A Quick Guide To Retiring Early

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Includes: AAPL, BKH, CINF, CWT, DVY, EMR, HDV, HP, HYG, JNJ, KO, MCD, MMM, MO, NNN, NWN, O, PEP, PFF, PG, PM, SDOG, SPHD, SWK, SYY, TGT, TLT, UVV, VCLT, VIG, VVC, VYM, WMT, XOM
by: Colorado Wealth Management Fund

Summary

Many investors want to retire early, but fewer wish to follow the path to getting there.

The path starts with frugality, but it also includes a few opportunities to get a risk-free return through employer matches or credits from the government.

If investors love investing, it will make it much easier to keep putting capital into the retirement accounts.

I’ll suggest a list of several companies and a few ETFs an investor could use as a starting point for finding potential candidates.

When investors are first learning how to research companies, they should stick to those with a more defensive strategy and solid record.

Planning to retire early? Perhaps, I should repeat the question with emphasis: Are you planning to retire early? Wanting to retire early and planning to retire early are two very different topics. This article is about the planning, few people need help in the "wanting" category.

One of Two Things

To get that early retirement and not end up going "back to work," you need one of two things: a significant portfolio of assets or a terminal disease. Since this piece is on investing, I'm going to focus on acquiring the former rather than the later.

Important Skill Sets

Investors come to Seeking Alpha to learn how to invest better, but the first step is knowing how to control costs. Even if an investor knows how to earn a solid return on their portfolio, they need to be putting cash into that portfolio. Earning a solid return on a portfolio of $7,000 is great, but it won't get an investor to retirement. That isn't meant to disparage people that are struggling to put away the necessary capital. The hardest part of retirement planning is making the commitment and every fortune begins with a very small amount of capital. Even inherited fortunes were originally created from a much smaller amount of capital.

Therefore, the first skill is managing expenses. That doesn't just mean looking for ETFs with low expense ratios. I feel compelled to point out that investors using mutual funds (common for employer-sponsored accounts) should look through all of the options available to them and should consider the expense ratio as one very important piece of information in picking the right combination.

Make Frugality Easier

I can't just tell readers to be frugal and check it off the list. This is a huge part of the strategy for retiring early, so it warrants further discussion. If you're not used to being frugal, what things can you do? One of the first steps is to look for those employer-sponsored accounts. Is there a 401(NYSE:K) available? Does it have an employer match? If there is any employer match, that is the first investment choice most investors should make. Even if the match is 50% on the first 6% of salary, we are talking about an immediate 50% return. I have no problem being measured against the S&P 500 for generating returns. As a professional, I expect to be able to beat it reliably without driving returns through a massive increase in risk. However, beating the S&P 500 is much easier than the performance of an account that invests in the S&P 500 and receives a free 50% return from the first day.

The use of that employer match not only provides a 50% return from day one, it also ensures the money is actually sent to the retirement account. I can't keep track of how many people I've known who want to money away for retirement and want to do it at the end of the year. It is painfully rare to see them actually max out those accounts.

Easy Money

Perhaps the easiest money available to investors is the Saver's Credit. For investors who qualify, this credit can be as large as $1,000 credit after sticking $2,000 into the retirement account. That isn't just a 50% match. The investor gives up $2,000 and the account gains $2,000. Then the investor receives $1,000 as a credit on their taxes. The net cost to the investor is only $1,000 but the account gains $2,000.

To qualify for that huge 50% refund the investor needs to have a low MAGI (modified adjusted gross income), but it is still the hardest return to beat. An instant 100% is exceptional. No reasonable person should be rejecting this risk-free return, but many people do it year after year.

Love Investing

Since I'm running my own solo 401(K) each contribution requires writing a check. I try to send that check no later than two weeks after the quarter ends. In many cases I send the check in early. I have a special advantage here though. As an analyst, I love buying stocks. Other people want to buy cars, boats, and other depreciating assets. My Tacoma is over a decade old and I don't expect to replace it this decade. I could afford to drive something fancy, but I'd rather buy more stocks. My favorite check to write is that check to my solo 401(K).

I will make an exception here. There is one scenario where I think it makes sense for investors to spend capital on something that is neither stock nor bond. When the investor goes to buy a house, they should consider how frequently they will be moving. The cost of paying the commissions and other costs to buy and sell the house add up dramatically over time. When the investor buys a house, they should be looking for something that makes sense today and makes sense every day for the next decade. Young investors buying a 2-bedroom condo with one kid, another on the way, and planning for more are not making a reasonable choice. I should add a caveat here though. If they are buying the condo and planning to get owner financing (better rates on mortgages for owner occupied) with the intent to stay in the area and use it as a rental (self-managed) while they buy another house for themselves, they could be making a great choice.

If they didn't plan to manage it themselves, there is already a great structure for having someone else manage real estate. Surely you know about REITs (Real Estate Investment Trusts). The buying and selling shares is cheaper than property. Without that plan to manage it as a rental, it would make more sense to be looking for something with at least three bedrooms. If this were a couple I knew, I would encourage them to look for three bedrooms anyway. There is nothing wrong with a three-bedroom rental and if interest rates shot higher (making mortgage financing harder to acquire) they could stay in the property.

