Generate a Fatter Flow of Income From the Money You’ve Saved

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Posted by The Savvy Retiree on February 27, 2020 in Make Money

I’ve been investing on my own since 1984, when I opened a Charles Schwab account and bought stock in Flying Tiger Lines, an airfreight company ultimately subsumed into FedEx. Now, looking back over 36 years of investing, I come away with two conclusions: Investing isn’t as difficult as Wall Street pretends it is, and the only strategy you really need to care about is income, an assertion I’ll return to in a moment.

First, there are a couple reasons this topic is top of mind for me right now…

Primarily, I worry U.S. stocks are irrationally valued. I won’t go into the multitude of dry, numerical reasons backing that comment, but I will say that based on any historical measure of valuation, U.S. stock prices haven’t been tethered to reality for a while. I’d just as soon avoid the necessary bloodletting.

More important: For millions of retirees, and those of us on the bench who are soon to join the game, nest eggs are often inadequate. As much as we might like to plump them up with high-flying stock market returns, we simply cannot afford the outsized risks involved with that strategy. Yes, the reward for success is great. Alas, the price of failure at this stage of life is potentially catastrophic. Thus, the risk-reward balance is tilted too much against us at this moment.

Instead, we have to focus on stability and on creating streams of income from the retirement savings we have.

Here’s the strategy I’m using—though I’m not saying this is a strategy you should use, too. Everyone’s financial needs and resources are different, and you have to assess your own risk before putting money to work in any investment.

Instead, I share this because nest eggs, like real eggs, are fragile creations. Break it, and all the king’s horses and all the king’s men cannot put your egg back together again. So, I’m hopeful you read this and give a few minutes’ thought to how you’re invested and how you can protect yourself from the market, and generate a fatter flow of income from the money you’ve saved.

Mainly, I’m focused on owning top-quality dividend-paying stocks. Along with the traditional universe of blue-chip New York-traded dividend aristocrats, I look for blue chips overseas (where dividend payments are far more common and typically larger) as well as under-noticed opportunities, like, for instance, a small company whose entire purpose is to pay monthly dividends based on Canadians’ undying appetite for inexpensive hamburgers. 

As well, I like so-called preferred stocks and specialty stocks focused on chemical pipelines or healthcare real estate.

I gravitate toward these three types of dividend payers because their demand remains strong pretty much regardless of the economy (healthcare and consumer desire for essential products, for instance, care not about economic whims). Sure, the share price can dip, but when your dividend is broadly secure because of relatively inelastic demand, that dividend becomes a built-in brake when the market falls apart. Plus, you still get paid, which can lessen the ache of a market downdraft.

One of my retirement accounts, meanwhile, is heavily invested in cash, U.S. Treasury bonds, and international corporate debt—and by “heavily” I mean upward of 70% of the portfolio. It’s never going to grow quickly, but in an age of extreme irrationality, I choose stability.

I’m also funding every month a couple of relatively small whole-life insurance policies. Some will argue the savvier choice is “term life and invest the difference.” I disagree. Term goes away, and I have reasons for wanting coverage to last beyond X number of years. Moreover, I like this form of forced, secure savings since most people won’t “invest the difference.”

Along similar lines, I’m now looking at funding a low-cost, deferred annuity, sans the pricey bells and whistles the industry loves to foist onto savers. Back in the 1920s, baseball legend Babe Ruth was regularly putting a large portion of his salary into annuities. In the depths of the Great Depression, when Babe retired for health reasons, his annuities generated today’s equivalent of $340,000 a year.

Aside from excellent health, there’s nothing in retirement—or in the run-up to retirement—as reassuring as knowing you have guaranteed income. Before retirement, that’s a deferred annuity (invested conservatively) which will grow while you’re still working. In retirement, it’s an immediate annuity, which will turn a lump sum of cash into a permanent income stream. I’ve written about both in an article on annuities in the November 2019 issue of our monthly publication, The Savvy Retiree.

Finally, I own a touch of physical gold in the form of rare and not-so-rare coins that various countries and empires minted across history. I don’t own these as investments or because I’m a gold bug. Rather, they’re lifestyle insurance. Depending on weight and rarity—and my budget at that moment—the ones I regularly pick up cost anywhere from a couple hundred dollars each to upward of $10,000.

Consumers, businesses, and governments globally have amassed more debt than can ever be repaid. And debt acts a lot like the Glenn Close character from Fatal Attraction—you either service the relationship regularly, or debt boils a rabbit on your stove.

The boiled rabbit in this case means the destruction of fiat currencies, particularly the U.S. dollar, which represents the most egregious amassing of debt the world has ever known. Gold has been part of the solution to every significant debt crisis in recorded history. That’s not going to change now. 

As to my initial comment that income is the only strategy you need on Wall Street: Dividend-paying stocks are historically the safest because in a world where corporate bean counters legally monkey with profits to present to Wall Street whatever picture they want, a dividend is proof that some level of earnings are real; and over time, dividends have accounted for about 60% of Wall Street’s total return.

With these investments, my portfolio will never experience explosive growth. But the better measure for me is that it won’t explode in my face.

Written by Jeff D. Opdyke