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Manulife IncomePlus: Don’t ignore dividends

November 5th, 2008 · 8 Comments

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.

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8 responses so far ↓

  • 1 Dividend Growth Investor // Nov 5, 2008 at 9:57 am

    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 :-)

  • 2 Iwonder // Nov 5, 2008 at 10:24 am

    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.

  • 3 DAvid // Nov 5, 2008 at 11:02 am

    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

  • 4 Canadian Capitalist // Nov 5, 2008 at 11:18 am

    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.

  • 5 Iwonder // Nov 5, 2008 at 11:47 am

    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.

  • 6 Dividend Growth Investor // Nov 5, 2008 at 12:22 pm

    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.. :-)

  • 7 The Financial Blogger | Financial Ramblings // Nov 8, 2008 at 12:10 pm

    [...] – Don’t ignore the dividends [...]

  • 8 Intelligent Speculator // Nov 8, 2008 at 4:21 pm

    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.

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