AgAuMoney's  Instablog

Barron's recently published an article comparing dividends on S&P500 stocks with inflation, since 2007 to the end of 2012.

Inflation is up a total of 12% since 2007.

S&P500 dividends are up a total of 14% since 2007.

Dividend growth beats inflation. Even over the worst dividend cuts thus far in the 21st century.

Saturday, March 30, 2013 "Speaking of Dividends": online.barrons.com/article/speaking_of_dividends.html

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

Additional disclosure: I have a few shares in many companies which might be found in the S&P 500 but I have no SPY or any other S&P 500 index fund.

I was holding CTL when they cut their dividend. I sold near the open of the market the next day. (down over $7 when I sold, about $1 above the close for the day) By selling, I converted the announced 25% cut to my CTL income to a 100% cut in my CTL income.

That very same week, my reinvested dividends and the announced future dividend increases compensated for 80% of that cut.

In other words, if selling CTL cost me $100 in income, by the end of the 1st week I was down only $20 in income compared to the week before.

During the next week, I invested the capital I had received from selling CTL into AFL, plus there were more reinvested dividends and announced dividend increases. All combined these covered the remaining 20% and 100% more.

In other words, by the end of the 2nd week I had replaced the lost $100 in CTL income and was $100 up compared to where I was before the CTL announcement.

It's called diversification, in this case diversification of income.

You get diversification of income by managing individual stocks in your portfolio.

You definitely do not get diversification of income as a wage slave in your occupation. You also do not get diversification of income with a stock fund (ETF or mutual fund) even when it is a dividend focused fund.

Look how much those funds paid out in dividends in 2006-2010. Did the amount increase every year? The amount I received from my dividend portfolio increased every year, even after a few of my holdings cut their dividends.

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

Additional disclosure: I was long CTL when they announced their dividend cut but sold the next day. I am currently long many dividend paying companies.

If you want to retire early, but your taxable accounts are not sufficient to fund your retirement until 59-1/2 when you can tap your Traditional IRA without penalty, what do you do?

First remember that Roth contributions can be withdrawn tax and penalty free.

Still not enough to live on? Or you don't want to deplete your Roth so early?

One strategy for IRA withdrawals for an early retirement (and avoiding the penalty) might be to start doing a conversion every year of funds from Traditional IRA to Roth.

Each year you will need to live off of and pay the taxes from non-Traditional-IRA funds, otherwise you'll pay an additional 10% penalty. But after 5 years, converted funds are considered to be Roth contributions.

So if you have taxable funds to live on (or existing Roth contributions which can be withdrawn tax free), then the strategy would be to convert up to your tax bracket is full or a year's worth of expenses from Traditional to Roth. Pay the taxes and live on your taxable or pre-existing Roth contributions.

Then 5 years later, that converted amount will be considered as "principal" (or contribution) and can be withdrawn tax free.

If you repeat this conversion every year (into a different Roth every year), then in the 6th year you'll be able to start using the 1st year's converted funds. The 7th year you could use the 2nd year's conversion, the 11th year the 6th year's, etc.

This way you deplete your traditional IRA starting early, but at the rate you decide and sheltering the money into a Roth. But at the same time, creating a source of funds to live on outside of the Traditional IRA, without paying the penalty for early withdrawal.

It seems like it could work and comply with all the IRS rules...

If you don't have enough outside the Traditional-IRA to survive that first 5 years, this approach could also be used to minimize the penalties incurred withdrawing from your Traditional IRA. Whatever you live on in the first 5 years, still do at least some conversion so that in year 6 you'll have the 5yr old Roth conversion contribution available. At that point then you won't need to spend as much if any T-IRA money until the penalty expires at 59-1/2.

Thoughts?