The 4% Rule Examined

numberfourI determined when I first started investing back in early 2010Β that the dividend growth investing strategy was extremely robust for my goals. And I’ve relentlessly pursued it, building up the six-figure portfolio I now control.

I wanted to be in a position to where I could retire by 40 years old, and live solely off of the passive income my portfolio generated. And I wanted to make sure that the income would never stop flowing, forcing me back into the workforce. Furthermore, the income had to increase over time, keeping up with inflation and making sure my purchasing power stayed intact.

I’ve already shared my reasons why I believe dividend growth investing is such a great strategy for those seeking retirement or financial independence very early in life. But let’s take a look at a major alternative out there.

The Trinity Study

The Trinity Study, affectionately referred to many as “The 4% Rule” or “4% Safe Withdrawal Rate Rule Of Thumb”,Β is an informal name referring to a paper released by three professors of finance at Trinity University.

The paper studiedΒ withdrawal rates, and how much an investor could theoretically withdraw from a portfolio on a yearly basis with a low likelihood of running out of assets.

It concluded that during a 30-year retirement, there was a high chance of success if one were to withdraw 4% per year of assets in stock-dominated portfolios at the outset, and adjust annually for inflation. If one were to simply withdraw a static 4% year after year, the probability of success was also quite high in portfolios with a more conservative mix of stocks and bonds.

The professors used information provided from Ibbotson Associates covering the 1925-1995 period, which includes the Great Depression, but not some of the more recent issues, like the recent financial crisis and Great Recession. Of course, that 70-year period also had many years where fixed-income rates were significantly higher than they are right now.

Thus, to many people investing for retirement is quite simple. You invest a sizable portion of your assets in index funds and withdraw 4% per year, adjusting for inflation or not based on your asset mix.

However, there are two major hangups to this strategy for me:

  • The study was based on a 30-year retirement. I plan to retire by 40, which means I’d have to make sure my investment income could potentially last twice that time frame.
  • The strategy requires the selling of assets, which potentially increases your chance of failure with every subsequent withdrawal. And every withdrawal further limits the earnings and income power of the underlying asset base.

The 4% Rule For Early Retirees?

My main issue with the idea of investing in index funds and then just withdrawing 4% per year means that there’s a chance that I’d eventually run out of income since I’m going to be living off of my investment income for much longer than the time frame used in the Trinity Study. Especially so if I start to adjust for inflation and increase my withdrawal rate.

Of course, there are many other reasons I’m not an index investor, but this is one of my primary reasons. For those that are anticipating a much shorter, traditional retirement, then investing in a couple of index funds and withdrawing 4% per year would most likelyΒ suffice just fine.

But what about those with much longer time horizons, where living off of passive investment income needs to be realistic for 3-4 decades or longer?

I propose for these people that investing in a collection of wonderful businesses that regularly and reliably pay and raise dividends is a better solution, and I’ll discuss why.

Sell Off AssetsΒ Piece By Piece

When reading about the merits of investing in funds and then selling off pieces of the portfolio to compensate for the spread between any dividends they may pay and the amount of income you need to pay your bills, I cringe a little. And that’s simply because every sale of underlying assets means you have a smaller asset base with which to generate future income. Sure, the broader market may compensate for this for periods of time, awarding each share in your funds a higher price, thus buoying your overall net worth. However, the percentageΒ actual equity you own in real companies is declining with every subsequent asset sale, and the amount of income these ownership positions can possibly generate is declining as well.

You can’t start with 1,000 shares of Johnson & Johnson (JNJ) and sell 50Β shares per year, hoping that the market will continue to value each share more and more over time to compensate the difference. Not only is that unlikely as the stock market rarely moves up in such a linear fashion, but you’ll still end year oneΒ with 950 shares, yearΒ two with 900Β shares, year threeΒ with 850Β shares, etc.

You can see where that’s going. Each share may be worth more if things go just right both with the company and the stock, but you’ll still own less equity in the company. And less equity will reduce your dividend income year after year, meaning you may have to accelerate your sales over time, further reducing your income-producing asset base.

Now, Johnson & Johnson has a 52-year streak of raising its dividend. And the strong likelihood of this continuing far into the future is one of the big reasons it’s currently my largest position by value. So dividend raises byΒ the company will, to a degree, counteract stock sales, meaning each share left should produce more income than it did the previous year. But this counteracting effectΒ will be reduced and eventually eliminated as time goes on for two reasons:

  • The amount of shares you own continuously decreases. As time passes, even static assetΒ salesΒ in terms of theΒ number of shares soldΒ increases the percentage of equity lost, and dividend raisesΒ will not be able to keep pace.
  • Inflation reduces the real value of money over time. This means your asset sales will likely have to increase as time goes on just to keep your purchasing power intact. So those asset sales will likely not stay static over time, thus accelerating the loss of organic income.

And eventually, you run out of assets to sell.

Furthermore, if the broader market has a major correction this can have a substantialΒ impact on your ability to sell off parts of your portfolio. For instance, the S&P 500 index experienced a -38.47% changeΒ in 2008. Investors in a broad S&P 500 index fund would have had a rough year. At that point, not only is your asset base then generating less income with every sale, but the actual value of your assets have plunged. That can leave one in an awfully precarious position.

Real Estate Example

Let’s look at this from another angle. This example is a little tongue-in-cheek, but I’m trying to extrapolate my point.

Imagine you’re a real estate investor. You have a fewΒ rental properties netting you $1,500 per month from rental income, which puts you in a pretty good spot. Unfortunately, your bills are $2,000 per month. You’re now retired and not interested in getting a part-time job, so where do you come up with the extra $500 per month?

Well, you simply sell off part of your real estate portfolio, in a piecemeal manner every single month: First goes a little siding here. Then it’s roof shinglingΒ there. Then the plumbing has to be sold.

What’s happening here as you sell off your rental properties in pieces?

Well, the amount of rent you can possibly collect from these properties is going down, rather than up. Instead of having a portfolio of high-quality assets generating rental income that will likely rise with inflation, you’re slowlyΒ turning your properties into shoddyΒ homes, thus limiting the chances of attracting tenants that will rent from you at all. And any that do rent from you certainly aren’t going to be paying what you were charging before you started selling off pieces of the homes.

My Dividend Growth Portfolio

Instead of selling off assets, I’d prefer to keepΒ my equity intact and collect the rising income those intact assets can produceΒ over time. Why would I want to sell off chunks of The Coca-Cola Company (KO) when I believe they’re going to generate more profit and dividends over the next 10 years? Why would I want to own less and less of the company?

I have 49 individual equity investments right now. These are all what I believe to be high-quality companies that are well-positioned to grow their revenue, earnings, and dividend payments to shareholders over the next 10 years and beyond.

If I would have had this same exact portfolio through the Great Recession I would have faced only two dividend cuts – General Electric Company (GE) and Wells Fargo & Co. (WFC) both cut their dividends in 2009.

I’d like to think I would have seen these dividend cuts coming and appropriately reacted, but there’s also a very good chance I wouldn’t have. As such, I would have seen income reduction from these two particular investments (neither completely eliminated their respective dividend). But the majority of the other companies that were paying a dividend back then kept right on increasing their payout right through the financial crisis, and I would have experienced an overall income boost. And that was during what very well may be the greatest economic calamity I’ll see in my lifetime! Not too shabby.

Is Dividend Growth Investing The New 4%?

It’s funny, but I think these two strategies aren’t really that far apart.

For instance, I’ve noticed that the overall yield of my entire portfolio has oscillated between ~3% and ~4% since its inception. ForΒ much of the last couple years, my portfolio’s yield has been steadily declining from around 3.8% to below 3.5%. And that makes sense as I shift from investing in Stage 1 stocks to Stage 3 stocks,Β and as the value of the stocks I’m invested in increases, advancing with the broader market. Rising stock prices causes their yields to fall, as the two are inversely correlated.

But if you can construct a diversified portfolio chock-full of equity in fantastic businesses that can also generate a yield for you that’s in the 3.5% or so range, you’re coming pretty close to the 4% safe withdrawal rate without actually trying to. However, you’ll be in even better shape if you’re solely living off of the dividend income your portfolio generates. Because at that point your dividend income will surely rise over time while the value of the underlying businesses also rise in kind. Your income and your wealth grows, and your odds of actually running out of eitherΒ are extremely low.

You would be living off of the organic income your portfolio generates with this strategy. No asset sales are necessary.

And it wouldn’t be impossible to construct a portfolio with a 4%+ yield, meaning you have reached the same yield level of the 4% SWR without needing to sell off assets. Shares in companiesΒ like AT&T Inc. (T), Realty Income Corp. (O), Kinder Morgan Inc. (KMI), and Philip Morris International Inc. (PM) all yield more than 4%, and all of these companies have histories of regularly rewarding shareholders with annual dividend raises.

Conclusion

I don’t think investors should be looking at the 4% safe withdrawal rate as a panacea to retirement income planning. Furthermore, if you are planning on following this strategy by building up a sizable base of assets and then selling off pieces in retirement, carefully consider this aspect of income planning that the professors behind the Trinity Study qualified their findings with:

The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.

However, I think most would be better off looking at planning for (early) retirement with the mindset of permanent wealth protection. That is, one shouldn’t be interested in selling any assets at all, unless a major emergency required such. Selling assets has a kind of reverse compounding effect, where the income that your investments can possibly generate declines over time, requiring every subsequent asset sale to be potentially larger than the last, depending on market conditions.

Dividend growth investing, in my opinion, offers the best of both worlds. You can customize your overall portfolio yield, and very likely get the aggregate yield of your entire portfolio near 4%. Thus, you’d be collecting your 4% yield in income without having to sell any of the underlying assets, allowing them to grow along with the dividend income they provide to you. By living solely off of the organic income your portfolio produces, you can allow your wealth to continue compounding. That could provide an extra layer of safety as you age, and potential medical problems increase the likelihood of having to tap assets. Furthermore, it could provide a legacy to pass on to others, if you so choose. You can actually have your cake and eat it too!

Full Disclosure: Long JNJ, KO, GE, WFC, T, O, KMI, PM.

What’s your opinion? A fan of the 4% SWR? Think dividend growth investing allows you to have your cake and eat it too?Β 

Thanks for reading.

Photo Credit: gubgib/FreeDigitalPhotos.net

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185 Comments

  1. I think you make a good argument here. After reading your articles for a while, I have decided to make dividend stocks a bigger part of my early retirement plan. I have a few core holdings that I will build on and will also be setting a yearly dividends received goal (I have never explicitly tracked it before). Keep up the good work!

  2. Personally, I am focused on building multiple streams of passive income, and am not relying on the 4% rule. I don’t believe my path, and by extension, your path, is the right one for everyone. Investing in anything individually requires research and understanding of your investment. For the lion’s share of folks our there, this isn’t feasible or realistic. For those people, finding a good set of investments through Vanguard and other reputable ETF and fund companies will likely yield the most desirable result long-term.

    That being said, I do believe the 4% rule to be somewhat valid in that an ETF tracking the S&P for example will yield just north of 2% per year. Accounting for that income, in addition to the harvesting of holdings, will likely carry a portfolio through to the end. The best bet for most folks is to build an extra margin of safety into their retirement plan and account for a lower withdrawal rate. This will increase the size of their portfolio substantially enough that the remaining percentage that must be sold each year to sustain living expenses will increase the odds of the portfolio outliving the investor.

    Again, this is not what I am focused on, as I want to utilize various passive income sources to fund my retirement and other adventures.

  3. Vawt,

    Glad to hear that! I think you’ll find success there, as long as what you’re doing works for you and your individual goals.

    I personally think investing in great businesses that routinely reward shareholders with rising payouts is a fantastic way to invest, but it may not work for everyone.

    Thanks for stopping by!

    Cheers.

  4. W2R,

    Yeah, withdrawing 4% annually from a simple index fund tracking the S&P 500 would probably suffice for traditional retirees that are aiming to retire at, say, 62 years old. You’d collect your ~2% yield (I believe it’s actually under that) and then close the spread with asset sales. I still think that leaves the door open to potential failure, and older age might invite potential unforeseen medical issues. Plus, you don’t know how long you’re going to live.

    Building in a sizable margin of safety to where one would live only off of the organic income the portfolio provides (fund or other) would really be the best way to go, and that’s what I’m suggesting here. If your portfolio of funds generates 2%, then trying to live off that 2% would be optimal. Of course, this is difficult for most people, as we’ve all seen the surveys and studies showing little in retirement assets for the masses. Although, it’s almost a moot point, as for many of these people even living off of 4% is quite difficult.

    It’s important to note, however, that the time period that was used also saw higher interest rates. That could certainly affect one’s outcome. Beyond that, a balanced portfolio of equities and fixed-income (which is what most will likely have) still didn’t allow room for inflation adjustment over time, which still means the retiree selling assets at a 2% clip (assuming a 2% yield) is losing purchasing power over time.

    I propose a better way. But it’s certainly not for everyone, as you point out.

    Best wishes!

  5. The 4% rule is what I base my projections on for when I will be able to retire, but I like to have some solid income base. I still want to have some of my portfolio in an index, maybe 10-25% and use those dividends along with the dividends from the great companies I purchase along the way.

    IMO, the 4% rule is more of a guideline than a rule. You need somewhere to start and develop from.

  6. Kipp,

    I definitely agree the 4% rule is more of a guideline, and that’s why I included that quote at the end. The originators of the study basically state such. You have to adjust as you go. Though, I do think people gloss over the inflation adjustment, because they were not proposing for such with a balanced portfolio. So the 4% rule as it’s known with typical inflation adjustment is really for an equity-heavy portfolio, which may or may not be appropriate for some.

    But I think it’s a nice starting point. However, I would argue that selling off assets in retirement, early or not, leaves the door open to running out of assets. Really depends on a lot of factors. But collecting organic income alone reduces the risk of such exponentially.

    Cheers!

  7. Great article again. I agree, the 4% rule meant well out the time, but it is outdated. With technology the way it is now, why would anyone not take advantage of the ability to own their FI and retirement? It also makes since that dividend growth investing, due to its compounding, is in many ways the more aggressive investing approach although on its surface it seems more conservative.

    Now only if I could get my fiancee to start thinking about it…

    – Grem.

  8. This article provides good food for thought and I think there is no absolute correct answer and will significantly vary based on individuals situation at that time. Most importantly age of retirement but also to some extent economic situations, minimum distributions from tax deferred accounts, Social Security etc.
    Something this made me think is tax considerations. Dividends are income so will be taxed as income tax as against selling assets which can be Long Term Capital Gains. So its not that simple but thanks for a great article.

  9. Gremlin,

    Thanks! Glad you enjoyed the post. πŸ™‚

    I don’t think the data is necessarily outdated. The authors have actually updated their results as of 2009, though their findings don’t really seem to change much as far as I can see:

    http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx

    Basically, if you want to ensure 100% success and adjust for inflation with a 75% stock/25% bond portfolio, you’d want no more than an initial 4% withdrawal rate. You can be more aggressive, but that opens the door to failure, based on their data. Seems appropriate to me, but again this is based on 30 years worth of retirement. So a longer retirement, longer life, or medical issues could potentially cause some issues.

    As far as dividend growth investing being a more aggressive approach, it’s interesting to note that you were more likely to fail, according to their data, with a bond-heavy portfolio. So it’s funny that people assume stock investing is more risky. More volatile, but actually less risky, if you’re judging risk by your chances of failure.

    Thanks for stopping by!

    Best regards.

  10. When I first started working and saving in my 401k I was a big fan of indexing but not a big fan of the 4% SWR. But I didn’t know of other options so I figured that’s what I would shoot for. Once I found DGI, pretty sure through your site, it all clicked. Live off the dividend income and leave the rest to compound and grow. Keep the base in tact.

  11. Haha, the ole 4%. My thought is that it’s only as good as the assumptions that support it. If your investments don’t grow at more than the assumed rate, it won’t work. If you live longer than the assumed amount of time, it won’t work. That being said, it gives the average investor some guidance.

    Personally, I’d rather not sell off my principle and instead live off the cash flow. I know you feel the same way! Better to keep principle as a buffer πŸ™‚ Glad you’re doing well up there. I’m curious how Ann Arbor will turn out. College towns are fun places to live. Take care buddy
    -Bryan

  12. Burnbrae,

    Absolutely. There is no correct answer. Really depends on an individual’s situation, risk tolerance, time horizon, etc. I personally think selling assets would be a bad idea for anyone, but that’s just my view on it.

    Dividends and long-term capital gains are taxed the same, which is to say fairly advantageously. You would pay 0% tax on qualified dividend income if you’re within the 15% ordinary income threshold.

    Thanks for stopping by!

    Take care.

  13. I’ve read so many articles and books that state the 4% withdraw rule just simply doesn’t apply in today’s low interests rate environment. As you pointed out already, the original study assumes that you’ll be in retirement for 30 years. There are also other assumptions in this study. Most of these assumptions are not true today.

    Some authors have come up with other methods of withdraw, for example change the amount of withdraw based on the market performance. I simply don’t like the idea of touching my capitals. That’s why I like dividend growth investing. If you invest in companies that grow dividend year after year, your yield on cost will raise slowly.

    Touching your capitals is like killing the golden goose. It just doesn’t make sense.

  14. JC,

    You know, your comment makes me think perhaps I was being too harsh on the 4% rule. I wasn’t an investor way, way back. But I’m guessing when the Trinity Study came out it was probably groundbreaking. The only conclusion I can surmise is that financial advisors were kind of shooting from the hip when advising their clients how much income they could withdraw from their accounts. With that in mind, it’s a great guideline.

    However, I think where the 4% rule breaks ground, living solely off of organic income your portfolio provides further advances the discussion. And that was really my aim here.

    Thanks for adding that. You give great food for thought!

    Cheers.

  15. Bryan,

    You’re absolutely right. Output is only as good as the input. I think it’s a good guideline. But for anyone with a modicum of interest in planning for their retirement could do better by rationalizing the idea of not selling income-producing assets to live off of them. I could see if we were talking about something that didn’t already provide cash flow (gold, art, etc.), but we’re not.

