Retirement Frontline: Cash Is Trash Unless You Invest It To Produce More Income

by: George Schneider


Zero interest rates render holding cash as trash.

Use it or lose it.

What is the point of holding an asset class that produces nothing?

Recently, my esteemed colleague, Regarded Solutions, wrote an article, in which he took the position that Having Cash Is Not A Sin, It Is Smart. He developed his thesis with the idea that sometimes it is prudent to work on building up your pile of cash and that someday, when the market calms down, that cash will go further.

He and I write articles that address many of the same concerns being faced by near-retirees, retirees, and even younger investors trying to prepare for their future retirements. Though we agree on many issues, occasionally, we have a difference of opinion. We have both pointed out different perspectives several times in our comments; this is what makes for a market.

Differing opinions often results in one being on the buy side and one being on the sell side of the trade. In this particular instance, I am on the buy side while he is on the sidelines.

Here's Where I Stand On This One

While the market has been in correction mode for several weeks now, and we continue to experience the worst start to a year in the markets, ever, I have written several pieces to advance the case that putting money to work to grow income is a better course of action than sitting it out.

On February 1, I wrote, "I Love This Market Because The Fill-The-Gap Retirement Portfolio Keeps Producing More Income" in order to demonstrate the advantages of buying more shares when they are cheaper so that the investor gets the benefit of a higher yield and more income.

Before that, on January 29, I wrote "Ma Bell Nurtures Retirees With Another Accidental High Yielder: AT&T (NYSE:T)". In it, I expressed the view that if the market is pushing down stocks indiscriminately without regard to fundamentals, then investors might consider scooping up some high-quality stocks at sale prices and benefit from the higher yield and income that is bestowed.

Of course, this course of action is not directed at retirees who have just enough to pay the bills between their social security benefit, any pensions they may be fortunate to have, and dividend income. Those folks are not in a position to have any extra cash around to take advantage of these sales in the marketplace.

However, for those investors who are also currently working, producing income from work, and have extra cash left over after paying their bills, I contend they should be putting that cash to work. Retired investors who have excess dividend income above what they require to pay the bills might consider the same course of action.

Constructing A Retirement Portfolio Takes Work

Building and maintaining and managing a portfolio towards the goal of providing retirement income takes work. Every time a stock is bought for income, the portfolio is progressing towards its goal. Every time a dividend is paid and reinvested, cash is being put to work to progress towards the goal. Anytime too much cash is left sitting idle for too long a period, it is not working and not producing income, not progressing toward the goal.

I am particularly interested in addressing the readership that is actively building their income for retirement. There are many folks, young, old, near-retirees and retirees alike, who have always lived their lives in such a way that they lived way below their means.

They could have afforded the luxury of the Mercedes but chose instead to buy the Honda or the Chevy that provided their transportation and got them from here to there, just as well. They could have afforded to buy the biggest house in the most upscale neighborhood but chose instead to live in a middle-class area and invest the difference in savings and investments.

There are many retired investors today who continue to live their lives as they always have, below their means. They might have $80,000 in combined income from Social Security and dividends and need only $50,000 to live on comfortably. These folks have excess cash coming in at all times from their dividend payments. What will they do with it? What could they do with it?

"A lot of lies can be told about a stock, but dividends don't lie. In order to increase dividends, a stock must create a history of producing cash. Analysts can lie, earnings can lie, CEOs can lie, but dividends don't lie. A company must increase its actual earnings in order to raise dividends." - Richard Russell

The Fill-The-Gap Portfolio

I began writing a series of articles on December 24, 2014, to demonstrate a real live construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near retirees face today.

The beginning article was entitled, "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.

The FTG Portfolio Constituents

Constructed beginning on 12/24/14, this portfolio now consists of 18 companies, including AT&T, Inc., Altria Group, Inc., (NYSE:MO), Consolidated Edison, Inc. (NYSE:ED), Verizon Communications, Inc. (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital Corporation (NYSE:MAIN), Ares Capital Corporation (NASDAQ:ARCC), Reynolds American, Inc. (NYSE:RAI), Vector Group Ltd. (NYSE:VGR), EPR Properties (NYSE:EPR), Realty Income Corporation (NYSE:O), Sun Communities, Inc. (NYSE:SUI), Omega Healthcare Investors (NYSE:OHI), StoneMor Partners LP (NYSE:STON), W.P. Carey, Inc. (NYSE:WPC), Government Properties Income Trust (NYSE:GOV), The GEO Group (NYSE:GEO) and The RMR Group (NASDAQ:RMR).

This is an example of where retired investors, near-retired investors and younger investors can constantly source cash to use as dry powder to make new investments to grow portfolio income.

FTG Dividend Pay Dates

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As you can see from the above table, the FTG Portfolio currently has 99 different pay dates. Our 18 portfolio components supply us with a good amount of dry powder each month. We accumulate this ammo over the month as we search for a good home for it. If we can find ways to use these dividend payments to grow our income, why let it sit under the mattress or burn a hole in your pocket?

