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Two weeks ago, I wrote this article about my opinion towards annuity purchases versus dividend stock investing. The response was overwhelming. It currently has 377 comments, and counting. There has been plenty of give and take from both sides of the fence, and for the most part, the commentary has been candid as well as respectful.

At times, I did become my cranky self, with some biting retorts, as did some of the other commenters. It was to be expected I suppose, with as touchy a subject as it is. I realize that I hit a nerve with insurance folks, and even a few professional financial planners (I even received some rather "interesting" direct messages). That being said, I still believe there are very few advantages in purchasing an annuity of any kind.

Let me be very clear about one important issue: If anyone is fearful of investing in the stock market, and is afraid that they will run out of money during retirement, investigating annuities could be prudent for you. As I stated in the original article, this is the number one reason an individual should consider purchasing an annuity insurance product.

On the other hand, if you are a prudent investor with a sound dividend investment strategy, I believe you will be much more financially secure than the annuity purchaser.

By simply looking at the Team Alpha Retirement Portfolio, an investor can see many of the basic elements of investing in a dividend income portfolio.

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

The yield on cost of this portfolio is currently 4.72%, and the growth has been roughly 35% over the last 15 months.

If you were to invest in these very stocks right now, with an equal dollar allocation, your yield on cost would be roughly 4.29%. I suggest taking this into consideration as you contemplate your own dividend investing strategy.

The Smackdown

For this follow up article, let the facts and figures do all of the talking. I have prepared a spreadsheet on a plain vanilla dividend stock investment plan, versus an individual fixed annuity without any other features and benefits, other than the annual payout. It contains the following assumptions:

  • The investor is a 65 year old male with $100,000 in cash.
  • The portfolio consists of mega-cap, blue chip, dividend winning stocks only.
  • The average growth rate is 5%, which is lower than the historical growth rate of the S&P 500 (which is about 7-8%).
  • The dividend rate is 3.00%, which is right in line (actually a little less) with the historical dividend yields of the dividend champion stocks of the USA.
  • I did not calculate any growth for the dividends. (An unlikely scenario)
  • Both the dividends and the growth rate have been calculated back into the investment each year.
  • A steady withdrawal rate of 6% each year has been calculated.
  • I did not figure any tax implications on the withdrawals, nor have I added anything for inflation.
  • The annuity is for an individual male, aged 65.
  • The initial purchase is $100,000.
  • The annual payout rate is 7%, which is somewhat higher than average.
  • There are no joint survivor payments, since I wanted the highest payout possible for this annuity.
  • Since this is a fixed immediate annuity there is no growth rate, nor dividend accrual, to the $100,000 purchase.
  • The 65 year old male dies at age 80 in each scenario.

Let's Take A Look At The Results

Dividend Stock Portfolio
Year 11000001050001080006480
Year 21015201065961093416560
Year 31027811079201110036660
Year 41043431095601126906761
Year 51059291112251144026864
Year 61075381129141161406968
Year 71091721146301179057074
Year 81108311163721196967181
Year 91125151181401215157290
Year 101142251199361233627401
Year 111159611217591252377514
Year 121177231236091271407628
Year 131195121254871290727744
Year 141213281273941310337861
Year 151231721293301330257981
At Death125044 107967

At age 80, the value of the portfolio is $125,044. The amount withdrawn over the 15 year period is $107,967.

Individual Fixed Annuity
Year 1100000 7000
Year 2100000 7000
Year 3100000 7000
Year 4100000 7000
Year 5100000 7000
Year 6100000 7000
Year 7100000 7000
Year 8100000 7000
Year 9100000 7000
Year 10100000 7000
Year 11100000 7000
Year 12100000 7000
Year 13100000 7000
Year 14100000 7000
Year 15100000 7000
At Death0 105000

There is no value left at the time of death and $105,000 has been paid back to the policy holder.

I realize that this is a very simple calculation, and there are variables not accounted for in each scenario. I offer this link for anyone who cares to plug in their own numbers for virtually any sort of immediate annuity scenario.

I believe all of the numbers speak for themselves.

The Bottom Line

Pay $100,000 for an immediate annuity policy, and as I have noted in the above scenario, not only will you receive less than THIS dividend investor over 15 years, but there will be none of the $100,000 left either. This dividend investor will still have over $125,000 in his estate at the time of death.

The decision is yours, and all scenarios are unique. If the market crashes by 20% one year, the numbers will look different. If the market rises by 20% one year, the numbers will look different.

By using a rather conservative return and dividend yield, I attempted to even the field, but any investment in the stock market carries risks.

The choice is yours, let the comments begin!

Source: Smackdown: Dividends vs Annuities, The Main Event