Investing for Dividend Income

[tarbe]

To go alongside the dying broke thread....here is a somewhat opposite plan.


I might take early retirement at the end of this month. The PBGC rate is at an all-time low, and it is a good time to pull the lump sum distribution out. Just trying to work out the details of my return as a contractor. My nervous-nellie boss (my wife) wants me to work a couple more years.

I will roll the lump sum into my company 401(k), then roll the whole thing over into an IRA at an outfit to be determined (Fidelity, Vanguard, ETrade, etc).

So I have put together a list of about 10 large cap dividend payers and one mid-cap oil royalty trust. I have allocated funds to each in such a way that the annual dividend income is more than enough to live on in retirement.

Some of these companies have not dropped their dividend in 25 years. All of them have a very good record of maintaining dividends through thick and thin.

Included are several Utilities, several diversified energy outfits, and companies like Dow, Vodafone, Sea Drill, etc.

Has anyone else done this? I like the idea of not having to worry about the daily swings in share prices. I will just watch quarterly earnings and dividends, and adjust if needed. But truthfully, my wife and I could live on the dividends even if they were cut to half the current level. Our 85 acres in Missouri is paid for, and the house will be built with cash...so no mortgage.

When we croak, the principle will still be there...and the dividends will keep coming....to the heirs.

Who else has invested for dividend income?

[Welshmom]

What's the "PBGC"?

[Ramblin Wreck]

Sounds like good plan. If I were King of the USA for one day, the first tax law I would change would be to tax capital gains at the full rate and dividend income at the current captial gains rate. Our tax laws encourage gambling and discourage long term investing with companies that make and share their profits with their owners.

[Micheal]

I'm with Welshmom - what's "PBGC"?

Also I'm sorta concerned about having this plan of yours tied up in an IRA..... your thoughts and so called minimum withdrawal rates may not be in sinc. There is also the possiblity that part of the monthly withdrawal from the IRA may contain part of the principal. Just something to check on????

Conventional wisdom says in retirement - bonds should be held in an IRA and stocks outside because of captial gains, taxes, etc...... that is if'n you follow con. wisdom.....

Have to give this more thought - to maybe comment on later.

Oh and yes I have invested in stocks for income but via DRIPs (Dividend Re-Investment Plans)...... not my IRA's.

[Scott SW Ohio]

Tarbe, would you want to share the stocks you have in mind? Your criteria sounds solid. I have a more ragged group which includes some speculative stocks (since I won't retire for a while yet), and a few that might have made your list: BP, DUK, NMM, NYB, PBI, PG, SJM, NUE. These are not equally weighted - PG is my biggest holding, followed by DUK.

[tarbe]

Originally Posted by Welshmom

What's the "PBGC"?

When you take a lump sum distribution of a pension at our company, the PBGC rate is used to calculate the size of the lump sum that will create an annuity equal to the annuity you have earned in the plan.

The lower the rate used, the larger the lump sum must be to spin off the required annuity payments.

So as the PBGC rate has gone down, it has had the effect of increasing our lump sums.

I expect that over the next two years, the PBGC will go mostly up...so a good time to get out. The PBGC is at an all-time low of 0.75%. Not much room to go down. And the rates it is based on have been trending up the past 3 weeks.

Tim

[tarbe]

Originally Posted by Scott SW Ohio

Tarbe, would you want to share the stocks you have in mind? Your criteria sounds solid. I have a more ragged group which includes some speculative stocks (since I won't retire for a while yet), and a few that might have made your list: BP, DUK, NMM, NYB, PBI, PG, SJM, NUE. These are not equally weighted - PG is my biggest holding, followed by DUK.

Here is what I have right now. It continues to change somewhat, as I move players in and out of my list. I will wait for a pull-back in the market before I start any accumulation!!


WHZ
PBI
SDRL
LINE
VOD
BTE
EXC
LEG
MO
DOW
AEP

This list overweight on energy right now....but the dividends are too good to pass up! Like I said above, many of these stocks are near 52 week highs...so I am not buying now. I think the market is due for a good pull-back. That is when I will start buying in.

Looks like we both have PBI!! I have flirted with DUK. That's a good one for sure...

[tarbe]

Replaced AEP with CLF today. PE ratio is 4.2, dividend yield is 5.6% and they made $7.40/share in earnings ABOVE the dividend this year!

Holy cow....

Oh, and it is closer to its 52 week low than high.

[MoonRiver]

As I see it, the biggest problem with dividend investing is the wild swings in the market. It's nothing to see 3-5% swings in the daily price of a stock. Set stops and computer selling will stop you out as the stock quickly falls and then rebounds.

One of my best investments over the last year was a preferred stock with a high dividend. Very little fluctuation in the stock price. Bond funds can be good too if you get in at a good price.

[tarbe]

If the share price swings 10%, who cares, if they keep paying the same dividend?

You only care if you sell on a dip...which of course runs counter to common sense.

