- Take a ride with me in the “way back” machine if you dare.
- An introspective review can point out mistakes we can learn from.
- A retrospective treatment might point the way forward.
- Each stage of our investment careers represents an exceptional time calling for exceptional measures.
Taking a ride in the “way back” machine is frightening for some folks. Some reflect on that “F” they got in math in third grade when the rigors of multiplication and division seemed just too much to absorb and process. Others reflect on the frustration and rejection of not getting invited to the high school prom, or are still upset about getting invited but not finding the perfect dress for the occasion.
Investors who experienced the fright of losing half the investment value of their portfolio at the depths of the 2008-2009 financial crisis have yet another reason they’d prefer not to revisit the past. It’s a form of denial, to guard the psyche against traumatic events that would cause more emotional trauma if we reflected upon them now.
However, if we can summon the courage, maturity and responsibility to revisit the various life stages of our investment careers, there is much we can learn. And once we confront these issues and use our own personal information and experience for our personal benefit, our investment outcomes can improve.
Think Back To When You Started Investing For Retirement
I don’t know about you, but as far back as the age of 11, I've been investing for retirement. For years before that, I sat beside my dad on Saturday mornings and entered closing prices on his stocks into an accounting book as he dictated them to me from the New York Times financial listings.
From these early beginnings, my interest in the markets was kindled and I religiously invested money earned every weekend playing in a rock 'n' roll band I formed with buddies called “The Islanders." Yes, this was before the Islanders Hockey team existed and stole our moniker.
Exceptional Times Call For Exceptional Measures
I like to think of investing in behavioral terms. As a retired clinical psychologist, it comes easy to me. Now that behavioral finance has become a respected niche in the academic and finance worlds, some of my early thinking has gone mainstream.
The behavioral terms I refer to have to do with what I like to call the three phases of investing.
In the initial phase, when we're young, full of ourselves and think of ourselves as invincible and invulnerable, we also think like the folks in Lake Wobegon, created and popularized by Garrison Keillor. In this mythical town, "All the women are strong, all the men are good looking and all the children are above average."
Each of us thinks of himself as smarter than the other guy. We're all-knowing. When it comes to investing, investors just starting out are always looking to hit it out of the ballpark. Each investment starts with the hopes of it becoming the next Apple (AAPL), Google (GOOG, GOOGL), Facebook (FB) or even Amazon (AMZN). All we need to do is pick the right one and we'll have riches beyond measure. Unencumbered by any responsibilities except to ourselves, many of us invest large percentages of disposable income in the markets without a care in the world. And often this is done with very little, if any, time spent on researching the company itself. As a counter to this bravado, "Retire Smarter: FTG Portfolio Gets Defensive For The Next Big Crash, Part 2" is instructive.
Midlife brings a new set of challenges. Most of us marry, buy a home, start a family and take on the large responsibilities that go with them. The recklessness we exhibited in phase 1 transforms to a more sober assessment in phase 2. We've got to pay the rent (mortgage), have to feed a growing family, buy new clothes each month as the kids grow, earn enough to pay for gas, utilities, car payments, cable bills and the rest. And then there's the college tuition we need to save for, to help our kids have a better life than we had. Investing needs to take a backseat for a while, and any investing that we do starts to turn to more recognizable companies that provide the goods and services we use every day. No more dot-com eyeball counting fly-by-night companies for us.
This article extols the virtues of one such telecommunications giant we all grew up with and my response to a year-long downward spiral in price. (Spoiler alert: It goes into some detail of my analysis of why AT&T (NYSE:T) made for a good investment, down 22% from its 52-week high and yielding over 6% at the time.)
Before the final curtain comes down, the final phase seems to hit us over the head. All the questions come flooding in and keep us up at night. Have I saved enough for retirement? Will I run out of money? Will I go from a comfortable middle class existence to living in the gutter? How will I earn money in retirement to pay the bills when I'm too old or sick to work ever again?
Would You Do Anything Differently?
When I began investing my hard-earned rock 'n' roll money for retirement, I didn't know what I know now. Now that I've gone through phase 1 and phase 2, I'm solidly in phase 3. March 9, 2009, the bottom of the market crash in the financial crisis, represented a definite turning point in my investing career.
Earlier phases have taught me that capital gains can be extremely ephemeral. Here today, gone tomorrow. I've had my share of double baggers and triple baggers pricked just as quickly by market contractions, corrections and crashes. When all the air was let out of them, capital gains turned astonishingly quickly into capital losses. I have several lifetimes of capital loss carryforwards on my books from multiple crashes throughout the decades. It would have been helpful if the recent tax reform bill had raised the cap of allowable deductible losses from a measly $3000.00 per year above capital gains. Because they didn’t do that, I’m stuck with multiple lifetimes of deductions.
Knowing What I Now Know, What Would I Do Differently?
I like to think of myself as someone who tries, whenever possible, to learn from my mistakes. But learning from them is just the first step. Applying those lessons in a proactive fashion is where the payoff really lies.
