Dividends4Life: Auto Pilot Engaged, Sir!

Auto Pilot Engaged, Sir!

Posted by D4L | Wednesday, April 23, 2008 | | 6 comments »

You are a financial advisor. You have clients that have worked 30 years and built significant nest eggs, now they are ready to retire and enjoy the fruits of their labor. After a few years your clients start to complain that:

they cannot live on the withdrawals they have been making. Inflation, averaging eight percent over the last five years, has so eroded their purchasing power that they must substantially increase their withdrawals or face a drastically reduced quality of life. When you compute the effect on your clients' portfolios of these much higher levels of withdrawals, you are shocked: many clients will deplete their assets in less than ten years, even though in many cases their life expectancies are much longer. You have very bad news to tell them. What could have gone wrong?
The above fictional account is from the article "Determining Withdrawal Rates Using Historical Data" by William P. Bengen. The article goes on to say:

Assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe.

But what if you live 31 years? What if the market declines by double-digit figures for three years in a row? What if you don't want to spend your retirement managing and worrying about your portfolio?

Put it on Auto Pilot, specifically on a Dividend Investing Auto Pilot. Dividends from a quality, well-diversified portfolio are much more predictable than capital gains and best of all, they are passive. You don't have to do anything, they just show up in your brokerage account each quarter. Inflation? Not to worry, the good companies routinely raise their dividends well in excess of the inflation rate.

Retirement is not when you want to start learning how to dividend invest. There is a degree of art to dividend investing. Start young, time is always a great ally.

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  1. D // April 23, 2008 at 9:09 AM

    The scary part about dividends is if we get another "Great Depression" like 1929-1932.
    In 1929 the S&P paid $0.97 in dividends. the close for 1929 was $24.86.
    In 1933 te S&P paid $0.44 in dividends. The close for 1933 was $7.09. On average you will make 10% from stocks. But year over year fluctuations could definitely deplete your nest egg. That's why some fixed income (at least 20%-25% at retirement) might help you stay diversified.
    Untill you reach your desired retirement age though , I would not
    recommend investing any money in bonds.

  2. Unknown // April 23, 2008 at 8:24 PM

    How much (in percentage) do they companies pay out dividends above inflation rate?

    I am not sure I am wording my question correctly. If that article says the companies raises the dividends above inflation, and let's say inflation is 3%, do the companies generally pay 2% above inflation?

    Does that make sense?

  3. Anonymous // April 23, 2008 at 9:24 PM

    Dividend Growth Investor: I would imagine that bonds would net even be safe in a "Great Depression".

    TheLocoMono: There is no set percentage, but for good dividend companies the sum of yield + dividend growth rate nearly always exceeds inflation.

    Best Wishes,

  4. Anonymous // April 24, 2008 at 5:35 AM

    This is scary. What sort of liability do the investors hold for the customers? I hope they are paying attention, because I would hate for someone that has been investing their whole life to have to go broke.

  5. Anonymous // April 24, 2008 at 5:58 AM

    Brooke: There is no direct liability to a company's customers, but the risk is having to sell all your investments in retirement just to live on. The old "don't outlive your money" problem.

    Best Wishes,

  6. D // April 24, 2008 at 8:39 AM


    Bonds would be helpful to a retiree during a deflationary period like the great depression. I would not consider adding any bonds to my mix untill I have 5-10 years to retirement.
    Stocks might cut dividends over time. But at least you could always find new stocks with uninterrupted dividend increases ( XOM hasn't cut its dividend since 1930's, although it did cut it at the end of the depression)
    Sometimes I am wondering though, whether dividend achievers/aristocrats are not a byproduct of the booming 1980's and 1990's.
    But then research shows clearly that dividend payers almost always outperform non-payers..

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