Retiring from the workforce can be stressful. We spend our entire lives earning a paycheck and living on a salary.
Now they expect us to live on our investments and a small amount of social security. Most of us don’t spend much time learning how to invest.
When we retire with a nice nest egg, we worry about dismantling it for income. However, we can overcome our fears by learning the ropes.
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Today, I want to talk about stocks and bonds. These two investments will help us achieve our goal of a Happy Cash Flow Retirement. Let’s begin.
What is dividend growth investing? Dividend growth investing (DGI) is the process of buying reliable blue-chip dividend-paying stocks over a long period.
Four components make DGI powerful: dividend reinvestment, stock price appreciation, dividend raises, and dollar-cost averaging.
When you combine these things, you build a fantastic nest egg that pays you a steady income. It’s like your house paying your dividends while appreciating in value.
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But let’s assume you arrived at retirement without a DGI portfolio. Instead, you have $500,000 in a 401K and don’t want to pick individual DGI stocks—what are your options?
Dividend ETFs for the win. Dividend ETFs use criteria to purchase a swath of dividend-paying stocks and put them into one security.
Therefore, when you buy one share of Schwab Dividend ETF (SCHD) or Wisdom Tree High Dividend ETF (DHS), you purchase multiple DGI stocks.
Dividend ETFs are powerful because they pack all four components of a DGI portfolio with much less risk (due to diversification). The downside is you pay a small expense fee.
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You also can miss out on some of the excitement of owning individual stocks, like stock splits, special dividends, and mergers & acquisitions.
But retirees are supposed to buy bonds. As we age, they want us to move into buying bonds—especially US Treasuries and Mortgage-backed securities.
Holding your bonds until maturity gives you a guaranteed income for 20 to 30 years. The stock market can be volatile, and your number one goal is capital preservation.
Bond yields have made a comeback over the last 15 months, so they are much more enticing than the previous 15 years.
Dividend ETFs versus Bonds. Why would you want to purchase Dividend ETFs over bonds? In a word, inflation.
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You will love the security of bonds, but your buying power will slowly diminish over time. Even 5% bond yields will begin to lose you money during low inflation (2% per year) over a few years.
Let’s take our $500,000 example. First, let’s take $500,000 and put it into SCHD over ten years. We will give it a 5% appreciation and a 3% dividend yield.
In year one, you will receive $15,000 in dividends. By year ten, your nest egg will be $814,000, and your dividend income will be $24,000.
Of course, this is simple math. Your numbers will probably be much higher. You can reinvest a portion of your dividends while also receiving dividend growth.
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Dividend growth is when the underlying companies increase their dividend annually. Therefore, you’ll get pay raises from companies like Verizon (VZ), ExxonMobil (XOM), and Carrier (CARR).
These raises work behind the scenes in your Dividend ETF (SCHD and DHS). With a little due diligence, you can continually increase your income.
Now, let’s put $500,000 into bonds. Let’s say we get lucky, and bond yields are 5% as we retire. We decide to put $500,000 into 30-Year Treasury Bonds yielding 5%.
Our annual income will be $25,000. In 10 years, our annual payments will be $25,000. Our principal balance will still be $500,000 if we don’t plan on selling.
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However, there is a powerful tool most people don’t consider with bonds—high-yield bond reinvestment. Let’s take $10,000 per year and invest it into high-yield products.
If you invest $10,000 per year into a 10% yielding closed-end fund, you will add $1,000/year to your income stream.
After ten years (using simple math), your annual income stream will be $35,000. You are getting powerful pay raises without any risk to your original capital.
A combination of both. Yes, you guessed it. A combination of Dividend ETFs and bonds will most likely work best for your situation.
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Let’s be honest; the stock and bond markets are being manipulated daily. We are not insiders; we stand to lose everything if we bet it all on black.
We must diversify, even if we want 100% in the stock market or 100% in the bond market. Therefore, a rule like 60/40 (60% stocks, 40% bonds) can come in handy.
Treasury bonds will pay you back in full if you hold them to maturity. However, selling early exposes you to the whims of the bond market.
If you had 5% bonds, and new bonds pay 2%, you are in for a treat. The opposite will not be a good day for you.
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It is the same for Dividend ETFs—pretty much index funds without growth stocks. When the stock market takes a massive hit, you’ll see your portfolio take a major dive. You must prepare for these moments mentally.
Rarely do stocks and bonds fall in tandem. However, 2022 proved it could happen when the Federal Reserve makes it a point to increase interest rates after 15 years at 0%.
Conclusion. The only way to survive retirement is to stay abreast of the facts. You must have a deep understanding of the stock and bond market.
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Dividend ETFs will give us the growth we need to outpace inflation, while bonds protect our capital from manipulation.
The greatest tool we can do to beat inflation, build our wealth, and have a wonderful retirement is knowledge. The more you understand, the less likely you are to lose money.
Robert Kiyosaki says, “There are no risky investments, only risky investors.” I agree wholeheartedly. Combining Dividend ETFs and Treasuries will give you the ability to thrive in retirement. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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