Retired Investors: Is It Time To Consider A New Investment Strategy? Part 4

by: Bob Wells

Wow!, the interest expressed in the first three parts of this series has been truly amazing with the series producing more than 650 comments to date. The ideas shared and the questions answered have helped us all to better understand our investments strategies and in some cases I trust to improve them.

The central focus of this series has been the retired investor in the "distribution stage" of investing. Many who have commented are already at the stage where they are obtaining retirement income from their portfolio. Others are a few years away and just beginning to make the transition in both their thinking and ultimately their Distribution Phase Portfolio Design.

I have heard from those of you who favor positions in fixed income such as bonds, as well as from those with pensions providing their fixed income positions. I have heard from investors favoring ETFs as their chief investment instrument. I have heard from those who favor holding no more than 20 stocks in their portfolio and from others with 50 or more.

I've tried to focus my comments during this series on two key principles: First, no one should enter the distribution stage of investing without a plan. We each need to set goals for this stage. We need to establish well defined guidelines to help govern the conditions under which we buy and sell a position. That plan should require a formal quarterly review to allow for adjustments if necessary.

Second, I believe that a risk adverse investor who is in the distribution stage or about to reach that plateau needs to fully consider establishing a Dividend Growth Distribution Portfolio as the principle equity investment in support of their retirement.

You will recall that in Part One of this series, we discussed how such a portfolio could be constructed with the use of customized watch lists from the over 400 Dividend Champions, Challengers and Contenders (CCCs). Building your portfolio from stocks included in the CCCs is critical since they along have the history of consistent dividends and proven dividend growth required by this investment strategy.

I built just such a watch list of Dividend Champions, Challengers and Contenders with yields of 2.75% or more and what I considered positive 10 year performance histories. The watch list and metrics important to Dividend Growth investors are summarized again in the chart below. If you are uncertain about your current investment strategy, consider again the potential these stocks hold to provide safe and growing income in support of your retirement.



Yield %







Est. 5 Year

Ave Growth

5 yr BETA






















Total 132







Click to enlarge

The stocks identified above represent a collective yield of more than 4%, They have enjoyed Dividend Growth more than double the rate of inflation. They have estimated 5 year Capital Growth of 7.6%. Finally, they have a collective beta of less than .70, meaning that over time they are 30% less likely to incur severe losses during extreme bear markets. These stocks like any you might consider deserve your own due diligence and should only be purchased when they are fairly valued.

I recently presented my personal Dividend Growth Distribution Portfolio and shared its quarterly progress as required by my portfolio business plan.

Remember the majority of my 51 holdings are part of the 132 highlighted above. My portfolio if purchased today has a combined dividend yield of 4.72%, .63% higher than the larger group of 132 represented above.

In return for higher yield and income I gave up .5% in projected 5 yr. growth and .4% in five year dividend growth. I consider the trade off to be worth it.

The BETA for my portfolio checks out the same at .68. In addition my portfolio has a combined chowder rule score of 15.8% clearly surpassing the requirement that stocks have a combined yield and dividend growth rate of 8 to 12%.

Remember before considering the stocks in my portfolio or any other to check that if purchased today it represents a fair or better value.

I will close this series by presenting some of the many personal exchanges I received over the past few weeks.

I have just started to read your articles and going over the CCC lists. I still have quite a lot of work to do but must say at first glance this is by far the best game plan I have seen and has really given me lots to think about. You have really helped me immensely as my biggest worry has been inflation eating away at my purchasing power as I just recently retired, and like you in the past, am not comfortable with my current portfolio setup and intend on changing it quite a bit and more in line with what you have done. So just wanted to say a big thank you for writing your articles as I am sure they are going to be invaluable to me and enable me to sleep at night a bit better.

I do have a few brief questions and hope you would be kind enough to answer them. Seems most of the analysis is based on past performance in making your choices. I know no one has a crystal ball but I guess one has to assume that past Can I expect growth rates/dividend growth will continue into the future based on the past?. My concern is that some companies increase dividends dramatically and have very high dividend growth rates but for how long can that continue and how do you analyze or consider this in your stock choices.

Now to my reply:

As to your statement, "I guess one has to assume that past growth rates/dividend growth will continue into the future based on the past?"

With dividend growth I look for consistency over time in the 1,3,5,10 yr. dividend growth rates (DGR) particularly with my more mature companies. It adds to my confidence to invest in companies whose rates are trending slightly higher. Sometimes you see a stock with a huge increase in the growth of their dividends, Apple and Cracker Barrel are two that come to mind. Should you expect a repeat next year, probably not. I think Apple might be an interesting case to watch since it just might trigger a shift from stressing growth to stressing dividend growth.

Regarding past performance, whether its capital gain or dividend growth, many times the winners (great stocks) continue winning.

I guess I'm like the handicapper who suggests that horses who win often are more likely to repeat.

I really like using the chowder rule as a measure of future dividend growth probability. I achieved a growth in income of 10% most of that coming from dividend growth last year. At the six month mark looks like I'm on track to repeat that number.

The reader continues:

Also are you concerned that potential rising interest rates will affect your portfolio as last month or so we have seen so called dividend stocks like utilities and REITS being sold off or is your view that the process of picking good dividend growers over time will lay these concerns to rest as higher interest rates could potentially compete with so called dividend stocks?

Again, my reply:

Utilities and REITS sold off big last month. I question just how much was due to rising rates and just how much was that they had heated up so much the months before. Remember that with this strategy short term changes in the market don't affect your income so they shouldn't affect your sleep patterns either.

We have seen bond yields move like this before, the most often cited comparison recently being 1994. In that year, the ten year rate moved from 5.75% on January 1st to about 7.8% by year end.

1994 the SPY returned 1.18%

I ran 1994 returns for a short diversified list of common Dividend Growth stocks for performance comparisons.

JNJ - 24.42%
KO - 17.97%
PG - 10.44%
MCD - 4.86%
INTC - 4.82%
CVX - 5.81%
SO - 5.48%

I believe you'll agree this compares favorably to the market.

As I've said repeatedly, I don't believe anyone should buy a stock without reviewing its ten year by year performance history and its five year history of dividend payments. Each can be done quickly on the Morningstar website.

Just enter a stock ticker in the "quote" box located at the top of the Welcome Page. After clicking enter, click on the "performance" tab located on the grey bar.

Next, click on "expanded view". You now have your performance history. For dividend history, just click on the tab "Dividends and Splits". An simple composition notebook is the easiest way to permanently record this information.

Anyone concerned about the effects of interest rate hikes would be well served by assessing the 1994 performance of each stock you are considering consideration as well as those already in your portfolio.

In conclusion, I hope you will now take the time to share how this series and the thoughtful comments of so many readers has helped to shape your thinking about your Distribution Stage investment strategy.

Ultimately, any decisions on how to invest during the distribution stage rest with you the individual investor. I wish each of you a strategy to support a retirement full of wonder and sleep filled nights.

Disclosure: I am long KO, PG, PG, MCD, CVX, SO. 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.