I thought it would be worthwhile to write about something that is on the minds of many baby boomers like me: how to create a predictable and growing income stream for retirement. The reality is, most of us are on our own for retirement planning. According to the Center for Retirement Research, U.S. Department of Labor, less than 20% of American workers aged 50-64 have employment-based pensions. So that leaves 80% of us trying to figure things out on our own.
Being new to the financial advisor world, I have been educating myself on various retirement strategies and discovered what I think is a solid option to achieve steady retirement income: a dividend-driven portfolio. Based on my research of various dividend portfolio strategies, I developed my own screening criteria and created a portfolio of 10 stocks. I researched a universe of over 50 stocks from various sectors and selected 10 that meet the following selection criteria:
- 10 consecutive years of increasing dividends (including during The Great Recession)
- Dividend payout ratio (% of earnings) of less than 60%
- Stock price outperformed S&P 500 over same 10 year time horizon
- Average 10 year Yield greater than 2.5%
- 10 year Total Return, including dividends paid, of 240% or 24% annually
- 10 year Total Return of 300% or 30% annually with dividends reinvested
- Stock price (only) growth of 188% vs 78% for the S&P 500
- 10 year annual average dividend growth of 26%
- Income growth of 236% (dividends paid) and 381% (dividends reinvested)
- Combined portfolio worst year was -24% which is lower than S&P worst year
If you had invested $500,000 ($50,000 per stock) on July 1, 2004 this portfolio would have generated $13,543 in annual income. On June 30, 2014 your portfolio value and annual income would look like the following:
- Portfolio value grew to $1,441,200 (excluding dividends paid) and $2,000,000 (dividends reinvested). This represents portfolio growth of $941,200 and $1,500,000 respectively.
- Annual income of $45,515 (dividends paid out) and $65,200 (dividends reinvested). This represents annual income growth of $31,972 and $51,657 respectively.
Who should consider this portfolio strategy? For those at or near retirement it could be an additional component of a diversified portfolio to generate steady and growing income (and possibility of share price growth). For those 10 or more years from retirement, a dividend reinvestment strategy could produce a significant income stream at retirement.
While the results may be impressive it is important to keep in mind that this is a narrow portfolio of individual stocks and past performance does not guarantee future results.
For more information contact Jeff @main-avenue.com or 503-336-3776