Taking a hard look at the dividend growth motive

I read about and follow the dividend-growth school of retirement investing. This school of investing espouses purchasing equities with a long history of dividend growth. Devotees of dividend growth investing state their primary interest in creating a portfolio that will produce an ever-increasing stream of income, with which they can pay expenses or re-invest, or both.  They claim to be less interested in total return or in capital gains. My problem is that I can't rest completely easily in the new orthodoxy of the dividend growth strategy.

In my heart of hearts, I worry that my dividend-growth strategy won't take me to the place I want to be. In order to have that stream of income, I need a pretty big pot of value.  The best performance I can see from folks who post their performance indicates a steady 4% off of the portfolio is possible. I worry that my strategy won't create the big pot of value that I need in the time that need it. At the moment, my portfolio yields about 40k in dividends yearly. At a 10% total return, it will yield 80k in cash when I'm 62 years of age and it will yield 160k when I'm 69 years of age. That doesn't include future investments. If I maximize my pre-tax deferrals for another 10 years, I'll have another $600k in some kind of retirement asset by then, yielding another $24,000 per year at age 65, and another $48,000 at age 72. I guess that should be enough. The government says I should work until I'm 67, so I could put away close to 750k. Actually, I don't see myself working like I do now for another 12 years.  If the combined current retirement portfolio assets of my wife and I were to double twice and we could harvest 4% off of it with a high-dividend strategy, there would be about $5 million in assets and $200,000 in yearly income. That's an optimistic estimate, as two doublings before we retire may not happen. Once we start to draw income from the portfolio, the net rate of appreciation will decline substantially. However, we'll contribute another $500k to the effort between now and then, so maybe that target isn't so unreasonable.

So...do I really believe in that strategy?  What if I can't earn 10% every year? What if my average is more like 7% per year. that means doubling in 10 years. What if there's a big recession and my portfolio takes a hit like 2008?  The best dividend growth companies marched through 2008-9 and never missed a beat with their dividends. Their value plummeted along with the rest of the market, only not so severely. The investor who didn't panic and sell out saw values rebound within a couple of years. I've been doing this long enough now that I'm pretty sure I won't panic and sell out. My biggest risk is simply not getting the investment performance I'm expecting from my dividend growth strategy.

There are still some big expenses ahead of us. My child's private school education is frighteningly expensive. We'll live under a bridge before my wife would sacrifice that experience for him. We'll be on the hook for college between ages 63-67 or so. It may be that inheritance will cover that expense, but no counting chickens...

I'm not counting on SSI, but if it's there when I'm ready to lay down the scalpel, I'll be happy to take it. According to a wise contributor to an investment site I read, SSI should be looked at as the fixed income-portion of one's retirement portfolio; yields about 3-4%, indexes up with inflation, a modest contributor to the whole.

One should ask, what will a couple of old people do with all that money anyway?  I'll be surprised if we're hopping around the world at that point. We'll be fortunate to have our health. We'll be fortunate if our son has established himself independently. We'll be lucky if the world is a hospitable place in which to wander around. One thing to acknowledge is that we won't quit working altogether in that interval. I can't imagine taking a traditional retirement. What we'll need to do is cover our expenses.

I'm pretty certain I couldn't capitulate and go back to fund, or fund of funds, or capital-gains investing. I fret enough as it is about capital value of my holdings, even knowing the dividend reinvestment is at work. I haven't completely abandoned the old me. So, I'll trudge along with this strategy and hope that eventually the hyper-vigilance will go away and I'll trust more fully in the process.

So, I guess I'm committed, since I can more easily see 3-4% dividends reinvested, along with 5-7% capital appreciation leading to a 10% total return on investment over the long haul, than hoping for higher capital gains and eventually converting to a "harvesting" regimen. If it only makes 7% per year, I can still get to a comfortable place where most or all of my wages are replaced by investment earnings.