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Willie Keng, CFA

Willie Keng, CFA

Chief Editor

How to Live Off Dividends in Your Retirement Guide 2020

Living off dividends in retirement is a lovely dream shared by many but achieved by few. But here’s how you can achieve it simply, safely and without worry.
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1. The Hard Truths About Retirement

Lee quit his job 5 years ago. Today, he is 63. 

Lee started saving for retirement when he got his first job in a Japanese engineering company. His plan was to retire at 61, but eventually managed to invest enough to retire early, at 58. 

I leaned forward (pushed my cold drink aside) asking him: “How’d you managed to plan all these?”

“Not really, I didn’t have a plan for an exact amount I needed for retirement. But I calculated we should have enough for both of us (and my wife). And my daughter is about to finish university… I was 54 at the time and you know life expectancy (in Singapore) is 84 years. Tell you, it’s not easy. I need 30 years of expenses, including inflation.” Lee said. 

“And as long as I had more than this amount, I think we’re quite safe.” Lee added.

At the height of his career, Lee earns about $210,000 annually. But unlike many of his peers who were earning his income, he saved and invested. 

The point here is this. Lee knew annuities and CPF weren’t enough for him. These provided only the basic spending needs in Singapore. He knew he had to make some adjustments. Later on, he also sold off his car to financing living his dream. 

“You see, my wife stopped working since our daughter was born. Now we’re both enjoying our retirement together.” Lee said.

Well, these days, he played more golf, and goes fishing with his “kaki” (buddies). Lee is living comfortably, happily in retirement.

You know, Lee is a very close friend of mine. He’s very thrifty, and doesn’t buy the expensive cars or collects the Rolexes. We met in an investing conference years ago. Once in a while, we’d ask each other out for lunch or kopi (coffee) to catch up.

Here’s the thing right, many people like Lee share a dream to live off passive income for retirement, but frankly, is achieved by a few. 

I’m going to share this from Lee — It’s going to be hard if you don’t know how to invest for a retirement ahead…

 

The Biggest Danger You Need to Know

Straits Times ran an article on retirement“To retire in 20 years and live on $3,000 monthly, you need $1.3 million… if you want to increase your spending power to $5,000 a month, OCBC says you will need $2 million.”

Of course, you can rely on retirement packages funded by income generators — annuities from insurance and CPF. But they simply aren’t enough. 

“If you are a professional in your early 50s who has been working hard for over two decades… you should have close to $500,000, if not more, in your Ordinary and Special accounts.” as Straits Times reports.

Now I’m not saying retirement packages aren’t good. They help provide you with the basics — just enough to spend for food, groceries, transport. That’s it. There’s only so much they can do for you.

And that’s just the tip of the iceberg. You see, you’ve to deal with one of the biggest dangers of retirement today — Inflation. And to retire in one of the most expensive cities in the world, you’ve got to protect your wealth from inflation, for the next 30 years or more. That’s a long, long time.

“You know Willie, interest rates are going down these days. I tell you, I walked into the bank branch the other day to roll over my fixed deposits. I was shocked. Even my bonds and fixed deposits aren’t giving me enough.” Lee said to me, concerned.

But Lee is smart. He knows inflation will crush the future purchasing power of his bank account today.

You see, you need something more than retirement packages. Rather than worry about money and security, the key thing is to prepare yourself for it. You need an extra income which not only protects your money from inflation, but grows your wealth over time.

It’s best to use a wealth defense strategy to protect against inflation. And to live an income-rich retirement. 

But buying government bonds and fixed deposits aren’t going to give you the protection against inflation. Nor provide you with the extra income you need. 

Let’s embrace it. Interest rates are going to zero. And many countries in Europe, even Japan, have experienced negative yields in their economy. The uncertainty here is going to make things a lot tougher. We’re indeed living in a different world today

Even the US is talking about their interest rates going below zero

Here’s something which I learnt about finance. When governments pay for large fiscal programs, they print a lot of money. This grows the supply of money, leading to inflation. And the unnerving thing is it becomes the silent killer that chips away the value of your dollar.

