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Summary

  • For five years, the U.S. economy has been expanding steadily, yet polling shows most Americans still think the economy is pretty miserable.
  • The stock market soared from the March 9, 2009 low of 666 on the S&P 500 index to over 2000 today. Most families didn't participate.
  • Families' income is lower now, when adjusted for inflation, than when the recovery began five years ago.
  • Buying supplemental income through dividend growth investing can close the gap.
  • Many workers have no, or inferior retirement plans at work.

For five years, the U.S. economy has been expanding at a steady clip. The stock market soared from the March 9, 2009 low of 666 on the S&P 500 index to over 2000 today, resulting in tripling of the index. Headlines are filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.

S&P 500 rose from 3/9/09 low to today's record close

(click to enlarge)

Chart courtesy of Google Finance

What may account for this paradox? New data from a noted research firm offers a simple but frustrating answer: Middle-class American families' income is lower now, when adjusted for inflation, than when the recovery began five years ago.

As discussed in a New York Times article on August 20, 2014,

"Sentier Research, a firm led by former census officials, used census data to tabulate an estimate of the median household income - how much is earned by families at the exact middle of the nation's income distribution. In June 2014, it found in a report issued Wednesday, the median household income was $53,891, down from $55,589 in inflation-adjusted dollars when the economic expansion began in June 2009."

In this light, the economic paradox resolves itself. "Purchasing power of the typical American family is 3.1 percent lower now than it was five years ago. It is no wonder that people are unhappy about the economy. The benefits of rising levels of economic activity have simply not been enjoyed by middle-income wage earners. Their wages remain below the level of mid-2009, when the recovery officially began."

US Median Household Income, inflation adjusted

(click to enlarge)

Chart courtesy of Wikipedia.org

Can We Ever a Get Off This Treadmill?

America, over the last thirty or so years, has transitioned its retirement system from a defined benefit model, to a defined contribution model. That is, most employers no longer guarantee a set payout for employees once they retire, (defined benefit) based on salary history and years of service.

Some employees work in jobs that offer no pension benefits whatsoever. Some are self-employed. They are totally on their own.

Today, if the employee is lucky, his employer offers him the opportunity to put aside part of his own salary (defined contribution) into a 401(k) plan. If he is super-lucky, the employer might match and contribute a set percentage of his salary into the plan.

If he's fortunate, the mutual fund(s) he chooses in the plan will do well and provide a decent return for retirement some day. At the same time, the employee is daily losing some of his contributions and accumulated capital and growth to mutual fund management fees, on the order of 1% to 2% or more, annually, in actively managed funds. And the long-term record of these funds is not pretty; the great majority do not even beat their own benchmarks.

Having to contend with these fees, (see my article dealing with management fees) inflation, and the ongoing loss of purchasing power due to a lack of salary raises that fail to keep up with inflation, what's a middle class investor to do?

There is a Way out of This Mess

The middle income family can overcome all of these headwinds they face by creating their own supplemental, spendable income from dividend growth investing.

In order to strike back at constant deterioration in their buying power, an investor can commit early, the sooner the better, to "buying income" for himself and his family.

Buy Income-Whip Inflation Now

If the middle-income family is willing to live below its means it could spend less than it earns. Instead of buying that new car this year, or that piece of jewelry, divert those funds to a steady investment into dividend growth stocks that will give you that raise each year that you're not getting at work. Buy income and supplement your salary. Give yourself a raise!

Shopping for Dividend Income

Many investors begin looking for the best "sales" for income on the shopping list of fellow Seeking Alpha contributor David Fish's CCC lists.

These lists present the shopper (investor) with delectable goodies, those companies that have paid steady, increasing dividends (income) for 5-9 years, 10-24 years and 25 years or more.

The middle-income investor can use these lists to begin his search for suitable candidates that will provide the extra, supplemental annual income that he seeks.

Let's assume an annual investment of $5000 yielding 7.41%, and a 5% annual growth in the dividend payments. With a mix of lower yielding, high dividend growth stocks combined with high-yielding, lower dividend growth names, here is what a middle-income investor might experience in the annual growth of his income over 20 years.

I've included real estate investment trust Realty Income (NYSE:O) which pays monthly dividends providing frequent cash flow, business development companies Triangle Capital (NYSE:TCAP) and Main Street Capital Corp. (NYSE:MAIN), tobacco companies Altria Group (NYSE:MO) and Vector Group (NYSE:VGR), telecommunication companies AT&T (NYSE:T) and Windstream Corp. (NASDAQ:WIN), and three master limited partnerships; BreitBurn Energy (NASDAQ:BBEP), StoneMor Partners (NYSE:STON) in the death care industry and Calumet Specialty Products (NASDAQ:CLMT), in the specialty oils and lubricants business.

