11-29-2013, 10:04 AM
I wasn't planning to post much this weekend, but glanced over at SA and ended up leaving a long comment that I thought would make an excellent topic here.
In this article, Eli Inkrot argues that you needn't choose between dividend growth investing and building a portfolio to live off of using the "4 percent rule" (selling off 4 percent of your assets annually). I agree that the concepts can (and in many cases should) be married, but that the solution presented in the article is not a solution at all. The article argues that you join the concepts by targeting a 4 percent yield from your dividend growth portfolio.
Here's the comment I left in response:
I always love your thoughtful articles, but have to disagree here. Achieving a 4 percent yield from your dividend growth portfolio isn't (in any way that I can see) "marrying" the concepts of living off your dividend stream and selling off 4 percent of your assets annually. That you target "4 percent" in the different cases doesn't mean you've combined the ideas.
It is true that people incorrectly assume they need to choose one or the other, but the combination of the two ideas is different from what you've presented here. The problem in my mind with the "pure" dividend growth approach is that many people will never be able to get their income stream high enough to cover all of their expenses. If you are fortunate enough to start young and have sufficient capital to put to work over time, DG will work, but otherwise, you may not reach that magical point of independence.
The important feature of the "selling 4 percent of your assets" every year that is easy to overlook for dividend growth adherents is that it allows you to get through your retirement with less than you would have to save in a pure DG approach. This is an obvious point -- a "pure" DG approach says you'll never need to touch your capital. A "sell your assets" approach" acknowledges that your capital is a perfectly valid source to tap to get through retirement in that manner you'd like.
With all of that understood, the right way to think about combining the two approaches is to build the best possible income stream you can, and to nonetheless be open to selling off some of your assets through retirement. Perhaps you've got enough income flowing from your portfolio that you only need to sell off 1 or 2 percent annually to make ends meet, while still having high confidence that your portfolio will outlive you. This will allow you to survive through retirement on a smaller nest egg than needed using only the income from your dividend growth portfolio, which may be much more realistic for many.
In this article, Eli Inkrot argues that you needn't choose between dividend growth investing and building a portfolio to live off of using the "4 percent rule" (selling off 4 percent of your assets annually). I agree that the concepts can (and in many cases should) be married, but that the solution presented in the article is not a solution at all. The article argues that you join the concepts by targeting a 4 percent yield from your dividend growth portfolio.
Here's the comment I left in response:
I always love your thoughtful articles, but have to disagree here. Achieving a 4 percent yield from your dividend growth portfolio isn't (in any way that I can see) "marrying" the concepts of living off your dividend stream and selling off 4 percent of your assets annually. That you target "4 percent" in the different cases doesn't mean you've combined the ideas.
It is true that people incorrectly assume they need to choose one or the other, but the combination of the two ideas is different from what you've presented here. The problem in my mind with the "pure" dividend growth approach is that many people will never be able to get their income stream high enough to cover all of their expenses. If you are fortunate enough to start young and have sufficient capital to put to work over time, DG will work, but otherwise, you may not reach that magical point of independence.
The important feature of the "selling 4 percent of your assets" every year that is easy to overlook for dividend growth adherents is that it allows you to get through your retirement with less than you would have to save in a pure DG approach. This is an obvious point -- a "pure" DG approach says you'll never need to touch your capital. A "sell your assets" approach" acknowledges that your capital is a perfectly valid source to tap to get through retirement in that manner you'd like.
With all of that understood, the right way to think about combining the two approaches is to build the best possible income stream you can, and to nonetheless be open to selling off some of your assets through retirement. Perhaps you've got enough income flowing from your portfolio that you only need to sell off 1 or 2 percent annually to make ends meet, while still having high confidence that your portfolio will outlive you. This will allow you to survive through retirement on a smaller nest egg than needed using only the income from your dividend growth portfolio, which may be much more realistic for many.