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Flooring
The Bucket Approach
Now for Johnny's Approach
My brother John, a retired financial planner in Philadelphia and alumnus of Penn's Wharton School, introduced me to another method. I'll call it Johnny's Approach.
First some background. I have warned my readers of the perils of the sequence of returns risk (Spring 2015). Basically, the problem is that if you continue taking withdrawals during a period of market declines, your nest egg is depleted at a faster pace, potentially dangerously so. We experienced a brief reminder of this phenomenon last December, when the market dropped precipitously. If you sold stock to take withdrawals during this time period you put undue pressure on your portfolio, reversing the old adage, "buy low, sell high."
 Johnny says, why not hold a portfolio of high dividend payers? If you are taking 4% from your portfolio, as is sometimes advised (Fall 2016), why sell to satisfy your cash needs when some investments pay 4% and more in dividends? So, in December, while other retirees were freaking out, Johnny just kept receiving his dividend and never had to liquidate any positions. Pretty nice! Of course dividends are, by definition, not guaranteed. But some companies have a consistent record. Procter & Gamble, for example, has paid a dividend consistently since 1891 and increased it each year for 64 consecutive years.
Let's go over what a dividend is. If a company earns a
profit
(which it commonly does) at the end of the year it can either plow it back into the company or
pay it out to the shareholders in the form of a dividend
. Let's use Procter & Gamble (PG) as an example. It declared a dividend last year of 71.72 cents per share. Say you own 1,000 shares. That means you get a dividend of $717.20 that quarter, or $2,868.80/year.
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Dividend/Share
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# Shares
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Quarterly Dividend
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Annual Dividend
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| $0.7172 |
1,000 |
$717.20 |
$2,868.80 |
Say the stock is valued at $100/share on the date the dividend is declared. Your investment is $100/share X 1,000 shares, or $100,000. A $2,868 dividend is 2.87% of your investment, or yield. Next quarter, if the stock drops in price, like stocks did in December, you still get your quarterly dividend of $717.20. The dividend is not dependent on the stock price.
Looking at it another way, if a stock's share price is $100 and you own 1,000 shares you have a $100,000 total investment. The company declares a $1/share quarterly dividend, that is $4/share annually. $4/share for 1,000 shares comes to $4,000. $100,000/$4,000 is 4%. If you have a $1,000,000 portfolio, you receive $40,000 income annually without ever having to sell. Of course, you can sell, if you need to.
| Income Approach |
Portfolio Before Distribution
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Distribution
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Portfolio After Distribution
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4% Dividend
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$100,000
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$4,000
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$100,000
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Sale of Stock
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$100,000 |
$4,000 |
$96,000 |
Or, of course much better, contact your adviser, whose focus is retirement income planning.
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