William Bengen’s Thoughts on Dividend Stocks Versus Bonds

Comments on “Insights on Using the 4% Withdrawal Rule From Its Creator,” by William Bengen, in the January 2018 AAII Journal:

I would be interested in knowing Mr. Bengen’s view on the role of dividends in his retirement strategies.
—David Von Knapp from New York

We continue to see diversification recommendations around 55% equities, 35% bonds and 10% cash.

In the current environment, it seems we leave a lot of earning power on the table with low bond rates.

I personally feel a high percentage of dividend-paying equities is a better option. I recognize the increased risk; however, most bear markets don’t last more than a few years and if you retain a couple years’ worth of cash to help get through the recovery you would be better served. Most of the dividend-paying equities increased in value 15% to 20% this year, with the added dividend return rate of 2% to 3%.
—John Schuerman from Mississippi

William Bengen responds:
I haven’t spent a lot of time in my research on dividends; I have focused on “total returns,” or the sum of dividends and capital gains. As long as the total returns you earn from your dividend-paying stocks are comparable to those for the asset classes I use in my research (e.g., S&P 500 index), my research would be applicable.

Having said that, dividend-paying stocks make sense to me, as they provide a continuing flow of cash to replenish your money market fund, which is the source of withdrawals during retirement. This can reduce the need for selling investments to rebalance an account, which might give rise to a taxable event.

It is very tempting, in this odd time of low bond interest rates and higher stock dividends, to substitute dividend-paying stocks for bonds in your portfolio. However, I caution you that by doing so, you place your retirement portfolio at risk.

My research is based on a study of 90 years of data, including the period of 1926 through 1966 when stock yields were much higher than today, and were consistently higher than bond yields. Yet the evidence shows that, even during those periods, replacing bonds with stocks tended to reduce the safe withdrawal rate. The effects of a major bear market on a portfolio heavy in stocks is frightful to see.

Originally, I had developed a 4.1% withdrawal rate using only large-cap stocks and U.S. Treasury intermediate-term bonds. When I did the research for my 2006 book, I replaced a portion of the large-cap stocks, which paid good dividends, with small-cap stocks, which paid no dividends at all. Yet the safe withdrawal rate increased to 4.5%.

It appears to me that “total return” from a balanced portfolio of stocks and bonds trumps higher income from a stock-heavy portfolio. Please be careful with making long-term changes to your strategy based on short-term phenomena.

Level3 ETF Makes a Move

Comments on “Altering the ETF Weightings in the Level3 Passive Portfolio,” by James B. Cloonan, in the January 2018 AAII Journal:

Since there is a proxy vote on moving Guggenheim to Invesco, what effect will the movement of shares from Guggenheim S&P 500 Equal Weight ETF (RSP) to a PowerShares equal weight S&P 500 fund have on Level3 Passive Portfolio recommendations?
—John Hallquist from Tennessee

Editor Charles Rotblut responds:
There shouldn’t be a significant change in how the exchange-traded fund is managed. Dan Draper, Invesco’s global head of ETFs, described his company as having been “very interested in getting this S&P 500 Equal Weight exposure really for quite some time.”

Stock Screening Strategies

Comments on “Polar Opposite: MAGNET Complex Goes From Bottom to Top in 2017,” by Wayne A. Thorp, CFA, in the January 2018 AAII Journal:

Thanks a lot to Wayne Thorp for the useful information. Chasing previous years’ stock screen winners has not yielded any good strategy for me. The Rule #1 stock strategy is flashing Micron Technology Inc. (MU), the only company to pass.
—Manjunath Sharma from California

Thanks for an exhaustive report! So much information to digest here. I appreciate all the hard work.
—Tim Taylor from South Carolina