I started young and I was lucky. Not everyone is lucky.
The power of compounding is massive - and every investor, no matter how old he is, should enjoy it.
I write this article for older investors who look for their path towards dividend growth investing.
I started investing at the age of 17 and started to implement my dividend growth investing strategy when I was 24. Not everyone is as lucky as I was to have the needed knowledge and access to the stock market at such an early age. Some investors start saving at a much older age. While experts recommend start saving before you reach the age of 30, some start much later in their 50s.
If you have roughly 10 years before your retirement, it isn’t ideal but it's far from being too late. You may need to adopt a more aggressive approach when it comes to saving, but with several decisive moves you can still build a nest egg that will supplement your social security checks and pension.
When you only have 10 years to save, your investment horizon isn't too long, and therefore, there are some key elements to keep in mind. You must plan meticulously, be prepared to invest in a conservative manner, and execute your plan on a monthly basis so you can use the time you have efficiently. While older investors may want to refrain from shares, I will argue that by investing in safe blue chips for the income they generate, you can enjoy the benefits of investing in stocks while limiting the risks.
In this article, I will explain why dividend growth investing is suitable for people in their 50s who want to plan their retirement. I will give my advice based on my experience and the answers that I have given over the years to people who asked for my assistance on this important matter.
Dividend growth investing for every age?
Yes! Dividend growth investing is suitable for every age. The greatest advantage it has for investors who are getting closer to retirement is that it helps them make up for their lost time in the market. Most strategies will imply that in your 50s you should allocate more of your capital towards fixed income and safer investment. These assets have limited upside, but they are also less volatile.
The risk in stocks is derived from their volatility. The stock market goes up and down, and when you rely on it for your livelihood, it can be dangerous. However, dividend growth investing allows you to deal with these two risks. Dividends are by far more reliable than capital gains, and relying on them is less dangerous even in a bear market. Moreover, when you invest in blue chips that have a long history of raising their dividends, you invest in companies with lower volatility compared to the broader market.
Planning is a crucial element, as time is limited. When you have plenty of time on your hand you need less planning because you can afford to make mistakes. In addition, when you have time you can simply aim in the right direction and execute. Mature investors need to plan meticulously and set firm goals for their retirement, as they won't have time to change plans.
By setting goals, meticulously planning and investing in dividend-paying blue chips, even mature investors can harness the power of time and compounding interest in order to achieve reliable income. Being invested in stocks and not in bonds or CDs will help them deal with the lost time in the market.
A story about Rebecca
As an investor, I always try to improve my investment strategy and figure out the best way to create wealth. I try to share this knowledge with my family, friends and readers. In the process, I find myself at many times trying to deal with issues that I personally didn't have to deal with but others did. I take these lessons with joy, as they help me become a better investor.
Rebecca is a 55-year-old woman who plans to retire in 10 years. She has some retirement savings in a 401(k) and some cash in her savings accounts. She is working and wants to build a dividend growth portfolio to supplement her social security and 401(k). The goal is to be able to maintain a similar lifestyle after retirement.
I try to help her achieve her goals using the lessons I learned as an investor and build a suitable dividend growth portfolio. She will get a monthly check from social security, monthly income from the dividend growth portfolio, and she will be withdrawing some money from the 401(k). The savings account will be an emergency fund.
Advice for investors starting their dividend growth portfolio late
The first step is to understand your needs. You must figure out exactly how much of resources you will need and how much money will you be spending when you retire. When people retire, they tend to spend less, and the rule of thumb says that you will be needing 70% of your last income. However, people are different and have different needs, and it should be dealt with individually.
Check how much capital you have right now and figure out the size of the gap between what you have and what you want to have in 10 years. Make a plan to save monthly in order to bridge the gap. The bigger the gap, the more you'll have to save, and the bigger sacrifice you will be making in the present to support your future. The savings rate is crucial, because it is the only factor that can be fully controlled by the investor.
Make a budget that will allow you to save as much you need to reach your goals. If you can't save enough, amend your goals accordingly. Goals should be challenging, but they should also be achievable. The budget is a tool that will help you execute your plan and achieve your goals. At this point, you know how much money you need and you know how much money you can save. It's time to start investing the money.
Once you save on a monthly basis, it's time to invest on a monthly basis. Every month counts, so avoid timing the markets. Time in the market is way more important. When you invest monthly, you are less concerned about short-term volatility, as it allows you to average down on positions that suffer from short-term weaknesses.
In order to start your dividend growth portfolio, you need to choose your anchors. This is especially important when you start it late. What I call an anchor is a "big, slow-moving, boring" company. These companies are usually market leaders and tend to be very reliable. In the long run, they perform well and bring reliable returns. I recommend choosing one anchor from each of the 10 sectors. The rest of your portfolio will be built around them.
Here are my anchors. If would start a dividend growth portfolio, I would certainly build it around these companies. Consumer staples - Procter & Gamble (PG), healthcare - Johnson & Johnson (JNJ), industrials - Boeing (BA), financials - JPMorgan (JPM), consumer discretionary - Disney (DIS), real estate - Realty Income (O), energy - Exxon Mobil (XOM), information technology - Microsoft (MSFT), telecommunications - AT&T (T), and utilities - Duke Energy (DUK). I don't necessarily think they are all attractive now, but I do believe that they are all very reliable anchors. I would start with AT&T and Exxon Mobil if I had to choose right now.
Once you have 10 anchors in your portfolio, you are diversified, as you have capital allocated to all sectors, and you are invested in relatively low-volatility stocks. At this point, you should add more stocks in companies from different sectors around your anchors. For example, if you own a big position in Exxon Mobil, you can add some Chevron (CVX). This way, you will be supplementing your anchors with more dividend-paying companies. It will lower the volatility and the risk in the portfolio.
Even in your 50s, it isn't too late to build your dividend growth portfolio. Sure, it's more challenging and requires more discipline, but with the right planning and execution, you can create an impressive nest egg that will offer crucial additional income. Dividend growth portfolios can enjoy the additional returns offered by stocks while limiting the downside.
While young investors should put the emphasis on education and building an investor state of mind, mature investors should have clearer goals and efficient execution. The use of anchors will allow them to build a reliable portfolio in less than a year. This portfolio will later be supplemented with other stocks, and therefore, will offer lower volatility and higher income.
Disclosure: I am/we are long PG, DIS, JNJ, T, CVX, XOM, JNJ, BA, JPM, O. 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.