Buy low, earn dividends. if you sell...sell high.

[MoonRiver]

Originally Posted by tarbe

If the share price swings 10%, who cares, if they keep paying the same dividend?

You only care if you sell on a dip...which of course runs counter to common sense.

Buy low, earn dividends. if you sell...sell high.

It wasn't that long ago that dividend paying stocks dropped a lot more than 10%. More like 30 or 40%. The last thing I want is a $200K portfolio suddenly worth only $100k. Dividends are great, but they are only half the equation.

[Narshalla]

Originally Posted by MoonRiver

It wasn't that long ago that dividend paying stocks dropped a lot more than 10%. More like 30 or 40%. The last thing I want is a $200K portfolio suddenly worth only $100k. Dividends are great, but they are only half the equation.

Yes, but if you didn't sell, and weren't planning on taking a loan out against the value of the shares, then why did it matter? Wait a while, and the value will come back up.

[tarbe]

Originally Posted by Narshalla

Yes, but if you didn't sell, and weren't planning on taking a loan out against the value of the shares, then why did it matter? Wait a while, and the value will come back up.

Exactly.

People could save themselves a lot of pain by refusing to run with the herd!

Let's just say I invest $1,200,00 in those stocks above, in a ratio that gives a weighted average dividend of 9.3%.

Annual dividends are $111,600...more than enough to live very well on your homestead. In fact...you live on $80,000 and re-invest $31,600 every year. So the pile of shares spilling out dividends is growing.

If the shares drop 20% in value due to some panic (like we have seen more than once in the past 20 years), the market value of the original portfolio is now $960,000, but you still have the same number of shares and the companies (these companies, anyway) are still paying dividends that you can live off of. A number of these companies have increased their dividend during this latest recession. Some have never reduced their dividend.

Holding these shares for the year or two it takes for recovery of market value is painless. Their immediate value is in the dividends.

It is almost like having an annuity, but you get to keep the principle in your possession.


Tim

[Scott SW Ohio]

Originally Posted by tarbe

Here is what I have right now. It continues to change somewhat, as I move players in and out of my list. I will wait for a pull-back in the market before I start any accumulation!!

WHZ
PBI
SDRL
LINE
VOD
BTE
EXC
LEG
MO
DOW
AEP

This list overweight on energy right now....but the dividends are too good to pass up! Like I said above, many of these stocks are near 52 week highs...so I am not buying now. I think the market is due for a good pull-back. That is when I will start buying in.

Looks like we both have PBI!! I have flirted with DUK. That's a good one for sure...

Thanks! I used to own LEG and MO but sold those and moved on...they still are good dividend stocks.

[Michael W. Smith]

So Tarbe, did you decide to retire or not?

I see nothing wrong with investing in good companies with a good paying dividend. The only "fault" I can see is rolling it over into an IRA.

If it's a traditional IRA, you MUST start taking distributions when you are 70 1/2. The distribution is pretty much calculated based on the amount in the IRA and how long your life expectancy is. The government WANTS you to be withdrawing out the principal so they can tax you on it.

Now, if you rolled it over into a ROTH IRA, you would have no distributions you would "have to" take - plus any withdrawals you made would be tax free. (But you could tax free with bonds - but that's a whole nother kind of investment.

Once invested in the companies, the stock price really doesn't matter much unless you are forced to start taking distributions. And unles the company falls on hard times, they aren't likely to slash the dividend.

[tarbe]

I did retire. Waiting for my lump sum to come in. I am back at work as a contractor for at least two months. I took a whole week off after I retired!

The "trouble" with the Roth is you have to fund it with money that has already been taxed. As they say....no free lunch!

[tarbe]

whz
tot
cop
exc
clf
vale
vod
line
sdrl
etp
pbi
agnc
cim
gni

[Michael W. Smith]

Well, congratulations on your retirement . . . . . . . . or semi retirement . . . . . . . . . or part time retirement . . . or whatever you want to call it!

Yes, the Roth does have to be funded by money that has already been taxed. Since you just retired, you may want to look into it once you get your lump sum and have an IRA established about moving some money from your traditional IRA and into a ROTH. (Yes, you would have to pay tax on it now - but will never pay tax on the ROTH money when you withdraw it.)

Depending on what tax bracket you are in now and what you plan to be in once you are officially "retired". But with the state and federal governments having no money, I don't think tax rates are going to be going down in the future - only up, up UP and AWAY!

I'm still "young" - 45 - but once the ROTH came into being, I immediately converted my Regular IRA's into ROTH's. But I'm certain the government will find some way to tax my ROTH money again.

[tarbe]

You have a healthy skepticism, Michael. It will serve you well!

[clovis]

tarbe,

How is your dividend investing plan?

I am working the same plan, but unfortunately, I still have 20+ years before retirement.

I would be very careful with WHZ. To my understanding, this is a royalty trust with an expiration date...meaning that you could wake up one morning and the value will be $0. That is $0, as in zilch, nada, no value, etc.

