You Don't Have To Shift Retirement Strategies With Blue-Chip Stocks

Includes: BAC, JNJ, KO, MO, PG, T
by: Tim McAleenan Jr.

In the popular imagination, there is this perception that retirement itself is the end game of investing. The common number that you see in many articles is this idea that "$1,000,000" is the watermark associated with retirement investing. The problem with that line of thinking is that it is incomplete. Accumulating those million dollars (and whatever happens to be your magic number) does not represent an end game, but rather, an inflection point.

After all, unless your plan is to convert your retirement funds to cash and then gradually spend it down while you are still alive, you are going to have to strategize and come up with a retirement plan of some sort. That is the funny thing about the conversation regarding retirement investing. Most of the focus is on making the kinds of investments that get you to that magic number without acknowledging the fact that, in many regards, you have to be a better investor during retirement than you were during your accumulation years. It is one thing if you are forty years old and have to deal with seeing 10% of your annual income get wiped out when Bank of America (NYSE:BAC) reduced its quarterly dividend from $0.64 to $0.01. That problem is magnified if you are a seventy year-old retiree experiencing the problem. The consequences of meaningful losses are much more significant during retirement.

What is interesting about blue-chip dividend investing is that it does not require an investor to change his strategy as he transitions from the accumulation years to retirement because high-quality dividend companies are exactly the kinds of stocks that you may want to own during your retirement years. If you can find a spot for Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO) in your portfolio when you are thirty or forty, it represents the kind of high-quality business that you would want to depend on when you are no longer drawing an income from your active labor.

A primary appeal of dividend growth investing is that you can passively receive larger dividend checks each year as the asset you own grows its profits over time. In the case of Johnson & Johnson, the company has raised its quarterly dividend from $0.05 per share in 1991 to $0.61 per share today. The fun part is that a retirement investor can indefinitely benefit from this growth. If he was 45 years old in 1991 when he originally bought his shares of Johnson & Johnson, he could have kept reinvesting those dividends until he retired at age 65 in 2011, and then take the payouts as cash starting with his 2011 retirement.

I do not mention this to suggest that you have to stick with the same stocks for decade after decade. None of this is binding. Plus, you may very well reach a point where you decide that the present current income offered by AT&T's (NYSE:T) 4.75% present yield or Altria's (NYSE:MO) 5.07% yield is more important than worrying about future income growth or capital gains. The point is this: with blue-chip dividend investing, there is no expiration date. There is no predetermined point when you must shift strategies. This is because as you grow older and want more secure dividends, you will want to own the kinds of excellent businesses that you had been building your portfolio with from the start. If you buy a stock like Netflix (NASDAQ:NFLX) or Yahoo (NASDAQ:YHOO) during your working years, there is most likely going to come a point as you inch closer to retirement when you're going to have to sell those companies. At that point, you may have to worry about the tax consideration of the sale, the fact that the company could be undervalued at the time, the new place to put your money, and so on.

The conventional wisdom with investing is that you must always be shifting strategies. You should be aggressive and focus on growth when you are wrong. Somewhere along the line, you're supposed to start applying these arbitrary rules like "take 100 minus your age" to determine your stock and bond allocation. And then, when you get old, you're supposed to focus on fixed with a dose of safe dividend stocks. I reject all of that because it forces you to spend your whole life changing strategies. I would rather master (or, at the very least, develop a strong proficiency) in one style of investing, and then carry that with me as I get older. In other words, I'd rather be a skilled craftsmen in one particular area instead of attempting to be the jack of all trades by shifting my strategy every decade of my life.

The advantage of investing in blue-chip stocks your entire life is this: your end game is your beginning game. The kind of stocks that you want to own in your 70s and 80s can be the kind of companies that you're buying in your 30s and 40s. The studies show that these blue-chip stocks really work their magic over time anyway. Procter & Gamble (NYSE:PG) has returned 12.80% annually since 1970. If you are a blue-chip investor your whole life, you actually stand a chance of participating in that kind of success story over the long term.

But here is the other thing you do not hear discussed as much: in retirement, you need to be a better investor than you have ever been in your entire life. You can survive just fine screwing up a $10,000 portfolio when you're 28. Screwing up a million-dollar portfolio when you are 82 is an entirely different matter. Considering it is so important to be a good investor in your retirement years, you might as well give yourself the advantage of spending decades mastering the strategy before you retire. I would much rather be an eighty year-old that had been investing in blue-chip stocks for forty years than be an eighty year-old that spent his working life meandering through different mutual funds and is now trying to craft an income strategy in retirement. Skills develop over time, and retirement doesn't have to be the time to try something new with your nest egg.

Disclosure: I am long JNJ, PG, BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.