Retirement Strategy: Dividend Investing After Saving Is The Magic Formula

by: Regarded Solutions

Investing does not need to be complicated. By taking a dividend income approach as we have with the Team Alpha portfolio, a prudent investor can achieve a stream of income while reducing risks. A well balanced and diversified portfolio can be many long term investors "Alpha."

Our portfolio now consists of Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), BlackRock Kelso Capital (BKCC), KKR Financial (KFN), Procter & Gamble (PG), Intel (INTC), Realty Income (O), Coca-Cola (KO), Linn Co, LLC (LNCO), Wal-Mart (WMT), Cisco (CSCO), Bristol-Myers Squibb (BMY), Healthcare Select Sector SPDR (XLV), and General Dynamics (GD).

This portfolio currently has a dividend yield of 4.62%, which based on the overall value of the portfolio as we have followed for over a year; ($123,000 of which $110,000 is invested) produces income of about $5,100 annually. As the portfolio grows, the income will rise. There is no magic formula other than having the discipline to stick with a strategy that works, and having the money to actually make it happen.

Take a look at this portfolio and see if it can work for your own financial goals. If it does, do you have the magic formula to make it work? If you do, you are better off than most people. YOU have the money to achieve your investment goals!

That is the true magic formula; having the money to make it work.

Saving Money

So many regular folks view investing as taking a chunk of money and tossing it at a bunch of stocks. Sometimes those stocks are something we heard about from friends or relatives, and some might be from resources we read. Far too few investors understand the single largest key to successful investing; saving.

Quite frankly, the American public just does not save enough money to allow them to pay all of their bills, let alone have money to invest with.

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This sad looking chart, dating back to the late 1950's, shows a current savings rate of 3.7%. The trend has been going DOWN as you can see, since the mid 70's. The several blips (up) in the rate ironically occurred during some of the deepest recessions.

When folks are afraid, they save money. When folks are less afraid, they spend money.

Obviously spending money keeps the economy going. One could argue that if our savings rate was to remain above 10% the economy would suffer, much like Japan suffered for over 2 decades. The odd thing now is that the economy is worse than sluggish, yet we are saving less (yes, more than in 2009).

Why is that? Well, the government has been artificially propping up our economy by printing money. Plain and simple. The government is doing the spending for us. As a result, we have this very weird situation that we have never faced before; the government is the largest employer AND the largest spender.

This chart shows that the civilian work force FROM ALL EMPLOYERS is at about 62%. The public sector, or all areas of government, accounts for nearly 40% of all employment. The government does not build or manufacture anything. Nothing. Nada. They sell absolutely nothing. They add absolutely nothing to the GDP, yet they have been able to prop up the economy.

The trend is down now, once again, in civilian jobs. Hopefully we can hang on until the trend reverses again. Thus far we are still breathing.

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Ok, that means that at least the entire house of cards has not fallen apart, and we are scratching our way out of a very scary mess.

That does NOT address the issue of personal savings however.

Take your calculator out and multiply a salary of $100,000 by the savings rate of 3.7%. If your calculator is the same as mine, the amount should come to $3,700 bucks. That is PER YEAR folks.

Multiply that by let's say 20 years. Without touching the principal and without compound interest, the amount is $64,000. Can YOU retire for the next 30-40 years with $64k saved????

Now unless you have an amazing pension, some very wealthy relatives in their very late 90's who are leaving you a bunch of money, you WILL be in a world of hurt, if you EVER want to retire.

"OK, We Will Work Forever"

How many of you reading have mumbled those words to yourself when you look at your savings balance? Perhaps more than we admit to. The truth is, that no matter what, there will be a time for the vast majority of workers, that work will no longer be a choice.

Whether it is because of job elimination, health issues, or simply not being able to do the job any longer, most people will be faced with a period of time with no earned income. ZERO. Once again unless you are lucky enough to have a pension, or make it to Social Security age, you WILL have to rely on your savings. SAVINGS, then investments.

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There have been no changes in the % of workers ages 65 and older for quite some time now. Under 4% of the entire work force is over 65 and given that we have an aging population, one would think that the age of the average worker has actually increased.

Here is another chart from SpectraEnergy from 2009:

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The bottom line here is that although there are many folks who will work past age 65, the odds of working "forever" are not in our favor. That leaves us with our biggest challenge; SAVING MONEY.

How Much Should We Save?

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In every single article we have written for Seeking Alpha, the answer to this question is always the same.

It depends.

  • How much do we earn?
  • How much do we spend?
  • How much will we receive in pensions and or Social Security?
  • What are our goals?
  • How do we want our later years to actually "look"?

There are simply no single answers to the question of "how much should we save". The only recommendations we can offer are as follows:

  • Save a minimum of 10-20% of your net income. If that is impossible in your mind, you will need to reduce all of your expenses. Remember, we are not going to worry about the economy, we are going to take responsibility of our own financial security. The government will just have to get by on its own.
  • If your employer offers a 401k, max it out.
  • If you can open an IRA, do it, and max it out.
  • Build an emergency fund that will maintain you for at least 9-12 months.

Now, get that calculator out again. Multiply $100,000 times 15%. It should come to $15,000, per year. Over the same 20 years that we used before, we would have $300,000 saved, if untouched, without compounded interest, and without investing a penny.

$300,000 is about 5 times the amount of savings if we just were to save at the average rate. It also looks a heck of a lot better! We might even be able to INVEST! Once we can invest, we can build wealth. Once we build some wealth, we will be able carve a more secure financial life for ourselves.

Add that amount to either a pension or Social Security, or both if you're lucky, and you will have a sound foundation to work with. There seems to be more of an emphasis on investing than there is on saving.

The truth is that there cannot be investing without saving. The more you save, the more you can invest. Before one dime is invested in the stock market, get your saving PLAN in order. Once you have your saving plan running smoothly, and your expenses in line with what you can afford without going into debt, THEN and only then, should you begin exploring investment opportunities.

Our goal here is not to just toss some stock symbols at everyone and hope we are right. Our goal is to help everyone understand that taking control of ones finances encompasses every aspect of our financial life.

It begins with saving more money and reducing all expenses.

Once we have these issues under control, we can look at a plan like this:

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The Bottom Line

Dividend income investing could create a more secure financial future, or present. At today's share prices of just about every stock within our portfolio, there are bargains to be had to generate an even greater yield than our current 4.62%.

I would also urge you to read this article for difficult markets, and this article to take advantage of higher yielding dividend opportunities.

Take a look at each stock and decide for yourself, but first, SAVE MONEY!

Disclosure: I am long XOM, JNJ, GE, T, O, KFN, BKCC, LNCO, WMT, KO, BMY, GD, INTC, CSCO, XLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.