I guess it’s normal as I am still relatively young (29), but usually talk about dividend growth portfolios and rarely about building a retirement portfolio. What is the difference between a dividend growth portfolio and a retirement dividend portfolio? It could summarized in 2 statements:
Portfolio Value Stability
Income Stability
From my experience in the financial industry, I have noticed that most retirees or people about to retire are interested in 2 things when it comes down to their investments; steady income and steady increases in value. They are not always looking for double digits returns; they just want to feel that they can enjoy their retirement without worrying about their investments.
There are some simple rules you can follow to secure your portfolio, reap the rewards dividends offer and not have to worry too much about market fluctuations.
#1 Look At Dividend History & Dividend Growth
Start your search for solid dividend companies among these lists:
These are strong dividend payers that have made their mark over time. They are well established companies that shouldn’t let you down.
#2 Ignore The Flavors of the Month
Hot stocks exist even in the dividend world. I would ignore them. Any fast growing company that pays a dividend should be removed from your portfolio. I would also avoid smaller companies in highly volatile sectors (such as HSE that I hold in my portfolio). Stay away from stocks that make the front cover of investors’ magazines and focus on more conservative ones.
Another example would be to avoid covered call etfs on the Canadian market. Their history is too short in Canada to truly assess how they would react over the long haul. It looks good, but since everybody is talking about it, I would stay away from them if I was about to retire.
#3 Buy Some Bonds & Preferred Shares
Bond rates are low, I know. However, they will bring stability to your portfolio as will the preferred shares. It is important to have a part of your portfolio that will hold on the fort at all times. Bonds & preferred shares should be able to play that role.
#4 Look for Mature Companies
If you go back to the dividend payers listed in point #1, you will find mostly mature companies. These are the ones with established management teams, brands and structures. They are in a better position to manage their cash flow and pay out their dividends on a regular basis.
#5 Tighten Your Dividend Key Ratios
On my other dividend site, What is a Dividend, I discuss the 5 dividend key ratios. While selecting stocks for a retirement portfolio, you simply have to tighten your search criteria. For example, instead of looking for a maximum dividend payout ratio of 70% or 75%, target 50%. Therefore, you will make sure to receive your dividend payout on time. Here are my suggestions with regards to the 5 dividend key ratios:
Dividend Yield: Between 2.5% and 5% (a lower dividend yield wouldn’t even protect against inflation while more than 5% becomes overly risky).
Dividend 1 year growth ratio: this must be positive (you aren’t looking for a specific number here, you just want a company that didn’t put a recent hold on their dividend increase strategy).
Dividend 5 year growth ratio: Here again, just look for a positive number. We are looking for consistency, not high growth dividend payout stocks.
Dividend Payout Ratio: 50% or less (let’s take only the most conservative dividend payers 😉 ).
Earnings Growth: Must be positive. With dividend growth and earnings growth both in positive territory, you will be selecting a dividend stock that will have all the chances in the world to keep your portfolio with a nice level of income generation.
#6 Diversification is always the key
In the end, even if you find a high paying dividend sector, I would suggest to not massively invest in it. For example, utilities in the US and financials (especially banks) in the Canadian industry are 2 sectors where it’s easy to find companies with a solid dividend record. However, as was the case in 2008 with the financials, you never know when a crisis will hit a sector. While the companies you have selected might remain solid in the storm, their stock market value may drop significantly.
The key with a retirement portfolio is to concentrate less growth and more about stability. By following these simple rules, you should be able to make it happen ;-).