Fox News Accidentally Makes The Case For Dividend Growth Investing

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Includes: DLR, ENB, ITW, LMT, MMM, MO, O, PEP, WPC, XOM
by: Nicholas Ward
Summary

I came across an interesting Fox News article recently that discussed retirement options.

The article looked at the best value oriented cities for retirees to live.

However, it didn't discuss what happens when money in retirement runs out, which it inevitably would have in the scenarios it laid out.

To me, a dividend growth investing strategy in an answer to this shortfall.

The other day an interesting article popped up on the news section of my iPhone. It was a Fox News article titled, “Best retirement cities if you don’t have $1M saved”. Now typically, I’m not one to read Fox News. Before any of you Fox patrons out there get up in arms, I suppose I should say that I don’t like to read CNN either. In general, I think the mainstream media outlets in this country have become entirely too partisan, which leads to misleading reports that verge on outright lies. Bias is so painfully apparent in reporting these days. It seems as if no one tells the whole truth, just the parts that they know their readership base wants to hear. The worst part is, these readership bases just eat it up, unwilling to breach their comfort zones. This a problem, not just for the media, but for society at large, so I wanted to take a bit of time to highlight the issue.

Although I suppose I’m more of a blogger than a journalist, I think it’s important for anyone with a podium to speak the truth. I also think it’s important for readers to seek out the truth, even when it’s inconvenient. No one likes to be uncomfortable. I understand that. But blissful ignorance is never the correct answer. Knowledge, to me, is power. In life and in the markets.

This is how I pivot back to an investment piece (in case you were wondering). The biased reporting and willful ignorance of so many individuals in this country (and across the world) comes down to one thing: fear. Fear is also a driving force in the markets. Irrational momentum in the stock market generally has everything to do with the fear of missing out (FOMO). I shouldn’t complain, because much of my investing strategy relies on taking advantage of the public’s herding mentality and the short-term inefficiencies it creates. Although I wish the public was better informed on all things, I suppose capitalizing on irrational behavior in the markets as a value investor is a small silver lining.

But, now that this tangent on journalistic ethics and the importance of pursuing the truth is over with, let me return to the article that sparked it all. I enjoyed the piece (good job, Apple algorithm). As someone who spends a lot of time thinking about retirement and financial freedom, even though I’m still fairly young, I get a kick out of reading articles like this. It’s fun to see just how far one’s money can go in different areas of the world. Yet, I did find a major flaw in this piece that I wanted to highlight to my readers who I know also spend time thinking about achieving their own financial freedom. I don’t think that dishonesty was the problem with this financial piece. Yet, I think the basis logic behind it was flawed and I wanted to highlight how a dividend growth strategy can fix the issues I took with it.

In short, this article was focused on how long one’s net worth would last in a given city using the drawdown method. In other words, how long will it take you to spend your money? How long will it take for your savings to dry up in retirement? How long until you’re old and on the streets with no where to go because you didn’t have a means of passive income to support you. What will I do then?

I know, I know…I’m falling into the sensationalist trap that media is known for with that last couple of questions above. Yet, to many retirees, these might seem like important questions to ask. And to those that aren’t DGI investors, the answers might be difficult to come across.

Money doesn’t grow on trees, right? In retirement, we only have so much and once it’s gone, it’s gone. I suppose, that’s true. However, I’ve always hated the idea of being forced to spend my money, dwindling down my hard earned savings. It’s depressing, thinking about working hard for your entire life, saving up money, only to spend it all, hoping that it doesn’t run out before you die…situations like that make me wonder, what’s the point of it all?

This is why I’ve gravitated towards the dividend growth strategy. I’m not retired yet, but I’m preparing for it actively. Instead of relying on regular withdrawals from my savings account in retirement, I plan to rely on the passive income that my portfolio generates. In a perfect world, I never have to touch my capital. This is great, not only for me and my stress levels (I can’t imagine the fear associated with knowing that you no longer have an income stream and your money is going to run out), but also for my offspring, or the world at large, because it gives me the freedom to pass down my income producing machine to my children (God willing) or to donate the wealth that I’ve accumulated throughout my life to charity, supporting causes that I’m passionate about. That seems like a much better situation to imagine on my death bed than wondering how my funeral is going to be paid for and feeling like a burden on my loved ones/society at large.

