Dividend Growth Investing and Retirement

I am continuing here with my Seeking Alpha articles organized by topic. This post's subject is retirement. I have written several articles on the subject of dividend growth investing's relationship to investing for retirement.

I have become frustrated with the retirement and investment advisory industries' failure to include dividend-growth investing as worthy of consideration for retirement planning. The "standard" industry approach to retirement funding goes something like this:

1. Invest all your life to reach "The Number." That's as big a collection of assets as you can amass. There are various ways to compute Your Number. One common method, and one which is usually extremely misleading, is to say that you will need retirement income equal to 70% of your final working year's salary.
2. As you approach retirement, convert a large portion of your assets from riskier to "safer." Safety is invariably associated with bonds, completely ignoring the fact that bond interest (and the principal itself) is powerless against inflation, because it stays static for the life of the bond.
3. In retirement, withdraw from your assets to create the income you need. That is, you sell your assets--you liquidate them.
4. Hope that you don't outlive your money. 

You can immediately see why I believe that dividend-growth investing should be considered as an alternative to the conventional approach to retirement planning. For one thing, while I too believe you should focus on a number, it is not the largest pile of assets you can assemble, but rather it is the annual income you will need each year in retirement. For another, if you have been accumulating assets that themselves produce income, then you don't have to convert them--thus sidestepping market risk during the conversion. Yet another point is that each dollar your assets produce as income wipes out a dollar that you would have to create by selling something off. In the ideal case, if your investments produce enough income each year that you do not ever have to sell anything, you guarantee that you won't outlive your money. Finally, dividend-growth portfolios produce income that rises each year, usually faster than inflation. Thus inflation is wiped out as a worry factor.

Topic: Retirement

The following series of four articles are the most highly-read articles that I have published on Seeking Alpha. The 4% Rule referred to in each title is the conventional rule for withdrawing assets in retirement: Withdraw 4% in Year 1, then increment that each year by 3% to account for inflation. (You wouldn't believe what that makes your withdrawal amounts in the later years of retirement.)

Retirement's 4% Rule: Surprising Answers You Need to Know About the Inflation Factor (July, 2011) This Editor's Pick article generated more than 350 comments. It introduces Mr. and Mrs. Growth, who plan their retirement according to conventional financial advice. Even though they save a cool $1,000,000 for retirement, they get surprised by how inflation (at 3% per year) forces them to withdraw more and more money each year. Despite similar-sized returns on their assets, their money runs out in Year 25 of a planned 30-year retirement. In other words, they're screwed.

Retirement's 4% Rule: The Importance of Return Sequence (August, 2011) In this article, we try some different withdrawal and return scenarios to see if they help Mr. and Mrs. Growth or hurt them even more. Along the way, we see how damaging it can be to need to make withdrawals early in retirement if that happens to coincide with a bear market. People who retired in 2008 can relate to this. So can people who retired in 2000-2001. The combination of a declining market and making withdrawals to fund retirement is a recipe for disaster.

Retirement's 4% Rule: Why Mr. & Mrs. Income Don't Need It (Part 1) (August, 2011) This article introduces Mr. and Mrs. Income, who saved for retirement by relying largely on dividend-growth concepts instead of amassing a Giant Number. They went to a financial planner who advised them on shooting for The Number, but they rejected that advice. Instead, they decided to do it themselves, creating a portfolio of some bonds and lots of dividend-growth stocks. This article was an Editors Pick and drew more than 300 comments.

Retirement's 4% Rule: Why Mr. & Mrs. Income Don't Need It (Part 2) (August, 2011) This article follows Mr. and Mrs. Income through their retirement. Using the same scenarios that destroyed Mr. and Mrs. Growth, we discover that the Incomes' portfolio worked wonderfully. The total income needed by the couple in 30 years of retirement was a little over $1.9 million. Their portfolio actually delivered more than $2.5 million. This article drew more than 450 comments, which as far as I know is the record on Seeking Alpha. I have never seen an article there with more comments.

The following series of articles appeared in 2010. The titles are pretty self-explanatory.

Financing Retirement: It's All About Income (July, 2010)

Financing Retirement: What's Your Real Number? (July, 2010) Hint: It's how much income you'll need.

Financing Retirement: Turning Capital into Income (July, 2010)

Financing Retirement: Asset Allocation (August, 2010)

Financing Retirement: The Cistern Analogy (August, 2010) I love this metaphor for visualizing retirement. It's better than "nest egg," because a cistern is dynamic, with inflows (dividends, interest, Social Security, pension payments), outflows (taking the income for spending money), and a leak (inflation).

The following articles are on various retirement subjects.

A Sampling of Investment Advisers Seeking Dividend Growth for Your Retirement Portfolio (May, 2011) Not all investment advisers follow the conventional path. There are a few who 'get it" about dividend growth approaches. This article drew more than 140 comments.

You're Retiring: Where Is Your Income Going to Come From? (March, 2011). This Editors Pick article was directed at professional financial planners. I asked them to tell me: "Why are the unique characteristics, benefits, and risks of dividend-growth portfolios ignored? Why are dividend-growth stocks never singled out as an investment category well suited to the needs of retirees, instead of being lumped in with all other stocks? Why are the rising-income-generating qualities of dividend-growth stocks never mentioned? Why is the dollar-for-dollar offset of dividend income against capital withdrawals never discussed?" There were nearly 400 comments.

Top 40 Dividend Growth Stocks for 2012

I have been receiving inquiries daily about whether there will be a 2012 edition of Top 40, and if so, when will it come out?

The answers are yes and mid-January. Readers of this newsletter will be the first to know, as I will announce the launch here. Thanks for your interest!!