In part III of my retirement guide, I looked at various options to generate a retirement income. I think that one of the most successful ways is to build your own pension plan through a dividend portfolio. The reason why you should do it is quite obvious; anyone with a bit of discipline can achieve a substantial dividend portfolio at retirement. You need the discipline to save and to stick to your investment strategy until the end. With these skills in hand, you can pretty much become a millionaire no matter where you come from.
Building a retirement portfolio isn’t much different than saving for any other goal. The only difference is that you are going for the long haul. Investing over a long period of time means avoiding trendy investments (such as oil & gas in the early 2000’s) and not ignoring low dividend yield stocks. In fact, if there is one thing you should ignore when you build your retirement portfolio, it’s the high yielder. For those who are about to retire or are retired already, I will discuss other strategies in Part V of this series. But for now, let’s concentrate on how to build this money making machine for the future!
How long is the long haul?
Before we even start discussing investing strategies, we must define what is long term. When you invest for your retirement, you should not be worried about short term events such as Trump’s election or the Brexit. If you plan to have money until you pass away, this means having money until you reach 85. And if you want to be on the safe side, you might as well consider having money available until you are 90. If you are reading this and you are 50, this means you still have 35 to 40 years in front of you. You might not have many years to put money aside, but you will be managing this money for a very long time.
The ”long haul” is probably somewhere 40 to 60 years depending on how old you are today. But it is certainly a lot more than 5 to 10 years. Therefore, everything you read about the current economic cycle (regardless if we are in a bull or bear or hybrid market!) is irrelevant. You read this right: short term economic news is irrelevant. In fact, you can throw away all your newspapers, they are worthless. The world isn’t going to change overnight and very few events will influence your portfolio for the next 40 years.
This is also true about where we are in the current market. Is the market too high or too low? This will not have any kind of impact over the next 40 years. Okay… you are right, you would be better off starting to invest in 2009 than early in 2008, but there is no way you can figure when the next crash hit. I’ve repeated myself many times on this blog; people have been waiting on the sidelines for the market to crash again since 2012… do you think they will make more money than someone who kept investing? I’m far from being a market genius and I show a 15% return compounded over the past 5 years… do you really think I could make more money sitting on the side line waiting for the next crash? Impossible. The key is to keep investing as you save money and stick to your plan.
Which is the best investing strategy for a retirement portfolio?
I don’t claim to own THE investing strategy that will make your retirement portfolio more solid than a defined benefit pension plan. But I think my strategy will work for my own plan anyways. My investing strategy is based on the 7 dividend growth investing principles:
- Principle #1: High Dividend Yield Doesn’t Equal High Returns
- Principle #2: Focus on Dividend Growth
- Principle #3: Find Sustainable Dividend Growth Stocks
- Principle #4: The Business Model Ensures Future Growth
- Principle #5: Buy When You Have Money in Hand – At The Right Valuation
- Principle #6: The Rationale Used to Buy is Also Used to Sell
- Principle #7: Think Core, Think Growth
The idea here is to build a portfolio that will provide you with both dividend growth and capital appreciation. You don’t have to limit yourself to dividend growth since you have several years in front of you. Therefore, you can look for companies that pay dividends in the first place, and will still show lots of room to grow in the future. A good example would be Starbucks (SBUX). The company has been increasing its dividend for the past 6 years, and the stock price jumped by 254% from June 2011 to June 2017. This is the kind of company you want to find and add to your portfolio.
When I start my stock analysis, I always start by looking at the dividend growth. I prefer to identify those businesses who show a strong dividend growth over the past 1, 3 and 5 years. Then, if the company shows a longer history, it’s definitely a plus. But since the market has been generous with us over the past few years, it’s important to find companies that have been able to keep it up during a bull period. The current yield doesn’t matter to me, what is most important is to know that the company will continue increasing it in the future.
When you think about it; a company that increases its payout significantly year after year must be confident in its business model. The company must generate growing revenues and profits in order to keep increasing its distribution. When a company is strong in the dividend triangle, the stock price will also climb. This is what we can call a win-win situation .
