Retirement Portfolio For Do It Yourselfers

Includes: ABT, CL, JNJ, KMB, KO, MCD, PG, T, WMT, XOM
by: Norman Tweed

When I was young (43) my wife said to me “I want my dream house.” I told her I didn't have the money and she said build it yourself. We made a deal. The two of us would build it together. It took 4 years, but after she learned to lay brick and block, do flooring and tile and get permits, the result looked the way she had always dreamed it would.

The same can be done for your retirement. When I started work (1967) my company had no 401k plan. However, we had a thrift plan that matched up to 3% of the employee's contribution to purchase company stock. This evolved over time into a 401k plan, in which you could invest in several different index funds held by BNY/Mellon Bank, or you could invest a portion in company stock. I wished that I could invest in other individual stocks, back then and finally was able to when I retired in 2000 and rolled the 401k plan over into an IRA.

Recently, a friend who is still working sent me a list of dividend growth stocks, which has had a good income growth since 2006. He asked me to present the results and here they are.

The portfolio consists of 10 dividend growth stocks: Abbott Labs (NYSE:ABT), Colgate (NYSE:CL), Johnson & Johnson (NYSE:JNJ), Coca Cola (NYSE:KO), Procter & Gamble (NYSE:PG), AT&T (NYSE:T), Exxon Mobile (NYSE:XOM), Kimberly Clark (NYSE:KMB), McDonald's (NYSE:MCD), and Wall-Mart Stores (NYSE:WMT). An initial investment (01/04/2006) of $100,000 was divided equally into 10 positions and the dividends were not re-invested. These are all Dividend Champions with 25 or more years of dividend increases. The results are as of 12/31/2010. Although this portfolio grew over the 5-year period through price appreciation, the point of interest is the income and income growth over the period. Dividends and Income growth are presented below:

2006 2007 2008 2009 2010
Total Div
ABT $290.33 $320.63 $329.46 $393.84 $434.23
CL $224.98 $251.98 $280.78 $309.58 $365.37
JNJ $232.50 $258.87 $286.83 $308.40 $337.17
KO $303.78 $333.18 $372.38 $401.78 $431.18
PG $205.47 $230.94 $263.20 $292.07 $320.16
T $534.35 $570.51 $642.83 $658.90 $674.97
XOM $218.54 $233.91 $264.64 $283.42 $297.08
KMB $321.88 $348.70 $380.55 $399.00 $432.52
MCD $295.68 $443.52 $480.48 $606.15 $668.24
WMT $140.87 $178.65 $201.32 $227.76 $254.75

Income $2,768.39 $3,170.89 $3,502.48 $3,880.90 $4,215.67 $17,538.33

The power of this income growth can better be seen graphically:

(Click charts to expand)

The key to this growth is compounding. The dividend growth rate multiplies the income by a factor of 1.52 in just 4 years. The next question is “How well was the original capital preserved?” Stock Charts for the 10 companies are presented below:

It can be seen that all companies held up well, even during the Great Recession. It is especially fortunate that MCD, KO, and CL were included to create price appreciation. However, preservation of capital is all that was required. The income that was thrown off by this portfolio was what the retiree would live on.

If one was looking for more income, while still in the accumulation phase of life, the dividends could be reinvested and additional investments could be made to increase the income stream. The stocks selected are not high dividend paying stocks. If a do-it-yourselfer can find better stocks, the income stream can be even better.

Disclosure: I am long ABT, JNJ, PG, T.