How To Create, Preserve And Protect A Growing Income Stream Even In This Market

by: George Schneider


There are ways to protect an income stream.

We’ll examine a crash-like scenario to witness the possible impact on portfolio dividend income with risk mitigation applied.

Building cash is fine, but only if you intend to use it productively.

Building Cash For Productive Use

It has been a very active 3 months since we launched Retirement: One Dividend At A Time, my premium subscription service on Seeking Alpha. Since November 1, 2015, the broad market indices have experienced one rocky ride almost from the start. From January 1 till now, this New Year has experienced a great deal of volatility, traveling 100 to 400 points in one direction or the other (mostly down) almost every day. Sometimes, it has traversed these ranges, up and down, within the course of one trading day, reflecting the extreme uncertainty surrounding the many situations driving investor sentiment today.

The latest investor fear/flavor of the day surrounds the distrust of central banks throughout the world. Folks are beginning to doubt they have a handle on their QE plans and feel the markets are getting away from them. In other words, adding this to the latest fear over Europe's banks and their stability, investors are coming to the conclusion that no one is driving this bus and we are on a collision course.

We Concentrate On What We Are Certain Of

My last few articles on the public site were posted as a friendly rebuttal to several of Regarded Solutions' recent articles. Most recently I wrote "Cash Is Trash Unless You Invest It To Produce More Income". He is generally taking a more cautious approach to this ongoing market correction, sitting on the sidelines. As you know, we are not sitting on the sidelines, but taking a very active approach, taking advantage of the volatility to relieve panicked investors of their high-quality shares at cheap prices. It set off a good amount of debate on either side of the question.

What I would like to emphasize is that we are not oblivious to falling prices and the fears that are created in most investors' hearts when this happens. On the contrary, we take the position that we are among those who benefit from the understanding of this fear.

Behavioral finance is a burgeoning field today. Some economists and psychologists work to understand the mechanisms triggered by large market movements. My long experience of over 55 years in the markets and my professional background as a clinical psychologist give me some insights in this regard.

Building cash because you believe better price points lay ahead is one thing. But raising cash by liquidating your portfolio in fear of a crash is selling off the engines that produce your income.

Price Vs. Income

Investors who have their eyes and minds constantly focused on price movements of their shares are understandably spooked when those prices fall. These are investors who only know one way to view the stock market. Price, and capital appreciation is their method to grow their capital for eventual use in retirement.

For any of my readers who might still have one foot in this camp, let me pose this scenario:

If you were completely price focused and invested all your life for capital gain and had no income producing stocks in your portfolio, ponder this situation. It's late 2007, early 2008 and the financial crisis is pummeling the prices of your stocks. If you suffered the average drawdown of 57% that investors experienced, and you were planning to begin your retirement around March, 2009, how do you think you'd feel about beginning your retirement? Remember, your assets that you planned to start living off of, spending down by selling a percentage of your stocks each year, have collapsed in value.

Keep in mind, at this time you don't have any idea when the bear market will end. Would you still retire on time or be forced to work many more years to make up for the shortfall? Would you have a choice? Would you be ready to live off 57% less than what you had planned? Sounds pretty drastic, doesn't it? Well nigh impossible for most folks.

The Greater Reliability and Improved Certainty That Dividends Bring

Don't get me wrong. I'm not trying to imply that dividends impart 100% certainty to the equation. There were many companies that reduced their dividend payouts in the depths of the financial crisis. But this I am certain of; If you diversify your investments into several industry sectors and into enough companies, you will reduce the probabilities that you will experience a reduction in income, come the next bear market.

On top of this, our money is invested, both in the subscriber portfolio and the public Fill-The-Gap Portfolio managed on Seeking Alpha, in such a way that, eventually when the bulk of our starting capital is invested, each company will throw off essentially equal amounts of income.

Some price-focused investors try to equal weight their portfolios in terms of amount of dollars invested in each company. This makes them feel that they will lighten the hit to capital when things go bad.

Our approach, because we are income-focused, takes a different approach, one that insures the least damage to overall portfolio income when a bear market is upon is. If we are interested in securing an income stream for retirement, doesn't it make more sense to protect that income stream than being concerned with stock price?

Being that we are income weighted, we can more easily adapt to a dividend reduction here or there. For example, if one of our 20 companies reduces the dividend by 10% in the depths of a bear market, here's what that might look like:

Before A Bear Market:

# of companies

Dividends per company

Total Dividends Received




Click to enlarge

At The Depths Of A Bear Market, One Company cuts by 10%

# of companies

Dividends per company

Total Dividends Received









Click to enlarge

This reduction of $10 in annual income represents just a .5% reduction over the course of the year.

