Or, the ElLobo UFT (Unified Field Theory) of investing!

Over the last several weeks, we have taken a detailed look at a few important concepts as related to investing.  First there was a thread on the meaning of Total Return.  Then there were two postings I made concerning the use of a yield focused approach while accumulating.  Then there was this latest thread concerning the use of a yield focused approach during retirement (decumulating, as it were).  This final thread that I have planned will tie this all together.

It all starts with a simple equation I recently gave:

V1 = V0 +/- CG + (C + Y – W)                           (1)

This says that the value V1 of your portfolio at some time equals it’s value at some previous time V0, to which the capital change component of total return CG is either added to, or subtracted from.  Additionally, you have to add to V0 any contributions C you made to the portfolio during that time period, as well as the yield Y (dividends and interest received) received during that time period.  Finally, you have to subtract out the amount withdrawn W during the period of time.  I called this the conservation of cash equation!

I previously alluded to buy, hold, and sell conditions, again related to this equation, but nobody picked up on it.  Turns out that the real meat of my recent discussions is tied to this.

Accumulation:

During your accumulation phase, W is zero, since you are not taking cash out of your portfolio.  You contribute cash to it (from your salary income and, maybehaps, your company matches), so C is some value.  Depending on the investments your choose for your portfolio, it may have some yield Y.  At any rate, (C + Y – W) is some positive number.  That means you are net adding cash to your portfolio, which is the definition of accumulation!

This you do for the 40 years you typically spend in your accumulation phase.  During accumulation, the cash you add to your portfolio hopefully increases in value, due to the compounding effect.  You are a buy and hold investor, choosing which assets to invest in, and how much to put in each.  You sell at your convenience and profit, hopefully taking advantage of over and under valued investments.

At some point in time, you may stop contributing to your portfolio.  However, whatever yield is generated by your portfolio is treated exactly like new money going into it.  You are still a buy and hold investor.

Retirement (Decumulation):

You are still a buy and hold investor, at least until you start withdrawing from your portfolio, and will remain a buy and hold investor, at least as long as you withdraw less than the yield.  You continue to choose which assets to invest in, and how much to put in each, the cash coming from the yield that is not withdrawn, but reinvested.  You sell at your convenience and profit, hopefully taking advantage of over and under valued investments.

The important thing is that you do not have to change your investment style, or strategy, once you start your withdrawal.  That is, your 40 year history of buy/hold (strategic sell) can continue indefinitely!

If you withdraw more than the yield, you can still be successful.  The key is to continue to sell strategically.  That is, you avoid, as much as possible, being forced to sell assets in down markets.

Risks:

I’ve taken the time to start these threads based on previous threads related to investment risks.  I have had discussions with many of you on the nature of specific risks, questioning you on your understanding.  Let me say that ALL investment risk shows up in equation (1) above, in either of the two independent variables that you cannot control.  Those variables are the capital change component CG and the yield component Y of the total return of your portfolio.  And the only part of the CG component that you cannot control is share prices (fund NAVs).

The market controls share prices/NAVs, while individual companies control dividend and interest yields.  You control the amount of cash C added to your portfolio, as well as the amount of cash W withdrawn from it.  You also control the number of shares of each of your assets that you own.  Your success in both your accumulation and decumulation phases of your life will depend on your money (cash) management skills.

Whenever people talk about risks, they typically talk about share price/NAV volatility.  Indeed, this is the classical and traditional measure of risk.  Let me emphatically state that volatility is not a risk over long investment time periods, falling share prices over that long time period is the risk.  In fact, short term volatility can be used to your advantage, that is, to increase returns.  Specifically, a highly volatile share price/NAV whose average value is rising steadily over time is an ideal investment.  The reason has to do with strategic selling and buying of this asset, over time.  That is, sell on or near the maxima return, buy on or near the minima.

Capitalizing on volatility:

Let’s assume you hold a certain number of shares N0 of a mutual fund, each with a NAV of P0.  The equation above tells you that the value of that holding is N0 * P0, or V0.  Let’s now also assume that your investment ‘strategy’ is to maintain that value over time, specifically over a long period of time.

First, over time, this fund will generate a certain amount of money (the yield Y), given by the per share yield times the number of shares owned.  Assume you put that yield into a money market account, rather than re-investing it.

