Dividend Growth Investing Or Annuities: What Would Fred And Wilma Do?

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 |  Includes: JNJ, KO, T, WMT, XOM
by: Regarded Solutions

Annuities or dividend growth investing. The road you choose is up to you, and there are many arguments that could be made for each. I wrote this article a few days ago that received a wonderful number of comments both pro and con for each issue, and it got me to thinking that I should place a clear picture up for everyone to look, and decide for themselves.

The first metric I will use here is to create a fictitious couple, Fred and Wilma, and their son Bam Bam.

Fred is now 65, Wilma is 63 (she still looks great also!) and Bam Bam is 34 years of age.

Fred has finally had it at the rock quarry, and Wilma wants to travel. Bam Bam has just started a business and hopes his folks have enough to retire on so that he does not have to foot the bill. He is also thinking just a little about what he might inherit when the sad inevitable occurs.

With his pension and social security, Fred can live comfortably but he has $100k saved and needs about $425/month to insure that he does not live longer than his money, and still be able to pay his bills.

They sit down with the finest professional retirement specialist in Bedrock and he works out a wonderful plan. Fred could buy an annuity from Bedrock Insurance Company with the $100,000, and has loads of options to pick from.

A Single Life Premium Just For Fred
One Time Payment Of $100,000
Monthly Spouse Bam Bam
$564 0 0
$501 Whatever is Left After Death
A Joint Annuity For Wilma And Fred
One Time Payment Of $100,000
Monthly Spouse Bam Bam
$452 $452 0
$438 $438 Whatever is Left After Death
Click to enlarge

The retirement planner shows Fred and Wilma these options, which are just plain vanilla annuities with a very simple formula; give the insurance company $100k and you can get monthly payments, either for Fred alone, or Fred and Wilma, and for a little less monthly payment, they can leave some over for Bam Bam if they happen to pass away sooner than later.

The retirement planner tells Fred and Wilma that they will be getting a "return" of anywhere between 5.25% to 6.76% depending on which annuity they choose, but now they could rest easy, not worry and have precisely what they need to make their retirement a reality.

Fred and Wilma are thrilled and take the paperwork home to review. That night they hop on to their computer and check out Seeking Alpha, which they heard had some good articles.

They happened to see an article by us on the benefits of dividend growth investing over the purchase of an annuity. Their curiosity is now peaked and they check it out.

It seems that we had taken that same $100,000 and invested it equally in 5 stocks held within the "Team Alpha" portfolio, made exclusively for Seeking Alpha readers. Review the latest results here.

The 5 Stocks Selected From The "Team Alpha" Portfolio

AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), and Wal-Mart (NYSE:WMT)

For this exercise, RS invested $20,000 into each of the 5 companies stocks back in 2002 and calculated what the value is now, including dividends, in 2012. Here is what that looked like:

Stock Shares Value '02 Value '12 Paid Div's Total
T 350 $20,000 24,100 7,000 31,100
JNJ 500 $20,000 19,000 5,300 24,300
XOM 500 20,000 44,000 6,800 50,800
KO 400 20,000 31,000 4,800 35,800
WMT 350 20,000 25,900 2,800 28,700
$100,000 144,000 26,700 170,700
Click to enlarge

The value of the stock portfolio had increased by about $70,000 over a 10 year period (including a financial meltdown and housing bust!). If the capital gains and dividends were taken as "cash" over that period of time, without reinvesting, and obviously without the tax bite, there would have been a monthly cash flow of roughly $583.00.

The $583.00 did not require a purchase of any kind, the original investment of $100,000 was virtually intact, and the process could continue with whatever results would occur. More often than not the dividends would be increased, there could be additional capital appreciation, inflation could possibly be kept up with, and the original investment would still be right there unless some principal is taken to keep the monthly income the same or growing if required.

Here are a few charts to take a look at:

The Bottom Line

Obviously Fred and Wilma realized that there were other options aside from that annuity insurance policy. They also realized that they did not have to purchase anything, and they could keep their nest egg invested, and available.

Bam Bam seemed pleased as well.

Disclosure: I am long XOM, T, JNJ, KO, WMT.