I know that this is a bit morbid. Thinking about one’s own demise is weird. But, I did start off this piece talking about the necessity to leave comfort zones, didn’t I? But, I’m not a financial adviser so I won’t continue on talking about the importance of establishing wills or maintaining life insurance. Instead, I’ll skip that part and get to the fun part of growing old: retirement!

The point if the Fox News article was to highlight great cities to retire in that offer relatively cheap living expenses because, according to a Fidelity report, roughly half of Americans won’t save up more than $1m for retirement. The Fox article was inspired by a study put together by GOBankingRates that compiled “a list of the top cities for those without $1 million saved up. The study looked at the 200 largest U.S. cities and what the average older American spends multiplied by each city’s cost of living index. The study also took into account characteristics like nearby amenities, crime rates, employment, weather and cost of living.”

Brittany De Lea, the author of the Fox piece, highlighted the top-5 cities of the GOBankingRates study. Here are the examples that she gave:

“In Tucson, Arizona, the average older American could get by on $650,000 in savings for a little more than 10 years. With $750,000 stashed away, they could live comfortably in this city for more than 15 years. The annual expenditures for older Americans in Tucson is about $49,047.”

“The cost of annual living in Aurora [Illinios] is similar to Tuscon. In this city, $850,000 in retirement savings would last about 17.3 years.”

“In this city [Baton Rogue, Lousiana], where the average annual expenditure is about $49,294, $650,000 in savings would last a retiree about 10.1 years.”

“Tallahassee, Florida – another state capital – ranked fourth in the study. The average older American would spend an estimated $49,542 each year in this city. Savings of $750,000 would last about 15.1 years.”

“In Norfolk, Virginia, $650,000 would last a retiree slightly more than ten years.”

As you can see, all she is doing is figuring out expected annual cost of living for an elderly person and dividing one’s savings account by that number. To me, that isn’t proper planning.

One thing I’ve learned since becoming an adult is that life rarely goes as planned as far as expenses go. Something always seems to pop up unexpectedly. A hot water heater, a pipe burst, a sick pet, a car crash, etc. And, I can only assume that these unexpected expenses increase in frequency as we age (due to healthcare, mainly).

So, while those average figures are great, what happens if you only have $750,000.00 and end up having to spend 5-10% of that on one major issue. When you’re not relying on passive income, that essentially cuts off a year or two off of your ability to pay your bills with your savings account.

And furthermore, I’m not sure that the author of this article took inflation into account. 2% annual inflation might not seem like much, but when you’re taking about cash eroding over a 10 to 15-year period (and maybe much longer than that if you plan on an early retirement), it becomes significant.

Now, the downside to dividend growth investing is that it requires a larger nest egg than most have (according to this article which states that roughly half of the U.S. population will never save $1m). A $1m portfolio generating 3% only produces $30,000.00/year in income (before taxes). While $30,000.00 is enough to live on in certain areas, they’re probably not the places that you’d find on any “Best Place To Live For Seniors” lists.

I think someone could create a portfolio with a 4-5% yield that is relatively safe, pushing up those annual passive income totals to ~$40-$50k with a ~$1m portfolio, but honestly, I wouldn’t want to go much higher than that because when you start targeting yields in the 6%, 7%, 8%, etc range, you’re likely taking on risk when substituting yield level for dividend safety.

And, while having ~$50k of annual passive income is great, it still doesn’t really offer enough cash to cover any of the unexpected issues that we discussed before AND pay the bills in the areas discussed in this article.

So, obviously the DGI retirement can’t work for everyone. However, the good news is that anyone who has time left to save and invest can begin to really set themselves up for long-term success with this method.

