Team Alpha And The Foundations For Financial Freedom

by: Regarded Solutions

The way I look at financial freedom from a layman's point of view might be simplistic to many folks who know so much more than I do. From where I sit it does not seem to be as daunting a task as some folks would have you believe.

I personally see the foundations of financial freedom having 4 separate, but very equal parts:

  • Investing in dividend paying, mega-cap, blue chip stocks, with a dash of growth potential stocks and dividend "opportunity" stocks.
  • Saving early, saving a lot, and saving some more.
  • Social Security, no matter how it is sliced and diced, is a main ingredient and cannot be dismissed.
  • Spending less than one has coming in, will forever be the ONE foundation that surpasses the rest.

It has only been about 15 months since we embarked on our journey of "seeking alpha" in our own small way by creating the Team Alpha Retirement Portfolio. The results have been pretty good thus far, and our main goal is to have a solid portfolio of dividend paying stocks that will pay us to own them.

Our Team Alpha portfolio now consists of Ford (NYSE:F) Chevron (NYSE:CVX) Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD), Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), BlackRock Kelso Capital (NASDAQ:BKCC), KKR Financial (KFN), Procter & Gamble (NYSE:PG), CSX Corp. (NYSE:CSX), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Annaly Capital (NYSE:NLY), Cisco (NASDAQ:CSCO), Bristol-Myers Squibb (NYSE:BMY), Healthcare Select Sector SPDR (NYSEARCA:XLV), and iShares S&P U.S. Preferred Stock Index Fund (NYSEARCA:PFF).

It is my opinion that by investing in a portfolio of dividend paying stocks, a regular investor can begin to build a foundation for future financial security.

Dividends Can Produce Income That Grows Exponentially

As of now, the Team Alpha Retirement Portfolio is producing an annual income for those who have followed the portfolio from the start, as well as for those just now jumping on board.

Team Alpha Income From Port.
Tot. Value Orig.Value Orig.Value
$134,000 $100,000 $100,000
Current% Eq. Alloc. TA Alloc.
4.72% 4.29% 3.89%
Income Income Income
$6,324 $4,290 $3,890

The income from dividends is not being reinvested for the sake of following this portfolio, but suffice it to say that the incomes would be considerable higher if all dividends were re-invested. More shares will pay more dividends for the time when the withdrawal phase begins.

Our yield on cost is 4.72% which is quite good but could have been better if we began this portfolio during the depths of the recession. That being said, the majority of dividend winning stocks have increased dividends since we began this endeavor.

MCD, XOM, JNJ, GE, T, CSCO, BMY, PG, KO, CVX, O, and the newly added F, have all had increased dividends in the last 15 months. Obviously this boosts our income going forward. Our dividend "opportunity" stocks; BKCC, KFN, and NLY gives the portfolio an immediate boost in overall yield, but also require much more monitoring than most of the other holdings.

While capital appreciation is not the prime focus of the portfolio, it has increased by over 35% in 15 months, beating the market averages. I also believe that further growth can be fueled by the likes of GE, CVX, XOM, F, and JNJ, as the economies around the world recover and begin to grow once again.

As of the beginning of 2013, the dividend yields of each of our holdings are as follows:

Stock Div.Yield%
XOM 2.5
JNJ 3.4
T 5.3
GE 3.6
BKCC 10.1
AAPL 2.5
PG 3.2
KO 2.7
XLV 2.1
PFF 7.7
O 4.2
KFN 7.5
CVX 3.1
CSCO 2.7
CSX 2.7
BMY 4.1
MCD 3.4
F 3.1
NLY 11.7

Our current allocations:

Stocks Held Allocation %
O   6%
KO   3%
GE   8%
JNJ   6%
XOM   7%
T   7%
PG   6%
NLY   2%
CSCO   6%
MCD   7%
BMY   5%
PFF   3%
KFN   4%
BKCC   4%
CVX   4%
XLV   6%
CSX   4%
AAPL   7%
F   2%
Cash   2%

Becoming an investor now, will set the stage for your financial future. I realize that there are many strategies and various portfolios that could put this one to shame, but the point is to begin someplace. The big question is when should a portfolio be built. Nobody has the answer to that but there are plenty of theories around; wait for a correction, sell naked puts to build cash and own a stock at a price you feel good about, slice up your buys into small "bite sized" purchases to attempt buying on dips, or dollar cost averaging. All of these strategies are fine, but let me leave you with this thought:

If you were to wake up today, and did not know that the economy had been through a deep recession, and the markets tanked by 50%, and all you saw were the same numbers in the market indexes from prior to the collapse and today's numbers with a P/E ratio of around 13.5, what would you do?