    Appreciate the well wishes with our little rendezvous in Ann Arbor. I’m about 99% sure I’ll be heading back to Sarasota, which is really a wonderful conclusion to this little odyssey. I had a different picture in mind when I came back, but such is life. At any rate, maybe we could meet up sometime when I’m back down there. Clearwater obviously isn’t too far away. And I’m sure Claudia would love to visit the city and see the area.

    Appreciate the insight, as always. πŸ™‚

    Take care!

  16. Tawcan,

    Well, the authors actually updated their study for 2009. That’s as new as the information gets. Of course, interest rates are still yet lower than they were back then by a decent margin.

    The newer study is here:

    http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx

    I don’t really see too much that’s changed. Except you can see how bad bond-dominated portfolios have fared. And that’s during a very favorable 30-year run. I’d hate to see how bond-dominated funds would do going forward. Speaks to my post a while back on why I don’t have any allocation to bonds whatsoever.

    But I couldn’t have said it better there with the golden goose. That’s exactly what an income-producing portfolio is. A dividend growth stock portfolio is even better because the golden eggs it lays get bigger and bigger. And that works well for me because I like eggs. πŸ™‚

    I’ve compared it before to a fruit tree, where the portfolio is the tree, the stocks the branches, and the dividends are the fruit. Cut the branches and eventually you’re left with no fruit. No bueno!

    Thanks for stopping by.

    Take care.

  17. I’ve always thought that the 4% rule was a little strange. It’s like having a block of gold, and cutting out some gold each year to pay for expenses. Sell enough and eventually you won’t have any more gold left. In addition, the price of gold depends on what other people are willing to pay for it, which I’d rather not subject myself to.

    Investing never really made sense for me until I found dividend-paying stocks. Solves both the need for income and the problem of trying not to dip into the principle.

  18. Seraph,

    Gold would be even more difficult because it produces no cash flow. At least most major index funds tracking the big indexes (S&P 500, total stock market, etc.) pay some income. So then you would simply have to bridge the gap between the yield they pay and the income you need to survive by selling off chunks of the fund(s). But you’re precisely right. In theory, it’s basically the same thing. You’re selling off little pieces to where you’re eventually left with no pieces. The thought is that most people won’t be retired for more than 30 years, based on averages. And backtesting has given this rule of thumb some weight. But anything can happen, and if you want to be absolutely sure you don’t run out of money the only way that I know of to do that is to live only off of the organic income your portfolio provides. And that’s true for real estate, stocks, bonds, index funds, etc.

    But I’m glad this strategy clicked for you. The same happened for me. I knew from the outset that the only thing that made sense was to live off of organic income, and this strategy really allows you to have your cake and eat it too. πŸ™‚

    Thanks for dropping in!

    Take care.

  19. Jason,
    Really off topic but something that has been eating me up inside. Do you know off the top of your head how much capital you have invested purely from your job each given year (excluding dividends), and the same including dividends? I personally would love to see how much capital you have put in yourself (and now your portfolio is worth 170k) vs how much you put in with dividends and how much you gained from appreciation.

    Thanks.

    -Mike

  20. Buffett mentions that he plans to allocate his estate to 90% stocks and 10% bonds, that way when you need to withdraw then you’ll withdraw from with bonds rather than having to sells stock at lower prices. I think that might work, I haven’t given much thought to it. But it’s another approach.

  21. I believe your post left out a few key points regarding the 4% rule.

    There is a margin of safety in that average stock market returns over time have exceeded 4% by at least 3-4% over the time period of the study. This allows you to withdraw a “safe” percentage (4%) & it still allows your portfolio to grow over time even taking inflation into account. Using your tree analogy, you can have a very tall sturdy tree that continues to grow & allows you to prune a few branches without killing the tree.

    As with any investment strategy, investment psychology is critical to the success of the 4% rule because you need a relatively high stock exposure for it to be successful. Some retirees (myself included) that follow this strategy like to keep 2-3 years of savings in cash or something similar to avoid having to sell when the market is down significantly. This also helps provide some protection against a sequence of bad returns early in your return.

    The biggest drawbacks that I see to dividend investing is that there is tax inefficiency & slower growth (they average 1-2% less than the broader stock market) which reduces your portfolio size in the accumulation phase, that it focuses on a relatively small group of stocks with similar characteristics, & the skill (or luck) involved with picking individual stocks.

  22. Mike,

    It’s funny you ask that. Another reader just asked the same question yesterday in a different post.

    I offer the information with the caveat that it’s not really something to be focused on. How much personal capital I’ve invested and how much wealth I have now speaks more to capital gains and the strength of the market over the last few years, which is something I really have no control over. However, the savings is something I can control, which speaks to the benefits of living below your means.

    I’ve contributed approximately $112k to date.

    Best regards!

  23. Henry,

    Yeah, I think that’s a fair mix. I bet he wouldn’t mind leaving 100% in the S&P 500, but the bond funds probably smooth things out a bit for his wife and whoever is controlling the account. It looks like the 100% stock portfolios have done the best, which is why I’m currently 100% stocks.

    But if we see the 10-year cross 5% I’ll be a lot more interested in fixed-income. We’re far away from that, however.

    Thanks for stopping by!

    Take care.

  24. scinvestor,

    That’s a good point there. The 4% SWR would imply a margin of safety, or it wouldn’t be called “safe” withdrawal rate. However, the best chances for success rely on a 100% stock portfolio, where one can also adjust for inflation. Your chances of success do start to fall as you withdraw higher rates and as your asset mix becomes more conservative. I would be willing to bet that most investors nearing retirement would be uncomfortable with 100% in stocks, so the margin of safety disappears a bit there. Moreover, the stock market doesn’t move up in a linear fashion by 7-8 percentage points per year. Of course, that’s why they qualified their findings with the fact that some people may need to adjust their withdrawals/spending accordingly. Now, whether or not your bills/spending can be adjusted as such will depend on your personal circumstances.

    However, it really gets to my point: Why risk any failure at all when it’s not necessary? Why sell assets when it’s not necessary. I’m not saying the 4% SWR is a bad guideline, and for most a 4% withdrawal will suffice for a shorter retirement. However, I do stand by my belief that it would not suffice for those, like me, seeking to live off of investment income very early in life.

    As far as your quote:

    “The biggest drawbacks that I see to dividend investing is that there is tax inefficiency & slower growth (they average 1-2% less than the broader stock market) ”

    Dividends are actually quite the opposite; they’re extremely tax-efficient. Qualified dividends are taxed at 0% if you’re within the 15% ordinary income tax bracket. For those that don’t have multi-million dollar portfolios, they’ll very likely be taxed at 0% on their qualified dividend income.

    If you’re speaking to tax inefficiencies as far as retained earnings being better, I’ll have to disagree. I’ve already discussed that ad nauseam here.

    And, finally, I take particular issue with the last part of that quote. Care to share your independent research that shows how dividend growth investing trails the broader market by 1-2%? Since you said it, I invite you to share your research. I’ve got research that actually states the opposite. But since you brought it up, please share.

    Best regards!

  25. Jason,
    Assuming you will be making 5500 in dividends this year ad you have contribued 112k thus far you are at a yield of 4.9% via dividends which does indead show the power of DGI as you own stocks that are currently yieling .40% (like Visa though you did just buy it).
    however, if you look at the current market value of your portfolio at 170k, and still assumming 5550 in dividends, your yield is a measly 3.23%.
    Not that you care (nor do I to a certain degree…. I only care about the amount of income I receive, like you) but you have gained 51% in apprecation of your ownership, while still receiving a 4.9% yield on total income saved, asssuming I did all my math correctly (amateur investor, been at it for six months thus far).

    Thanks for the insperation,
    -Mike

  26. I’ve read a number of articles on the 4% rule and one thing that has never come across clearly in these articles is what happens to the overall portfolio value? Does it stay flat and you live off the 4% growth? Does it eventually erode to 0 while living off the 4% and taking into account inflation erosion? I think what you are saying is it erodes to $0 by the end of the 30 years. Not sure if I agree with that, as I was thinking that it meant your portfolio earns 4% + inflation and you withdraw 4% annually, which is the same scenario as your dividend paying stocks. But, I have to say that I’ve never read anything that has been clear on this regarding the principle of the 4% rule. Yours is the first I’ve read that says the portfolio erodes.

  27. Great points DM,

    I haven’t done so purposely, but the yield on my portfolio has been hanging out around 3.5 like yours. Interestingly, I have been buying positions in the low 3% yield for the most part throughout the year. Luckily, I am on track to get a raise from everyone but INTC!

    I can see the 4% rule being more applicable after one has converted most of their portfolio to bonds. The price stability will enable them to sell without enormous swings in value. But, I suppose if you are holding just bonds you may be able to get above 4% depending on what type. You may outlive your money though, based on loosing out on the potential gains of stocks.

    But then there is always the tax man who takes a little bite.

  28. I actually prefer a combination of your ” keeping the golden goose intact” as you highlight, as well as a previous comment about developing income streams. When you retire, my thoughts are to create a half dozen buckets ( income streams) that are diversified. First look at any pensions whether from company or government and figure what portion of your overall monthly income requirements will be covered by this bucket. Since your pension should be considered a guaranteed fixed income I don’t want any more than a 10% allocation to laddered short term bonds (CBO) and 10% to North American preferred shares (XPF) which will give you 4.06% and 5.21% respectively. I am conservative, and can’t tell you if dividend equities or broad index investing is best, so I go with 20% Vanguard Canadian & 20% US indexes & the final 40% evenly invested in 20 of the best blue chip dividend stocks averaging 3-4% dividends, In my humble opinion, with each of these buckets producing an income stream, the only decision you should have to make in retirement is do you want a Corona or Heineken? CHEERS.

  29. Debs,

    Well, I don’t believe I wrote anything saying a portfolio will erode to $0 after 30 years. I’m saying there is a chance of such. Nobody knows what’s going to happen in 30 years. The research shows that there is a very little chance (4%) of this happening if you withdraw 4% out of a 50% stock/50% bond portfolio over 30 years and adjust for inflation, based on the research of past results (the updated study). The chances are even less if you go all in with stocks, though some might be uncomfortable with that.

    But, this is based on the past. This might not happen the same way going forward, especially with interest rates being as low as they are right now. Furthermore, I believe that selling assets, if unnecessary, would be opening up the possibility where it need not be. And this is also based on a 30-year retirement. For those looking to ensure their money can last even longer, I would especially recommend relying on organic income alone. And, finally, I’d like to have a larger margin of safety and know that there will be sizable assets to tap in case of unforeseen medical issues. No one situation can broadly apply to everyone.

    I hope that clears it up! πŸ™‚

    Cheers.

  30. ILG,

    See, you’re in a pretty good spot there. Just living off of your dividend income means you’re basically adhering to your own “3.5% rule”, while not having to sell any of the underlying assets. Plus, your income will rise at least in tandem with inflation, but more likely at a higher rate. You get to have your cake and eat it too. πŸ™‚

    As far as the 4% rule being more applicable to bonds, that’s actually not the case. Bond-dominated portfolios actually fare much worse with this strategy than stock-dominant portfolios, according to the research that goes back to 1925. It’s funny how you might associate bonds with “low risk” when actually they’re quite high in risk, if you’re defining risk by the potential of running out of capital and inflation eating away at your purchasing power. People just assume bonds are safe, and they’re really not. They might be a lot less volatile, but that lack of volatility introduces risk. Especially with low interest rates.

    Thanks for stopping by. And I hope INTC gives you that raise. πŸ™‚

    Cheers.

  31. Brian,

    That’s definitely not a bad way to go there. I would argue that each of the companies that will be paying my dividends is a separate income stream in itself, so I’ll have 50+ income streams in my (early) retirement. And that’s because while they’re all the same asset class, Johnson & Johnson’s operations have nothing to do with Aflac, and vice versa.

    But I think you have a great plan there. Naturally, many of us will have Social Security income, so that’ll come into play as well. Furthermore, there will likely be some type of bond income, if rates rise substantially. A pension may come into play as well, if you’re so lucky. But creating a few buckets is definitely a great idea.

    Just gotta make sure you have ice for your beer! πŸ™‚

    Thanks for sharing.

    Best wishes.

  32. My problem with 4% rule in the S&P or other index is that it makes no distinction for valuation of the market at the point you decide its safe to retire… Starting retirement $1,000,000 portfolio with the market PE at 15 is entirely different from a $1,000,000 when the market PE is 25.
    If you’re looking at your $1m portfolio of PG, CVX, T, JNJ etc and focused on the dividends its paying that will at least give some perspective. If in the over valued market that portfolio is only paying $25k in divs that will tell you to ignore the market value and keep saving if you expect to be able to spend 40k/year.

    Really part of the issue is that if you want to be conservative you can plan on withdrawing 4% but do that expecting your expenses to be 3-3.5%. Nobody retiring early should be planning a withdrawal rate that doesn’t leave a decent cushion. Plus I’d rather not be withdrawing money from stocks (even dividends imo) to spend the same year, rolling the current years dividends into a CD a few years out would be my preference – but I’m probably on the conservative side.

  33. DM,

    Great robust article, I applaud the research, examples and lessons to the readers. I would agree – the dividend income is essentially the new 4%. Here is the kicker though – year after year – you are generating more income instead of eating into your capital due to dividend increases! Your yield may stay the same at 3.5% due to possible appreciation in the markets, but your yield on that investment or yield on cost is dramatically higher, probably north of 4% at that point. It’s all very interesting – I cringe as well when someone sells a stock simply because it shot up in price 15%. I cringe even more deeply when they’ve held it for only a few short months, cough short term capital gain tax, cough. Plus with fees involved in selling – you lose so much, not just income, but even more value.

    Mantra, I guess it really comes down to individuals goals. We are looking to retire at 40 at the latest of not earlier. We have different mindsets and passions with our life. We like to live our own life and control our own path. We are keeping the goal in sight to have $X dividend income every year, and once we hit that goal – maybe we can devote the time to creating a new e-book on the “New 4% Rule”.. haha thoughts?

    -Lanny

  34. I am not sure why you are so worried about not selling assets, if your assets are growing at a faster pace than you are withdrawing them they are still growing. If they didn’t, it would obviously be a dumb strategy that wouldn’t have a little chance of succeeding over the long term. 100% stock exposure is not necessary for the 4% rule to work, you can mitigate some of the volatility by keeping some cash on hand.

    Regarding taxation of dividends, I was referring to them being taxed in the accumulation phase (i.e. while you are still working & being taxed at a higher rate than you would be when you are retired). If you get a 3-4% dividend, it is subject to taxation each year which reduces your effective return versus a low expense ratio tax efficient mutual fund which pays little in dividends and/or capital gains. This allows the investor to decide the best time for them to sell, which is hopefully when they are in a lower tax bracket in retirement.

    My assumption was that the majority of dividend stocks are large cap stocks versus smaller cap stocks that generally don’t pay dividends, here are two sources of data for my comment regarding the 1-2% difference in overall growth. Obviously with higher returns there is more risk over a shorter time horizon, but lower risk in the long run.

    http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/02/04/7-myths-about-dividend-paying-stocks

    http://www.bankrate.com/finance/investing/small-cap-funds-versus-large-cap.aspx

  35. pacer45,

    That’s a great point there. When you retire will absolutely change the chances of success. I’ve read some further research that shows what a sharp decline in the first year or two of retirement can do, and in some cases it can permanently erode your wealth and make it impossible to ever catch back up. Really all depends on the individual circumstances. But, as I stated in the article, the great news is that I would have rolled right through the latest calamity with my income actually increasing, based on my current holdings. Of course, hindsight is 20/20.

    And I would agree you’d still want a margin of safety, no matter if you’re following a 4% rule or living off of your dividend income. There should always be a buffer. πŸ™‚

    Thanks for adding that!

    Cheers.

  36. Lanny,

    Thanks! Glad you enjoyed it.

    And you’re absolutely right. The growing income is exactly what I was trying to point out in the article. No need to “adjust for inflation” because your dividend income is growing and “adjusting” for you. No need to run your calculator, or look at last year’s spending, or check the inflation rate. Just let your portfolio grow your income for you. “Oh, a raise? For me? Thank you very much!” πŸ™‚

    Haha, yeah that e-book might open some eyes. Or at least open some minds and possibly create some new perspectives. I just don’t see why you’d want to sell assets if it’s unnecessary. I’d much rather let my wealth quietly compound while living off of my (growing) dividend income.

    Keep up the great work. Early retirement, here we come!

    Best regards.

  37. scinvestor,

    You seem to be making a lot of assumptions.

    How would you know that those in the accumulation phase will be taxed on their dividends? How do you have access to the income of all investors currently accumulating assets? You don’t face a different tax rate when working or when retired. You only face different tax rates when your income changes, or when you’re being taxed on different sources of income (dividends and long-term capital gains being more advantageous than W-2 income).

    “My assumption was that the majority of dividend stocks are large cap stocks versus smaller cap stocks that generally don’t pay dividends,”

    does not jive with:

    “The biggest drawbacks that I see to dividend investing is that there is tax inefficiency & slower growth (they average 1-2% less than the broader stock market)”

    The broader stock market is not smaller cap stocks all by themselves, regardless of whether or not the pay a dividend. The broader stock market is the broader stock market, typically the DJIA or the S&P 500 index. And plenty of small and mid cap stocks pay growing dividends. I would suggest some research. πŸ™‚

    Cheers.

  38. scinvestor,

    I meant to add that this discussion is now out in the weeds as I find myself having to define what the stock market is. I wish you the best with your investment strategy, but this discussion is adding no value.

    Cheers.

  39. 1000 JNJs -4% = 960 JNJs. You end up year two with 921 shares, year three with 884 shares, etc. Year 30 with 293 shares. Year 100 with 16 shares.

    I think scinvestor made some very good points.

    No offense.

  40. Samuel,

    My example of JNJ wasn’t to imply a 4% sale year after year. It was simply to illustrate the reduction of equity inside a company. It was an extrapolation of a point.

    Reducing that particular stake 4% year by year and comparing that to what might happen otherwise would require future information on share prices, dividend increases, etc. I’ll make no attempt at that. You could of course put any numbers in a spreadsheet to make a point, but that really wasn’t what I was after. I was simply pointing out that selling shares in a company will in fact leave you with less tangible equity in the company, regardless of the value of that equity (which will obviously fluctuate).

