Wednesday, November 30, 2011

How to Build a Retirement Dividend Portfolio with only $1000/month

Most articles on retirement investing assume that a lump sum of approximately $1 million is invested in order to provide income in retirement. In reality however, few individuals receive a lump-sum of such proportions all at once. Instead, many individual investors end up with a substantial nest-egg through long-term saving and investing. This long-term investing utilizes the power of compounding during the time it took to accumulate the nest egg. With dividend investing, instead of focusing on an asset number, investors typically focus on generating a specific amount of income. In a previous article I discussed the ways to increase your dividend income.

The way that younger dividend investors should approach retirement is no different. They should save a set amount of funds each month and purchase quality dividend stocks that are attractively priced at the time. After that, they should strive to reinvest dividends selectively or using drips. As they build their portfolios over time, investors in the accumulation stage should also avoid concentrating their efforts on just a handful of stocks. In order to have a properly diversified portfolio, which will withstand dividend cuts during financial crises, investors in the accumulation stage should hold at least 30 individual domestic and international securities representative of the ten market sectors in the S&P 500.


Diversification is not a silver bullet however, as certain risks, such as market risk cannot be diversified away, unless of course a non-correlated asset such as Real Estate or Fixed Income is added to the portfolio mix. In addition, investors should not diversify for the sake of diversification, and should stick to purchasing quality dividend stocks and attractive valuations.

So how can one accumulate a dividend portfolio that would generate sufficient dividend income in retirement?

I ran the numbers using the following assumptions:

An investor saves $1000/month and is able to allocate them to dividend growth stocks which yield 3% at the time and grow distributions at 7% per year. At that rate the distributions will double every ten years. This investor will also re-invest the accumulated dividends into more shares of dividend growth stocks yielding 3% which grow distributions at 7% per year.
This means that in year 21, this investor will be able to generate over $20,000 in annual dividend income based off the $240,000 investment. The purchasing power of this investment will be cut in half assuming a 3% annual rate of inflation.

In order to increase their dividend income, the investor should either save a higher amount of money every month or they should let their investment compound for a longer period of time. Saving $2000/month will generate over $41,000 in dividend income in year 21. If one saves $2000/month for 30 years however, this would lead to an annual dividend income of $118,000 by year 31.

The types of dividend growth stocks that investors could purchase include:

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 13% per year over the past decade. Yield: 3.20% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has managed to boost dividends for 37 consecutive years, and has also managed to increase them by 17.80% per year over the past decade. Yield: 2.80% (analysis)

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 8.80% per year over the past decade. Yield: 3.80% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has managed to boost dividends for 48 consecutive years, and has also managed to increase them by 12.40% per year over the past decade. Yield: 2.70% (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health care products worldwide. The company has managed to boost dividends for 39 consecutive years, and has also managed to increase them by 9.20% per year over the past decade. Yield: 4.20% (analysis)

In addition, this example did not account for taxes. If investors could afford to stash away as much as possible in tax deferred accounts which let them compound their investments tax free for decades, they will avoid paying the tax man every year out of their investment returns. The drawback is that withdrawals from such accounts are difficult and costly to make if one wants to retire before the age of 59.

Relevant Articles:


This post was featured in the Carnival of Persona Finance

4 comments:

  1. I have read you for awhile and think your articles are great. Thanks for contributing your wisdom, knowledge and contribution. I have a few questions too ask and am wondering how to email you.

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  2. Does your assumption include a stable stock price? If stock prices rise, an investor will then receive less shares per reinvestment, generating less income. I assume you left it out for simplicity, but I wonder how large of an effect something like this can have...

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  3. That is a great question. I assume that you could invest funds at an average yield of say 3% or 4%. That might mean that the initial investment could be in stocks with certain yields, but the next round of investment ( or re-investment) could be in another company.

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  4. One question I have is how do you acct for the commission on making the trade itself. Vanguard is charging me $7/trade, does it make sense to continue to buy positions monthly with this fee structure? A couple Shares of PEP today and another few shares in the next month? This could get expensive....

    This is a great post. For the past few years I've subscribed to Richard Ferri's thoughts on Passive Investing. I've read several of his books and could be considered a bogle head. I've stumbled upon your writings over the past month and am slowly convincing myself to start investing in your methodology.

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