Seeking Alpha

Two Myths Retirees Need To Forget To Earn More Income Today

|
Includes: IMBBY, KHC, MAC, NOBL, O, REGL, SDY, T
by: Rida Morwa
Rida Morwa
Research analyst, REITs, energy, Dividend income for retirees
Summary

Often repeated myths have led many to believe them to be true.

Investors and retirees need to take an active role in their portfolios.

Immediate income investing provides you money when you need it - now.

Co-produced with Treading Softly and PendragonY

I recently enjoyed watching Little Foot with my family. There was one character that is designed to represent a repressive member of the old guard. Someone who is set in their ways and the traditions of the past. This person is the Stonekeeper, and upon these stones are set traditions, typically based on a little fact and a little fiction designed to keep others in line and following a single truth.

Source

Ironically, when it comes to retirement, advisers and writers often play the role of a stonekeeper. They repeat the same tired and often incorrect mantras that lead a herd of retirees through retirement. Often retirees who would benefit from thinking outside of these myths. Today we want to examine a couple of these myths together.

Sleep Well At Night, Or Asleep At the Wheel?

Investors will often see authors writing about SWAN stocks (SWAN being the acronym for Sleep Well At Night). I am going to suggest to you that SWAN is an attractive term because it offsets the idea of a retiree being stuck awake at night fretting about their portfolio and income stream. On the flipside however most "SWAN" labeled stocks offer such a low yield that most retirees living on them alone would probably struggle to sleep due to hunger pains.

Retirees need to be aware that taking an active part of their retirement portfolio's management is the only route to truly sleep well at night. Most of you have taken charge of your life, picking a career, deciding where to live and who to spend time with. It's fulfilling and powerful to maintain control over important aspects of your life. Why is it that when it comes to investing, everyone wants to be asleep at the wheel? Retirees understandably want many aspects of their golden years to be as simple and straight forward as possible. They want to believe that lower-yielding options will truly enable easier sleep. One guaranteed way to lose sleep is to lack the necessary income to live because your investments are paying you too little. As we have previously shown (see here and here), low-income investments also substantially increase sequence of returns risk.

Retirees need to reject this blanket idea that any investment deserves no continual monitoring. I am not suggesting you remain glued to your portfolio daily but only that your portfolio should never be left completely alone and forgotten about. If you do not feel comfortable going it alone, consider hiring an investment adviser who will invest with a similar mindset as yourself or, even better, find a community of like-minded investors to become a part of. This is often the largest benefit that members experience upon joining High Dividend Opportunities - a family of like-minded investors. If our style doesn't match what you are looking for - perhaps you like to invest in metals or gold - another marketplace should offer you a similar community of investors, albeit at a smaller size.

Consider Realty Income (O), multiple analysts and Seeking Alpha authors tout O as the ultimate SWAN. Currently, it yields 3.5%. It would take $1,000,000 to earn $35,000 if invested now. Most retirees don't have $1 million to invest or want to concentrate this money in one place. Yet aware investors who practice portfolio rotation selling in and out of O at various times could produce far superior results and income.

Chart


When compared to its historical normal, O is overvalued and an ideal candidate for profit-taking. Investing in its dips could produce yields as high as +5%. Investors sleeping at the wheel would miss out on opportunities to move their gains to new investments.

Myth: SWAN stocks are what you should be investing in!

Truth: No investment should put you asleep at the wheel, remain active in your portfolio

This List of Stocks is the Only One to Buy From

Surprisingly, the second myth we want to tackle today revolves around creating a list of stocks or securities that are the "only acceptable" ones to invest in. Often these lists are given strong, powerful sounding names: Dividend Kings, Dividend Aristocrats, Dividend Achievers. All are designed to include and exclude securities based on a specific set of metrics. This has led to entire ETFs being built specifically to follow them, ETFs like:

  • ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
  • ProShares Trust - ProShares S&P Midcap 400 Dividend Aristocrats ETF (REGL)
  • SPDR S&P Dividend ETF (SDY)

These elite lists often depend on historical performance as a reliable determiner of future performance. During the Great Financial Crisis, 23 of the 59 companies making up the Dividend Aristocrat list were removed, others replaced them over time. Investors who depended on these companies for dividend growth investing or income often received a double whammy of lost income and lost capital as other investors fled from these fallen angels.

Dividend growth stocks often trade at high valuations as investors bank on past performance to be set as future performance. They are willing to pay a premium for this expected return. When a cut comes and the company is removed from the list, investors suffer.

Chart


Kraft (KHC) is a classic example of a massive sell-off after a dividend cut from one of these hailed companies. Investors in these companies were starting to flee already, but the flight hit full speed once the cut came through. Faith was lost, but more dollars were lost after its price plunged in reaction to the cut.

Why do these lists continue to be a key source of investment ideas? Because they are touted as amazing companies that you can sleep well at night investing in! Ironically, these two myths perpetuate each other. In a previous article, we reported that:

The lower yielding, higher growth dividend stocks would produce $15,197 in annual income by year 20, versus $68,421 annually by year 20 for the high yielding stocks. Imagine when you decide to no longer reinvest those dividends. Initially your annual income is over $50,000 a year different.

This was after comparing 20 years of investing in dividend growth stocks from one of these lists versus high-yield picks. I encourage readers to re-read that article.

If you feel you must follow one of these lists, simply investing in one of the passive ETFs that track them will often prove easier and better than buying and trying to individually keep up with who is getting added or removed yourself. We strongly feel that investing off of the list generally yields better immediate income - something investors and retirees need in retirement rather than banking on the potential of future dividend raises.

Myth: You should only buy off of this set list of stocks

Truth: No list of stocks accurately projects future success and often leads investors to miss opportunities, or worse, suffer losses.