    Cheers!

  41. Nice post Jason! I’d much rather collect 4% in dividends from my portfolio throughout my retirement and then pass on my portfolio to future generations then withdraw 4% a year and hope that my money can outlast me. Such as sad thought that living longer than your money could actually be a curse using the standard 4% withdraw rate that so many advisors still recommends. And if one wants to retire early, the likelihood of running out of money is even greater for those using the standard 4% rule.

    No way…dividend paying stocks is definitely the route I prefer and have now committed to. AFFJ

  42. AFFJ,

    Thanks! Hope you enjoyed it. πŸ™‚

    I’m with you. I don’t know why I’d want to open the door to the potential of running out of money, no matter how unlikely. I think the data is pretty accurate, and the odds of someone entering a more traditional retirement is very unlikely to run out of money using the 4% rule. However, all circumstances are different. The big risk might be unforeseen medical issues, which could require larger capital withdrawals.

    But, in my opinion, having a portfolio of investments that can approach an organic 4% yield that also grows at least in line with inflation is by far the better option. Living solely off of the income your portfolio provides without selling any assets is about as ironclad a guarantee of not running out of money as I can think of. And this is obviously a much better choice for those of us looking to retire early. It would, however, be nice to see this study extrapolated out over 50 years using the same data and same portfolios. I think that would be interesting. That would probably serve a very small audience, as 30 years is typically a very long retirement for most people.

    Thanks for stopping by!

    Best wishes.

  43. Hey Jason,

    I have a few thoughts on this topic. First, Retirement has been on my mind since before I graduated high school. My father “retired” when he was 51 years old. I say “retired” because that is when he got his pension and stopped working his regular job after 35 years. He never truly retired. He retired when I was a sophomore in high school. All of his friends retired basically at the same time with pensions. Anyway, I talked to him often about saving and investing and I went to many of the seminars with him. From what I remember, the 4% rule was mentioned often but it was explained to them as a way to not outlive their money- meaning that if they had 1 million dollars, they could withdraw no more than 40k the first year and then less and less each year following. The main idea was that there were no guarantees, so 4% each year allowed for the money to not run out for 30 years. But, after the 30 years, you potentially had 0 savings left from what I remember. This 4% was for the investments and savings. The pensions and social security was going to come as long as they lived.

    Well, I knew I was not getting a pension, so I started really early and did not like the idea of having to take 4% of some amount that was either up or down year over year. I have always put an amount on paper that would allow me to do what I want and made a determined effort to accumulate enough shares in companies to allow me to achieve that amount. I never used saved or invested money for anything but new investments and I hope I never will. The dividends will be my pension and it will hopefully see cost of living raises from time to time. Also, I never included SSI in my calculations, so if I get it that will be a bonus. Once the money hits the account, I live like I do not have it. My plan is not to live off of some percentage, but to cover my expenses and needs and let everything extra stay the course. I am 46 and have been dreaming of retirement every day since my dad retired in 1984. My dreams get bigger every year and what I needed and thought I needed to live very comfortably has grown along with those dreams.

    Anyhow, I think the 4% rule was put forth to help those who retired long ago to be able to not outlive there money. Many of the old timers I knew were afraid of banks and the market. They were from the depression and remember when people lost everything—-everything. I heard the horror stories and stashing cash in a cedar chest was not uncommon at all. So if the money was in one of those chests, you needed the 4% rule so you had something in the end. With the FDIC and strict rules on margin usage, things are better for us- hopefully.

    Keep cranking it,

    Robert

  44. Sounds good Jason. Just let me know when. We’re actually going to be down in Bradenton in November if you’re back by then.

    Your journey reminds me of the old cliche’, “you can never go home again”. I know my home town feels strange and different than when I left, and that was only a couple years ago. Look forward to talk with you soon.
    -Bryan

  45. Hi

    My magic number is 7.1%.

    First, this the total return in investment (equity gain + reinvested dividend) that I need to achieve my financial goal in 5 years without having to invest any additional money in my RRSP.

    Secondly, a ROI of 7.1% – in fact it is 7.18% – is required to double an investment in 10 years.

    Thirdly, with a growth of 7%, you can withdraw money annually 4% + compensate for inflation 2%+ build a reserve for bad years.

    I’m reorganizing my portfolio right now to select stock that will have a great probability to keep returning 7% in dividend and growth.

    My investments are and will be 100% equity but an increasing percentage will be invested in stock market funds with guaranteed capital.

  46. Hi Jason,

    Great post.

    I think that what’s missing to people is some education about finance and financial planning. School has prepared us to be good workers, not good investors.

    So people rely on other sources of information.

    Medias are only showing us the great and the impossible to reproduce. It’s cool to know that someone has made 10,000% because he bought Tesla shares at its IPO but is it really a strategy? And how do you turn these gains into income?

    Parents… well my mom knows nothing about finance and my dad only invest in government treasury notes… he has a defined benefits pension plan so he never had to worry about how to turn money into income.

    Banks are often seen as THE professionals! But unfortunately most “professionals” in banks only had a very thin training and they have to push pre-packaged products they don’t really understand. A bank wants you to make them make money, not the opposite. So they sell you mutual funds and when you’ll be at the age of retirement, they will push you to convert your capital into an annuitie that they will calculate with a very low interest rate so that your return on invested capital will be pretty low.

    Some people have realized that and that’s why this 4% rule of thumb has become popular.

    I agree with you that this rule is not great and it all depends of everyone’s particular situation. But I prefer this rule to an annuitie where all my capital would be tied up and given to an insurance company in exchange of a regular check.

    In the end I prefer dividend growth investing. It’s a complete solution offering both capital accumulation and income to spend or reinvest.

    I’d add that saving with an index fund strategy and then, at age of retirement using that capital to slowly buy dividend growth stocks and bonds could also be a good strategy…

    Have a great day

  47. Hi Jason,

    Good stuff, I love the contrarian view. I’m about done with my own post on this topic as well. 90% of our $ are in index funds, so I’m coming from the other side

    I always figured that nothing is 100% guaranteed, and that no matter what investment approach I chose it would be necessary to be flexible

    The day after we retire we could get framed for our wife’s murder (Shawshank Redemption), the Simian flu could wipe out half the human race (Planet of the Apes), or Tyler Durden could erase the debt (and wealth) record (Fight Club). We don’t know what the next Black Swan event, but we can be sure there will be at least one in our life time

    I look at how the S&P500 dividend yield dropped by about 50% in 2008 and didn’t recover in real terms for 4 years.
    http://www.multpl.com/s-p-500-dividend/table

    Somebody living purely off the dividends would have either made some big cutbacks or sold assets. I know your portfolio did better. Do you think your approach of hand selecting individual stocks is inherently more robust? (Thanks in advance for expanding on your thoughts here)

    The cool thing though, somebody that is able to save enough to retire quite early has shown they have the fortitude to do what needs to be done. If we define success as having more than $0 when we die, whether we choose a DGI or a “4% rule” method, being in the “early retiree” club means both us are almost guaranteed to be a success… almost, because there are no guarantees

    All the best

    Jeremy

  48. Although the 4% rule is clearly way oversimplified and I don’t subscribe to it, I’m OK with how the media constantly talks about it because otherwise a lot of people who know nothing about finance start thinking they can retire on 10x their expenses. πŸ™‚ So I think it may serve society well as a whole, even though it’s far too crude for individuals.

    You probably don’t know this, but my original plan was to index until I reached retirement and then switch to a dividend growth strategy of withdrawing only the dividends. The evidence about these sorts of things are all over the map, so you can always find something to support any particular conclusion, but take it all around, my opinion was that the probability of hitting a higher number was better with indexing.

    However, the problem is that probabilities are calculated across many time frames, many possible interest rates, many world scenarios, etc. Yet I only have one life, one start date (now), one set of numbers that is going to be my fate of living when I do. Thus, unless the probabilities are extreme (which they are not), they provide little predictability to my actual life. I switched to DGI in the accumulation phase for this reason. I believed it provided me a higher probability of assigning and hitting a particular retirement date, even if it meant that date was pushed back a little bit over the abstract indexing probabilities.

    Having said that, there is risk in any strategy. For DGI without touching principal, you are expecting that dividend growth will exceed inflation. This is a good bet in the abstract — e.g. S&P500 dividend growth vs CPI. But some people will experience personal inflation way beyond that, and sometimes for reasons they cannot control. Some of this can be mitigated by locking in certain things and purchasing insurance.

    Another general issue with any approach — including DGI — is that long term results are probably heavily dependent on getting into asset classes at a reasonable price. Equities are reasonable right now; bonds are not. Hence, strategies which depend on a lot of fixed income are suspect at this point in history. 10 years from now that may be different. Right now, you can find many good companies with 2.5% – 4.0% yields. This makes it possible to construct a decent portfolio with a reasonable amount of money. However, it wasn’t too many years ago (e.g. 1999) that yields were so ridiculously low that you would have needed enormous amounts of money to pursue this approach. If that’s the hand you’re dealt, there’s not a lot you can do. You can either wait until yields eventually become attractive or you can peg your dividend income to the low 1.5% yield. Either way, your retirement timeline is pushed back quite a bit.

  49. Hi,

    I’ve been lurking and reading for a while. While I’ve never been the type to comment on any of the blogs I read, this topic has been one of my particular interests the past few years since I share similar goals (early financial retirement with low expenses). So this is actually my first comment on a blog post maybe in several years.

    I feel that comparing DGI with the 4% rule is a false dichotomy, since DGI seems effectively equivalent to a pseudo “3-3.5% withdrawal rate” strategy. A 3% withdrawal rate over 60 years with the right asset allocation would have pretty much never failed, and a 3.5% withdrawal rate would have had a 99% success rate (a single failure in all 60-year rolling periods), over the recorded history of the American stock market. A .5% withdrawal rate difference is enormous. On the other hand, a DGI strategy relies a lot on individual judgment, so it’s hard to say if any particular investor would have been skilled enough to achieve a similar historical feat.

    Therefore, there is almost no practical difference between retiring once dividends exceed expenses, and retiring once your portfolio exceeds 30-33 times your expenses, especially since the majority of that 3-3.5% will be dividends anyway if you are invested in the overall market. In any case, aiming for 99-100% historical success is probably too conservative for many market scenarios; people don’t remember that a vast majority of the time, the simple 4% rule would actually leave you with millions more in the bank at the time of your death, given that in the luckiest of periods you could’ve lived like a king off 7%. But I digress.

    I would really like to try out DGI in full, but I can’t shake the knowledge that, ultimately, obtaining the total stock market return through an index is mathematically superior. To make an analogy to debt reduction, a dividend strategy is like the “debt snowball” approach of paying your debts in order of total balance: it does have certain benefits and reasons you may want to do it, but paying off debts in order of highest interest rate is a better strategy in an objective mathematical sense. In the same way, a total market index fund gets you more return in an objective mathematical sense (unless you are one of the few active investors who can beat the market over a long period–then you should obviously ignore me since you have skills that most hedge fund managers do not). Dollars are dollars, whether you get them from dividends or capital gains.

    Especially if your living expenses are low (as in much lower than the 15% marginal tax rate ceiling, as we are both planning), you could always rebalance later toward dividend growth stocks or some other more conservative allocation with virtually no tax consequences. On the other hand, you can’t make up for lost gains in previous years. Especially during the accumulation phase, this loss of relative wealth seems significant. If you follow a mathematically probable way to get to $500k faster, you can reach your goal in fewer years than the hypothetical alternative you who used a more conservative approach to accumulate. At that point, as I mentioned, you always have the option to convert to the more conservative approach for its benefits.

    My other big concern is interest rate risk. The equity risk premium over the past several years has meant stocks have grinded up due to an extremely low interest rate environment with few appealing alternative investments. While dividend stocks may not be in a bubble exactly, I feel dividend stocks have likely gained disproportionate inflows since there are a lot of boomers out there right now looking for yield. When the Fed inevitably raises rates in the next year or so, dividend stocks thus stand to lose disproportionately as safer or more attractive sources of yield become available and income investors start to move their money in these other investments. Even you have mentioned putting some money into fixed income once the rates are worth it; the problem is that every income investor out there with dividend stocks is going to be thinking the same thing.

    Well, why am I here reading your blog then? I do have similar goals of early retirement, and it’s interesting to watch and root for you as you make the journey as well. And I do have certain parts where I disagree with hardcore index investors. For instance, I think the overall market is extremely overvalued right now, but I am sitting on more cash than I’d like. I may be foolishly market timing, but blindly lump sum investing into an overvalued market seems like a bad idea to me. In this scenario I’ve become more interested in looking for undervalued businesses with limited downside compared to the overall market and good potential (stuff like buying AAPL last year based on valuation, and recently initiating on BP after it dropped 6%). Hedging, so to speak, since the money currently in my index funds is going nowhere. One of the nice things about active versus index investing is that it’s a lot more fun if you like making fundamental analyses of businesses. After all, there are reasons to not take the absolutely optimal theoretical approach every time. I’ve enjoyed reading your stock analyses and hope you keep it up.

    The analogy of taking the fruits from a tree is a very powerful metaphor, but just as for the debt snowball, metaphors can’t beat math. You are right to say that, given your personal goals, you don’t compare your returns to the market. But over a long period of time, the total market index fund investor both 1) likely has had better returns than any kind of active investor, including DG investors, and 2) could probably convert to DGI with that extra money at any point–for example if he wanted to capture the advantages of a more conservative approach like DGI, such as dividend raises above inflation, after the accumulation phase. I think some of DGI’s other merits are that it’s a sound, healthy way to approach investing (“ownership in good businesses,” as opposed to speculating on “the next big thing”), and that financial analysis is a good hobby as well. You could even view the expected lower relative return compared to the market to be the “costs” of the hobby. It’s still a hobby that pays off better than most “consumptive” hobbies like automobiles and collectible trading cards. That isn’t so bad at all.

  50. Hi DM. I’m so excited! I finally submitted all the paperwork to open a new brokerage account and they are going to contact the 5 DRP’s that I have to close them out and transfer in the shares. It will be so nice to have everything in one place. And I’m not going to have the dividends re-invested going forward. So those, combined with any other money I put into the account, will go towards buying new shares. I’ll continue to contribute to the 401k at work. The match is too good to give up. But I’m really looking forward to seeing how quickly I can get this account to grow.

    Thanks for the inspiration. Love reading your posts and can’t wait for you to write a book!

  51. I’m in the same situation as you. As I was reading the article, I was preparing a response, but you beat me to it and did a much better job than what I could’ve done. I would simply like to add that the Trinity Study kept a 4% withdrawal rate year after year with no regards to actual returns. Just as a DGI would scale his expenses to the dividends he receives every year, an index investors can easily scale his expenses depending on market returns, which would effectively guarantee the success of the “4%” rule and let you die a millionaire. Furthermore, the failure of the 4% rule occurred when one retired just before a recession. While one can’t predict such an event, knowing about it can certainly help if it does occur (getting a part time job for a year to not rely as heavily on your returns etc.). I do love this blog and I think DM is one of the most passionate bloggers out there that really wants to “connect” with his readers.

    Cheers!

  52. 112 K now worth 170 K since 2010 = 51% appreciation. I realize investments were dollar cost averaged since then but also realize the S&P 500 is up 93% over the same time period. I think one should do both types of investing.

  53. I’m going to disagree with you on the real estate example, now keep in mind this plans to be anywhere from 50-75% of my early retirement income, so I am biased.

    I think real estate and dividend income are very similar in nature. Here’s a couple reasons why:

    *Both don’t make a ton of money in the beginning, 100 shares is making a $100 and most rentals are making a small percentage as well.

    **Dividends and Rents increase over time. Rent usually is increased from year to year, $25 extra month becomes larger and larger over time.

    ***Eventually your position in the house(paid off) and dividend stock is so large you are receiving a large amount each month. You now have 1,000 shares of Johnson and Johnson and I have a paid off home(in the future) where this is paying for our expenses.

    ****You can sell your shares at any time but why would you they are producing monthly income, same thing with the rental property, our shares and rental may be valued at the same amount and produce the same income at this time. Real estate is more hands on than Stocks, but DIY Toilet vs Calling a Guy separates that and they can become much more equal in this regards.

    The long winded answer is I don’t believe in FI most real estate people are selling off home by home for their 4% rule, but rather the spread in rental income vs expense has increased so much that they have a portfolio that acts as a reliable income source, much like a dividend stock. If anything the FI real estate person is more likely to sell off his entire portfolio and retire to Aruba than sell off each house year by year.

    Sounds like one of us should do a post on this;) I have been thinking about Bonds vs Dividend Stocks as a post as well, but I don’t know if I’m the guy who should be diving into the details.

    Fun post to read, thanks.

  54. Robert,

    Thanks for sharing that. That’s a great point there.

    I think the 4% rule is really useful in that way, regardless of your investment strategy. It gives people a guideline; a place to start. You can do some very quick math, based on your assets, and have a very good idea of where you stand. In that regard, the research is invaluable. Because without it, people would probably have no idea how much to withdraw.

    I’m really glad to hear how passionate you are about retirement and pursuing some of your passions. I really hope you’re able to get to where you want to be. I’ve kind of had a sneak peek at it, and it’s really fantastic to basically own your own time.

    Thanks for sharing that!!

    Best wishes.

  55. Hemgi,

    I’m not sure how the stock market works where you’re at, but the US stock market would return a bit more than that over the long haul. And that’s basically where the 4% rule comes from, and why it’s typically quite successful over a 30-year retirement. One should be able to withdraw 4%, adjust for inflation, and the growth of the underlying assets should make it so that one never runs out of money.

    Some of the more conservative portfolios had higher failure rates, which speaks to the inherent risks there. Stocks typically return the most, but they can also oscillate pretty heavily.

    Wish you the best of luck! πŸ™‚

    Take care.

  56. Allan,

    I agree with you. It’s a shame there isn’t more education on finances. I believe if financial education was more pervasive, we might have less issues there. But that’s where I come in. πŸ™‚

    I hear you on annuities. Those are typically bad investment products. They are loaded with fees, so they make the people selling them a lot of money. But you’re left with no capital to tap in an emergency, and a return that is very likely lower than what you could achieve on your own. Suffice to say, I won’t be buying any annuities when I become FI.