Over time, the value of that investment will vary as the fund NAV rises and falls (it’s volatility).  To capitalize on that volatility, assume you sell off 10% of the shares your own whenever NAVs rise 10%, and you buy 11% more shares whenever NAVs fall 10%.  If NAVs stay within 10%, you neither buy or sell, you simply ‘hold’ what you own, collecting yield.

If share prices continually rise over time, you end up realizing a 10% capital gain every time that gain goes above your window.  You will gradually own less and less shares, but each is worth more and more than your purchase NAV.  All the while, the value of that holding stays within +/-10% of V0.

If NAV volatility is greater than 10% but the long term NAV is steady, then you will gradually build up capital gains, always buying low, selling high.

You may ask how this strategy can be used to ‘grow’ your portfolio, especially during accumulation?  It’s quite simple.  You start with a single mutual fund, and all contributions and yield from it go into the fund, until the target amount V0 is reached.  You then take all yield as cash, along with any of the realized capital gains, and invest in a second fund (along with new contributions).  Reaching V0 for that second fund, go on to a third, then a fourth, and so on.

If you reach a manageable number of funds (20-25 is a good target), you can go back and double (or at least increase!) your target value V0, but I would suggest that you again sequentially increase your holdings.

Anyhow, most people ‘grow’ their portfolio vertically, that is, they hold a fund or two, contribute to each, and watch shares prices rise.  The type of growth I am describing here is more horizontal.  The difference is that you take advantage of NAV volatility, rather than simply living with it!

There are other advantages.  First, you portfolio stays essentially equally weighted.  That is, you hold equal amounts of money in each asset.  Next, by choosing funds from drastically different asset classes, you are certainly well diversified.  Also, the returns from each of these drastically different asset classes are probably NOT well correlated, even hopefully inversely correlated, so overall portfolio risks are reduced.

So, how do you choose asset classes (and funds/stocks to represent those classes?).  First, I would choose the highest yielding fund in each class.  Then I would choose the most volatile fund for each class!  Finally, I would start with the highest yielding fund and work down in yield, as I add funds to my portfolio.

Next, you would not have to limit yourself to open ended mutual funds.  Certainly CEFs can also be used.  Likewise, individual stocks and bonds could be used, but I would use them only after most of your 20-25 asset portfolio had been constructed.  That is, if an individual stock is the second asset you choose, that target amount V0 represents half of your portfolio, but if it’s the 25^th, it represents only 4% of your portfolio.  We’re talking risks now!

As to what that target amount should be, I suggest something in the neighborhood of 1-2 years of your contributions to your retirement portfolio.  That is, if your salary is $50,000/year, you contribute 8% to your 401k, and your company matches with 4%, your annual net contribution will be $6,000, so a good target amount for V0 would be $10,000.

Likewise, if you are using mutual funds, set your gain/loss window at 10%, or $1000.  Finally, if you are using CEFs or individual stocks, set your gain/loss window at the value of 100 shares.

As to suggestions for those 20-25 funds, here is my suggested list, in very rough order of purchase (after the first 4!):

1 – ADVDX

2 – IMSIX

3 – Vanguard’s 7% managed distribution fund

4 – VWEHX

5 – LV fund

6 – SV fund

7 – LG fund

8 – SG fund

9 – REIT fund

10 – Long Term Investment Grade bond fund

11 – Short Term Investment Grade bond fund

12 – World LV fund

13 – World SV fund

14 – World LG fund

15 – World SG fund

16 – World bond fund

17 – Emerging Markets equity/bond fund

18 – Convertible Securities Fund

19 – Preferred Stock fund

20 – Utility stock fund

21 – Financial Services fund

22 – Inflation Protected Securities fund

23 – BDC individual stock

24 – Canadian Energy Trust individual stock

25 – Tanker individual stock

I can't find much to fault, ElLobo, with your suggested strategy.  I only wish I'd had a more ordered accumulation phase to have taken advantage of such a strategy.

But, given my love of infrastructure master limited partnerships, I'm surprised they didn't make your 'top 25.'  Perhaps they didn't make your list because you were focused on a tax-advantaged situation?

They could be purchased, within your strategy, in a taxable account with very little tax effect (maybe 90% of distributions are tax-deferred) and the considerable yield utilized as you outlined to diversify and add or add to other classes.  Over the last several decades, as a group, they certainly have done as well as some of the other classes you listed and fit within your other criteria - very low correlation to total market, 18% or so total annual return of which, on average, about 7.5% has been cash distributions, great growth of distributions, hardly a ripple in that early decade upset, etc., blah, blah, blah.