When that happens, even Singapore government bonds aren’t staying at 2.5% for long. It’s going to go lower.

 

2. The Ultimate Wealth Defense for Your Retirement — Dividends

If you’re like Lee who worries about inflation and the risks it presents on your retirement money, you’re not alone. 

You might also be worried about the inevitable, future crises — like the global financial crisis, or recent Covid-19 pandemic — wrecking your investments.

If you’re thinking about this, then the immediate decision is to have a dividend investing strategy. Let me tell you. This is the “Ultimate Wealth Defense”. Because it’s not only simple and safe to use, but it unlocks predictable, generous cash flows for yourself.

Many people have used this strategy to build and protect their wealth for retirement. And you know what? It even made people huge fortunes in stocks too.

And what you’re about to hear might surprise you. So, here’s a true story about Mr. Ronald Read, who amassed $8 million, working as a Vermont-based janitor and gas station attendant. He lived a very modest life, was the first in his family to graduate from high school, then served in the military during WWII. After the war, he found a job as a janitor at JC Penney, married a woman and had 2 children.

What blew my mind was this. Mr. Read had no college degree, worked his entire life in a humble job, yet was still able to create a fortune. He never spent excessively. 

When he died at the age of 92, he bequeathed a large part of his fortune to a library and hospital. Even his family was shocked by his massive wealth.

“He only invested in what he knew and what paid dividends. That was important to him…” a close friend who knew Mr. Read.   

You see, I’ve tried all kinds of investing strategies (and racked up huge losses) before — high tech growth investing, ‘special situations’, small-cap investing. But, so far this dividend investing strategy gives the best wealth defense.

It’s the strategy I’m using for my mom’s retirement too.

Ok, so picture this. The reason why dividend investing is an incredible strategy for your money is this — It’s a lot like planting a seed in the ground. Once you give it fresh sunlight, water and air, the seeds automatically take root and start growing.

You don’t have to do anything more with it. You carry on with your normal day and let the force of nature do its work. Over time, this seed is going to turn into a plant, then a tree, then it starts to bear fruits and flowers. 

It’s going to give you share for your children, food for your family and it’s going to grow more and more. Think of it like a money safe protection. It’s going to give you the financial security you need. Not only for yourself, but your family too. 

 

3. What Truly Matters to Growing Your Wealth

If you’re reading this, chances are you’ve put some money in the stock market. You’ve done some homework — watch CNBC or Yahoo News, monitor stock prices, hop from financial website to another. 

And I know, you want to take it to a more serious level. 

Along the way, I’m sure you’ve met “financial gurus” who promote trading strategies, tips on cryptocurrencies, economists calling the next crisis on the economy. I’ve had my fair share.

So lean closer here. Because this is about to shock you. For 97% of the people who trade stocks, I can tell you, what they’ve been doing all along is a huge distraction.

You see, the problem with “financial gurus”, or what you read on financial media, on CNBC or Yahoo News is totally meaningless. The sole purpose of them pushing information upon you is to make more advertising fees. 

And consuming all this information is wasting time and pulling you away from making the big, safe returns in the stock market. 

The key thing here is this. If you truly want to grow your wealth in stocks, you’ve to accumulate a basket of solid, dividend growers at a fair price.

That’s it. 

 

The Greatest Way to Invest Through Crisis After Crisis

Here’s something to remember. Have you heard of the Dutch East India Company? It was a publicly-traded company, created in 1602, to trade with Asia. 

You see, the Dutch East India Company sends ships all throughout Asia, buying and selling commodities. And the company was making money with the goods it brought back. It was a huge operation which ran like clockwork.

Now this is what I found interesting. As investors of the Dutch East India Company, you’d get paid dividends when the company brought their ships back to dock. And the company paid dividends for over 180 years.

Can you imagine this? Having all your ships lined up at the dock, waiting to be showered with cash payments from them. From the completed trades of their operations. 

