Seeking Alpha

How The American Dream Can Crush Your Retirement

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Includes: AGNCN, ANH, ANH.PC, ARR, AVB, BKH, CHMI, CHMI.PA, CIM.PB, CINF, CMO.PE, CVX, CWT, DLR, DX.PB, ED, EMR, EQR, ESS, HP, JNJ, KMB, KO, LOW, MCD, MFA.PB, MMM, MO, NLY.PF, NNN, NRZ, NWN, O, PEP, PFF, PG, PM, SCHO, SWK, SYY, T, TGT, THE, TROW, TWO.PE, UVV, VGSH, VZ, WMT, XOM
by: Colorado Wealth Management Fund
Summary

Is the American Dream responsible for crushing our ability to create retirement savings?

Ditching the daily latte and cutting the cable cord aren't the answers.

Being able to build sufficient savings for retirement comes down to the lifestyle choices we make - or don't make - today.

Living in a beautiful home in suburbia is the American Dream. But that "dream" isn't for everyone. Source

While an increasing number of people have questioned the notion of the American Dream over the past couple of decades, it doesn’t seem like all that many have abandoned the challenge of chasing it. We still spend our money on things such as big houses, sending kids to college, multiple cars in the garage and many other accoutrements of our prevailing suburban lifestyle.

This is the American Dream, in a nutshell.

And it’s potentially one reason why so many Americans struggle to cobble together a robust and sustainable retirement.

A couple of our recent “How To Retire” articles got me thinking about this.

First, in How To Retire (Your Kid’s Edition): An Absurdly Unrealistic Goal, we summarize what we think is a big part of the reason why so many Americans fall short saving for retirement:

Think about it - we’re asking 25-year olds to save $500 a month, every month, for 40 years. A vast majority of people are not doing this, yet all we do is (a) write articles about how bad things are and (b) tell people to do the very thing they have proven they’re incapable of doing again and again.

Combine that with one prevailing sentiment from readers of our recent article, How To Retire In An Expensive City Like Los Angeles: That anybody willing to forgo square footage, green grass, home equity and the perfect picture of the traditional nuclear family must be an insane person. In fact, other ways exist to organize one’s life that do not necessarily include all of the above. Our attachment to pursuing the American Dream might just be one reason why so many Americans have found setting themselves up for retirement to be such a difficult proposition.

As a quick aside, other commenters were quick to point out that someone paying $1,350 to rent a studio in Los Angeles must be living in substandard conditions in a crime-ridden neighborhood:

$1350 a month rent in LA and you will never leave your house unarmed and in a group of like minded armed survivors!”).

This simply isn’t true.

While our friend definitely resides in an urban neighborhood that has its problems, it's one of many “hip” parts of the city where, if you’re willing to sacrifice square footage primarily, you can find a nice living arrangement - without roommates - for less than $2,000 a month. The neighborhood our friend lives in is close to bustling enclaves such as Koreatown and Silverlake and is rapidly gentrifying itself. In five to 10 years, you likely won’t be able to touch the studio our friend rents for less than $2,000 a month. Alongside these changes come prized urban amenities.

Our “quick aside” actually brings us closer to the heart of the matter.

Popular fixes to the problem of not being able to save what's necessary to fund a proper retirement include making more money, saving more of what you already make or cutting expenditures. You’ll often hear retirement “experts” suggest ditching the daily Starbucks’ habit or getting rid of cable television. While these are all well-intentioned ideas, they’re obviously not working. At least not to the extent to have an impact on easing the aforementioned retirement crisis. They amount to blips on the radar when we’re talking about a multi-million-dollar problem.

Making more money, saving more of what you make and slashing from your present-day budget all function within the context of preserving your current way of life. While ardent Seeking Alpha readership tends to, by and large, have its collective ducks in a row, we direct the following recommendations to new readers looking to up their investment games and the larger population responsible for the pathetic retirement savings statistics we have been discussing these last few weeks.

Spending is the issue. Spending absolutely is the issue. However, tweaks don’t amount to much. If you’re struggling to sock away what you need to successfully cross the retirement finish line, a lifestyle change might be in order.

Will giving up your morning latte or cable television get you there? Or are these remedies simply ways to nickel and dime your way to a situation where you’re simply doing a slightly better job of scraping by?

Fixing what amounts to window dressing in your life might work in some scenarios where there isn’t a long way to go to get to where you need to be. However, if you’re far away from the $500 or $750 or whatever it is you need to be saving every month, wholesale changes might be in order.

Is it really all that crazy to ditch your mortgage, get rid of your cars and downsize to a studio in a gentrifying neighborhood in Los Angeles or a one- or two-bedroom apartment in a place like Denver or Minneapolis or Albuquerque? To be clear, we’re not saying these are the solutions for everybody. While they might be for a few people, they’re certainly not for everyone.

