Team Alpha Portfolio: The World Is Fraught With Risk, So Is Dividend Investing

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 |  Includes: JNJ, KO, NLY, XOM
by: Regarded Solutions

It amazes me how often I receive comments about how dividend investing has all sorts of ominous risks. So ominous in fact, that investors should be leery of the entire strategy!

Last week I wrote this article, updating the performance of the Team Alpha Retirement Portfolio. The portfolio has obviously failed miserably since it has returned "only" 45.63% over the last 21 months or so, while the S&P 500 destroyed the portfolio by about 3.5% including dividends! I suppose that any investor who fails as miserably as that should be taken for a flogging, to whip some sense into them.

Not only did I have to read comments such as this:

You're losing to the SP 500. How can you be sure that "Team Alpha" is useful at all?

I also slogged my way through some articles written by a few "pro's" who feel that too many folks might be jumping on the band wagon, and that alone will destroy the dividend investing strategy. Of special note was this well written piece which stated that many dividend income investors have a "religious sort of devotion" to this investment strategy.

The author went on to say; "a lot of the commenters display some very textbook cognitive deficits and do so repeatedly". While I am not quite sure what the writer meant, it sounds to me as if not only DGI authors are a bit "off", so to speak, in the ability to understand simple matters, but so are readers/commenters of Seeking Alpha.

Are you kidding me?

What Dividend Investing For, And During Retirement, All Boils Down To

Just to quickly glance at some basics; the Team Alpha Retirement 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 Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NASDAQ: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), Wells Fargo (NYSE:WFC), and Intel (NASDAQ:INTC).

Last month we had some solid gains, and the most important component of dividend investing is the INCOME. For us cognitive deficient who follow this approach, here is what the actual numbers looked like as of 8/1/2013:

Stock #Shares 8/1/2013 TotValue Orig. Price
XOM 100 93/shr 9300 75
JNJ 100 94/shr 9400 62
T 100 36/shr 3600 27
GE 500 24/shr 12000 15
BKCC 600 10/shr 6000 10
AAPL 20 456/shr 9012 436
PG 100 81/shr 8100 61
KO 100 40/shr 4000 34
NEM 200 29/shr 5800 33
WFC 100 44/shr 4400 37
O 200 43/shr 8600 32
KFN 600 11/shr 6600 10
NLY 400 12/shr 4800 13
CSCO 400 26/shr 10400 18
CVX 50 126/shr 6300 116
BMY 100 44/shr 4400 32
MCD 100 99/shr 9900 86
CSX 200 25/shr 5000 19
F 300 17/shr 5100 13
INTC 200 23/shr 4600 24
Cash Rsvs x x 8317
Tot Value x x 145629
Click to enlarge

To make it even easier for the author noted above, the amount of dollars invested, with a 5% yield on cost, is currently about $137,000. Income generated per year is at about $6,500.

It does not matter if the market goes up or down, the $6,500 per year will keep coming in, unless one of two events occur.

  • The dividends get cut or are eliminated completely, which would reduce or stop our stream of income.
  • The dividends get raised, which would increase our stream of income.

That's about it folks. Quite frankly, it does not require a brain surgeon to grasp this concept, does it?

No Investment Is Risk Free

This should come as no surprise to anyone reading this article. If it does, then you should not invest on your own, ever. Please, pay someone like the writer of the above noted article, the 1-2% to invest for you. He has operators standing by to take your call 24 hours per day, 7 days a week. Maybe if you mention this article, you can get a discount. That being said, some risks are less obvious than others with dividend income investing, so let's run down a few, just as examples.

  • Unforeseen and unplanned for events might necessitate the need to sell shares of stock in the portfolio. This will impact the income stream.
  • Hyper inflation takes hold and the dividend stream is less able to keep up. This will reduce the purchasing power of our income.
  • The Government decides to raise all taxes on all forms of dividends. This action will also erode the value of our income stream.
  • The dividend champion stocks either reduce the percentage of increases per year or just stop the dividends completely. This would be terrible when combined with increased taxes and hyper inflation.

