Retirement Strategy: Dividend Investing And The Accumulation Phase

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 |  Includes: AAPL, CVX, F, GE, JNJ, KO, MCD, MO, MSFT, PFE, PG, T, WMT, XOM
by: Regarded Solutions

Summary

Keeping in mind that new investors are coming to Seeking Alpha every day, a focus on dividend income investing during the accumulation phase is far superior to purchasing annuity products.

Dividend income investing can reduce risks while building an income stream.

It is all about the income when you retire.

Each day that passes, a new investor comes to Seeking Alpha with a desire to become investors during their 'accumulation of assets' phase, and realize they cannot wait until the last minute for a magical, and mythical, secure retirement to happen automatically.

There are folks who will retire at age 65 after saving well for an entire career, and simply go to an insurance company to purchase a lifetime annuity to have a flow of regular income to last a lifetime. This approach will work for some people who choose to hand a chunk of money over to an insurance company, never have access to it again, and have the insurance company send them back their own money plus a sprinkle of interest added on.

  • Annuities can pay a certain amount each and every month for a lifetime, including a spouse or beneficiary, based on an initial purchase amount, and the added features and benefits the annuity buyer will pay for upfront.
  • The companies that offer these products are usually insurance companies and while some are considered "investments" most annuities are insurance products that will cost the buyer money.
  • Most annuities will never allow any access to the money you have paid upfront for the product. Once you pay, the money will belong to the insurance company, which in turn will invest those dollars much like a dividend growth investor quite frankly.
  • An annuity buyer will never "run out of money" but unless the buyer pays more fees, they will not keep up with inflation, and the security of keeping up with expenses is greatly reduced.

The folks who choose the path of dividend growth investing will find that the road towards a more secure financial future will greatly exceed an insurance company annuity product in more ways than higher income. Not only will the DGI investor be the master of his ship and never have to rely on an outside source to manage their money, but they will always have access to their money, never pay the hefty fees that an annuity charges, and can navigate their own holdings on their own terms, with the ability to make adjustments along the way if needed.

  • An individual investor can choose whatever stocks they feel meets their needs.
  • Stocks can be bought and sold easily with 100% access to all of your money.
  • Various strategies can be utilized to enhance the income you receive, such as covered call writing.
  • Additional stock can be purchased to either add to existing positions or to take advantage of a new stock with an income opportunity.
  • Dividends can be reinvested for as long as you desire to exponentially grow your income stream and cash flow for the time you require it.
  • Each year you invest in dividend growth stock, the more income you will have during the distribution phase.

Our new BTDP (Buy The Dips Portfolio) could help these folks actually begin their journey on a dividend growth income strategy, to secure the financial future they seek.

The BTDP consists of the following stocks: AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Altria (NYSE:MO), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL) General Electric (NYSE:GE), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), and Pfizer (NYSE:PFE).

Sound Allocation Of Available Dollars Can Reduce Risks As Much As A Sound Strategy Itself

One of the mistakes that newer or younger investors make is that they just toss a bunch of money at a stock that they "think" or have heard, will become the next magical money maker. As a result, too much of this investor's savings will be over allocated in a few stock picks.

I read with great interest this article recently which gives some support to my thesis. It states quite directly that "most investors do not have a clue":

That give and take - the push and pull of emotions - is inevitable, but a study released today by Natixis Global Asset Management suggests that investors aren't particularly accepting of those compromises, and instead are living in a world of unrealistic expectations and conflicting sentiments, leaving them hoping impractically that events will work out their way because they see no other route to success.....Meanwhile, their behaviors reduce the chance that they get the best possible outcome, often because their actions are based on "gut instinct," which is a good way to develop trust in the moves you are making, but not necessarily the best way to decide which financial steps to take.

The gut reaction to "investing" will probably derail most investors from a strategy that can actually work.

You can take few risks - if that's all you can get comfortable with - provided you save more. You can trust your gut - rather than an adviser - provided you've learned enough to build a plan that not only minimizes indigestion but gives you a realistic chance of reaching your goals.

