Sustaining Your Retirement Income Through the Next Bear Market Tim Plaehn Editor The Dividend Hunter
The Problem • After retiring many retirees must depend on earnings or withdrawals from a lump sum amount to fund a part of their retirement income. • The challenge is to produce enough income through the ups and downs of the markets, including the inevitable Bear Market(s). • Predicting or Timing stock market swings is a daunting to impossible task.
The traditional "4% rule" withdrawal rate sets retirees up to run out of money, possibly when they need it the most.
Ivory tower researchers have designed a large number of strategies to attempt to ensure that retirement lump sums don't run out of money before retirees run out of time. An article by Wade Pfau, Ph.D., CFA was titled "39 Modern Retirement Income Planning Techniques". Yes, 39 different possible strategies .
Midstream MLPs Big sector with different sub-sectors • • Fewer drill rigs will hit gathering focused MLPs • • Sponsor assets may be undervalued
I am not a retirement planning expert, but I know a few things: • Probabilities only work for large numbers and individual results can and will vary significantly from large group percentages. • 39 different strategies means that a really good solution is very difficult to find. • I prefer the most simple to employ approach to get the job done.
Today I want to present a simple strategy to "Generate 6% Dividends or More for Retirement Without Spending Down Your Capital". Just because the basic strategy may be simple, the execution will likely be more complicated.
A Set of “Simple” Rules • Invest in dividend stocks with an average portfolio yield greater than 6%. • Only draw 6% (or less) in cash from your retirement investments portfolio. • Reinvest all excess dividends back into your dividend stocks to generate larger dividend amounts in the future. • Build a cash flow cushion for higher expenses or dividend reductions.
Can this be done? • The 21 stocks in the current recommendations list for my Dividend Hunter service have an average yield of 8.4%. • Individual stock yields range from 4.9% to 16%. • Let's go over some strategy rules.
Diversify across 20 to 25 higher yielding stocks The high yield shares tend to come out of a few sectors, so you need to pay special attention to the types of businesses in which you are investing. • For example Starwood Property Trust, Inc. (STWD) and TPG Real Estate Finance Trust (TRTX) are both in the commercial mortgage business. I recommend them both, but if I found another commercial mortgage company, I would limit myself to the best 2 out of 3. • High yield stock sectors include finance REITs, equity/property REITs (lots of subsectors in this group),BDCs, energy infrastructure, and offshore domiciled companies that pay low taxes and higher dividends.
Research to understand how each of your income stocks produces cash available for dividends . To be high yield a stock will be either misunderstood or dangerous to your portfolio value. Follow the jargon: FFO, AFFO, DCF, CAD, not EPS • You need to see either a growing cash flow per share trend or very high cash flow coverage. • A couple of analysis examples:
Aircastle Limited (AYR) is an offshore domiciled commercial aircraft leasing company. Current yield of 5.8% with 8% to 10% annual dividend growth. • $1.20 current annual dividend rate vs. EPS of $2.59. Even better, business generates more than $5.00 per share in free cash flow. • This is a great stock to buy or hold during market corrections.
New Residential Investment (NRZ) is a finance REIT that owns non-mainstream financial assets related to residential mortgages. Currently yields 11.9%. A very high yield stock. • NRZ pays out a high percentages of “core earnings per share” as dividends. Last few quarters earnings of over $0.60/share vs. $0.50 dividend. Over last 3 years dividend has grown from $0.45. • Great company and stock, with a triple-digit total return since early 2016 correction. Must watch the core earnings vs. dividends every quarter to make sure the company remains on track.
Avoid stocks that require extensive and complicated hedging strategies to protect expected free cash flow results. • Agency mortgage backed security portfolio REITs. • Upstream, oil and gas producing MLPs. These have all gone bankrupt or restructured to something that doesn’t pay dividends. A lesson to not forget. History has shown that when underlying prices change significantly, hedges do not preserve distributable cash flow, they just hold off or delay the day of declaring bankruptcy.
Change Your Mindset About Share Prices! • Falling share values are an opportunity not a curse. • Buy low to earn a higher yield and larger dividends. • Your stock selections are based on your cash flow per share research and not influenced by share prices. • Take a profit if one of your shares moves rapidly higher, and the yield no longer make sense. • For example, in the last market crash, AYR dropped to less than $3.00 per share. Free cash flow per year was over $4.00 per share. Dividend was cut, but two years later the stock was in the mid-teens with a growing dividend.
