02-15-2014, 08:12 PM
(02-15-2014, 04:26 PM)hendi_alex Wrote: Here is one thing that puzzles me about the DG model. When accumulating relatively slow growth stocks which only yield 2%-3% on the average, when does additional accumulation no longer make sense? I mean, it will take a 2.5% yielding stock about 8 years at 10% annual dividend growth rate to yield 5% against investment. During that period inflation will erode a significant portion of the purchasing power of those dividends. So counting inflation the yield is perhaps at best 3.5%-4% in inflation adjusted dollars. Who could survive on the paltry cash flow that results when using a safe withdrawal rate from those earnings? It would seem to me that a typical dividend growth investor would need to switch to higher yielding income stocks at some point, or would have achieve a huge portfolio in order to replace 50%-70% of current income. So going back to my original assertion, wouldn't one need to switch away from 2%-3% yielding stocks at least 12-15 years prior to retirement.
At 9 years into retirement and at age 63, I don't consider any buy to hold dividend stock that currently yields less than 5%. All lower yielding stocks are held in my IRA and are used strictly as covered call plays where they usually generate 10%-15% per year. I expect the portfolio to kick out at least 6%-8% in cash flow per year! but am actually striving for 10%-12%.
A LOT of meaty topics in there, Alex!
Off the top of my head, I'd mention that you are right about the income needed -- to completely replace income I think most DG'ers would indeed need to accumulate a huge portfolio. That was the idea I tried to explore in this thread. It is a touchy subject with many dividend growth investors, though.
If you can get comfortable with the fact that you might need to touch the principle, though, then you can also count on some good capital appreciation over the years. While it is true that a stock with an initial yield of 2.5 percent and 6 percent dividend growth will not be drowning you in money, even given a lot of time, it s reasonable to expect that, if the yield stays in a reasonable range, if the dividend does keep growing over the years, the share price will climb along with it. This will give you a much nicer nest egg from which to make any withdrawals needed to make up for the gap between income and spending.