Name

Ticker

Annual

Annual

Initial

Initial $

Dividend $

Yield %

Investment

Income

Realty Income

O

$2.19

5.10%

$500.00

$25.50

Triangle Capital Corp.

TCAP

$2.36

8.70%

$500.00

$43.50

BreitBurn Energy

BBEP

$2.01

9.40%

$500.00

$47.00

Altria

MO

$1.92

4.70%

$500.00

$23.50

Vector Group

VGR

$1.60

7.70%

$500.00

$38.50

Calumet Specialty Products.

CLMT

$2.74

8.70%

$500.00

$43.50

AT&T

T

$1.84

5.20%

$500.00

$26.00

Windstream

WIN

$1.00

8.70%

$500.00

$43.50

StoneMor Partners

STON

$2.44

9.50%

$500.00

$47.50

Main Street Capital

MAIN

$1.98

6.40%

$500.00

$32.00

Average

Total 1st year

Total 1st year

Yield %

Investment

$ Income

7.41%

$5,000.00

$370.50

Growth of Supplemental Income at a 7.41% yield, increasing by 5% per year

7.41% dividend yield

Year #

Cumulative Running

With Average 5% div.

Total Investment

growth + $5000 added, p/year

1

$5,000.00

$370.50

2

$10,000.00

$778.05

3

$15,000.00

$1,225.43

4

$20,000.00

$1,715.60

5

$25,000.00

$2,251.73

6

$30,000.00

$2,837.17

7

$35,000.00

$3,475.54

8

$40,000.00

$4,170.65

9

$45,000.00

$4,926.58

10

$50,000.00

$5,747.67

11

$55,000.00

$6,638.56

12

$60,000.00

$7,604.17

13

$65,000.00

$8,649.74

14

$70,000.00

$9,780.86

15

$75,000.00

$11,003.47

16

$80,000.00

$12,323.89

17

$85,000.00

$13,748.84

18

$90,000.00

$15,285.47

19

$95,000.00

$16,941.40

20

$100,000.00

$18,724.70

At the end of the first year, this investor will notice a $370.50 increase in his pay, compared to not having made any investment at all.

After the second year, the investor has received a total of $778.05 ($10,000 X .0741=$741+$37.05 (5% increased dividend payout on the first year's investment).

Already, after just 2 years, our middle-income family has given itself a raise of $778.05.

As the years progress, the $5000 investments continue. The companies keep giving average 5% pay raises to these stockholders and the dollar raises become significantly larger and larger.

By the end of the 20th year, what began as a $5000 investment, throwing off $370 in additional supplemental income, has grown to $100,000 and produces $18,724.70 extra annual income for this family.

Competing income-buying opportunities today yield paltry income on $5000.00

% Yield

Annual Income

Money Market Fund

0.05%

$2.50

10-year Treasury

2.39%

$119.50

5-year CD

1.00%

$50.00

Courtesy Bankrate.com

None of these alternative, common savings vehicles will provide the middle-income family with the income they need to supplement their income and increase buying power. None will overcome the pernicious effects of 2% or greater inflation and the tax bill incurred on this interest.

Shopping for income bears some resemblance to shopping for most other things in our lives. The shopper is interested in getting the most value for her money. In the marketplace of stocks, the investor seeks stocks that present good value, or stocks that are on sale. You can read about some methods I employ to buy stocks on sale and enhance returns here.

  • If you pay $100 for a share of XYZ stock that pays a $5.00 dividend, your yield on this investment will be 5%.
  • If you can buy a share of the same company's stock, on sale, for say $50.00 (like a 50% sale at Macy's), your yield rises to 10%.
  • $5 dividend/$50 share price= 10% yield
  • This means, in a large market correction or collapse such as we experienced just 5 1/2 years ago, you could buy 2 shares of XYZ at $50.00, instead of at the previous price of $100.00.
  • Now, you have bought $10 of income on the same $100 investment, giving you a current yield of 10%.

Buying income on sale, due to temporary negative news impacts, secondary offerings that dilute current stockholders and general market panics can enhance the middle-income family's income.

Conclusion

Buying supplemental income via investing in dividend growth stocks can help middle-income families deal with the effects and negative consequences of not receiving raises at work, not receiving wage increases that keep pace with inflation, and no longer receiving retirement security from their employers.

Of course, this same method of dividend growth investing can be applied towards constructing your own retirement plan. Invest in a tax advantaged IRA or Roth account. If started early in life, reinvesting dividends, instead of spending them, will create huge increases in capital, share count and annual income when retirement arrives. This supplemental income can mean the difference between a meager, hand to mouth existence and a comfortable, enjoyable, financially independent retirement.

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Source: Is The Middle Class On A Sinking Ship? No Economic Good Times For Them Or Their Retirement