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  • Why Dividend Investors Could Withdraw More Than 4% Of Their Portfolio [View article]
    The actual dividends graph and data are "inflation adjusted" and therefore my statement is 100% correct. The dividend in 1965 was $20.08 versus $20.86 in 2002 in inflation adjusted dollars. Look again at

    Do dividend increases beat inflation over the long run? Yes, by less than 2% per year on an inflation adjusted CAGR basis. Let's use 1960 $15.36 to 2014 $39.43 from the data on the above chart. CAGR = 1.76% on inflation adjusted results.

    The only remaining issue is if one believes they are a better stock picker than the market. Since the market beats 70% or more of active managers and is "fairly" efficient, DGI investors believe they can spot other investors making mistakes and capitalize on them to achieve market beating results. Maybe or maybe not. I look at it as if you were playing trivial pursuit against a team of experts. Do you really think you are going to win?

    Here is another piece of information to consider based on this article: "The Historical Changes of the Dividend Aristocrats".
    "You can see that in 1989, the number of companies was only 26. Only 7 of the original companies still remain in the index. The companies are: DOV, EMR, JNJ, KO, LOW, MMM and PG.
    In 2004, the number of Dividend Aristocrats rose to 56. Currently there are 60 companies in the index. The percentage of companies that remain in the index after 10 years is about 30%. There have been about 116 companies that have gone through the index for the 15 year period form 1989 to 2004. So as a dividend investor, you should expect year over year changes in the index.
    The average company stayed 6.5 years in the S&P Dividend Aristocrats index from the time of its addition."

    I would love to keep the rose-colored glasses on and continue to invest with the belief that if I just pick the "right" stocks I can live happily ever after with my increasing dividends. But these are facts and demonstrate that survivorship and dividend cuts/freezes are issues that need to be addressed in DGI portfolios. My decision to address these issues is to move to the S&P 500 index, become a buy and hold investor in that index, and deal with the market reality of lower dividend yields and erratic dividend levels. That is the reality of becoming an owner of a business. Sometimes the owner gets a paycheck and sometimes owners pay their employees out of their savings and live without a paycheck until the business recovers.

    I also have first hand experience with dividend aristocrats losing their status as I worked at two former dividend aristocrats that lost their status.
    Mar 24, 2015. 09:30 PM | 3 Likes Like |Link to Comment
  • Why Dividend Investors Could Withdraw More Than 4% Of Their Portfolio [View article]
    Eli, I recently switched from "active management" DGI to "indexed" Dividend Investing. I've done a lot of research on dividend consistency and safe withdrawal rates using the S&P 500 as a portfolio. My research suggests that dividends are not as consistent as they have been over the past several years. There are many years where the S&P 500's dividends were flat or dropped significantly in the past. Here is a graph showing historical dividend growth You can also look click the link to the data from the chart. Notice that the dividend growth in the 1990's was really low even though the market was on a tear. Here is another chart on the actual dividend from the S&P 500 There is also a data table. Notice on the data, the S&P 500 total dividends first broke $20 in 1965 and was still at $20.86 in 2002 in inflation adjusted dollars!

    I know I'm going to hear that this is why DGI's don't use the S&P 500. But you have to admit that the S&P 500 is dominated by many DGI favorite (and former favorite) companies. Here's 15 of the top 20 positions in the S&P 500: XOM, MSFT, JNJ, WFC, GE, PG, JPM, PFE, VZ, CVX, T, DIS, MRK, BAC, KO. Lots of familiar names. If you keep going down the list you will find hundreds more stocks from the CCC list.

    I believe the expectations are getting too high among dividend investors based on my study of history and was glad to see many comments to this article that questioned using a high withdrawal rate. I believe that the safe withdrawal rate for a portfolio (DGI or S&P 500) without damaging future income and capital base is 4% or less. My new bible "Winning the Loser's Game" by Charles D. Ellis suggests 3% and questions selecting higher yielding stocks to make up for spending needs. For DGI investors that want the "rest of the story", I would encourage reading the book "Winning the Loser's Game" by Charles D. Ellis.
    Mar 24, 2015. 04:19 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Thanks Dale for your comment. I'm always open to new ideas and strategies when I believe they will be beneficial. At this time, I'm sticking to my 100% VOO plan since my real cost basis on this portfolio was established by going to 100% SPY as the market fell in 2008. Since I was ahead of the S&P 500 index since moving from SPY to DGI in 2011, moving back to VOO now has not cost me anything.