OK, now you can get back to the theory.  I found it interesting you used a card-playing, gambling expression as your subject when your strategy seems like a very conservative approach.

Regards.

Cliff

Thanks for taking the time to put your thoughts together for us.

re Risk...

Why would falling share prices be a problem for an investor who is essentially getting all his Total Return from yield, skimming off his SWR, and reinvesting the leftovers toward additional shares? Isn't this what you attempt to do?

re Yields...

Yields are only partially under control of companies. Companies, and indirectly investors, can set the distribution/share but the market sets the price. Within a certain range and over a certain time frame the distribution/share can be adjusted so that the yield stays constant, a nice benefit for investors reinvesting the distributions. But if the market is behaving irrationally, especially to the upside, yields are going to drop. This can be a problem.

We've discussed how a fund like VDAIX, a dividend growth index fund, could have a "problem" in the future because the lure of growing dividends pumps up the share price such that investors may be disappointed in such a fund's income potential. Of course, selling greatly appreciated shares is a good thing.

re Volatility... 

Looking at downward volatility... 

One needs to distinguish between good and bad volatility: Good volatility is a price drop based on movement of the overall market, whereas bad volatility is movement based on a company.

Good volatility can provide a buying opportunity because the investor can be pretty sure the company is not the problem. Bad volatility is a price drop reflecting investor fears about earnings, credit, bankruptcy, etc. Purchases under these conditions could be considered a test of one's valuation abilities or a test of one's contrarianism.

I think prices generally aren't perfect, but when a company suffers a 50% drop when there's a bull market everywhere else you really have to wonder.

Good Luck, Ken.
 

Because you are seeking volatility (to exploit during a trading range or an upward trend), ETFs (exchange traded funds) strike me as superior choices to regular open ended mutual funds.

At least, so long as this is the only difference.

Have fun.

John Walter Russell 

"I can't find much to fault, ElLobo, with your suggested strategy.  I only wish I'd had a more ordered accumulation phase to have taken advantage of such a strategy."

I wish I knew, then, what I know now!

Actually, during accumulation, I had only a few funds available in my 401k.  It wasn't until I retired, and rolled it over to Vanguard, that I was able to build my current portfolio.  As you may know, 40% of my portfolio is in VWEHX, while the remaining 60% is split about equally into 20 different individual stocks, CEFs, and one equity fund, ADVDX.

The whole point of this exercise was to try to respond to helmut, Bill, Ken, and Mathguy2 regarding using portfolio yield as the basis for the construction of a portfolio, it's ongoing management, and the withdrawals taken from it during retirement.  Specificaly, people often have asked how such an approach differs from a 'total return' approach.

I've made statements that portfolio yield is safer than portfolio growth, regardless of how you define risks.  That by relying on yield for withdrawals guarantees that your portfolio lasts forever, and that the withdrawal has a good chance of keeping up with inflation as well.  And that one can use a yield focused approach to investing regardless of whether in accumulation or decumulation.  Yet people tend to not believe, simply because this all goes against traditional, and current, thought.

Enough of this.

"But, given my love of infrastructure master limited partnerships, I'm surprised they didn't make your 'top 25.'  Perhaps they didn't make your list because you were focused on a tax-advantaged situation?"

Actually, I wanted to show a yield focused strategy using mutual funds, rather than individual stocks.  Most who frequent this board, especially the newer, younger, people, have a well founded fear of stocks.  I wanted them to focus on the strategy, rather than the specific examples.

As I mentioned above, I hold 2 OEFs, 4 CEFs, 3 BDCs, 3 CANROYs, 3 tankers, 3 REITs, 1 financial, 1 tobacco, 1 coal.  All are in either a traditional or Roth IRA (I'm busy converting as much of my traditional to a Roth as I can as fast as I can!).  I have nothing in a taxable account.

It was better for us to use up all that we had there before touching our IRAs.  Whenever we DID have significant assets in a regular taxable account, all was in either MMA or CHC, which are MLPs.  In fact, if I did have any taxable money, I'd be back into either of these!

"I found it interesting you used a card-playing, gambling expression as your subject when your strategy seems like a very conservative approach."

