In this article, I outline a few options that investors could do, as well as what I plan on doing with my portfolio after I am gone.
The question is however what happens if the individual/s who built the portfolio from scratch cannot afford to manage the investments anymore.
Once the dividend machine is set up properly however, and starts throwing off a sufficient stream of income, investors would have to spend less than 10 hours/week on managing investments.
You have spent your whole life accumulating your nest egg. Building a long term dividend portfolio takes a lot of time, effort and a little bit of skill or luck. Once the dividend machine is set up properly however, and starts throwing off a sufficient stream of income, investors would have to spend less than 10 hours/week on managing investments. This is not a huge time commitment, but it provides investors with the ability to make changes if stories do not work out as expected. Investors who looked after their income portfolios in 2007-2009 bear market would have been able to dispose of their securities in a timely manner after they cut or eliminated dividend payments.
The question is however what happens if the individual/s who built the portfolio from scratch cannot afford to manage the investments anymore. This could be due to several reasons including death, incapacitation or other gruesome events. As dividend investors, we tend to focus on selecting companies that would generate income for decades, but do not spend a lot of effort on who would be the next one in the family to maintain and manage the portfolio. Selecting a beneficiary for your online brokerage accounts is just a small step in the process. Writing a will which lists all online accounts is another small step that should be done, in order to avoid having inheritors scramble to locate assets after an unfortunate event.
These unfortunately still do not answer the question of whom and how the income portfolio would be managed. There are several potential options, each coming with its own set of risks.
-The first is to just hold on stocks, don't do anything, except for maybe sell after dividend cuts. I have noticed that many companies tend to raise dividends for long periods of time, and then freeze them, only to continue raising them again. Kellogg (NYSE:K) is a prime example of this, as it ended a four decade streak of annual dividend raises in 2000, only to start boosting distributions again nine years ago. Hershey (NYSE:HSY) and General Mills (NYSE:GIS) are another example that holding on to companies that leave dividends unchanged in a few years is not a signal to sell. One piece of research I find particularly telling is the work that Jeremy Siegel has done on the performance of the original S&P 500 companies in 1957. He found that a portfolio of these companies, where investors did absolutely nothing, except for reinvest dividends and reinvest cash proceeds from acquisitions in the portfolios, would slightly outperform over the next 50 years.
- The second thing to do is to educate family/close ones, in order to ensure they can manage investments without a considerable input from outside help. The goal is to make family members motivated enough so that they can manage money and are interested in making it last for several generations. If family members are not motivated, chances are the amounts of money will be spent quickly, leaving little behind in a few short years after the original accumulator is no longer in charge. As a result, creating a trust fund where only the income could be spent might be the best solution. This would require some help from an attorney, in order to set up the trust properly, and outline bylaws and trustee responsibilities.
- The third option is to hire someone to manage investments and focus on implementing your strategy. This could cost a lot, particularly if the wrong type of an advisor is selected. In addition, there has to be a process for selecting advisers in the future, since many would end up retiring on their own. You also need to decide how to avoid the future Madoffs of the world.
- There is a fourth option, where one could simply place the money in mutual funds, and probably be just fine with that. However, going back to step two, if the beneficiaries are not properly trained to think about money, they can blow through the funds in no time. Alternatively, someone who has a large nest inherited nest egg and doesn't know a lot about investments can panic during the next bear market and sell. Thus the beneficiary could potentially undo decades worth of patient compounding by the original capital accumulator.
Overall, I believe that a relatively well diversified portfolio, consisting of several stocks from each sector should do well over time, even if managed passively. I believe in the living off dividends method, since this is a sustainable way to ensure that a nest egg can produce income to live off for decades. This is what has ensured success for charitable organizations and trust funds for decades. Examples of companies to include per each sector includes:
|Sector||Name||Ticker||Yrs increase||10 yr DG||Fwd P/E||Yield|
|Information Technology||IBM||(NYSE:IBM)||19||19.40%||10.21||2.40%||Analysis of IBM|
|Financials||Aflac||(NYSE:AFL)||31||16.80%||9.95||2.40%||Analysis of AFL|
|Energy||Chevron||(NYSE:CVX)||27||10.55%||11.86||3.50%||Analysis of CVX|
|Healthcare||Johnson & Johnson||(NYSE:JNJ)||52||10.84%||17.44||2.70%||Analysis of JNJ|
|Consumer Staples||Procter & Gamble||(NYSE:PG)||58||10.59%||18.96||3.20%||Analysis of PG|
|Consumer Discretionary||McDonald's||(NYSE:MCD)||38||22.80%||17.48||3.20%||Analysis of MCD|
|Real Estate||Realty Income||(NYSE:O)||20||5.99%||N/A||5.10%||Analysis of O|
|Telecommunications||AT&T||(NYSE:T)||30||4.88%||13.17||5.30%||Analysis of T|
|Industrials||United Tech||(NYSE:UTX)||20||14.48%||17.05||2.00%||Analysis of UTX|
For my money, I plan on placing them in trusts that would distribute dividends only to beneficiaries for decades to come. The only decisions that would be done by a trustee would be about selling companies that cut or eliminated dividends, or distribute proceeds from companies that are acquired for cash by someone else.
What are you doing to ensure longevity of your nest egg, beyond your own generation?
Disclosure: The author is long K, IBM, AFL, CVX, JNJ, PG, MCD, O, UTX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article. I have sold HSY puts