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The one question I am most often asked about retirement portfolios is if the money will last a lifetime. As you probably already know, the Team Alpha Retirement Portfolio attempts to create an income stream for those of us who are retired (or close), as well as a dividend yield that can be re-invested to grow the entire portfolio value exponentially.

As of the most recent portfolio update, the value of the portfolio has increased by greater than 35% in the last 15 months, and has a current dividend yield on cost of 4.72%.

Our Team Alpha portfolio now consists of Chevron (CVX), Apple (AAPL), McDonald's (MCD), Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), CSX Corp. (CSX), Realty Income (O), Coca-Cola (KO), Annaly Capital (NLY), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), and iShares S&P U.S. Preferred Stock Index Fund (PFF).

While nothing is ever guaranteed, I believe that between an average rate of growth in both capital appreciation and dividend payouts, investing in a strategy, and a model similar to that of Team Alpha, could continue to produce a regular income stream to help those of us who are either retired now, or just about ready to, achieve a more secure financial future.

That Nasty Retirement Killer: Inflation

Besides keeping a very close eye on my number ONE rule; spend less money than you have coming in, I believe that if there was anything that could derail a retirement plan it would be inflation.

Most of us are aware of it, and most of us complain about it. We also tend not to believe what the "official" inflation numbers are. I suppose that every time we fill our gas tanks up or buy groceries for the week, we get a dose of reality.

Too many folks just shrug their shoulders and let the inflation wave roll over them. Pretty soon (sooner than you think) many folks' financial quality of life begins to decline. The longer we live, the less and less we might have. Too many folks also believe there is not much they can do about it.

If an investor does nothing and ignores inflation, then they will NOT be able to do anything about it. Even the lower inflation numbers reported can have rather devastating effects on our future lifestyle, if we do nothing.

Take a look at this chart:

(click to enlarge)

This chart is of the most severe period of inflationary pressures that eroded purchasing power. $100k in 1971 was "worth" only about $25k in 2009. Inflation has eaten up another $2k in the last 3 years for a total value now of roughly $22k. In today's dollars, you would require $100k to purchase what $22k did back in 1971.

To put this into investment terms, if your investments earn 2% after taxes but the rate of inflation is 3%, your gain in "real" net worth is actually minus -1%. That is why it is so important for you, as an investor, to understand inflation, how the rate of inflation influences the value of your portfolio, and your overall purchasing power. That in turn will affect your financial security over the course of a long retirement.

If we look over the very long term, the average annual dividend growth rate for the S&P 500 is roughly 3.47%. That figure goes back as far as the averages were calculated (1871) through 2007, or 136 years give or take a few!

S&P 500 Dividends per Share, January 1871 through November 2007

Given the historical mean inflation rate of 2.27% from the same period, but through 2012, dividend growth stocks have actually outpaced inflation by over 1%. That means that by investing in the entire S&P 500, for as long as you have lived, your purchasing power would not have eroded from inflation at all.

The power of dividend stock investing can never be overstated when discussing prudent ways of investing to keep up with, or surpass, historical inflation rates.

By the same token, if an investor was to put all of their funds into fixed income products that do not change, falling behind inflation would creep up much like the first chart I noted above.

The Team Alpha Retirement Portfolio Will Beat Inflation

While I cannot state that it will beat inflation every year, or forever, I can do some quick simple math. First let's look at what the current yield on cost produces for our portfolio.

Tot. ValueOriginalOriginal
$131,000$100,000$100,000
Current%Eq. Alloc.TA Alloc.
4.72%4.29%3.89%
IncomeIncomeIncome
$6,183$4,290$3,890

Those investors who have followed this portfolio from its inception and made the same trades and changes, would have an income of roughly $6,183 per year for every $131,000 invested with the same allocations. If you began today, with an equal allocation in each stock, you would have about $4,290 per year, per $100k, and if you began today using the Team Alpha allocations, you would have about $3,890 per year, per $100k invested.

Our current allocations are as follows:

Stocks HeldAllocation %
O 6%
KO 3%
GE 8%
JNJ 6%
XOM 7%
T 7%
PG 6%
NLY 2%
CSCO 6%
MCD 7%
BMY 5%
PFF 3%
KFN 4%
BKCC 4%
CVX 4%
XLV 6%
CSX 4%
AAPL 7%
Cash 4%

Given the historical dividend growth increase of the entire S&P 500 of 3.47% per year applied to the Team Alpha current yield of 4.72%, we could estimate that in 10 years, the yield would be roughly 5.75% with an annual income of about $7,600 without ANY capital appreciation at all.

If we apply a very modest capital appreciation rate of return of 5% annually, in simple terms, the value of the portfolio would be roughly $200k (yes I rounded up by a few thousand bucks). That would mean the income produced would be roughly $11,500. Almost twice what it currently pays today.

When you compare that figure to the historical mean inflation rate of 2.27%, without investing in dividend growth stocks, you can easily see that our income has outpaced inflation quite handily. The risks of course are if inflation goes wild, dividend growth stops, and capital appreciation stalls. While the scenario is possible, it is historically not likely.

There are far too many regular folks who fail to consider inflation, and I would urge everyone to take a look at this very simple inflation calculator from the Bureau of Labor Statistics. Visit the website and plug in the numbers you want and it will calculate the eroding power of inflation in a split second.

Now, just for fun, take look at this article which is encapsulated by a Seeking Alpha "Market Current":

  • S&P 500 companies are expected to pay out at least $300B in dividends this year, surpassing 2012's record of $282B. The number could go quite a bit higher depending on what Apple intends to do, and what the largest banks may be allowed to do (though Citi elected not to boost their dividend). DVY +8.1% YTD, not including the 3.4% yield.

Dividend investing is even more lucrative than ever!

The Bottom Line

We can discuss the individual stocks of this and any portfolio forever. There are positives and negatives, pros and cons, and obvious risks of investing. From every historical metric, dividend stock and dividend growth stock investing is by far the best path towards financial security for just about anyone who invests.

The Team Alpha portfolio is one of hundreds of thousands of portfolios and strategies that could help us come closer to that elusive "Alpha".

Take another very hard look at how YOU are investing. Dividend income investing could very well be the right road to travel.

Source: Will Your Retirement Savings Last?