Sure, and it happens all the time. There were dangers of piracy, shipwrecks and diseases. But the operation went so well that it still paid investors really good money.

And these went on for years after years. Investors were paid like almost 20% year after year. I can tell you this, I’m very sure the investors of the Dutch East India Company were a very happy bunch.

I want you to know this. The idea is the same with solid, dividend growers. If you can launch yourself a plan to collect dividends and bring it back safely to dock, it’s going to help you live off on these dividends into retirement. Except what you’d get for ships are electronically-traded stocks.

With that image in mind, onward.

 

4. What You Need to Know About Solid, Dividend Growers

So, let’s talk about that solid, dividend growers a little bit. Not many people take the time to understand their characteristics. But it’s the first thing you need to know about. Before knowing what’s happening in the economy, what’s going on in the news, or what the government is doing.

I’ll explain. 

A solid, dividend grower is a business which pays you steady and rising dividends. Dividends are paid quarterly or semi-annually, to a company’s shareholders. This is what you get as a check in your letter box. 

But before a business pays you steady and rising dividends, it needs to have durable competitive advantage. This is what Warren Buffett calls — an “economic moat”.

In his letter to shareholders, he explains simply: “What we’re trying to do… is we’re trying to find a business with a wide long-lasting moat around it, surrounding — protecting a terrific economic castle with an honest lord in charge of the castle.”

An economic moat could be a strong brand, secret formula like patents or intellectual property, a high switching cost, or a lowest cost producer. 

And these businesses with a durable competitive advantage, or economic moat are usually the top dog in their own industry. If you track big companies like Johnson & Johnson, Walmart and Microsoft, they have some form of economic moat. 

Think about it. Microsoft’s operating system has been widely used in many offices and homes that it becomes so hard to switch out of it. And their move into cloud computing with their Azure, it deepens the economic moat they have.

Or Walmart with their super huge distribution network allowing it to sell products at very low prices. 

 

“It’s an Addiction”

Now, what lies behind their durable competitive advantage is this — deep within their economic moat is something you don’t often hear about. And this drives massive profits for businesses. 

It’s very subtle but the effect is very strong.

And this is what leads me to an important point here. Most of the truly solid, dividend growers sell habit-forming products or services. If you noticed carefully, the best-performing stocks over the past 50 years sell habit-forming products or services. This is valuable somewhat, when you’re picking solid, dividend growers. 

These businesses get customers to use their stuff again and again. And customers will fork out money to buy what these businesses are selling.

The customers become “addicted”.

Think about Apple. Their products — iPhones, iMacs, Apple Watches, AirPods, iPads are widely used by customers globally. And every minute someone steps into the glass-paned apple shop, you get a new “Apple convert”. They buy one of their popular smartphones or iPads. And it doesn’t stop there, its products will get you into their ecosystem — iTunes, which makes it hard for you to switch to their competitors.

Or early office workers who frequently drop by Starbucks for their morning coffee. It becomes a habit. It’s not surprising how high Starbucks has gone up since they IPO in 1992. 

Major payment companies like Visa and Mastercard are part of this group. People think tech stocks don’t pay good dividends. That’s not true. These companies pay rising dividends year after year. When you pay for your groceries, look at the 2 most popular logos on your credit card — Visa and Mastercard. 

Of course, you can’t forget traditional drug companies like Abbott Labs, Merck and Pfizer. These are huge, growing businesses whose products customers are buying over and over again. 

People also love going to fast food chains. Processed sugar and chemicals found in food leave customers wanting more. This is why McDonald’s have been so successful over the past decades. 

Now if you’d realized, these companies make things you use or eat every day. It could be food, payment services, groceries, home furniture. You don’t have to spend time looking deeply into the latest cancer research, or the next “Software-as-a-Service” technology in the market. 

You see, the thing about spotting consumer habits is when people get hooked to a product or service. Or simply “forced” to use it due to regulations or licenses. It could be sticking to a particular brand, or a customer finding it hard to switch services. This creates repeat businesses.

