Many people have worked their entire lives and now are approaching retirement. Have they saved up an adequate nest egg? If not, it is never too late to start. The first step is to analyze your situation. How much have you saved? How much will your Social Security and pension pay? How long until you will be retired? What are your expenses, now and with belt tightening? How much do you need to supplement your Social Security plus pension? After answering these questions, one alternative is to buy dividend growth stocks to supplement your income.
If you are ready to buy stocks, what is a simple way to get started? I started buying them when I was 10 years old with my newspaper route money. I bought larger positions during my working years, but my main retirement savings were invested in my company's 401k plan, which I rolled over to an IRA in 2000, when my company retired me. By selecting dividend growth stocks in all 10 market sectors, using the best of breed in each sector, a diversified portfolio can be assembled. What I did was haphazard, back in the 1960s-2000. Today, I have my grandchildren open equal positions in each sector, as they build their college funds.
A journey of 1,000 miles begins with the first step. If you pick the best dividend growth stock and open a full position in that one stock, you can watch it grow and the dividends will be substantial enough to use for reinvestment in that same stock. This is referred to as a Dividend Reinvestment Plan or "drip." Brokerages will usually perform the drip for free and you can watch your nest egg grow. If your nest egg is large enough to buy 10 positions, you can cover all of the Sectors of the S&P 500.
Three stocks purchased this summer in this retiree's portfolio:
Intel (INTC) - Technology sector. This Dividend Challenger has nine years of consecutive dividend increases. The current yield is 4.2%. The 5-year annual average dividend growth rate is 14.5%. The current p/e is 8.9. The projected earnings per share growth rate for next year is 4.66% and 22.9% annually for the next five years.
Raytheon (RTN) - Industrials sector. This Dividend Challenger has seven years of consecutive dividend increases. The current yield is 4.23%. The 5-year annual average dividend growth rate is 10.8%. The current p/e is 7.5. The projected earnings per share growth rate for next year is 10.4% and 12.9% annually for the next five years.
Verizon (VZ) - Telecommunications sector. This Dividend Challenger has six years of consecutive dividend increases. The current yield is 5.68%. The 5-year annual average dividend growth rate is 3.6%. The current p/e is 16.2. The projected earnings per share growth rate for next year is 16.07% and -3% annually for the next five years.
During the present market turmoil, preservation of capital is paramount. The above dividend growth stocks provide a high enough yield to place a floor under the stock price. The companies have long enough histories of earnings growth to weather this downdraft, in my opinion. A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks. However, the growing yields have kept price fluctuation in relative check since 2009.
Click to enlarge
With equal positions of $10k each, these stocks will produce a quarterly income stream as shown in the following table:
Stock | Quarterly Dividend Rate | Number of Shares | Quarterly Income |
INTC | $.21 | 507.61 | $106.59 |
RTN | $.43 | 246.06 | $105.80 |
VZ | $.50 | 283.76 | $142.88 |
In order to investigate the growth of the portfolio, due to dividend reinvestment, I have created the following spreadsheet for an investment in these stocks made 1 year ago:
| Stock | Date of reinvest | Div Rate | # Shares | Dividend | Drip price | # Shares pur |
| Totals | 476.83 | $344.13 | 16.29 | |||
| INTC | 09/01/11 | $0.21 | 476.83 | $100.13 | $19.99 | 5.01 |
| 06/01/11 | $0.18 | 472.94 | $85.70 | $22.00 | 3.90 | |
| 03/01/11 | $0.18 | 468.96 | $84.98 | $21.39 | 3.97 | |
| 12/01/10 | $0.16 | 465.55 | $73.32 | $21.48 | 3.41 | |
| Totals | 212.97 | $333.78 | 7.16 | |||
| RTN | 08/11/11 | $0.43 | 212.97 | $91.58 | $40.32 | 2.27 |
| 04/28/11 | $0.43 | 211.12 | $90.78 | $49.25 | 1.84 | |
| 02/10/11 | $0.38 | 209.59 | $78.60 | $51.20 | 1.54 | |
| 11/04/10 | $0.35 | 208.07 | $72.83 | $48.06 | 1.52 | |
| Totals | 321.62 | $614.76 | 17.35 | |||
| VZ | 08/01/11 | $0.49 | 321.62 | $156.79 | $35.87 | 4.37 |
| 05/02/11 | $0.49 | 317.50 | $154.78 | $37.56 | 4.12 | |
| 02/01/11 | $0.49 | 313.29 | $152.73 | $36.27 | 4.21 | |
| 11/01/10 | $0.49 | 308.64 | $150.46 | $32.40 | 4.64 |
The Spreadsheet shows the growing income stream for the four quarters under the heading Dividend. It can be seen from the totals at the top of each column that the larger yield of VZ provides more compounding than either of the other two stocks. In addition, VZ did not raise the dividend until the November payment in 2011 and shows constant rate for the entire year studied. The total dividends were $344.13+$333.78+614.76=$1292.68. On the initial investment of $30,000 this works out to be 4.3% yield. These results have been graphed:
Click to enlarge
For those who like the idea of Do-it-Yourself investing, my previous paper shows the example of a friend's portfolio over the period 2006-2010. For more click here.
Conclusion: It is possible to save for retirement or college through drip investing. The yield on selected dividend growth stocks with long records of increasing dividends provides safety of principal while compounding dividends each quarter. These three stocks were selected with safety of principal in mind, during a time of global financial turmoil. It is critical that one does their own due diligence on any investment.
Disclosure: I am long INTC, RTN, VZ.
