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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75616  
Subject: Re: Dividend References Date: 7/5/2008 2:35 PM
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It is very hard to predict dividend growth beyond just a few years.

The irony of this statement coming from JWR is too funny. I guess it's hard to predict, but you can guarantee a CONSTANT growth rate of 8% or more.

This guarantee is given even when your poster child (DVY) has failed to:
(A) achieve this result in the 4.5 years it has been around (it has had just ONE year where it achieved an 8% dividend growth rate); and
(B) has had a year with negative dividend growth.

Between these two conditions, anyone using your strategy starting in January, 2004 would be totally hosed.

I ran the numbers starting on January 1, 2004 with the following assumptions:
(1) Investment A is DVY using an initial yield in 2004 of 3.5% and the real growth rates for 2004-2007. Then, from 2008 forward, I used the bogus assumption that it will return a fixed 7.5% annual dividend growth rate (what it has achieved to date);
(2) Investment B works as "advertised" on JWRs site -- 6.1% initial yield with dividends growing 2% per year;
(3) Starting Funds = $1,000,000;
(4) Portfolio initially 15% Investment A and 85% Investment B;
(5) Inflation: use real data for 2004-2007; then use 4.63% thereafter as that is the annualized rate of inflation since 1970;
(6) Withdrawal needs are dividends received in 2004 plus inflation

Here's the table...

Year  Investment 1    Investment 2   Total                Inflation  Needs(*)       Shortfall
2004 $ 5,250.00 $ 51,850.00 $ 57,100.00 3.388% $ 57,100.00 $ -
2005 $ 5,096.96 $ 52,887.00 $ 57,983.96 3.226% $ 59,034.55 $ 1,050.59
2006 $ 6,128.13 $ 53,944.74 $ 60,072.87 2.848% $ 60,939.00 $ 866.13
2007 $ 6,517.33 $ 55,023.63 $ 61,540.96 4.481% $ 62,674.55 $ 1,133.58
2008 $ 7,006.13 $ 56,124.11 $ 63,130.23 4.630% $ 65,482.99 $ 2,352.76
2009 $ 7,531.59 $ 57,246.59 $ 64,778.18 4.630% $ 68,514.85 $ 3,736.68
2010 $ 8,096.45 $ 58,391.52 $ 66,487.98 4.630% $ 71,687.09 $ 5,199.12
2011 $ 8,703.69 $ 59,559.35 $ 68,263.04 4.630% $ 75,006.20 $ 6,743.16
2012 $ 9,356.46 $ 60,750.54 $ 70,107.00 4.630% $ 78,478.99 $ 8,371.99
2013 $ 10,058.20 $ 61,965.55 $ 72,023.75 4.630% $ 82,112.57 $ 10,088.82
2014 $ 10,812.56 $ 63,204.86 $ 74,017.43 4.630% $ 85,914.38 $ 11,896.96
2015 $ 11,623.51 $ 64,468.96 $ 76,092.47 4.630% $ 89,892.22 $ 13,799.75
2016 $ 12,495.27 $ 65,758.34 $ 78,253.61 4.630% $ 94,054.23 $ 15,800.62
2017 $ 13,432.42 $ 67,073.50 $ 80,505.92 4.630% $ 98,408.94 $ 17,903.02
2018 $ 14,439.85 $ 68,414.97 $ 82,854.82 4.630% $102,965.27 $ 20,110.45
2019 $ 15,522.84 $ 69,783.27 $ 85,306.11 4.630% $107,732.56 $ 22,426.45
2020 $ 16,687.05 $ 71,178.94 $ 87,865.99 4.630% $112,720.58 $ 24,854.59
2021 $ 17,938.58 $ 72,602.52 $ 90,541.09 4.630% $117,939.54 $ 27,398.45
2022 $ 19,283.97 $ 74,054.57 $ 93,338.54 4.630% $123,400.14 $ 30,061.61
2023 $ 20,730.27 $ 75,535.66 $ 96,265.93 4.630% $129,113.57 $ 32,847.64
2024 $ 22,285.04 $ 77,046.37 $ 99,331.41 4.630% $135,091.53 $ 35,760.12
2025 $ 23,956.42 $ 78,587.30 $102,543.72 4.630% $141,346.27 $ 38,802.55
2026 $ 25,753.15 $ 80,159.05 $105,912.19 4.630% $147,890.60 $ 41,978.41
2027 $ 27,684.63 $ 81,762.23 $109,446.86 4.630% $154,737.93 $ 45,291.07
2028 $ 29,760.98 $ 83,397.47 $113,158.45 4.630% $161,902.30 $ 48,743.85
2029 $ 31,993.05 $ 85,065.42 $117,058.47 4.630% $169,398.38 $ 52,339.90
2030 $ 34,392.53 $ 86,766.73 $121,159.26 4.630% $177,241.52 $ 56,082.26
2031 $ 36,971.97 $ 88,502.06 $125,474.04 4.630% $185,447.80 $ 59,973.77
2032 $ 39,744.87 $ 90,272.11 $130,016.98 4.630% $194,034.04 $ 64,017.06
2033 $ 42,725.74 $ 92,077.55 $134,803.28 4.630% $203,017.81 $ 68,214.53
2034 $ 45,930.17 $ 93,919.10 $139,849.26 4.630% $212,417.54 $ 72,568.27
2035 $ 49,374.93 $ 95,797.48 $145,172.41 4.630% $222,252.47 $ 77,080.06
2036 $ 53,078.05 $ 97,713.43 $150,791.48 4.630% $232,542.76 $ 81,751.28
2037 $ 57,058.90 $ 99,667.70 $156,726.60 4.630% $243,309.49 $ 86,582.89
2038 $ 61,338.32 $ 101,661.05 $162,999.37 4.630% $254,574.72 $ 91,575.35
2039 $ 65,938.69 $ 103,694.27 $169,632.97 4.630% $266,361.53 $ 96,728.56


Look at the massive shortfalls. At the end of the 30-year period, not only are the shortfalls still growing, but the growth rate is getting faster. In fact, you cannot overcome this by limiting your increased withdrawals to the increase in dividends received -- you will fall more and more behind inflation every year for the rest of your life. (This is true no matter how you try and work your withdrawals.)

I used to think that JWR at least had some reasonable thoughts even if he had done substandard "research" and used faulty assumptions, bad math, and a stick-your-head-in-the-sand manner of addressing problems. After running these new numbers and finding that it is actually IMPOSSIBLE for his methods to work out when you use any kind of real-world data, I no longer will even give him that much credit.

Of course, JWR would say that I just don't understand. But he no longer replies to any of my posts, so I don't expect to even see that!

Acme
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