There is an abundance of really amazing contributors here on Seeking Alpha who spend countless hours offering their knowledge to anyone who cares to listen. These contributors write tirelessly about the many advantages of dividend income investing for a more secure financial future and/or retirement.
I proudly count myself among these contributors. I also would like to state emphatically that if an investor is diligent about investing in solid, mega cap, blue chip stocks that regularly pay dividends and usually increase these dividends every year, the path to a secure retirement is virtually guaranteed.
A Bold Statement But Nonetheless...
Look, we all want to create as much wealth as we possibly can. That is why we even bother reading about investing, stocks, and the markets. Having plenty of money for the rest of our lives is a goal I believe everyone wants. By using just 2 strategies, I believe this goal is achievable.
- Keep your expenses below your income, forever.
- Invest in solid, blue chip, mega cap dividend paying stocks.
Of course there are strategies within these, but that really is what all of this boils down to. I offer this chart to support my opinion:
The chart above shows a time tested conservative withdrawal rate of 4% per year. As you can see, $1 million will last roughly 25 years when someone retires in 2013. (Based on a conservative mix of 60/40 stocks and bonds)
Now let's say that you have amassed $1 million, still the standard by which many feel defines "wealth", and you stopped working at age 60. According to this chart, by age 85 you will have exhausted all funds for retirement, and will then have to move in with your 60 year old kids, or begin choosing between prescription drugs or food, for the remainder of your life. I say that tongue in cheek, of course, but for some it is a reality.
A chart like this is used to scare folks into thinking they will never ever have enough. It does not have to happen.
The reason the numbers have come in the way they do in this chart, is because of THIS chart:
The figure being used as a real return is only 1.9% for those retiring in 2013. It is based on current market yields to "estimate" future returns.
If you withdraw 4% per year, and have a return of only 1.9%, you will eat into your nest egg by more than 2% per year which will have a depleting effect on the total value of the portfolio every single year. In other words, all things being equal, you will have less invested to produce the 1.9% return every year.
Now let's look at this chart:
With an estimated annual inflation rate of 2.5%, the investor will lose purchasing power of the nest egg each year. In short, that means the portfolio will decline by 2.5% each year, in addition to the 2.1% decline when withdrawals of 4% are based on a "real return" rate of the 1.9% noted above.
Just think about this; take a few extra bucks (let's assume an extra 3% for argument's sake) out for a few years and you might run out of money by the time you are 75 instead of 85!
Not only are these figures quite absurd, the entire scenario can be avoided just by virtue of the fact that if you are an income seeking, dividend stock investor, the likelihood of outpacing the withdrawal rate of 4% per year just from the average dividend yield over time, will reverse the trend of asset depletion.
The Team Alpha Portfolio Is A Solid Example
The Team Alpha portfolio consists of Ford (NYSE:F), 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 (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Newmont Mining (NYSE:NEM), Intel (NASDAQ:INTC), and Wells Fargo (NYSE:WFC).
The entire portfolio, based on today's dividend yields, is roughly 4.39% based on an equal allocation in each stock:
|Stock||Initial Investment||Total Invested||Yield Now|
At an average yield of 4.39%, this portfolio will produce $43,900 per year just in dividends. More than likely, the core blue chip dividend champion stocks will increase dividends every single year.
While it is true that there are times when dividends are cut or even stopped, it is the exception not the rule, and almost always will affect the dividend "opportunity" stocks like NLY, BKCC, and KFN.
Stocks like XOM, JNJ, PG, KO, O, CVX, and MCD have such stellar track records that an investor for the long term can just about anticipate getting a dividend raise every single year, which will not only further eliminate asset depletion, but might also increase the portfolio value if the withdrawal rate always remains the same.
How Much Is Enough?
There are simply no definitive answers to this question. In the example used above, an income of about $43,000 plus Social Security of about $40,000 for a couple at the age of 66, means an annual income of $83,000 before taxes.
That brings us to strategy number one; keep your expenses less than your income, forever. Based on this income, you can spend $82,999 each year and have $1.00 left over for a bag of pretzels.
If you want more, save more or spend less, forever.
If you have less, then spend less, forever.
Then you will have an idea of how much is enough.
Disclosure: I am long AAPL, BKCC, BMY, CSCO, CSX, CVX, F, GE, INTC, JNJ, KFN, KO, MCD, NEM, NLY, O, T, WFC, XOM. 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.