Dividend Investing For Retirement

[George the original one]

On the original question/statement: "I would also want to learn how ERE readers are investing their money in order to ensure longevity in retirement."
I'm buying high yield stocks, MLPs, REITs, & bond funds. My target yield for the portfolio is 6.5% and it is currently yielding 7.4%.
Ideally all of the securities show consistent dividend/distribution growth of at least 5 years and that growth matches/beats inflation, but in reality only half the portfolio is in that category. About a quarter of the portfolio has a variable dividend history or lack a long enough dividend history. The other quarter of the portfolio are the bond funds.
Realizing that higher yielding stocks are risky, I set a mental stop loss. It's a mental stop loss because we've seen prior "flash crashes" before and most brokerages are notoriously poor at execution of programmed orders.
I also trade out of any position when it reaches a significant gain and I "feel" that it is a local maximum. This "feel" isn't very scientific, but, over the years, I've found it's seldom a bad idea to book profits and I shift the money into one of the other positions. Note that the whole position is never closed out; the profits plus 2 years of dividends are not sold, so typically I'm keeping 20-35% of a position and can consider it "free money that will unlikely ever be sold".
2010 YTD performance:

+ 4.3% dividend gains

+ 9.3% capital gains

+13.6% total gain

[JohnnyH]

@DGI: even WMT lost 25% in the 08/09 crash... That can take over a decade to recoup with dividends. Also, dividends are not written in stone and can vanish. Not that I think WMT's will, but it is always a possibility.
Stocks take the stairs up and the elevator down. Right now there seems to be a heightened potential for the elevator being used again... Once (or IF) the VIX maintains 03-07 levels I'll be all over dividend producers.
Just saying...

[jmsims2]

One thing to keep in mind in regards to the portfolio value is that, generally speaking, it doesn't matter all that much. You said yourself that you don't expect WMT to cut their dividend (I don't either). So who cares if the stock loses 25%? All of my stocks went way down over 07 and 08, but my dividends remained the same or increased. If you are living off the income, that is all that matters. If you are sufficiently diversified and sell at the first hint of actual business trouble (rather than when the stock goes down by 10% for no good reason) than you will be all set. I find that people who have not bought into investing for income fully focus too much on the portfolio value. My portfolio value varies, however my dividends only vary in the sense that the income I receive tends to go up from year to year.

[George the original one]

@JohnnyH -
jmsims2 is telling it like it is. If you're an income investor, then even through 2008 you experienced very little drop (if any) in income unless your portfolio was overweight in finance, banking, & mortgages. The income in my own portfolio dropped by 10% due to stupidly hanging on to one financial stock.
If you relied on capital gains for income in that period, then you suffered.

[jmsims2]

I was bit by hanging on to GE. Although my other stocks made up for it with increases, I still hung on too long. I still hang on because I believe in the company and think they will be back. But yeah, income is a better way to view the market vs. capital gains, IMO.

[JohnnyH]

Good point guys, if the income doesn't change who cares what the share price does.
I think it's the commitment that scares me the most... Woah, investments as relationships.

[Dividend Growth Investor]

Jmsims2,
I agree with you 100%. Dividend income is important, since this is what pays the bills. Prices can go up or down and if you rely on selling stocks off for living expenses, thsi is akin to cutting off the tree branch you are sitting on. This is also why I noted that whetehr you purchase WMT at $45 or $50 doesn't really matter in the grand scheme of things ( assuming that you believe WMT will do well over the next few decades). Of course long term capital gain potential is important as well. Stressing on whether your stocks are up or down over the past 1-2 years is not a value added activity.
The issue today is that investors are always bombarded with so much information, that they feel they need to act somehow on it in order to make money. Actually the opposite is true - the less you trade, the more likely you are to make money ( assuming you are diversified of course).
I did have dividend cuts in a portfolio of about 40 stocks in 2008,2009 and 2010. I had 1 company cut dividends in 2008 (ACAS); 2 companies cut dividends in 2009 (GE and STT) and one in 2010 - BP. Overall I did manage to have my total dividend income increase over the past 3 years (without assuming dividend reinvestment. If you assume dividend reinvestment, then it increased even more ).

[epoch707]

Very interesting discussion. Dividend investing goes hand in hand with value investing, because as a company's earnings grow, their dividends increase too. Since the company is making more and more money, the stock rises as well. So only good companies with a competitive advantage will be able to routinely keep their dividends constant and growing.

[arrrrgon]

Do you do your dividend investing in a Roth IRA or just in a regular investment account?
I'm a bit unsure on how to start investing when we have the money next year. If we happen to reach enough money for retirement in our late 40s early 50s then we're better off with a regular investment account, aren't we?
Maybe I'm thinking of this all wrong and I should just figure that I could take from the Roth IRA principal the same amount that is reinvested from the dividends each year?

