Does the Yield Shield protect retirement finances?

Does the Yield Shield protect retirement finances?

In the previous post How Sequence of Returns Risk Messes Up Retirement and the 4 percent rule, we illustrated the retirement choices of three relatives – John, Jane and jimmy Toh. John retired in 2008 (at the height of the stock market cycle), Jane in 2009 (at the bottom of the stock market cycle, and Jimmy in 2010 (after everything blew over). Interestingly, we saw how the timing of retirement made a huge difference to their retirement funds after 10 years. This is what sequence of returns risk is all about.

  • John ends up with his portfolio down by 25% after 11 years, and has a significant risk of running out of money in the future
  • Jane ends up with a portfolio about 80% more than what she started with after 10 years
  • Jimmy ends up at about the same level as he started off with after 9 years. However, he still has a good chance of making it through retirement with enough money

John’s, Jane’s and Jimmy’s portfolios 2008 – 2019

Jane not only showed impeccable timing as to when she retired, but also had a portfolio which gave her enough dividends to cover her living costs (4% of the initial portfolio value) so that she did not need to sell any of her stocks at all. This allowed the stocks which had fallen in value in 209 enough time to recover their value in the subsequent upturn in the market. We also saw this concept of a “Yield Shield” earlier in the post Does the 4 percent rule work in Singapore? where we showed that a portfolio left entirely in the CPF Special Account (SA) earning 4% interest a year could last for the entire 30 years of retirement. Somehow, a portfolio with a high dividend yield seems to be a magic cure-all to the problem of retirement financing!

Has the Yield Shield worked elsewhere?

But this is not always the case. There is little research on the effectiveness of the Yield Shield. A series of articles from Big ERN here, here and here, show that the Yield Shield did not really work in the Great Recession in the US in 2008. This was because the US Yield Shield portfolio was heavily tilted towards financial sector preference shares, which took a real beating in 2008 from which they never recovered. International stocks also got walloped in 2008. And as the US dollar soared afterwards, the local currency returns of these international stocks in the subsequent recovery got heavily watered down.

Big ERN also shows the danger of over-reliance on the Yield Shield for the long haul in this illustration:

High dividend stocks don’t necessarily give higher total returns!

Returns from stocks come in the form of dividends or capital gains. Regardless of the split between dividends and capital gains, the long term total returns are the same. Both dividends and capital gains come from the same earnings of the company. Hence, it is likely that high dividend stocks will have lower capital gains compared to low dividend stocks. So the Yield Shield is not a magic cure-all. It gives higher income, protecting against Sequence of Returns Risk. But this comes at the cost of not being able to outpace inflation due to lower capital gains.

Has the Yield Shield worked in Singapore?

So, has the Yield worked in Singapore over the same period? To test this, we construct a equally-weighted Yield Shield portfolio of 5 REITs and 6 Straits Times Index (STI) stocks. The REITs cover a broad range of different sectors, as do the stocks. Therefore, no single sector is over-represented in the portfolio. Note that STI stocks are good candidates for the Yield Shield. Faced with limited room for growth in the small but lucrative domestic market, many companies pay out more dividends. Of course this means that they may have problems with outpacing inflation, as shown above.

To compare with the findings of our previous post How Sequence of Returns Risk Messes Up Retirement and the 4 percent rule, we use the same period from 1 Jan 2008 to 1 Aug 2019 for our Yield Shield portfolio. The table below shows the initial and end prices of each component of the portfolio, and the total dividends paid out per share over the period.

Stock NamePrice 1 Jan 2008Price 1 Aug 2019Dividends paid
Ascendas REIT$2.15$3.06$1.68
Capital Mall Trust$2.42$2.60$1.22
Capital Commercial Trust$1.47$2.05$1.02
Frasers Logistics Trust$0.85$1.50$0.88
Parkway Life REIT$1.12$3.08$1.21
SingTel$3.65$3.35$1.86
DBS$17.38$26.25$8.13
Venture Corp$10.20$14.60$6.40
SGX$9.6$7.89$3.35
Comfort Delgro$1.56$2.64$0.86
Keppel Corp$9.94$6.00$4.10

At the start of every year, we withdraw 4% of the initial portfolio value, adjusted for inflation, from the portfolio. If the dividends we receive are more than enough to cover this, the excess is re-invested in the portfolio on an equal weighted basis. There is no sophisticated portfolio re-balancing.

How does the Singapore Yield Shield portfolio perform? We show this below, along with the performance of the STI ETF we discussed previously for comparison:

The performance of the Yield Shield 2008 – 2019

The performance of the 2 portfolios are similar in the first two years. The Yield Shield portfolio pulls ahead in Year 3 and never looks back. The higher dividends from the Yield Shield portfolio allow the retirement expenses to be almost completely covered, hence preserving the value of the portfolio for the subsequent rebound in stock prices.

Does the Yield Shield only work with REITs?

Has the performance of the Yield Shield been largely due to the REITs in the portfolio? We answer this question in the chart below. This clearly shows the outperformance of a Yield Shield portfolio composed of REITs only, compared to the Stock Yield Shield portfolio and the STI ETF.

The performance of the REIT and Stocks Yield Shields 2008 – 2019

The Stocks Yield Shield mirrors the performance of the STI ETF retirement portfolio closely for the first few years. From Year 5 onwards, it pulls away, when the dividends start increasing. The REIT Yield Shield on the other hand, outperforms immediately when the stock market rebounded. Overall, a carefully selected.

How does the Yield Shield work?

What we do in retirement is actually Dollar Cost Averaging in reverse. Instead of investing a constant sum of money periodically, in retirement we withdraw a sum periodically. Just like Dollar Cost Averaging, the best results occur when we buy at lower prices and sell at higher prices. In retirement, the Yield Shield allows us to avoid selling at depressed prices. By preserving the investments in the portfolio, the retiree can take advantage of the subsequent upturn in the market better.

The outcome for the Yield Shield portfolio for retirement look promising historically. However, this test covers only a limited period in the past. In our next post, we look at simulating across different possible 30 year periods to more fully test its reliability in retirement.

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