Strategy Recap • Build a diversified portfolio of 20 to 25 stable high yield stocks. • Goal is an average yield well above 6%. • Reinvest extra dividend income to grow future dividend payments. • Security of cash flow to pay dividends is the primary analysis factor. • Share prices and temporary portfolio value declines should not be a concern. • History shows that share prices of dividend paying stocks will recover from a bear market. Reinvesting dividends will boost that recovery. • Balance your portfolio for more income or more growth.
Have an Emergency Amount Set Aside • This all is great, but a deep recession driven bear market will likely be accompanied by individual dividend reductions. Definitely by uncomfortable share price drops • Have an idea of which of your dividend stocks would be more likely to cut dividends. More importantly, which ones should sustain dividends through a downturn. • Set aside money into a safe investment that you can tap through the bear market. One- year’s worth of expenses will give you peace of mind. Do this now and let it build. • I currently recommend a bond ladder type of strategy in the Invesco Investment Grade BulletShares ETFs. • These are unique, fixed maturity bond ETFs that currently yield 3.5% to 4%.
How Much Can You Earn With a High Yield Portfolio? • Remember the goal is to pay yourself a retirement income and also reinvest a portion of earnings for future income growth. • I find that investors overly focus on the higher yields, which are the higher risk stocks. Don’t fall into this trap. • Have a portfolio management strategy. Think balance, balance, balance amount your income stock holdings. • Be ready to shift priorities if the economy shows real signs of distress. • Here are some hypothetical portfolio balancing ideas and how much cash flow would result from $100,000 of investment.
Current Yield Equal Weight 70% Hi-10 70% Lo-10 50% 10%+ $ 727.27 $ 1,120.00 $ 400.00 $ 2,000.00 16.0% $ 550.00 $ 847.00 $ 302.50 $ 1,512.50 12.1% $ 545.45 $ 840.00 $ 300.00 $ 1,500.00 12.0% $ 536.36 $ 826.00 $ 295.00 $ 1,475.00 11.8% $ 431.82 $ 665.00 $ 237.50 $ 263.89 9.5% $ 431.82 $ 665.00 $ 237.50 $ 263.89 9.5% $ 418.18 $ 644.00 $ 230.00 $ 255.56 9.2% $ 413.64 $ 637.00 $ 227.50 $ 252.78 9.1% $ 400.00 $ 616.00 $ 220.00 $ 244.44 8.8% $ 400.00 $ 616.00 $ 220.00 $ 244.44 8.8% $ 395.45 $ 217.50 $ 217.50 $ 241.67 8.7% $ 363.64 $ 200.00 $ 200.00 $ 222.22 8.0% 7.6% $ 345.45 $ 190.00 $ 532.00 $ 211.11 7.4% $ 336.36 $ 185.00 $ 518.00 $ 205.56 $ 290.91 $ 160.00 $ 448.00 $ 177.78 6.4% $ 290.91 $ 160.00 $ 448.00 $ 177.78 6.4% $ 281.82 $ 155.00 $ 434.00 $ 172.22 6.2% $ 277.27 $ 152.50 $ 427.00 $ 169.44 6.1% $ 268.18 $ 147.50 $ 413.00 $ 163.89 5.9% $ 263.64 $ 145.00 $ 406.00 $ 161.11 5.8% $ 240.91 $ 132.50 $ 371.00 $ 147.22 5.3% 4.9% $ 222.73 $ 122.50 $ 343.00 $ 136.11 8.4% $ 8,431.82 $ 9,443.50 $ 7,427.50 $ 10,198.61
Some High-Yielders to Research Clearway Energy Inc. (CWEN). A renewable energy focuses Yieldco that was taken over by a new sponsor in 2018. PG&E exposure has driven down share price, pushed up yield. 8.8% yield plus quarterly dividend increases. TPG Real Estate Finance Trust (TRTX). This is a relatively new (July 2017 IPO) commercial finance REIT. The company provides bridge, 2 to 3 year financing for commercial real estate purchases and/or remodeling. The stock yields 8.5% with strong dividend growth prospects. Virtus InfraCap Preferred Stock ETF (PFFA) is a new, actively managed ETF to compete with PFF. Active selection of preferreds plus moderate leverage allows PFFA to yield over 9% vs. 6% for PFF. Monthly dividends.
Thank You! • • • • • • • • •
Recommend
More recommend