    I wish you the best of luck as you keep marching towards financial independence! Thanks for stopping by.

    Take care.

  57. Jeremy,

    Great points there. There really are no guarantees. I think the 4% rule is highly unlikely to fail someone over a 30-year retirement, as the research bares that out. Who’s to say what the next 30 years will bring? But the last 90 years or whatever is probably a decent place to start. I still do wonder what would happen to someone withdrawing a full 4% while adjusting for inflation over a 50-year time frame. It would be interesting to see how that looks, using the same research. Perhaps that might be my biggest hesitation with the idea, because I plan on living off of my portfolio for much more than 30 years. Well, that is if I don’t catch Simian flu. πŸ™‚

    As far as the S&P 500 dividend yield goes, that’s a catch-all. That’s all stocks in the S&P 500 that were paying a dividend of some kind. That isn’t really necessarily representative of stocks that had paying and raising dividends for years or decades. Hindsight is 20/20. But I’d like to think that if I could jump in the Wayback Machine I’d still be picking companies like Johnson & Johnson, Coca-Cola, Pepsi, Philip Morris, Norfolk Southern, Aflac, and Kinder Morgan to lead my portfolio. There’s no reason I wouldn’t have. But I would of course also picked up General Electric and Wells Fargo, both of which had decades of dividend growth under their belt. So I would have caught a hit, as I discussed above. But most of the other companies would have either kept on paying their current dividends, or they would have been raising their dividends. So it certainly wouldn’t have been a situation where I took a 50% haircut.

    But I do agree with you on the $0 when you die. That is success, unless you have it in mind to leave behind a legacy. Or maybe life insurance comes into play there. That’s all individual planning. I would only say that I don’t want to still have a year or two to go when that $0 hits. And, in my view, selling assets all the way along opens that door just a bit.

    But the great thing is that we’re both documenting our journeys. I don’t know what your withdrawal rate is, because I don’t think I’ve ever seen you guys post all your assets and your investment income. But if you guys are withdrawing the full 4% and adjusting for inflation, then that would be an excellent case study. Because you guys are in fact retired quite young. Meanwhile, I have plans to keep this little shindig going for many more years, and so we’ll see how living purely off of the organic income goes. Should be fun. πŸ™‚

    Thanks for stopping by!

    Best regards.

  58. Long time reader from the old SA days and first time commenter. While I agree with your take on the traditional 4% rule I also don’t want to pass my entire fortune onto heirs or charity. I would like to gradually draw down my portfolio while at the same time gifting around 50% to family and causes I support. Would love to see an analysis that is a middle of the road approach (not relying on 4% rule but also not relying on never selling a share)

  59. S.B.,

    Excellent points there. I think I could have probably added in some of that, but I honestly didn’t see it from that perspective.

    I agree with you on personal inflation. I suppose I’m a bit remiss to touch on it in the post, but I honestly can’t factor that in for everyone. In my mind, those that have the fortitude to see this type of strategy out where you’re living below your means for a decade or more, relentlessly investing every month for years, and doing all the necessary research, one would probably be intelligent enough to avoid a lifestyle that is prone to excess inflation. Of course, that’s impossible to predict. Life can happen pretty fast. I sometimes find myself lingering in the abstract, only because I brought some of the abstract into reality. Ideas like eating ramen noodles for lunch for a year to save and invest as much as possible to get my snowball moving early on were quite abstract until I did it. Similarly so, putting around on a scooter risking life and limb could also be abstract for many people out there. It was for me until I did it. Taking that point further, if your lifestyle is prone to inflation above and beyond the rate at which your investments are growing, or the CPI, then perhaps one needs to look inward.

    And I also agree with you on prices, value, yield, and timing. I have a post that I’ve been working on discussing this, but we’re basically in a “Golden Age” right now. Stocks have run up quite a bit, sure. But you have access to equity in hundreds of fantastic companies with yields that are very reasonable and enough to live off of if you build a sizable portfolio. The timing is good for those doing this now. Wasn’t so much the case in prior periods, especially around 1999 there when stocks were very inflated and yields therefore pushed lower. Of course, the 10-year was 4.72% on January 1, 1999. So, given the circumstances, I suppose fixed-income would have made a lot more sense back then, and hope would not have been lost. But it would have indeed been much more difficult to pursue this specific strategy back in the late 90s. Luckily, the party ended and things became a bit more reasonable a few years down the road.

    But I do agree with you. There is risk in any strategy. One needs to balance that risk against returns, all known alternatives, personal circumstances, and their time horizon. I think this particular strategy works pretty well when looked at in that light, but I can also see how some people disagree.

    Thanks for stopping by and adding that!

    Best regards.

  60. SR,

    So glad to hear that! I’m very excited for you. The snowball rolling begins, and I’m confident you’ll build a monster in no time.

    Appreciate the support very much. Hope to continue inspiring you for years to come!!

    Best wishes.

  61. Anonymous,

    I appreciate you taking the time to stop by and comment. I do hope you stay in touch, because I do fear that the few times I’ve criticized index investing or anything relating to it (this post included) you all of the sudden have some people popping out of the woodwork to stop by, leave a comment criticizing that particular work or the idea behind it, and then never coming by again. Always a shame.

    I’m not here to change your mind. It sounds like you’ve already made up your mind with index investing, and I think that’s great. I’ve determined it doesn’t work for me and my goals, but that doesn’t mean it’s not a very sound strategy. I think it works great for most people. The costs are low, broad diversification is built in, and vast investment knowledge isn’t necessary at all. My baby niece could literally be an index investor. I would just need to open up an account for her and put $10 in. Bam, she’s invested in the S&P 500 index. So easy a caveman could do it, or something like that.

    However, I disagree with you that the comparison is a false dichotomy. I purposely compared dividend growth investing and one’s ability to build a portfolio with a 4% yield on purpose, so as to say selling underlying assets wouldn’t be necessary. But it’s not a false dichotomy because most popular equity index funds (S&P 500 index, total stock market, etc.) yield much less than 4%. So you have selling assets vs. not selling assets. No false dichotomy there. Just plain facts.

    As far as performance goes, I stopped tracking myself against the S&P 500 early last year. I was beating the index up until that point. I found it to add no particular value for me and my goals. However, I’m familiar with a couple of other dividend growth investors that track their performance, and they are generally able to beat the index over business cycles, but that performance may lag when the market moves up significantly.

    I disagree with: β€œI would really like to try out DGI in full, but I can’t shake the knowledge that, ultimately, obtaining the total stock market return through an index is mathematically superior.” That’s making a lot of assumptions. How exactly is it mathematically superior? Because it’s highly unlikely to beat the market? Because all of the studies done on that encompass every investor in the world, retail and professional? I don’t make such assumptions, but I suppose one biases themselves if they do.

    I’m not here to persuade anyone to invest the way I do. I’m simply here to share my strategy, experiences, journey, and my victories and failures. And in that sharing I hope to inspire others to take control of their finances and march toward financial independence, because freedom is attainable for just about everyone.

    Also, do you have a link to the 60-year study?? I’d like to know where you got your numbers. I wasn’t aware the Trinity Study extrapolated their results out that far.

    Cheers!

  62. trostock,

    I see this is your first comment here. How appropriate. πŸ™‚

    The S&P 500 index is up approximately 73% from March 2010 to now, which is really meaningless to what you’re inferring. I obviously didn’t invest $112k all in one pop. I was beating the S&P 500 index up until I stopped tracking myself, but I’m honestly not interested in my year to year performance against a benchmark that has little to do with my own personal goals and success.

    Take care.

  63. Fortunately you weren’t in WaMu, Citibank, or Bank of America in 2008, although many were for the sake of yield (I believe at least BAC was considered a Dividend Aristocrat before the drama in ’08.)

    We are under 4%… I saved too much πŸ™‚ But maybe we will move permanently to Western Europe and bump up our spending for the purpose of the case study haha. We retired in our 30’s so a 60 year retirement is in the realm of possibility

    For the 4% rule, I’ve done some analysis for longer periods than 30 years, and in cases where a portfolio survived 30 years it survived 60. It’s basically the case that once a portfolio has lasted 30 years, it has generally become so large that your family can become a Dynasty like the Kennedy’s. Or another way of looking at it, spending 5%, 6%, or even 7% would work in most cases for 30 years and often even for much longer. For analysis, I like http://www.cfiresim.com which lets people do their own Trinity Study and experiment with assumptions

    Let me finish my lengthy post on the subject, it would be great to get your feedback

  64. Steven,

    No need to disagree, my friend. I think rental properties are a great way to achieve financial independence. You’ll probably see returns greater than I will, but I also believe the work will be greater. Being a landlord is really outside my interest, scope, and circle of competence, so I invest in what I invest in. I’ll stick to my REITs and not have to worry about the proverbial leaky toilet. Of course, I’m also acknowledging that I’ll likely see less overall returns that way.

    My example on real estate was tongue-in-cheek, as I mentioned in the post. It was purposely ridiculous to illustrate a point behind selling assets. I was basically comparing the idea of selling one type of asset (equity) to another (real estate) to extrapolate my point on why I think selling assets is a bad idea. I suppose I should have been more clear about that.

    I wasn’t criticizing real estate investing. I was criticizing the idea of selling assets when the future cannot be predicted, and those assets that are sold can no longer be productive for you, limiting the amount of income you can possibly receive from your remaining asset base.

    Cheers!

  65. Ryan,

    Thanks for stopping by!

    I don’t think there’s anything wrong at all with that idea. And I think that’s what’s so great about this strategy. You will have your entire asset base intact for you when you’re old and gray. If you’re 70 and want to start spending like a madman, you can do that. You can start dismantling the portfolio and selling off pieces of businesses one at a time. Nothing says you can’t do that. Rather, I was only inferring that I wouldn’t want to have to do that for years on end just to survive, because there’s a chance I might have to do such a thing to pay for an unforeseen emergency/medical issue.

    Of course, one could do the same thing as an index investor. You could look at your balance at 70 years old and decide to travel the world by yacht for the rest of your life. You would then simply increase your withdrawal rate from 4% to whatever you want.

    However, my strategy would leave the entire asset base intact, which I’m assuming would be quite sizable if you started building it 30 or 40 years prior.

    Cheers!

  66. Jeremy,

    Good points there. I could have easily have been invested in some of those banks, though unlikely all of them. And I say that from an asset allocation point of view. BAC is certainly a possibility, depending on what I saw if I were an investor back in 2008. Though, even if I were invested in it, my overall income still would have likely risen, and above the rate of inflation.

    Hey, you guys are in a great spot to be under 4%. And I think that was at the heart of the Trinity Study’s message. They’re basically saying 4% is likely to serve you well, but if you can be under you’re even better. From everything I can see, a 3% withdrawal rate is pretty much a lock for success over long periods of time.

    That’s an interesting calculator there. I must say I never ran into it before. I ran my own portfolio (I rounded up to $175k) and assumed a 4% withdrawal rate (adjusting for inflation) over 60 years. I assumed no other assets or income sources (for a fair comparison). It gave me a 88.24% success rate. Not bad, but I’d hate to land in the ~12% at 77 years old. I was surprised to see a 93.91% success rate even after backing it down to 30 years, which is lower than what the updated Trinity Study came up with. Perhaps the years between the latest study and the calculator is the difference, showing an even less likely success rate for the 4% SWR. Thanks for sharing! I’ll definitely run some more scenarios with that bad boy. Seems very robust. πŸ™‚

    I want to add:

    “Or another way of looking at it, spending 5%, 6%, or even 7% would work in most cases for 30 years and often even for much longer.”

    The updated Trinity Study shows low success rates, even with 100% stock portfolios, with withdrawal rates that high:

    http://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx

    A 7% withdrawal rate has a 55% chance of success with a 100% stock portfolio, adjusting for inflation. The success rate is even lower, at 45%, for a 75% stock/25% bond portfolio. I wonder if anyone out there has the fortitude to test the research. πŸ™‚

    Keep up the great work!

    Best regards.

  67. Good analysis Jason. Still, isn’t there some evidence that index funds would outperform a dividend strategy during the accumulation phase? That is to say, while withdrawing 4% might have some drawbacks compared to simply living off of dividends once you start living off your investments, you likely would start from a larger base (perhaps a much larger base) from which to withdraw if you went with index funds, right?

    http://www.ifa.com/articles/portfolios_individual_dividend-paying_stocks

    From my perspective, there are a lot of ways to skin this cat. Many strategies can work.

  68. trostock,

    I see this is your first comment here. How appropriate. πŸ™‚
    —————————————————————————————
    Don’t get me wrong. I like DGI. In fact, it is the largest part of my portfolio. I’m just saying I like to diversify by investing style as well as asset classes, sectors, etc.

  69. Zol,

    I have run across firecalc and have used it on occasion, especially when I was first starting out.

    However, I hadn’t run into that second calculator until today. Jeremy @ Go Curry Cracker pointed that calculator out to me in a separate comment. It’s very robust. I ran a couple simulations using my own portfolio with a 4% withdrawal rate, adjusted for inflation. I was given a ~94% success rate over a 30-year time frame, and a ~88% success rate over a 60-year time frame. Whether those results are palatable or not is really up to you. I think the calculator’s results generally jive with the Trinity Study’s results. That is to say, there is some room for failure with a 4% SWR, but the odds are very good that you won’t run out of money over a 30-year time frame. The odds aren’t quite as solid over a longer period of time, at least according to the calculator. I prefer my odds of not selling any assets at all, but that’s just my view on it.

    Thanks for sharing those resources! I think they’re both very solid, overall.

    Best wishes.

  70. DB40,

    It is my opinion that it is impossible to say without a doubt which strategy would provide more absolute wealth during the accumulation phase. Using past data cannot necessarily be extrapolated out into the future. Furthermore, you have millions of retail investors out there making different decisions. Some will likely outperform, some will perform exactly to a benchmark (call it the S&P 500 index) and some will likely underperform. That is the nature of averages.

    However, your link is beyond my comprehension. That company (what company is this, again?) is comparing the VDIGX (an index fund that has awfully high expense ratios for a portfolio anyone can build) against “Index Portfolio 72”. What exactly is Index Portfolio 72? I don’t know how comparing one index to another speaks to an individual’s ability to outperform the broader market, but this study doesn’t really say much of anything. Furthermore, I contend that a typical dividend growth investor’s portfolio would probably have pretty decent exposure to companies with low beta, as I’ve discussed before. Comparing a portfolio like that to “globally diversified portfolios of index funds tilted towards small cap and value stocks” doesn’t seem to be apples to apples, as small caps typically have higher risk by their very nature. Just my take on it.

    But I’ll provide further data to support my point. Ned Davis Research, via CNBC, concluded dividend growers and initiators produced a total annual return of 10.1% from 1972-2013, versus 7.6% for the S&P 500 index during that same time frame.

    http://www.cnbc.com/id/101331582

    So for someone looking for the most absolute wealth, they would have been better off avoiding the entire S&P 500 index and been better off to focus on stocks that pay and grow dividends.

    Furthermore, you can look to John Bogle (the founder of Vanguard and most of the index funds we know today) for further claims to the importance of dividends and, more specifically, reinvested dividends:

    “During the past century, the average rate of inflation was 3.3 percent per year, reducing the nominal 5 percent earnings growth rate to a real growth rate of just 1.7 percent. Thus, the inflation-adjusted return on stocks was not 9.6 percent, but 6.3 percent. In real terms, then, dividend income has accounted for almost 75 percent of the annual investment return on stocks.

    But while dividend income has accounted for nearly 50 percent of the long-term nominal annual return on stocks and 75 percent of the real annual return, even these figures dramatically understate the cumulative role played by dividends.

    Consider this: An investment of $10,000 in the S&P 500 Index at its 1926 inception (Figure 2) with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4 percent compounded). [Using the S&P 90 Stock Index before the 1957 debut of the S&P 500.] If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1 percent compounded)-an amazing gap of $32 million.”

    Source: http://www.etf.com/publications/journalofindexes/joi-articles/3869-the-importance-of-investment-income.html

    So you would surmise that one would be better on focusing on what’s truly driven returns over a significant period of time: Dividends and reinvestment of dividends, which is exactly what the DGI strategy is after.

    Again, I’m not trying to talk anyone into this strategy. But it’s good both for wealth creating and income creation/growth. Even better, this is all done without having to knock down the castle that brought you freedom brick by brick.

    I hope that helps!

    Best regards.

  71. trostock,

    I wasn’t trying to knock your comment for not believing in DGI. I’m not trying to talk anyone into this, and I furthermore see the benefits of other strategies. You’ll notice that I’ve had many candid discussions on index investing with many others, like Jeremy in this very thread. And he’s on my blogroll, and I’ve had him guest post on this site. So I’m not “anti index fund investing”. Rather, I simply share my particular experience and the benefits of such so as to inspire others out there to take control of their freedom, however that may be.

    I was rather knocking your comment for inferring that I’ve somehow drastically underperformed the broader market by using incorrect numbers. The S&P hasn’t performed from mid-March to mid-September like you stated, but rather as I stated. Moreover, I didn’t start with $112k right off the bat. I started with $5k.

    If I were making the first comment on someone else’s site I would try to be a little respectful, and at least use proper numbers. You know, just to get off on the right foot. Just my view on it.

    Cheers!

  72. Hey DM,

    I kindly disagree with Index Investing. But, you always write a well thought out, open, and knowledgable article. It’s thought provoking and brings out discussion! I love it! Thanks for sharing!

  73. Hi, DM!

    Just found your site a few months ago, reading up on your fantastic journey! There are so many bloggers just distantly commenting on purchases, often with very little analysis, rarely explaining ideas, reasons, their future and dreams the way you do. Not to mention how you are very honest with events such as ‘Resentment’ a few weeks ago.. Thanks a lot! Really appreciate your honesty!

    I wanted to ask about spending your principal. Perhaps you’ve written on that before, and in that case I apologize. But do you aim never to touch your principal (unless big unforeseen medical stuff come along, as you explained above), or would you spend some “safe” amount at the end of your amazing journey? I mean, disregarding heirs or charity, it seems almost like a waste saving up huge amount of purchasing power, only never to use it. Do you see my point?

