- Comments (9)
- Text Size: Down Up
moneysense.ca, 5/11/08
Manulife IncomePlus: Don’t ignore dividends
One of the stated benefits of Manulife IncomePlus is protection against a poor sequence of returns in the withdrawal phase of retirement. Here’s how this brochure explains the concept:
During the accumulation phase, regardless of whether a portfolio experiences poor or strong returns early on, the market value will be the same in the end.
This is not true in the retirement phase. As the table below shows, Portfolio A experiences poor early returns and runs out of money within 20 years. Portfolio B, which has strong early returns, benefits from 15 more years of withdrawals and still has a positive market value at age 100.
While, this is a legitimate concern, it is incorrect to focus only on price levels and ignore a very important component of stock returns: dividends. The example cited shows the effect of a sequence of returns on two portfolios. When the sequence of returns over 7 years is -23.1%, -6.1%, -0.3%, 24.5%, 18.0%, 19.6% and 22.7%, the poor early returns combined with capital withdrawals decimate the portfolio. But when the sequence of returns is reversed, the portfolio is able to support withdrawals for a much longer time period.
The problem with this example is that it completely ignores dividends. Today, the dividend yield on the major indexes is close to 3%. An investor with her entire portfolio in stocks can consume the dividends and reasonably expect the portfolio to last for a very long time. Then again, if the fees you pay for money management is greater than the dividend yield, a poor sequence of returns could quickly deplete the portfolio.
moneysense.ca, 5/11/08
Ignoring dividends is a big mistake, as they have historically provided for over 35%-40% of average annual returns for several decades.
Another great mistake is purchasing a complicated financial product rather than stick to the basics – income producing stocks and bonds.
Several decades ago people held stocks and bonds mainly for their dividends and interest payments not to day trade and become the next George Soros.
But maybe this time it’s different
Once again an excellent point. I agree that dividends should to taken into account when constructing a portfolio that could survive a poor returns sequence at the start of retirement.
Note however that dividend payouts do tend to fluctuate with the business cycle. For example, using Shiller’s data http://www.econ.yale.edu/~shiller/data/ie_data.xls, dividends from the S&P 500 in 2008 dollars peaked at $22.25 in March 1999 and bottomed at $19.47 in September 2002 for a decline of 13%.
So if you were expecting a $30k dividend payout on a million dollar portfolio, you might reasonably expect that dividend payout to drop to $26k during bad times.
Personally I’m not sure I would want to live off of 2.6% of my orginal retirement portfolio at the start of my retirement. But that’s just me.
Iwonder,
However, if you look at specific companies, rather than the whole herd, you will find some make a practice to maintain or even increase dividends to stockholders, while others reduce their disbursements. If you built your portfolio based on these stellar dividend producers, you should have a solid return.
DAvid
Iwonder: Thank you for the Shiller data – it’s a gold mine of information. I agree that there will be periods when dividends could decline in real terms (S&P 500 2009 dividends are sure to be less than 2008 dividends as DGI pointed out in a post). Such declines could also last for a long stretch of time. It is best to rely on a combination of dividends, bond interest and some consumption of capital for living expenses.
DAvid,
Yes you can construct a portfolio of “stellar dividend producing” stocks, which might help keep the dividend payout from declining during bad times. However, I’m not very good at picking stocks to picking those who pick stocks.
Another alternative, which I favour, is to rely on a combination of the whole stock market and government bonds.
For the dividend portion of total return by decade, please refer to this chart ( utilizing Shillers data which should of course be taken with a grain of salt)
http://www.dividendgrowthinvestor.com/2008/03/case-for-dividend-investing-in.html
But please ignore the etf picks at the bottom..
[...] – Don’t ignore the dividends [...]
I have actually attended at a presentation explaining the downside of Manulife Incomeplus strategy. It was obviously given by one of its competitor
However, they were showing with an excel spread sheet a simulation of annual yields over a 20 years period. In the end, the fund never really give more than a steady income unprotected against inflation. Retirees would have been better off with a classic portfolio or a lifelong revenue.
Perhaps I am missing something…I have read the posts, however still believe that my $3.9 Income Plus purchase was a good idea and I plan on depositing an additional $5.0 Million on June 2nd 2010.
I would like to believe that I am fairly intuitive and combined with a formal education I would also like to think that am also in a favourable position to make a rationale decision on the Income Plus product through Manulife.
At the risk of sounding a little over the top I think that most of the people writing these post really like to “major in minor things”. They don’t get it!
You simply miss the overall picture by micro analysing the whole structure. It’s my impression you try and look at the negative instead of the positive and that’s why you are always “lagging behind” and not successful in your own world.
I guess in the end my post is just as meaningless as all those who have dismissed the Income Plus Structure however, what I can say is that most of these people saying how bad it is are losers who are financially inept. It actually makes me laugh,,,
I made $16.8 Million last year. Not that it matters, but most of these people providing advise cant see the “forest for the trees”.