What Likely Happened To Dividend Growth Retirees In The Recession: Another Point Of View

Includes: CLX, KO, MDC, PG, WFC, WMT
by: David Crosetti


Setting goals for retirement income is a beginning point and not the end point.

Creating a plan to achieve your goals requires that you consider all potential outcomes.

Jumping ship on your plan when it goes south on you does not always produce the best results.

Of course, if you fail to plan, you plan to fail.


In a recent article: "What Likely Happened to Dividend Growth Retirees In The Recessions," Dale Roberts presents a very interesting scenario where a hypothetical retiree had amassed a million dollars and decided to invest that money into a retirement portfolio consisting of 6 companies.

Those companies were Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Clorox (NYSE:CLX), Wal-Mart (WMT), McDonald's (NYSE:MDC) and Wells Fargo (NYSE:WFC) back in December of 2007.

What I Know:

I am just a retail investor, but I have a lot of experience in the markets, both good and bad. Since I am primarily a DGI, I have an admitted bias to the strategy. However, I am going to say without any reservation that there is no such thing as a "perfect" investment strategy.

Every strategy comes with its own set of risks. It only takes a single meltdown in your particular strategy to appreciate those risks and to cause an investor to question his own particular strategy. Let's face it, when things go south, it's not a pleasant experience.

What You Should Know:

If someone is fortunate enough to have a million dollars to invest in the stock market, or anyplace else for that matter, there are many different ways to invest that money. Dale presented one view of how to invest that money. His retiree was looking to accomplish a retirement that would give him $40k in income the first year and allow for increases in that income to account for inflation moving forward.

Since the stocks that made up the portfolio did not throw off a dividend stream to produce $40k a year, the investor was starting from a position where "he was behind" the stated goal. But, as Dale so rightly pointed out, the investor could sell stock in his portfolio to make up the shortfall in the income stream.

Issues With The Strategy:

First, an investor with $1 million who would select only 6 stocks for his portfolio would be taking an incredible risk. Think diversification. Instead, it may have been a better idea to have selected 15-20 different companies to invest in and at the same time take a hard look at those companies that had a current yield point that would have helped the investor to reach his initial goal of $40k in annualized income.

In order to generate $40k in income, the investor would need to have a portfolio that approached a 4% yield point and perhaps that would have put him in the position of not having to sell any of his stock holdings to achieve that goal.

Second, shortly after making his stock selections and creating his 6-stock portfolio, the market took a downturn as we entered a recession in 2008. Many investors experienced an erosion of the value that they had in their portfolios. The recession was not selective in punishing companies. Some companies took bigger losses than others, but for all intents and purposes, the downturn affected just about every investor.

Third, while the 6 stocks selected for this study were chosen to perhaps illustrate a point, I have to ask why any investor would have purchased any of these companies in late 2007 in the first place. I am not saying that I am some kind of a genius with stock selection, because like this hypothetical investor, I created a portfolio called The Portfolio For Do It Yourselfers in January of 2006 and that portfolio had the experience of being in place during the 2008 recession as well.

I think it's safe to say that while there were people that owned these companies back in 2007 and many more companies that had even more damaging results, success in the market has to account for valuation. This may sound like heresy, but just because a company is selling for a particular price or has a particular dividend yield does not make that stock a value. The investor that ignores value puts himself at risk, in my opinion.

Fourth, if the investor was taking a pure DGI approach, he may or may not have sold his position in WFC at $9 a share when that particular stock tanked. As I've pointed out in my own articles, sometimes the best course of action is to do absolutely nothing.

Selling a position because it freezes, cuts, or eliminates the dividend is a common thread in DGI discussions. While some DGIs focus on that metric as a be-all-end-all approach to managing their portfolios, it's not always the best course of action - again in my own opinion. In other words, "it depends."

Fifth, the investor in this model decided to sell his WFC stock at $9 a share. Considering that he purchased the stock at $27 a share, that was a massive hit on his portfolio value. At the same time, the other 5 companies in that portfolio also experienced a decline in price, however, not nearly as dramatic as WFC.