And once people get used to a product or service, companies can increase their price. This deepens the economic moat, increasing a business’s durable competitive advantage. And companies make more money sustainably this way — or what you call sustainable earnings power. 

This gives you higher sales growth, fatter profit margins. All good for your investments.

Companies also don’t have to change their products often. Once Microsoft made a homerun on its operating system software, it didn’t have to change it. The same goes for other solid, dividend growers like Coca-Cola, McDonald’s and Starbucks.

More money can be spent on advertising, distribution or building more factories to increase volumes. All these goes to increasing a business’s return on investment (ROI).

The excess profits can be used to reward shareholders through more dividends, more share buybacks. 

That’s how you get your rising dividends year after year.

When you buy a solid, dividend grower, it means more dividends for you. And you don’t have to worry about dividends getting cut. 

 

Solid, Dividend Growers Can Grow Bigger Safely

Just because businesses are large and stable, doesn’t mean they stop growing. It’s a deadly logical lie. 

In fact, if you spot solid, dividend growers, with a durable competitive advantage, they’ll help you to grow your wealth sustainably year after year. 

Look at how some of the top dividend growers performed in the past 10 years: 

  • Apple (Ticker: AAPL) — +1,025% gain
  • Starbucks (Ticker: SBUX) — +682% gain
  • Visa (Ticker: V) — +891% gain
  • Mastercard (Ticker: MA) — +1,115% gain
  • Abbott Laboratories (Ticker: ABT) — +223% gain
  • McDonald’s (Ticker: MCD) — +235% gain
  • Merck (Ticker: MRK) — +134% gain
  • Pfizer (Ticker: PFE) — +208% gain

Don’t you think these are pretty good returns? You get even more after you include their dividends paid to you over the years.

Solid, Dividend Growers Move with the World

I’ll let you in on an open secret. Even the Covid-19 pandemic is not going to stop this — The world is increasingly interconnected. 

We have to embrace it. Companies too.

Big, growing businesses don’t just sell to the US or to a small country like Singapore. Many of them are looking across borders like Europe and Africa. Even going into China and India, where the combined population is 10 times larger than the US. 

I live in Singapore, but I also see young people in China and India having more spending power. They want to enjoy high-quality products and services too — medicine, food, technology, beer, cigarettes in the future.

Solid, dividend growers think globally. 

No one could have imagined a trillion-dollar company 30 years ago. 

But look at how big Apple is today? It hit a trillion-dollar market cap just 2 years ago.

And for me, I’m confident these solid, dividend growers can continue to grow bigger. 

It’s certainly not hard to spot them, and you don’t need to be a genius doing so.

 

5. Your Dividends Don’t Lie

“Hold on a sec…” You might think… “If I’m looking at businesses with a durable competitive advantage, why don’t I simply pick huge growth stocks that invest all their earnings year after year to get an even bigger ROI?”

Yes, you can. By looking at solid, dividend growers alone, you could miss out on the next Amazon, or the next Facebook.

Here’s the thing. For every winner like Amazon, there are more than 10,000 failed companies. It’s not that easy. Trying to find the next Facebook may cause you to lose more money in the long run.

And it’s highly unlikely you’ll be able to consistently spot these companies at the beginning. You need to spend a lot of time doing research. More often, you’ll have sweat and grunt, spending hours after hours trying to read the many pages of data. And if these companies don’t turn profitable, you could get wiped out on a single stock.

These companies are very vulnerable to market disruptions early on. Think about the many competitors fighting to be the top. If there’s no sustainable business models, companies could fail very fast.

Look at GoPro Inc, Blackberry and Nokia. You see some of these well-known tech names falling from the top of the world, to the ground flat.

Well, if you choose to invest in them, you need to own a few hundred of them to diversify your risks. That’s a lot of time needed to watch your investments. Better to spend time on your hobbies, travelling, play golf or look after your newly born grandchild. 

