Team Alpha Retirement Portfolio: Is There Finally Some Value In Annuities?

by: Regarded Solutions

I realize that I have written some scathing articles in the past, denouncing virtually all annuities as just money makers for those entities that sell them. My initial article can be read here, and is worthy of a few moments of your time.

Since the article itself received close to 25,000 "reads", and was only my 9th article ever written here on Seeking Alpha, it became quite a lightening rod for comments (nearly 250), both pro and con. Suffice it to say I probably did not endear myself to many folks who actually sell these products. Of course two years have gone by and I am taking another look at this retirement "vehicle", not to replace, but to add to our outstanding Team Alpha Retirement Portfolio.

Currently, the Team Alpha Retirement Portfolio consists of Apple (NASDAQ:AAPL), AT&T (NYSE:T) BlackRock Kelso Capital (NASDAQ:BKCC), Cisco (NASDAQ:CSCO), CSX Corp. (NYSE:CSX), Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Ford (NYSE:F), General Electric (NYSE:GE), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Mid-America Apartments (NYSE:MAA), McDonald's (NYSE:MCD), Newmont Mining (NYSE:NEM), Procter & Gamble (NYSE:PG), Realty Income (NYSE:O), and Wells Fargo (NYSE:WFC).

Dividend Income Investing Is Still Superior

Let's be candid, I still believe that an investor with basic skills can do better than plunking down a large chunk of money for an annuity that charges hefty fees, as well as returns more of your own money than money that is earned from dividends.

Take a look at what this portfolio has achieved as of the most recent update:

Stock #Shares 9/27/2013 TotValue Orig. Price
XOM 100 87/shr 8700 75
JNJ 105 87/shr 9135 63
T 400 34/shr 13600 28
GE 500 24/shr 12000 15
BKCC 500 10/shr 5000 10
AAPL 20 483/shr 9660 436
PG 100 77/shr 7700 61
KO 100 38/shr 3800 34
NEM 200 28/shr 5600 33
WFC 200 42/shr 8400 40
O 240 41/shr 9840 34
CSCO 400 24/shr 9600 18
CVX 55 123/shr 6795 116
MCD 100 97/shr 9700 86
CSX 200 26/shr 5200 19
F 300 17/shr 5100 13
INTC 200 23/shr 4600 24
Cash Rsvs x x 7791
Tot Value x x 142221
Click to enlarge

*MAA was purchased after this update.

Aside from having more than a 42% increase in overall portfolio value in 2 years, it also produces an annual income of over $6,700 from $134,000 invested. That is a yield on cost of 5% on dollars invested, and I am sorry annuity folks, you simply cannot compete.

In fact, the average earnings of a plain vanilla annuity is a tad more than 1%. No matter what anyone tells you, an annuity cannot match the returns of dividend income investing. (Yes, I am aware of the "rate of return" between 6-8%, but that is mainly your own money given back to you)

I am also fully aware of the various annuity options that could generate more actual income than the current fixed annuity options; variable annuities, and deferred annuities being the most popular. However, even those options are both more costly to eventually roll over into a fixed annuity, and will probably pay actual earnings of much less than the 5% earned through dividend investing.

Of course, now comes my epiphany!

Annuities DO Help Many Investors

First of all, let me say that in dealing with my own mothers portfolio, and her recent move into an assisted living facility, I myself want to make certain that a solid percentage of her expenses are covered, without my having to worry about what would happen if I were to pre-decease her or something of that nature. She is 85 now and I seem to be catching up rather quickly!

After looking into all sorts of annuities for HER, not me, I found that one of the best products for her needs is a fixed annuity for a set period of time (for example 10-15 years) that will pay the beneficiaries either a certain percentage upon her passing, or whatever is left over that has not been depleted.

Of course, if she lives to 100, well, I hope to be around to see that, but I am also not talking about putting all of her money into this type of annuity. I am going to place enough money in the product so that her account can receive enough money to pay her essential bills, whether I am around or not.

The products I have been researching can be found at this link.

By purchasing just enough to cover her expenses with her pension, and her Social Security, and this "Immediate Fixed Annuity", which is less than half her portfolio value, I can rest easy knowing that even with my own mortality, my mother will be adequately taken care of, with plenty left over for me to keep in her dividend income portfolio.

The value that I see is that of some specific needs that investors might face as we age. There IS a value for the premium paid for that service and product.

By looking at these products from my new found perspective, I concede to everyone who might fall into the same financial situation as me, or even something similar, annuities DO have a place in some retired investors portfolio.

Do Not Mistake An Annuity With Investing

I would like to make something clear. While I do see the value of certain annuities for some situations (such as mine) I would never call it an "investment". Yes, it is an "investment" in peace of mind, but that is about it.

I would much prefer buying shares RIGHT now in GE, JNJ, XOM, CVX, O, KO, MCD, T, and CSX. I believe all of them will continue to increase dividends and the share prices of each are fair enough to add right now.

For myself, I am not yet ready for any annuity, but my Mom most definitely is.

Disclaimer: The opinions of this author is not a recommendation to either buy or sell any security or retirement product. Please do your own research prior to making any financial decisions

Disclosure: I am long AAPL, BKCC, CSCO, CSX, CVX, F, GE, JNJ, KO, MAA, MCD, NEM, 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.