The purpose of this article is to be accountable going forward. I want to demonstrate how my retirement portfolio will increase the current income over the next four and a half years. At that point my goal is to collect enough dividend payments to meet our living expenses. The non retirement portfolio (taxable account) is listed below for completeness; however, I will not be tracking its performance.
My entire retirement portfolio is listed below with my allocations. I will not disclose the actual value of my retirement portfolio. It is not needed to track results. I am going to use $1M for simplicity sake to represent my retirement portfolio in order to track future results.
My main objective here is to be transparent from July 22, 2014, going forward. I will update my readers with any changes to my portfolio when appropriate. I will report the current dividend income and show how the reinvested shares increase from quarter to quarter, thereby increasing the income.
Retirement portfolio as of July 22, 2014 close: I list the percentage allocation, dollar amount, share count, closing price, annual dividend and the income.
American Capital Agency (NASDAQ:AGNC) = 40.3% = $403,000 = 17,230 shares, price = $23.39 the current annual dividend= $2.60= Income= $44,798
Altria Group (NYSE:MO) = 38.3% = $383,000 = 9,134 shares, price = $41.93 the current annual dividend= $1.92= Income= $17,537
Prospect Capital (NASDAQ:PSEC) = 21.4% = $214,000=19,705 shares, price = $10.86 the current annual dividend= $1.325 = Income=$26,109
Total value of the portfolio = $1M Total Income =$88,444 = a yield of 8.8%
My plan is to keep reinvesting all dividends paid back into the three stocks above that comprise my retirement portfolio for at least the next 4 1/2 years. I am 55 and will be 59 1/2 at that time. My wife and I will live off of our taxable account for the next 4 1/2 years, selling KMR shares when needed. This will diminish the taxable account. KMR pays a stock dividend that is not taxed. The only tax consequences of KMR are incurred when one sells shares. Gains are treated as capital gains tax. Since I have sizable past carry forward losses ( from trading internet stocks in 1998-2000 and other trading) they will offset any capital gains from KMR for quite some time. Therefore my taxable account is a non taxable account until my past carry forward losses are used up at which point I would of course owe capital gains tax on any subsequent gains.
So, I would love to not deplete our taxable account. However, I think the best strategy is to leave the retirement accounts alone and reinvest the dividends until I am at least 59 1/2. Our Roth IRA comprises about 73% of our retirement portfolio, the other 27% is a SEP IRA. I could take enough in ROTH distributions from dividend payments to meet a significant portion of our living expenses at the current time, however my wife does not think that is a good idea. I agree with her.
My Taxable Account is:
Kinder Morgan (NYSE:KMR) = 100%
Allocation when combining Retirement Accounts + Taxable Account:
AGNC = 29% rounded
KMR = 29% rounded
MO = 27% rounded
PSEC = 15% rounded
Total Yield = 8.5%
My Investing History:
I have been investing in the stock market since 1992. Initially, I bought three mutual funds in my Retirement accounts, that were recommended by my close friend who worked in the financial industry. I bought them by myself and he received no fees. I bought a Total stock market index fund ( tracked the Wilshire 5000), a small cap fund and an International Fund. Seventy percent was allocated to the Total Stock Market Fund. I continued to add to these funds till 2008. In 1996 I started to day trade in a brokerage account, then in my Retirement accounts with new contributions. At first I did extremely well. I eventually lost a substantial amount of money in my taxable brokerage account trading internet stocks. Fortunately, I did not suffer losses in my Retirement accounts. I was more cautious in my Retirement accounts. From 2003-2008, I did not trade, I just kept adding to the three mutual funds. A bull market did wonders for my Retirement accounts.
