The response to the first part of this article as been overwhelming. Best of all has been the discussion generated by over 200 comments. Among the comments are many great ideas and suggestions from so many sharing their ideas, and even their personal investing struggles. If you haven't done so already, let me encourage you to return to Part 1 of this article one more time and read the many thoughtful comments received.
Let me be clear that in Part 2 of this article I hope to reach those already in retirement or less than five years out. I believe that all of you within that subgroup need to consider whether an approach called Dividend Growth Investing is right for you.
I suspect that many of you born between 1946 and 1956 maintain at least some level of distrust in the market. I'm sure that for you the period from 2007 to the present has been particularly challenging. I know it has been for my wife and I. Retiring at the end of 2008, we learned first hand that a portfolio invested in cash was not going to support the 4% withdrawal rule and provide a stable stream of monthly retirement income. At 3% or under it was unlikely to match inflation for long. Annuities were considered but didn't seem right for us. We hated the idea of leaving nothing to our kids and grandkids. We also liked the idea of a portfolio that could provide for any unforeseen costs we might incur in 30 or more years moving forward.
I believe the goals and fears of an investor of modest means already in retirement are different. Such investors should by now fully understand the risk associated in trying to grow our portfolios, particularly after they are providing monthly income. Common sense and experience tells many of us that we need to preserve capital during this period of investment rather than actively seeking to grow it. At the same time, many of us seek income equal to at least 4% of the value of our portfolio coupled with a growth in that income stream larger than inflation.
During my investment life prior to retirement, my investment options were limited. I'm sure I wasn't alone. In my 401(k) I was limited to a fixed cash investment and index funds that mirrored the S&P 500, the Nasdaq, and the aggregate bond fund. My wife's was limited to fixed cash and mutual funds, most with high fees. We invested with each paycheck though hard times and good times. We always invested enough to receive the full amount of our employer's match.
My wife and I became concerned with the increasing volatility in the market and moved all our accounts to cash in late 2007. A combination of blind luck and gut feeling helped us dodge the bullet. We retired as planed just before the big drop. I'm sure many of you were not so lucky. In our case, we began taking withdrawals from our portfolio accounts equal to the income they generated. When that income slipped below 3% by the end of 2010, our plan was no longer working. At the same time, my mother required our financial assistance due to her declining health. It was time to make a new plan. My friend introduced me to investing for dividends. I converted my 401(k) in February 2011 and, as I've discussed in past articles, it was quite a learning experience. I chased yield and bought in and out of positions a lot that first year, and learned firsthand the lesson in this old adage: "A portfolio is like a bar of soap. The more often its handled the smaller it gets." Again, with blind luck and gut feeling, I ended 2011 with gains of about 3% in addition to the dividends that served as income.
It was my good fortune again at the end of 2011 to have been introduced to the concept of Dividend Growth Investing by reading articles by Seeking Alpha authors, including David Van Camp, Robert Schwartz, and so many others. I have continued to learn as well from those who don't post articles but share their wisdom and sometimes even their portfolios. If you're retired or considering retirement in a few years, you need to explore Dividend Growth Investing as an in retirement investment option.
I learned that Dividend Growth isn't about the growth of capital; it's about owning stocks with sustainable dividends that grow. Seeking Alpha contributor David Fish provides a list of such companies.
The goal of Dividend Growth investing to the retired investor is to never sell a stock to produce income. A portfolio yielding over 4% handles that. My dividends are collected monthly as their received in my account as cash. On the first day of each month my broker deposits an amount equal to what's required to supplement our monthly income directly to our checking account. No fuss and at no cost.
The goal of Dividend Growth investing while enjoying retirement isn't about being diversified in the traditional sense. You should be diversified among a universe of companies like Coca-Cola (KO), McDonald's (MCD), Altra (MO), Chevon (CVX) and others with long track records of sustainable dividends that are growing annually at a rate higher than inflation. The good news is you don't have to invest in banks or tech or with foreign companies unless you are comfortable with such investments. How many of you realized that, at last count, 164 -- or more than one-third -- of the companies in the S&P 500 were tech and financial? Hardly my idea of the proper diversification for the average retiree. I don't trust U.S. banks, so I currently own one Canadian bank and a single tech company, Intel (INTC). Together they make up 4% of my portfolio, rather than over 35% in a portfolio anchored by the S&P 500 index.
The goal of Dividend Growth investing once retired is to maintain and grow your income from the dividends your portfolio produces. You maintain steady uninterrupted monthly retirement income as long as collectively your stocks will continue to produce 4% or more income annually and the dividend is not cut. I believe I reduce the fear of lost income from dividend cuts by following the suggestion of a contributor, holding a portfolio of 50 stocks each representing 2% of my dividend growth portfolio. Your monthly income doesn't go down when the markets down. It only goes down when one of your stocks reduces or eliminates a dividend.
Will this approach beat the market? Remember you're retired, so that's not your goal. How do you know if it's working for you? If at the end of a year your dividend income is greater by the rate of inflation or more, then you win. Remember, you haven't had to sell a single stock and your family got a raise in income.
Readers interested in learning more can download and examine two free resources:
- David Fish's lists of Dividend Champions, Contenders, and Challengers.
- Robert Schwartz's list of dividend histories and statistics.
If you're already retired, I ask that you do one more thing. Treat your investments like a business and develop a business plan. This article by David Van Knapp shows each of us how. In Part 3, I promise to present our family's plan based on Van Knapp's work.
I want to encourage each of you to continue to share your insights, particularly those of you who are retired and those yet to comment. It was from the comments and questions I learned so much from those generous enough to share their experiences.
Disclaimer: I am not a professional investment advisor or financial analyst. You need to do your own research and due diligence before you decide to trade any securities or other products.