Forget About SWANs, Fish And Chowder: Chase Yield In Retirement

by: David Stein


The best dividend growth comes from reinvesting high current yielders.

In retirement you spend dollars, not percentage increases.

A 2% champion will never catch up to an 8% current yield.

Diversification is a must. Take advantage of MLPs, BDCs, REITs and preferred shares.

Keep a cushion as cash and remember Uncle Sam's great annuity.

There have been many articles and theories in Seeking Alpha that tout Dividend Growth as the way to go in retirement. This article is intended as a contrarian view that should be considered especially if your time horizon to retirement is 15 years or less and you will not be receiving a pension.

The flaw in many of these theories and 'screens' that people run is that they have been written during the past 5 years of unprecedented stock price and dividend percentage increases. We cannot depend on this to continue forever. So here are my recommendations for success if you ever hope to live off the income from your portfolio.

Forget chowder rules and SWANs, and Champions. Build your portfolio with current high yielders. The best dividend growth comes from reinvesting the most money! I know the rule of 72 says that a 2% dividend that increases by 10% a year will equal a current 8% yield after 15 years. The truth is that it will never catch up! Let me repeat that. It will never catch up. Even if you assume that the company will maintain that 10% annual increase, all that means is that the YOC of you original investment will be 8%. But for 15 years, every year, the 8% yield means you are reinvesting more every year, starting with 4 times more money in year one!. And sure the price will probably increase over time, but if you are not selling, all that means is that your dividends will be buying fewer shares due to the rise in price. So when you retire and want to spend, remember you want the portfolio that gives off more dollars, not higher percentage increases.

You can easily build a portfolio yielding 6%-7% by taking advantage of the investments available to all investors. Investment grade preferred stock, MLPs, BDCs, REITs are a must for you to succeed. So mix those with 'traditional' stocks.

If you are worried about safety, don't forget Uncle Sam's great tax advantaged Annuity. It is called Social Security. If a couple were to get $50,000 annually that is the equivalent to having an immediate annuity of $700,000 that pays you 7% per year.

If a person is not getting a pension or working there is a good chance that you will be in the 15% tax bracket. What that means is that the qualified dividends in your taxable accounts will not be subject to income tax. Keep the REITs and BDCs in your IRA. Tax planning is a must if that is your situation.

Finally, if you are retiring in a year or two take advantage of the current market to take some profits. This is not 'market timing,' just common sense. Sell enough to equal 2 years worth of dividends if possible.

CONCLUSION: There are better alternatives to investing in companies that pay 2%-4% dividends. Everyone's risk tolerance and financial position is unique. So you must decide if this will work for you.

ABOUT THE AUTHOR: I manage my own portfolio and have done so for over 40 years. I will be retiring in a few months and living off Social Security and the income from my portfolio. I do not have a newsletter to sell, just like a lively discussion.

Disclosure: The author is long PNNT, CODI, LNCO, KMP, O, MCC, ARLP, NGG, AINV, NYCB, MO, OHI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Also preferred stock like PSB-PU, PSA-PR, BBT-PG, NNN-PE, RAS-PB.