Hindsight is twenty-twenty. But here is what I did, and what I'd do differently 50 years ago if I knew back then what I know now.
As retirement came into my sights, it was apparent I needed a better method. I began to experiment at a propitious time - at the bottom of the last crash - with dividend growth investing. I needed a way to generate income from my assets to pay retirement expenses in the future, in a way that was more reliable and dependable than depending upon the daily whims of investors pricing stocks based on irrational exuberance, fear or panic, up one day, down the next.
It turns out that buying companies most of us are familiar with, like AT&T, that have long histories of paying and increasing dividends, is a very viable way to dependably fund our retirements. Knowing that it has shared a growing stream of dividends to shareholders for 34 consecutive years conveys a certain amount of assurance that this company is no fly-by-night. AT&T has proven its ability to transform from an old-line telephone company to an advanced telecommunications company that has its hand in almost everyone’s daily activities, from wireless phone services to internet provider to entertainment provider. Especially when stocks of companies like this are bought on sale.
AT&T is but one of many examples of stocks I bought at the depth of the financial crisis whose dividend yields had shot up way past their historical yield levels. Buying T in the low $20 range allowed me to capture what is now a 10% yield on cost because the company just raised the dividend to $2.00 annually per share. Sometime in the future, the companies I bought when no one else wanted them will be paying me 100% of my investment back, each and every year, in dividends alone.
Doing so brings the benefits of capital appreciation when the dust clears and markets recover, as well as accidentally high yield and income. The lower the price, the higher the income. It’s basic math, so simple even a gorilla could invest like this. A recent article, read by over 160,000 Seeking Alpha readers, illustrates this well: "Retire Smarter: Big Social Security Changes For 2018 And FTG Portfolio Supplements."
Have Your Cake And Eat It, Too
I like cake. More than that, I like to have it and eat it, too.
I also discovered that the tail of these companies usually wags the dog. That is, strong companies that fit this profile will inevitably confer large capital gains as a side benefit to the income investor. So, even though my main focus is always first on the company's ability to pay and grow the dividend, the added benefit of capital appreciation always comes along for the ride, eventually.
In the case of AT&T, for instance, we bought more shares at $32.60 several weeks ago, and it rose from there to above $39.00, a rarefied range it had not visited in some time. Aside from the exceptional 6.01% yield we captured, that tail-wagging brought us over 18% capital appreciation as well.
This is a simple truth to understand as well. The dividends can't exist unless the company earns the money to pay them. The exception, of course, is miscreant companies that borrow too much in order to pay the dividend. With growing earnings comes a growing ability to not only pay the dividend but also to pay a growing stream of dividends. With higher earnings come higher dividends and higher stock prices. They are really the left hand and right hand of the handshake the markets offer us. In other words, you can have your cake and eat it, too.
Strategic Ideas For 2018
As the New Year begins, we'll be keeping our eye on many important developments that will surely have an effect on the markets and the stocks we all keep on our watch lists for opportunistic pricing.
The tax cut bill was signed by the president before he left for Mar-a-Lago for his Christmas break. It is widely recognized that it will positively impact stocks in several major ways:
- The reduction in the corporate tax rate, from 35% to 21%, will leave corporations with lots of extra cash. Some of the more solid companies will be able to pass some of those tax savings along to investors in the form of increasing dividends. There are several stocks on our watch list that stand to benefit. How about yours?
- This same infusion of cash from money not spent on corporate taxes will be available to companies, should they be so inclined, to buy back some of their shares on the open market. This will have two major impacts. With extra buying pressure, stock prices will rise. After shares are bought back, there will be fewer shares outstanding. Less shares outstanding means more earnings and dividends to go around for those smaller amounts of shares remaining. Those higher earnings per share will boost stock prices, and higher dividends per share will put more money into investors' hands.
- As consumers and ordinary workers, many of us will see little to no benefit from the tax cut. However, the silver lining for us is the plain and simple fact that as small investors, we stand to gain from increased stock prices and increased dividend growth.
- What's on your watch list to take advantage of these developments?
Back To Basics
It is this set of principles and a combination of methods and strategies that I employ for subscribers to my Seeking Alpha newsletter. My mission is to help followers, readers and subscribers to build, grow and protect dividend income for retirement, one dividend at a time, just as I've succeeded in doing for my own future retirement.
In order to share the methods and strategies I’ve learned with readers, I began writing a series on Seeking Alpha several years ago to publicly demonstrate the process of building, constructing and shaping a portfolio of dividend growth stocks. It has been my hope that it would serve as a model that readers could refer to in order to transition their own portfolios to an asset class of equities that could serve as the engine of income growth in their own phase 3.
Only 24% Of Workers Have Pensions Today
Today, only 24% of workers are covered by traditional, defined benefit pensions at work. The rest of us must fend for ourselves. Big corporations which used to provide pensions now save enormous sums by no longer offering them. Instead, the other 76% have been encouraged to find ways to fill the gap between the meager amounts we’ll receive from Social Security and the actual spending needs we’ll all have in retirement. This was the genesis of the Fill-The-Gap Portfolio.