[George the original one]

@arrrrgon - from a tax efficiency perspective, one would put REITs and royalty trusts in the IRA or Roth IRA since they're taxed like your regular income. Qualified dividends are taxed at a lower rate than income (for most people), so not a big deal if they're in a regular account.

[spoonman]

DGI,
I can’t even begin to tell you how incredibly happy I am to see you in this forum!!! You are one of the reasons why I decided to get into dividend growth investing. I’ve been a DG investor for almost three years now, and it all began with your awesome blog!
Right now, our passive income from dividend stocks is something around $9500 per year and we’ve been growing it by about $4000 per year. That will put us in an ERE-style retirement in about two years (or sooner, if we move to a cheap state or abroad).
Anyway, I just wanted to express my thanks to you and this entire community for all the awesome advice.
P.S. This is my very first post on this forum. I’ve been a lurker for years, and now I think I’m ready to share my journey with the community. I’ll start a journal soon.

[Dividend Growth Investor]

I think this topic is an oldie but goodie. Any other dividend investors out there?

[secretwealth]

DGI: Nice to see you--I love the blog. What're your thoughts on BDCs?

[C40]

I'm getting close to starting with dividend investing..


I'd been using the Permanent Portfolio but wasn't very happy with how I had to set up my amounts between 401k and post tax options.. (ended up having a lot of PRPFX, which I do not like). I also have some reservations about how the Permanent Portfolio works and I might be more comfortable with dividend-producing businesses. I sold my gold and bonds this year to liquidate money for a house, and I'm considering a change as I get back in. I've been reading up on DGI with some books... about to start looking over individual companies..

[frommi]

I'm getting close to starting with dividend investing..


I'd been using the Permanent Portfolio but wasn't very happy with how I had to set up my amounts between 401k and post tax options.. (ended up having a lot of PRPFX, which I do not like). I also have some reservations about how the Permanent Portfolio works and I might be more comfortable with dividend-producing businesses. I sold my gold and bonds this year to liquidate money for a house, and I'm considering a change as I get back in. I've been reading up on DGI with some books... about to start looking over individual companies..

I`m in the same boat as you, i started the PP in the beginning of this year and am now considering dividend growth investing. But i am really nervous, because i don`t want to be the performance chaser who is jumping from one method to the other, only to the see the next fail for a year. Therefore i decided to leave the gold/bonds and stocks of the PP where they are and start DGI investing with the cash part and new money coming in. I will DCA into this and buy some stocks every month. Perhaps in the next big crash (>-25%) i will transfer more money from gold/bonds to stocks. If that doesn`t happen i`m relying on the history of the PP .

Btw. your site is really great @ Dividend Growth Investor, its full of treasures . I also read http://www.joshuakennon.com/ and http://theconservativeincomeinvestor.com/ which helped me understand being a business owner.

[workathome]

You could keep the permanent portfolio and create a "variable" or "Dividend Growth" portfolio separately (mentally, or separate account) that you put new cash into.

[Dividend Growth Investor]

Thanks everyone for responding recently. I think that before you start putting your money in any strategy, you need to get comfortable with it.

The thing that makes me stick to dividend growth investing is the fact that even when everyone else was hurting in 2008, I still kept receiving my dividends. There were much more companies that raised dividends in my portfolio than those that cut them. Therefore, my overall dividend income kept increasing. It is very reassuring when the quality companies you own stock in send cash dividends to you from their profits. You can spend it, reinvest it, or do whatever else you want with this cash - it's yours to keep. If you accumulate enough cash generating dividend paying stocks, you can retire early.

[ToFI]

Income doesn't really mater if we don't need it yet. Before I pull the trigger, I try to maximize ROI, emphasize on total return. Dividends come from the businesses profit. The total return still depends on the business ROI.
As I approach retirement, I would convert some investment to income for living expense using: Bond, cash, Real estate, dividend etc.

[Spartan_Warrior]

Dividend investors: If I were looking to start a simple dividend growth portfolio, with no more than 10-15 stocks for ease of management, and with a relatively stable combined yield between 5-10%--what are some stocks you might recommend? Thanks in advance.

[George the original one]

Go to http://dripinvesting.org/tools/tools.asp, download the US Dividend Champions spreadsheet, remove everything yielding under 2.6%, and finally remove everything that hasn't raised dividends substantially higher than inflation.

That gives you a starting point to pick & choose, selecting among REITs, MLPs, and common stock. Filter out any companies that you dislike for whatever reason (e.g. I won't invest in tobacco companies). Examine the balance sheets of the remaining stocks and throw out those who are too far on the financial edge.