Individual Stocks

I put together a list of several companies offering a reasonable dividend and many of them qualify as Dividend Champions (25 or more years of consecutive increases). This is where an investor should start looking for their first individual allocations. Remember that this is not an endorsement of every stock in the list at the current prices. It is simply providing a list for where investors might start doing their own research.

The "Years" column is the number of consecutive years with dividend increases. Some will have increased again since I last pulled the data:

Company

Ticker

Years

Northwest Natural Gas

(NYSE:NWN)

60

Procter & Gamble Co.

(NYSE:PG)

59

Emerson Electric

(NYSE:EMR)

58

3M Company

(NYSE:MMM)

57

Vectren Corp.

(NYSE:VVC)

55

Cincinnati Financial

(NASDAQ:CINF)

55

Coca-Cola Company

(NYSE:KO)

53

Johnson & Johnson

(NYSE:JNJ)

53

California Water Service

(NYSE:CWT)

48

Target Corp.

(NYSE:TGT)

48

Stanley Black & Decker

(NYSE:SWK)

48

Altria Group Inc.

(NYSE:MO)

46

Sysco Corp.

(NYSE:SYY)

45

Black Hills Corp.

(NYSE:BKH)

45

Universal Corp.

(NYSE:UVV)

44

Helmerich & Payne Inc.

(NYSE:HP)

43

Wal-Mart Stores Inc.

(NYSE:WMT)

42

PepsiCo Inc.

(NYSE:PEP)

43

ExxonMobil Corp.

(NYSE:XOM)

33

McDonald's Corp.

(NYSE:MCD)

39

National Retail Properties

(NYSE:NNN)

26

Realty Income Corp.

(NYSE:O)

22

Apple

(NASDAQ:AAPL)

4

Average

44.61

Overall this portfolio is designed to be more defensive than a broad market ETF.

Why I Suggest Starting With Dividend Champions

When new investors enter the market, they are often deluded with the idea that more risk equals more return. That is entirely false. It is true that a riskier portfolio strategy requires more expected return, but that does not mean the higher returns will actually occur. If investors were guaranteed higher returns would actually occur, the entire "risk" part of the equation would be gone.

One way that investors often struggle with this concept is that they reach for a huge dividend yield with no idea about the fundamentals of the company. They see the dividend yield and think that part of the return is secure. They don't know if the company is simply returning equity. They don't know if the dividend can actually be maintained. They simply think that they are getting that dividend and treat changes in the price as "random fluctuations." This is a poor strategy and it is a reason investors learning how to do their own due diligence should often start with companies that are more defensive and have an excellent record of accomplishment.

I still follow my own suggestions here. As an analyst I trade in high yield stocks, but I also have some core allocations to companies like Wal-Mart, Target, and Altria Group. Philip Morris (NYSE:PM) is also in my portfolio, though it doesn't show up on the list above. Some dividend screeners won't give it credit for the history of dividend increases that came from MO and PM when they were one company.

ETF Options

The following list of ETFs provides some of the ETFs with more reasonable expense ratios that either provide strong dividend yields, slightly lower beta, or in some cases negative beta.

Ticker

Name

Expense Ratio

(NYSEARCA:VIG)

Vanguard Dividend Appreciation ETF

0.10%

(NYSEARCA:VYM)

Vanguard High Dividend Yield ETF

0.10%

(NYSEARCA:DVY)

iShares Select Dividend ETF

0.39%

(NYSEARCA:HDV)

iShares Core High Dividend ETF

0.12%

(NYSEARCA:PFF)

iShares U.S. Preferred Stock ETF

0.47%

(NYSEARCA:SDOG)

ALPS Sector Dividend Dogs ETF

0.40%

(NASDAQ:VCLT)

Vanguard Long-Term Corporate Bond Index ETF

0.10%

(NYSEARCA:TLT)

iShares 20+ Year Treasury Bond ETF

0.15%

(NYSEARCA:HYG)

iShares iBoxx $ High Yield Corporate Bond ETF

0.50%

(NYSEARCA:SPHD)

PowerShares S&P 500 High Dividend Portfolio ETF

0.30%

I wouldn't want to allocate the entire portfolio to a single company or even a single ETF. There are few ETFs with enough diversification that I think they make sense by themselves. However, I will point out that for many investors going with a company 401(K) the target date funds can be a good deal. As usual, watch the expense ratios.

Don't Keep It to Yourself

If you found this article helpful, e-mail it to someone you think might enjoy it or simply share it on Facebook.

My best research comes out first on the Mortgage REIT Forum. The service has over 100 subscribers, and I'm working with Seeking Alpha to adjust prices (higher) for new subscribers. All existing subscribers will be grandfathered in at the current rate of $240/year. This is a great time to be locking in the lower price. Why do I allow investors to lock in their rate? Because I want to show my appreciation for the subscribers who gave me a chance when I was launching a new system. The Mortgage REIT Forum averages 3 articles per week. One provides updated book value estimates for several mortgage REITs and includes my ratings (adjusted each week). The second article rates the different preferred shares and shows investors which ones are offering the best bargains. The third is used to highlight individual stocks and market failures or to provide a sneak preview on the articles I'm planning to publish over the next couple weeks.

Disclaimer: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

Disclosure: I am/we are long WMT, MO, PM, TGT.

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.

Additional disclosure: Tipranks: Assign no ratings.