    I'm still using the DGI mindset of spending the dividends from my portfolio, but my portfolio is now going to be VOO. Since VOO's dividend increases should be higher than my DGI portfolio, I may soon be able to live on just the dividends from VOO. That to me would be the ultimate goal.
    Mar 21, 2015. 10:25 AM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Thanks BT, I especially like your last paragraph and am nearing the end of my explaining and defending. Thank you everyone for testing my conviction to this move and strengthening my resolve by making me research my replies to your questions.
    Mar 21, 2015. 10:12 AM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Market Map, I have personally used the 200-day Moving Average (10 SMA) to time the market in the past. It all looks so simple on a historical chart. But every trading system has its flaws and the biggest flaw of this system in my experience was whipsaw. When I bought or sold on the crosses of the 200-day in real time, I lost 1-2% of the my investment on each trade. Giving up 1-2% on each crossing will eat up the gains that look so simple to obtain when you look at a chart and imagine moving in and out of the market at the crossing price. Also in a flat market, those whipsaw crossing can happen very frequently. I understand using the monthly closing price is a designed to stop some whipsaw, but I am certain it is still a problem. What if you get two full circle crosses a year and lose 2% on each cross? 2%+2%+2%+2%=8% You need to make up 8% from your cost of trading. Suddenly, that easy money from looking at a chart doesn't look so easy. But if using this system allows you to invest in the market and sleep at night, I'd say go for it . There are pluses and minuses to every investment plan.
    Mar 21, 2015. 06:57 AM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Jorgemb, see my reply to Robert.from.CT above. SCHD is in the sweet spot near 3% and has a good P/E. I'd have to study its constituents to comment on its potential dividend growth rate.

    My recent attempts at developing a portfolio that satisfied my combined income, growth, and valuation requirements did not result in a "diversified" (meaning more than a handful of stocks and from several market sectors) portfolio. That is why I moved away from a self-directed DGI portfolio into the S&P 500.
    Mar 20, 2015. 09:07 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Larry, Sometimes it just better to let it go! Thanks for your comment.
    Mar 20, 2015. 08:45 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    JT, you are correct that the dividends on an index fund will be much more variable than many of the consistent dividend payers in the consumer staples group or utility group. That is an issue that will need to be dealt with in a broad market portfolio. I believe by using the S&P 500 index over the broader Wilshire Index and International Indexes will somewhat help to reduce this variation. But in 2008 and 2009, many large banks slashed their dividend payments and caused the S&P 500 index's dividend to be cut significantly. Anyone who held these large banks in a DGI portfolio would have had the same result. With a self-managed DGI portfolio, an investor can select certain sectors to minimize dividend payment reduction, but this would also reduce the diversification of the portfolio and possibly the growth rate of the dividends during bull markets. There is no free lunch in investing. The market is very good at discounting risk. The less risk taken, the less the reward will be. Its important to understand the risks you are undertaking in your portfolio selection and be prepared to deal with those risks when they surface.
    Mar 20, 2015. 08:42 PM | 1 Like Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Alan, I would go with John Bogle's opinion on this concept as stated in "The Little Book on Common Sense Investing" Chapter 14. He states Traditional all-market-cap-weighted index funds guarantee that you will receive your fair share of stock market returns, and virtually assure that you will outperform, over the long term, 90 percent or more of the other investors in the marketplace. Maybe this new paradigm of fundamental indexing—unlike all the other new paradigms I’ve seen—will work. But maybe it won’t. I urge investors not to be tempted by the siren song of paradigms that promise the accumulation of wealth that will be far beyond the rewards of the classic index fund. Don’t forget the prophetic warning of Carl von Clausewitz, military theorist and Prussian general of the early nineteenth century, “The greatest enemy of a good plan is the dream of a perfect plan.” Put your dreaming away, pull out your common sense, and stick to the good plan represented by the classic index fund."

    Bogle also states "Indexing has become a competitive field. The largest managers of the classic index funds are engaged in a fiercely competitive price war, cutting their expense ratios to draw the assets of investors who are smart enough to realize the price is the difference. This trend is great for index fund investors. But it slashes profits to index fund managers and discourages entrepreneurs who start new fund ventures in the hopes of enriching themselves by building fund empires. So how can promoters take advantage of the proven attributes that underlie the success of the traditional index fund? Why, create new indexes! Then claim that they will consistently outpace the broad market indexes that up until now have pretty much defined how we think of indexing. And then charge a higher fee for that higher potential reward, whether or not it is ever actually delivered... So the miracle, as it were, of the index fund, is simple arithmetic. By minimizing all those costs of investing, it guarantees that its participants will earn higher net returns than all the other participants in stock ownership as a group. This is the only approach to equity investing that can guarantee such an outcome."

