In my last article, I discussed the first steps to transform a retirement portfolio into a retiree’s portfolio. Today, I’m going to press fast forward on my current pension account and see what changes I would make if I was going to retire tomorrow. Let’s imagine for a minute that I wake up at the age of 64 and in 364 days I will retire and expect to live another 20. Let’s see what can I do to make my portfolio “retiree lovely”.
Let’s start by looking at my current holdings… not retiree lovely!
I’ve taken the holding I show in my latest January income report:
| Company Name | Ticker | Sector | Yield |
| Company Name | Ticker | Sector | Yield |
| Alimentation Couche-Tard | ATD.B.TO | Consumer Defensive | 0.58% |
| Andrew Peller | ADW.A.TO | Consumer Defensive | 1.24% |
| Royal Bank | RY.TO | Financial | 3.60% |
| Canopy Growth Corp | WEED | Healthcare | 0.00% |
| Enbridge | ENB.TO | Energy | 6.08% |
| Fortis | FTS.TO | Utility | 4.10% |
| Lassonde Industries | LAS.A.TO | Consumer Defensive | 1.00% |
| Magna International | MG.TO | Consumer Cyclical | 2.09% |
| Shopify | SHOP.TO | Technology | 0.00% |
| Apple | AAPL | Technology | 1.53% |
| Disney | DIS | Consumer Cyclical | 1.54% |
| Gentex | GNTX | Consumer Cyclical | 1.73% |
| Hasbro | HAS | Consumer Cyclical | 2.22% |
| Honeywell | HON | Industrial | 1.80% |
| Lazard | LAZ | Financial | 2.80% |
| Microsoft | MSFT | Technology | 1.77% |
| Starbucks | SBUX | Consumer Cyclical | 1.92% |
| Texas Instruments | TXN | Technology | 2.17% |
| United Parcel Services | UPS | Industrial | 2.95% |
| Visa | V | Technology | 0.57% |
| Average | 1.98% |
Let’s pretend that I rebalance all my holdings to have equal value for each position. Let’s assume I have $1M invested and I need to generate $50,000 per year. I also want to keep up this $50,000 with a 2% inflation rate.
Therefore, my average yield would be 2%. I have 2 stocks not paying dividend and 3 paying 1% or less. This is a problem if I’m going to retire tomorrow. As a young retiree, I will want to earn a lot more in dividend as I will not aim at selling all my precious shares to generate the bulk of my income.
The second problem I have is the concentration in some sectors:
I obviously have an important concentration in techno and consumer cyclical stocks. While those sectors are perfect for what I want to achieve now (e.g. growth), they are more likely to provide additional volatility too. As a young retiree, I don’t want that. Canopy Growth (WEED.TO) is considered to be part of the healthcare sector… let’s just say I don’t have any in this sector!
Now… let’s see how I can modify my portfolio to A) generate higher yield and B) diversify my portfolio in order to avoid a big drop at a bad moment for me.
Which stocks am I dropping?
To be honest, when my friend pitched me the idea of making a “retire now” portfolio, I thought it would be easy. I thought I would simply change a few stocks and then write my article within an hour. But it turns out that changing an existing portfolio toward an income generating machine isn’t that easy.
My first goal was to raise my average yield over 3%. My second goal was to change my sector allocation to make sure I would not suffer from a crash due to a single industry.
| Company Name | Ticker | Sector | Yield |
| National Bank | NA.TO | Financial | 3.85% |
| Emera | EMA.TO | Utility | 5.22% |
| Royal Bank | RY.TO | Financial | 3.60% |
| Bell | BCE.TO | Telecom | 5.06% |
| Enbridge | ENB.TO | Energy | 6.08% |
| Fortis | FTS.TO | Utility | 4.10% |
| Telus | T.TO | Telecom | 4.46% |
| TFI International | TFII.TO | Industrial | 2.73% |
| Apple | AAPL | Technology | 1.53% |
| Disney | DIS | Consumer Cyclical | 1.54% |
| Procter & Gamble | PG | Consumer Defensive | 3.37% |
| Hasbro | HAS | Consumer Cyclical | 2.22% |
| 3M | MMM | Industrial | 2.33% |
| Lazard | LAZ | Financial | 2.80% |
| Microsoft | MSFT | Technology | 1.77% |
| Starbucks | SBUX | Consumer Cyclical | 1.92% |
| Texas Instruments | TXN | Technology | 2.17% |
| United Parcel Services | UPS | Industrial | 2.95% |
| Pepsi | PEP | Consumer Defensive | 2.84% |
| Average | 3.19% |
As you can see, I’ve made a lot of changes. The first thing I did was get rid of low yielding stocks:
- Alimentation Couche-Tard
- Andrew Peller
- Canopy Growth
- Lassonde Industries
- Shopify
- Magna International
- Honneywell
- Visa
- Gentex
Yup… that’s 9 stocks out of 20… nearly 50% of my portfolio! You can see how having so many low yielding stocks could be problematic when you try to generate income! I also “sold” one position to have the equivalent of 5% in cash.
I’ve added companies with higher yield, but that still show positive dividend growth over the past 5 years. National Bank will increase my exposure to Canadian bank. Emera will boost my average with a 5%+ yield. BCE and Telus are 2 great yielders that are part of an oligopoly. This is perfect for stability. I decided to sell Magna and replace it with TFI international as I rather get a higher dividend yield from a trucking company. On the US side, I’ve played it safe by adding classic dividend payers with Procter & Gamble, 3M Co and Pepsi. The new sector allocation is a lot more diversified as no industry represents more than 16% of the portfolio:
The new portfolio is “Retire Ready!”