We talk quite a bit about dividend stocks in the business section of this forum in the stock market thread. If you haven't already, come join us!!!!

[Nevada]

Originally Posted by tarbe

Who else has invested for dividend income?

Depending on conditions in your area, there could be better opportunities.

In my area in particular, you can still buy a 3-br home for about $30,000 if you have cash to invest. The risk is low, since prices are significantly below the replacement cost of the home itself, so there is no speculative value to speak of. You may not see significant property value appreciation for 5 years or so, but the opportunity is in income.

While property values have dropped dramatically in Las Vegas, rents have actually increased. That's because so many people have lost their homes and need a place to rent.

So if you can invest in a 3-br home for $30,000, which is realistic, and then rent it for $850/month, which is also realistic, then you will see a 100% return on investment in about 3 years. That's a ROI of around 35% per year. You will double your money back in 6 years or so, which is about the time I expect to see the property values in Las Vegas to begin to increase significantly.

Look around your area, and think outside the box.

[clovis]

Nevada-

That is excellent.

I wish homes could be bought here for that kind of money. We've got plenty of foreclosures, but there seems to be quite a demand too. Of course, our area didn't see the big boom in house prices that Vegas did.

Yes, there are some bargains in our area, but unfortunately, a $30,000 home here is, well, simply stated, a major dump.

I think you are really onto to something. The ROI is going to be outstanding for those who are willing to get out there and find the homes.

I've known several wealthy families that made their money buying up foreclosures during the Great Depression. This is another amazing opportunity to do the same thing...but I can't seem to find the right homes for me.

[Nevada]

Originally Posted by clovis

I think you are really onto to something. The ROI is going to be outstanding for those who are willing to get out there and find the homes.

This is an extension of a conversation I had with a neighbor recently. She complained that housing prices have been flat round here for years, and pointed out that a home on our street recently sold for about the same as I paid 3 years ago. She said, "There years and you haven't made anything." I replied, "No. Three years and my house is already paid for."

It's all in how you look at it.

[clovis]

Are you looking to buy more houses for rental income?

[Nevada]

Originally Posted by clovis

Are you looking to buy more houses for rental income?

It's a cash market for homes in that price range. I simply don't have it.

[clovis]

I understand that...

Here is to you stumbling into a great house, and making a bundle off of it!!!!

[tarbe]

Originally Posted by clovis

tarbe,

How is your dividend investing plan?

I am working the same plan, but unfortunately, I still have 20+ years before retirement.

I would be very careful with WHZ. To my understanding, this is a royalty trust with an expiration date...meaning that you could wake up one morning and the value will be $0. That is $0, as in zilch, nada, no value, etc.

We talk quite a bit about dividend stocks in the business section of this forum in the stock market thread. If you haven't already, come join us!!!!

Clovis

All oil Royalty Trusts that I am familiar with have expiration dates. Understanding that is part of the trick to making wise investing choices.

For instance, WHX (not WHZ) is expiring in a few years. The unit price has been discounted accordingly, and it is paying over 30% annually now.

WHZ just opened this year and will not expire until about 14 years from now.

I have been active in the plan for about a month now. I actually made some irresistible returns in October and ended up selling some plays...when you make 5% on a stock in one day, it can be difficult to hold it!

I did lock in on $10k in profits during the first month. I am currently sitting on about 38,000 shares of various entities, with an annual dividend payout of $74,000. I have hit my self-imposed limit of what % of my portfolio I will put into equities, so I am done buying for the moment (unless something crazy happens and I see some unbelievable bargains...then I might become a buyer again).

If I was smart, I would probably just go hunting now and forget about the market....but I am not that smart!

[clovis]

Wow...that is absolutely impressive!!!!

I am such small potatoes compared to you. Of course, I have quite a few years before retirement, but my account doesn't even hold a candle to what you've accomplished.

I just bought another small stake in EXC, and am taking a beating on the stock since buying it. I'm down 5 or more points on all the shares I own.

[tarbe]

Originally Posted by clovis

Wow...that is absolutely impressive!!!!

I am such small potatoes compared to you. Of course, I have quite a few years before retirement, but my account doesn't even hold a candle to what you've accomplished.

I just bought another small stake in EXC, and am taking a beating on the stock since buying it. I'm down 5 or more points on all the shares I own.

I admit that I have taken a beating on EXC. It will come back if you are patient....easier to be patient when a stock is paying 8%!

I just got my first dividend payment today....kinda exciting!

WHZ paid me $15,712 today. Next quarter it will be $30,000 as I have added to the stash since the election (took advantage of a price drop and added more shares).

PBI, EXC, DD, and DBD will all pay in the coming weeks.

I can get used to this....

[Scott SW Ohio]

I added EXC at a pretty good price just before the ex-dividend date. I think it will come back up, but it's not certain they will maintain the current dividend.