The Fill-The-Gap Portfolio
The FTG Portfolio contains a good helping of dividend growth stocks, like AT&T. It was built with the express purpose of benefiting from this and other strategies.
Three years ago, I began writing a series of articles on December 24, 2014, to demonstrate the real-life construction and management of a portfolio dedicated to growing income to close a yawning gap that so many millions of seniors and near-retirees face today between their Social Security benefit and retirement expenses.
The beginning article was entitled "This Is Not Your Father's Retirement Plan." This project began with $411,600 in capital that was deployed in such a way that each of the portfolio constituents yielded approximately equal amounts of yearly income.
The FTG Portfolio Constituents
Constructed beginning on 12/24/14, this portfolio now consists of 21 companies, including AT&T Inc., Altria Group, Inc. (MO), Consolidated Edison, Inc. (ED), Verizon Communications (NYSE:VZ), CenturyLink, Inc. (NYSE:CTL), Main Street Capital (MAIN), Ares Capital (ARCC), British American Tobacco (BTI), Vector Group Ltd. (VGR), EPR Properties (EPR), Realty Income Corporation (O), Sun Communities, Inc. (SUI), Omega Healthcare Investors (OHI), W.P. Carey, Inc. (WPC), Government Properties Income Trust (GOV), The GEO Group (GEO), The RMR Group (RMR), Southern Company (SO), Chatham Lodging Trust (CLDT), DineEquity (DIN) and Iron Mountain, Inc. (IRM).
Because we bought most of these equities at cheaper prices since the inception of the portfolio, and because most of our stocks have increased their dividends regularly, the yield on cost that we have achieved is 7.67% since launch on December 24, 2014. Current portfolio income, including recent dividend raises by AT&T and Realty Income, and our newest addition of AT&T shares, now totals $33,187.86, which is $1750 more annual income than the previous month. This represents a 5.6% annual income increase for the portfolio.
When added to the average couple's Social Security benefit of $32,848.08, the $33,187.86 of additional supplemental income brings this couple annual income to $66,035.94. This far surpasses the original goal set to achieve a total of $50,000.00, which is accepted as a fairly comfortable retirement income in many parts of the country. That being said, this average couple now has the means to splurge now and then on vacation travel, dinners out, travel to see the kids and grandkids and whatever else they deem interesting.
Taken all together, this is how the FTG Portfolio generates its annual income.
FTG Annual Dividend Income
(Chart source: Author)
As discussed in “Even A Cloudy Crystal Ball Comes Into Focus Twice A Year,” paying too much attention to the everyday price swings, even with stodgy stalwarts like AT&T, can drive investors to drink. But for those investors willing to be more proactive in their investing, there is a lot to be said for putting favored stocks on a watch list and exercising the patience to wait, and then pouncing when others have thrown the stock out with the bathwater. Great capital gains and enormous growth of portfolio income can be accomplished. When AT&T’s yield shot up from its usual 5% range to 6.01%, we could not stand by passively and look that gift horse in the mouth. We acted, for ourselves, our readers who follow me and subscribers.
We all have mistakes we’ve made that we can learn from. The key is having the courage to look back upon them, learn from them and then act upon the information learned.
When we say “woulda, coulda, shoulda,” it means that we wish we would have acted, that we had the means and could have acted and that we understand, in retrospect, that we should have acted.
In regard to our recent successful AT&T trade, this learning translates into, “If AT&T trades down to a point where it yields 6%, I will buy it, I can buy it and I did buy it.”
At each phase of my investing career, I’ve learned many lessons and have tried to apply those lessons in the next phase. Now I try to share them with you.
Your Engagement Is Appreciated
As always, I look forward to your comments, discussion and questions. Have you been able to recognize discernible differences in your investment style as you’ve aged? Did you notice a transition from invincible investor to one with more patience, given to carefully researching your prospective investments? Do you occasionally contemplate taking a quick profit, or do you now understand that taking that profit will cut off your income? Please let me know in the comment section how you approach these situations in your own portfolio and how you arrive at your decisions.
Author's note: Should you be interested in reading any of my other articles detailing various strategies to enhance your returns on a dividend growth portfolio, you will find them here.
If you'd like to receive immediate notifications as soon as I write new content, simply click the "Follow" button at the top of this article next to my picture or at the bottom of the article, then click "Get email alerts."
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Thanks for reading. Interested in more dividend strategies and ideas?
I run Retire 1 Dividend At A Time to help investors stay focused on their portfolio income and long-term goals.
My promise to you: With every exclusive article, email, instant text and chat, I'll help guide you to:
- Increased income for retirement, one dividend at a time.
- Undervalued stocks for a greater margin of error and higher capital appreciation.
- Methods to safely diversify your portfolio.
- Strategies to build, grow and protect your income for retirement.
You're invited to take a two-week free trial to get started on the next step of your investing journey!
This article was written by
Analyst’s Disclosure: I am/we are long ALL FILL-THE-GAP PORTFOLIO STOCKS. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.