How To Retire In 2019

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Includes: ANH.PC, BKH, CINF, CMO.PE, CVX, CWT, DX.PB, ED, EMR, ESS, IVR.PC, JNJ, KMB, KO, LOW, MCD, MMM, MO, NNN, NWN, O, PEP, PG, PM, SWK, SYY, T, TCO, TGT, THE, TROW, UVV, VZ, WMT, XOM
by: Colorado Wealth Management Fund
Summary

Ted and Mary are regular retirees who enjoy learning about stocks on Seeking Alpha. They cover expenses with a mix of dividends and Social Security.

High dividend yields are a great way to supplement income during retirement.

A stock portfolio filled with companies who consistently increase their dividends each year is better than any scheme to make money online.

Ted and Mary demonstrate a reasonable dividend portfolio that could help them meet their needs.

Investors worry over what happened in the stock market today or yesterday, but long-term returns depend on executing a financial plan.

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

Most investors are thrilled for the opportunity to retire. If you’re doing everything right, you may even get to retire on your own terms. It’s not a guarantee, but it is possible.

How to Retire

When you’re designing your portfolio for retirement, you may want to consider preferred shares. They can be an excellent source of additional income. They offer much higher yields than most common shares, but they involve significantly less risk. The trade-off is simple, you won’t expect much appreciation on the preferred shares. We’ve found as part of a portfolio strategy they can make retirement planning dramatically easier. They boost the yield and lower the volatility compared to most portfolio strategies.

Consequently, we run a bi-weekly series on preferred shares. Our latest installment was Preferred Shares Week 162. Each week we highlight which opportunities look most attractive. Whether investors want to trade the positions or follow a buy-and-hold approach, finding a solid entry point enhances their total income.

Let’s look at a couple preparing for retirement.

Ted and Mary

One of the most popular segments on retirement has been about Ted and Mary. Today, they returned to show how they are going to deal with retirement.

It's heartbreaking to hear retirees state they need a 14% return per year. Given the recent run higher in the stock market, there are few stocks with ultra-high yields that aren’t sucker yields. Bond yields are increasing, but remain quite low. Taking on credit risk with lower-quality bonds doesn’t reward investors with a much higher yield either. Ted and Mary will demonstrate how to succeed in a different manner.

What Retirees Need to Know Before Retirement

Retirees need to know how to plan cash flows, build a steady portfolio, and what to expect in the future. If they are already fabulously wealthy, they can ignore this article and call their masseuse back in.

Still with me? Alright, let’s get into.

The Top Mistake for Many Retirees

Trying to sustain a 14% return would require an insane amount of volatility and risk. Aiming for unsustainable returns is the No. 1 error I see from many investors.

Unfortunately, many investors aiming for these double-digit yields are doing it because they don’t see any other option. They don’t have enough capital available to sustain the lifestyle they want. Rather than cutting back on expenses on looking for additional income, many risk the nest egg they can’t afford to lose.

Let’s see how Ted and Mary are preparing for retirement.

Skip to "Building a portfolio" if you don't care about Ted and Mary's unique situation.

Building the plan

Ted and Mary face situations many readers may face. They aren't professional investors. They weren't able to save up an enormous amount of money for retirement. They have a decent retirement portfolio, but they are not millionaires.

Ted made a decent living as an accountant for a major conglomerate for 30 years. Mary worked her dream job for most of her life, helping run a non-profit organization. Her income wasn't nearly as much, so she is relying on spousal benefits.

Social Security

Ted and Mary were both born in 1955 and are 63-years-old. It would've been nice if Ted and Mary could have waited several more years for the maximum benefit of Social Security, but they aren't going to be able to. The only way they could live off their retirement of $500,000 with their current lifestyle would be to search for risky investments. They know this wouldn't be a good idea. They want to go the safe route and just take Social Security out early instead of risking their portfolio.

Normally, taking Social Security early could be a losing proposition. It mostly depends on how long an investor expects to live. However, Ted and Mary are focused more on the next decade. They are not convinced they will need to plan 30 years out.

Should You File Early?

Whether retirees should take Social Security early depends on how long they expect to live and the relevant cost of waiting for payments. Many investors fail to recognize the time value of money in this equation.

If a retiree has significant amounts of credit card debt, or any other high-yield debt, it would make more sense to take Social Security early.

Regardless, Ted and Mary decided filing for Social Security benefits immediately was the right choice for them.