Wall Street fund managers who pick these stocks hire a team of analysts to analyze them — dig deep into financial reports, getting on management calls, flying to factories to “kick the tires”. 

It wouldn’t be possible for the average investor to do all that.

Even then, paying expensive fees to get fund managers to invest for you is hard. Because most of them struggle too, and often fail trying to bet on the next big winner.

What separates solid, dividend growers from huge growth stocks like Facebook and Amazon is this — rising dividends is a hallmark of financial excellence. 

This is common sense. Before a decision to raise dividends, management must believe there’s prospects for higher earnings in the future. Having to face their Board of Directors, no manager will stick their heads to raise dividends if they feel poorly about its company’s future prospects.

By sending you a regular check for dividends, it tells you the business has sustainable earnings power with a strong financial health. 

As far as my 10 years of investing experience, I see it’s way easier and safer to pick solid, dividend growers instead.

 

6. The Surest Way to Get High Stock Market Returns in Retirement

Let’s face it. Who doesn’t like to achieve high returns in the stock market?

The thing is, there are many ways you can profit from stocks. But only a handful of ways to achieve it consistently and safely

And dividends are the key to it.

What I found out about solid, dividend growers might surprise you. A study by well-known investment research firm, Ned Davis Research analyzed the returns of different types of stocks in the S&P 500 benchmark from 1972 to 2019.

In the study shown, each stock is classified into 6 different categories. You’d notice that categories with Dividend Payer and Dividend Growers & Initiators produced the highest returns.

Simply, if you’d invested $100 in either category, you’d made $6,607 or $9,568 respectively over 40 years, much more than stocks in the other categories. 

Rising dividends boost share price over the long run. Because “the market” sees rising dividends as a form of potential value and a good predictor of future growth.

 

“The Client Effect”

And here’s another thing. A company raising dividend year after year creates a sticky “client effect”. What this means is shareholders who own dividend stocks are less likely to sell their shares and hurt stock prices.

The “client effect” dampens the “volatility” on your portfolio, giving you more stability and a higher risk-adjusted returns.

This is solid, why dividend growers are the best way to achieve your high stock market returns safely.

 

7. Why You Don’t Have to Worry About “The Market”

When I first started investing, I was constantly on the news.

It was stressful. Because it felt like I had to be “engaged” with the market every day — looking over small market movements, stock announcements, news clips and other things that are meaningless in the grand scheme of investing.

I’d spend time following “financial gurus” on TV hyping a particular stock or an economist preaching the next crisis. I’d be excited one day, anxious the next. It was emotionally tiring.

I can tell you this is also very common with most people who are “in the market”. I was on a wild goose chase worrying about the market, instead of focusing on the greatest asset of investing.

Now this asset is called… Time.

Let me explain.

Time allows you to make massive yields from solid, dividend growers.

Time allows you to ignore the moods of the stock market.

And if you focus on understanding this asset, interesting things will happen for your portfolio.

It makes you less stressed over investing. It’s as simple as that.

 

Enter Freshly Brewed Company’s Dividends

Example. Say you buy Freshly Brewed, a fictional solid dividend grower selling coffee products, at $50 per share. 

It pays you a $2 annual dividend every year. 

Its dividend yield is 4%.

Now, say it increased dividends every year for the past 30 years.

And dividends continue to grow at 10% each year for the next 10 years.

Your $2 dividend will grow to $5.19 dividend after 10 years. At a 10% growth rate.

This $5.19 dividend now becomes a 10% yield on your original $50 investment.

And it doesn’t stop there. As time goes by, the stock continues to pay you more dividends and your dividends will increase.

If you’d pick solid businesses with durable competitive advantage, the growth continues and you’ll be sitting on a stack of high yielding dividend growers.

After 15 years, your yield will be 16% on your original investment.

After 20 years, your yield will be 27% on your original investment.

I only realized this concept of time later on. If you’re earning a safe 10% dividend yield over the long term, would you care if the stock market was down 3% today?

Or if home prices declined 7%?

Or if oil prices go up by another $10 per barrel?

