Retirement Model Portfolio

Retirement Portfolio Model

The focus of a dividend retirement portfolio is to generate enough income to cover expenses, have the income keep up with inflation and avoid depleting the portfolio. Unlike the generalized retirement approach, depleting the portfolio is not the primary strategy but possible at a later stage. There are definitely stages of retirement based on your health and goals but the main concern remains the same for all retirees and it’s to ensure you do not outlive your money.

Retirement Income Generation

Long ago, the financial industry established what would be considered an acceptable withdrawal rate to ensure you do not outlive your portfolio. The withdrawal rate was established at 4% but it is very generalized and assumes retirement is not early and it also assumes there would be a certain rate of return on the fixed income portion of your portfolio.

Seeing all the variables being challenged in the low interest rate environment we have been in for a relatively long time; the 4% rule can no longer be trusted, and fixed income investments do not provide the safe return it used to provide. The status quo no longer works. I see DIY investors chasing high yield stocks for the wrong reasons.

Dividend investing is a solid strategy to generate income and avoid depleting your portfolio but it’s not every dividend stock that works. You need to consider the dividend yield for your overall income, you need to have dividend growth and avoid dividend drops. Dividend yield is an easy data point to access but dividend growth is not easy and assessing the dividend safety of a stock is another story.

Keeping Up with Inflation

To start with, a dividend yield above inflation is not how you keep up with inflation – that’s a misleading thought. The income is what you use for your expenses. To keep up with inflation, you want the income to grow at the same rate as inflation or greater; that comes from dividend growth.

Dividend Yield is for Income
Dividend Growth is for Inflation

Take a REIT with no dividend growth, for example, the distribution you received is fixed every year while your expenses increase. After a number of years, you end up needing more and more. If you are not adding more money to the REIT, you are not increasing your income. To keep up with inflation, you need the income to grow through dividend growth.

Since the income comes from cash distributions or dividends, to grow the income, you have 2 options:

  1. Increase your holdings, or
  2. Receive a dividend increase

Option 1 is normally off the table when you are in retirement so that leaves you with option 2. Do note that not all of your holdings need to provide growth in dividend as long as the overall income increases by what you need. The higher the dividend growth the better but generally there is a relationship between the growth and the yield and it’s an inverse relationship.

Retirement Stock Filters

In the accumulation years, I aimed for a 10% dividend growth and I am satisfied with a low yield since the stock price will have growth but in retirement, we can make some adjustments to optimize income. I am satisfied with a 3%-4% yield, a Chowder Score of 8% and a market capitalization over 5B. Large cap only – it’s not the time to take a risk on a smaller business.

Using the Dividend Snapshot Screeners, I get the following stocks.

Pay attention to the 3, 5 and 10 year dividend yield average (If you have access to the data) in order to make sure the stock has paid above your desired yield for consistency. While there are more than 10 stocks that show up in each of the filters, I am going with 10 holdings form the TSX and 10 from the NYSE or NASDAQ. Those represent my core dividend payers but they do not have to be the only stocks. The filter in the page is fixed but I found a couple of stocks outside with a lower Chowder Score that still attracted me. In the end, it’s not the individual stock’s ability to keep up with inflation that is important but the overall portfolio dividend growth.

Canadian Retirement Stocks

Based on my Dividend Snapshot Screener, I came up with the list below that matches my criteria. Nothing surprising if you are familiar with the Canadian stock market. Perhaps you already own them all.

There are 10 stocks. All solid blue chip stocks from a Canadian perspective and if you were to have $50K in each, that would be worth $500,000 with an income of $22,000 or a 4.42% yield. There are other names you can add but I consider those the core stocks for a Canadian retirement portfolio. Feel free to swap a bank or a telecom, both industries are pretty much an oligopoly and will be protected by the Canadian government for the foreseeable future.

You get an approximate dividend growth of 4% which means you could still have a lower yield stock like CNR or CP if you want. I intend to reduce my high growth dividend stocks to reach represent no more than 3% of my portfolio.

US Retirement Stocks

This is is similar to the Canadian list but in general the yield is a bit lower. You would make around $18,200 in dividend for a $500,000 portfolio value in Canadian dollars and a yield of 3.77%. Obviously, the best account to hold the US stocks is in your RRSP.

Why hold US stocks in retirement? It’s simply a bigger economy and if you are not willing to hold $1,000,000 in the 10 stocks above, you are diluting your Canadian holdings into lower yield stocks or riskier holdings. The difference between the Canadian and US stock market is significantly different.

A Word on REITs

Contrary to other investors, I am not keen on REITs. Real estate is a solid and stable asset class but when you invest in a REIT, you invest in a business that holds the real estate asset class and you rely on management to run the business. REITs are a proxy to the real estate asset class and real estate stocks is a sector where you invest in stock equity. The physical building is an asset class like bonds and equities. There is a distinction between a REIT and a real estate building.

Moving past this nuance, I find the yield of many REITs high and risky. Sure, it’s appealing but I want safety and I want it for 10, 15 or 20 years and it’s impossible to predict safety like that for REITs. I got burned and after watching REITs for the last 5 years, I see too many drop the distribution over time. If there is a REIT with a normal yield and it has a limited limited growth, why should I bother with the REIT in my portfolio over a bank or a utility? REITs have to convince me they

  • are more stable than other stocks (size)
  • have similar stock growth than other stocks (keep up with the TSX)
  • have similar distribution growth than other stocks (a decent chowder score)

What about Bonds?

No bonds for this model portfolio as it assumes the dividend income will cover your expenses. If it doesn’t then you delay and save more or you need to withdraw money from your portfolio. 

If you need to withdraw, you should have bonds. You should establish your strategy to have access to bonds or fixed income equivalent that will not fluctuates with the stock market.

Transition to a Dividend Retirement Portfolio

The transition should not be sudden on the day you flip the switch to retirement. You want to ease yourself into the new stocks as you slowly start taking profits from your other holdings not fitting your retirement income goals.

One way to do this is start a position 3 to 5 years ahead of your retirement years. You can start investing and averaging into those different holdings.

My approach will go with a 5 year transition and see new money added to some of those stocks to build a position. With a few stocks not currently in portfolio, I can chose the stock with a better value when it’s time to buy and grow my position over time.

Depletion & Withdrawal Strategy

To avoid being caught in a stock market storm, there needs to be a strategy for cash. I plan to use my dividends and flow them through a set of cash accounts or a 1 year GIC as an example. 

I plan to have a full year’s worth of cash on hand (maybe two) and the following year is being filled by the incoming dividend income. Stock market fluctuation should not impact the dividend income.

If there is a need to withdraw, I will consider bonds (ETFs or coupons) to avoid selling at the wrong time and shift part of the portfolio to fixed income.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

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