I could list more risks, but I believe you get the picture. If any or all of these events occur, investing for growth would seem to be the more viable strategy. Of course this income portfolio did grow by 45%, so, what am I missing?

Yes, XOM could stop finding oil and go bankrupt. JNJ could decide it wanted to stop selling healthcare products and begin development of the next space shuttle, and KO could discontinue Coke.

Life itself is fraught with risks, and dividend income investing has its share for us to navigate.

I look forward to the "religious" zealots commenting so that our "cognitive challenged" readers can understand these concepts even more easily.

Some Basics To Help Reduce Risks

It is my opinion that in the uncertain times we are in right now, we should have enough LIQUID funds available to us to pay our BASIC needs and requirements for 5 years. Tuck it away in an FDIC account or several, so that it is there for you to pay for your BASIC needs. DO NOT TOUCH THAT MONEY.

Here are the basics that should be covered:

  1. Food
  2. Shelter
  3. Health related expenses (insurance)

Yes I know I have left a ton of expenses out, but these are the basic, cannot LIVE without ones, that I am suggesting you have a 5 year reserve account for.

Once you have that 5 year amount set aside, move on to other things, like reviewing your situation at least once a year, evaluating it, adjusting it as required, and of course, keeping an eye on INVESTMENTS.

For the sake of this article I have selected 3 scenarios that most people will be able to relate to, either closely, spot on or not at all, but will "get the picture". Then we can take each scenario and evaluate how much money will actually be needed to spend and invest, after basic needs are covered, for at least 5 years.

I have created a married couple, ages 66 and 65, both eligible for Social Security and Medicare, no company pensions, and with a modest portfolio. This married couple will fall into each scenario, and if they differ from YOU in any way, remember that this is just to be used as a guide. Some folks might be better off, and some might not be.

Scenario #1

Family Yearly Income at Retirement: $50,000

  • Savings: $100,000
  • Yearly Food Expenses: $6,000
  • Yearly Shelter Expenses: $12,000
  • Yearly Health Expenses: $12,000
  • Basic Needs Expenses: $30,000/per year

Yearly Income For Retirement: $19,500

  1. Social Security For Person 1: $13,000
  2. Social Security For person 2: $6,500
  • Total Reserve Required Per Year: $10,500
  • Total Reserve Required For 5 Years: $52,500
  • Balance Remaining From Savings: $47,500

Scenario #2

Family Yearly Income at Retirement: $100,000

  • Savings: $250,000
  • Yearly Food Expenses: $7,200
  • Yearly Shelter Expenses: $20,000
  • Yearly Health Expenses: $15,000
  • Basic Needs Expenses: $42,200/per year

Yearly Income For Retirement: $27,000

  1. Social Security For Person 1: $18,000
  2. Social Security For Person 2: $9,000
  • Total Reserve Required Per Year: $15,200
  • Total Reserve Required For 5 Years: $76,000
  • Balance Remaining From Savings: $184,000

Scenario #3

Family Income at Retirement: $150,000+

  • Savings: $500,000
  • Yearly Food Expenses: $10,000
  • Yearly Shelter Expenses: $25,000
  • Yearly Health Expenses: $20,000
  • Basic Needs Expenses: $55,000/per year

Yearly Income For Retirement: $36,000

  1. Social Security For Person 1: $24,000
  2. Social Security For Person 2: $12,000
  • Total Reserve Required Per Year: $19,000
  • Total Reserve Required For 5 Years: $95,000
  • Balance Remaining From Savings: $405,000

Now that we have our scenarios, please remember that all individual numbers will vary according to the uniqueness of the individuals. These numbers should only be used as broad guidelines.

I firmly believe that by being prudent and disciplined in your income investment strategy, anyone can develop the ability to deploy the balance of remaining funds into a solid income producing portfolio, like Team Alpha.

The income derived is very real, and very spendable.

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.