Something interesting happened the other week…
During an unseasonably warm day, I decided to get out of the house and the post-Christmas clutter.
Days after Christmas, I’m still finding scraps of wrapping paper. There are Crayons all over my living room floor. And I’ve stepped on far too many lost Legos.
There’s a school near my house with a batting cage and a playground. So when my son went down for his nap, I got some fresh air throwing a few buckets of balls to my daughter.
We have a rule. She has to see 100 pitches before she gets to go play. She obliged and then darted off to the jungle gym.
I sat down on a bench. An older man joined me. He started the conversation, complementing my daughter’s swing, saying that he loved the sound that the balls made on her metal bat. There’s something timeless about that “ping.”
He used to coach Little League… and as it turns out, that wasn’t all we had in common.
He worked in finance for decades. He told me he was born and raised in New York City and eventually went on to work on Wall Street.
These days, he spends his winters on Marco Island and his summers in a cottage at the foot of Mount Washington.
As someone who loves white sandy beaches and hiking in the Whites, I thought he must be living the dream. Then he said something that shocked me.
He said he was in Virginia visiting his grandchildren. He and his wife spend a month with the kids each year over Christmas and another one in the summer. They’ve done it for years. And they love it… but he fears the tradition is coming to an end.
Money was getting tight. Inflation isn’t helping the cause.
He tried to justify pulling back on visits. With his grandkids getting older, they seemed more interested in video games, smartphones, and spending time with friends. Did they really need their grandparents around so much?
I was honestly floored. He’d had a successful career. And he owned houses in two of my favorite vacation destinations. If this guy was worried about money in retirement, what hope was there for the rest of us?
Outliving Your Money
As it turns out, my new friend wasn’t alone. Just before New Year’s, The Wall Street Journal (“WSJ“) ran a story with the title “Even Rich Retirees Fear Outliving Their Money.”
From WSJ:
Retirees worry they will live too long to enjoy their money.
Studies show those who spend more report greater satisfaction in retirement, yet older Americans often live below their means. The prospect of a life of 95 or 100 years turns many into penny-pinchers, reluctant to spend their hard-earned savings now with so many years of bills remaining.
Researchers call it the retirement consumption puzzle.
The story went on to say that even wealthy retirees – a category I’m sure my new friend fell into – fear running out of money to the point that they pass up fulfilling life experiences like travel.
I told my new friend not to give up hope.
I mentioned studies that I’ve read highlighting the health benefits of being around grandchildren.
For instance, a 2017 German study showed that grandparents who regularly provide periodic care to their grandchildren live, on average, five years longer than those who do not.
And I assured him, after his granddaughter ran up to him squealing, “Grandpa, Grandpa, Grandpa, come look at this!” that there was still plenty of space for him in her life.
Financially, he also has options.
Dividend Growth Investing Isn’t Just a Young Man’s Game
Longtime readers will know we’re big proponents of dividend growth investing here at Wide Moat Research. On a long enough timeline, the power of compounding can work wonders. The critique we sometimes get from readers is that they worry they won’t have years or decades to wait.
But contrary to what you might think, dividend growth investing isn’t just a young man’s game.
Sure, the younger you are, the more powerful compound interest will become over the long term. However, no matter how old you are, it’s important that your passive income grows.
If it doesn’t, the purchasing power of that passive income is being eroded away by inflation. In normal times, when inflation hovers around 2%, that’s not good. And it’s even worse when we’re seeing elevated inflation figures.
Dividends have been helping people get rich – and stay rich – for generations.
Kevin Simpson, the founder and CEO of Capital Wealth Planning, made this point crystal clear the other day on CNBC.
In a recent segment, Simpson points out that since 1926, the S&P 500 Index has generated a 10.2% average annual return. “Of that,” he said, “39% of the return is dividends and distributions reinvested.”
But it’s sustainable dividend growth that allows you to stay rich.
According to the U.S. Bureau of Labor Statistics inflation calculator, you’d need $133,600 of income in 2024 to match the purchasing power of a $100,000 income from a decade ago. You’d need $165,000 today to generate the same purchasing power of $100,000 from 20 years ago.
This means that retirees relying on stagnant passive income streams are going to find themselves in trouble over the long run.
The solution – obviously – is to own stocks that grow their dividends, year in and year out, like clockwork.
They protect the purchasing power of the passive income stream. Oh, and provide incredible peace of mind as well.
So, how do you construct your dividend-paying portfolio?
You Have Options
As a publisher, I can’t provide personalized advice. But as a general rule, here are some things to think about when constructing your income-producing portfolio in retirement.
Everyone’s holdings will depend on the size of their nest egg and the cost of their chosen lifestyle in retirement. Once you know those numbers, you can decide what yield is required of your portfolio to meet your passive income needs.
Understand this figure and then find quality investments that can deliver it.
We track hundreds of high-quality companies that pay reliably growing dividends at Wide Moat Research. The portfolios at The Wide Moat Letter are chock full of our favorites.
If you’re someone who prefers to go the exchange-traded fund (“ETF”) route instead of incurring the risk associated with individual stocks, then there are high-quality funds whose goal is to produce dividend growth as well.
The Vanguard Dividend Appreciation Index Fund (VIG) yields 1.7%, has been increasing its dividend for nine consecutive years, and has a five-year dividend growth rate of 9.6%.
The Schwab U.S. Dividend Equity Fund (SCHD) yields 3.65%, has been increasing its dividend for 13 consecutive years, and has a five-year dividend growth rate of 11.6%.
If you require a higher yield, it’s possible to supplement high-yielding investments, such as real estate investment trusts, business development companies, or master limited partnerships, with higher growth stocks, using a yield-oriented barbell approach to meet your personal income needs. My colleague Stephen Hester does excellent work on many of these assets in our premium service High-Yield Advisor.
The fact is, there is no one-size-fits-all recipe for retirement success…
But if you ask me, there is one ingredient that every retiree’s portfolio should include: dividend growth.
When your passive income is compounding at an annual rate that exceeds inflation, your purchasing power is not eroded over time. It grows.
That means, the further and further into retirement you get, the better and better your financial outlook becomes.
If that prospect doesn’t allow you to sleep well at night, then I don’t know what will.
So, if your passive income stream didn’t grow in 2024, it’s time to take a close look at your holdings as we head into the new year.
It can. And it should. And we can help with that at Wide Moat Research.
Regards,
Nick Ward
Analyst, Wide Moat Research