Core Retirement Portfolio For The 55 Year Old

|
Includes: D, PG, RTN, SYY, T
by: Norman Tweed

It's never too late to start saving for retirement. If you find yourself close to retirement age, what can you do to supplement your Social Security? I used dividend growth stocks with long histories of increasing dividends when I was retiring. Can you make a bundle overnight? No. Will the portfolio pay more than Treasury bonds? Yes. So, how should you go about it?

Safety of principal is paramount today, with the global financial crisis. You don't want to end up like Greece. Look around for stocks that have a long track record of paying dividends; long record of annual dividend increases; long record of earnings per share growth. Pick stocks in industries that you are sure will be around as long as you are.

In the past I have written about the do-it-yourself retirement portfolio. I use 10 sectors as defined by S&P. How can you build this portfolio if you have just started saving at 55? Take one step at a time. Use your best idea first , second best idea second, etc. I started saving for retirement with stocks that I knew—Dominion Resources (NYSE:D) (an electric utility), my company's stock. I branched out into T for AT&T telephone and PG for Procter and Gamble (my soap company). I didn't know about sectors then, only what I used on a daily basis.

Since retiring, I have bought other stocks, including defense stocks like Raytheon (NYSE:RTN), for diversification. Let's start with three stocks and follow the dividend flow and reinvestment. (Data from First Call, Yahoo Finance and David Fish's CCC charts):

  • Sysco (NYSE:SYY)--Consumer Cyclical sector. Sysco Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. This Dividend Champion has 41 years of consecutive dividend increases. The current yield is 4.02%. The 5-yr annual average dividend growth rate is 10.8%. The current p/e is 13.75. The projected earnings per share growth rate for next year is 3.03% and the 5-yr projected earnings per share growth rate is 5.6%.

  • AT&T (NYSE:T)--Telecommunications sector. AT&T Inc., together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. This Dividend Champion has 27 years of consecutive dividend increases. The current yield is 5.9%. The 5-year annual average dividend growth rate is 5.4%. The current p/e is 14.73. The projected earnings per share growth rate for next year is 6.78% and -3.8% for the next 5 years (which includes the ending of this business cycle).

  • Raytheon (RTN)--Industrial sector. Raytheon Company, together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support. This Dividend Challenger has 7 years of consecutive dividend increases. The current yield is 3.9%. The 5-year annual average dividend growth rate is 10.8%. The current p/e is 8.09. The projected earnings per share growth rate for next year is 8.6% and the next 5 years is 12.9%.

A chart comparing these three stocks over the last five years shows the cyclical nature of all three stocks, when compared to SPY (S&P500 Index ETF). Click to enlarge:

We will now look at the dividend income stream for these three stocks. With equal positions of $10k each purchased 1 year ago, these stocks produced a quarterly income stream as shown in the following table:

Stock

Quarterly Dividend Rate

Number of Shares

Quarterly Income

SYY

$.25

345.06

$86.266

T

$.42

349.4

$146.75

RTN

$.375

224.16

$84.06

In order to investigate the growth of the portfolio, due to dividend reinvestment, I will once again create a spreadsheet for only the last year (October 2010-October 2011).

Stock Date of reinvest Div Rate # Shares Dividend Drip price # Shares pur
Totals 354.30 $363.69 12.86
SYY 10/05/11 0.260 354.30 $92.12 $25.47 3.62
06/29/11 0.260 351.35 $91.35 $30.97 2.95
03/30/11 0.260 348.08 $90.50 $27.71 3.27
12/05/11 0.260 345.06 $89.72 $29.67 3.02
Totals 229.83 $365.64 7.64
RTN 07/01/11 0.430 229.83 $98.82 $50.11 1.97
04/04/11 0.430 227.88 $97.99 $50.46 1.94
01/03/11 0.375 226.04 $84.77 $46.09 1.84
10/01/10 0.375 224.16 $84.06 $44.61 1.88
Totals 364.51 $614.05 20.64
T 10/05/11 0.430 364.51 $156.74 $28.31 5.54
07/06/11 0.430 359.56 $154.61 $31.23 4.95
04/06/11 0.430 354.55 $152.46 $30.47 5.00
01/06/11 0.430 349.40 $150.24 $29.15 5.15

At this point, I will add a table to illustrate the growth of dividends received and the steadily growing income over time.

Stocks

Q1

Q2

Q3

Q4

SYY

$89.72

$90.50

$91.35

$92.12

RTN

$84.06

$84.77

$97.99

$98.82

T

$150.24

$152.46

$154.61

$156.74

Totals

$324.02

$327.73

$343.95

$347.68

In addition, I will illustrate the total value of this portfolio by quarter in the following graph. Click to enlarge:

It can be seen from the table that the income for the year was $324.02 + $327.73 + $343.95 + $347.68=$1343.38. On the initial $30k investment, this was 4.47% which meets my minimum 4% yield for a core dividend growth stock portfolio. In addition, it can be seen from the Total Portfolio Value chart that the ending portfolio value was $30,859.79. This computed out to be a capital gain on the initial $30k of $859.79 or 2.86%.

Conclusion: Why did I choose these particular stocks for the core portfolio? My criteria for the core portfolio of a retiree requires 4% minimum yield, a long history of dividend increases, good cash flow, and general robustness of the company. I like to see growing earnings to cover the payout of dividends. I also like to see robustness during market downturns, as illustrated by the price charts compared to SPY. Diversification does not in itself insulate the retiree from volatility, but as can be seen from the price charts it helps stabilize the total portfolio. One must have many stocks to diversify and these three are a start in that direction.

These three stocks were selected with safety of principal in mind, during a time of global financial turmoil. It is critical that one does their own due diligence on any investment.

Disclosure: I am long RTN, T. I may start a position in SYY in the next 72 hours.