Then in January 2008, I got a feeling (that's right a feeling) in my bones that the market was going to crash. What did I do? I sold all my mutual funds in my Retirement accounts and went to 100% cash in January 2008. That lasted for a few days, and I started to trade once again. I read every book I could get my hands on about trading. I was doing well and then I went to 100% cash again in July 2008. I could not resist trading again and decided to put 80% of my money into FCX (buying in many lots as the price cratered) and about 20% into AAPL. I got caught as the market crashed. I had unrealized losses of about 75%. I was devastated. Luckily, I had explained to my wife before the crash, that most people would panic out of markets at the worst time, near a bottom. I was about to become a victim and sell at the bottom. My wife insisted that I hold and forget about the market. I listened and became a workaholic. I earned a good income; I was self-employed.
Shortly after my accounts had unrealized losses of 75%, my brokerage firm, Charles Schwab, assigned an advisor to my account. I will never forget the phone call I received from this advisor. I even remember where I was at the time (in a convenience store across from my office at the time). He introduced himself and then he said, do you realize that you are over concentrated? My jaw dropped and I said, now you are calling me, where were you before the crash? I was angry and blurted out the words loud and clear "do not ever call me again," I then hung up the phone. I could not help wonder where was this guy before the 75% drop in my portfolio. Not that I would have listened, but at least I would have considered him credible.
In late 2009, all my Retirement accounts were back to even and I sold all my Freeport-McMoRan (NYSE:FCX) and Apple (NASDAQ:AAPL). I traded in 2010 and had a very good year. In 2011, I bought a 3X short Russell 2000 ETF (in many lots), I was convinced the Russell would have a large correction. I was right, but I was too early. I lost about 60% of my 2010 trading gains. My wife convinced me to quit trading, the stress was too much.
My transition from a trader to a dividend stock investor:
Making the transition from trader to dividend stock investor was not easy. I was 52 years of age. I knew that I needed a plan that would enable us to retire with enough money to last us the rest of our lives. The mainstream media and financial advisors offered MPT (modern portfolio theory). They wanted us to withdraw 4% per year by selling shares. That did not make sense to me. I knew there had to be a better way. I did not understand annuities and did not trust the sales people. I thought about bonds and then dividend stocks. Dividend stocks made sense to me. The entire concept excited me. Living off of dividends and maintaining my share count. Possibly, living off of a portion of our dividends an reinvesting the dividends not needed and growing the share count and income. I loved the idea.
In May of 2011, I started reading books on investing in dividend stocks. I did internet searches and found Seeking Alpha. My life changed when I started reading the knowledgeable Authors' articles here at Seeking Alpha. They wrote about their real life experiences investing in dividend stocks and their successful results.
I have a strategy in place that is currently delivering an 8.8% yield in my retirement portfolio. I am going to reinvest all the dividends for at least the next 4 1/2 years. My wife and I will meet our expenses by selling shares of KMR from our taxable account. There will be no taxes until my past carry forward losses are used up. At that point in time I will owe capital gains tax on any gains. At the current dividend income level, we can sustain a 30% drop in the income and still maintain our lifestyle today. However, I am expecting our income to increase at least 50% over the next 4 1/2 years.
MO is the bedrock of my portfolio. My plan is to keep reinvesting the dividends in MO for at least 15 more years. I do not plan on selling a single share of MO for at least 15 years unless they cut their dividend. If that occurred, I would rethink my plan for MO. AGNC will be managed based on my prior article: "The Mindset Needed To Be A Successful American Capital Agency Investor." I will be coming out with a more detailed article on how I plan to manage AGNC in the future. I will manage PSEC with the help of Scott Kennedy's exemplary articles. Here is a link to Scott Kennedy's latest article on PSEC: "Prospect Capital Corp.'s Dividend And Net Asset Value Sustainability Analysis (Post Fiscal Q3 2014 Earnings) - Part 2." As far as KMR, we will be selling shares to meet our living expenses over the next 4 1/2 years. If KMR did not raise their distribution, I would consider selling the position.
My goal is to collect enough dividends from AGNC and PSEC at age 59 1/2 to meet our expenses. I believe the dividends from those two stocks will exceed our expenses by 40-50% by 2019.
I welcome all comments, questions, criticism and positive feedback.
Disclosure: The author is long MO, AGNC, KMR, PSEC. 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: Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.