The couple have five ways they've decided to bring in cash or cut expenses:

  • Mary has spent a lot of time reading on Seeking Alpha and has decided that her favorite way to invest is in companies which have a long track record of raising their dividends. Mary provided Ted all her research, and he also agreed that dividend investing is the best route to take. If they are able to live off the dividends and keep the rest invested for another decade or two, then they will be in good shape.
  • Ted had a great job for 30 years as an accountant. However, the stress of working 50-hour weeks has caught up to him. He has decided to take a relaxing job and drive a shuttle for a hospital at $15 an hour. He enjoys driving around and conversing with all the hospital staff and really enjoys his job. Ted plans to only work 20 hours a week to stay below the earnings threshold for reducedSocial Security payments. You can read more about that here.
  • Ted and Mary have decided to take out Social Security early so they won't need to tap into their retirement or choose investments which are too risky and may land them in a horrible situation.
  • Mary's father, whom she learned from, was a very successful carpenter. She wants to stay home and do repairs around the house to save money.
  • The couple moved to Colorado Springs after Ted retired as an accountant and loved the area. Instead of going on expensive vacations, they've decided to make sure they have good transportation to travel around the state. They both love the outdoors and would rather spend a day photographing nature, hiking, fishing, swimming, etc. As a result, vacations should only cost gas, travel supplies, and Ted taking time off from work. Luckily, most of the places they love to visit are within a two-hour drive, so Ted doesn't have to take a lot of time off work, if any.

Ted and Mary's current life

Ted retired at 60 and Mary retired at 55. They both wanted to move somewhere with a lot of sun and mountains and a relatively low cost of living. They ended up moving to Colorado Springs, as it fit all these criteria. Mary started trying to figure out how to make money online at 62. During her research, a friend suggested she learn more about investing by reading on Seeking Alpha. Most ploys to make money online are nothing more than a way to waste time. Unfortunately, many retirees want to make money online and end up infecting their computers with malware.

Following her friend's advice, Mary became an avid reader of Seeking Alpha. Most evenings, she would browse the site to learn about Dividend Champions. She could stay up to date on what happened in the stock market today, but her goal was investing for the long term with high dividend yields.

The couple wanted a single-story house after they retired and ended up buying a very affordable house in a nice neighborhood. They had the benefit of spending a year looking for a good deal in Colorado Springs.

Building a portfolio

Because Ted and Mary agree on the importance of dividend investing, they have worked together to build a portfolio with several of their favorite dividend payers. Many of these companies are Dividend Champions, which means they have a record of raising dividends every year for at least 25 years.

Equal-weighting

Given Ted and Mary's relatively short time span for learning about investing, they have decided to stick with a very simple weighting strategy. Therefore, the portfolio will have equal weights across each company.

You can see the stocks they selected below:

Ticker

Name

Allocation

Div. Yield

NWN

Northwest Natural Gas Company

2.94%

2.66%

PG

Procter & Gamble Company

2.94%

2.53%

EMR

Emerson Electric Company

2.94%

3.02%

MMM

3M Company

2.94%

3.30%

CINF

Cincinnati Financial Corporation

2.94%

2.09%

KO

Coca-Cola Company

2.94%

3.04%

JNJ

Johnson & Johnson

2.94%

2.92%

CWT

California Water Service Group

2.94%

1.48%

TGT

Target Corporation

2.94%

3.06%

SWK

Stanley Black & Decker, Inc.

2.94%

1.87%

MO

Altria Group, Inc.

2.94%

6.80%

SYY

Sysco Corporation

2.94%

2.28%

BKH

Black Hills Corporation

2.94%

2.55%

UVV

Universal Corporation

2.94%

5.11%

WMT

Wal-Mart Stores, Inc.

2.94%

1.92%

PEP

Pepsi, Inc.

2.94%

2.99%

XOM

Exxon Mobil Corporation

2.94%

4.68%

MCD

McDonald's Corporation

2.94%

2.20%

NNN

National Retail Properties

2.94%

3.94%

O

Realty Income Corporation

2.94%

3.93%

LOW

Lowe's Companies, Inc.

2.94%

2.17%

KMB

Kimberly-Clark Corporation

2.94%

3.04%

ED

Consolidated Edison, Inc.

2.94%

3.48%

T

AT&T Inc.

2.94%

5.99%

TROW

T. Rowe Price Group, Inc.

2.94%

2.68%

CVX

Chevron Corporation

2.94%

3.87%

PM

Philip Morris International Inc.

2.94%

5.45%

VZ

Verizon Communications Inc.