I do consider my approach quite conservative, although most on this forum consider it quite risky, given that 60% of it is in individual stocks, and high yielders to boot!  As of this afternoon, the overall weighted yield of my portfolio is 9.68%, I actively use the capital gain capture strategy I described in this thread.

I thought Kenny Roger's song quite appropriate for my strategy.  I am quite selective in what I invest in.  I have chosen a few stinkers over the last 4 years (I retired in 2003), but recovered.  I actually DO intend to buy, and hold, forever each stock or fund that I invest in.  But the final 'key' to my strategy is to decide when to 'fold 'em' and walk/run away.

Whenever I initially buy a stock, or fund, I select it based first on it's yield, then a host of other 'quality' measures.  I think we have discussed this in the past.  Anyhow, I have a 'target' yield of 8% for the asset.  That is, I see no benefit in spending a whole lot of time trying to decide whether or not it makes sense to invest in a company that pays 3-4% dividend yield!  Such a yield is double the current market yield, but I do better.

I mentioned that the ideal stock for me would be one with an ever increasing share price, but one that was quite volatile.  But there is one other condition as well, and that is that the dividend also increased over time.  If that DOESN'T happen, as the share price increases over time, the percentage dividend yield will decrease as well.  It turns out that, at the point where the yield becomes half of what it was whenever I got in, I get out!  That is, I fold.  If I go in at 8% yield, I get out at 4%.  In at 10%, out at 5%, and so forth.

My reasoning is quite simple.  Even though the quality of the dividend probably didn't change, if I wouldn't buy the company at 4% or 5%, why would I continue to hold it?  Remember, I still hold my target amount in the stock, having harvested capital gains every 10% or so, on the way up to that low yield!  The net result is that, at that fold point, I will have realized a 100% return on that capital (or would that be 200%?), as well as all of the accumulated yield harvested while holding it.  It isn't that the particular stock became a stinker, it's just that I can do better, as I explained above.

Actually, this is the point where I walk away from the stock.  I usually run if the stock cuts, or eliminates, it's dividend.

"Why would falling share prices be a problem for an investor who is essentially getting all his Total Return from yield, skimming off his SWR, and reinvesting the leftovers toward additional shares? Isn't this what you attempt to do?"

Yes, this IS what I do.  As a result, share price volatility is NOT a risk for me.  It's actually an opportunity to capitalize and get a bit more return, in addition to the yield of my portfolio.

Volatility IS the major risk most often discussed around here.  I remember discussing volatility, and Sharpe's ratio, with you, regarding the risks associated with funds like VWEHX and IMSIX.  I remember discussing volatility risks with Bill, and getting quite deep into efficient markets and frontiers, rebalancing, FF3F, small/value premia, and so forth.  I remember discussing the relative riskiness of two stocks, XOM and NAT, with helmut.

I remember posting about the relative riskiness of yield versus growth (share price behavior).  I remember discussing the relative riskiness of 10% yield stocks compared to 2%, or zero yield, stocks.  All of these discussions were based on my view that volatility wasn't a risk that I was much interested in, let alone worry about.

But a lot of this fell on deaf ears, hence my threads.

"Yields are only partially under control of companies. Companies, and indirectly investors, can set the distribution/share but the market sets the price."

The dollar amount of the distribution is set by the company, not even indirectly by investors.  The market sets share prices.  The percentage yield is thus set by both the company and the market.

"Within a certain range and over a certain time frame the distribution/share can be adjusted so that the yield stays constant, a nice benefit for investors reinvesting the distributions."

I know of no company that tries to keep it's percentage yield constant, by varying the dollar amount of the dividend.  Also, there is no way the company can directly affect it's share price.

"We've discussed how a fund like VDAIX, a dividend growth index fund, could have a "problem" in the future because the lure of growing dividends pumps up the share price such that investors may be disappointed in such a fund's income potential. Of course, selling greatly appreciated shares is a good thing."

This is something that a yield focused investor isn't concerned with.  We care about the yield, and the quality of that dividend, period.  Share price behavior isn't important, unless one strategically buying and selling.  Put another way, I am more confident chasing yield than chasing growth!

Furthermore,

"One needs to distinguish between good and bad volatility: Good volatility is a price drop based on movement of the overall market, whereas bad volatility is movement based on a company."