Consider these ideas within a broader context, knowing that the actions you take (if you indeed do need to take significant action) might look a lot different. But the overarching point is that if you’re married to your present way of life, this might be exactly what's getting in the way of an early, on-time and/or stable retirement. Your chosen way of life might be the very thing holding you back from doing what you need to do to get there. The way you live - on a grand scale - might be incompatible with a successful retirement plan and outcome.

As such, you might need to completely rethink the lifestyle and big-ticket material things that define what you’re doing in the big picture. Big sacrifices could have a much bigger impact on improving your retirement situation than giving up your daily latte.

Become an income investor. To that end, changing your investment mindset might be all you need to get to where you need to go. Of course, at The REIT Forum, we subscribe to the belief that the way to get there is investing smartly and steadily in income-producing vehicles such as REITs and other steady dividend-paying stocks.

To achieve your goal of becoming an income investor, you might consider building a portfolio that looks something like this:

Ticker Company Name Dividend Yield
VGSH Vanguard Short-Term Treasury ETF 2.27%
SCHO Schwab Short-Term U.S. Treasury ETF 2.21%
AGNCN Preferred share from AGNC 6.70%
ANH.PC Preferred share from ANH 7.48%
CHMI.PA Preferred Share from CHMI 7.95%
CIM.PB Preferred Share from CIM 7.43%
CMO.PE Preferred Share from CMO 7.41%
DX.PB Preferred Share from DX 7.62%
MFA.PB Preferred Share from MFA 7.26%
NLY.PF Preferred Share from NLY 6.65%
TWO.PE Preferred Share from TWO 7.37%
NWN Northwest Natural Gas Company 2.90%
PG Procter & Gamble Company 2.45%
EMR Emerson Electric Company 2.70%
MMM 3M Company 3.43%
ESS Essex Property Trust 2.44%
CINF Cincinnati Financial Corporation 2.08%
KO Coca-Cola Company 3.01%
JNJ Johnson & Johnson 2.80%
CWT California Water Service Group 1.55%
TGT Target Corporation 2.11%
SWK Stanley Black & Decker, Inc. 1.80%
MO Altria Group, Inc. 6.93%

Sometimes you need more than a list of ticker symbols and dividend yields. That’s OK, we’ve got you. Our Classic Portfolio Tracker offers a deeper dive:

This portfolio offers a 4.74% current yield. It produces $13,738.68 in annual income on a market value of $290,030. That's pretty good for a portfolio where we allocated $40,000 to VGSH and SCHO. Those ETFs just hold short-term Treasuries and are a substitute for holding cash. If the investor needs to access additional cash at any point, those positions have very steady prices. They simply pay much better interest than a checking account or savings account today.

And of course, you always can build your own portfolio based on your individual investment objectives. Here’s an example of how you might do that:

As we can quickly spot, the positions in AGNCN and ANH-C are carrying a significant portion of the portfolio's total value and of the total income. However, these are fairly steady preferred shares so we're quite confident in their dividend and expect a fairly stable price.

You also may notice that there are quite a few preferred shares included in the portfolio. This is an excellent technique for raising the overall dividend yield without sacrificing quality. Preferred shares often carry a fixed-rate for the dividend and they have priority over all common shareholders. So long as any common dividend is paid, the preferred shareholder must be paid in full.

A Deeper Look

AGNCN and ANH-C are both preferred shares we suggest for buy-and-hold investors.

Why do buy-and-hold investors like these particular shares so much? They have:

  1. Plenty of call protection
  2. A reasonable dividend rate with the best coverage in the sector
  3. A floating rate to protect investors if rates begin rising in a few years
  4. A solid spread when the floating rate kicks in, so investors keep getting a reasonable yield

What's unique about their pricing?

Over the last year, many preferred shares moved to trade at significant premiums to their prior ranges. We recently had AGNCN trading around the same level it has seen over the last year. Investors going after the high-risk shares are paying huge premiums to normal valuations, but the lower risk shares haven’t been bid up. That’s great for investors because it improves the yield to call and reduces the downside risk. Even if the market went into a panic, these shares should hold their value much better than most investments.

To be fair, the rally in riskier shares mostly represents a recovery of losses in late 2018. Shares of the iShares U.S. Preferred Stock ETF (PFF) got wrecked in late 2018, only to recover and become expensive again:

Did you want more volatility, lower yield, and an expense ratio with PFF? We’d rather stick to picking individual shares and entry points.

We go over preferred shares every two weeks in our bi-weekly series on preferred shares. In the latest article, Preferred Shares Week 178, we provided additional depth on ANH-C. We stated:

The appeal in ANH-C doesn’t come from a discount to their normal price range. It comes from offering a fairly steady price, a 7.57% stripped yield, and a positive worst-cash-to-call. Most of the preferred shares with coupon rates above 7.5% are trading at a negative worst-cash-to-call.