Do you think it matters one bit listening to financial news clips on TV?

You don’t have to bother about it.

Customers are still going to buy their coffee from Freshly Brewed no matter what happens to the stock market. Or what someone on national TV is spouting about the “death” of the economy.

The stock market could drop by 17% and you’d still get your 10% dividend yield on your shares.

Even if the stock market was shut for a year, you’d still be paid dividends.

What I’m trying to say is this — You don’t have to worry about the market. No matter what stories these gurus are spinning on financial TV, or whether the market is up or down today, solid businesses like Apple, Johnson & Johnson, McDonalds, are still the top dog in their own industries.

 

The Secret to Create 49% Dividend Yield

Warren Buffett used this exact strategy which I mentioned. Since 1988, Warren Buffett bought $1.3 billion of Coca-Cola shares at $3.25 per share. 

In his letters to shareholders, he mentioned he expects to “…hold these securities (like Coca-Cola) for a long time… and when we own portions of outstanding businesses with outstanding management, our holding period is forever.”

Everyone knows about the iconic Coca-Cola drink. The beverage giant is well-known for a secret recipe that gets consumers coming back for more.

But little did people know that Coca-Cola was the building block of Berkshire Hathaway’s dividend machine. And this income strategy paid off very well.

Today, Coca-Cola pays a dividend of $1.60 per share. And you know what? It grew to a huge dividend yield of 49% on Warren Buffett’s initial cost of $3.25 per Coca-Cola shares.

In 2019, he collected $640 million of dividends from Coca-Cola alone. Coca-Cola has been increasing dividends over the past 32 years. 

And that’s not all. Warren Buffett’s initial $1.3 billion investment on Coca-Cola grew to $22 billion over the 32 years. That’s a 1,604% gain and Warren Buffett did not care one bit about the market.

Unlike traders who rush to sell and book profits on their stocks, Warren Buffett held on to his tenaciously. Warren Buffett thinks long-term.

So, you not only have to buy solid, dividend growers at a fair price, but you have to hold them for the long-term.

Remember this, once you focus on buying a basket of solid, dividend growers at a fair price and leveraging the concept of time, “watching” the market becomes a distraction.

Allow yourself time and you’ll get your huge dividend yield on your original investment. Your portfolio will grow bigger and bigger, that you and your family can enjoy.

This is how you grow your dividend yield, and get higher dividends year after year.

 

8. Leverage the Power of Compounding in Your Retirement

If you focus on picking solid dividend growers, making 10%+ or even 20%, 30% yield on your investment, plus the gains from higher share prices. You’re well on your way into a comfortable retirement.

You see, when you own solid, dividend growers, you’re making use of the Power of Compounding. This happens when you take all the dividends you collect, and reinvest into more dividend growers. 

This is commonly known as a Dividend Reinvestment Plan or DRIP. There are companies which offer such plans for their stocks. But you can always do it yourself 

I’ve a video here to illustrate the Power of Compounding

Mr. Einstein used to say: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

And dividend growers are the perfect tool to leverage on this.

Think of compounding like pushing a snowball down a hill. As the snowball gets bigger, it’s able to accumulate more snow, which makes it even bigger, and accumulate even more snow.

You get the picture.

Eventually, you get a snowball so huge that it’s almost the size of a house.

This is the true way to safely build your wealth in stocks.

Here’s the kicker. As you reinvest your dividends, you collect more of them. And because you immediately see the cash coming in, it motivates you even more. It creates momentum to follow through. 

And ultimately keeps your dividend machine churning. Cool eh?

When I worked in a private bank serving ultra-high net worth clients, this is what clients all do with their money – They’d snowball their income and grow from mere tens of thousands into millions of dollars. That’s why the rich get richer.

What I love about investing is it’s a fair game. It’s not exclusive to the rich. Only the rich take action. Even a normal person like myself could do it. It’s easily achievable with a small capital.

Let me show you.

Say you invest $10,000 in a stock which pays you 4% every year. And you want to compound it year after year.

