Tuesday, January 08, 2008

Make dividends work for your retirement

If you are going to buy stocks on credit, via a home mortgage loan, now is an excellent time to consider doing so. Bankrate.com currently shows the average national 15 year fixed at 5.08% and 30 year at 5.56%. Here's how to make those fantastic rates work for you.

Let's say that you and your wife have poor retirement prospects (never saved any money) and are both now 50. By purchasing strong dividend- paying stocks, you can actually build a substantial positive cash-flow by retirement.

By screening for large-cap stocks, with strong dividend history, we can assemble a moderately diversified portfolio, with strong dividend history. Here's a selection of eight large-cap S&P500 stocks with a five year history of increasing their dividend over time - by an average of 8.5% annually. (Name - Industry - Stock Symbol - Recent Price - Dividend Yield)

  1. Wells Fargo (Bank) - WFC -$27.68 - 4.35%

  2. US Bancorp (Bank) - USB - $29.71 - 5.61%

  3. Bank of America (Bank) - BAC - $39.90 - 6.35%

  4. Pfizer (Pharmaceuticals) - PFE - $23.23 - 5.52%

  5. Progress Energy - (Utilities) - PGN - $48.37 - 5.19%

  6. Reynolds American (Tobacco Conglomerate) - RAI - $67.37 - 5.17%

  7. Verizon (Communications) - VZ - $43.35 - 3.96%

  8. General Electric (Industrial Conglomerate) - GE - $36.04 - 3.44%

These stocks, if bought in equal amounts, would currently produce an overall dividend yield of 4.95%.

If, for example, $20,000 of each stock was purchased, then a mortgage of $160,000 would have to be taken out. Using a 30 year fixed rate schedule, the monthly payment (5.56% rate) would be $914. Against that, the first year, you would receive dividend payments of $660 monthly; a modest shortfall of $255 monthly. However, even that shortfall would likely be in name only, since the interest (roughly $740 per month during the first year) can be written off on your taxes.

Assuming the dividends continue to grow by an average of 5% annually (against the actual average five year growth of 8.5% annually), by year five the dividend income ($843 monthly) would nearly match the actual payments, before the interest write-off.

Under the same assumption, by retirement at 65, a dividend income of $1372 per month would be produced, and by the time the mortgage is paid off in 30 years, $2852. If the dividend income grows at the same pace it has over the past five years, then you'd have to revised those two prior figures significantly upwards, to $2243 and $7628 per month, respectively. Sure eases the worry of being on a "fixed income" later in life!

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As a final plus, if the stock value also grew at an average of 5% per year, then the value of that portfolio in 15 years would be $332,628 and $691,510 in 30 years.

Lest anyone think that three of these stocks - the bank stocks - are too risky - be advised that billionaire genius investor Warren Buffett has recently added to his stash in these three stocks. And uncle Warren isn't noted for buying into distressed companies.

By the way, there's also a ton of academic research showing that dividend-paying stocks produce a better rate of return over time, and are less volatile than non-dividend-paying stocks.
Right now, funding a healthy retirement is easier than you might think.


The Confused Capitalist

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