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How to retire like an aristocrat

Originally published on Marketwatch.com website http://www.marketwatch.com/story/how-to-retire-like-an-aristocrat-2015-01-22

Retirement planning really isn’t that complicated.

Say you want to retire today and need an income of at least $100,000 a year from your investments. All you need to do is have $5 million saved up and buy 30-year U.S. Treasury bonds. If saving the $5 million is problematic, you might want to consider some other investment strategies.

The subject of how much you should withdraw from your retirement account each year has been the topic of a lot of debate. The Trinity Study, done years ago, found that 4% plus an inflation factor each year would have a very high probability of not depleting your principal over long withdrawal periods, like 30 years or more.

One strategy than can help with long-term income needs is to invest some of your dollars into dividend growth stocks, holding them long term and collecting the cash flow in retirement.

I recently wrote about dividend growth investing. I received a lot of questions about dividend stocks after that and thought it would be helpful to take a look at the long-term performance for the Standard & Poor’s Dividend Aristocrats Index SPDAUDP, +1.29%  to see how much dividend growth occurred in the past.

Right now the realized 12-month dividend yield on the SPDAUDP Index is 2.27%, which doesn’t sound that impressive. But, let’s take a look at would have happened had you bought the Dividend Aristocrats 25 years ago and held them until now.

Assume that you had purchased one share of each of the S&P Dividend Aristocrats on the first trading day of January 1990. Your total cost at that time would have been just over $2,500 without considering commissions. As of Tuesday, the total value of your stocks would be $33,359. Last year, in 2014, your realized cash dividends would have been over $660, which is a yield to cost of 26%. Five of the 53 stocks had a yield to cost of over 60% last year.

As you can see from the chart below, the total return of the Dividend Aristocrats has been much stronger than the Standard & Poor’s 500 Index.

I’m not suggesting that a dividend growth strategy is the only investment strategy you use, just one that investors should be aware of. Past performance doesn’t guarantee future results. Dividends can be cut or eliminated by the issuing corporation — but if you think you might need some strong cash flow down the road, don’t overlook the effect of dividend growth.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.


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