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The 4% rule as a plan is not very smart in the current environment. A few years ago it was difficult to get safe higher yielding equities/bonds, but no longer.

The 4% rule as a plan is not very smart in the current environment. A few years ago it was difficult to get safe higher yielding equities/bonds, but no longer. You can build a quite safe stock/bond portfolio yielding 8% on distributions alone. Why would you aim to sell 4% of principal a year when you can avoid touching the principal at all at close to twice the yield? Large caps are also at quite high valuations historically... earnings grow over time, but valuation multiples are cyclical. There are so many safe small caps at depressed, recessionary valuations right now. Look at any number of the ~1B market cap or under REITs that often yield 7%+ right now and have strong balance sheets and good growth prospects Owning 10,000 apartment buildings isn't really any more differentiated or safer than owning 1000. Especially not when you're paying 1.5x the multiple for it. The growth in popularity of passive investing has really inflated the spread in valuation between large/small cap. EDIT: The negative engagement on this comment is strongly explanatory as to why there's so much opportunity in the market right now.

slg 2y ago
The thing about retirement, especially early retirement, is it (hopefully) lasts a long time. It is foolish to assume that the trends of the last couple of years will continue on indefinitely rather than return to historic norms. Banking on a 7%-8% return on low risk assets is just asking for trouble.
- adam_arthur 2y ago
  You seem to misunderstand. If a company owns apartment buildings and earns $1B a year, and pays out $500m a year in dividends at 5% yield, that is a 50% payout ratio and very safe margin of error on cashflow for real estate. If you buy today and hold, that's locked in. You are in a safe position, if you assume that rents aren't going to decline nationally and materially. There is no "good times and bad times" you're in the position and in the game. Just hold it If you buy Costco today at a 45x earnings multiple and 0.5% dividend, and expect to be able to sell it down at 4% a year and earn a better yield at lower risk, that is quite clearly poorly conceived in my opinion. (among many other large caps in a similar position)
  - slg 2y ago
    Do you have an example of an REIT that fits your hypothetical that has a history of delivering these yields consistently for decades?
    - adam_arthur 2y ago
      O (Realty Income) pays 6% today, AFFO multiple of 12x, low debt (35% debt to asset value), low payout ratio (75% of AFFO), and has never cut their dividend, including during the GFC And I think this is one of the poorer income choices today. People would rather buy Costco at 50x earnings multiple and try to sell the principle down at 4%/year, apparently! The responses to this thread are really eye opening to why such a large small/large cap valuation gap exists. (Yes, O is large cap, but smaller REITs have even better numbers)
      - slg 2y ago
        You pretty quickly when from "yielding 8% on distributions alone" and "REITs that often yield 7%" to "pays 6% today". There are plenty of windows in which an investment in O wouldn't have met your original criteria.
        adam_arthur 2y ago
        I gave a widely known larger cap name. We are discussing a proposed strategy of selling 3-4% of principle as your "income". 6% is clearly far higher, and in this case safer too (imo), which was my original point CTO pays 8.8% with similar setup, higher payout ratio and debt, but below market rents across the portfolio, and well situated in the Sunbelt. As one smaller cap example
        slg 2y ago
        And I can get 4-5% by just holding cash in a high yield savings account right now. The point of the 4% rule is that is has remained true over large scales of time in which a lot changes. Compare that to your CTO example, and that 9.5% yield hasn't exactly been consistent. https://www.nasdaq.com/market-activity/stocks/cto/dividend-history https://www.nasdaq.com/market-activity/stocks/cto/dividend-h...
jandrewrogers 2y ago
Those yields can shrink or disappear quite rapidly, and then you are left selling the equity. From a purely financial perspective, there is nothing special about dividends versus selling equity, it doesn't make you better off; that is just rearranging how value is recognized. The main difference between dividends and growth is tax structure, which generally favors the latter due to the added optionality. Dividends are mostly only useful if you want to cater to fixed income investors and similar.
- adam_arthur 2y ago
  A company owning real estate, paying 8% dividends with a 65% payout ratio isn't going to have its dividends disappear overnight. I can buy O (Realty Income) right now and lock in a ~6% yield. They didn't cut their dividend even during the GFC. And I think O is one of the poorer options of REITs to choose from right now. What do you mean? This entire thread is about retirement, where fixed income becomes important. If you're 75 do you want to wait 10 years for the market to recover to resume selling your principle?

slg 2y ago

The thing about retirement, especially early retirement, is it (hopefully) lasts a long time. It is foolish to assume that the trends of the last couple of years will continue on indefinitely rather than return to historic norms. Banking on a 7%-8% return on low risk assets is just asking for trouble.

adam_arthur 2y ago
You seem to misunderstand. If a company owns apartment buildings and earns $1B a year, and pays out $500m a year in dividends at 5% yield, that is a 50% payout ratio and very safe margin of error on cashflow for real estate. If you buy today and hold, that's locked in. You are in a safe position, if you assume that rents aren't going to decline nationally and materially. There is no "good times and bad times" you're in the position and in the game. Just hold it If you buy Costco today at a 45x earnings multiple and 0.5% dividend, and expect to be able to sell it down at 4% a year and earn a better yield at lower risk, that is quite clearly poorly conceived in my opinion. (among many other large caps in a similar position)
- slg 2y ago
  Do you have an example of an REIT that fits your hypothetical that has a history of delivering these yields consistently for decades?
  - adam_arthur 2y ago
    O (Realty Income) pays 6% today, AFFO multiple of 12x, low debt (35% debt to asset value), low payout ratio (75% of AFFO), and has never cut their dividend, including during the GFC And I think this is one of the poorer income choices today. People would rather buy Costco at 50x earnings multiple and try to sell the principle down at 4%/year, apparently! The responses to this thread are really eye opening to why such a large small/large cap valuation gap exists. (Yes, O is large cap, but smaller REITs have even better numbers)
    - slg 2y ago
      You pretty quickly when from "yielding 8% on distributions alone" and "REITs that often yield 7%" to "pays 6% today". There are plenty of windows in which an investment in O wouldn't have met your original criteria.
      - adam_arthur 2y ago
        I gave a widely known larger cap name. We are discussing a proposed strategy of selling 3-4% of principle as your "income". 6% is clearly far higher, and in this case safer too (imo), which was my original point CTO pays 8.8% with similar setup, higher payout ratio and debt, but below market rents across the portfolio, and well situated in the Sunbelt. As one smaller cap example
        slg 2y ago
        And I can get 4-5% by just holding cash in a high yield savings account right now. The point of the 4% rule is that is has remained true over large scales of time in which a lot changes. Compare that to your CTO example, and that 9.5% yield hasn't exactly been consistent. https://www.nasdaq.com/market-activity/stocks/cto/dividend-history https://www.nasdaq.com/market-activity/stocks/cto/dividend-h...

jandrewrogers 2y ago

Those yields can shrink or disappear quite rapidly, and then you are left selling the equity. From a purely financial perspective, there is nothing special about dividends versus selling equity, it doesn't make you better off; that is just rearranging how value is recognized. The main difference between dividends and growth is tax structure, which generally favors the latter due to the added optionality. Dividends are mostly only useful if you want to cater to fixed income investors and similar.

adam_arthur 2y ago
A company owning real estate, paying 8% dividends with a 65% payout ratio isn't going to have its dividends disappear overnight. I can buy O (Realty Income) right now and lock in a ~6% yield. They didn't cut their dividend even during the GFC. And I think O is one of the poorer options of REITs to choose from right now. What do you mean? This entire thread is about retirement, where fixed income becomes important. If you're 75 do you want to wait 10 years for the market to recover to resume selling your principle?