Year 1 — the $10,000 investment paying 4% dividends will give you $400. You take the cash and plough it into the same stock.

Year 2 — this investment grows into $10,400 but still makes you 4%. During the year, you get $416, which again buys more of the same stock.

You see where I’m going?

After 10 years, this investment is going to snowball into $14,802.

After 20 years, this investment is going to snowball into $23,911.

The compounding just gets better over time.

That’s how Warren Buffett became a billionaire at age 56, just by sitting at his desk everyday finding these investments. His money works for him.

While your insurance annuity, pension schemes like CPF and savings generates income for your retirement, they reduce your assets as the years go by. Your assets deplete over time.

That’s why you need a strategy like dividend investing to compound your wealth over the next 30 years and beyond.

Imagine. If you’d invested $10,000 in solid, dividend growers at age 30. And they pay you around 4% dividend yield.

And every year, you set aside just $5,000 from your annual pay check to buy more of these stocks.

And every time you collect your check in the mail for dividends, you reinvest them.

At 54 years old, this is going to give you $1,025,415.

Plus, your dividend growers will continue to pay you a yearly $41,017 dividend. That’s a decent $3,418 per month sitting in your pocket.

Don’t you think there’s a lot you could do from that amount with your family?

Compounding Table

From the table above — At age 30, you put in $10,000 principal. At the end of every year, you put in an additional $5,000.

With the power of compounding, you’d get $1,025,415 when you hit 54 years old

Plus, you still have passive income of $1,025,415 X 4% dividend yield = $41,017 dividends per year.

These dividend growers are going to build your wealth like a cash machine. 

 

9. The Biggest Trap Dividend Investors Need to Avoid in Retirement

If you’re starting out, pay close attention to this. I see investors make this big mistake when they first start out. I wasn’t spared from this. And it cost me tens of thousands of dollars.

You see, when it comes to dividend stocks, the first thing people look at is the dividend yield. 

Dividend yield = Dividends per share / Share price.

The yield can be 1%, 2%, up to 4% like I mentioned earlier.

But when investors find stocks with 6%, 8%, or even 12% yield and above, their greed grands salivate.

People would ask me: “Willie, why invest in stocks paying you only 3% when I can get 7% on a dividend stock?”

And they start to “chase yield.”

 

“More Money Has Been Lost Reaching for Yield Than at The Point of a Gun”

— Raymond DeVoe Jr.

“Chasing yield” goes like this — an investor buys stocks which only offer an attractive yield, ignoring the prospects of the business.

And these stocks could be businesses already in a risky position, or having a risky venture. They may take up huge debt to finance their business. 

You know, it’s very obvious. You’ll notice the share price keeps going down, which causes their yield to go up. It makes investors think they found a bargain — spotting a high yielding stock. Then they buy the stock and continue to see its price free fall into the abyss.

This is commonly known as a “Value Trap”.

Investors get attracted into the “high yield” number, but it’s unsustainable. Management can decide to cut dividends if the business worsens. And if you’re building your retirement portfolio, you want to avoid dividend cuts as much as possible. 

Not only that — falling share price results in capital losses. This way of investing is very dangerous.

Warning: an unusually high dividend yield sends a message that a company is in danger.

One example is General Electric. The business took on risky ventures in the early 2000 by raising a lot of debt. Management thinks the company could do well with a series of acquisitions. But when the global financial crisis hit, it almost went into trouble. Until today, General Electric Capital, the financing arm of the company, is still struggling to restructure and sell off its bad assets.

And because of this, General Electric was forced to sell down a lot of its assets to raise money. Valuable assets like its Biopharma and Baker-Hughes were sold to improve its financial health.

Management eventually decided to cut its dividends. And you can see how the share price has fallen from $31.01 per share to $7.82 per share between 2016 to 2020. A whopping 74.7% drop.

GE Price Chart

Source: Interactive Brokers

Look. I’m not saying everyone must avoid this bad investment.

