Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

ZERO RISK RETIREMENT 101 (Or Close To It)

|Includes:AbbVie Inc. (ABBV), COP, KMP, MCD, MO, NEM, OHI, PEP, PG, PM, PSX, SLW, T, VZ, WBA, WEC, WMT

A few years ago I started thinking about a few very basic questions. 1) Why do we save and invest? 2) What is the long term goal to investing? 3) And most importantly, how do we invest long term without worrying about the next Lehman style collapse!

Why Do We Save?

I think for most people the reason they save/invest is to one day have those investments grow so large that they can retire and live off of their investments. Seems simple enough. I have noticed over the years that there is a lot of information and opinions on how to invest, get bigger returns and how to plan for retirement but there is very little information on how to actually handle your investments during retirement.

It seems the mainstream thinks it is ok for you as the individual investor to invest on your own as you grow your nest egg (I assume this is because they can't get at your 401(k) until you retire…) but as soon as you retire, you better give your money over to a "trained" professional to manage your money. And to some degree it makes sense. Let you have all the risk building up your nest egg while you work and once you retire just pay someone else to manage the risk while you sit back and relax. Once you retire most people don't want to do the leg work to maintain their wealth, they just want to sit back and enjoy what they have earned. Who wants to be stressed out picking stocks and watching the market like a hawk everyday while in retirement…retirement is supposed to be all fun and games, not trying to predict when the boom will turn to bust next. Besides, investing sounds way to much like work, and work is the last thing a retired person wants to do!

The Plan

I wanted to find something that avoided all the major hurdles of retirement investing, was easy to do and could be done by anyone (avoid paying people to manage your wealth and usually getting below market returns). So I set out to devise a plan that would
#1) Allow you to live comfortably in retirement
#2) Always stay ahead of inflation
#3) Avoid the risk of high drawdown years (never forced to sell stocks during a crash)
#4) As close to set it and forget it as possible (no need to watch the markets)

The answer was to buy stocks with a High Dividend CAGR (Compound Annual Growth Rate) and high dividend yields with the goal to live off of the cash generated by their dividends. My strategy is geared toward companies that have paid a dividend and have grown that dividend for 10 years+. This is not a new concept but it is hard to find a "free" guide that tells you which stocks to buy AND more importantly to me, which stocks are going to grow their dividends fastest over the long term. If you have a large list of great companies that grow their dividend every year you are most likely set for retirement but I wanted to find the best of the best to assure myself that I could hold these companies for 20+ years without selling and beat inflation by a mile so I never worry about my purchasing power decreasing.

The kicker in all this is you don't even care when there is a crises in the stock market. Look at 2008-2009 and the 50% drop in the stock market. Companies like P&G actually RAISED their dividends 8-10%/year during those years. So even if the underlying stock value falls 50%, you don't care because the cash you generate to live off of keeps going up and up and up! Since you never have to sell, you are virtually immune from market corrections. And since you know the company only increases the dividend because it is certain the business is doing well and can be sustained, you know that long term the underlying value of that company is rising even if the current market environment does not notice that value because of the economic panic…. In the long run your principal in the stock is going to grow and grow considerably. You can choose when the right time is to sell.

For instance, right now we are closer to the top of the current economic cycle then the bottom so if you planned to make a major purchase like say a new vehicle or a down payment on that nice lake house you always wanted, you can sell some of your stock now to pay for it. You inevitably have a much larger nest egg than you did earlier in this economic cycle because your dividends grew much faster than inflation (so you potentially have a lot of extra cash on the sidelines) and your underlying stock principal grew as well. You are never at the mercy of the markets, you always choose when to sell stock.

Better Than Sliced Bread

Why is this the better option than any investing advisor? Because they can't promise you a positive return every year. The typical investment advisor will tell you never to draw down more than 5% (3-5% usually) of your nest egg in one year. With this strategy you can easily pick companies that will give you an average cash dividend yield of 4-5% of your nest egg every year. So you instantly have the ability to "take out" 4-5% of your nest egg each year and spend it, without selling any stock and without reducing your nest egg even a penny. No retirement advisor can promise you that without some huge fee to go along with the assurance.

The inflation rate per year for the last 100 years is about 3.5% and according to the government it is falling. The government also claims the last 20 years it has been about 2.25%/year (yeah right!). Let's use a conservative inflation rate and say 4% per year. A typical company on my list raises its Dividend by 7-10% per year. That means year in and year out you are not only beating inflation but lapping it! Your purchasing power is actually going UP without you doing a thing.

How Come Everyone Doesn't Do This?

Honestly I don't know. My guess is you don't hear much about it because anyone can do it, it costs almost nothing, it takes very little time once you do the upfront research and it doesn't require lots of trading. Add all those up and it is easy to see why "wealth" managers and the like hate the idea. There is nothing in it for them, you don't even need them at all so they can't earn their fees from you to (mis)manage your money…..

It works great because only the best of the best companies can pay big dividends and continue to increase them. These companies are usually in the slower growth phase and they rely on Dividend seeking investors to keep their stock price up. They use any extra earnings they get to spike the dividend payment and hold on to investors like you. These companies have a track record of slogging through booms and busts, dealing with inflation (higher input costs) and still monetizing that into cash flow to the bottom line. So as long as you pick companies that are always raising their dividends higher than inflation, you are golden.

MY PICKS

This is good example of a High Dividend CAGR (Compound Annual Growth Rate) and high dividend yield portfolio. It has a mix of both kinds of stocks. This is not the absolute BEST portfolio possible (not giving that one out for free) but it will generate massive amounts of cash for you year in and year out.

This list has been used in an actual retirement portfolio since 2011 and has current (if bought today) average dividend yield of 4.18% and the cash generated has grown 12.12% in 2011, 8.35% in 2012 and 12.58% in 2013 so far.

In a later post I will go over in more detail how to figure out which companies are the best of the best.

     

YIELD

% In Each Stock

1

AbbVie Inc.

ABBV

3.70%

6.23%

2

ALTRIA GROUP

MO

5.10%

7.79%

3

AT&T

T

5.30%

4.65%

4

CONOCO PHILIPS

COP

4.10%

8.80%

5

KINDER MORGAN EP

KMP

6.40%

9.70%

6

MCDONALDS

MCD

3.20%

5.83%

7

NEWMONT MINING

NEM

3.10%

2.30%

8

OMEGA HEALTHCARE INV

OHI

6.70%

10.21%

9

PEPSICO

PEP

2.80%

5.28%

10

Phillip Morris International

PM

4.00%

6.61%

11

Phillips 66

PSX

2.20%

1.61%

12

P&G

PG

3.00%

8.88%

13

Silver Wheaton

SLW

1.50%

1.24%

14

VERIZON

VZ

4.30%

4.32%

15

WALMART

WMT

2.50%

5.54%

16

WALGREEN

WAG

2.60%

8.13%

17

WISCONSIN ENERGY

WEC

3.70%

2.88%

 

Average Div Yield

4.18%

For those who want to do the research for themselves and find the best of the best, check out http://www.dripinvesting.org/ The information there is invaluable for all dividend investors. Click on Info/Tools/Forms and select "Information U.S. Dividend Champions U.S. Companies with 25+ Straight Years Higher Dividends". This is the ultimate treasure to all dividend investors. Dave Fish maintains the spreadsheet. God bless him!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Although I do not personally own any stock in these companies, I manage a portfolio that owns all of the stocks mentioned.

Stocks: ABBV, MO, T, COP, KMP, MCD, NEM, OHI, PEP, PM, PSX, PG, SLW, VZ, WMT, WBA, WEC