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I'm a 33 year old IT manager who recently realized his 401k and social security might not fund his retirement. After realizing that, I opened a Roth IRA last year (2011) and fully funded it. Along with an IRA rollover from a previous job, I had nice little nest egg. When talking with others about my interest in the stock market and retirement, I started getting questions about the best way to invest in the stock market and retirement. I'm one of those people who hate not being able to answer a question.
That lead me on an intense study of the stock market for short-term and retirement. My first question was: Can someone really figure out the short-term market direction? What happens in a flat market? I started
by puting Mad Money and Suze Orman on #1 and #2 spot on my DVR. Suze Orman was the one that taught me about the difference between tradition and roth IRAs. Jim Cramer taught me about diversification and incremental buying. I still wasn't sure what stocks to invest in. I started setting up different stock portfolios on howthemarketworks.com to see if any of those ideas would beat the overall market.
I first looked at the commission-free ETFs offered by TDAmeritrade. When I did a study of two index funds, VNQ (REIT) vs IWO (Russell 2000) starting from Jan 2005 investing $10,000 in both. I realized both with dividend reinvestment the portfolio value was about the same. The difference was the dividends. In the VNQ index fund, dividends were paying between $500 - $700 per year. While the dividends from IWO were still very small. IWO had a little higher capital gain though.
That really turned the light in my head towards stocks that have a long history of not only paying dividends, but increasing them too. I tried looking at ETFs based on the strategy but none have a history of increasing dividends even though they invest in the strategy (which doesn't make sense to me). Once I realized that, I started my portfolio based off the buying strategies noted by DGI:
1. Diversify into different sectors
2. Dividend history > 10 years *only a select few get past this
3. Dividend yield > 2%
4. Dividend payout < 70%
5. Dividend growth > 7%
6. P/E ratio < 20%
I'm currently long: AFL, WMT, MCD, ABT, WAG, ITW, MDT, CLX, PG, PM, CTBI, CBU, MDP, ED, PEP, STR, ADP, COP, CVX, LMT
These types of stocks work in any market, actually they work better in a down market because the dividends buy more shares. The risk is when the share price is below the purchase price because a loss will be taken if the dividend gets cut. That is why a long history of increased dividends is so important. The overall goal is to live off the dividends in retirement rather than selling the shares for capital gains. Each year with increasing dividends, the income will grow each without reinvested dividends.
Dividend stock ideas & income, ETFs, Options, REITs, Retirement savings, Stocks - long, Stocks - short, Tech stocks
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