2.94%

4.36%

ESS

Essex Property Trust

2.94%

2.58%

TCO

Taubman Centers

2.94%

6.66%

IVR-C

Invesco Series C

2.94%

7.39%

DX-B

Dynex Capital Series B

2.94%

7.75%

ANH-C

Anworth Series C

2.94%

7.56%

CMO-E

Capstead Series E

2.94%

7.46%

Stock Analysis Tools

To demonstrate the portfolio, we’ve tossed it in the REIT Forum’s Portfolio Tracker:

This is the same tool we use to provide our portfolio updates to subscribers.

Ted and Mary split the investment evenly across each of the shares. We can see that the yield would come in at 3.96% across the portfolio.

If we wanted to increase the total yield, one of the simplest ways to do it would be to utilize preferred shares.

What do preferred shares offer investors?

Preferred shares offer investors a higher yield than common stock will normally carry. Further, preferred shares generally carry less volatility and less risk. Preferred share owners usually do not have voting rights. However, preferred stock does have a higher priority on assets and earnings relative to common stock. Keep in mind that the preferred share dividend cannot be cut unless the common stock dividend is cut to zero. If that were to happen, for the common stock to start paying a dividend again the preferred shareholders are paid all unpaid dividends if the preferred shares are “cumulative.”

We only cover cumulative preferred shares.

What about risk-averse investors?

Many investors may be searching for investments that carry less risk than common stocks. Preferred shares not only carry relatively less risk than the common stock, but the income tends to be significantly more consistent. Preferred shares carry a consistent yield that's normally higher than the yield on corporate bonds. Investors worried about risk also can hunt for preferred shares with more call protection on the calendar, a discount to call value or an FTF (fixed-to-floating) rate as a hedge against rising interest rates.

Buy-and-hold investors should stick to high quality. We suggest that buy-and-hold investors avoid anything with a risk rating of four or higher since it implies we are not comfortable enough in the long-term health of the company/security. It's far from suggesting "this stock might go under next year." We're simply eliminating anything from consideration for buy-and-hold where we would be concerned that the fundamentals might deteriorate. With those higher-risk positions, it's better to just avoid going in rather than trying to figure out when to salvage a loss.

What about aggressive traders?

Aggressive investors or traders may be opposed to preferred shares because of their defensive nature. However, we believe there are opportunities for aggressive investors in the preferred share space. Higher yield preferred shares may be a great fit for an investor who is willing to take on more risk. Further, for investors who are willing to trade, we’ve had excellent success when trading in and out of preferred shares. That includes dividend captures.

How much should investors allocate to preferred shares?

We believe the amount that investors should invest in preferred shares is not a specific percent. While writing this guide, our allocation to preferred shares was 29%. Our allocation in preferred shares can swing in either direction for a few reasons. When investors are confident in their common stock investments, they are less likely to invest a significant amount into preferred shares. When investors are worried about common stocks, they may allocate more to preferred shares. We believe that it’s important to look at:

  • The current economic environment
  • Personal investment style
  • Risk tolerance
  • Current valuations

The Retirement Portfolio Without More Preferred Shares

If Ted and Mary decide to stick with the retirement portfolio as shown, they would still have another $200,000 to invest in other securities. We think they might want to use CDs or ETFs filled with very short-duration Treasuries. These securities can provide a very stable value while providing some income. They would only be looking at yields around 2%, but many savings accounts offer a much lower yield.

The retirement stock portfolio offers $11,857 in income, the 2% on their savings would add another $4,000, and the couple is expecting about $21,000 per year in Social Security.

That only comes to $36,857, but Ted and Mary still have the $200k to pull from without touching the stock portfolio. This is the $200k they placed in savings accounts or in a short-duration Treasury ETF.

Note: Technically the ETF would be in a stock portfolio, but for investors who plan to withdraw the money, it can be simpler to think of it as a superior form of savings account.

What if they added more preferred shares?

If they swapped $100k of savings for additional preferred shares, the portfolio income would increase to about $19,420. They would give up about $2,000 in interest income from their CDs, but the net result would still be about $5,500 more in income each year. That would put them above $42,000 and they would still have a significant amount of cash on hand to draw from during their retirement.

Of course, retirees with larger portfolios could see materially higher levels of income. However, we wanted to focus on a situation that's relevant to the vast majority of readers.

Conclusion

For many investors, incorporating preferred shares is a reasonable way to increase income while reducing volatility. It does reduce the potential for appreciation, but it is also reduces the potential for loss. Overall, we consider that an excellent deal. If you want to learn more about how to build a defensive portfolio that incorporates a solid dividend yield with long-term growth, please click the “follow” button by my name.

Disclosure: I am/we are long MO, PM, WMT, TCO, ESS, IVR-C, CMO-E. 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.