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  • How Will You Fund Your Retirement Portfolio? 11 comments
    Aug 17, 2014 9:46 AM

    With my ongoing series on dividend growth investing, as well as being on the heels of this article the other day (The Absurdity of Believing That Dividends Don't Matter In Retirement), I believe it is prudent to discuss how we can actually fund a portfolio like our Buy The Dips Portfolio or BTDP. Clear out the cobwebs and think very basically for a moment. There are two ways for a regular investor to fund a portfolio:

    • Save as much as you can, for as long as you can, as soon as you can.
    • Eliminate as many expenses as you possibly can, prior to retirement.

    There are sub-sectors to these two rules, but that really is it in a nutshell.

    The BTDP WILL Produce Regular Income, But You Need To Fund It

    I can write about every stock on the planet, if an investor does nothing but think, dream or wish, nothing will ever happen. Currently, the BTDP is producing nearly $5k in annual income, and the portfolio is not even 6 months old. The initial investment was $110k, and in future articles I will discuss total returns.

    For the purpose of this piece, it is all about income being generated.

    The BTDP portfolio consists of AT&T (NYSE:T), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), Procter & Gamble (NYSE:PG), Altria (NYSE:MO), McDonald's (NYSE:MCD), Chevron (NYSE:CVX), Apple (NASDAQ:AAPL), General Electric (NYSE:GE), Ford (NYSE:F), Microsoft (NASDAQ:MSFT), Wal-Mart (NYSE:WMT), Pfizer (NYSE:PFE), Annaly Capital (NYSE:NLY), American Capital (NASDAQ:AGNC), and BGC Partners (NASDAQ:BGCP).

    SymbolSharesOrigYieldDividendAnnual Income
    T2005.60%$ 1.84$ 368.00
    XOM502.80%$ 2.76$ 138.00
    JNJ1003.10%$ 2.80$ 280.00
    KO2003.00%$ 1.22$ 244.00
    PG1003.10%$ 2.57$ 257.00
    GE3003.60%$ 0.88$ 264.00
    MCD1003.50%$ 3.24$ 324.00
    CVX503.60%$ 4.28$ 214.00
    AAPL752.25%$ 1.88$ 141.00
    MO1005.20%$ 1.92$ 192.00
    F4003.20%$ 0.50$ 200.00
    MSFT2002.80%$ 1.12$ 224.00
    WMT1002.50%$ 1.92$ 192.00
    PFE2003.20%$ 1.04$ 208.00
    NLY50010.70%$ 1.20$ 600.00
    AGNC30011.30%$ 2.60$ 780.00
    BGCP5006.30%$ 0.48$ 240.00
    xx4.46%x$ 4,866.00

    Notice that once again I have not shown the share price, because it does not matter in this discussion. However, this previous article did point out a few stocks that are at very reasonable pricing.

    Especially enticing right now are T, KO, PG, F, WMT, and PFE. Each have reasonable PE ratios, pay an average over 3.4% (just these) and have come significantly off of their 52 week highs, as noted in the article I highlighted above.

    The amount of funds allocated to this sort of portfolio will determine how much income you will begin with. By reinvesting all dividends right back into these stocks, you will own more shares and create more income, and that will continue to grow exponentially. Not too tough to figure out, but far too many people never ever get to this point.

    Saving money and reducing expenses will act as accelerators to this strategy.

    Start Saving Right This Second

    Take a look at this chart. I know it is simple, but if it opens ONE eyeball to the power of saving money, then I will have achieved at least something:

    (click to enlarge)

    I do know that 7% is a stretch right now, but as you can see from my BTDP chart, the current yield is 4.46% and we are just getting started.

    From the U.S Department of Labor:

    • Fewer than half of Americans have calculated how much they need to save for retirement.
    • In 2012, 30 percent of private industry workers with access to a defined contribution plan (such as a 401(k) plan) did not participate.
    • The average American spends 20 years in retirement.

    If you see yourself in one of these statistics, then the BTDP might never materialize, and that is what we hope to avoid.

    Since we all have time horizons, I offer this chart to note different actions, at various ages:

    (click to enlarge)

    Believe it or not, the 2 basic actions (savings and cutting expenses) can be done at the same time every now and then. Here are just a few examples:

    You can make your own list up, but these are just a few that are obvious. Add all of these up, and you would have saved about $57k in 10 years, or more than half of the amount I invested in the BTDP.

    Plus, you would have reduced expenses so you could potentially save even more. Let's look at a realistic example. If you have currently saved about $40k in the BTDP, just by saving $200/ monthly by eliminating a weekly dinner for 2, in ten years, based on just about my current yield of 4.46% (rounded to 5%) here is what that $40k will look like:

    For many folks, this approach could be as simple as breathing. Especially if you have set your sites on a more secure financial future. If you are a late starter, here are some suggestions from the Department of Labor:

    (click to enlarge)

    Since pictures are worth 1,000 words, I found this chart especially compelling from Fidelity Investments:

    (click to enlarge)

    Bob is 25 years old and earns $40,000 a year as a software designer. Eager to save more, Bob increases his salary deferral by 1%, boosting his initial monthly saving by $33 a month, to $133. That amount will grow over time along with his salary at 1.5% per year. He also invests in a growth-oriented portfolio. Assuming a 7.0% annual nominal return over his lifetime, that initial $33 a month in extra savings generates a potential $330 a month in retirement income. That's almost $4,000 a year, and more than $99,000 over 25 years in retirement. (Results are in today's pretax dollars.)

