Ben Stein How Not to Ruin Your Life

Here's an option that might work for a good chunk of your retirement portfolio: It involves higher-dividend-paying stocks and REITs. (An REIT is a real estate investment trust, which owns big portfolios of commercial property and pays out at least 90% of the income each year to the stockholders.)

Now, I don't just like high-dividend stocks, I love them. Apart from the dividends they yield, the payouts often indicate that the companies are generally making money and are legit (although not always). Moreover, long-term, careful studies show that over lengthy periods, high-dividend stocks have better total return than either low or no dividend stocks, or the broad market generally.

Great Financial Odds

I asked my pal and financial guru, Phil DeMuth, to construct for me a portfolio that is 50 percent the Wilshire REIT index (RWR is an ETF that reflects this index) and 50 percent the DVY ETF reflecting the 50 top dividend payers in the Dow Jones U.S. Total Market Index. As of the writing of this article, the DVY yields about 3.03 percent current income, and the RWR yields closer to 4 percent.

I had Phil run Monte Carlo simulations of what would happen based on the past history of these instruments under 10,000 different scenarios of market movements, interest-rate changes, and price fluctuations. These simulations covered 30 years, which should be enough for most retirees. Note that I also asked Phil to track what would happen if the owner of the portfolio withdrew 4 percent per year and allowed the balance to compound.

What Phil found (in very rough terms) is that only in one case out of 10,000 would you run out of money before the 30 years was up -- and that was in the 29th year. In the average case, the portfolio after 30 years would have been 16 times what you started with! That would be good news indeed for your children and grandchildren. And it shows that portfolio would have grown so much that a fixed percentage of it would easily keep up with inflation.

The news gets even better than that: If you withdraw 5 percent a year -- which is a great deal more than many seers tell you to do and hugely more than 4 percent a year -- you still have only a less-than-one-in-100 chance of running out of money before you reach 30 years of retirement.

The most likely scenario with 5 percent withdrawals a year has you with nine times as much at the end of the 30 years as you started with. In the worst case of 10,000 Monte Carlo simulations, you run out of money after 18 years -- but that's a one-in-10,000 chance. Again, this is very good news for those of us worried about inflation and music to the ears of heirs and heiresses.

Getting Your Cake and Eating It, Too

High-dividend stocks exist in other forms than just the DVY and the RWR. There's a new high-dividend ETF called the SDY from S&P, and the ICF index for real estate from Cohen & Steers. As always, the goals are low fees, high diversification, and brand names. (I own the ICF ETF and have been very happy with it.)

The beauty of the high-dividend portfolio is simply this: You get to have your cake and eat it, too. You get excellent returns, plus a lot of money at the end of your life.

Obviously, it works for the run-up to retirement, too. In fact, in a tax-deferred account, it's a super-fine vehicle. (Phil's calculations assume it is in a tax-deferred account.)

I also like other options, such as variable annuities, for helping your retirement savings stretch far enough, but for at least a chunk of your funds, the high-dividend route looks good to me.