Imagine that I have $1M in my portfolio. I now have 19 stocks for $50,000 each and a $50,000 in cash. This allows me to withdraw money from my portfolio on a monthly basis without worrying about the current state of the market.
The remaining $950K invested would generate roughly $30K per year. This amount will certainly keep up with inflation as all my 19 stocks are known to increase their dividend on a regular basis. Each year, I will only have to sell for $20,000 or 2% of my portfolio to finance my lifestyle. You don’t need to be a math geek to know that you will have enough to live for more than 20 years with this kind of plan.
Final Thoughts
This was a fun exercise and I realized it was more complicated than I thought. Starting from an existing portfolio aimed at growth and transform it into an income machine isn’t an easy task. I’m sure you have some suggestions of other stocks I didn’t include in this portfolio.
In the last part of this series, I will make a list of my Top 10 “retire ready” stocks for each market. Stay tuned!
Portfolio looks good. 19 stocks with 50,000 in each looks risky. But, I do understand the logic behind it.
You would be surprised that most mutual funds don’t include more than 40 stocks. Each time the market went through a correction (about 10% drop in 2015, 2016 and recently), my portfolio did better. Therefore, I don’t see this strategy as riskier than holding the market (through ETF).
@dividendgeek
19 stocks with $50,000 is not risky at all. If you are not confident in the investments, buy an index …
Thanks for publishing this article – our audience is mostly people age 50+ who have been planning & saving for retirement. Do you suggest any low fee Dividend funds that replicate what you are doing by constructing your portfolio yourself?
Hello Steve,
Sorry, I’m not a big fan of ETFs investing. The problem is that most ETFs would include stocks I would not like to hold in my own portfolio. Since I have the knowledge, time and interest to build and follow my portfolio I rather do it myself.
We use XDV and VIG as benchmark when we compare our returns with Dividend ETFs. I hope this helps!
Cheers,
Mike.
Portfolio looks good. I think when I’m ready to retire, I might just put a lot of my money in a diversified dividend growth ETF or something like that plus some bonds.
I’ll definitely keep some money on the side for fun like I do now but i like the idea of diversifying via an ETF.
The main advantage of ETFs is instant diversification. You don’t need to bother too much on rebalancing your portfolio either (unless you build a portfolio of ETFs. Then it gets as complicated as picking your own stocks!).
What is the reasoning behind keeping the other three 1% payers? I know you love Disney but you could have kept Visa instead for example and drop Disney. Visa outperformed DIS over the past 10 years.
Just curious as there are many options to lift all of the 1% and 2% yields like adding healthcare stocks.
Hey DE,
Those are interesting questions! Visa definitely outperformed most of the market in the past 10 years. It is a great company, but it is more vulnerable than Disney. In the event of a new technology taking over the transaction business, Visa, Mastercard and Amex could have a hard time. Technology evolves very fast. As for Disney, it will remain a stable money earner stocks with 3 times Visa yield.
As a 36 year old investor, I would pick Visa. As a retiree, I would pick Disney. Fortunately, I can keep both!
As for healthcare stocks, they are not my favorite. In fact, there are less than a dozen healthcare stocks showing a 3%+ yield with a dividend growth rate over the past 5 years and I haven’t used any other basic metrics in my search (like positive revenue and earnings growth). The problem with healthcare stocks (from my DGI perspectives) is that they must use lots of their cashflow to develop their drugs and keep a strong pipeline. This reduces money available for consistent dividend increases.
But then again, all roads lead to Rome. There are many ways to build a retirement portfolio that will work!
Cheers,
Mike
DivGuy,
Great Parts 1 & 2. Thanks! I think you need a Part 3 though – it is about the transition and taxes. Let’s just say I have a bit of experience here being retired for about 5 years now.
I did quite well investing throughout my career and retired at age 62 (my choice of when to retire). Like your hypothetical changes, I chose to make some also. I had a decent pension covering about 50% of our basic expenses and knew I’d take Social Security in 4 years to cover another 35%. So the rest was a piece of cake to generate via investing…..especially since my investing portfolio was growing very nicely.
One thing I had not thought a great deal about was taxes, Social Security, and Medicare (Health Plans).
First thing was shifting stocks held to generate more income just like you example. Since I held a lot of the stocks for very long times, I had huge capital gains to consider. The pension (and later SS) plus generated investment dividend and capital gains at the end of the year put us in the 28% tax bracket. Yeah, rich peoples problems. But it meant I couldn’t just sell stocks quickly unless I wanted to pay higher tax rates. We had to do this more gradually, except in the 401ks.
On top of that, SS was taxed at the 85% level, and we had to pay extra for the Medicare portion of our health care plans.
I waited until 66 years old before taking SS – that ~4 year period let me transition our stock holdings from ~ 100% growth to more like 60% mixed growth and dividend stocks and 40% bonds to lower risk and generate income.
Next up is RMDs from our IRAs – that is going to force big $$$ withdrawals that will be taxed as plain income. Roth IRAs are a consideration, but once again those are taxable events (when they are initially done).
It is somewhat complex when examining all this and it is easy to overlook. My outlook on this is that I’m learning that no good investing deeds over your lifetime are going to go unpunished by the IRS. 😉