averaging 11.2 per cent a year compared with the 9.6 per cent market average. This also assumes that dividends are re-invested. Lower-yield stocks delivered 7.2 per cent.

http://business.timesonline.co.uk/artic ... 77,00.html

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

Post by JWR1945 » Fri Feb 18, 2005 7:48 am

ForeignExchange wrote:Not surprisingly, given the key role of dividends in equity returns, it has paid over the long run to invest in stocks with above average yields. In the UK, an index of high-yield stocks has delivered a money return averaging 11.2 per cent a year compared with the 9.6 per cent market average. This also assumes that dividends are re-invested. Lower-yield stocks delivered 7.2 per cent.
Actually, this comes as a big surprise for at least one generation.

I know that thoughout my entire lifetime I have heard claims that dividends don't matter and/or that it is better for a company to put money back into itself to generate growth.

Dividends were credited with two features: they don't lie (while earnings statements can lie through deceptive accounting) and they cushion the downside.

There was also something about retired people. But everybody knew that widows and orphans trade away the upside in favor of a reliable income stream that is protected on the downside.

Only recently have I seen assertions that superior returns and higher dividend yield go hand in hand.

It turns out that this has been true all along. People who knew that dividends detract from returns believed a lie.

Have fun.

John R.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Fri Feb 18, 2005 1:23 pm


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

Post by JWR1945 » Fri Feb 18, 2005 2:02 pm

Thanks for the link to an excellent story.

It was kind of scary when I read this paragraph:
Jay Ritter, who teaches finance at the University of Florida, takes the argument further. In a paper that will be published soon...he maintains that not only is past economic growth no guarantee of future stockmarket returns, but even future economic growth (could we but know it) is no guarantee of contemporaneous stockmarket returns except in the most transitory way. A rough-and-ready empirical example of that truth, looking only at share prices: in 2004, and for the second year running, China was the worst performing stockmarket tracked by The Economist, falling 15% despite the country's rapid growth. Mr Ritter reckons that current earnings yields are the best guide - but earnings need to be massaged over ten years or so to remove the distorting effects of specific moments of the business cycle.
Then I remember that it is Professor Robert Shiller (along with Professor Campbell) who has been advocating the use of P/E10 (where the earnings yield E10/P is 1 / [P/E10] ). In addition, Professor Shiller credits Benjamin Graham with the idea of averaging at least 5 to 10 years of earnings.

Jay Ritter is undoubtedly familiar with Professor Shiller's work.

It is common for a new discovery to have applications that an inventor never imagined. I doubt seriously that Professor Shiller was thinking about Safe Withdrawal Rate research when he came up with P/E10.

Have fun.

John R.

ForeignExchange
* Rookie
Posts: 19
Joined: Wed Feb 25, 2004 4:46 pm

Post by ForeignExchange » Fri Feb 18, 2005 2:59 pm

Nurture your dividend nest eggs

Reinvest and capture the inflation-busting long-term returns that equities offer

It is often said - and too often forgotten, that dividends matter.

The London Business School numbers hammer this message home. Spend dividends as you receive them and you'll have immediate enjoyment but condemn yourself to a portfolio that barely beats inflation - that is, your future spending power will not grow; reinvest them and you will capture the inflation-busting long-term return that equities offer.

All assuming, of course, that the future resembles the past.

http://www.guardian.co.uk/business/stor ... 96,00.html

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

Post by JWR1945 » Sat Feb 19, 2005 9:18 am

From the UK Guardian article:
First, the bald numbers: over the past 105 years British equities have produced an annual [price] gain of 4.7%. However, had shareholders reinvested all dividends paid to them by companies over the period, their overall annual [total] return would have been 9.6%. This compares with annualised inflation in the economy over the century of 4% and total returns from government bonds and cash in the bank of 5.4% and 5% respectively.

It is often said - and too often forgotten, that dividends matter.

The London Business School numbers hammer this message home. Spend dividends as you receive them and you'll have immediate enjoyment but condemn yourself to a portfolio that barely beats inflation - that is, your future spending power will not grow; reinvest them and you will capture the inflation-busting long-term return that equities offer.
These numbers look very good for retirees: if they live off their dividends (without selling anything), they can still see their nest eggs grow a little bit faster than inflation.

There is more to the story, of course. For example: do dividend amounts increase in a reasonable, predictable manner? Or are there long periods without any increases followed by occasional jumps? The first type of behavior is better.

In addition, IMHO the World War 2 era should be extracted and treated separately because of the physical damage inflicted by Germany, especially at the beginning.

Have fun.

John R.

Post Reply