    Keep up the great work! Thx for enriching the lives of the rest of us!:)

    /J

  74. DM,
    Sorry it came across as an attempt to show that you greatly under performed the market. That was not my intent. I did say that I realized you dollar cost averaged in. I used SPY adjusted prices from Yahoo. I see March 1, 2010 as 102.13. Today’s closing price is 199.13. That equates to 95% rounded. Still not trying to show out performance but I do have to defend my number. Tell me where I made a mistake.

  75. Anon,

    Thanks for the kind words and support. Really appreciate it!

    I do try to provide a unique and personal perspective on investing, dividends, frugality, life, and relationships. I’m not perfect, and I’ve made my fair share of mistakes over time. I hope in opening up to the world I can enrich all of our lives. And I also aim to inspire others to march toward their own vision of a better life, whatever that may look like.

    Thanks again.

    Best wishes.

  76. Joakim,

    Thank you. I’m so glad you appreciate the effort I put into this. I work very hard behind the scenes, and I try my best to put out great, informative, and inspirational content. I take it very seriously. πŸ™‚

    It’s funny you mention enriching lives, as that was just something I was mentioning in an above content. That’s exactly what I try to do. And I do that through my own mistakes and experiences. I hope that others can learn from both my victories and my failures.

    That’s a good question there in regards to spending money. As is, I plan to let the actual underlying wealth grow until I’m dead. And I say that because I truly believe the income will grow faster than I can spend it. So even with some modest and voluntary lifestyle inflation the income growth should outpace the growth in my expenditures. But time will tell.

    I may have some desire to spend some excess capital/principle at some point. It’s impossible to say now. But I don’t specifically plan on it. I suppose it depends on what happens down the road. Life changes. But if I were able to leave some wealth behind to charity I could think of worse positions to be in.

    Thanks for stopping by!

    Best regards.

  77. trostock,

    My apologies. I misunderstood the nature of your comment.

    I used the actual point change in the S&P 500 index, which went from ~1150 to ~1985 from mid-March 2010 to today. That’s a 73% (rounded up) change in the index. You can use the interactive charts from any of the major finance sites to get these figures, but Google is the one I use. Yahoo jives with the same info (as it should). That result also jives with VFINX (Vanguard’s S&P 500 index fund), so I’m not sure why there’s a discrepancy with SPY. That is a simple price change, which doesn’t include dividends, but even then you won’t have a 22% swing in four years.

    Either way, it’s a moot point. I don’t believe comparing oneself against something else (rather than your own goals) is a value-added activity, but that’s just my take on it. Many others do track benchmarks and compare themselves, and they may find value in that.

    Take care!

  78. If you’re planning to live off your dividend income in retirement without selling assets then your portfolio’s dividend yield (obviously) needs to be more than your desired withdrawals. Dividend growth stocks (e.g. JnJ) that yield 2-3% make sense when you’re 20 years from retirement in the accumulation phase since the dividend growth has many years to compound, but as you get closer to (and move into) the withdrawal phase you need to focus on stocks that have the highest possible sustainable dividend payout. You still want a little dividend growth ( to keep up with inflation) of course.

    BTW- I don’t know if the raw data is available or not, but I think it would be interesting to redo the trinity study but instead of using overall market average returns pick a basket of stocks each starting period that meet the dividend growth criteria.

  79. DM,

    Yeah, withdrawal rates are both a fascinating and interesting topic, so of course there’s going to be a lot of different points of view. I like a good discussion.

    First, my “false dichotomy” comment was more about comparing success rates. The presentation should not be “DGI has a strong built-in safety margin, while a passive 4% rule is less reliable in worst-case scenarios” because a 3.5% rule would have historically had 99% success over any 60-year investment period in modern American history–a very big safety margin, with less time spent and probably more gains. This is something that inherently cannot be said of any active strategy in which individual choice of stocks plays such a primary role.

    As for “selling assets,” I mentioned before that dollars are dollars. In fact, what will happen during most market cycles is that 1) you will have outsized gains during good times that you leave there to reinvest into the portfolio, compounding gains for the lean times, and 2) for most of market history until the early 90s, a 3.5% withdrawal rate based on a market index would have only taken from the “fruit” just like a DGI strategy. (see http://www.multpl.com/s-p-500-dividend-yield/). In part, DGI has gained popularity recently because of prevailing, atypical market conditions (record low yields and heightened awareness of crashes), but I feel this concern over “selling assets” is overstated in the light of historical data.

    As for market outperformance, there is a wealth of evidence that suggests the vast majority of active and professional investors, with the best educations and informational advantages, cannot beat the passive market index (http://www.bloomberg.com/news/2014-01-08/hedge-funds-trail-stocks-for-fifth-year-with-7-4-return.html for a typical article). The only reason Warren Buffett is so renowned is that he has been one of the handful, out of thousands of wannabe and would-be investors, to beat the S&P over decades. He would be just another chump if he matched or underperformed the market like the vast majority of investors.

    Anyone can beat the market for a few years, but show me how many people have consistently beaten the market for 15, 20+ years. And for early retirement, your portfolio will have to last 60+ years, so any disparities from market returns will be magnified so that you might easily end up with half the returns or worse. Do you want to make the mathematically improbable bet that you are the next Buffett or Peter Lynch, and can one-up them by matching/outperforming the market for 60+ years rather than the 40 or 20 they are legendary for? Everyone is confident that their strategy can beat the market over the long run, but I am unaware of any objective studies or evidence that prove otherwise. Again, anyone can beat the market for a few years, but we are talking about very long periods. Even the small number of star managers who have beaten the market for 7, 10, 15 years eventually lose and fall behind. This is why I can state index returns are almost certainly “mathematically superior” to any form of active investing.

    As for the data on 60-year returns, I believe you’re already aware of (and have been linked to) the Monte Carlo retirement simulators (Firecalc, etc.) I simply input a 3% and 3.5% withdrawal rate for a $500k portfolio with no other changes (I believe the default assumption for Firecalc is a 75/25 stock/bond allocation. Links:

    3%:
    http://www.firecalc.com/index.php?wdamt=15000&PortValue=500000&term=60&callprocess2=Submit&ss1=0&ssy1=2027&ss2=0&ssy2=2029&signwd1=%2B&chwd1=0&chyr1=2017&wd1infl=adj&signwd2=%2B&chwd2=0&chyr2=2019&wd2infl=adj&signwd3=%2B&chwd3=0&chyr3=2023&wd3infl=adj&holdyears=2014&preadd=0&inflpick=4&override_inflation_rate=3.0&SpendingModel=constant&age=48&pctlastyear=0&infltype=PPI&fixedinc=Commercial+Paper&user_bonds=4.0&InvExp=0.18&monte=history&StartYr=1871&fixedchoice=LongInterest&pctEquity=75&mix1=10&mix2=10&mix3=10&mix4=40&mix5=40&mix6=10&mix7=15&mix8=5&user_growth=10&user_inflation=3.0&monte_growth=10&monte_sd=10&monte_inflation=3.00&signlump1=%2B&cashin1=0&cashyr1=2017&signlump2=%2B&cashin2=0&cashyr2=2027&signlump3=%2B&cashin3=0&cashyr3=2032&process=survival&showyear=1960&delay=10&goal=95&portfloor=0&FIRECalcVersion=3.0&

    3.5%:
    http://www.firecalc.com/index.php?wdamt=17500&PortValue=500000&term=60&callprocess2=Submit&ss1=0&ssy1=2027&ss2=0&ssy2=2029&signwd1=%2B&chwd1=0&chyr1=2017&wd1infl=adj&signwd2=%2B&chwd2=0&chyr2=2019&wd2infl=adj&signwd3=%2B&chwd3=0&chyr3=2023&wd3infl=adj&holdyears=2014&preadd=0&inflpick=4&override_inflation_rate=3.0&SpendingModel=constant&age=48&pctlastyear=0&infltype=PPI&fixedinc=Commercial+Paper&user_bonds=4.0&InvExp=0.18&monte=history&StartYr=1871&fixedchoice=LongInterest&pctEquity=75&mix1=10&mix2=10&mix3=10&mix4=40&mix5=40&mix6=10&mix7=15&mix8=5&user_growth=10&user_inflation=3.0&monte_growth=10&monte_sd=10&monte_inflation=3.00&signlump1=%2B&cashin1=0&cashyr1=2017&signlump2=%2B&cashin2=0&cashyr2=2027&signlump3=%2B&cashin3=0&cashyr3=2032&process=survival&showyear=1960&delay=10&goal=95&portfloor=0&FIRECalcVersion=3.0&

    Very ugly links. You can always plug in the info yourself.

    Again, I enjoy reading along with your journey. I’m not saying to change what works for you. But I do think it is disingenuous to claim DGI is actually mathematically better than an index approach (though it may be better in other ways), given all the evidence out there for the difficulty of beating the market.

  80. steve,

    Everyone’s situation is different. What one person can live off of, another cannot. I personally don’t plan on changing my asset mix a lot as I close in on my financial independence. Sacrificing quality for yield is really not a game I’d like to play, but others are certainly more than welcome to try it out. In fact, the portfolio you see before you today is going to be the majority of what I enter FI with. It may change a bit here and there over the years, but this is the gist of it. If I’m falling way short of my goal as I near 40, then I’ll have a choice (as will anyone else who finds themselves in a similar situation). You can either work longer to put away more capital, or you can crank up the yield, which may also crank up the risk. That’s a choice everyone must make for themselves. I personally plan to keep it a pretty conservative portfolio, which is ironic coming from someone who’s almost 100% in equities. πŸ™‚

    Thanks for stopping by!

    Cheers.

  81. DM,

    Interesting that there can be differences like that. BTW, I really appreciate your efforts here. I visit often and I think your willingness to be transparent has greatly contributed to your success. Keep up the great work and I will keep reading.

  82. Anonymous,

    β€œDollars are dollars”.

    That’s very true. But selling assets that are generating rising income, and not selling assets are two totally different concepts. One strategy will ensure the portfolio should be able to generate rising income for all time, and the other strategy will probably make that difficult, depending on the size of the sales and how much the organic income is able to grow to offset those sales.

    To me, it’s not really 4% vs. 3.5% or 3%. I ran my own calculation using this calculator: http://www.cfiresim.com/input.php

    I used a portfolio value of $175,000 at a 3.5% spend rate over 60 years, adjusting for inflation. No rebalancing. It gave me a 97.65% success rate. Is that a success rate you can live with? Only you can answer that. I’d like to give myself the best shot at 100%, which I feel would be maintaining the underlying asset base. You are free to disagree.

    And I say it’s not a percentage debate as a false dichotomy because one could quite easily set up a 4% (or 5%, for that matter) DGI portfolio that STILL does not require asset sales, and should still be able to grow the organic income over and above the rate of inflation. I’m currently running an overall yield below 3.5%, but that’s because I’ve purposely expanded my horizons into lower-yielding, faster-growing investments. I certainly didn’t have to do that, and could very easily crank it up to 4% or above. Debating the percentages is missing the forest for the trees, in my opinion. It’s about selling assets vs. living off of organic income. That was the whole point of the article.

    As far as outperforming the market, I make no claims to my ability to do so. I’ve already been very open about why I don’t track myself against the market. If you believe in EMH and/or indexing or hold the opinion that Warren Buffett is sent from heaven above and is the only man ever capable of beating the average (how did an average get there?) over a number of years, then you’re free to believe that. I was beating the S&P 500 index up until I stopped tracking myself, but it wouldn’t have really mattered if I wasn’t. If the S&P 500 index beats me this year do I switch to index investing? What if a dividend growth investor then beats the market the next year? Do I then switch back to that strategy? What if another index beats the S&P 500 index for the next three years? Should I switch to that index now?

    Worrying about who’s doing what instead of what you need and what you’re accomplishing is just not a value-added activity, in my view. I believe in setting goals and reverse engineering the best possible solution to meeting those goals. And that’s what I believe I’ve done, and that’s what I share with my readers. I hope to inspire others out there to do the same, regardless of the strategy they follow.

    By the way, I’ve stated before I’m not β€œanti index investing”. I have open index investors on my blogroll, and I had Jeremy guest post here not that long ago. I think it’s a great investment strategy. Low cost, heavily diversified, easy, very little time commitment. My dog could do it. That’s great. I just personally think this strategy is superior for reasons I’ve laid out before. Again, you’re free to disagree. But to have hours of conversation on it will do neither of us any good.

    Take care.

  83. Don’t necessarily want to appear like I’m butting in here, but to clear up the discrepancy..

    I think you are both wrong and need to meet in the middle.

    SPY closed at $111.89 on 3/1/10. It closed today at $199.13. That’s a gain of about 78%. But SPY has paid out $9.76 in dividends during that time bringing the adjusted close on 3/1/10 to $102.13. Perhaps a better way to think of it is that today’s adjusted close is $208.89.

    Either way the actual total gain is about 86.7%.

  84. Excellent article, it pretty much sums up the reasons why I will never feel comfortable with blindly following the 4% rule. This here is probably the biggest reason why I will never rely on selling assets: “At that point, not only is your asset base then generating less income with every sale, but the actual value of your assets have plunged. That can leave one in an awfully precarious position.” I would hate to be in a position where I’m selling assets that have already experienced a 50% drop in value.

    Btw, thanks for dropping by my journal over at the ERE forums, I responded to your questions. We’re back from Yosemite now and the glow of the national park adventure hasn’t worn off yet! We’re gonna slow down a bit in the next few weeks as we prepare to move to the PNW.

  85. Spoonman,

    Looks like you guys really enjoyed your time at Yosemite. The pleasures of not having to worry about a 9-5 anymore, huh? πŸ™‚

    And I read you on the PNW plan. Sounds like a great idea. Looking forward to reading about your international adventures!

    You and Spoongirl have basically achieved what I’m after, and that’s living off of your dividend income alone. So your opinion certainly has some weight. I’m with you on not selling assets. To be in a position where my assets have plunged by 30-40% or more and then have to sell on top of that…I don’t know. Maybe the math works out, maybe it doesn’t. But I certainly wouldn’t sleep well at night as it’s happening. Quite another scenario altogether to live off of the organic income alone and see pay raises right through a major calamity. That can certainly can have a calming effect. πŸ™‚

    Best regards!

  86. Jason,
    Thank you for the hard work you put in for these articles. Your analysis is refreshing.

    Your articles are also spinning up a lot of discussion which is great. I look forward to to seeing your progress over time.

    Thanks!

  87. DM,

    As always, another great article. I agree with you that living off of dividend income and not principle is the best way to NOT run out of money in retirement. I didn’t get to read all of the comments, so excuse me if you have already answered this question.

    So this is my question. Why don’t you take 5% of your investment income per year and throw it into a Roth IRA for some Stage 3 investments or pure growth investments? Assuming you contribute approximately $24,000 into your taxable accounts (this is just a guess/assumption), why not throw 5% of that into a Roth for growth tax free? Maybe you can find a 20 bagger or hit a huge windfall in a fantastic growth stock in that account (with a couple of losers thrown in). Maybe you just invest in V, MA, GILD, DIS, SBUX, AAPL or BRK.B and let it/them run for ~30 years until you start taking distributions at 59 and 1/2 and place those distributions into your already established and ultra successful DG stocks?

    I think your system is awesome. In no way am I criticizing your model. But I guess I’m curious as to why you don’t place even a small portion of your assets into a tax sheltered account?

    I love your stuff and wish you nothing but the best.

    Andy

  88. John,

    Thank you very much. I’m glad to work hard and put out quality content when I think it provides a lot of people value. πŸ™‚

    And while it’s not necessarily my attention to spur a major discussion, I think that’s a good thing. It helps us all, including me. I’ve learned a lot through the years in these conversations, and have become a better saver/investor. In fact, I wasn’t aware of some of a robust retirement calculator that was pointed out earlier. So that’s another calculator I can play with!

    Appreciate the support very much. Stay in touch.

    Cheers.

  89. If you really believed that owning just the dividend payers within the S&P is going to under perform the index, then you shouldn’t invest in the index because that would be inefficient. You should start your own index fund that just holds everything in the S&P500 that doesn’t pay a dividend and outperform the S&P consistently and have investors lining up to give you their money. πŸ™‚

    While somewhat joking above, I will also acknowledge that there is probably at least a little truth to it… At some level people are willing to accept a lower return for (at least the perception of) a reduced risk with a lot of the dividend payers. If one has the risk/volatility tolerance for it a small caps have historically outperformed S&P long term, and there’s probably not enough history yet but I’d say emerging markets are likely to over the long term.

    I also acknowledge that there may be tax inefficiencies with dividends during accumulation for many – but that makes my first statement all the more practical.

    I generally agree with your comment about low interest rates creating some overvaluation in dividend payers currently, and am sitting on a fair amount of cash because of it. REITs dropping 4-5% today on a ~2.6% 10yr should make everyone a little nervous about how much room there is to drop until interest rates approach any sort of normal.

  90. Andy,

    Thank you very much. Appreciate the kind words and support.

    As far as your question goes, it’s actually quite simple. I’m running a very tight ship here. And the ship is even tighter after recently quitting my full-time job in the auto industry to focus solely on writing. I’m covering about 25% of my expenses via dividend income, and I’m four years into a twelve-year journey, so that puts me about on pace. However, it’s also unlikely I’ll be able to keep pace with some of my past capital infusions, as I just don’t make as much. As such, I need to concentrate all of my firepower on ramping up my Freedom Fund as fast as possible so as to make my dream a reality. To divert any capital away from what I’m doing here would possibly mean I don’t get to where I want to be.

    I hope that helps. I actually discussed that a while back when I wrote about why I don’t use tax-advantaged accounts. But the idea is even more relevant now that I have less income.

    Thanks again. And I wish you nothing but the best as well!

    Cheers.

  91. Whoops, almost missed this. Just some final comments.

    First, I’m actually getting 3 failures (~97% success) with your inputs in this other calculator for some reason; the differences in results are probably due to asset allocation or something. In any case, the slight difference versus Firecalc can be easily resolved with the slightly more aggressive 80/20 or 85/15 allocation (or rebalanced 90/10) you’d be logically using for 60-year periods: this again results in 1 failure, a ~99% success rate.

