Investing During Retirement – What I Do.

Having heard no nays, here it comes.

I think it is important for people, if they are investors, to have goals.  My goal is to generate a reliable and increasing income stream from financially strong companies that have a history of increasing their dividends each year.  I am a dividend growth investor.

There, that is the easy part.  Now, what do I mean by that?  I look for companies that pay at least 150% of the average dividend for S&P 500 companies.  That is about 2% now, so I am looking for a dividend yield of about 3% or higher at the time I purchase the stock.  By financially strong I generally look at the Morningstar credit rating or the S&P bond rating.  I want companies rated at least BBB+, and most of the companies I hold are higher than that.  That is not all I look at, of course, but I am going to avoid the details of the additional research I do when making a decision about whether to invest in a particular company.

What level of dividend growth am I look for?  It depends, in part, on the type of company.  For most companies I am looking for a multi-year average annual dividend increase of at least 5%, and most of the companies I own have higher dividend increase rates.  For regulated utilities, Real Estate Investment Trusts (REITs) and telecommunication companies (like Verizon or AT&T, for example), that typically pay higher dividends, I will accept a lower rate.   For the record, I do not own shares in Verizon or AT&T.

I guess the next question might be, why do I invest in this way?  Well, the answer is multi-part.  First, some context:  Kathy and I have enough income from our pensions and Social Security to meet our monthly budget. I view that as the fixed income part of our retirement portfolios – what some people might get from bonds or annuities.  We do get annual cost of living increases with these sources, though those are limited to a maximum of 2% in the case of one of our pensions and 1.5% for the other two.

We have some money in IRA accounts, funds that were rollovers from the defined contribution portion of our hybrid pension plans in Oregon, 401K plans, and from contributions we made to the accounts in years when we could afford to.  This is where the dividend growth investing happens.  The income generated by these accounts increased by about 11% last year.

The increase came from a combination of dividend increases announced by the companies we hold stock in, and by reinvesting the dividends back into the shares of the companies that paid them.  By reinvesting (buying more shares with the dividends), we have slightly more shares the next time when the companies pay a dividend, which creates a small increase in the dividend payment. The reinvestment is set up to happen automatically with our brokerage firm, and there are no transaction fees associated with the re-investments.

The plan is to continue reinvesting the dividends for as long as possible, hopefully until I have to start taking the required minimum distributions from the IRA in another 8 years, though we could start taking some of the dividends as cash before then if we need or want to.

Our plan is also to avoid being in the position where we have to sell shares in the companies we own in order to generate income – in other words for the dividend income and our pensions/Social Security to adequately fund our needs.  We could certainly choose to sell some stock, but we want that to be a choice.

We currently own shares in 36 companies.  We do not invest in mutual funds or exchange-traded funds.

Where do we get our ideas?  I subscribe to Morningstar’s DividendInvestor newsletter, a service called F.A.S.T. Graphs and participate in a couple of dividend growth discussion groups.

Are there other ways to invest?  Heck yes – and they may well be better suited to many investors or retirees.  Over two decades of personal experience with investing, this is the route I have taken, and it seems to fit our personal circumstances.  I am not recommending this path or any other particular path to anyone.  I am attempting to describe what I do.

It is a fun and so far profitable hobby that ties in well with my past as a research analyst in a whole different field.  Oh, and make sure to read the previous blog post with the disclaimers :).

Finally, I have had a number of mentors and teachers along the way.  The list would be fairly long and the names would not have meaning to most of you, but if I decide to write more about this area of my life, I am sure I will write about the history of how I got here and the people who were important in this part of my path.

Hobby: Investment stuff

A reader commented on an off-handed remark I made about managing the Smith Family Hedge Fund with this:

I’m a lurker from the northwest, have been enjoying reading about your plans and the implementation of them. I encourage you to write about your Smith Family Hedge Fund activities; I’d be very interested in your perspectives. Thanks for sharing your experiences!

With that little bit of encouragement, and it does not take much, I will soon launch into a description of what and how I proceed in this avocation, but first some important disclaimers:

1)  Nothing here constitutes investment advice.  I am neither competent nor licensed to give that.