Another fine Seeking Alpha colleague, Fear & Greed Trader, wrote Sunday in an article I highly recommend:

"Regardless of how one is interpreting the stock market these days, companies raising their dividends in a challenging environment are a long term investors' dream. The quote from Mr. Russell highlights the fact that there is little to be argued that companies raising dividends are solid investments."

Failure To Use Cash For Investment Is Lost Opportunity

Today, we are living in a financial environment of ZIRP, or zero interest rate policy. This has been the Fed's ongoing policy some 10 years now. Only a few weeks ago, they made their first move to increase rates 25 basis points (1/4 of one percent). Essentially, we are still at zero, and this increase caused none of the banks to pass on this largess to depositors. Zero is still zero.

Well, when we factor in the government's inflation rate of near 2%, cash holders are left holding the bag every time. Their $100.00 in the bank will barely buy $98.00 worth of goods or services one year hence. The longer cash sits idly by on the sideline, earning zero, the more this asset wastes away and becomes worth less (worthless at some point). It turns into what is known as a wasting asset.

Instead of sitting on the sideline, if an investor bought some AT&T as discussed in the above article, and received a 5.7%yield on his excess $100.00 in cash, he'd have received $5.70 in income after a year's time in the market.

Compare this now to the investor who sat on the sidelines and collected zero from the bank. His opportunity cost comes to $5.70 that he could have earned if he had decided to invest his cash in an income-producing asset, AT&T stock.

Would the investor have benefited from waiting and hoping the correction deepened so he could buy the stock 5% cheaper? First of all, hope is not a good investment plan. But yes, he would have paid less for each share of stock if the correction in fact deepened and if in fact the stock price also cooperated by weakening as well. But what about his lost income? How long must the correction continue and how low must the stock go for the sidelined investor to gain the benefit of waiting. The longer the correction lasts, the longer that investor collects no income on the stock he did not buy.

There are many variables here, too many to account for. That is why it is usually agreed that time in the market is more important to long-term performance and more effective than timing the market.

The longer an investment is allowed to work, the higher income it will produce for that investor. Time outs lead to lost income. This applies to cash on the sidelines, as well as to panicked investors who sell in corrections and lose their income-producing engines once they are sold.

Layering In And Averaging Down Is A Good Approach

In all of my recent writings, nowhere have I advocated backing up the truck in this correction and dumping all cash at once into this market. In this piece, "Confessions Of A Retired Energy MLP Investor", I discussed how I had become too concentrated in the energy sector and that I was lightening up my exposure and freeing up cash to take advantage of the compressed prices this correction was handing me.

Incidentally, selling my ConocoPhillips (NYSE:COP) position several weeks before the 66% slashing of the dividend and 20% fall in stock price yielded good results. That capital was redeployed to result in higher portfolio income.

I am using the same approach I advocate to my readers and subscribers, layering slowing into positions as prices come down to my entry points that will give me the yield I seek and better value with a margin of safety. Averaging in assures the investor will never be paying the highest price over time, and allows for attainment of higher yield and higher income with each small bite taken along the way.

What If The Correction Takes A "V" Turn?

A big problem that accompanies the sideline approach comes with trying to figure out how far a correction will go. No one has that crystal ball. Analysts can claim to use various signs and signals in the economy to give them guidance, but really, there are so many factors involved, not least of which is CEO and investor psychology.

You see, staying out of the market for an income investor presents the dilemma of having to be right twice. First, this investor must make the decision that stocks are over-priced and he'll not buy till prices go lower. Then, he must make the right call on when to enter and make the purchase.

If the market correction reverses before he has decided it's safe to come back in, then he's missed his chance. He'll probably rationalize it and say that it's a false, dead cat bounce, bound to come back down. As prices keep rising and perhaps turn into a "V" shaped recovery, it will be so sudden and quick that the investor will not have the chance to re-enter at advantageous prices.

At this point, when prices have recovered to past highs, this investor will feel like he's missed the boat. No money was committed and he won't be disposed to do so now that he's missed the entire move.

Half A Loaf Is Better Than No Loaf

For my money, I'd rather have cash working at all times, producing income for me. Buying in this fashion, I am destined to be growing my income at all times, sometimes at higher price points and lower yields, other times at lower price points and higher yields. Over time, these will all average out.

Since I am not capable of timing the market correctly twice, what I can time and get correctly every single time, is the event of buying small portions and guaranteeing that my income is constantly rising. This is the part I can control and can always get right. Buying income and focusing on that rising stream of income is what makes this perspective so satisfying.

If I buy high-quality companies with long histories of growing their earnings which fund a rising dividend, then my income will always be rising from dividend increases as well as the compounding of income from reinvesting those dividends.

For investors fortunate enough to always have a continuing reserve of dry powder, this represents a very virtuous circle.

