Yield On Cost Vs. 4% For Your Retirement Income Stream

Includes: JNJ
by: Jeff Stallman

The financial services organization is a very powerful industry and their focus is to make money. Their advice is not all bad and making money isn't bad either; there is just one little dirty secret that you don't see or read about.

Most financial planners, bankers, and insurance representatives will tell you the rule of thumb for drawing down your portfolio for retirement is 4%, plus or minus inflation on a yearly basis. The belief in the 4% is that you will not outlive your portfolio should you live an extended life.

I guess if one invests solely for capital gains in their retirement portfolios they need a good metric to live off of. Could you imagine, at 85 years old, sleeping well at night using a 4% rule? What if the market crashed before, or during my retirement?

One thing the 4% rule does do well, it generates a lifetime of commissions for the financial professionals because at some point, you will have to sell assets (generate commissions) to give yourself income. You will also need the financial professionals' advice annually to insure your portfolio is keeping up with inflation.

Most people over their investment lifetime will not be able to save the multi-millions that the financial services industry says you will need to live a relatively nice retirement. Many advertisements and retirement calculators say you will need multi-millions so that the 4% rule will work for a 30 to 40+ year retirement.

YIELD ON COST (Y.O.C.) to the rescue! Y.O.C. is the abbreviation that the financial services industry refuses to sell to the public as a means for the everyday Joe Saver to live a comfortable retirement. Why, because Y.O.C. does not generate income for the financial professionals who need to make a living.

Yield on Cost is a compound interest formula that simply equates to making an initial investment in good quality dividend stock, reinvest all dividends, and let the compounding do its work for you. Patience is pretty important and usually at least a 5 + year time frame to reap the extreme benefits of the Y.O.C. strategy. Richard Bloch, a seeking alpha contributor, wrote an excellent piece on exactly how Y.O.C. works if you invest in just a few stocks over different time periods. Each quarterly reinvested dividend and annual dividend increase will push your Y.O.C. and your income stream higher and higher. It really is that simple.

The everyday Joe saver will struggle to even save a few hundred thousand for retirement. When financial professionals say you need to save multi-millions, Joe throws his arms in the air and says, "I'll never be able to retire, I'm just going to work forever."

Average Joe Saver, take a deep breath and let the Y.O.C. strategy help you relax. Let's pick one good quality dividend stock for Joe Saver to invest in today that offers a relatively good price, AAA rating, low beta, reliable 6% annual dividend increases, and a 3.90% starting yield - Johnson & Johnson, JNJ. If average Joe Saver could tuck away just $10,000 by age of 30, invest it today in "JNJ", in 32 years Joe would have an annual dividend stream of $53,000 with a Y.O.C. of 530% - WOW! The amazing thing about this investment is Joe most likely could retire on $53,000 in annual dividends, and his principal in JNJ is only around $275,000.

If you walked into a financial professional's office at age 62 and said, "I have $275,000 for retirement," most financial professionals would throw their arms in the air and say "keep working!" Couple that small principal amount with the power of the Y.O.C. strategy, and you just put the financial services industry out of a job!

Do you feel better about your retirement now?

Age 30, JNJ investment at $62 stock price, 3.9% yield, and 161 shares purchased:

Year Income Yield on Cost Holdings Value
1 $389.30 3.90 $10371.30
2 $428.75 4.30 $10800.05
3 $473.26 4.74 $11273.31
4 $523.64 5.25 $11796.95
5 $580.84 5.82 $12377.79
6 $646.01 6.47 $13023.80
7 $720.51 7.22 $13744.31
8 $805.99 8.07 $14550.29
9 $904.45 9.06 $15454.74
10 $1018.31 10.20 $16473.05
11 $1150.53 11.53 $17623.58
12 $1304.74 13.07 $18928.31
13 $1485.41 14.88 $20413.73
14 $1698.10 17.01 $22111.83
15 $1949.72 19.53 $24061.54
16 $2248.93 22.53 $26310.47
17 $2606.68 26.11 $28917.15
18 $3036.83 30.42 $31953.97
19 $3557.09 35.64 $35511.06
20 $4190.25 41.98 $39701.31
21 $4965.77 49.75 $44667.08
22 $5922.10 59.33 $50589.18
23 $7109.70 71.23 $57698.88
24 $8595.42 86.11 $66294.30
25 $10468.43 104.87 $76762.73
26 $12848.77 128.72 $89611.50
27 $15899.40 159.28 $105510.90
28 $19843.59 198.79 $125354.49
29 $24990.14 250.35 $150344.64
30 $31770.40 318.28 $182115.03
31 $40793.07 408.67 $222908.10
32 $52926.39 530.22 $275834.49
Click to enlarge

Graph Courtesy of www.dividendcalulator.com

A small investment, patience, and time make Y.O.C. the best strategy. Plus, you only have to pay a one time commission at the initial purchase date. You don't even need a financial professional to manage your portfolio, just an online brokerage account. Most average Joe Savers can accomplish this.

Most professional investors would find using the Y.O.C. strategy for retirement boring because you're not investing in MLPs, REITS, puts, options, and other fascinating investments. I call those steroid investments and best left to the professionals and best left out of the average Joe Saver account. We will let the 4% rule manage their lives at retirement as they are looking for huge capital gains and principal accumulation.

After reading this article, there is zero excuse for anyone that wants to have a retirement income to not move forward. Really at any age, the power of the Y.O.C. strategy will supplement if not provide a full retirement for you.

My favorite website for deciding if an investment fits my Y.O.C. strategy is YOC CALCULATOR LINK.

Disclosure: I am long JNJ, PG, MCD, MO, ED.