How to Avoid Dividend Cuts and Build a Safe Retirement Portfolio Brian Bollinger, CPA
Today’s agenda: • The appeal of a dividend strategy in retirement • How to avoid companies that cut their dividends • A framework to build a durable dividend portfolio
“In investing, we get what we don’t pay for.” – Jack Bogle
“Solar powered clothes dryer, only $49.95!” Source: Alchetron
Source: Consumerreports.org
Things we don’t do… • Hype unrealistic performance claims • Promote frequent trading to justify value • Cherry-pick results and shun accountability • Outsource any of our work • Waste time marketing instead of improving
We help investors use dividend stocks to generate income and preserve capital in retirement $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 Age
Today’s agenda: • The appeal of a dividend strategy in retirement • How to avoid companies that cut their dividends • A framework to build a durable dividend portfolio
Dividends can provide numerous benefits in retirement • Income detached from stock price volatility • Less need to sell shares to make ends meet • Income growth in excess of inflation • Competitive long-term returns, less volatility • Higher current income than bonds
Dividend investing is all about durability Source: elitefeet.com
We want the Cliff Youngs of dividend stocks 1895 1898 1885 1882 1891
Dividends are an output 1) Pay down debt 2) Make acquisitions 3) Buy back shares 4) Pay dividends
We value companies with predictable outputs • Simple, mature businesses with timeless offerings • Solid profitability and strong financial health • Enduring company-specific advantages • Alignment with secular growth trends • Management committed to paying dividends
• Shipping is timeless • Network effect advantages • E-commerce beneficiary • Dividends since 1969
• Fickle consumers • Online disruption • High fixed costs • Inventory risk
Today’s agenda: • The appeal of a dividend strategy in retirement • How to avoid companies that cut their dividends • A framework to build a durable dividend portfolio
It’s not always easy to identify goldfish from piranhas
Which of these dividends is safe? Uninterrupted Dividends Company Industry Payout Ratio S&P Credit Rating Since A Medical supplies distribution 1977 69% B Food containers, cookware & B 1996 59% BBB- beauty Fee-based energy pipelines & C 1986 107% BBB- storage D Fuel storage infrastructure 2011 81% BBB- E Consumer apparel retailer 1974 82% BB+
Trick question…they all cut 1-Day Stock Company Name Dividend Cut Date Cut Amount Reaction A Owens & Minor (OMI) 10/31/18 71% -44% B Tupperware Brands (TUP) 1/30/19 60% -27% C Buckeye Partners, L.P . (BPL) 11/2/18 41% -2% D Macquarie Infrastructure (MIC) 2/21/18 31% -41% E L Brands (LB) 11/19/18 50% -18%
Our Dividend Safety Scores help investors avoid dividend cuts before they happen 282 of 287 cuts caught in advance
Companies cut their dividends because they need to free up cash for other purposes • Profits no longer cover the dividend • The balance sheet has too much debt • Weak outlook for long-term profitable growth • Access to affordable financing is in doubt
Our Dividend Safety Score system evaluates the financial health of companies • Payout ratio • Leverage and liquidity metrics • Recession performance • Industry nuances • Management’s historical commitment to dividends
• Struggling core business reduced cushion • Risked balance sheet to buy growth
• Cyclical earnings tied largely to oil and gas prices • Strong balance sheet, dividend commitment
• Regulated utility with predictable earnings • Able to safely maintain higher debt, payout ratios
Today’s agenda: • The appeal of a dividend strategy in retirement • How to avoid companies that cut their dividends • A framework to build a durable dividend portfolio
How to build a quality dividend portfolio • Hold between 20 and 60 stocks to reduce company- specific risk • Equal-weight each holding since it's hard to predict winners and losers • Invest no more than 25% of your portfolio in any one sector • Target financially healthy companies with Safe or Very Safe Dividend Safety Scores
Why not buy a dividend ETF instead? Vanguard High Dividend Yield ETF (VYM): Trailing 12-Month Dividends per Share $1.80 $1.59 $1.56 $1.60 -31% $1.40 $1.20 $1.08 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12
The market’s too high…when should I buy in? • The 90 best trading days between 1969 and 1993 accounted for 95% of the market’s gains • If you were out of the market just 7% of the 780 months from 1926 through 1990, you would’ve earned nothing • Since the 1950s, the S&P 500’s worst 15 -year annual return was a gain of 3.7% per year • Attempting to time the market is almost always a losing bet over the long run
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