Core Retirement Portfolio For The 56 Year Old

Includes: AGNC, GD, PM
by: Norman Tweed

“Where did Lucky Strike Green go? Lucky Strike Green Has Gone To War!”

The above question and answer was all over the radio, when I was a kid. I didn't understand what it meant, but I knew it was important. In times of market volatility, like today, it is important to buy stocks that provide safety for capital and good returns. This requires strong demand for the products the companies produce in times of unusually slack demand and high unemployment. What does the investor need? I want 4% yield + 10% dividend growth rate. This requires stocks with long histories of increasing dividends as well as increasing earnings per share. In a recent article, I spoke of the coming downturn. In last week's article, I recommended 3 stocks for those about to retire. In this article I will recommend 3 additional stocks that have a large moat, good dividends, and provide safety of capital (time is getting shorter for our prospective retiree).

(Data from First Call, Yahoo Finance and David Fish's CCC charts).

  1. General Dynamics (NYSE:GD) -- Industrial sector. General Dynamics Corporation provides business aviation, combat vehicles, weapons systems and munitions, military and commercial shipbuilding, and communications and information technology products and services worldwide. This Dividend Contender has 20 years of consecutive dividend increases. The current yield is 2.86%*. The 5- year annual average dividend growth rate is 16%. The current p/e is 9.3. The projected earnings per share growth rate for next year is 5.42% and 10.7% for the next 5 years.

  2. Philip Morris International (NYSE:PM)--Consumer staples sector. Philip Morris International Inc., through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This dividend stock is in the appendix of the CCC charts and is about to become a Dividend Challenger with 5 years of consecutive dividend increases. The current yield is 4.5%. The 3 year annual average dividend growth rate is 12%. The current p/e is 15.35. The projected earnings per share growth rate for next year is 7.47% and 11% for the next 5 years.

  3. American Capital Agency Corp. (NASDAQ:AGNC)--Financial sector. American Capital Agency Corp. operates as a real estate investment trust (REIT). It invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. government agency or U.S. government-sponsored entity. This stock has held its dividend constant since September 2009 at $1.40. The current yield is 19.6%. The current p/e is 4.25. The projected earnings per share growth rate for next year is -10.73%. There is no projection for the 5-year earnings per share growth. Being a REIT, it has secondary offerings when it needs capital, due to distribution of most of its earnings to shareholders.

* Yield on GD does not meet my minimum 4% threshold for strategic investment. I would hold out in purchasing this stock until it met my metric.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF).

(Click to enlarge)

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:


Quarterly Dividend Rate

Number of Shares

Quarterly Income













In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (October 2010-October 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur
Totals 160.10 $282.45 3.99
GD 06/29/11 $0.47 160.10 $75.25 $73.90 1.02
04/06/11 $0.47 159.10 $74.78 $74.74 1.00
01/12/11 $0.42 158.17 $66.43 $71.16 .93
10/06/11 $0.42 157.13 $65.99 $63.64 1.04
Totals 176.25 $467.53 7.39
PM 09/23/11 $0.77 176.25 $135.71 $63.81 2.13
06/21/11 $0.64 174.61 $111.75 $68.05 1.64
03/22/11 $0.64 172.86 $110.63 $63.34 1.75
12/21/10 $0.64 170.99 $109.43 $58.48 1.87
Totals 401.09 $2,094.36 73.97
AGNC 09/21/11 $1.40 401.09 $561.52 $27.12 20.71
06/21/11 $1.40 382.31 $535.23 $28.50 18.78
03/21/11 $1.40 364.76 $510.66 $29.10 17.55
12/29/11 $1.40 347.82 $486.95 $28.75 16.94

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.





















In addition, I will illustrate the total value of this portfolio by quarter in the following graph:

(Click to enlarge)

It can be seen from the table that the income for the year was $662.37 + $687.72 + $721.71+ $772.48=$2844.28. On the initial $30k investment, this was 9.48% yield, which meets my minimum 4% yield for a core dividend growth stock portfolio. In addition, it can be seen from the Total Portfolio Value chart that the ending portfolio value was $33,955.43. This computed out to be a capital gain on the initial $30k of $3955.43 or 13.18%. An important point here is the value of diversification among sectors. A major portion of the income stream and total capital appreciation came from the MREIT AGNC. If the dividends had been spent, rather than reinvested, capital appreciation would have been considerably smaller. High yielding MREIT stocks, like AGNC involve the added risk of the financial and real estate sectors. In addition, REIT dividends are taxed at normal tax rates, not those of qualified dividend stocks and are more tax efficient when held in an IRA.

Conclusion: As one gets closer to retirement, income becomes a more important consideration. Higher yielding stocks become preferable to higher dividend growth rate stocks. Stability of growth, as demonstrated by PM is also important to the growth of capital and safety of principal. In times of global turmoil, especially financial crisis and war it is necessary to maintain one's policy of portfolio diversification and minimum yield standards. Four percent yield + ten percent dividend growth rate will provide a window of opportunity for a sound fiscal retirement. It is critical that one does their own due diligence on any investment.

Disclosure: I am long PM. My grandchildren hold AGNC in their college fund accounts.