Anworth (ANH) has another preferred share, ANH-A (ANH.PA). They should’ve called it years ago, but they haven’t called it yet. Since management has been less than enthusiastic about calling in ANH-A, it doesn’t seem like they would be quick to call ANH-C when call protection does run out (on 1/27/2020). We’re not expecting ANH-C to rally much higher, but it should still provide a solid source of income and the call risk isn’t too bad since the worst cash to call remains positive.

Using Dividend Growth

One major reason for making changes in your lifestyle is that it allows you to include more dividend growth stocks so you're income is growing over time. One of our recent picks is Digital Realty (DLR). We recently sent subscribers an update on DLR.

This is a dividend growth stock where we remain quite bullish. The entire article is quite large, but we'll share a portion of it here:

Management’s decisions have driven substantial shareholder value over the last 15 years. Since its IPO, 15 years ago, DLR has thoroughly smashed any index. Whether it is compared to REITs or to technology stocks, DLR has been a winner:

Since its IPO, DLR has won consistently. There's a great deal to like about the REIT. They deliver a solid dividend yield while maintaining exceptionally fast growth. At times, their growth techniques can bother some analysts. Management has routinely prioritized long-term growth over short-term earnings growth. That’s a sign of good real estate management.

We’re going to go out on a limb and make a statement that may bother some analysts: “DLR’s management is more talented at evaluating data-center opportunities than analysts.” Their latest acquisition is a perfect example.

DLR is a great pick where we remain bullish. Yet it won't appeal to all investors. The dividend yield is 3.57%. That's providing a material amount of income, but it won't be enough for some investors. For investors who are comfortable adjusting their lifestyle or including preferred shares to boost the yield, it becomes one more great step toward a secure future.

What About Trading?

Trading isn't for everyone. Some investors are quite uncomfortable with the idea of trading, yet others have done very well by trading. We prefer a mix of buy-and-hold strategies with trading opportunities for a portion of the portfolio.

We've succeeded in the vast majority of our investments (trading opportunities) in mortgage REITs. However, we recently had one that turned out poorly.

We bought ARMOUR Residential REIT (ARR) on 7/25/2019 for $17.86, collected a dividend of $.17, and sold it for $16.68 on 8/23/2019, so we could relocate the capital to a different mortgage REIT. It was a 5.66% loss. It stung a little, but we knew we wanted to reallocate that capital. We wanted to buy more shares of Cherry Hill Mortgage (CHMI) and ANH. Did we make a wise choice?

It looks like a great choice. We accepted a 5.66% loss and gave up what would've been a 3.49% return. We could still be in the position and "only" be down 2%. The shares we purchased instead delivered 18.91% and 5.44%. I don't know about you, but I like those numbers better.

Could you have followed us on those trades? Probably. We sent the alert to subscribers in real time, and we sent a public strong-buy for CHMI six days later:

The article focused on providing readers with correct information and accurate details about the company's financial statements. It went on to indicate that management was providing a truthful assessment of the business in both book value and forward earnings. At the time, some investors were concerned about the quality of accounting for both CHMI and New Residential (NYSE:NRZ). There was nothing to worry about as the companies were innocent. Since we're very familiar with mortgage REITs and their accounting, it didn't take us long to look at the statements and determine there was no need for fear. That allowed us to take action before the market bounced back.

Responding to the fear in the market, both NRZ and CHMI responded with buyback programs:

This was a great trading opportunity, but it was only available to those with the specialized accounting knowledge or who had access to an analyst with that knowledge. While we were busy buying in at the bottom, other investors were busy selling their shares to us in a panic.

What about Anworth? We bought shares of ANH at the same time, but we hardly talked about them. We are reiterating our bullish outlook on ANH. Shares still look quite cheap as they trade at an exceptionally large discount to book value relative to their peers. Consequently, we expect to see the price recover over the next few months.

Combining Investment Strategies

There's room for multiple strategies within your financial plan. You can focus on ways to trim expenses or boost income. You can build a long-term dividend growth and/or supplement that portfolio with preferred shares. If trading is right for you, you can look for an analyst with in-depth knowledge in the sectors you're interested in trading.

An Old Adage

It all comes down to an old adage. You can’t do the same things you’ve been doing forever (or only make smallish tweaks to them) and expect different results. If you’re worried about falling dangerously short in retirement, a significant lifestyle change might be what you need to get there. Perceived short-term pain for long-term gain.

Disclosure: I am/we are long AGNCN, CMO-E, EQR, ESS, MFA-B, MO, PM, WMT, ANH, CHMI, 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.