Before I purchase any stocks, I also make sure that I write down my investment thesis. This is a process that is often overlooked by many investors. It seems redundant and demanding to actually write down the reason why you think a company should be part of your holdings. However, I use my investment thesis to not only confirm my purchase decision but also to validate my potential selling decision. As I review my holdings on a quarterly basis, the minute a company doesn’t fit my investment thesis, it goes on to my sell list and is eventually sold within a few months. By taking this doubt out of my mind, I have become a greater investor and no longer suffer from paralysis by analysis!
Great stocks, but not all of them
When you will pull out your first stock research list, chances are you will find many great companies evolving in the same industry. This is only normal. Depending on the timing of your search, there will always be one or several industries benefiting from the current market. For example, many techno dividend stocks seem to be quite interesting now. There are several companies with solid balance sheets, strong dividend growth and lots of cash in hand. Here’s a quick list of interesting companies showing double digit dividend growth over the past 3 years:
- Apple (AAPL) 10.21% annualized dividend growth
- Cisco Systems (CSCO) 14.88% annualized dividend growth
- IBM (IBM) 14.13% annualized dividend growth
- Microsoft (MSFT) 16.02% annualized dividend growth
- Qualcomm (QCOM) 18.96% annualized dividend growth
- Texas instruments (TXN) 15.30% annualized dividend growth
- Western Digital (WDC) 25.99% annualized dividend growth
- Xerox (XRX) 10.46% annualized dividend growth
Does it mean that you must pick all of them? NO! What is happening is that we see a specific sector getting traction in today’s overall economic context. Therefore, all the companies evolving in the same sector have the chance to ride the wave. But this doesn’t make them all good surfers!
The key point in building a strong retirement portfolio is a good asset allocation. Remember, you are not in this to beat your brother-in-law at the next Christmas party, you are in for the long haul, for the next 40 years. Most horror stories I’ve heard come from investors who focused on a few sectors and finally hit a wall at one point or another. I rarely put more than 30% of my portfolio in a single sector for this reason. My DSR portfolio models are built following the same methodology and show great results after 3 and a half years.
A complete guide to build your portfolio
I could hit you with a 10,000+ word article but you would need a whole morning to digest it and your boss would probably realize by then that you are not working… and this would not help you out in building your retirement portfolio! Hahaha!
Instead, I’ve create a step-by-step guide to build your portfolio and to make sure to avoid many pitfalls in the process. You can download this guide for free right here:
This book includes the strategy used to manage my own portfolio. I’m certain it will help you to build your own and succeed.
For the next part of this series, we will take a look at how you can manage your portfolio once you are retired. Taking care of your money when you no longer save is a whole different ball game!
DGI is indeed a great option to build a retirement portfolio.
In what way would taxes on dividends make you switch to total return approach via an ETF? I ask because in Belgium we pay 30pct taxes on dividends and also in the home country of the stock. A US company that pays 100, returns me only about 59,5 in dividend…
Hello AMT,
Very good point! I guess we are lucky in Canada as I can invest in 2 different type of accounts where there are no taxes. The RRSP (Registered Retirement Saving Plan) is a tax sheltered account where you pay taxes only on withdrawals (no matter if the money comes from profit or capital). Contributions to RRSP are also tax deductible (since all withdrawals are taxable based on your marginal tax rate). The TFSA (Tax-Free Saving Account) doesn’t have tax deductible contribution, but you never pay taxes on profit (capital gain, dividend or interest included) nor on withdrawals. This is why I’m not too concerned about tax implication on this side of the ocean 😉
This is a very good post Div Guy, and is a strategy I’m pursing. I still feel as if I’m starting late because I’m almost 40. I realize that the long haul may take me to age 85 or 90, but I’m going to have to start using some of the money invested around age 55-65. So, because I’m starting late in life, my DGI strategy would only allow me to supplement my income in retirement.
I max out my 401k at work and my IRA, and recently started my dividend portfolio last year. I’m worried, but hopeful at the same time. I guess only time will tell. Thanks for the post and I might check out your retirement guide.