    Alan, I would suggest you read the whole book, but this chapter answers the question you have asked.
    Mar 20, 2015. 08:27 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Dave, I have no problem if investors want to invest in small caps and international funds for additional diversification. Check out my reply to "TheUnknowInvestor" above that investing in VTI and VXUS for added diversification is a good idea. You may want to add a bond fund on top of this. My choice would be TLT because of its negative correlation to equities. But then again, TLT is not the most diversified bond fund available, but it would be my choice. How about real estate, commodities . . . and dozens of other "asset classes". One can complicate their portfolio as much as they want.

    My plan is to invest in a "diversified list of U.S. large capitalization stocks". The S&P 500 index represents 80% of the capitalization of the U.S. stock market. That's good enough for me. I would submit to Occam's Razor: choose the least complex hypothesis that fits the data well. When managing only 500 mega-cap stocks gets you to 80% of the U.S. market's capitalization, I see no need to invest in thousands of additional stocks to say I'm "fully" diversified. Yes, both VOO and VTI have a 0.05% expense ratio, but investing in thousands of extra thinly traded positions has a cost. A cost I do not feel is necessary.

    I spent twenty years of my finance career analyzing the 401(k) offerings and pension portfolios at two multi-billion dollar S&P 500 Dividend Champions. I do know a little about diversification. The purpose of this blog was to share the my revised plan for my portfolio. I propose using the S&P 500 index as does Warren Buffet in this quote: "What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors…"

    As Forrest Gump was quoted above, and that's all I have to say about that.
    Mar 20, 2015. 05:12 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Robert, what you are missing is that I would need to withdraw the dividend payments from VOO plus 1.5% of my portfolio balance to equal the yield of my DGI portfolio. In the article I stated "I believe that is sustainable".

    What you are also missing is buried in a quote above from Charles Ellis' "Winning the Loser's Game" which I will repeat: "BEWARE a subtle danger: An investor can almost always produce more income from a portfolio by investing more and more heavily in income producing stocks. But other investors are rational, and they'll let you get more today only if they can expect more tomorrow. So part of what appears to be high current income is really a return of capital."

    What this is saying is that you can select higher yielding dividend stocks, but beware that increasing your dividend yield beyond 3% will likely decrease your future income in the same way as withdrawing more than 3% of your capital each year.

    The "Sweet Spot" of dividends is 3%. Therefore, you can either set up a portfolio with a 3% dividend yield or withdraw 3% of your capital from a diversified portfolio each year and not damage your inflation adjusted income in retirement. I believe in the current market, I will be better off withdrawing 3% from VOO each year (2% in dividends and 1% in capital) than trying to set up a lesser-diversified portfolio of dividend paying stocks yielding 3%. If the dividend increases from VOO are large enough in the future, I may be able to live only on its dividend without the need to remove any capital. That would be the ideal scenario.
    Mar 20, 2015. 03:38 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Warren Buffett in his 2014 Investor letter stated: "investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing."

    The following is what Bogle wrote on page 186 of the book:
    Don’t Take My Word for It
    While Benjamin Graham’s clearly written commentary
    can easily be read as an endorsement of a low cost
    all-stock-market index fund, don’t take my
    word for it. Listen instead to Warren Buffett, his protégé and collaborator whose counsel and practical
    aid Graham acknowledged as invaluable in the
    final edition of The Intelligent Investor. In 1993,
    Buffett, unequivocally endorsed the index fund. In
    2006, he went even further, not only reaffirming
    this endorsement, but personally assuring me that,
    decades earlier, Graham himself had endorsed index
    funds. Hear Mr. Buffett: “A low-cost index fund is
    the most sensible equity investment for the great
    majority of investors. My mentor, Ben Graham
    took this position many years ago and everything I
    have seen since convinces me of its truth.” I can
    only add, after Forrest Gump, “And that’s all I have
    to say about that.”
    Mar 20, 2015. 03:14 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Varan, I agree that investing in the S&P 500 and withdrawing a small percentage of capital will be sustainable in retirement. That's the new plan and I feel very confident in my decision.
    Mar 20, 2015. 02:47 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    I just read that VOO announced its dividend for 1Q2015. Woohoo! 26.3% increase from 1Q2014. ($0.984 vs $0.779). That raises my YOC from 1.836% to 1.944% with my first dividend payment. So far so good!
    Mar 20, 2015. 01:40 PM | Likes Like |Link to Comment
  • Decision Made To Move From DGI To The S&P 500 Index [View instapost]
    Thanks EB for sharing your withdrawal plan. It is good food for thought.
    Mar 20, 2015. 01:28 PM | Likes Like |Link to Comment