10/2000=.5% That's ½ of one percent.

I contend that most of us would be able to find many ways to cut back our daily expenditures to adapt to a small, temporary loss of income.


Yes, history shows that the average bear market lasts 12 to 18 months. At the end of this period, the economy is normally beginning to recover. Companies regain their footing as people go back to work, unemployment declines, employment rises, consumer spending resumes and companies go back to earning money again. These earnings are then shared with shareholders in the form of dividends.

Many companies are actually able, even during terrible economic times, to continue increasing dividends. It is these increases that create the ballast to a portfolio with enough equities that restore the original income to investors. That is the first reason that a loss of dividend income is so temporary. The other reason is based on the almost certainty that the original dividend cutter will restore the lost income when good times return by increasing their dividend as well.

Collect Dividends While Maintaining Vigilance: Monitoring The Chicken Coop

If we wish, we may also determine to sell a cutter and redeploy remaining capital into another name that we deem to be more reliable. Sometimes we can wind up with higher income than what we began with, before the cut was endured. I wrote an article about just this type of scenario recently. I sold ConocoPhillips several weeks ago because I felt their dividend was threatened (they subsequently slashed the dividend by 66% several weeks later) and I redeployed the preserved capital into REITs I determined were more safe and reliable and also paid a higher dividend. Not only was I able to avoid the loss of 25% more capital, I was able to increase annual portfolio income at the same time. Two birds were killed with one stone.

Dividend Income Growth Is More Reliable Than Price Growth

I retain a sense of certainty that If I remain committed to investing excess funds, above and beyond what I need to live on, that I can continue to grow income.

If we stay with our plan to keep reinvesting dividends, we will certainly compound the amount of income we receive going forward. That is assured.

If we are working and continue to invest excess savings above living expenses, we are assured to continue growing our income.

None of these things can be said to occur for price focused investors. In a market correction or bear market, their compressed stock prices can only assure of one thing; their capital is decreasing. While they fret about their capital decreasing, we are acting opportunistically, buying those cheaper shares to increase our yield and our income.

Lower price= higher yield= higher income

These Companies Will Let You Sleep Pretty Well At Night

On Thursday, another Seeking Alpha Author I hold in high regard, Psycho Analyst, wrote a highly recommended article, "These 26 Dividend Aristocrats Won't Let You Sleep Well At Night". In it, he very ably reminded us of the dangers of survivor bias that can creep into our analyses. He also cautioned us to monitor our positions carefully because dividends are not guaranteed.

He pointed out:

"When I compared the list of stocks that had been classified as Dividend Aristocrats in 2007 against the current list, which you can find here, I learned that fully 26 of the original 59 companies listed in 2007 were no longer included"

He went on:

"Now, as you can see, not all of the companies were removed because they did not raise their dividends. Five of the 26 companies were acquired or merged into other companies, losing their identity. Some went on to pay dividends. Some did not.

But 15 of the original 59 companies, fully one quarter of them, did cut their dividends, in some cases radically."

I have borrowed the author's chart to illustrate.

I would not contend that such a situation would be of no consequence. To the dividend investor reliant on this income to pay the bills in retirement, it would certainly be a concern if almost 25% of a portfolio's constituents reduced their payments.

Again, let's use a possible scenario to examine the possible damage to annual income if this should occur in the future.

We will use the assumption that each of this hypothetical portfolio's constituents contributes an equal amount of annual income, the same way I structure my portfolios to minimize impact from a dividend cut. So each company will be assumed to provide $100 of dividend income to the investor.

We will examine the impact of 15 companies reducing their dividend payment by 10% .Additionally, we'll assume 20 companies hold the dividends steady (frozen) and 22 companies continue increasing the dividend even at the worst of economic times, as many do, conferring dividend increases of 5% and that two, using the author's data, completely eliminated the dividend and did not restore it.

Dividends p/company, Total Dividends Received

20 Kept Dividend Frozen



22 Increase the Dividend 5%



15 Reduce Dividend by 10%



2 Eliminate the dividend



Click to enlarge

Total $5660

What's The Damage?

I believe the assumptions I've used are fairly conservative and what might be expected in a bear market scenario caused by economic recession and I have used several of the author's data points as well as including number of companies, number that reduced dividends and number that completely eliminated them.

