Good point. Dividend cuts are always a concern.

I believe that this will fall under the "gentle failure mechanism" category--at least, for a diversified holding. I doubt that the big financials will cut their dividends all the way down to zero.

Have fun.

John Walter Russell
 

This is what I wrote in the original article:

Dividends continue indefinitely

Making sure that dividend income will continue is straightforward.

Dividends come out of earnings. As long as earnings, averaged over several years, are healthy, dividends are secure. Many people are more comfortable evaluating the quality of earnings than earnings growth and other factors. Diversification makes a lot of sense when you focus on dividend income.

Have fun.

John Walter Russell

Lili,

"1) Dividends continue indefinitely.

I think the Citigroup, Wachovia and Washington Mutual shareholders might have something to say about that one.

I am a dividend investor, too, but the recent cut back in dividends by the financials has me a bit worried."

The MAJOR risk of a yield focused investor is that dividend/interest yield is cut, or eliminated.  You diversify that risk by NOT having all of your eggs in the WM or Citi basket!

Compare that to the risk that the share price of those same stocks declines, and you are relying on the TR (actually, share price APPRECIATION) to fund withdrawals.  That is, you are selling shares, spending capital/principal, rather then yield income.

In my particular case, the overall weighted yield of my portfolio is 10.46%, and I can, if needed, comfortably withdraw the 6% that JWR mentions, and still have 4.46% 'excess' yield to both 'cover' any dividend cuts, or allow future increases in withdrawals, or to 'grow' that yield over time.

ElLobo:

The MAJOR risk of a yield focused investor is that dividend/interest yield is cut, or eliminated.  You diversify that risk by NOT having all of your eggs in the WM or Citi basket!

I agree, but if we are in an inflationary economy, even if the dividends don't get cut, if they don't increase, your dividend decreases in terms of purchasing power.  And if we are in stagflation, I can see dividends not increasing in many sectors.

ElLobo:

Compare that to the risk that the share price of those same stocks declines, and you are relying on the TR (actually, share price APPRECIATION) to fund withdrawals.  That is, you are selling shares, spending capital/principal, rather then yield income.

I definitely believe in dividend investing for myself over relying on cap gains growth, but I am still worried about how many companies in different industries can increase dividends in the current environment and if their earnings fall, whether they can sustain them.

ElLobo:

In my particular case, the overall weighted yield of my portfolio is 10.46%, and I can, if needed, comfortably withdraw the 6% that JWR mentions, and still have 4.46% 'excess' yield to both 'cover' any dividend cuts, or allow future increases in withdrawals, or to 'grow' that yield over time.

Do you have your portfolio posted somewhere?

Extreme Yield Investing sounds great.

But:

Besides the fact the income 'can' drop (even with reinvesting a part of the yield), using this method, the major realization of using this method is : The Value Of One's Portfolio Needs to Become Almost Meaningless in the quest for income, to invest this way..

t

Like most other investing wisdoms, these work.... until they don't work.  And when they stop working,  things can get very messy.

A diversified set of high-yielding financial  stocks (use the XLF as a proxy) has had a drawndown of capital of 1/3 during the past year   That ain't "gentle".   DVY, a broad-based U.S. divd-paying ETF is down about 30%.  VYM another broad-based divd ETF is down by 20%.  PID, the intl divd ETF is down, but less so -- perhaps because of the severe debasement of the U.S., serving to reduce the losses in dollar terms.

Everyone of these 3 is simply WRONG.   Factually wrong.

1) Dividends continue indefinitely.   WRONG!

2) Dividends isolate you from price fluctuations.  WRONG!

3) Dividend-based strategies have a gentle failure mechanism.  WRONG!

Doesnt't mean avoid divd paying stocks, but putting out info like this is deluding the amateur investor.  

If anything, you could substitute  "30-year Treasury" and get closer to the truth... when your 30-year bond comes due, you can roll it over, and keep collecting interest that way, in perpetuity (so long as the U.S. Govt has a printing press!).    Hold the bond to maturity, you experience NO price fluctuation. And there is NO failure mechanism, barring a default on the GOs of the U.S. Gvt. (which, were it to happen, I assure you, your stock certificates would probably be worth much, MUCH less also.)

I don't own (or recommend) Treasuries, but its closer than throwing up that rubbish about divd paying stocks, despite the evidence of the past +1 Year.   History is littered with companies that once paid a divd which they later cut or discontinued.

Tragic error: confusing prices and dividend amounts.

A diversified set of high-yielding financial  stocks (use the XLF as a proxy) has had a drawndown of capital of 1/3 during the past year   That ain't "gentle".   DVY, a broad-based U.S. divd-paying ETF is down about 30%.  VYM another broad-based divd ETF is down by 20%.  PID, the intl divd ETF is down, but less so -- perhaps because of the severe debasement of the U.S., serving to reduce the losses in dollar terms.

The price cuts are one of the reasons that I personally prefer a delayed purchase approach. 

I expect overall market prices to fall dramatically at some point within the next 5 to 10 years. We can wait that out. BUT retirees drawing income can do just fine living on dividends. 

The key to dividend based approaches is to avoid selling shares. The price is relevant to the withdrawal rate ONLY at purchase.

Have fun.

John Walter Russell 

John is basically 100% correct...........

==================== 

 Plus:

There are however different ways to create an income growth strategy without selling shares in retirement. Some can be quite bit less volatile than others.

DVY, PID, VYM and XLF are concentrated caustic examples where one should have expected significant deviations in prices. 

t

pining4Lenore:

Like most other investing wisdoms, these work.... until they don't work.  And when they stop working,  things can get very messy.

I am worried that what we have seen in the financials may spill over to other sectors due to stagflation - both a price drop and a dividend cut. But even if dividends do not get cut, if they don't increase during inflationary periods, you get an effective decrease.

If the Fed raises interest rates to combat inflation, we may be better off in CDs.

At the end of every 3 months I put down dividends and total shares in my Rollover IRA and have started adding up June dividends. In these uncertain times two things that is showing up for me is the dividend increases and added number of shares. Now I know that June is a big month for dividend increases, bu