1a)  Everyone, myself included, is responsible for their own investment decisions.  It does not matter whether you follow the advice of a highly paid adviser, a hot stock tip by an anonymous poster on some internet forum, advice from your brother-in-law or shoeshine girl (or some random dude who writes about his hobby on a retirement blog) – you and you alone are responsible for your decisions.

2)  I may use some company names to illustrate specific points, but that does not mean I am giving a positive or negative recommendation on those companies.

3)  These activities are something I do for fun, but it is serious stuff.  My background as a research analyst is certainly helpful.  What I do is ill-suited to people who do not have the time or inclination to engage is the level of study and work that I do – about 10-20 hours during most weeks.

4)  There are some good resources for folks who do want to learn more and who may be interested in becoming self-directed investors, but many people may also be well served by using a registered financial adviser, investing in index funds or one of the relatively new “retirement date” funds.  I also have no advice on any of those.  I will provide information and web links to some of the resources I use.

If we can kind of agree on those disclaimers and points, I will put some stuff out there in the not too distant future.

Five months in

We moved on January 30. This is an interim progress report of sorts.  We talked a lot about what we thought we would do once we moved to Mérida, so this first section will be comparing that with reality.

Daily activities

We planned to spend time on healthful activities – walking and exercise, buying and preparing healthy foods.  It took a while to get going on the first one.  Kathy is legally blind, which makes walking in the urban environment a bit challenging, given the uneven nature of city sidewalks here.  Then we found the Estadio Salvador Alvarado. We are there at least five mornings a week, walking three to five kilometers.  Mission accomplished.  We also purchased a used elliptical trainer that Kathy just got finished using.  Here is a photo of the walking track at the Sports Center

Alvarado Walk

We are doing a pretty good job of buying and cooking good food.  There will be more food posts later with details about that.

I have semi-jokingly said that I would manage the Smith Family Hedge Fund, and I do spend some time in investment research, reading, and activities.  It is a good fit, given my career as a research analyst in postsecondary education.  I may write a more detailed post about that later.

Housing and climate

We have moved into a longer term rental and are delighted with it.  It is a three bedroom, three bathroom house with a side and back patio and a swimming pool.  I am glad we decided a pool would be a requirement for living in this tropical environment.  We use it daily during this season, starting with morning coffee.  Kathy does water aerobics in it and I enjoy an occasional cooling dip during the day and in the evening.

The pool and the house, with its good ventilation, are making it a bit easier to acclimate to Mérida’s weather.  The temperatures and humidity this time of year are elevated.  We get by with fans and spending time out in the shaded back patio during the day.  The house has mini-split air conditioners in each room, and I have been running the one in our bedroom and in the adjoining study at night, set on 80-84 degrees (27-30 celsius).  After only five months here, it is difficult to say with certainty that we will acclimate successfully, but we have become accustomed to sweating :).  Others have and I am confident we will be able to also.

Day trips and vacations

We bought our car in early May, and have started doing the day trips we planned on before we retired. We talked of trying to do a weekly day trip around the closer to Mérida parts of the Yucatán peninsula, and we have done two.  I have blogged about our trips to Motul and Izamal and will continue to bring short travelogue-y blogs about those.  We initially talked about a 3-4 day trip once a quarter or so.  So far we went on a longer trip when friends from the States were here in March, and a two night trip to Tulum in May.  June saw a unplanned two week trip to the states, and currently we have nothing along these lines planned until a 5 night trip to the Caribbean side of the peninsula in November.

We are planning a major trip to Spain and Portugal for late Spring, 2015, starting by way of a wine tasting trip to California to see old friends.  We’ll see how those plans go.  Kathy wants to see Barcelona and the Alhambra before her retinal disease progresses much further and, having grown up in Brazil, I insisted we spend time in Portugal if we got as close as Spain.

That is about it for now.  I cannot say there have been any major surprises or shocks, no big disappointments or downers.  Life is proceeding well so.  We are enjoying retired life in the Yucatán.