Some investors might just say that now would be a great time to jump right in! It is all a matter of perception. Keep in mind that although we have recovered what was lost, we are not higher. The historical trend of the markets has been UP, so where do we go from here? My own little brain, is that for the long term, the trend will once again be UP.

Let's Face It, The Nation Has A Savings Crisis

I do not believe I would shock anyone here by telling you that the wide majority of folks close to, or even in retirement, have not saved enough for a more secure financial future. This WSJ article painted a pretty bleak picture.

Life expectancies are rising, and confidence is eroding that folks will have enough money to retire with. The actual numbers are frightening.

Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008.

I don't know about you, but if I was facing retirement with about $25k in the bank, I think I would be calling my kids up to take me in!

Here is a chart from 2010 with the 3 major generations facing the retirement savings dilemma. Even at the top end of the chart, having less than $80k for retirement is frightening. Since we cannot go back in time it is clear that everyone needs to save early, save often and save a lot.

My suggestion would be to save 20% of your income every year for as long as you work. Use all deferred savings accounts that you can.

  • IRAs, either ROTH or regular, or both.
  • 401k accounts offered by employers whether they match contributions or not, and make sure you max out.
  • Deferred annuities when all other accounts are maxed out.
  • Employee simple savings accounts taken directly out of your pay each pay period, even if the account is not a deferred account.
  • The sooner you begin, the more you will have.
  • Never take money OUT of these accounts. Not even to pay debts!

I would urge everyone to view this site and watch the US Senate discuss the very dismal state of affairs when it comes to the USA savings debacle.

Let me wind this section up by saying this; most of us reading this article are probably not in the situation that many others face. I do believe we know folks who are and perhaps we can help them by simply alerting them to this article! Our children and grandchildren should learn at the earliest age possible, that their own financial well being hinges on the actions they take while they can take them. Knowledge and education is power.

Social Security Is More Important Now Than Ever Before

We can spend the rest of our lives debating the various issues that face the Social Security System. I believe that we should accept the fact that just about every American facing retirement or who are already retired, relies on Social Security as perhaps the most important ingredient to our financial well being.

The Center on Budget and Policy Priorities shows the chart above, which is very compelling.

If seniors did not have Social Security, almost 44% would fall into poverty levels. As it is, nearly 9% of seniors are living in poverty even with Social Security.

As you can see from this chart, seniors rely heavily on Social Security to fund their retirement. There are no sectors of the population that is not reliant upon this program, and let me emphasize that Social Security is NOT an entitlement program, contrary to what the talking heads say.

All workers pay for this program through the tax structure. All employers pay for this program through corporate tax structures. The self employed pay the taxes completely, and all our Government does is collect the money and puts the funds somewhere, to eventually pay it back to us.

The more we earn during our working years, the less percentage Social Security pays us in relationship to our wage earnings. Of course if the higher wage earners do not save (as I outlined above) the disparity will be far greater, and more frightening. Where will the money come from to make up the difference, or even half of the difference?

Well, if an individual saved enough, the difference would come from the savings, AND the potential income derived from dividend stock investing as I detailed from the start!

Finally, my own opinion on the machinations in Washington D.C. pertaining to Social Security. I believe the issue will be resolved the same as it always has been; raising the age to collect and increasing taxes. The other malarkey being tossed around will never happen in the next 2 or 3 generations. That is just my opinion, but I have seen this "show" before.

Cut Back, Spend Less Than You Have Coming In

Do I really need to spend a lot of time going over this simple rule? Sure I do, because too many folks simply spend more than they have, and more than is coming in. Let me be brief however and outline some steps that should be taken.

  • Pay off all debts, including your mortgage, as fast as possible.
  • Reduce all spending to an amount below your income.
  • Maximize your income with prudent dividend stock investments.
  • Re-invest dividends until you require the income to live on.
  • Just because you have $1millio bucks does NOT mean you can buy a $500k house. DOWNSIZE!
  • We all like nice things, but not at the risk of spending our nest-eggs prematurely.
  • If you are spending less than you have coming in, for as long as you live, you are home free and can enjoy NOT having to worry about your financial freedom; you are already there.

The Bottom Line

You are the masters of your financial destiny. You are in charge and make the decisions. Many of the decisions you make early in life could affect your entire life. The suggestions I have shared are nothing more than suggestions.

The decisions you make are your own. Take the path that you feel most comfortable with and enjoy life while you do it.

Disclosure: I am long AAPL, BKCC, BMY, CSCO, CSX, GE, JNJ, KO, MCD, NLY, O, PFF, T, XLV, XOM, F. 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.