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03-08-2014, 06:48 AM
(This post was last modified: 03-08-2014, 06:55 AM by Robandcindy2.)
Interesting Article:
Income Planning With Johnson & Johnson
by Doug Carey | Mar 05, 2014 Leave a comment
For many investors approaching retirement income planning for retirement has become extremely difficult, if not downright impossible. So many people had hoped to live off of income generated by relatively safe treasury bonds and high quality corporate bonds, but that strategy is out the window for most given where interest rates are today.
Not only are interest rates historically low today, but the Federal Reserve has no intention of letting them rise anytime soon. It is best to assume that interest rates will stay low for a long time to come.
In this article I want to show just how difficult it has become to cover expenses with just income in retirement if an investor is looking to do this with fixed income. I also want to show an alternative to this: Using dividend-growth stocks; but not just any dividend-growth stocks. I want to show how investing in dividend payers with a solid history of dividend growth, even in recessions, can help retirees live off of their income in retirement without touching their principal.
Read the rest:
Income Planning with Johnson & Johnson by Doug Carey
And just for the record...I am not recommending WealthTrace. They do, however, have some useful calculators at their site and Doug speaks the truth about DGI.
There are people who use up their entire lives making money so they can enjoy the lives they have entirely used up
Frederick Buechner
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Here is the main problem as I see it. For current workers over the age of 45 or so, your assumptions are nearly meaningless. Three fourths of U.S. Households have less than $300k in retirement savings. Less than half of the other quartile have as much as $600k. For these limited amounts of savings, the average yield on a typical DG type of portfolio will simply be inadequate to cover cash flow needs. IMO most families nearing retirement will have no choice except to chase yield and/or dip into principal. For those fortunate enough to have a pension or who have over $500k in savings, the DG type of portfolio could represent an attractive option. Once again, this represents a small and shrinking part of the population.
Alex
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(03-08-2014, 08:05 AM)hendi_alex Wrote: Here is the main problem as I see it. For current workers over the age of 45 or so, your assumptions are nearly meaningless. Three fourths of U.S. Households have less than $300k in retirement savings. Less than half of the other quartile have as much as $600k. For these limited amounts of savings, the average yield on a typical DG type of portfolio will simply be inadequate to cover cash flow needs. IMO most families nearing retirement will have no choice except to chase yield and/or dip into principal. For those fortunate enough to have a pension or who have over $500k in savings, the DG type of portfolio could represent an attractive option. Once again, this represents a small and shrinking part of the population.
Yes, that is a problem, but does not mean dividend growth cannot be an attractive option - though not the only option in a multi-pronged approach to fund retirement.
The bigger barrier for most folks, in my view, is a lack of financial and investing knowledge. Even with a relatively small portfolio of, say $150k, a nice income supplement can be had. The current yield of our portfolio is 3.9% - that would provide about $480 a month in income - nothing to sneeze at as a supplement to SS payments, but....
Building and maintaining such a portfolio, of say 30-40 dividend stocks is a monumental task for most folks.
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I've already shown part of our portfolio. Even with mine added in, we're not going to reach $300k -- no way, no how -- unless we have some unbelievable bull market for the next 10-15 years. Neither of us has a pension. I still think we'll be living OK. If we have to touch principal later in retirement, so be it. What is wrong with that? Luckily, I think I've educated myself enough to know what to expect and how to handle it.
If it's meaningless, then how do you propose we fix it, Alex? Or should we?
I agree with Ron, education is sorely lacking and that I lay squarely at the feet of politicians and educators but that's a discussion for another place and another day.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
At age 45 one should be able to add $10k to their portfolio annually. Assuming a modest growth on the portfolio of 5% and div growth of 5%, in 20 yrs the portfolio should be around $725k and generating $60k income.
Of course that's straight line calculations which is not realistic, but one should be able to do better than the 5%. If one is serious and at your prime earning age you should increase the contribution and then easily exceed the $1 Mil.
Remember it's the income generation you should concentrate on not the growth of the pile.
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(03-08-2014, 11:13 AM)cannew Wrote: At age 45 one should be able to add $10k to their portfolio annually. Assuming a modest growth on the portfolio of 5% and div growth of 5%, in 20 yrs the portfolio should be around $725k and generating $60k income.
Of course that's straight line calculations which is not realistic, but one should be able to do better than the 5%. If one is serious and at your prime earning age you should increase the contribution and then easily exceed the $1 Mil.
Remember it's the income generation you should concentrate on not the growth of the pile.
At the age of 45 I was in grad school investing in myself and borrowing 10,000 a year to make that investment. It was worth it, but today, in the aftermath of the Great Recession, there are many people who are barely hanging on. Also, many 45 year olds have kids entering college and aging parents to help. The 10k a year scenario is not feasible for many, I fear.
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What to do? I use a variety of approaches to squeeze a minimum of 8%-10% from our modest portfolio. I don't chase the highest yielding most risky equities, but do try to average about 6% yield on the pure dividend portion of the portfolio. I also use lots of covered call lower yielding dividend stocks to generate 10%-15% cash flow per year. So far the combination of strategies has worked out well.
Alex
(03-08-2014, 01:58 PM)rnsmth Wrote: At the age of 45 I was in grad school investing in myself and borrowing 10,000 a year to make that investment. It was worth it, but today, in the aftermath of the Great Recession, there are many people who are barely hanging on. Also, many 45 year olds have kids entering college and aging parents to help. The 10k a year scenario is not feasible for many, I fear.
When you read that the majority of people have saved little, have no pension other than SS, you are right, $10k is not within their means.
Regardless of their current earnings and position, most manage to have cell phones, spend money on junk food, buy lottery tickets and any number of items they could do without. I'm not saying they could ever mass a large sum, but they do have options and could save small amount.
Invested wisely in DG stocks, I'd suggest DRIP's and OSP where the investment can be minimal and with no fees attached. What they could expect is a growing income stream to offset their expenses and help with the rising cost of inflation.
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"the portfolio should be around $725k and generating $60k income."
60K annually from a $725K portfolio seems hard to pull off. Is this really doable without taking on high risk?? Any thoughts, anyone?
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Sounds like some overly rosy assumptions to me. With a DG type of portfolio it would take over $2M to kick out $60k per year. $2000000 x .028 = $56000.
Alex
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The current yield of our portfolio is 3.9% (sum of annual dividends at current rate / sum of current value of the positions).
That seems to be close to what other dividend growth investors I read about are getting.
That would bring in $28k of income in year one, growing by whatever growth factor you use for dividend growth - but 6-8% is probably an okay estimate to use for that.
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03-10-2014, 07:40 AM
(This post was last modified: 03-10-2014, 07:55 AM by hendi_alex.)
I'm talking about current market yield on current market NAV for a DG type of portfolio. Very few DG stocks yield north of 3% right now, so how does a person average 3.9% or higher on such? If a person includes some MLPs, telecomm, REITs, etc. 4%+ can be achieved, but very few seem to be including those categories as DG types of stocks. Most have histories that are too short, market cap is too small, dividend increases have been inconsistent, etc. Also, the person seeking yield would have to severely limit the DG superlative stocks in order to boost the yield to the over 4% level. So I guess that at this point, perhaps it would be useful for someone to define DG stock as a category.
VIG, a dividend growth ETF, only pays 1.85%. Its holdings appear to be a who's who of big cap dividend growth stocks.
Alex
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