Defy Conventional Retirement Investing With These Cash Kings

Joseph Hogue's picture

Tuesday, December 23, 2014 - 1:30pm

by Joseph Hogue

  

 

Financial planners routinely advise clients to plan for a retirement nest egg that can be drawn down at a 4% annual rate.

 

Ongoing investment gains in the retirement portfolio, coupled with that 4% drawdown, is often expected to be sufficient to meet income needs without running the risk of rapidly depleting your portfolio.

 

The problem: you need a portfolio valued at well over a million dollars to meet most budgets.

 

With two market crashes since 2000, most portfolios have fallen well short of such a lofty goal. And  withdrawing a higher percentage every year in retirement risks depleting your nest egg too soon, which can lead to financial ruin.

 

There is a better way to plan for retirement, a way that does not rely on arbitrary investing rules.

 

To Trust Or Not To Trust The 4% Rule?

Fidelity Investments recently found that investors heading into retirement, people age 55 to 64 with both a 401K and an IRA, had a combined average balance of $261,400. Those with only a 401K had a balance of just $165,200. Using the 4% rule means living on less than $10,500 a year or about $871 per month in addition to the $1,294 average monthly benefit from social security.

 

A portfolio evenly split between stocks and bonds would have earned 5.9% over the past ten years, though an increase in the withdrawal rate to 6% of the average portfolio balance still means living on just over $15,600 a year.

 

Worse yet for income investors: The portfolio only yielded a dividend of 2.9% annually over the period.

 

But there is a way to position your portfolio that could provide for a higher return and a stable cash payout.

 

A Cash King Portfolio

Positioning in Dividend Aristocrats, which I’ll focus on in a moment, offer benefits beyond most other stocks:

 

  1. As mature companies with strong cash flows, share prices are generally not as volatile as other stocks. The stable trading patterns mean reduced risk, which may enable you to increase the weighting of stocks over bonds. Over the long haul, stocks still tend to outperform bonds.  
     
  2. As cash flow machines, dividends can help provide for spending needs without having to sell shares.

 

In fact, a portfolio comprised of 35% bonds and the three dividend aristocrats below would have yielded a total return of 7.9% over the past ten years, with an annual return of 4.6% in dividends. That extra 2% return means thousands more every year in retirement, even on the average portfolio.

 

A company is deemed a dividend aristocrat after increasing its dividend payout each year for the past 25 years, and it must continue to do so each year to maintain that status.

 

 

 

Increasing the annual withdrawal rate to $22,000 means a total annual income of just over $37,000 including social security, about 75% of the median household income. This withdrawal rate would bankrupt the traditional portfolio of 50/50 stocks and bonds even before the age of 85. Investing in cash kings provides for years of additional spending and a sizeable annual cash return.

 

AT&T, Inc.  (NYSE: T) is marking a huge expansion with its proposed acquisition of DirecTV (Nasdaq: DTV) for $45 billion and a recent acquisition of a Mexican wireless company. As I recently wrote, the acquisition of the satellite provider not only brings a huge opportunity for services bundling, but geographic diversification with the company’s 18 million customers throughout Latin America.2

 

The acquisition of Grupo Iusacell SA, the third-largest wireless operator in Mexico, could not have come at a better time, as  new legislation is expected to break the near-monopoly control of Carlos Slim’s America Movil S.A.B. de C.V. (NYSE: AMX).

 

Shares of AT&T pay a 5.7% dividend yield and have returned an annualized 7.7% over the past decade. The company has paid a dividend since 1881 and has increased it for 30 consecutive years.

 

HCP, Inc. (NYSE: HCP) uses a unique 5x5 strategy to invest across five property types and five investment strategies to diversify exposure in the healthcare real estate market. One area of focus is retirement housing. With more than 10,000 people reaching retirement age every day through the end of the decade, senior housing is an enviable market for sales growth.

 

Overbuilding in the senior housing space weighed on the sector in 2013 but that concern is fading. Shares pay a 4.8% dividend yield and have returned an annualized 11.2% over the past decade. HCP has paid a dividend since 1990 and has increased it for 29 consecutive years.

 

Despite recent weakness in energy, Chevron Corp. (NYSE: CVX) is well-diversified across the value chain and the benefit at its downstream segment will help to offset weakness in production revenue. The $193 billion giant has plenty of liquidity to ride out weak energy prices, even as smaller competitors cut back on production.

 

Management is moving quickly to adapt the change in oil prices. For example, they recently  canceled plans for drilling in arctic Canada, as lower cash flow projections made the project unfeasible.  Shares pay a 4.1% dividend yield and have returned an annualized 10.3% over the past decade. The company has paid a dividend since 1912 and has increased it for 27 consecutive years.

 

Risks To Consider: Even companies in mature industries with strong cash flows can see shares fall in a market panic so it is still a good idea to hold bonds and cash as well.

 

Action To Take --> Shifting your investments to Dividend Aristocrats with strong cash flow and a healthy cash return can help meet expenses in retirement. These companies are solid examples of how to achieve that goal, but you can use this framework to seek out other solid yielders with a history of proven capital appreciation.

 

Now that you have a reliable divided-paying stock, you need a strategy to fully utilize it. Our resident income expert Amy Calistri is a master at finding dividend paying stocks and making them work for you -- and your retirement. Her strategy is so successful that she was invited to speak in front of a live studio audience at St. Edwards University. To find out how she got a dividend paycheck for each day of the year, click here.

 

 

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of T in one or more of its “real money” portfolios.