A Profitable Year As The DGI10 And TR7 Continue To Outpace The 4% Rule

Jan. 03, 2020 2:22 PM ETRITM, PEAK, SIR, SO, VOO, VTR, WPC, WY34 Comments
FinancialDave profile picture
FinancialDave
1.37K Followers

Summary

  • After 4 years, the RMD withdrawal method still outperforms the 4% rule.
  • In 2016, I deployed a new DGI portfolio alongside an ETF portfolio for retirement income going forward.
  • Both portfolios use an RMD withdrawal strategy.

Year four of this venture saw the markets roar for a more than 31% gain of the S&P 500 (VOO), but the income of both portfolios was set in January of 2019, so this year's gains will be reflected in the income going forward in 2020. How this was determined was described in my article from January of 2019.

My wish is to point out that both approaches, income and total return, can work when combined with a structured variable withdrawal program.

Background

In a previous article, which you can find here, I laid out the starting positions of my two portfolios. One is a dividend income portfolio I call the DGI10 (10 dividend stocks), and the other is a total return portfolio, which I call the TR7 (7 ETFs where shares are sold to fund the income). Both of these started at the end of 2015 with about $100,000 each. The income drawn from both will be based on the IRS Required Minimum Distribution table III, from IRS publication 590b, appendix B, starting at age 73 in the table. This approach has the potential to provide more retirement income from the fact that the income drawn each year is based on the portfolio's last year ending value divided by the current year IRS table distribution factor. Its purpose is also to slowly draw more and more from your IRA each year as you get older so as to maximize your spendable income and keep up with inflation. An added bonus of this method is after years where your account totals were down such as in 2018, next year's withdrawals will be trimmed based on the RMD formula, allowing the account to rebuild, which is exactly what happened in 2019. Some other background information can be found here that relates why these methods might be useful to you and how taxes may affect you during this journey.

So far in the first four years, I have sold three stocks, the first being HCP Inc. (PEAK) which allowed me to avoid a big sell-off in the stock and use those proceeds to buy Select Income REIT (SIR). You can read about that in this previous article. This transaction netted a positive cash balance which when added to other excess cash in this account left me over $1,000 of excess cash which I deployed to purchase more shares of Southern Company (SO) and Weyerhaeuser (WY), which I explained in this comment. The second sale was in January of 2018 when I traded my Ventas Inc. (VTR) for W.P. Carey Inc. (WPC). Later in September, after SIR announced an upcoming merger with GOV, I traded my SIR for New Residential Investment Corp. (NRZ). In 2019, I made no changes to the portfolio.

2019 - Recap - DGI10

Below is a table showing where these investments have gone after 48 months.

What can be seen from the above table is an initial starting dividend run rate at the end of 2018 of $5276, which improved by the end of 2019 to $5,513 for an increase of 4.9%. It should also be noted that 8 of the 10 positions did increase their dividends. Only NRZ & WY did not have a dividend increase in 2019, but I am holding both for now. NRZ is paying out over 12% of income and also had a 13.4% price gain last year. I am giving WY one more year for a dividend increase. Otherwise, it will be gone.

Also of important note is that the DGI10 now has $1734 built up in cash reserve, which becomes important to not selling any shares for as long as possible as the income continues to be driven by last year's balance and the IRS RMD tables. Next year's income will be driven by the age 77 divisor in the table. As many may know who follow me, I have a number of years to go to age 77, but that is what makes this method adaptable to anyone, as long as you take whatever minimum distributions are required from the sum total of your necessary tax-deferred accounts. It could in fact even be used on a taxable account or Roth account to manage the cash flow in an efficient manner.

2018 - Recap - TR7

Below is a table showing where these investments have gone after 48 months.

2019 was a great year for both portfolios. As can be seen from the above tables, the DGI10 portfolio balance increased 22.5%, and the TR7 increased by 19.8%. The total returns were roughly 27% and 23%, respectively.