Volatility is the SD of the return, and since the dollar amount of yield typically doesn't vary much (except tankers!), almost all TR SD is due to share price SD.  That is to say, share prices are much more volatile than dollar amounts of yield.

The SD of the TR of a company is a statistical characteristic of that companies historical share price behavior, regardless of the causes of that behavior.  As you well know, the TR of a company one year down the road has a 66% or so probability of being within 1 SD of it's historical long term average annual TR, 95% chance of being within 2 SDs of that average, 99% chance of 3 SDs, and so forth.

Nevertheless, I understand your point.  If the market, as a whole, lost 10% last year, then you might expect any stock that also lost 10% to suffer with all of the other drops of bathwater, regardless of the specific performance of the company.  But a company that fell 10% while the market was up 10% should be suspect.

I am a firm believer in evaluating each and every individual stock that I own on it's own merits, not on that of the market.  I"ve always called that an evaluation of the quality of the dividend.  As I've explained several times, I'll sort all individual stocks in the market by their individual yields, and select, as a first cut, all stocks with a dividend yield above 6%.  I then start at the one with the highest yield and evaluate each and every company, looking for reasons to NOT put money into it!

My first screens are the M* Financial Health and Profitability stock grades.  Idealy, both grades should be A.  I don't really care about the growth grade, since I am perfectly willing to collect, for example, a 10% yield from a company, rather than hope for a 10% growth in it's share price!

Anyhow, I won't go over all of the details again.  JWR calls my process 'due dilligence'.  At any rate, I eventually end up with a stock, CEF, OEF, MLP, fund (almost any type of asset) paying a yield (hopefully above my minimum 7% that I get with my junk bond fund).

Then I minimize my overall risk of investing in it by putting no more than, in my case, 3% of my portfolio into it!

The bottom line is that I think it much more fruitfull to look at assets in this manner than to try to figure out why a companies share price is doing what it's doing!  I'm much more interested in figuring out what a company will be doing with it's dividend.

JWR,

"Because you are seeking volatility (to exploit during a trading range or an upward trend), ETFs (exchange traded funds) strike me as superior choices to regular open ended mutual funds."

I'm not sure what an ETF would buy you.  I know what they are, and assume that their price at any point in time is reflective of the NAV of some corresponding OEF.  Perhaps I'm wrong.  I've never really looked at them in much detail.  Each time that I have, it seemed that their yields, although quite high by market measures, we're still quite low by mine.  That is, an ETF, such as DVY, might pay double the market yield, but 3.25% is still so far below what I target as not being something that I really spend time on.

Others may feel differently.

I think it much more critical to have all different asset classes represented in a portfolio, and choose the OEF, CEF, ETF, individual stock for that class that has the highest quality yield, and live with whatever volatility that tags along.  That is, this gain capture strategy is secondary to my main yield focused strategy.

In general, I've found that I may make only one or two 'gain capture' transactions on any one individual asset per year in my portfolio.

Usually, an ETF is more volatile than its corresponding index fund.

However, I am not sure that suitable index funds exist.

Have fun.

John Walter Russell 

Then I minimize my overall risk of investing in it by putting no more than, in my case, 3% of my portfolio into it!

Do you ever allow your "winners" to grow beyond 6%?

Unless your expected returns are similar, you may be limiting your upside.

OTOH, this does handle bankruptcy, fraud, accounting and related real world risks.

Have fun.

John Walter Russell 

re "Yields are only partially under control of companies. Companies, and indirectly investors, can set the distribution/share but the market sets the price."

The dollar amount of the distribution is set by the company, not even indirectly by investors.  The market sets share prices.  The percentage yield is thus set by both the company and the market.

I disagree that investors have no effect on dividends, why do you think corporate management has such a tough time declaring dividend cuts. And why do you think dividend cuts can cause such large price drops...the investors are selling and looking for better investments.

re "Within a certain range and over a certain time frame the distribution/share can be adjusted so that the yield stays constant, a nice benefit for investors reinvesting the distributions."

I know of no company that tries to keep it's percentage yield constant, by varying the dollar amount of the dividend.  Also, there is no way the company can directly affect it's share price.

You are missing the potential for increasing dividends, and how they provide constant value for investors who have no inclination to sell shares in order to realize gains. Companies can't directly affect their share price...try an earnings surprise!

re "We've discussed how a fund like VDAIX, a dividend growth index fund, could have a "problem" in the future because the lure of growing dividends pumps up the share price such that investors may be disappointed in such a fund's income potential. Of course, selling greatly appreciated shares is a good thing."

