Over the past century stocks have delivered a 10% annual total return on average. The total return consists of price appreciation and dividend payments. The issue with average returns is that over the past century, there are only a few occasions where stocks clocked in annual returns of somewhere close to 10% in a given year. In reality, some years these returns have been much more than 10%, whereas in other years these returns have been less than 10%. As a result, investors should be warned that these 10% in annual returns are not a sure thing every year.
A large portion of the volatility in annual total returns comes from volatility in capital gains. Years of prosperity during economic booms are swiftly followed by severe market drops during recessions. Investors who sell stocks to fund their retirement face the risk of selling off stocks at low prices during bear markets, which could result in asset depletion and increases the risk of return to the workforce. As a result, relying on selling off stocks for income in retirement might be similar to cutting off the tree branch you are sitting on. For example, investors who retired in 2000 and relied only on S&P 500 index funds for retirement needs would have less than a few year’s worth of expenses left in their nest eggs by now.
On the other hand, dividend income has remained more stable than capital gains. Since 1977, the dividend income for S&P 500 has experienced declines in only 4 out of 34 years. As a result, it is no surprise that the predictable nature of dividend payment amounts is appealing to investors in retirement.
Unfortunately, yields on S&P 500 have been low since 1995, and therefore insufficient to live off of. An enterprising dividend investor however can generate a portfolio which has a better current yield, while also enjoying dividend increases along the way.
For my dividend retirement plan, I am focusing not only on the dividend, when selecting stocks however. I try to select companies that regularly pay and increase dividends, and also have the potential to increase profits over time. Rising profits supply firms with the firepower to increase dividends over time. In addition, I also focus on qualitative characteristics such as competitive advantages, strong brand names and products or services that clients are willing to pay top dollars for. Another important factor is valuation, since overpaying for even the best income stocks will surely lead to subpar returns for the first several years of the investment. Several firms that fit the profile include:
McDonald's (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has raised distributions for 36 years in a row. Over the past decade, it has managed to boost dividends by 28.40%/year. Currently, the stock is attractively valued at 18.20 times earnings, yields 3.10%, and has a well covered dividend. Check my analysis of McDonald's.
Wal-Mart Stores (WMT) operates retail stores in various formats worldwide, under three major segments: Walmart U.S., Walmart International, and Sam's Club. This dividend champion has raised distributions for 39 years in a row. Over the past decade, it has managed to boost dividends by 18.10%/year. Currently, the stock is attractively valued at 14.80 times earnings, yields 2.50%, and has a well covered dividend. Check my analysis of Wal-Mart Stores.
Chevron (CVX) engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend champion has raised distributions for 26 years in a row. Over the past decade, it has managed to boost dividends by 9.60%/year. Currently, the stock is attractively valued at 9.10 times earnings, yields 3.30%, and has a well covered dividend. Check my analysis of Chevron.
Kinder Morgan Partners (KMP) operates as a pipeline transportation and energy storage company in North America. This dividend achiever has raised distributions for 17 years in a row. Over the past decade, Kinder Morgan Partners has managed to boost distributions by 7.50%/year. Currently, the partnership yields 6.20%, and has a well covered distribution. Check my analysis of Kinder Morgan Partners.
Realty Income (O) is a publicly traded real estate investment trust.This dividend achiever has raised distributions for 19 years in a row. Over the past decade, it has managed to boost dividends by 4.20%/year. Currently, the trust yields 4.80%, and has a well covered dividend. I would consider adding to the stock on yields above 5%. Check my analysis of Realty Income.
Full Disclosure: Long MCD, WMT, CVX, KMR, O
- Check Out the complete Archive of Articles
- Why I am a dividend growth investor?
- My Dividend Retirement Plan
- The case for dividend investing in retirement
- The case for dividend investing in retirement
Warren Buffett is the most successful investor of all time. Warren Buffett was able to keep learning about investments and business from t...
When selecting a dividend stock, investors should look at the dividend last. Income investors should first focus on profitability when inves...
One of my favorite aspects of dividend growth investing is the ability to receive more passive dividend income, simply because I made the ri...
There are many risks to investing . One of the major risks that could ruin a portfolio’s chances of generating adequate dividends are p...
As a dividend investor, my main goal is to attain financial independence when dividend income exceeds expenses by an adequate margin o...
In my investing, look for businesses I can understand that have some sort of a competitive advantage that translates into consistent earn...
Rebalancing is the process where investors sell an asset that takes an above average allocation in their portfolio, and use the proceeds to ...
There are several factors that drive future investment returns. The important drivers behind future returns on equity investments include: ...
Wal-Mart Stores Inc. (NYSE:WMT) operates retail stores in various formats worldwide. The company operates through three segments: Walmart U....
For the first three to four years of my transformation into dividend growth investing, I managed to develop a process of identifying attrac...