One man’s junk is another man’s treasure. There are hedge funds who are able to catch the lowest point of these stocks, and make a lot of money in them when it rebounds. They have specialized analysts to go deep into the numbers.

We call this “special situations” investing.

I used to invest in these companies. But they require a huge amount of time to analyze and dissect the financial statements.

For the average investor, you might not commit so much time and surely you wouldn’t have analysts in your bedroom digging the trenches for you.

So, the average investor ends up picking these stocks at the WRONG price. He could buy these high dividend yield stocks at 9% and end up losing 70% of their money.

There are tons of companies like this. And it’s easy to fall into this trap thinking you have gotten a bargain when what you’ve gotten is junk.

The question here is — why make life so hard for yourself when you’re better off picking stocks that reliably pay out growing dividends.

While the share price and dividend of companies like General Electric keeps going down, stable, growing businesses like Johnson & Johnson or Starbucks continue to pay ever rising dividends. Their share prices also steadily go up.

 

10. The Best Person to Look After Your Money in Retirement

This is one really big question here.

If you can answer this right, you’ll live a life of financial security and comfort as you accumulate your wealth safely and consistently. 

So, who’s the best person to look after your money?

You see, I‘ve worked in the finance industry as a bonds analyst. And I’ve worked for some of the largest banks in Singapore, helping wealthy clients manage their money. 

Like most analysts, I did my job. I managed their bonds portfolio, recommended bonds to buy and support them in every way I could.

But even then, people were still not getting the wealth they desired. 

No one will look after your money better than you will. Only you can take the required action to achieve your financial goals.

When I say you’re the best person to look after your money, I don’t mean you need to do all the research and trading yourself. You can work with brokers, bankers and analysts. You need to rely on experts. 

What I’m really trying to say is this. You can’t ignore what’s happening with your money.

Sometimes, a lot of what the banks sell to you may not be in your best interest. People have gone broke buying shares, bonds and other complex financial products they may not understand. 

Do your research. Don’t just push finances aside and give up responsibility.

 

11. Final Thoughts — A Perfect View of Your Retirement Garden

Remember the seed story I told you at the start? Well, the problem with a dividend investing strategy is, it’s very boring. Not many people are going to appreciate it, because there’s no “get rich quick scheme” here.

Once you grasped the concept of this overlooked strategy, you’ll know something 99% of investors don’t know — that intelligent, investing in the long run is accumulating a basket of solid, dividend growers at a fair price. 

This goes beyond all the financial noises you hear on TV, and the “complex trading systems” you hear about.

And these solid, dividend growers are often under the radar. You don’t hear about the next “big thing” from them, yet they’ve been relentless in growing their sales, profits and dividends year after year.

You don’t need to take trade much once you’re sitting on them. It’s like planting seeds in your garden and watching them grow.

As you build your investment garden, you’ll have a huge collection of dividend-growing stocks which keeps growing year after year — giving you the shade for your children, the fruits for your family and the financial security you and your family needs.

Most importantly, you can sleep well at night. It’s low risk. No stock market correction, no government, no doomsday predictions is going to stop your checks from entering the letter box.

This is how you live off dividends in your retirement.

Always here for you,

Willie Keng, CFA

Chief Editor, Dividend Titan

Editor’s Notes: I invite you to join our growing community simply by subscribing for our completely FREE email list. In it, you’ll received some of our best ideas about how to protect and grow your wealth safely. And if you want go down the rabbit hole of becoming a dividend investor fast, I’ll show you behind-the-scenes some of these solid, dividend growers using a Power Stack of proven recipe to accelerate your financial goals. It’s risk-free anyway. Nothing to lose. 

 

Willie Keng, CFA

Willie Keng, CFA is the founder of Dividend Titan, a financial publication for self-managed investors. A former research analyst for top private banks, Willie today runs his own consulting firm. Some of his clients include asset managers and family offices. Willie has a deep passion for helping everyday investors take control of their financial future. And has spent over 10,000 hours researching, analyzing and recommending investment ideas.

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