Retirement Choices: Annuities Vs. Dividends

by: Regarded Solutions

I have written often about retirement, and we have a current series of articles called "Retirement Strategy: Buy On Dips, Add to Core Holdings." We are up to Part VI.

Our portfolio consists of ExxonMobil (NYSE:XOM), Johnson and Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Exelon (NYSE:EXC), Procter and Gamble (NYSE:PG), McDonald's (NYSE:MCD), Philip Morris (NYSE:PM), Intel (NASDAQ:INTC), Realty Income (NYSE:O), ConocoPhillips (NYSE:COP), Pfizer (NYSE:PFE) Chevron (NYSE:CVX), E.I. du Pont (NYSE:DD), Duke Energy (NYSE:DUK), PPL Corp. (NYSE:PPL).

Here are our Retirement Strategy Portfolio results as of year's end:

Stock Buy 11-23 12-31-PPS Cost Basis Current Value
XOM 75/SHR 85/SHR 7500 8500
JNJ 62/SHR 66/SHR 6200 6600
T 27/SHR 30/SHR 2700 3000
GE 15/SHR 18/SHR 1500 1800
NLY 16/SHR 16/SHR 1760 1760
EXC 41/SHR 44/SHR 16400 17600
PG 61/SHR 67/SHR 12200 13400
MCD 92/SHR 100/SHR 9200 10000
PM 71/SHR 79/SHR 9940 11060
INTC 23/SHR 24/SHR 2300 2400
O 32/SHR 35/SHR 3200 3500
COP 67/SHR 73/SHR 6700 7300
PFE 18/SHR 22/SHR 1800 2200
CVX 94/SHR 106/SHR 9400 10600
DD 44/SHR 46/SHR 4400 4600
DUK 20/SHR 22/SHR 2000 2200
PPL 28/SHR 29/SHR 2800 2900
Tot.Value 100000 109420

We realized a 9.42% return in about a month with a total cash reserve from dividends and call premiums of approximately $4,000.00. I think we have done pretty well, given the fluctuations in the market, and it will be really interesting to see where we stand at our next update at the end of January.

A while ago, I wrote an article about annuities vs. dividend growth investing, and the general consensus was that dividend and growth investing was the superior choice for greater income during retirement.

I also began subscribing to an annuity website that promised 8% monthly payments for life, and I began receiving 2-3 emails per day with all sorts of really wonderful videos to watch and calculations to review, and a really pleasant young fellow who obviously believes in his product and loves what he does. It happens to be a fine insurance product.

I am certain he has been successful as well. However, I would like to point out that if you opted to "buy" an annuity insurance policy on 11/23/2011, with the same $100,000 we used here to invest in our stocks, you would have received a grand total of roughly $1,600 to date. Plus, the $100,000 would be history, in the insurance company's coffers. (By the way, that 8% guarantee is not for a 65-year-old, but for age 70 or older.)

On the other hand, if you copied our simple portfolio and decided to sell it at the end of the year, you would have in your pocket roughly $13,500 in cash, plus the entire $100 principal to start all over again with!

The annuity, while steady and "guaranteed," would need almost an entire year to catch up, and you still would not have your $100,000 to use as you please.

I am illustrating this now because, for one, it becomes very clear when the simple math is done which direction offers more income, and it also becomes clear that you do have a choice about how you want the quality of your years in retirement spent, from an income perspective.

Secondly, it is the New Year, and everyone can make choices on how they would like their financial life to be, with a fresh start, or if you are just now deciding which path to take. To many, the choice is clear, and we are investors in quality stocks that have solid dividends with an opportunity for capital appreciation. The other choice is an annuity that will pay you your money back, monthly, plus a little interest, and for giving them the chunk of cash up-front, you will always get that monthly amount. It's the same monthly amount with no chance of growth, even for inflation (unless you pay a higher price for the annuity policy, of course, which would mean much lower payments to begin with, anyway)

Finally, since this is the New Year, I would bet that your email boxes were beginning to get overloaded with annuity solicitations. That is not a bad thing. It is an insurance product that some folks desire or need, and it can become part of an overall retirement plan. I am writing this article to show the other point of view. What will you choose?

Disclosure: I am long XOM, JNJ, NLY, GE, EXC, O, INTC, PFE.