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<<Second: What general feedback on this “pruning for income plan” can be offered?>>


As some other have mentioned the problem with this strategy comes during periods of downturn when you have to sell your stocks at a loss to cover income.

It sounds like you are mainly looking at growth stocks for the 40 and hoping they will not be significantly down when you sell them. If they are you get rid of your base portfolio at a much greater rate than expected.

As you start building the list of 40, you might be best off looking for companies that offer dividends and a reasonable probability of some growth. By getting at least some of your income from the dividends your base will last significantly longer.

I have been retired about a year and a half and gradually over the last three years have moved most of my stock investing to companies paying dividends. While I had some big winners on growth, I frequently found that the duds cut into the overall growth enough that the growth stuff wasn't growing as much as I thought it would. On the other hand I was seeing that the dividend generating stuff was frequently growing at a greater rate than the growth stuff was. When that happens, it is the best of all worlds. You have the income regularly in terms of dividends and long range capital gains when some of position is sold off.

Your options depend on size of your nest egg and the amount of income you expect to need to generate to meet expenses. However, you might also consider some dividend plays that pay higher dividends. While some have some short term risk, many are not more risky than growth stocks. The market has a habit of punishing any stock that misses concensus even if overall numbers are good. There are some that offer pretty high dividends and a history of growth in stock price. One of my better investments this year has been FDG, a coal company. It just doubled its dividend and recently had a 3 for 1 split. Dividend rate is now close to 15%, and the stock has gone up 47% in 4 months.

Sometimes assumptions of how much base is needed for a certain income level are too conservative. For example, something that pays 8% dividends will require half the investment that something that pays 4% or 1/4 the investment that pays 2% to get the same income without touching the base.

One of the main measurements I use to determine the true value of my holding is a calculation of annualized return on my investment. It calculates average daily gain/loss and adds that to annual dividend precentage. It mixes a consideration of both growth and income generated. It gives equal weight to a stock with high dividends that does not grow as much during the hold period as one with higher growth but lower dividend rates. It represents a true return on investment.

Using this type of measurement sometimes it makes sense to reduce a position in a stock that has grown dramatically rather than prune some of the slightly marginal price performers. When a dividend paying stock goes up dramatically, there becomes a big imbalance between dividends based on cost vs. dividends based on current price. When that happens it sometimes is possible to replace the first stock with one paying more based on current pricing but lower than dividend percentage based on cost of the first, while still generating more income from the dollars invested. Using this type of method can help lock in profits on the stock that has gone up in price, while still generating greater income. As an example, one stock I have had for several years went from $14 to a current price of $37.45. It also happened to be a stock that paid a reasonably high dividend. At today's price the dividend is 8.38%, but divend on my cost was over 25%. By selling off about half of my position and replacing it with another stock that paid close to 9% at current price I reduced an overweight position in the first while still generating a higher income from the same original investment.

There is historical data that points to dividend paying stocks providing greater long term growth than those that do not offer dividends. By concentrating on stuff that pays divends you can, on the average, generate greater total income without tapping into the base as much.
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