    If we’re talking about worst case scenarios, the big example is 1966, which was actually the worst year in the 20th century to be holding a lot of stocks for the long run. Worse than 1929 and probably 2007/2008. This period illustrates one of the biggest reasons to hold other assets as a hedge. From 1966-1982, stocks even with dividends reinvested got absolutely creamed by hyperinflation in one of the longest bear periods of all time. If you adjust retirement calculators for 40 year periods, you get 1 additional failure for 3.5% from this start year, but this may also be the one market condition where DGI might not be possible. Unless you were able to concentrate your portfolio by picking the few outperforming stocks (where you would still have to live off excess capital gains), 100% stock DGI strategy would have suffered in the 70s because there weren’t many stocks consistently raising their dividends above 10-12% annual inflation for a decade. Thus, anyone fully in stocks would’ve eventually been forced to sell assets to keep up with the inflation. As I mentioned before, DGI is a strategy popularized by current prevailing market conditions with low yields. DGI is very safe, but it is not 100% safe because in times of extended hyperinflation, stocks do not effectively perform their function as inflation hedge. I believe SB, a previous commenter who is using DGI, also mentioned this risk of dividend growth vs. inflation. It’s a small risk, but it’s there.

    If you really wanted a failsafe strategy (thus far in history), nothing will beat a 3% withdrawal rate approach with proper asset allocation. It has the historical 100% success rate you want, even for 1966. Meanwhile, an extended hyperinflation event that overtakes dividend growth for several years, while incredibly unlikely, strikes at a core assumption of DGI unless you have amazing stock-picking skills. I believe that designing for 100% success is almost counterproductively risk-averse, especially since it’s easy to tell if failure is imminent from your first decade of retirement returns, but if you truly wanted 100% success, 3% seems like the safer bet. As for living off income versus assets, I did mention that 3-3.5% withdrawal means the great majority of your income will come from dividends in any case, and that for most of stock market history, you would’ve been living completely off dividends for an index. In addition, you would be accumulating a ton of extra reinvested shares in bull markets from additional gains on top of your original shares. So it’s not a black-and-white distinction between “selling assets you never get back” and “living off organic income.”

    Your comments about “beating the average” are odd because “average” obviously does not refer to the average returns of all investors, as you are implying, but the average return of the total stock market over time, which most investors do not beat in the long run. The S&P 500 index is only important so far as it represents the overall market, so other indexes or investors that outperform are irrelevant. The mindset of “if so-and-so beats the S&P in a particular year, so should I switch” or “so-and-so was beating the S&P index for these years” goes against the idea of an index approach: the whole point is that you absolutely do not want to chase overperformance. It’s more that active investing will likely lead to underperformance in the long run. Thus, the rationale for indexing is that overperformance is extremely difficult and that underperformance is extremely likely. Now, your goal obviously doesn’t have to be beating the market. As I mentioned, I think DGI has many advantages such as establishing a safe, fundamentals-based portfolio, developing a sound investing mindset, cultivating financial knowledge, and just having fun. It may also fit your particular financial situation better: I think SB mentioned the one important advantage DGI has over indexing for early retirement, in that as a conservative approach it provides for a more consistent, if later expected retirement date. And you don’t absolutely need optimal returns for a great retirement.

    I do agree that it’s pointless to spend hours conversing over details back and forth. It’s just that I’ve been very interested in the financial nuts and bolts of early retirement, and this is one of my pet research topics. Sorry about the verbosity. I look forward to reading your future blog posts, and I’ll be wishing you the best of luck.

  92. Anonymous,

    No problem with the verbosity. I’m infamous for my own.

    I appreciate the support, and I do hope you stay in touch. Even if we come from different angles, we’re still after the same thing.

    Cheers.

  93. I honestly don’t think a person can go wrong with a very diverse DG portfolio, as long as they have 50 plus holdings. Most of my investments are in index funds and I have done crazy well over the last 15-20 years, so I’m sure that strategy works. I enjoy owning quality businesses and its so awesome when I get all those dividend checks posted to my account! I have only invested in individual stocks for the last few years, so I don’t have as much experience in that realm yet. I do notice that when rates go up my dividend portfolio gets crushed compared to my total market index fund. It is a concern for me, especially when bond rates are bound to rise. The 4% withdrawal rate worries me a bit, but it does make it simple for planning. There is no doubt, that with DG portfolios, you will leave a massive amount of money to someone one day. I would rather spend it all while I’m still on this earth! Great article!

  94. Your thinking about selling part of the asset vs living off the dividends seems faulty. Buffett has written about a similar topic, specifically pertaining to shareholders of Berkshire (non-dividend paying) and harvesting income from Berkshire stock during retirement. I’m surprised if you haven’t read his writings on the topic. And, if you’ve read them, I’m surprised that you disregarded his thoughts on the topic.

    Anyway, of course asset values with fluctuate, which might cause you to occasionally sell below intrinsic value of the shares. But, if you’re selling regularly to fund retirement, you will also occasionally sell above intrinsic value. Even better, if you have multiple assets, and some ability to determine value, you can pick & choose which assets to sell at a particular time and limit the below-intrinsic-value sales.

    The dividends come from the company’s value. Over the long-term, it I hold two stocks, both companies growing at 10%, with one that pays a 4% dividend, and one that doesn’t… Does it make much difference if I spend the 4% of the company that is paid out via dividends, versus spending 4% of the non-dividend-paying company by selling stock? Buffett says no. I agree.

  95. Monty,

    That’s very interesting that you have experience with both strategies, albeit much more with index investing.

    I wonder why your dividend stock portfolio is so negatively affected by rising interest rates. I honestly haven’t noticed that to a large degree, though today was pretty rough for most of my REIT holdings. But I try to keep my REITs down to about 5-7% of the portfolio or so.

    “I would rather spend it all while I’m still on this earth!”

    I hear you there. I’m guessing most people feel that way, but I don’t really care. If I have everything I need, I’m warm in the winter, cool in the summer, good food in my belly, and a loving partner by my side, it doesn’t matter if I have $5 million left in the bank or $5,000. I’ve already determined that money doesn’t correlate with happiness above a certain level, but I’m obviously in the minority there.

    Thanks for stopping by! Appreciate the support.

    Best wishes.

  96. John Galt,

    I’m as big a fan of Buffett as anyone else, but he’s also an independent thinker and has dictated such a quality to be incredibly important to both investing and life in general. To that end, I’m an independent thinker, and don’t follow anyone’s advice blindly. I wouldn’t recommend anyone else to do so either.

    Furthermore, it’s interesting that we’re bringing up Buffett and dividends. You are aware most of his big investments are in companies that pay fairly substantial dividends, correct? And you are aware he uses that incoming capital to allocate elsewhere while keeping the original equity intact, like with his big Coca-Cola stake?

    You’re taking a valuation stance with your comment, when I attempted no such thing. The point behind the article, and this strategy, is to avoid selling assets so as to reduce risk of failure as much as possible. Selling assets, at least to the 4% level, does introduce risk of failure, as has been expounded upon lengthily in both the article and the comments. Not selling assets, by the very nature of that strategy, would further reduce, or possibly altogether eradicate, that risk. I plan to show it in action as I go. It’s not about overvaluation or undervaluation when selling, because living off of organic income alone eliminates the need to worry about valuations altogether. Am I going to want to worry about stock valuations when I’m 70 years old or how in the world I’m going to spend all of my dividend income? The answer, to me, is obvious.

    β€œThe dividends come from the company’s value”

    That’s assuming if the capital that would have otherwise been paid as a dividend was instead retained to earnings and the company would be able to grow that capital at the same rate. That’s also assuming the company doesn’t waste the money on bad acquisitions, etc. However, management is basically saying “We have no use for this money. By keeping it, we’d be wasting it. We cannot grow it faster than you can. Take it.” I would presume they know what they’re talking about.

    Furthermore, selling 4% of stock and receiving a 4% dividend are two different things. The dividend is coming directly from the company, and doesn’t fluctuate. Selling stock requires an intermediary in the stock market, and your β€œ4%” will yield you different amounts, based on when you sell. Moreover, selling that 4% could very well lead you to running out of assets, as we’ve already gone over. I feel like I’m being goaded into a straw man argument here.

    At any rate, it’s not my intention to talk anyone into this strategy. Rather, it’s a poignant discussion on the 4% SWR, and the gospel that’s associated with it. It should be a rough guideline, at best. And as long as people are okay with the possibilities, however unlikely, of running out of capital then that’s okay. I propose a better way for those so interested, and I plan to continue documenting my use of that strategy for many years to come. We’ll see how it turns out, but I’m betting that I’ll have sizable assets as an old man with an income that I can never possibly spend. We’ll have to revisit this topic 50 years from now to see how it all turned out.

    Cheers!

  97. It’s pretty clear. If a person has 50 companies and they only take dividend payments they will be much safer than index investing. You will always have most of your principal. Even if 20 companies fail, you would still have 30 remaining that are worth dramatically more. There is no comparison when it comes to portfolio safety. Total portfolio returns is a different ball game IMO. You might do better with the total stock market index fund, but during withdrawals it is impossible to be as safe as DGI. With that said, I do have most of my assets in a balanced index portfolio, because of years of 457/401k investing.

    When it comes down to it, just throwing as much money as you can into and index fund and forgetting about it for the next 20 years is a bullet proof strategy IMO.

    I have always found it ironic that Buffet has always says to just sell shares of BRK when you need money, but on the other hand, his life is built around dividend investing. Do as I say and not as I do. lol

  98. Jason,

    You definitely make a good case against the 4% rule and withdrawing from your portfolio during retirement. Just like you, I’m a little hesitant to sell off assets to generate income, because it feels counter-intuitive.

    However, a well-balanced portfolio also keeps a certain percentage of bonds to counterbalance the effect of a stock market decline. (With the current bond yields I’m not to sure that’s possible though.) Most index funds also pay dividends, which reduce your need to sell more and more underlying assets year after year. Another thing to consider is that the people who adhere to the 4% rule should be flexible in their spending. When a stock market crash hits, it doesn’t make sense to sell assets to go on a luxury vacation.

    (For me as a Belgian, a lot of non-dividend paying index funds are also a lot more tax efficient than dividend paying stocks or funds since we don’t have capital gains taxes!)

    That said, I’ve gotten into dividend growth investing precisely for the reasons you mentioned above. I prefer the rather steady stream of income dividends provide, even during an economic downturn. And monthly dividend reports make it easier for me to visualize my progress.

    Great post! Have a nice weekend,
    NMW

  99. With that JNJ example you actually only need to sell off 1-2% per year because of JNJ’s div of 2-3%. In your example, if you sell off 1-2%/year I wonder if it might still be realistic to end up with a higher portfolio value after 30 years even after selling off your shares. If JNJ grows by 5-10% per year and eventually splits shares, what will the results look like? Will you actually have more shares than you expect after 30years.
    I think I recall reading that WB’s advice to shareholders looking for divs was the shareholder could sell shares instead. If the company grows by more than what you’ve sold you’re still up. Imagine starting with 1000 shares of brk.a in the 70s, I suspect you’d be richer now then in the 70s even if u sold off enough shares to support your lifestyle each year.

    Ultimately it depends on the strategy you want to take to meet your goals in retirement. Both are valid and are actually more similar mathematically than they might seem. Personally I’m aiming to live off dividends and other passive streams of income like DM.

  100. Hi Jason,
    it’s funny. But before I knew your blog. I calculate exactly like you. I thougt about how much money do I need and how much would be the dividend yield approximately. I calculated something between 3 % and 4 % and I took the middle 3,5 %. Than I caculated how much money I would need. I knew about my expenses per year and so I could calculate how much money I would need for my Portfolio with a dividend yield of 3,5 %. Now I would calculate a little bit lower. Maybe 3,25 %.
    And I wanted the same like you. Never consume my capital stock. My capital stock (portfolio) is my security for unforeseen things.
    Further on I calculate with an inflation rate of 4 %. So that I’m looking for companies that can grow their dividends by at least 4 %.

    Ahoj,
    ZaVodou

  101. I have read and re-read the arguments here, and I’ve read about the 4% rule on other websites too. My biggest problem / fear is the timing, particularly with stock markets currently trading at all-time highs and almost every government printing money like it’s going out of fashion: the UK, the US, Japan and now the EU too. There are a lot of educated and experienced people calling for a major correction.

  102. Hey Jason,

    I like your approach better than the standard 4% rule states. I agree. Why sell if you don’t have to? If instead you can build in a cash buffer an reduce and increase spending according to the economy, why part with the assets that you worked so hard to buy?

    Long Term Brian

  103. I fully agree – do not see the Golden Goose – keep the great Dividend paying companies and reap the rewards of their juicy dividends that increase over time – if psbl, take the dividend income if substantial enough to cover your monthly expenses, but DON’T see the actual Company. Hopefully their dividends increase at or more than 4% a year, thus this is your ‘raise’ in income… Build the portfolio to the point where by one can live off the Income stream but do not if psbl, seel the actual shares… or if need be – take 2% of the shares and sell them – combined with the dividend income received – i would never actually sell off my portfolio dividend paying companies by 4% a year – i find that is simply too much – interesting read Mr DividendMantra. Enjoy your wkend – john

  104. DM,

    Thanks for the post back. Exactly – no need to run a calculator or hope that some income gets a “COLA”. Our dividend increases typically will outpace an inflation mark – a very arbitrary figure/relative term depending on who is calculating – and we are not cutting into our “nest” or “egg”. Few bold predictions as well for this month – I am guessing an 8 cent raise for MCD and a 15% increase for LMT – just tossing that out there now! Off subject, I know haha.

    Book would be fun, different mentality. Do you think the last 3-5 years you’ve seen more individuals who had invested into growth stocks/funds – turn to dividend increasing blue-er chip stocks as well as increasing their financial literacy? Curious on what you think/where that trend is going?

    Thanks DM, talk soon.

    -Lanny

  105. Hi DM,

    I prefer to collect a nestegg and live of the dividends.That way I won’t need to touch my lovely investment tree and will I harvest the dividendfruits every year.

    Cheers,
    G

  106. Greetings from Sweden Jason!

    I’m sure people have asked you before but I definitely think you should start a weekly podcast (or monthly if
    you feel you won’t have enough time). I do remember hearing you on another podcast a year back I think, can’t
    quite remember which one. I think you would have lot’s to talk about since this really is a lifestyle-blog as much as it is
    an investment one. I prefer investing in U.S equities since here in Sweden, most companies only pay out dividend
    once a year, and being an income investor, you need to have dividend payouts preferably every month but at least
    every quarter. I wanted to ask you also what you think of BDCs, too risky? Or are there some that could “spice things up” in the portfolio?

    Sincerely
    Mathias

  107. “My baby niece could literally be an index investor. I would just need to open up an account for her and put $10 in. Bam, she’s invested in the S&P 500 index. So easy a caveman could do it, or something like that.”

    Might I suggest you take this approach (although maybe with something a little larger than $10)? With the stock market averaging a real, after inflation return approaching 7% historically, if you were to invest $1000 dollars today for your niece, it would grow to $81,272.86 when she turns 65 (in today’s dollars, since we’re using real, after inflation returns). An 812% return on investment is pretty phenomenal, and would be a pretty sweet “gift” to her 65-year-old self.

  108. I’m not so sure you can dismiss this so cavalierly. I understand your goal is to grow dividend income streams that pay all your expenses, but at a certain point the added growth of an index approach (that you’re foregoing) will dwarf your dividend incomes in amount, even at a 2% dividend rate (vs. your 3.5-4% rate).

    I mean, I understand what your goals are, and good luck with them. But mathematically/historically, you’re foregoing superior returns and the ability to retire earlier by forging this DIG-instead-of-indexing path.

  109. I am curious about whether you have thouht about the $15,000 goal and how inflation and increased desires might change the goal. When I first read about your goal I was curious if the numbers were in todays dollars or future dollars.

    Thanks,

    Robert

  110. DM,

    I agree! If I could do individual stocks in all my accounts I would, but have funds in one account, a ROTH IRA, and a taxable (may add another taxable to take advantage of FRIP or receiving checks).

    If I am able to safely live off the income and it’s reliable enough I don’t see myself selling off assets I worked hard to obtain for many years just like that. It would have to be an emergency event probably, but I would hope I could find the money elsewhere before messing with the income I live off of.

  111. Monty,

    Exactly. It’s really about safety. And I can’t truly see how selling assets is as safe as not selling assets. But everyone has a different way of looking at things. I’d prefer to keep my money tree intact and harvest the dividends only. Cutting the branches down potentially puts you in a position of having no tree left at the end of it, as I’ve discussed. Furthermore, there’s little margin of safety there. If you’ve been selling assets all along and all of the sudden a medical emergency or something else pops up you might be in a tough spot. Just the way I see it.

    “Do as I say and not as I do.”

    Indeed! I’d prefer to build my own miniature Berkshire Hathaway portfolio that kicks off a ton of income/capital organically with which I can allocate as I please.

    Cheers.

  112. NMW,

    Bonds do typically smoothe portfolio fluctuations out a bit. And usually I would have some allocation to fixed-income. But that asset class just doesn’t make a lot of sense right now. And if you look at the updated Trinity Study you’ll find that bond-dominated portfolios fared the worst. And this included a 30-year bull run in bonds. So when people think of bonds as “low risk” they’re actually incorrect in terms of risk of running out of capital. Maybe low volatility, depending on when it is you’re investing in them. I would certainly think that volatility is going to increase over the next 10 years compared to the last 10, but I suppose we’ll see.

    That’s a great point there about the dividends making it easy to visualize your progress. The tangible nature of the steady, rising cash flow isn’t abstract at all, and one can actually see freedom coming into view. I really enjoy that aspect of this strategy. πŸ™‚

    Thanks for stopping by!

    Best wishes.

  113. Hi Jason,
    I’m always learning something new here, great article! Congrats too on the award! You mentioned the term “organic income”, that was a new one for me and I like it. I’m still sitting on the sidelines w/cash, waiting for that predicted correction in the market, although I have made some profits using my Roth tax-free account.
    Best wishes πŸ™‚

  114. In a way dividend investing follows closely with the 4% ‘rule’ in that if your average dividend yield is roughly 4% than every time a dividend is paid out you ‘take out’ 4% of that company when it starts trading ex-dividend. Which is great because you are not selling off any of the underlying assets which would then erode your income base.