This is something that a yield focused investor isn't concerned with.  We care about the yield, and the quality of that dividend, period.  Share price behavior isn't important, unless one strategically buying and selling.  Put another way, I am more confident chasing yield than chasing growth!

What happens as the price of a stock goes up......the yield decreases. IOW, the dividend is more costly to investor; therefore, the investor is losing value.

How can you claim to be a yield investor when you say "We care about the yield, and the quality of that dividend, period.  Share price behavior isn't important,..." Share price is just as important as the dividend itself. When you pay too much for the dividend the future income stream is worth less to you.

Good Luck, Ken.

Thank you as  for a good post full of information and I agree on most of what you say about when to fold and when to hold, however I have some questions about your folding when your  yield is cut in half because of stock price appreciation. I assume you are talking about market yield as I see no way your yield could be cut except the company cuts their dividend. If you are talking about market yield and the company raises their dividend ever year is not your dividend going higher every year?

Lets drop the word yield for a min. and talk cash! Walmart takes cash, checks and credit cards only no yield so if XOM raises their dividend every year and every four or five years splits their shares and dividend rate and you have a pile of shares times their low dividend rate due to spliting shares are you not better off with the hand you can see that you are holding then to throw the cards on the table and take five new ones?

Hope I made sense!

Copie

Keep in mind that ElLobo uses the capital Y for the total income from yield, not the percentage yield.

Have fun.

John Walter Russell 

This time I made a better reference to ElLobo's work.

http://www.early-retirement-planning-insights.com/notes-11-23-2007.html

Have fun.

John Walter Russell 

JWR,

"Do you ever allow your "winners" to grow beyond 6%?

Unless your expected returns are similar, you may be limiting your upside."

In my personal portfolio, the answer is no.  All of my equity is individual stocks ('cept for ADVDX), and I own each one specifically for it's yield.  That is, I prefer to harvest 10-12% yield rather than work for 10-12% capital gain.  So any gains that I DO realize are extra.

Now, if those gains (for an individual stock) come about through growth in dividends, the percentage yield should stay roughly constant.  If dividends do NOT grow, then share price appreciation leads to percentage yield decreases.  THIS is the case where I 'fold 'em'.

If I were to own an individual stock (or a fund) for share price/NAV growth, I would let it ride, harvesting those 10% increases.  That is, I would hold (in my example) $10,000 in a growth fund, and take out $1000 every time the NAV rose 10%.

Thanks for asking the question.  I've been thinking like a high yield individual stock investor for so long I forget what it was like before!

Copie, 

"I have some questions about your folding when your  yield is cut in half because of stock price appreciation."

If a company pays a constant dollar amount of dividend/yield every quarter, that is, there is no growth in the dividend, then it's percentage yield is cut in half whenever the share price doubles.  So, if I bought the stock because it paid a 10% yield, and the share price doubles such that it's percentage yield is cut to 5%, I'll fold.  I've at least doubled my money in this stock (plus the yield I collected while I held it).

So, if I wouldn't buy the stock if it paid a 5% yield, I won't hold it at 5%.  I'll fold and buy another individual stock that pays 10%.

Now, if the share price increases enough from year to year, and that is in response to an increase in the dollar amount of the dividend (like XOM), then the percentage yield should not be cut in half (with a doubling of the share price.  In my example, if the company pays a $1 dividend at a share price of $10, it's a 10% yield.  If it doubles it's dividend, and the market responds to that increase by doubling it's share price, it will now pay a $2 dividend at a share price of $20, which is still a 10% yield.

Ken,

"I disagree that investors have no effect on dividends, why do you think corporate management has such a tough time declaring dividend cuts. And why do you think dividend cuts can cause such large price drops...the investors are selling and looking for better investments."

"You are missing the potential for increasing dividends, and how they provide constant value for investors who have no inclination to sell shares in order to realize gains. Companies can't directly affect their share price...try an earnings surprise!"

You're missing the point that share prices are not DIRECTLY set by companies, nor are dividends DIRECTLY set by the market.  The company sets dividend amounts based on earnings (primarily), as well as a slew of other financial information.  The market regurgitates that same information and sets share prices.