If I sit on the sidelines and don't invest, my income will not rise, except from dividend increases on past purchases. If I invest during this correction and receive somewhat lower income than the investor that waited for lower prices later, that's O.K., too. I'll always have the knowledge that I've been collecting income all day, every day, while the investor who waited collected none.

Half a loaf is better than no loaf at all.

Portfolio Construction And Management 101

I have recently launched my premium subscription service right here on Seeking Alpha. For those readers who have not yet joined, it's a service of active portfolio management that will help you build an exclusive dividend growth portfolio for your retirement. To learn more about my premium subscription service, please click this link:

Retirement: One Dividend At A Time

This new portfolio began with a starting overall portfolio dividend yield of 5.77%. It is already giving us a current yield of 5.99%, just two months after launch in November.

The Portfolio Income Tracker Spreadsheet

To help my subscribers stay focused on income production, at no cost, I provide them with a spreadsheet I've created that allows them to track the exclusive subscriber portfolio we manage. It also allows them to input their own portfolio holdings, share amounts and dividend amounts. The formulas I've built into it then figure their annual income from each component, show the current yield and total the portfolio income.

It looks like this:

Click to enlarge

If you feel this spreadsheet would be a useful tool to track your own investments and income, and would like to have one, simply send me a direct message on Seeking Alpha, and ask for the Portfolio Income Tracker. For a very nominal amount, I'll be glad to email you one for your use.

Announcing The New, Real-Time Portfolio Tracker

I am pleased to announce that I have just completed work on a Real-Time Portfolio Tracker that will perform all of the following functions automatically, without any effort required of the user:

1. Once you enter your stock tickers, the tracker will automatically update the prices of each of your positions throughout the day.

2. It will display the current price of your equities, grabbed all day from Google Finance.

3. It will display the amount you invested in each equity.

4. It will update the current total value of each position throughout the day.

5. This tracker will show you your percentage gain or loss on each position in real time.

6. The tracker will automatically grab the correct annual dividend amount from Yahoo Finance.

7. It will display your current yield based on the moment's price.

8. It will show you the yield you received based on the price YOU paid.

9. It will tell you how much annual income each position is paying you.

10. It will break down in percentage terms, how much value each position represents of your overall portfolio based on current prices.

11. Most importantly, it will tell you what percentage of total portfolio income each position pays to you.

12. It displays the total amount you have invested in your portfolio.

13. It gives you a total portfolio value, updated all day long.

14. The tracker will tell you, automatically, what percent your total portfolio is up or down from purchase.

15. It will display the current total portfolio dividend yield as well as the total portfolio yield on cost.

16. It will tell you your total portfolio capital gain or loss.

17. Lastly, it will display the remaining cash left in your portfolio available for investment.

This Real-Time Portfolio Tracker is a very powerful tool that will allow the investor to stay current and up to the minute on every important aspect of his portfolio. Used creatively, it can point to positions that need topping off or trimming in order to arrive at a portfolio that throws off equal amounts of income from each position.

Again, if you think this new tool can help you in your planning, maintenance and management of your portfolio while everything is on auto-pilot for you, please send me a direct message. I'll be happy to share this tool with you for a very nominal amount.

Plan Of Action-Portfolio Management

Our aim is to get the most bang for our bucks. We will look toward any further weakening in the markets as our developing opportunities to buy more income for the portfolio at cheaper prices, gaining higher yield along the way.

We are in no hurry here. We will follow our playbook just as we did with the recent W.P. Carey and The Geo Group purchases made this past Friday on a 4% dip which yielded us 9% on this private prison REIT. We'll pick our spots, and when those entry points arrive, we'll pounce.

Final Thoughts

The Fill-The-Gap Portfolio for 2016 presents a new beginning, an opportunity for retirees, near-retirees and new, younger millennial investors to start the process of making their transition to dividend growth investing in some of the safest, most predictable, long-paying, high-payout companies in America.

For younger millennial investors willing to be open to ideas to further their financial education, this portfolio represents a solid foundation. For them, and all pre-retirees and retirees, this model of portfolio construction is offered as a foundational way to build retirement income for the future that addresses inflation head on. The dividends in this portfolio will continue to grow in such a way that future income will not be degraded and decimated by inflation. On the contrary, purchasing power will be preserved, unlike what would befall an investor buying 0% T-bills today or negative interest rate T-bills next week as discussed in those articles I penned.

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If you found this article, the concept and investment results interesting and intriguing, I invite you to read the other articles in this series. Stay tuned for further articles that will introduce additional sectors and names to further diversify a portfolio for continued ballast and mitigation of risks to any one sector.

Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.

As always, I look forward to your comments, discussion and questions.

Please feel free to ask me anything by typing your question into the "Ask Me Anything" box.

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.

Disclosure: I am/we are long ARCC, COP, CTL, ED, EPR, GEO, GOV, MAIN, MO, O, OHI, RAI, RMR, STON, SUI, T, VZ, VGR, WPC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.