By Brett Owens
How much money do you need to retire on dividends alone?
This is a better question to ask than the typical aEURoemagic numberaEUR formula that most aEURoefirst-levelaEUR thinking firms tout. LetaEURtms review why their approach is fatally flawed, so that we can derive a more reliable method of our own based in actual reality (and funded by actual dividend payments .)
Fidelity Says What?
aEURoeYou should aim to have 10 times your final salary in savings.aEUR
Buy why? I suppose they are claiming that, if you earned $100,000 in your final year working, that youaEURtmll want to earn this much in income every year for the rest of your life.
So, Fidelity says save a million bucks and youaEURtmre in good shape.
But how exactly is $1,000,000 supposed to throw off $100,000 in excess income annually?
FidelityaEURtms Strategic Dividend & Income Fund ( FSDIX ) pays 2.45% today. Which means, if you follow their advice to a tee, and buy their flagship income fund, you are earning $24,500 per year in income from your million-dollar stake.
ThataEURtms a start. But where exactly is the other 75.5% of your income supposed to come from?
Fade the 4% Fallacy for a Smarter aEURoeMagic Dividend NumberaEUR
Our retirement approach is grounded in reality versus fantasy and false math. So, letaEURtms begin with the value of your actual portfolio.
Back to the $1 million example. LetaEURtms say we saved that money like Fidelity said to, and we still want $100,000 per year.
WeaEURtmll ditch the flawed notion of selling capital for income, and live on dividends alone. This means our portfolioaEURtms aEURoemagic yieldaEUR is 10% annually.
So, weaEURtmre faced with a decision. We can:
- Settle for less income, or
- Save (or make) more money.
ThereaEURtms actually a third, superior option aEUR" earn more yield on your money. IaEURtmll show you how to bank 6%, 7% and even 8% yields with less risk than buying a blue chip stock.
First letaEURtms look at four of these aEURoeflawed dividend payersaEUR that simply donaEURtmt pay enough (or have sufficient growth prospects) to belong in any retirement portfolio. If you own any of these stocks, I would recommend selling them and replacing them with the higher paying ideas weaEURtmll soon discuss.
Mondelez ( MDLZ )
Dividend Yield: 2.5%
Back in September 2017, I called out global foods blue-chip Mondelez ( MDLZ ) as one of several renowned dividend payers to sell .
And HereaEURtms What Mondelez Has Done Since Then
If you didnaEURtmt heed my advice then, hereaEURtms your second chance.
Mondelez aEUR" once part of the former Kraft Foods aEUR" is a snacks titan whose brands include Oreo, Nabisco, Chips Ahoy!, Triscuit, Ritz, Cadbury, Trident, Dentyne, Belvita and everyoneaEURtms favorite space drink, Tang.
At a glance, Mondelez would seem to be doing well. Earnings are expected to grow by about 13% this year, and a decent 7% next, and MDLZ beat profit estimates in its most recent report.
Better still, Mondelez is cranking out some nice dividend hikes, including a 13% payout raise announced in July.
But if you look under the surface, the math starts to get ugly. Specifically, that dividend growth is running laps around earnings growth aEUR" itaEURtms not even close.
MondelezaEURtms ( MDLZ ) Dividend Growth IsnaEURtmt Sustainable
Also, MondelezaEURtms bottom-line growth is being built on balsa-wood stilts. While earnings growth projections for the next couple years are nice, revenues are projected to climb less than 2% annually this year and next.
MDLZ has traded flat for almost three years now, and while it might pick up in the short-term, I have serious concerns about its ability to produce for retirement investors over the next decade-plus.
Hershey ( HSY )
Dividend Yield: 3.0%
Hershey ( HSY ) is an American classic and one of the foremost names in chocolate. Brands including its namesake chocolate, not to mention Kisses, ReeseaEURtms, KitKat, York, Jolly Rancher, Twizzlers and Bubble Yum.
In fact, candy and gum is all Hershey does aEUR