"Share price is just as important as the dividend itself. When you pay too much for the dividend the future income stream is worth less to you."

If a company pays a $1 dividend, I'll buy that company at a share price of $10, but not at $20.  That is, I'll buy a 10% yield stock, but not a 5% yielder, and I'll bail out if share prices rise enough such that the yield, initially at 10%, falls to 5%.  Even though the dollar amount of the dividend doesn't change.

This is why I consider a 10% dividend yield company less risky than a 5% yield company.  We've argued this in the past.  Any given company that pays 5% has a much greater chance of seeing it's share price FALL by half, raising it's yield to 10%, then to see it's share price rise, and yield fall to 2.5%.

Whenever I say I don't care what share prices do, I simply mean that my investment strategy, for accumulation or decumulation, is based primarily on yield.  I always withdraw less than the yield of my portfolio (in dollars), so I am always reinvesting the excess yield.  So my withdrawals do NOT depend on selling shares.

Having my withdrawals always covered by yield means that I don't really care what the actual VALUE of my portfolio does, over time.  That value rises, and falls, as does everyone else's portfolio.

The fact that I do buy and sell shares, as I described in this thread, simply means that I use share price volatility to my advantage, and it's NOT a risk to me!

People often ask what it means to be a yield focused investor, rather than a total return focused investor.  They will talk about the total return of their portfolio, and how they withdraw less than the TR, but then can't answer what happens in the case where TR is negative!

For those who are NOT yield focused, I usually ask what kind of retirement withdrawal strategy they use.  Invariably, it's the Ad Hoc approach I described in previous threads.

Because if they say they use the Income Certain approach (constant real inflation adjusted amount of withdrawal), I ask how long they expect their portfolio (and income) to last.  Whatever they respond, I ask what will they do if they see they are running out of money before life, and they say they will stop withdawing.  And that's Ad Hoc.

Very few people, other than a yield focused investor, ever say they use a Period Certain strategy.

I had dividend growth in mind.

Consider the rapid growth of the JNJ dividend amount. Might it make sense to allow that dividend growth to continue beyond 10% (ignoring price changes).

Have fun.

John Walter Russell 

re

Because if they say they use the Income Certain approach (constant real inflation adjusted amount of withdrawal), I ask how long they expect their portfolio (and income) to last.  Whatever they respond, I ask what will they do if they see they are running out of money before life, and they say they will stop withdawing.  And that's Ad Hoc.

Very few people, other than a yield focused investor, ever say they use a Period Certain strategy.

Two reasons investors/retirees may be uncomfortable with Period Certain:

1) it forces them to confront their own demise

2) it may force them to lower their standard of living starting on the day they retire.

The actual investment style, ie yield-focused or growth-only, has nothing to do with choosing Income Certain or Period Certain. A growth-only only investor could use Period Certain and a yield-focused investor could use Income Certain. It boils down to portfolio size upon entering retirement, periodic expenses, return expectations, life expectancy, and a number of other variables.

However, I think tilting toward yield can improve the odds of success regardless of whether the Income Certain or Period Certain approach is selected. A question is whether strategies that get 100% of their TR from either yield or growth are wise?

Good Luck, Ken.

However, I think tilting toward yield can improve the odds of success regardless of whether the Income Certain or Period Certain approach is selected. A question is whether strategies that get 100% of their TR from either yield or growth are wise?

Then why does El Lobo need to sell stocks?  Or why does the thread explain why a yield focused investor is not taking 100% of his TR from yield?

Roberta 

Hi Roberta,

Not sure if I'm following you.

re my statement:

However, I think tilting toward yield can improve the odds of success regardless of whether the Income Certain or Period Certain approach is selected.

What I was trying to say, indirectly, was given the market's current yield I think investors almost have to tilt (mostly toward LV) in order to get a reasonable split between the TR components of growth and income...I think accepting a yield of about 1.5% and claiming to be a TR investor are contradictory.

re

A question is whether strategies that get 100% of their TR from either yield or growth are wise?

EL can use the Period Certain approach because theoretically he never has to worry about dipping into principal, he lives off the big yield and probably is even able to reinvest some of it towards fighting inflation. As long as the yield is sufficient to pay the bills, he's set...almost. Is he taking on a lot of risk for that high yield?

Hopefully, being more specific helps.

Good Luck, Ken.