    Now consider Sally. She's 35 years old and earning $60,000 as a financial analyst. Like Bob, she too is concerned about her future, so she increases her deferral, from 6% of her salary to 7%. That initially increases her contributions by $50 a month, to $350, and that amount will grow along with her income-which is assumed to grow 1.5% each year. With a balanced asset mix, Sally's portfolio generates 5.5% annual nominal returns. By the time she retires at 67, her extra monthly savings generates a potential $180 a month more in retirement income, which is $2,160 a year, and $54,000 over 25 years.2

    Notice the striking difference between Bob's and Sally's retirement paychecks, illustrated in the table below. Even though initially Bob put away $17 less a month than Sally, his extra 1% in savings earned him $150 more per month than Sally's. Over 25 years of retirement, that difference could add up to $45,000. The reason: Bob started saving 10 years earlier than Sally, and earned higher returns (7.0% versus 5.5% nominal returns).

    Ok, now we have a 1% plan to add to our bag of tricks!

    Now You Are Ready

    By following a few basic steps, you are now ready to reap the benefits of a dividend growth portfolio like the BTDP. As I expand the portfolio to include more dividend champions, and add more of my savings to each, the current value of the portfolio will be doing only one thing, growing.

    Perhaps not always by the share price in each stock, but always by the amount of income being generated.

    • Savings matter.
    • Lower expenses matter.
    • DIVIDENDS ABSOLUTELY MATTER. Especially when compounded:

    The choice is always yours, and it truly is a choice, especially if you are seeking alpha, and reading this right now.

    What are you waiting for?

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Comments (11)
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  • turk617
    , contributor
    Comments (170) | Send Message
    Hi RS... I am very happy I became a follower of yours. Heck, Im 40 now, and I have no confidence on our wonderful social security system...People have to plan for themselves...I am doing very well so far. Started when I was 18 with a $40 in the Putnam growth and income fund. No looking back since then. My total portfolio including retirement is over 575k..earning more than 6k a month in taxable/non taxable income. The only individual stock I own is AT. The rest is high yielding cefs, and efts..I only care about monthly income now, more so than capital preservation...for now..I have everything on DRIP..unless im taking family on vacation, then I un-DRIP my tax free bond income to pay for the vaycay...Amazing thing is I can take my tax feee ny muni bond income, put 10k ttl into a ny529b college plan (5k each kid) and deduct if from my income even further...
    I just have one question if I come you dont have any buy/write cefs in your portfolio? I mean there are good ones like etw,etb, ety, that are yielding anywhere from 7-10%...didv is paid on monthly basis...thats income for retirement!!!!
    17 Aug 2014, 10:13 AM Reply Like
  • ferjen
    , contributor
    Comments (276) | Send Message
    I read somewhere recently that if SS is not changed, people like you and I could receive 70% of the current benefit. So, don't write it off completely, we should receive something back for our hard work. I'm good with 70% because, like you, I'm taking care of my own business. SS would just be icing on the cake...
    18 Aug 2014, 09:20 PM Reply Like
  • Andysud
    , contributor
    Comments (266) | Send Message
    And it gets even better when you can invest with zero commissions at online brokerages like



    No minimums, no commissions, no excuses.
    17 Aug 2014, 03:35 PM Reply Like
  • Regarded Solutions
    , contributor
    Comments (17132) | Send Message
    Author’s reply » Hey Andy, do you get a commission, by tossing up their website?
    17 Aug 2014, 04:34 PM Reply Like
  • billinsd
    , contributor
    Comments (1627) | Send Message
    I own 12 of the BTD portfolio.
    Very happy with my results.
    17 Aug 2014, 10:03 PM Reply Like
  • davidchulak
    , contributor
    Comments (17) | Send Message
    Great advice. Keep up the good work!
    18 Aug 2014, 05:34 AM Reply Like
  • ronako
    , contributor
    Comments (10) | Send Message
    Is this portfolio recommended for someone in their 20's-30's or is it meant more for older people? Also, how would one know when to sell a certain stock?
    18 Aug 2014, 01:44 PM Reply Like
  • Regarded Solutions
    , contributor
    Comments (17132) | Send Message
    Author’s reply » it is for anyone who prefers dividend income growth investing at any age......when to sell? well I just trim positions so I do not reduce my income.
    18 Aug 2014, 06:53 PM Reply Like
  • ferjen
    , contributor
    Comments (276) | Send Message
    Dividend reinvestment is powerful and the longer your time horizon, the better. I wish I found the strategy when I was in my 20's. I kinda knew about it, but had a hard time concluding how I was going to have a portfolio when I retire in the millions when I'm receiving a whopping 30 cents a share in dividends. I used to think "whoopee". Now I think WHOOPEE!!! Because as you get older, you make more, and when you make more you invest more, and all along the way, those divvies re-invest for free and the shares pile up spawning more divvies. And the beautiful part is those divvies increase each year at a rate greater than inflation. And all of it together begins to snowball. Next thing you know, you retire at 50 to 55 and laugh at all the suckers still working for no raise while you continue getting raises year after year and paying taxes at 20% or less while your peers are getting raked for taxes.
    18 Aug 2014, 09:28 PM Reply Like
  • ronako
    , contributor
    Comments (10) | Send Message
    Right now, I mostly have an ETF portfolio and I do reinvest dividends. I do realize ETF's may not have consistently increasing dividends, but they still do seem to be trending upward. Should I stick with my ETF's and focus on growth, or should I move towards individual stocks?
    19 Aug 2014, 12:01 PM Reply Like
  • Regarded Solutions
    , contributor
    Comments (17132) | Send Message
    Author’s reply » have you read my articles comparing in real time, ETFs to individual stocks? Thus far the difference is simply too much to ignore in favor of stocks.
    19 Aug 2014, 07:24 PM Reply Like
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