Ken, those are reasonable questions.  At some point in the future, I may see bonds as an appropriate addition to my portfolio.  I have conceptualized my pension has having a similar function to bonds in a portfolio.  Right now, I'm strategizing how I will utilize my investments to support me in the sytle to which I have become accustomed.  So far (and I'm a few years away from actually withdrawing any money from my investment accounts) I am gradually moving to more dividend paying stocks in my two accounts that are in individual stocks.  At some point, I plan to begin to have my mutual funds begin paying me dividends rather than reinvesting them.  I have enough cash to supplement my pension for a 2-3 year period, and I have several years of enough money to supplement my pension in a taxable investment account (these are in stocks, so will slowly convert to cash in the next x years).  I expect I will need to shift some of my investments (slowly and planfully) as I move closer to and then into retirement.

Alpha

I have been doing Income-Only investing for the past 9 years, and I think I've got it fairly well understood.

There are many beginning retirement who share your sentiment....you've spent a career saving and now, just like that, you're supposed to start consuming (reverse-saving) while watching your diversified portfolio, which with Social Security, is all that financially stands between you and the judgement day, gradually disappear?? Although there's lots of statistices on past market performance that shows safe withdrawal rates on certain asset-class mixes that looks good, but somehow does not lessen the pain of  watching your savings gradually trail off.

But let me offer you a few points from my experience, some that have already been raised, and some have not:

1. Ignore the marketplace and focus...repeat... FOCUS on a company's ability to generate free cash flow. Without this, the dividend cannot be supported or grown. And remember, all 'middlemen' out there will speak poorly of this approach to retirement investing...as it essentiall eliminates them.

2. Unlearn total return investing and start training yourself to think income. Virtually all of the preceding posts have included reference to Total Return. You've got to teach yourself to ignore this. Reliable and growing distributions from operational cash flow that is shared with shareholders (whether by choice of the BOD or by law) will take care of the share price over time...you don't need to track this or any of its measures...its a waste of your time.

3. Never, ever, ever, ever, ever chase yield! High-yielding securities are that way for a reason, not because the market has somehow missed this. The risk here is a dividend cut or entire elimination. Now, there's nothing wrong with holding high-yielding securities...I own several. But make sure you understand the risk(s) and consequence of holding them.

4. Dividend history is a good screening tool but not a selection tool, as many a company has had great dividend growth right up until the dividend flattened and then  was cut. Other factors are the trend in payout ratios (C-Corps) and FFO payout rations (REITs), the tax character of distributions and management's committment to supporting the dividend.

5. Do not invest in mutual funds, open end or closed end, as there is a conflict of interest within all MF operations relating to the income it generates...including well respected MF families like Vanguard..

6. Fixed income may be part of your holdings, provided all other income securities grow their dividends sufficiently to make up for this lack of dividend growth. Examples are individual bonds, preferred stock and bond ETF's

7 .MLP's do NOT pay dividends...they make distributions. Make sure you understand this difference and the tax ramifications of this kind of income security

8. Diversification is a dillutional tool of the income portfolio to lessen the impact of an unexpected dividend cut or elimination, which is different than diversification employed in Total Return.

The only source I've ever found that speaks accurately to true Income investing is the annual shareholder's report from Realty Income (Sym: O). Go to their web site and read it for 2007......this is Income investing in its pure form.

A portfolio yield of 4.5 - 5% with annual growth averaging 3-5% is entirely doable.

Best wishes

BruceM

Bruce offers great ideas and great advice along with a less than 100% perfect list of specifics geared basically (let me add) to those investors who'd rather own individual securities than managed packaged products.....

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There ARE mutual funds that have proven they can solve these problems for investors, but unfortunately you can count them on one hand with three fingers amputated......:-)

Total Return does NOT need to be thrown out with the bath water, but it does need to be a less important ingredient for retired investors to count on......

Taylor

 

 

This has been a most interesting discussion.  My question may be totally naive, but how is it possible to live primarily on income from dividends?  What would be a "ballpark" figure of the invested amount that would yield enough income to live moderately well?

4 - 5% yield (1st year withdrawal) on your total assets, that would grow (the payout) over time...

t

Good post.

re point #2. If we assume for the sake of argument that total return is 50:50 growth:income for a stock why would you pass up the opportunity to capture appreciation and re-balance the profits into bonds, REITs, TIPS, etc.? A long time concern I've had regarding rebalancing is the sale of shares, is this your concern?

re point #8. I think you need TR diversification too. We recently saw a number of dividend payers that most of us hold cut their dividend. What happens if this pattern spreads throughout the sectors we traditionally look to for divs, and worse yet what if there is an overall market turn away from dividends? The way I see it is I'm going to need every red cent I can get my hands on when I quit the workforce. Just as I've spread my income portfolio over several asset classes, I can't see limiting myself to just interest and dividends when I can get both of them plus growth...basically, the more the merrier. (BTW, I happen to think the new VG payout funds are quite good. If you look at the core stock holdings (TSM and TIM) there really is no focus on stock income. VG has taken the approach that a high level of diversification increases the odds of growth, which translates into a growing base of income producing classes...bonds, REITs, and TIPS.)

Good Luck, Ken.
 

Say you need $50k/year. A reasonably attainable and somewhat safe level of income from a portfolio is 4 or 5%, let's say 5%. That means you need $1M generating 5% to get that $50k.

If your portfolio cannot generate sufficient income, either because the principal is too small or the yield is too low you will have to sell shares to meet your living requirements...then the problems start. And there are no guarantees that having both sufficient principal and yield is going to do the trick over a 30 year period either.

Good Luck, Ken. 

Actually, you may be better off with your inflation protected pension now that I think of it.

Say there is deflation, you probably just won't get an inflation adjustment that year but your "fixed" rate should remain intact. TIPS OTOH I believe actually reduce the composite rate when there's deflation.