  115. Roso,

    You’re right about the JNJ example. For a more apt comparison to an S&P 500 index fund I should have chose a stock with a similar (1.85% or so) yield. However, I wasn’t really trying to compare the two directly like that. Rather, I was just illustrating lost equity by extrapolating my point out.

    “If the company grows by more than what you’ve sold you’re still up.”

    As I understand it, that’s the fundamental basis behind the 4% SWR. You sell investments, but those investments should grow faster than your income. But my point is that’s not always the case, especially for more conservative portfolios. It’s a great guideline, but it’s not gospel. And life can happen pretty fast. Furthermore, I’m part of a group of people who have an interest in becoming financially independent quite early in life. For us, I believe this SWR has even riskier implications. And that’s what I’m basically saying here.

    Best regards!

  116. ZaVodou,

    Sounds like we’re cut from the same cloth. πŸ™‚

    You have done it exactly how I have. I had a problem (working at a job I disliked greatly). I found a solution in early financial independence/retirement, living off of the income my portfolio could provide me for potentially the rest of my life. And I simply reverse engineered the numbers, and in doing so realized that this strategy appeared to offer me the greatest probability for success.

    I wish us both much success as we continue to grind toward that eventuality. πŸ™‚

    Take care.

  117. Myles Money,

    It’s impossible to say what’s going to happen in the stock market tomorrow, the next day, or a year from now. Some have believed a correction has been coming for more than two years now.

    I don’t know when it’s going to happen. I’m honestly quite surprised we haven’t seen one in a while. But that’s exactly why I don’t time the market and try to trade. I buy high-quality assets at attractive prices. A correction would only mean those same assets are more attractively priced, which furthers my progress.

    Best of luck!!

    Cheers.

  118. My thoughts on the 4% discussion, a person should gauge his equity sales in retirement according to how much he wants to leave behind for family, children or charity………..right? I personally want to leave something behind for my children, with specific instructions in trust, so I would be more inclined to hold on to my investments, and live on the divs………

  119. Brian,

    I’m with you 100%. Why sell when you don’t have to? That’s my point exactly.

    I’m not saying I’ll never have to sell assets. There could be an unforeseen incident that requires it. Who knows? But I’d rather have the full power of all my assets at my disposal, if that’s the case.

    Thanks for stopping by!

    Best wishes.

  120. John,

    Thanks! Glad you found the read interesting. Hope there was some value there for you. πŸ™‚

    I also plan to keep my Golden Goose around. Why sell as long as long as I keep getting my golden eggs?

    Cheers!

  121. Lanny,

    I’m not sure if there’s a general trend there or not. Really hard to say. I’ve noticed a lot more blogs dedicated to investing in dividend growth stocks over the last year or two for sure. When I first started I was pretty much the only one doing exactly what I’m doing. And the readership has also grown.

    I suppose the financial crisis probably took its toll on people. They saw what could happen to their principle in a downturn and perhaps thought there might be a better way.

    It’d be interesting to know the stats of retail ownership in some of these companies. Not sure if there’s a general trend there or not. The valuations on many of these stocks have risen over the last few years, but so has the broader market. Really tough to say.

    Cheers!

  122. Geblin,

    I’m with you. I plan to live in the shade of my tree for many years, living off the fruit alone while leaving the tree and branches completely intact to grow and grow. Should be a beautiful thing and I plan to document all of it! πŸ™‚

    Thanks for dropping in!

    Take care.

  123. I also found value in playing with different withdraw rates and introducing SS eventually (reduced given uncertainty) combined with potential side-income since i don’t see completely stopping receiving it. Depending on risk tolerance you can create a multitude of scenarios that might paint a rosier picture than “worst case”. Or even in “best case” if you are doing pure DGI play but the income and portfolio value skyrocket how can you live better / donate / share more?

    For me personally i don’t plan on leaving a ton when i meet the maker (especially since im leaning towards no kids). So how to best optimize income vs risk and my comfort zone is something i’ll eventually have to think about. Just food for thought, i’m still a ways off from pulling the trigger but doesn’t mean i don’t like to play number games πŸ™‚

    EX: What happens if you are very low-risk person and manage to hit on one of the goldy-locks zone lines in firecalc. I would readjust (upwards) my spending if the money/income was exceeding my goals but the question would be how much? Or maybe pursue FI sooner than anticipated due to meeting all my goals sooner?

    I’m very much like you, i’d prefer a 100% # in the success categorize due to my personality. But having had a few life altering events in my relatively short lifespan has taught me to be a little (just a little) more daring than i would have been otherwise. Still trying to find the balance!!

  124. I’ve always shot for a 3% yield/withdrawal rate, since the idea of actually selling income-producing assets is repugnant to me. Granted, this means I’ll have to work that much longer before retiring, but that extra margin of safety makes me happy for sure. Rather be too conservative and never run out of money than be in such a rust to retire than I end up running out (or worse, working again!) in a few years down the line.

  125. Mathias,

    Thanks for stopping by from Sweden! I’m really humbled to have readers from all over the world. Really appreciate your readership and support. πŸ™‚

    I might start up a podcast. I was part of the Chasing Financial Freedom Podcast with my buddy Kraig. I liked it, and it was a lot of fun. But it was incredibly time consuming. Even more so than writing. And we were totally winging it. We just basically would call each other with an idea and then chat for about an hour. It would then just get condensed down a bit.

    I’d be interested in doing something like that again. I’d have to carefully consider the time, however. I really enjoy writing, and I remember the podcast getting kind of a lukewarm reception. So if there was strong demand for that and it provided a ton of value than I’d definitely be interested. I definitely had a lot of fun. I mean I could just sit down and talk about all of this for hours and hours.

    As far as BDCs go, there is additional risk there. But there is potentially additional rewards. You have to carefully consider your risk-adjusted returns with them. As I understand them, it’s basically private equity that’s available to the retail investor. PE has a negative connotation due to their tendency to kind of raid a company, load it up on debt, get rid of people, max out revenue, and then sell for a profit. I’m not saying that’s how BDCs necessarily operate, as that’s just not a realm I’ve spent a lot of time in.

    But you look at PSEC as an example, a popular BDC, and I see a few things that pop out to me. First is negative operating cash flow. That’s a huge red flag for me, no matter how it’s structured. I don’t understand how they’re not losing money with negative operating cash flow.

    And then you look at the stock. If you’re interested in total returns, I don’t know if that’s where you want to be. The stock has gone nowhere over the last five years while the S&P 500 index has basically doubled.

    The big dividend is attractive. Is it growing? It looks like it, since FY 2010 (after a big cut). Okay. Is it sustainable? I have no idea, to be honest. And that really speaks to my final point. Do you know what you’re investing in? Are these private companies they’re investing in going to turn a profit? How so? These are the questions you have to ask yourself, and look beyond the big yield. Think like an owner. Would you want to own this entire company? If the answer is yes, then you should invest. Remember that “spicing things up” might also be “risking things up”. Not necessarily a bad thing if you know what you’re getting into. That can lead to great rewards. But it can lead to disastrous results as well. Best of luck!

    Cheers.

  126. Chadnudj,

    Thanks for the suggestion!

    I might open an account for her. Me and my girlfriend already bought her a piggy bank, and Claudia affixed a “Freedom Fund” badge to the side. She’s so creative. I then put a little cash in there.

    But I might open an account. Of course, it wouldn’t be an index fund in there. I’d probably buy a share of one great company and let it ride for her. And then every birthday maybe another share. We’ll see. πŸ™‚

    Although, we both know it wouldn’t sit there until she’s 65. It would be there until she’s 18 or 21 or whatever. Which is fine. It’d still be a great sum of money for her for college or other endeavors.

    Take care.

  127. Chadnudj,

    “But mathematically/historically, you’re foregoing superior returns and the ability to retire earlier by forging this DIG-instead-of-indexing path.”

    I’m not sure why you say that.

    Ned Davis Research, via CNBC, has already done the homework for you:

    http://www.cnbc.com/id/101331582

    “Dividend growers and initiators in the S&P 500 produced a total annual return of 10.1 percent between 1972 and 2013, compared with 9.3 percent for all dividend-paying stocks and 7.6 percent for the S&P 500 Index.”

    Index investing is fantastic for most people, but I’ve already laid out my case many times before on why I feel dividend growth investing is a superior strategy. I don’t really have the inclination to go through all that again, and it’s not the point of this article anyway.

    Cheers!

  128. Robert,

    I’m not worried about increased desires at all anymore. I was when I first started, to be honest. But not anymore. As time goes on I have less desire to spend money, not more. I’ve inflated my own lifestyle a bit over the years, as I now have a car (a $5,400 Toyota Corolla) and I’m eating healthier these days. But the research will already tell you that more money doesn’t buy more happiness once you have your basic needs met. Why fight science?

    As far as the specific amount, that was in today’s dollars. I’ll have to adjust as I go, but I had to have something to shoot for. I think it’s reasonable to assume I’m more or less on pace, as I’m about four years in and I’m covering approximately 25% of my expenses right now.

    Furthermore, some of my expenses will disappear. For instance, my last budget had over $200 in student loans. Those will be paid off. And I’m amortizing the cash purchase of my Toyota with under 30,000 miles on it. It should still be running great by the time I’m 40, and I won’t have that $300 “expense” any longer. So you can knock more than $500 off right there. When looked at through that lens, I think I’m on pace.

    But we’ll see. Life changes, and anything can happen. I’m not dismissing that. I could be injured in some accident. Or maybe me and my partner want to buy a house. Who knows. But as I see it right now, I’m in this 100%. And I’ve never been happier. Meanwhile, she’s totally on board as well. So it’s exciting!

    Thanks for stopping by.

    Best regards.

  129. late bloomer,

    Thank you very much! I’m really honored. Even if I don’t win, it’s just fantastic to be even mentioned in that regard. πŸ™‚

    I do hope we get that correction. I will say we’ve been hearing about it for about two years now, and especially so over the last year. It’ll come eventually. When it does, great assets will be even cheaper. And the investments I’ve been making over the last two years (ignoring the noise) will be providing some extra firepower to buy up those cheaper assets.

    Happy shopping over there!!

    Best wishes.

  130. Dividend Wisp,

    Right. That’s basically what the section of the article subtitled “Is Dividend Growth Investing The New 4%?” was trying to say. You’re collecting the same amount of money (4% yield) without selling assets, which would erode future growing organic income. Spot on, my friend. πŸ™‚

    Cheers!

  131. late bloomer,

    Well, it’s tough to gauge like that. You don’t know when you’re going to die, you don’t know how much money you might need in the future, and you don’t know what the market is going to do. So it’s tough. The 4% SWR would be unlikely to fail you in a traditional retirement scenario, but everyone’s situation is a bit different. You might need more capital than you thought. Or you might live a really long time. Or you might die tomorrow. Who really knows.

    I prefer this strategy because the underlying assets can quietly continue to compound uninterrupted while I live solely off of the income they generate. But some prefer it a different way. Whatever works for you and your goals is ultimately what’s best.

    Best regards.

  132. Zol,

    Absolutely. You have to find the balance that best suits you.

    It’s a difficult thing to plan and gauge precisely, because you don’t know when you’re going to die. So you might see your balance just killing it 10 years into retirement, start a more aggressive withdrawal percentage for a couple of years and get used to that (buy a more expensive pad, car, vacations) and then the market falls by 40%, and then you have to then scale way back. And maybe you live to 100. So there’s a lot to think about there. And the other thing of it is, will you WANT to think about this when you’re 70 or 80? I don’t know. I’d rather just have the checks coming in without any work on my part when I’m that old, instead of fiddling around with the market and withdrawal percentages. Just my take on it.

    Cheers!

  133. DD,

    Yeah, it seems the 3% SWR means a 0% failure rate across multiple scenarios and time lines. So I think you would be safe there whether or not you sell assets. I’d prefer not to sell assets for all the reasons I’ve listed, and a 3% yield across a portfolio of dividend growth stocks would be extremely easy to attain, but either way and you’d be fine.

    But I’m with you. I’d rather err on the side of caution. Better to die with $500,000 in the bank than be 80 years old and broke. You’d have your SS, but I’ve seen people living only off of SS. I’d rather have a little margin of safety there.

    Best wishes!

  134. Selling part of you portfolio every year just sounds stupid, no point of doing that dividend’s are just so much better. Only place to sell is: if you plan is to trade stocks, or if you get into problems that you have no other choice, or the company that you have invested in experiences some sort of trouble that you determine that it is best to sell.

    is this the same place that recently studied that walking may causes cancer… πŸ™‚

    but anyway, fun reading, nice post.

    cheers
    Anha

  135. I don’t know. The 4% SWR have nothing to do with long term dividend investment. Even in retirement I don’t see the use to destroy your capital if you generate enough of revenue… In 2008, those who needed to sell to generate their revenue for retirement weren’t dividend investors…

  136. You are so right about life changes. I never really took into account the kids and my wife being an animal lover- she seems to love them more and more each day, so things do change.

    Good luck and keep cranking,

    Robert

  137. Great article on an important topic Jason.

    IΒ΄ve been using a DGI investing approach for soon to be three years now, after examining other options, as I felt it to be the method that best fit my persona. Being a checkΒ΄nΒ΄doubleΒ΄check person, IΒ΄d be interested to hear your standpoint on Dividend Mutual Funds (as I suspect Dividend ETF Funds are out of the question?).

    OffTopic, glad to hear you stayed your course and stayed in Michigan! Eventually planning for FI with your GF sounds great!

    Best wishes from Sweden
    /zicam

  138. Hi DM,

    Great article, and a very interesting topic.

    I agree with you 100%. I understand the logic to the 4% SWR, but it seems too uncertain to me. I don’t like the idea of selling shares and reducing your potential income. DGI feels a lot more secure to me. The dividend payouts should increase year after year so as you grow older you can benefit from having a higher income for doing very little.

    I recently calculated my yield and it at 4.84%. This might sound attractive to many and I’m NOT complaining! My yield is also high as my portfolio value is slightly behind the cost (0.5%). I recently received a good question as to why I don’t just invest in index trackers as my value is down. Like yourself, portfolio value is not the primary reason I invest. I invest for income. I want to live off my portfolios income and keep adding to it for the rest of my life. The idea of having Β£200-Β£300K in index funds and withdrawing 4% of it feels a lot more risky to me.

    Thank you for sharing your thoughts!
    Huw

  139. I’m definitely hoping for a podcast! πŸ™‚

    I’m not saying I’m an expert in online marketing strategies or anything but I think you
    could reach new audiences with a podcast that not only discusses investing for the future,
    but also how to manage budgeting and living below your means. As I see it, there is a definite
    need in western society as a whole to educate about things like managing a budget and making
    people think about what is really important, instant gratification (by consuming) now or saving for early retirement? We have really built up a system where everything revolves around debt, unfortunately,
    going into debt is necessary sometimes (like when buying a house) but people seem to be using credit
    for everything nowadays.

    I guess you are right about BDCs, several of them seem not be raising their dividends a lot, which is not a good sign, but in this low interest rate-environment, I guess they manage to attract investors with a steady 10+ percent yield, but if interest rates go up, they are gonna have to raise the yield unless the shareprice is going to take a hit, which in turn is going to be hard with decreasing profits or income.
    I’m for now sticking to REITS, and it is working well πŸ™‚

    Best wishes
    Mathias

  140. That’s a good point. I don’t know how well the old ticker is gonna work at that age. I have 90 year old relatives that are just as sharp as they always were and some that are not really at the same capacity. Lord only knows what the world looks like 60 years from now for me πŸ™‚

    I do love hearing 92 year old grandma stories though. They weren’t rich enough to get a new refrigerator so she often likes to regal the younger members of the family with stories of chasing the “ice truck” down the street. You know, because you had to refill the refrigerator! She still can’t wrap her head around the “internet” let alone a “smartphone”.

  141. Anha,

    Ha. I’m not sure about a study in regards to walking and cancer. Haven’t heard of that before.

    In regards to selling, absolutely. There are times when selling is necessary. Perhaps it’s a result of fundamental issues with a company, or perhaps a personal scenario that requires capital to be raised. I just object to the idea that the course of automatically selling a prescribed percentage of your portfolio over decades is a good idea.

    Thanks for stopping by!

    Cheers.

  142. If you have a 100% equity portfolio and you sell 4% each year, you will always have 96% left.
    I dont understand when people say that you can run out of assets to sell, this can not happen with this approach.

  143. farcodev,

    Well, the 4% SWR is part of retirement planning and deciding how much income you can generate from your portfolio. A lot of popular funds out there don’t offer a high enough yield for most people to solely live off of, so they usually end up in a situation where they’re selling part of their assets in a piecemeal fashion.

    But I agree this isn’t really a strategy most dividend investors would feel comfortable with, as I describe. I’d much rather live solely off of the growing dividend income my portfolio can provide and leave the equity intact to quietly compound for decades. πŸ™‚

    Best wishes!

  144. zicam,

    Appreciate the support from Sweden! πŸ™‚

    And thank you for the well wishes with the girlfriend. I’m excited to pursue this strategy with her fully on board. We operated somewhat independent finances before, with somewhat independent goals. But we’re completely aligned now. It’s very exciting.

    As far as dividend mutual funds, I can’t really get behind paying fees for something I can do myself. That being said, I did do a comparison between dividend growth investing and index investing (which is applicable here) a while back:

    https://www.dividendmantra.com/2013/04/why-i-vastly-prefer-dividend-growth/

    I hope that helps!

    Thanks for dropping in. Stay in touch!

    Best regards.

  145. Huw,

    I’m with you 100%, my friend. The goal is rising income, independent of the value of the portfolio generating that income. My bills are paid by cash money, and a fluctuating net worth is not something I’d like to have to rely on. Furthermore, I don’t go down to the net worth store and buy stuff. I have to use cash, which is just so happens is the currency my dividends are paid in.

    You can certainly sell assets and generate cash, but it’s a totally different scenario. You have to hope Mr. Market is going to give you a fair deal every single time you’re looking to sell, and you’re likely paying transaction fees. I’d rather just let the money come to me rather than having to go out and chase it, and in the process destructing the portfolio I probably spent a good portion of my life building.

    Cheers!

  146. John H,

    Hmm, not according to math, my friend.