At that point in time, seeing your position dropping like that, it is a very safe assumption that many people (perhaps most) would have likewise sold the position. But would that have been a good idea?

Things To Consider:

When authors try to present a story by going back in time, it becomes difficult sometimes to get the other side of the story. For example, if you are trying to find historical pricing for Kodak stock or some other company that is no longer in business, it's difficult at best. But with recent history, it's not always that hard to reconstruct things.

Taking this particular group of stocks, the dividend history for this group of stocks, and the results from "doing nothing" is not that hard to reconstruct. Let's take a look at this portfolio in a slightly different way.

Now, our retiree wanted to have $40k in income from his portfolio, but in the first year (2008), the portfolio would have delivered $32,918, which is a shortfall of $7082.

It would seem that the retiree could easily make up that shortfall of income with Social Security.

Looking at the dividend income, there is no doubt that the cut in the dividend from WFC really hurt in 2009 and 2010, but in 2011-2013 with the growth in dividends from the other 5 companies as well as the increases in the WFC dividend, things got back on track pretty quickly.

Was it painful? You bet. Was it with some fear and second guessing about buy, sell, or hold? Absolutely. I am not minimizing the emotional roller coaster that this retiree would have found himself on.

But I find this table to be pretty interesting, don't you? Looking at the "do nothing" approach, how would the portfolio have done in terms of value:

What began as a $1 million portfolio has grown to a value of $1,784,839 which is a 78.48% increase. That's a CAGR of 10.14%.

So, it would seem that the investor who did nothing actually did pretty well for himself, wouldn't you say?


1. If you're going to invest in individual stocks, don't ignore valuations. Buy great companies and buy them when they are priced at a value.

2. An "investor" purchases shares in companies that he/she plans to hold for a long period of time. Buying dividend stocks and "trading" is contrary to the nature of dividend-paying stocks.

3. Making money in the stock market is not hard because it's difficult to find great companies. It's hard because the best and easiest to understand strategy for stock market success is so difficult for investors to follow. In a nutshell, "buy and hold."

4. If you have identified companies that are priced at a value and those companies are consistent with your own investing goals and objectives, then why would you not hold them until that company gave you a clear and unmistakable reason NOT to continue holding it?

5. If you are not inclined to holding stocks for the long term, consider what Warren Buffett has said: "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

6. There is no such thing as the "perfect investment." If investing was simple, then everyone who invests in the market would be rich. But everyone makes mistakes or misses opportunities. When you find a strategy that is meeting your goals and objectives, stick with it and don't allow yourself to get sidetracked with "the latest and greatest" market novelty.

7. Create diversity in your stock portfolio. Owning 6 companies is just not a good idea. Having 20% of your stock market investment in one company is definitely not a good idea. By having a broad-based, diversified portfolio, an investor can reduce his risk significantly.

8. Consider giving your portfolio a "health check" at least once a year. Many of us avoid the doctor, but I like getting a physical every year. It gives me the chance to see where I'm at, determine where I want to be, and then put together a plan for how I'm going to get there. The next physical is a measure of how well we did over the last 12 months.

9. Always have a "reason" as to why you are putting your money at risk with a particular stock. If you are buying any company, you need to ask yourself: Why am I buying it? What are my expectations from my ownership of it? How large a position do I plan to take? How does this company improve my investment portfolio? Would I be better off without this company and putting more money into an existing part of my portfolio?

10. Always consider having an "exit strategy" in place before you need to use it. What would compel me to sell this stock? In having a well-defined "exit strategy," you can perhaps avoid the emotional exit strategy. Let's face it. If a stock was a compelling buy and after making a purchase, the stock declined in price, would selling the position be the best decision? Or could adding more shares be a better decision? As an investor who is seeking success in the market, you better be able to answer that question for yourself.

Disclosure: The author is long PG, KO, WMT, WFC, CLX, MCD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.