Tracking the Total Results

To make it easier to follow along on a year by year basis, here are the combined results of these two portfolios.

In the above table 4, column four shows what would have been your income totals had you decided to use the 4% rule [explained here]. In simple terms, the 4% rule starts in year 1 by withdrawing 4% of the previous year's balance and, from then on, increases the withdraw amount by the consumer price index. In my example above, I use the more common CPI-U data obtained from the Bureau of Labor Statistics.

One obvious conclusion from the above is that both the DGI10 and the TR7 have provided me with more spendable income over using just the 4% rule. In fact, over the 4 years ending in 2019, the DGI10 has provided an extra $944, while the TR7 provided an extra $2,669 for a total extra income of $3,613 from the combination. This $3,613 extra income is 9.9% of the total income received. In 2020, this excess will jump to $6,377 for the 5 years or 13% of the total.

The Year Going Forward

Currently, as I mentioned above, both NRZ and WY are on my watch list and could be sold in 2020. These sell triggers can be reviewed here. One of these triggers looks for stocks underperforming the S&P 500 by more than 10% for both the 3-year and 5-year time frames. Weyerhaeuser is at this trigger point, but because it had a total return of 44% last year, I am giving it a little leeway. If you don't understand how important total return is to your income generation long term, then read this article titled "Is There Magic in Dividends."

So far, in 2020, the DGI10 has had 3 of the 10 positions increase the dividend.

Summary

Unlike some income portfolios which rely totally on the corporate board actions of companies to continue their dividends, these two RMD rule-based portfolios have their income defined for the full year from the previous year-end totals, and that will not change during the year. For these portfolios, the total income I will receive in 2020 is $5,260.59 for the DGI10, plus $6,211.28 for the TR7, which will be $11,471.87 or $2,868 withdrawn per quarter. This is up over 25% from last year, and up over 41% from the start in 2016.

Conclusion

What this journey offers is a real-life comparison of a concentrated dividend growth portfolio earning greater than 4% income to an ETF portfolio with a similar value slant to it and its dividends reinvested. As time goes forward, my hope is that you can compare and contrast these two portfolios and take away what is appropriate for your own situation. In the future, I will be comparing these two portfolios to other options which focus on DGI in the more traditional sense where basically you spend the dividends and let the capital appreciation run where it may.

Once again, as I pointed out in the article, I certainly would not want to imply that someone who wants to do DGI for retirement do it with 10 stocks invested in 100% of their retirement savings. As I have mentioned many times, I have other buckets that I can draw from, and these two accounts are not my only source of income.

This study is only as good as the data presented from the sources mentioned in the article, my own calculations, and my ability to apply them. While I have checked results multiple times, I make no further claims and apologize to all if I have misrepresented any of the facts or made any calculation errors.

You also must realize that past performance is no guarantee of the future, and in that regard, all the information presented here is past performance up to this point. The information provided here is for educational purposes only. It is not intended to replace your own due diligence or professional financial advice.

This article was written by

FinancialDave profile picture
1.37K Followers
I am a retired Electrical Engineer since 2012 and a Registered Financial Consultant (RFC) since 2010. I have been investing in equities, in the form of stocks & options, since the early 80’s and more recently in mutual funds, and ETF’s. My current investments consist of a DGI, 10 stock portfolio +7 ETF portfolio for my supplemental retirement income and a second portfolio of mutual funds, ETF’s, & stocks primarily focused on growth. This is how I keep my income strategy separate from my growth strategy.My passion is to reach young and old investors alike who are apprehensive about investing their money in the market and show them that investing does not have to be complicated, but you do need to spend a little time at it, but with the proper tools this can be made relatively easy.Everyone needs to come up with a strategy that works for them, and I do not claim my strategies will work for everyone (or anyone other than myself,) but offer them merely as something to consider.

Disclosure: I am/we are long D, MO, NRZ, O, OHI, PM, SO, WFC, WPC, WY, IEI, TLT, VBR, VIOO, VNQ, VOO, VTV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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