“I have an investment portfolio of high quality stocks. The dividends they pay are about 2% of their share prices. How can financial advisors be telling people they can withdraw 4% per year “safely’ when stocks only pay 2%?”
Excellent question!
You and I need to clarify two important points before I can answer your question. First, the fact that your ‘high quality’ stocks (however that may be determined) pay 2% is hopefully just part of their overall return to you as investors. If you have chosen well, the value of your stocks may rise over time. That rise in value, added to the dividends produced equals the total rate of return of your portfolio.
The second point upon which we need to be clear is the type of portfolio that most advisors would see as being able to produce 4% withdrawal rates with a reasonable degree of reliability would almost certainly not be 100% in stocks. In fact, producing more consistent, more reliable income streams would almost certainly call for a diversified portfolio of stocks, bonds, alternative assets, and cash. Naturally some of these assets (particularly on the fixed income/bond side of the markets) could produce higher than 2% annual income streams. While none of these returns is guaranteed, this balanced and diversified approach to creating retirement income streams provides the foundation to the long term 4% withdrawal pattern.
Before we leave your question, please let me at least mention that annuities are very interesting retirement income producing tools. While annuities can be quite complex and take some serious work to understand they can also offer some income options and assurances that do not normally exist within the stock and bond market. If your income goal is to build more peace of mind into your plan, you might want to take the time to get educated on the use of annuities.
Finally, just to have as much fun as we possibly can, I offer you the universally recognized answer – ‘all of the above’. Many retirement income plans are crafted of multiple components. Some in dividend paying stocks. Some in balanced portfolios of mutual funds and exchange traded funds. Some in individual bonds. Some in annuities. Each piece designed to bring a different but important value to the effort of producing a reliable stream of income in your retirement.
If you need more information on any/all of these approaches you simply need ask.
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