It appears that the investor who was expecting $5900 of dividends from his 59 companies, paying him equal amounts of income because he weighted his share purchases to mitigate loss of income in just such a scenario, would find his total annual income reduced to $5660. The loss of $240 in annual income represents 4% of his expected dividend income before the crash.

If the investor's dividend income represents 50% of his retirement income when combined with his Social Security benefit and any pension income, the 4% hit to dividend income would amount to just 2% of his total yearly income. For example:

$5900 + $5900=$11,800

$240/$11,800= 2%

We should also recognize that the investor willing to monitor his portfolio to keep the fox from eating the chickens, would be in a position to possibly sell stock before the dividend was cut, saving himself further capital loss and preserving it to reinvest in another more promising name. This could conceivably result in no loss of income at all, or even higher income, depending on the yield of the replacement company.

Weighting a portfolio as to income rather than to price/cost is a powerful method I employ in all of the portfolios I manage. It recognizes that there will be risk to portfolio income under conditions of market duress and deals head on with it. Mitigation of risk to income is achieved by the old saying, "There's safety in numbers".

The numbers we address are number of stocks held in a portfolio to diversify risk, and numbers of dollars procured from each of those stocks in order to reduce risk further.

Let's take a look at some of the reliable dividend income the FTG portfolio produced last month.

FTG Dividend Table for January

Click to enlarge

Out of eighteen portfolio components, we received dividend payments during the month of January from seven of them. Total dividend payments for the period came to $1549.64.

As you may be aware, since inception of this FTG portfolio on December 24, 2014, we have layered into several additional share purchases at considerable discounts to earlier purchases (in most cases), thereby increasing our yield picture and of course, we have grown income just as considerably.

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).

These portfolio constituents represent 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.

I have recently completed work on a Real-Time Portfolio Tracker that helps me and subscribers focus on our portfolio income. All data for the portfolio is updated in real time, constantly throughout the day, helping us to monitor positions and suggest possible entry points for additional shares.

This is a sample of what it looks like:

Portfolio Real Time Tracker

Click to enlarge

When we first began the premium subscriber portfolio on November 1, 2015, just 3 months ago, our overall portfolio yield was 5.77%. The comparable figure to our yield on cost, based on all of our purchases has grown to 6.43%. Since the portfolio has increased considerably in capital appreciation, the current dividend yield based on Wednesday's prices is 6.17%.

The Real Time Portfolio Tracker allows us to see at a glance how our annual income on the portfolio has grown and what we have so far. We can also quickly learn that when we add this period's dividend income to our beginning commitment to this portfolio and subtract the amount we've already invested, we can see the balance still available to invest for upcoming opportunities that come our way.

As we see how the quarterly income has grown, we can infer our new annual income. You can also see from the dividend table that thirteen of our companies have recently increased their dividend payments. These increases and the payment of the dividends will form the foundation of our compounding of income based on their reinvestment.

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 is available to non-subscribers for a nominal amount. It also allows them to input their own portfolio holdings, share amounts and dividend amounts. The formulas I've built into it then figures their annual income from each component, shows the current yield and totals the portfolio income.

It looks like this:

Portfolio Income Tracker

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. It is free for subscribers and will be provided to other readers for a very nominal amount. I'll be glad to email you one for your use. Just send me your email address in a direct message.

Announcing The New, Real-Time Portfolio Tracker

I am pleased to announce that I have just completed work on the 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. This tool is also available to readers for a very nominal amount and at a substantial discount for subscribers. I have already provided this tool to many readers and subscribers and the feedback has been very favorable.

The screen shot shown earlier in this article demonstrates the look and feel of the Real Time Portfolio Tracker will all of the included category heads.

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 last Friday on a 4% dip which yielded us 9% on this private prison REIT. We've done the same with our recent purchases of Omega Healthcare Investors, Ares Capital and Welltower. We'll pick our spots, and when those entry points arrive, we'll pounce. Thursday, additional positions were taken in W.P. Carey at a 9% sale giving us a 7.53% dividend yield.

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.

Author's note: Please consider following me in real time. This will enable you to receive an email the moment any of my articles are published on Seeking Alpha. Just click the down-arrow next to the "Follow" link above this article title, and check the boxes for "Follow this author" and "Real-time alerts on this author."

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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.

To learn more about my premium subscription service, please click this link:

Retirement: One Dividend At A Time

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, 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.