    If you sell 4% of 100% and that 96% declines by 38% (like in 2008) what are you left with?

    The point is that whatever you’re left with after selling assets is not a fixed number. Your assets will fluctuate with the market. Sometimes they will go up, other times they’ll go down. The hope with the 4% SWR strategy is that the stock market will go up faster than your asset sales, over the long haul. So capital gains will hopefully counteract the asset sales. Whether or not the stock market’s overall gains will be able to outpace a 4% withdrawal strategy over the next 30-50 years remains to be seen. I’d rather not risk it, personally. But many other people are willing to risk it. It’s really up to you.

    Best wishes.

  147. 4% rate is one I think is pretty damn good as a basis. All depends on your risk of your portfolio and bond allocation. With someone with 50-50 bonds I would say 3% would be a better rate. With someone with high growth aspects then u can say closer to 5%. Just got to ride out the storm when corrections occur.

  148. A-G,

    I agree. If one were to use a SWR, 3% would be much better with a 50% stock/50% bond allocation. That would have resulted in a 0% failure rate over 30 years, using data from 1926-2009.

    However, I would caution your recommendation of saying one could go closer to 5%. Using even a portfolio with 100% stock allocation (greatest growth prospects) would have resulted in a 20% failure rate, when adjusting for inflation. And that’s only after 30 years. Those retiring/becoming financially independent even earlier might have more difficulty.

    Thanks for stopping by!

    Cheers.

  149. Yah u r probably right 5% is pushing it. Depends on your age is well as its better to be more conservative the further u r out and take on a bit more risk in your later years as the likelihood of outlasting your money lessens.

  150. Well said Jason.

    JG – With a moniker of John Galt, I would expect your logic to be spot on. Unfortunately I find it to be what is “faulty”, not Jason’s premise.

    Capitalism 101: businesses exists primarily to pay profit to its shareholders, the fact that they can be bought and sold on the open market is secondary. We invest with the expectation of a return, in the form of a share of the profits. The value of a stock can always ultimately be traced back to its ability to pay (or potentially pay) a dividend. Let me repeat that: The value of a stock can always ultimately be traced back to its ability to pay (or potentially pay) a dividend. It’s the profits that matters, nothing else. When you sell equity, you diminish your future profits. The rational way to invest is to accumulate shares of businesses that return profit. The rational way to retire off of a portfolio is to preserve that profit returning engine as much as possible.

    I only buy stocks that pay dividends, if it doesn’t pay a dividend, I don’t consider it investing. Call it speculation or trading, but its NOT investing in my book. The only exception I would personally ever make to this rule is in the case of Berkshire Hathaway stock itself, and this is only because Buffett has explicitly stated for decades that the only reason Berkshire Hathaway exists is to increase its per share intrinsic value by a percentage that beats the S&P 500. And he has done just that, so I think its safe to trust that benefiting shareholders are a top priority for Berkshire Hathaway. (A retiree could easily follow the 4% rule with a 100% BERK portfolio. Buffett himself keeps unloading his shares to charity, yet his net worth continues to increase every year.) But this is an anomaly, the exception that proves the rule. Any other stock that does not pay a dividend I have to assume is not interested in benefiting its investors any time soon. They may say they are, or be in a “growth phase” or whatever, and that’s fine – but not for me. I want my profits. It’s the ultimate performance metric.

  151. Having discovered FIRE just about 2 months ago, obviously the 4% rule popped up, but I really couldn’t get my head around where the money was coming from since S&P Index funds are paying 1.6%-2% dividend yields, the total market funds were in the 1.3-1.6%, and that was the basic strategy of most of the sites.

    Then 6 week ago I ran across the DG model and it just “clicked”. It just made more sense to me to rely on increasing dividends as the revenue stream vs. the paper gains related from growth or liquidating assets and capturing capital gains. Now, I still have a few growth holdouts from my old portfolio and they are up 500%+, 70%, and 50%, but it’s all on “paper”, there is nothing realized until I sell the asset. Although I might put AAPL in that Stage 3 category now as they settle down as a company with a 2% yield and they’ve increased their dividends the past 3 years.

    I would rather have tangible income than strictly “paper” gains that require selling to profit.

  152. DH,

    “I would rather have tangible income than strictly β€œpaper” gains that require selling to profit.”

    That’s exactly it. Those paper gains require the cooperation of Mr. Market, which can cease at any time. Tangible income instead relies on the cooperation of the companies that are paying you your rising dividend income. However, when I look at a company like Johnson & Johnson with over 50 consecutive years of dividend increases, and a stock market that has definitely NOT gone up over the last 50 consecutive years, I like my chances sticking with rising dividend income.

    Cheers!

  153. DH,

    Same here with my 100 shares. I haven’t bought JNJ in a while because I’m still balancing the rest of my portfolio out. But I’m glad I have the 100 shares. πŸ™‚

    Cheers!

  154. You’re simply selling 4% of the remainder. How long until the remained is so miniscule that withdrawing the entire amount can’t cover a trip to McDonald’s? Plus, as your entire portfolio shrinks, how long until 4% just doesn’t cut it anymore?

  155. Even without index investing, just the traditional approach of buying a stock that pays no dividend and waiting for the share price to go up struck me as a bit odd. Think about it. You have this incredible company, fund, or portfolio that is making you tons of money and you are relying on it to carry you through your “Golden Years”. The strategy? “Let’s get rid of it!”. It’s really crazy when you think about it. That’s why I’ve never touched Berkshire Hathaway. Even though it’s run by Warren Buffett himself, the only way I can make money from it is to literally get rid of it! Why would I want to get rid of something run by Warren Buffett?

    Of course, to counter myself, I’m thinking of putting money that’s currently sitting in an aggressive municipal bond fund (an actively managed mutual fund that has done nothing for me) into both Berkshire Hathaway and the Vanguard S&P 500 index fund. It’s only a small amount, but you got something run by Warren Buffett and recommended by him for the “know nothing investor”, respectively. I would see it has a hedge against dividend investing (in case it somehow turns out that we are completely wrong about this) as well as my own competence when it comes to selecting dividend-paying companies. I often interpret metrics differently than others, and have been wrong a good few times.

  156. I should clarify, just in case we’re all wondering what a “small amount” of money is to someone who can buy Berkshire Hathaway, I’m talking about their B shares. Not the $200,000+/share A shares. I wish.

  157. Joey Batz,

    I’m with you all the way. To sell something that could potentially finance the rest of my life as is seems like an awfully bad idea. Of course, a 4% SWR does have a low failure rate over a 30-year time frame. I’d simply much rather rely solely on the income my portfolio generates and leave those assets intact. Seems like a strategy with much lower risk to me.

    Nothing wrong with your idea of buying BRK and a Vanguard S&P 500 index fund to diversify yourself a bit, if that’s what you feel comfortable with. If I were to invest in index funds, that’s probably the only fund I would have. I might add a bond fund when rates rise, but that’s it. No need to get carried away with 10 funds or something crazy when you’re already incredibly diversified with just the one, in my opinion.

    Best regards!

  158. I’m all for making investing simple, but I’ve never really been a fan of the 4% withdrawal rule. It seems TOO simplistic and doesn’t take into account many factors. It’s a neat academic finding that is tough to apply in the real world due to the reasons you stated. I do enjoy my job and the average age of when eye doctors retire is around 65 so I probably see myself working until around then. I plan to max out tax friendly retirement accounts but also invest in dividend paying stocks to cover my income. This will allow my tax favored accounts to keep on growing. Thanks for the great post.

  159. Syed,

    I agree with you. This is one of those academic studies that may or may not pan out in real life. I understand the need for academic studies like this to give those of us in the real world a guideline with which to work from, but I also wouldn’t want to put all my eggs in the 4% SWR basket.

    And that’s really where my blog comes into play. I’m putting the rubber to the road; theory to reality. This is real money being put to real use to chase after a real early retirement. So it’s not just a study. And I hope blogs are still around 40 years from now, and I’m still mentally able to write so that everyone can see what it looks like from start to finish and well thereafter. πŸ™‚

    Sounds like you have a great plan over there. Working until 65 is something I have a lot of respect for. I’m guessing you really enjoy your job, in which case I’m super happy for you. You’re in a rare spot. Enjoy it!

    Best wishes.

  160. Hi Jason, I asked you question couple of days ago, but somehow it got disappeared πŸ™
    As many others I plan to live mostly on dividends after retirement… In Canada we can convert our registered plan RRSP to RRIF, where you don’t pay fees on withdrawals and have withdraw minimum tahat more or less equal 4% – close to what my portfolio yielding, so I generally don’t need to touch principle and sell stock…. but at the end of the day…. what do you plan to do with principal ? It’s fine that you can leave it to your family, but wouldn’t it be too much? If you retire , lets say 45, do you plan at certain age 65 or 70 or …. start redeeming some of your holdings?

  161. gibor,

    Sorry about that. Not sure how your comment would have disappeared, unless it somehow got caught up in the spam folder.

    Well, I don’t ever plan to sell any of my holdings, or live off of the principle. However, I’m not naive enough to think that life might not force me to that, depending on what happens far in the future. But I’d rather have the full force and power of everything I’ve built over my life at my disposal, if necessary, were an emergency or life event befall me. I’d rather have the entire tree to chop from, if it were, than maybe just a few branches or something.

    But I definitely wouldn’t mind being in a position like Buffett where I can became a philanthropist later in life. I honestly think the dividend income, by that age, will be more than I can spend. I hope so, anyway. So I could probably start giving some away on an annual basis. And then I could leave much of it behind to a charity that I eventually become close to. That will all come later, but I do look forward to becoming a philanthropist.

    And I’m not totally against rewarding myself a bit more down the road, after compounding has done much of the heavy lifting. Long-term travel is something we might like to explore, and that’s something that probably wouldn’t be all that expensive anyhow. So we’ll see.

    I think, for me, it’s all about being flexible. Not selling assets to subsist means I have more flexibility down the road in case I have to sell assets.

    I hope that answer made sense?

    Best regards.

  162. Then I totally agree with you! Selling off assets is not the best way to have reoccurring income, with a house/real estate it sounds even more out of bounds.

  163. I understand the appeal of dividends, and used to invest this way. However, after doing some thinking and research, I am starting to doubt that this is really a better way of investing than index funds and the 4% rule.

    The reason is that dividend investing seems to boil down to a form of stock picking in an attempt to beat the market. If my dividend stock portfolio does worse than an index fund portfolio, then I am worse off – I will retire later and/or with less money. After retirement it is the same story. A certain percentage of my gains will be used to pay expenses (e.g. 3.5%, 4%, or whatever). It matters little whether my returns come from dividends or capital growth. When a stock pays dividends, the amount paid out in dividends reduces the value of my capital (resulting in a reduction of stock price on the ex-dividend date). There is really not much difference between receiving dividends vs. selling a few shares of higher value. It is a matter of the form more than substance. The difference seems mainly psychological ~ i.e. the fact that you keep the same number of shares, but this logic ignores the reduced value of those shares. Ultimately, what matters for the comfort and sustainability of retirement is the total annualized return of the portfolio being greater than the amount withdrawn to pay expenses.

    I am also not sure the extent to which dividend portfolios assist in the ability to withstand downturns. During downturns, some dividend paying companies cut dividends. Some companies have not done this recent history, but this is merely hindsight – you could not predict in advance which ones those would be. The ones that did cut dividends are simply no longer on the “aristocrats” list. This happened to me recently. One of the companies I had invested in due to its solid dividend track record recently stopped paying dividends due to poor performance. Additionally, a portfolio of individually held stocks is less diversified and therefore likely to be somewhat more volatile. Overall, dividend cuts could require the dividend investor to sell off shares during a downturn to pay expenses.

    Overall, I am starting to lean more towards index funds and the 4% rule (or 3.5% or whatever) as likely being the superior approach, since I don’t believe my ability to pick stocks is superior to the collective wisdom of the market. It is also easier and takes much less time.

  164. Pete,

    I think index investing is a fine way to invest, but I still think it’s inferior to dividend growth investing. I explained some of my thoughts on that before here:

    https://www.dividendmantra.com/2013/04/why-i-vastly-prefer-dividend-growth/

    The benefits to this strategy become more evident down the road when the portfolio is seven figures and you’re NOT paying ongoing fees. That said, I think index investing is better/more approachable for most people due to the small time commitment, as you point out.

    “Overall, dividend cuts could require the dividend investor to sell off shares during a downturn to pay expenses.”

    I don’t agree with that. I explained in the post how I wouldn’t have been in such a situation back in the financial crisis. You could even add in a Bank of America or something else and I still would have been fine. Of course, not everyone wants to own and manage 50 or so stocks like I do, which requires that aforementioned time commitment:

    https://www.dividendmantra.com/2014/04/why-i-eventually-want-to-be-invested-in-50-companies-income-diversification/

    Best of luck to you! πŸ™‚

    Take care.

  165. good technique would buy an index fund and when you pass it to important corrections dividend shares , plus you produce handicaps that is more fiscally correct
    you think ?

  166. go buy index fund .

    when there are large corrections.

    pass dividend shares .

    I like the idea . ?

    you understand me ?

  167. I read through a bunch of comments and your answers, but I’ll admit not all. This got to be quite a lengthy discussion πŸ™‚

    The 4% rule is a little faulty in a few ways. Like you said, your overall return rate has fallen from 3.8 to around 3.5%. Mostly as you realized, the stocks went up in price. Kind of like if you bought 100 shares of X at 10$ per share, and its paying out a 10% dividend. Now, the shares of X go up 50% and your dividend percentage drops by 50%. But you’re still getting your 10$ per year dividend, you have not lost anything. Now if the shares drop by 50%, your dividend % goes to 20%, you still get your 10$ per year in dividend returns. Its all an inverse ratio – one part goes up, other goes down, but you still receive what you bought in at, unless they change the dividend itself.

    You’re whole ‘plan’ is really what Bob Brinker (moneytalk fame) would call critical mass. You want to have enough of your money generating an income, where you can live off of that income without touching the principal. Basically, your money is earning enough for you to live off of. In a changing world/economy/stock market, critical mass is a different number for everyone based on a lot of factors.

    I would not worry so much over the 4% rule, just buy good stocks with good dividends and let them do all the work.

    As a side note, I’m not so sure I’d agree with how you have your dividends set up, as I prefer to have mine reinvested in the stocks they come off of, so those stocks can grow in # and in dividend repurchases. Some companies offer a small discount when you drip, and also, it ends up dollar cost averaging on its own, so cheaper in the long run if a stock goes way up in price. I’m more of a buy and hold type of investor πŸ™‚

    Keep up the blogging/website, I enjoy following your investing adventures πŸ™‚

  168. Oh yeah, I’m not sure if you have an IRA at all? If not, definitely look into getting a Roth IRA. You can always pull out whatever you put into it (tax free, but you’d be taxed on anything it made if you took that out early, but its basically a fantastic springboard to massive earnings. You’re locked in at 5500 in contributions per year, but whatever you make in it, is tax free. All of it, tax free! At 59.5, you can access all of it, with no repercussions. You definitely need to look into it, if you havent already.

  169. Jack,

    Hmm, I haven’t really thought of the term critical mass in regards to living off of dividend income. Rather, I’ve always thought critical mass was when the momentum of dividend income and growth was such that you couldn’t be stopped. But you could certainly think of it the other way as well. πŸ™‚

    In regards to dividend reinvestment, DRIPping is a fine way to invest. I personally selectively reinvest for a number of reasons I’ve laid out before:

    https://www.dividendmantra.com/2014/03/selective-dividend-reinvestment-vs-drip/

    Thanks for stopping by! I appreciate the support.

    Best regards!

  170. I’m not really a dividend stocks investor, but subscribe more to a 50/50 mix of stocks and bonds thru VTI/BND or equivalent mutual funds (this is because I am 64 years old, an 80/20 or 90/10 mix is recommended for younger people with a longer retirement horizon). Vanguard wrote a paper describing how a 4.75% withdrawal rate has an 89 percent chance of lasting 35 years on a 50/50 stocks/bonds portfolio. Their unique twist is, instead of adjusting yearly withdrawals for inflation, you determine the yearly delta of your portfolio, and if plus, increase by the delta, but cap at a 5 percent increase, and if minus, decrease by the delta, but cap at a -2.5 percent decrease. So when you begin with a portfolio of $1,000,000, for example, withdraw $47,500. This leaves you with $952,500. Next year, if your portfolio is $1,030,000, that’s a 3 percent increase, below the 5 percent cap, so increase your next years draw by 3 percent from $47,500 to $48,925.

    Sorry, DM, but I feel dividend growth stocks investing has some dangers. You all chase the same stocks. Yes they have had wonderful performance, and wonderful history of increasing dividends. But sometimes the story changes. McDonalds may be going thru a secular downturn, because, people are finding their food to be less than nutritious. CocaCola – same story – people are switching to drinking water more, because Coke may be hazardous to your health. Jim Collins tells it like it is – and thinks you should own the whole stock market. Coke and McDonald’s can fall, but new stocks rise in their wake, and you just accept the average. 80 percent of hedge funds are underperforming the SP 500 this year, that’s how hard it is to pick stocks..

  171. Kenneth,

    The Trinity study has done the math, and that’s what this article points out. Whether or not you’re comfortable with “an 89 percent chance of lasting 35 years on a 50/50 stocks/bonds portfolio” is up to you. I personally wouldn’t.

    “Next year, if your portfolio is $1,030,000, that’s a 3 percent increase, below the 5 percent cap, so increase your next years draw by 3 percent from $47,500 to $48,925.”

    Right. A lot of ifs and buts there. What if the portfolio is only worth $700,000 the following year? Again, I’d rather not rely on Mr. Market to produce the gains I need to pay rent. I’d rather rely on the companies directly, and corporate profits have a longstanding track record of producing the cash flow necessary to give out the pay raises I’m speaking about.

    The good news is that it’s a big market out there. We live in a wonderful country that provides all of these great choices. You feel you’re best off with the 50/50 mix there, and that’s wonderful. I feel I’m better off doing what I’m doing, and I’m showing the results in the process. We’ll probably both achieve what we’re after, but I was simply pointing out that the 4% SWR isn’t a lock for success.

    Cheers!

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