Hope and necessity won't make your financial dreams come true.

If you are expecting things to work out for you "because that's what has to happen," trade some blind optimism for a dose of realism; the one standing between you and your goals is you.

While there are no limits to successful investing ideas for the future, I have found that by selecting stocks that pay and increase dividends regularly, that we can actually understand the business the companies are in, and continually strive to increase our income from those stocks, has become the most reliable path for many, if not most, newer or younger investors to embrace.

Allocation is a key component of the strategy, because putting too many eggs in one stock, or one sector could have a disastrous effect if that stock or sector goes bad. Based on the stocks selected for our BTDP, here is what I would consider a sound allocation approach for any amount of money, to kick start the journey:

52 wk lo 52 wk hi TGT PRICE Symbol % To Inv.
31.74 37.83 34 T 7%
84.79 103.45 94 XOM 9%
81.71 102.01 92 JNJ 9%
36.83 43.43 40 KO 6%
73.61 85.82 80 PG 6%
21.11 28.09 25 GE 9%
92.22 103.71 98 MCD 6%
109.27 127.83 118 CVX 6%
385.11 604.41 500 AAPL 9%
33.12 38.58 36 MO 6%
12.65 18.02 15 F 7%
28.51 41.66 35 MSFT 7%
71.51 81.37 76 WMT 6%
27.12 32.96 30 PFE 7%
x x x x 100%
Click to enlarge

Notice I have my K.I.S.S. approach as to the price target an investor could focus in on for buying the stock. Simply stated it is midway between the 52 week high and low of each stock. It might not be perfect, but since I was a day trader who used technical analysis to buy and sell stocks every day, I found that a consistent channel of prices occurs with all of the best stocks on Earth, and while TA can help a day trader, it simply is not required for those investors who were buying for the very long term. Buying at my suggested levels will not mean you are getting the lowest price, nor paying the highest price. A fair price to get your dollars working is more important in my opinion.

On the right hand side, I have listed what I consider a sound allocation percentage to be invested in each stock. It is primarily based on the dividends paid and record of dividend increases, as well as current PE levels and payout ratios. These companies are some of the largest blue chip, name brand mega cap stocks in the world, and each has a global impact as well.

Risks can be reduced by having an appropriate strategy combined with a well diversified assortment of stocks, sectors and sound allocation.

Implementing Any Strategy, Discipline, Focus, and A Well Defined Goal Will Keep You Headed In The Right Direction

By choosing the dividend growth investing strategy, it is important to remember what your ultimate goals are. Here are just a handful:

  • It is always about the income and a more secure financial future.
  • Income growth is as important if not more important than overall portfolio value.
  • While total return is important, the price of a mega cap dividend stock, as we have in the BTDP, is secondary and should only be a main factor when buying or selling any security.
  • Knowing how much you will require will enable you to focus on reaching the amount, and to stay the course if you are serious about this type of investing.
  • Always keep your expenses either in line or below your after tax income.

I found this sound Seeking Alpha article to be quite good at showing a chart of how compounding of dividends will continue to grow income over an extended period of time:

These results over a 30 year period of time are based on the author's following assumptions for each stock, with a $10,000 investment:

Initial investment of $10,000

  • Dividend yield of 3.5%
  • Dividend growth rate of 5%
  • Stock price appreciation rate of 5%
  • Full dividend reinvestment at the end of each year
  • Investment of $1,000 in new capital at the end of each year
  • Portfolio held in a Roth IRA, so no taxation of dividends or capital gains

Simple and compelling. The article was written over a year ago, but is still pertinent and accurate. The strategy can be duplicated by building a portfolio of the types of stocks held in the BTDP and by buying the dips to grow income from there.

The Bottom Line

Investing for your future does not need to be rocket science or brain surgery, although at times it sure feels like it. If we keep it simple and do basic research on solid companies, your chance of succeeding and reaching your goals are greatly improved.

For us retired folks, it IS all about the income! Have fun in your journey.

Disclosure: I am long AAPL, CVX, F, GE, JNJ, KO, MCD, MO, MSFT, T, 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.