Mentality Shift: Dividend Investing Vs. Annuities, Part 3

by: Intelligent Speculator

<< Return to Part ll

It has certainly been an interesting discussion to compare the benefits and downsides of using annuities or a dividend portfolio, the true cost of buying an annuity as well as a variety of different subjects that have been mostly talked about in the comments both on the blog but also on Seeking Alpha. Quite a few of them raised more questions or opinions and today I’d certainly like to discuss one of the more debated points.

A major downside of having a dividend portfolio is that the investment will go through a lot of fluctuations and could lose 20-30% or maybe even more in major recessions

That was one comment but several others were made along those lines. The basic premise was that if you own an annuity, you are immune to market fluctuations (of course there are different types but in general they do have a floor in what your payments will be no matter where the market does go).

Misguided Argument

From an initial look, I did (and still do) agree with that statement. It’s true that if you buy a $500,000 dividend portfolio, the value could move down significantly at some points in time and you could probably lose 20% or more of that value in market crashes.

It Does Not Matter

I know that many will not agree but hear me out on this. If the goal of your dividend portfolio is to provide a passive income in a similar (but cheaper and more efficiently managed) to an annuity, than the number you should be looking for is not the market value but rather the annual dividends that you are receiving.

The Two Are Not Directly Linked

There is a link between a company’s stock price and its dividend payout but I think that link is mostly true over longer time periods. In the short term, healthy companies will suffer stock price losses but the dividend will generally keep growing. Isn’t that the whole point here? To ensure a solid and long term income? Obviously, having the value of that portfolio increase is great but when the market recovers following the crash, that is exactly what will happen.

Using Different Metrics

What if you decided to focus only on the dividend amount that is paid out every year as well as holding high quality sustainable dividend stocks? That would mean the number you’d be looking at every month would not be the value (and fluctuations) of the portfolio value but rather the dividend amount that the portfolio is generated.

Do You Think It’s Impossible?

Regular readers might remember our “Ultimate Sustainable Dividend Portfolio,” which generated tremendous interest. We explained exactly what types of stocks we were looking for and how we found them. The bottom line is that almost all of these stocks either increased their dividend payouts or kept them stable during the past 2 crashes. It’s certainly possible that one or two of them might have been forced to reduce their payout but what are the odds that our well-diversified portfolio would actually see a decline in dividends? Nearly 0% in my opinion. You can also think of stocks such as the dividend aristocrats that have increased dividends for 25 straights years or more, including during several very severe recessions and economic times. Quality companies will do that for you:)

The chart that we published (seen below) might look better or worse but over time, the fact is that a well built portfolio would see the dividend increase even in difficult times on the markets.

Viable Way To Manage Your Dividend Portfolio?

I don’t think this is for everyone, especially not younger investors trying to build a large asset base. However, in the case where a dividend portfolio is an alternative to a product such as an annuity, don’t you think that such a mentality shift could be enough to seal the deal?