Right now, my portfolio yields ~2.35%, posted dividend growth of 10.45% last year, and is projected to post dividend growth of nearly 20% in 2019. Those figures include only organic growth (I haven’t added new money to the portfolio for several years because my wife is in graduate school and we haven’t been able to save). I feel very confident if the safety/growth metrics of my portfolio over the long-term, yet someone who is closer to retirement/a current retiree wouldn’t need to prioritize growth over yield like I do.

I think it would be fairly easy (and relatively simple) to create a portfolio of high quality DGI names that yields ~4% and has long-term dividend growth potential of ~5% annually (which is more than double the current rate of inflation).

Obviously I’m not a financial adviser and I’m not recommending that anyone go out and buy this portfolio, but here’s an example of 10 companies whose combined dividend metrics fit that description.

Name Ticker Dividend Yield Annual Increase Streak 5-year DGR

Most Recent Annual Dividend Increase

Digital Realty DLR) 3.76% 14 4.90% 6.90%
Lockheed Martin LMT) 2.88% 16 11.40% 10%
W.P. Carey WPC) 5.56% 22 5.10% 1.98%
Realty Income O) 3.91% 27 4.10% 3.20%
Illinios Tool Works ITW) 2.77% 44 16.40% 28.20%
3M Company MMM) 2.75% 60 16.50% 5.9%
Pepsico PEP) 3.20% 46 9.10% 15.20%
Altria MO) 6.14% 49 9.70% 21.20%
Exxon XOM) 4.17% 36 5.60% 6.49%
Enbridge ENB) 5.97% 23 10.90% 10%
4.11% 33.7 9.37% 10.90%

These aren't necessarily the 10-best stocks for retirees to own, they're just a handful of my favorites that offer relatively high yields. This is just a quick exercise to show that there are better ways to retire than to simple stash money away in a bank account (or under a mattress).

Not only do these companies pay strong yields, but they all have long histories of not only paying dividends, but raising them over time. I talk about this a lot, but my ultimate goal is to get to the point where my money does all of the working for me, so that I don’t have to work for my money. Dividend growth investing is how I plan to achieve this goal.

Now, it wouldn’t be fair not to say that the stock market always comes with risk. Anyone considering this sort of retirement shouldn’t take the decision lightly. Inflation does erode the value of cash over time, but that risk is relatively small compared to losing very large chunks of your savings in the market.

As someone who has invested the vast majority of his savings in equities, I’m obviously satisfied with the risk/reward scenario that the market offers me, but then again, I follow it on a regular basis and have a great understanding of fundamentals and value investing. If you don’t feel comfortable being a self-directed investor, I’d definitely recommend talking to a profession adviser who knows your financial situation in and out before making any changes to your portfolio.

Basically, what I’m saying is to take this article with a grain of salt. Make of it what you will (since I’m not a professional in the finance industry I feel compelled to post these warnings because I would hate for someone to read these words and act rashly because of them).

So, why write this article in the first place then? Because I think it can offer hope to those who’re worried about their long-term financial health in retirement.

I wanted to take some time to write up a response to the article I read on my iPhone the other day because the plans discussed in that piece are certainly not the ones I plan to pursue personally, I realized that were are probably thousands of people out there trying to figure out how to make their money last in retirement, and I believe that dividend growth investing might be the answer for some of these people.

If you enjoyed this piece, please stay tuned for the upcoming Seeking Alpha marketplace service that I'm currently working on, The Dividend Growth Investor Club. I'm hoping that this will be a place where income-oriented individuals can come together and discuss their ideas as we all pursue financial freedom. I'll be posting a variety of exclusive content, including single stock research, sector DGI watch lists chock-full of relevant fundamental data and sample portfolios with different target dividend yield and growth thresholds for Club members. I’m working hard and getting closer and closer to launch. I think we’re a week or two away, so get ready to buckle up and take this ride with me.

Disclosure: I am/we are long ENB, MMM, ITW, MO, PEP, O, WPC, DLR. 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.