I Don't Believe These Myths Anyways!

Some of you are thinking to yourself that these myths haven't fooled you! Good. But these myths often form the basis in which the analysts and authors view the market. The story is told of two shoe salesmen. Both are sent to a remote island where the islanders have never worn shoes, let alone seen one! The first salesmen is dismayed at his lack of luck - "They'll never want to buy my shoes now!" The other sees only opportunity - "I'm the only one selling this valuable product!"

The articles you read are written by two groups of people, those who see the world through the filter of these myths - selling only SWAN stocks or from their special list - and those people who view the market more holistically and embrace that risk and opportunity abound in every security at different levels. We here at High Dividend Opportunities like to say that knowing macroeconomic conditions is half of the battle, likewise, knowing the biases through which authors view the market can help you filter out the nonsense. In the months prior to KHC dividend cut, the overwhelming majority of Seeking Alpha articles were bullish. Immediate after? Many of the same authors were suddenly bearish! Why? The dividend was cut and now it triggered fears for both of those myths!

Are we saying you should load up on KHC? No. However, those analysts' views changed on a dime when the dividend was cut. It wasn't deteriorating fundamental performance that drew the bearish views - they all missed the buildup - but simply a blind adherence to a rule.

Why We Use the Income Method

Previously we highlighted how the Income Method works, we use it to capture high immediate income, which provides the stuff of life now. It doesn't gamble on potential dividend increases or live in the fabled land of sleeping at the wheel. High Dividend Opportunities and investors who use a similar method know that reinvesting the excess income can generate a strong total return without the need for dividend increases.

Immediate Income Investing: 10 years, no reinvestment, 10% yield

Capital Invested

Dividend Yield

Total Dividends Received

10,000

10%

1000

10,000

10%

2000

10,000

10%

3000

10,000

10%

4000

10,000

10%

5000

10,000

10%

6000

10,000

10%

7000

10,000

10%

8000

10,000

10%

9000

10,000

10%

10,000

After 10 years, a total of $10,000 worth of dividends have been received - doubling your original investment. This is highly achievable through proper portfolio maintenance. We aim for a 9-10% yield providing strong income.

We look for high-yield immediate income picks, without the limitations of any pre-set list or the need to have "SWAN" stocks. Why? These myths cause stumbling blocks that prevent retirees and investors from generating the income they need to live off of now, or the dividends they need to reinvest for future growth!

Our method combines lower-yielding, lower volatility picks - like AT&T (T) and combines it with higher-yielding, often deep value picks to create a portfolio that has fortress-like qualities. Sand by itself is weak and fragile, but mixed with cement makes concrete - a very strong substance. Furthermore, we believe in a level of active portfolio rotation, this allows us to put unrealized gains to work - avoiding the issues created by blindly holding O or another "SWAN" stock - with the realization that some stocks have irrational run-ups and drops in prices.

Our Immediate Income Method takes these myths head-on to create a portfolio yielding more and generating superior returns than the market itself. It is simpler to generate 9-10% income generating yield than to constantly pick stocks that generate 9-10% returns on price alone annually.

These Two Picks are Excellent Additions to Your Portfolio Today

Here are two excellent picks for your portfolio today. Since most investors often have portfolios littered with lower-yielding, lower volatility picks, these two picks are deep value plays that offer high yields for a limited time. When the market's sentiment turns back around, their share prices will rise and yields drop accordingly. You can lock in these high yields now, but if you follow those myths above you'd look right over them!

Macerich Company (MAC) is a high-quality mall REIT with a 10.5% yield. Investors will be well served ignoring the hysteria and buying based on its fundamental strength. Consider this, current consensus NAV is $58/share. That means that at the current share price, MAC is trading at a 45%+ discount to NAV. Furthermore, there are a few potential near-term catalysts that suggest this discount will not last long.

We wrote about this gold nugget in our most recent report on MAC:

MAC sold off most of their lower quality properties before malls went out of style, and now have a well-curated portfolio of premium properties. Despite having high-quality properties, consistent same-store NOI growth and plenty of liquidity, MAC's share price has suffered along with most mall REITs.

The market has become utterly irrational towards anything mall related, by focusing on the fundamentals, we can recognize MAC for the gem that it is. When gems are selling at a 45%+ discount, buy them!

A second excellent choice would be Imperial Brands PLC (OTCQX:IMBBY) a global tobacco company yielding over 11%. This international brand is seeing headwinds due to vaping concerns but IMBBY is a solid dividend payer whose yield has risen as fears have controlled investors.

Why the big price moves? Partly due to fears concerning vaping and also due to IMBBY's reduction in dividend growth. IMBBY has been a choice holding for many dividend growth investors. Anytime the growth is at risk, these often risk-averse investors sell. IMBBY now sports a yield that immediate income investors will love and a guarantee of future dividend growth albeit at a slower rate.

Currently IMBBY covers its dividend by 142%! This means its not an illusionary yield paid by destroying shareholder value, but a strongly covered yield from a misunderstood company. Do not fear investing in this UK-based security, there are zero withholding taxes on British dividends from regular corporations.

Both of these picks are excellent income-generating choices that would've been excluded by those who follow the above myths!

Takeaways

As investors, you must invest with a degree of cold hard rational thinking. Often the market moves on irrational thoughts and sentiment, using your rational thinking skills you can capture amazing high dividend opportunities and earn strong immediate income for years to come. Today, we wanted to tackle two intertwined myths that ensnare so many well-meaning retirees and investors.

Thanks for reading! If you liked this article, please scroll up and click "Follow" next to my name to receive our future updates.

Disclosure: I am/we are long IMBBY, MAC. 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.